<PAGE>
As filed with the Securities and Exchange Commission on April 19, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SALON INTERNET, INC.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
California 7373 94-3228750
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
</TABLE>
706 Mission Street, San Francisco, California 94103
(415) 882-8720
(Address and telephone number of principal executive offices)
---------------
Michael O'Donnell
Chief Executive Officer and President
Salon Internet, Inc.
706 Mission Street, San Francisco, California 94103
(415) 882-8720
(Name, address and telephone number of agent for service)
Copies to:
<TABLE>
<S> <C>
Thomas W. Furlong, Esq. Bruce Alan Mann, Esq.
Christopher P. Bifone, Esq. James H. Laws, Esq.
William A. Rodoni, Esq. Valerie A. Villanueva, Esq.
Michael B. Gebhardt, Esq. Morrison & Foerster llp
Matthew E. Horsley, Esq. 425 Market Street
Gray Cary Ware & Freidenrich llp San Francisco, California 94105-2482
400 Hamilton Avenue (415) 268-7000
Palo Alto, California 94301-1825
(650) 328-6561
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act, please
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 of 1933, as amended (the
"Securities Act"), please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration 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,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Title of Each Class of Proposed Maximum Aggregate
Securities to be Registered Offering Price(1) Amount of Registration Fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock ($0.001 par value)................ $38,812,500 $10,790
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
---------------
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 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Initial Public Offering Prospectus
Subject to Completion, April 19, 1999
2,500,000 shares of common stock
$ per share
[LOGO OF SALON.COM]
Salon.com is a leading
Salon.com Internet media company
706 Mission Street, 2nd that produces a
Floor network of ten
San Francisco, California subject-specific,
94103 demographically-
targeted Web sites and
a variety of online
communities designed
to attract premium
Internet advertisers
and electronic
commerce partners.
The Offering
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Price................. $ $
Underwriting discounts and
commissions................. $ $
Proceeds to Salon............ $ $
</TABLE>
This is our initial
public offering and no
public market
currently exists for
our shares. We expect
that the price will be
between $10.50 and
$13.50 per share. This
price may not reflect
the market price of
our shares after this
offering.
Proposed Trading Symbol:
The Nasdaq National Market - SALN
----------------------
This offering involves a high degree of risk. You should purchase shares only
if you can afford to lose your entire investment. See "Risk Factors" beginning
on page 5.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
We have entered into a firm commitment underwriting agreement with the
underwriters for the sale of the shares in this offering. We have granted the
underwriters a 30-day option to purchase up to an additional 375,000 shares of
our common stock to cover over-allotments. The underwriters expect to deliver
shares of our common stock to purchasers on , 1999.
WR HAMBRECHT+CO DAIWA SECURITIES AMERICA INC.
, 1999
<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 our common stock only 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 this
prospectus or of any sale of our common stock.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY....................................................... 1
THE OFFERING............................................................. 3
SUMMARY FINANCIAL DATA................................................... 4
RISK FACTORS............................................................. 5
FORWARD-LOOKING STATEMENTS............................................... 17
USE OF PROCEEDS.......................................................... 18
DIVIDEND POLICY.......................................................... 18
CAPITALIZATION........................................................... 19
DILUTION................................................................. 20
SELECTED FINANCIAL DATA.................................................. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 22
BUSINESS................................................................. 34
MANAGEMENT............................................................... 48
CERTAIN TRANSACTIONS..................................................... 55
PRINCIPAL STOCKHOLDERS................................................... 56
DESCRIPTION OF CAPITAL STOCK............................................. 59
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 63
PLAN OF DISTRIBUTION..................................................... 64
LEGAL MATTERS............................................................ 67
EXPERTS.................................................................. 67
WHERE TO FIND ADDITIONAL INFORMATION ABOUT SALON......................... 67
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
----------------
"Salon" and the Salon logo are trademarks of Salon.com. All other trademarks
or tradenames referred to in this prospectus are the property of their
respective owners.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully. This prospectus contains forward-
looking statements based on our current expectations, assumptions, estimates
and projections about our business and industry. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, which are more fully described in the "Risk Factors"
section beginning on page 5 and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
SALON.COM
Our Business: We are a leading Internet media company that produces a network
of ten subject-specific, demographically-targeted Web sites and
a variety of online communities designed to attract premium
Internet advertisers and electronic commerce partners. We
believe that our network of Web sites combines the
thoughtfulness of print, the timeliness of television and the
interactivity of talk radio.
Our Strategy: Our strategy is to build a premier network of Internet
destination sites through compelling content that appeals to
users with high-value demographics. To establish our network of
premier Internet destinations, we intend to:
. broaden our revenue base in advertising and electronic
commerce;
. expand our content and communities;
. expand our network of distribution partners;
. grow our brand recognition through advertising and
syndication; and
. enhance our technology to improve production, user
experience, advertising delivery and circulation analysis.
Our Market: The Internet is becoming one of the most important mediums for
global communication and business. Industry analysts estimate
that the number of Internet users worldwide will increase to
319.8 million in 2002 from 68.7 million in 1997. The dramatic
increase in Internet use provides a tremendous opportunity for
both online advertising and electronic commerce, which industry
experts believe will realize significant revenue growth in the
near future.
Our Network: Our network of subject-specific Web sites includes:
.Salon News .Salon Books
.Salon Technology .Salon Media
.Salon Arts & Entertainment .Salon Travel
.Salon Mothers Who Think .Salon People
.Salon Health & Body .Salon Comics
Our other media offerings consist of Table Talk and The Well,
our interactive Web communities; and Salon Shopping, an
electronic commerce destination aimed at marketing upscale
Salon branded and third party products to our high-value
demographic base. The main entry and navigation point for our
network is www.salon.com.
1
<PAGE>
We believe the scope of our product offerings and the high-
value demographics of our user base offer the opportunity to
build a premier Internet destination capable of highly targeted
advertising and electronic commerce marketing.
We were incorporated in California in July 1995 and intend to reincorporate
in Delaware and change our name to "Salon.com" prior to the closing of this
offering. We currently employ 74 people in five offices in San Francisco, New
York, Washington, D.C., Chicago and Los Angeles. Our headquarters are located
at 706 Mission Street, 2nd Floor, San Francisco, California 94103 and our
telephone number is (415) 882-8720. Our principal Web site is located at
www.salon.com. Information contained on our Web sites does not constitute a
part of this prospectus.
Unless otherwise indicated, all information contained in this prospectus
assumes that:
. the underwriters will not exercise their over-allotment option;
. all outstanding convertible preferred stock will be converted to common
stock before this offering is completed;
. we will reincorporate in Delaware and change our name to Salon.com before
this offering is completed; and
. we will complete a 1 for 2 split of our common stock before this offering
is completed.
2
<PAGE>
THE OFFERING
Type of security............ Common stock
Common stock offered........ 2,500,000 shares
Common stock to be
outstanding after this
offering...................
10,730,623 shares
Use of proceeds............. For expansion of our sales force, marketing and
distribution activities, expansion of our
business operations and general corporate
purposes. See "Use of Proceeds" for more
information.
Proposed Nasdaq National
Market Symbol..............
SALN
The method of distribution being used by the underwriters in this offering
differs somewhat from that traditionally employed in firm commitment
underwritten public offerings. In particular, the public offering price and
allocation of shares will be determined primarily by an auction process
conducted by the underwriters and other securities dealers participating in
this offering. A more detailed description of this process is included in "Plan
of Distribution."
3
<PAGE>
SUMMARY FINANCIAL DATA
Summary Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal
Year Ended For the Nine Months
July 27, 1995 March 31, Ended December 31,
(inception) to ---------------- --------------------
March 31, 1996 1997 1998 1997 1998
-------------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 196 $ 280 $ 1,156 $ 689 $ 2,058
------ ------- ------- --------- ---------
Operating expenses:
Production, content,
and product.......... 463 1,555 2,832 2,071 3,135
Sales and marketing... 124 419 1,655 1,107 2,580
Research and
development.......... 52 176 276 203 305
General and
administrative....... 43 129 291 221 338
------ ------- ------- --------- ---------
Total operating
expenses........... 682 2,279 5,054 3,602 6,358
------ ------- ------- --------- ---------
Loss from operations.... (486) (1,999) (3,898) (2,913) (4,300)
Other income, net....... 10 55 73 52 2
------ ------- ------- --------- ---------
Net loss................ $ (476) $(1,944) $(3,825) $ (2,861) $ (4,298)
====== ======= ======= ========= =========
Basic and diluted net
loss per share......... $(1.26) $ (3.84) $(10.20) $ (7.63) $ (11.20)
====== ======= ======= ========= =========
Weighted average shares
of common stock
outstanding used in
computing basic and
diluted net loss per
share.................. 376 507 375 375 384
====== ======= ======= ========= =========
Pro forma basic and
diluted net loss per
share.................. $ (1.20) $ (1.05)
======= =========
Shares of common stock
used in computing pro
forma basic and diluted
net loss per share..... 3,190 4,075
======= =========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------
Pro
Actual forma As adjusted
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $1,607 $12,562 $39,862
Working capital...................................... 1,522 12,477 39,777
Total assets......................................... 3,386 14,341 41,641
Long-term liabilities................................ 137 137 137
Total stockholders' equity........................... 2,011 12,966 40,266
</TABLE>
The pro forma information above reflects the net proceeds from the sale of
2,967,782 shares of Series C preferred stock on April 14, 1999.
The as adjusted information above is adjusted to give effect to our receipt
of the estimated net proceeds from the sale of 2,500,000 shares of common stock
in this offering at an assumed public offering price of $12 per share.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties may also adversely
affect our business. If any of the following risks actually occur, our business
could be harmed. If our business is harmed, the trading price of our common
stock could decline, and you could lose all or part of the money you paid to
buy our common stock.
RISKS RELATED TO OUR OPERATIONS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE OUR
BUSINESS AND PROSPECTS
We originally incorporated in July 1995 and launched our initial Web sites in
November 1995. Because we have a limited operating history, you must consider
the risks and difficulties frequently encountered by early-stage companies like
us in new and rapidly evolving markets, including the market for advertising
and commerce on the Internet. These risks include whether we will be able to:
. attract a larger number of users to our Web sites and online communities;
. increase banner advertising, sponsorship and electronic commerce
transaction revenues;
. increase awareness of the Salon brand;
. strengthen user loyalty;
. offer compelling content;
. maintain current and develop new strategic sponsorship and distribution
relationships;
. respond effectively to competitive pressures;
. continue to utilize current and newly-developed technologies effectively;
and
. attract, retain and motivate qualified personnel.
We may not be able to successfully address these risks. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
detailed information on our limited operating history.
WE LACK SIGNIFICANT REVENUES, WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE
INCREASED LOSSES
We have not achieved profitability and expect to incur operating losses for
the foreseeable future. We incurred net losses of $3.8 million in the fiscal
year ended March 31, 1998 and $4.3 million in the nine months ended December
31, 1998. As of December 31, 1998, our accumulated deficit was $10.5 million.
We expect these operating losses to increase for at least the foreseeable
future. We will need to generate significant revenues to achieve and maintain
profitability, and we may not be able to do so. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If our revenues grow more slowly than
we anticipate or if our operating expenses exceed our expectations, our
financial results would be harmed. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more detailed information.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND MAY CONTINUE TO FLUCTUATE, WHICH
MAY ADVERSELY AFFECT OUR STOCK PRICE
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside
our control, and any of which could harm our business. These factors include:
. our ability to attract and retain banner advertisers, advertising
sponsors and electronic commerce sponsors;
5
<PAGE>
. our ability to attract and retain a large number of users;
. the introduction of new Web sites, services or products by us or by our
competitors;
. the timing and uncertainty of our advertising and sponsorship sales
cycles;
. the mix of banner advertisements and sponsorships sold by us or our
competitors;
. seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;
. the level of Internet usage;
. our ability to attract, integrate and retain qualified personnel;
. our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;
. technical difficulties or system downtime affecting the Internet
generally or the operation of our Web sites; and
. the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and infrastructure.
In order to attract and retain a larger user base, we plan to significantly
increase our expenditures on sales and marketing, content development,
technology and infrastructure. Many of these expenditures are planned or
committed in advance and in anticipation of future revenues. If our revenues in
a particular quarter are lower than we anticipate, we may be unable to reduce
spending in that quarter. As a result, any shortfall in revenues would likely
adversely affect our quarterly operating results.
Due to the factors noted above and the other risks discussed in this section,
you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of
public market analysts and investors. If this occurs, the price of our common
stock may decline. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our quarterly
operating results.
We depend on banner advertising and sponsorship sales for substantially all of
our revenues, and our inability to increase banner advertising and sponsorship
revenues would harm our business
Our revenues for the foreseeable future will depend substantially on sales of
advertising and sponsorships. In the fiscal year ended March 31, 1998,
advertising and sponsorship sales accounted for 99% of our net revenues, and in
the nine months ended December 31, 1998 they accounted for 93% of our net
revenues. In order to increase our revenues, we will need to attract additional
significant banner advertisers, advertising sponsors and electronic commerce
sponsors on an ongoing basis. We may not be able to attract or retain a
sufficient number of banner advertisers or advertising sponsors in the future,
and if we cannot, our business would likely be harmed. Increasing our
advertising and sponsorship revenues depends upon many factors, including
whether we will be able to:
. successfully sell and market our network to advertisers and sponsors;
. increase our user base;
. increase the amount of revenues we receive per sponsorship;
. increase awareness of the Salon brand;
. target advertisements and electronic commerce opportunities to users with
appropriate interests;
. accurately measure the number and demographic characteristics of our
users; and
. attract and retain sales personnel.
6
<PAGE>
If we do not sell a sufficient number of advertisements or sponsorships or do
not engage a sufficient number of advertisers or sponsors during a particular
period, our business could be harmed.
Our revenues depend on a limited number of advertisers and sponsors who are not
subject to long-term agreements
Historically, we have relied on a small number of banner advertisers and
advertising sponsors for a significant percentage of our revenues. In the
fiscal year ended March 31, 1998, Borders accounted for approximately 37% and
IBM accounted for approximately 16% of our revenues. In the nine month period
ended December 31, 1998, Borders accounted for approximately 18% of our
revenues. The loss of any of our significant banner advertisers or advertising
sponsors could adversely affect our business. We anticipate that our financial
results in any given period will continue to significantly depend on revenues
from a small number of banner advertisers and advertising sponsors. In
addition, particularly because few banner advertisers and advertising sponsors
are contractually obligated to purchase any advertising in the future, we are
unable to anticipate our mix of banner advertisers and advertising sponsors in
future fiscal periods.
The length of our sales cycles is uncertain and can lead to shortfalls in
revenue
Our dependence on banner advertising and sponsorships subjects us to risk
because the sales cycles for advertising and sponsorships vary significantly.
If sales are delayed or do not occur, our financial results for a particular
period may be harmed. The time between the date of initial contact with a
potential banner advertiser or sponsor and receipt of a purchase order from the
advertiser may range from as little as one week to up to nine months. Sales of
banner advertising and sponsorships are subject to factors over which we have
little or no control, including:
. advertisers' and sponsors' budgets;
. internal acceptance reviews by advertisers and their agencies;
. the timing of completion of advertisements and sponsorships; and
. the possibility of cancellation or delay of projects by advertisers or
sponsors.
During these sales cycles, we may expend substantial funds and management
resources but not obtain advertising or sponsorship revenues.
We must increase our user base to generate additional revenue
Increasing the size of our user base is critical to selling advertising and
sponsorships and to increasing our revenues. If we cannot increase the size of
our user base we may not be able to generate additional revenues, which could
leave us unable to maintain or grow our business. To increase our user base, we
must:
. expand our content and communities;
. expand our network of distribution partners;
. grow Salon brand recognition through advertising and syndication;
. enhance our technology to improve the functionality of our network of Web
sites; and
. offer attractive electronic commerce opportunities to electronic commerce
sponsors and users.
If we do not achieve these objectives to increase our user base, our business
could be harmed. Additionally, a significant element of our business strategy
is to build loyal online communities because we believe communities help retain
actively engaged users. However, the concept of developing these communities on
the Web is unproven, and if it is not successful, then it may be more difficult
to increase the size of our user base.
7
<PAGE>
We must establish and maintain distribution relationships to attract more users
to our network
We depend on establishing and maintaining distribution relationships with
high-traffic Web sites to increase our user base. There is intense competition
for relationships with these sites, and we may not be able to enter into such
relationships on favorable terms or at all. Even if we enter into distribution
relationships with these Web sites, their sites may not attract significant
numbers of users, and our Web sites may not attract additional users from these
relationships. Moreover, we have paid and may in the future pay significant
fees to establish these relationships.
We must continually develop compelling content to attract Internet users
Our success depends upon our ability to attract and retain a large number of
users by delivering original and compelling Internet content and services. If
we are unable to develop content and services that allow us to attract, retain
and expand a loyal user base possessing high-value demographic characteristics,
we will be unable to generate advertising revenues or enter into sponsorships,
and our revenues and operating results will be severely harmed. The content and
services we provide on our Web sites may not appeal to a sufficient number of
Internet users to generate banner advertising revenues or attract sponsorships.
Our ability to develop compelling content depends on several factors,
including:
. the quality and number of writers and artists who create content for
Salon;
. the quality of our editorial staff; and
. the technical expertise of our production staff.
Consumer tastes and preferences change rapidly and we may not be able to
anticipate, monitor, and successfully respond to these changes to attract and
retain a sufficient number of users for our network of Web sites. Internet
users can freely navigate and instantly switch among a large number of Web
sites, many of which offer content and services that compete with Salon. In
addition, many Web sites offer very specific, highly targeted content that
could have greater appeal than our network to particular subsets of our target
user base.
The new design of our network of Web sites may not appeal to users
We recently made significant changes to the design of our network of Web
sites. If the new design of our network does not appeal to our existing users
or new users, the amount of traffic on our network could be reduced, which
would make it more difficult for us to enter into agreements with banner
advertisers, advertising sponsors and electronic commerce sponsors, because
these agreements are based on the quantity and quality of users that visit our
network. A loss of advertisers or sponsors could harm our business.
The controversial content of our Web sites may limit our revenues from banner
advertising, advertising sponsorships or electronic commerce sponsorships
Many of our Web sites contain, and will continue to contain, content that is
politically and culturally controversial. As a result of this content, current
and potential advertisers and sponsors may refuse to do business with us. Our
outspoken stance on political issues, including the investigation and
impeachment of President Clinton, as well as much of our other published
content, has and may continue to result in negative reactions from some users,
commentators and other media outlets.
Our promotion of the Salon brand may not be successful
The success of the Salon brand depends largely on our ability to provide high
quality content and services. If Internet users do not perceive our existing
content and services to be of high quality, or if we introduce new content and
services or enter into new business ventures that are not favorably perceived
by users, we may not be successful in promoting and maintaining our brand. Any
expansion of the focus of our operations creates a
8
<PAGE>
risk of diluting our brand, confusing consumers and decreasing the value of our
user base to advertisers. In order to attract and retain users, and to promote
the Salon brand, we may need to increase our budgets for content and services
or otherwise substantially increase our financial commitment to establishing
and maintaining loyalty for the Salon brand name. If we are unable to establish
the Salon brand or are forced to substantially increase our expenditures to
promote the Salon brand, our business could be severely harmed.
We may not be able to hire, integrate or retain qualified editorial and design
personnel
Our success significantly depends on the continued services of our key
editorial and design personnel. In addition, because the content of our Web
sites must be perceived by our users as having been created by credible and
notable sources, our success also depends on the name recognition and
reputation of our editorial staff, in particular David Talbot, Salon's editor-
in-chief. The loss of these individuals or other key editorial or design
personnel would likely harm our business.
We have recently hired a chief financial officer and a senior vice president
of sales. If we cannot integrate each of these persons into our management
team, we may not be able to retain their services, and may have to search for
other persons to fill these positions.
We expect that we will need to hire additional personnel in all areas in
1999. Competition for personnel in the Internet industry is intense. We may be
unable to retain our current key employees or attract, integrate or retain
other qualified employees in the future. If we do not succeed in attracting new
personnel or integrating, retaining and motivating our current personnel, our
business could be harmed.
We have limited protection of our content and other intellectual property.
Others could misappropriate our intellectual property and we may not be able to
enforce our rights
Our success and ability to compete are significantly dependent on our
proprietary content. We rely exclusively on copyright law to protect our
content. While we actively take steps to protect our proprietary rights, these
steps may not be adequate to prevent the infringement or misappropriation of
our content. Infringement or misappropriation of our content or intellectual
property could materially harm our business. We also license content from
various freelance providers and other third-party content providers. While we
attempt to insure that this content may be freely licensed to us, other parties
may assert claims of infringement against us relating to this content.
We may need to obtain licenses from others to refine, develop, market and
deliver new services. We cannot assure you that we will be able to obtain any
such licenses on commercially reasonable terms or at all or that rights granted
pursuant to any licenses will be valid and enforceable.
We recently acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address. If we fail to adequately
protect our rights in the address, or if a third party infringes our rights in
the address or otherwise dilutes the value of www.salon.com, our business could
be harmed.
Our technology development efforts may not be successful in improving the
functionality of our network
We have recently developed a proprietary online publishing system. If this
system does not work as intended, or if we are unable to continue to develop
this system to keep up with the rapid evolution of technology for content
delivery on the Internet, our network of Web sites may not operate properly
which could harm our business. Additionally, software product development
schedules are difficult to predict because they involve creativity and the use
of new development tools and learning processes. Delays in our software
9
<PAGE>
development process could harm our business. Moreover, complex software
products like our online publishing system frequently contain undetected errors
or shortcomings, and may fail to perform or scale as expected. Although we have
tested and will continue to test our publishing system, errors or deficiencies
may be found in the system.
We rely on third parties for several critical functions relating to delivery of
advertising and our Web site performance
We rely on a number of third party suppliers for various services, including
Web hosting, banner advertising delivery software, Internet traffic measurement
software and electronic commerce fulfillment services. While we believe that we
could obtain these services from other qualified suppliers on similar terms and
conditions, a disruption in the supply of these services by our current
suppliers could materially harm our business.
We have recently begun to use new third-party software to manage the delivery
of banner advertising on our network of Web sites. If this software
malfunctions or does not deliver the correct banner advertisements to our
network, our advertising revenues could be reduced, and our business could be
harmed.
We have also recently begun to use new third-party software to measure
traffic on our network of Web sites. If this software malfunctions or does not
accurately measure our user traffic, we may not be able to justify our
advertising rates, and our advertising revenues could be reduced.
We must manage our potential growth
We have experienced and are currently experiencing a period of significant
growth. If we cannot manage our growth effectively, we may not be able to
coordinate the activities of our technical, accounting, finance, marketing,
sales and production staffs, and our business could be harmed. We intend to add
new subject-specific Web sites to our network, hire additional staff in all
departments, expand existing offices and open new offices. As part of this
growth, we will have to implement new operational procedures and controls to
train and manage our employees and to expand and coordinate the operations of
our various departments. If we acquire new businesses, we will also need to
integrate new operations, technologies and personnel. If we cannot manage the
growth of our network of Web sites, staff, offices and business generally, our
business could be harmed.
We may not be able to successfully integrate our acquisitions
Acquisitions and business combinations entail numerous operational risks,
including:
. difficulty in the assimilation of acquired operations, technologies or
products;
. diversion of management's attention from other business operations;
. risks of entering markets in which we have limited or no experience; and
. potential loss of key employees of acquired businesses.
We acquired The Well LLC, an online community provider, in March 1999. We may
not be able to successfully integrate The Well LLC or any businesses, products,
technologies or personnel that we might acquire in the future, and if we
cannot, our business could be harmed.
We will need more working capital to expand our network
We believe that our current cash resources, combined with the net proceeds
from this offering, will meet our anticipated working capital and capital
expenditure requirements for at least the 12 months following the date of this
prospectus. We may need to raise additional capital to do the following:
. expand our network of Web sites and interactive communities;
10
<PAGE>
. increase our electronic commerce opportunities;
. aggressively promote awareness of the Salon brand;
. make payments under distribution relationships;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
If we raise additional capital by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of our current stockholders. Additionally, we may not be able to
obtain additional financing on favorable terms, or at all. If adequate capital
is not available on acceptable terms, our ability to expand, take advantage of
unanticipated opportunities, develop or enhance services or otherwise respond
to competitive pressures would be significantly limited. This limitation could
harm our business. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for a discussion of our working capital and capital
expenditures.
Provisions contained in our charter documents may delay or prevent a takeover
of Salon
We intend to reincorporate in Delaware prior to the completion of this
offering. Provisions of our Delaware certificate of incorporation and bylaws
and of the Delaware general corporation law could make it more difficult for a
third-party to acquire us, even if a change-in-control would be beneficial to
our stockholders. These provisions also may prevent changes in the management
of Salon. See "Description of Capital Stock" for more detailed information.
Risks Related to Our Internet Business and Prospects
Acceptance and effectiveness of Internet advertising and electronic commerce is
unproven
Our success is highly dependent on an increase in the use of the Internet for
advertising and electronic commerce. If the markets for Internet advertising or
electronic commerce do not develop, our business may be severely harmed.
The Internet advertising market is new and rapidly evolving, and the
effectiveness of Internet advertising cannot be accurately measured. As a
result, demand and market acceptance for Internet advertising is uncertain and
may not increase as necessary for our business to grow or succeed. Many
advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied on traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Potential advertisers may believe Internet advertising to be
undesirable or less effective for promoting their products and services
relative to traditional advertising media. If the Internet advertising market
fails to develop or develops more slowly than we expect, our business could be
harmed.
Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures could reduce our advertising revenues.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are commonly available.
Widespread use of this software could adversely affect the commercial viability
of Internet advertising and our business.
Many retailers have little or no experience using the Internet for electronic
commerce. The adoption of electronic commerce, particularly by companies that
have historically relied on traditional channels to sell their products and
services, requires the acceptance of a new way of conducting business,
exchanging information and completing commercial transactions. Potential
electronic commerce partners may believe electronic
11
<PAGE>
commerce to be undesirable or less effective for selling their products and
services relative to traditional channels. If the electronic commerce market
fails to develop or develops more slowly than we expect, our business could be
harmed.
Tracking and measurement standards for advertising may not evolve to the extent
necessary to support Internet advertising
There are currently no standards for the measurement of the effectiveness of
advertising on the Internet, and the industry may need to develop standard
measurements in order to sustain advertising volume or attract new advertisers.
Standardized measurements may not develop and if they do not, our business
could be harmed. In addition, currently available software programs that track
Internet usage and other tracking methodologies are rapidly evolving. The
development of such software or other methodologies may not keep pace with our
information needs, particularly to support our internal business requirements
and those of our advertisers and sponsors. The absence or insufficiency of this
information could limit our ability to attract and retain advertisers and
sponsors.
It is important to our advertisers and sponsors that we accurately measure
the demographics of our user base and the delivery of advertisements on our Web
sites. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business while we are replacing these services. Companies may choose to
not advertise on Salon or may pay less for advertising or sponsorships if they
do not perceive our measurements or measurements made by third parties to be
reliable.
If use of the Internet does not grow, our business could be harmed
Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. limited availability of cost-effective, high-speed access.
If these or any other factors cause use of the Internet to slow or decline, our
results of operations could be adversely affected.
Increasing competition among Internet content providers could harm our business
The market for Internet content is relatively new, rapidly changing and
intensely competitive. We expect competition for Internet content to continue
to increase and if we cannot compete effectively our business could be harmed.
Additionally, we expect the number of Web sites competing for the attention and
spending of users, advertisers and sponsors to continue to increase, because
there are so few barriers to entry on the Internet.
12
<PAGE>
Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm
our business. Competition is likely to increase significantly as new companies
enter the market and current competitors expand their services. Many of our
present and potential competitors are likely to enjoy substantial competitive
advantages, including the following:
. larger numbers of users;
. larger numbers of advertisers;
. greater brand recognition;
. more fully-developed electronic commerce opportunities;
. larger technical, production and editorial staffs; and
. substantially greater financial, marketing, technical and other
resources.
If we do not compete effectively or if we experience any pricing pressures,
reduced margins or loss of market share resulting from increased competition,
our business could be adversely affected.
If the Internet infrastructure continues to be unreliable, access to our
network may be impaired and our business may be harmed
Our success depends in part on the development and maintenance of the
Internet infrastructure. If this infrastructure fails to develop or be
adequately maintained, our business would be harmed because users may not be
able to access our network of Web sites. Among other things, development and
maintenance of a reliable infrastructure will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access
and services.
The Internet has experienced, and is expected to continue to experience,
significant growth in number of users and amount of traffic. If the Internet
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able
to support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face additional outages and delays in
the future. These outages and delays could reduce the level of Internet usage
and traffic on our network of Web sites. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity. If the Internet
infrastructure is not adequately developed or maintained, use of our network of
Web sites may be reduced.
Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.
We may be held liable for content on our Web sites
As a publisher and distributor of content over the Internet, including user-
generated content on our online communities, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the material that is published or
distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our insurance or is in excess of
our insurance coverage could severely harm our business.
Concerns about transactional security may hinder our electronic commerce
strategy
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability.
13
<PAGE>
We rely on encryption and authentication technology licensed from third parties
to provide secure transmission of confidential information. As a result of
advances in computer capabilities, new discoveries in the field of cryptography
or other developments, a compromise or breach of the algorithms we use to
protect customer transaction data may occur. A compromise of our security could
severely harm our business. A party who is able to circumvent our security
measures could misappropriate proprietary information, including customer
credit card information, or cause interruptions in the operation of our network
of Web sites.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.
Our efforts to engage in electronic commerce may expose us to product liability
claims
We have and continue to foster relationships with manufacturers or other
companies to offer certain products to users through our network of Web sites.
We have very limited experience in the sale of products online and the
development of relationships with manufacturers or suppliers of these products.
Users who purchase products may sue us if any of the products sold on our
network are defective, fail to perform properly or injure the user. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. As a result, any such claims, whether or not
successful, could severely harm our business.
Our systems may fail due to natural disasters, telecommunications failures and
other events, any of which would limit user traffic
Substantially all of our communications hardware and computer hardware
operations for our Web sites are located at Frontier GlobalCenter's facilities
in Sunnyvale, California. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems and cause interruptions in our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our network of Web sites and could cause advertisers and sponsors to
terminate any agreements with us. If any of these circumstances occurred, our
business could be harmed. Our insurance policies may not adequately compensate
us for any losses that may occur due to any failures of or interruptions in our
systems. We do not presently have a formal disaster recovery plan.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. Our Web sites have experienced in the past and
may in the future experience slower response times or decreased traffic for a
variety of reasons. For example, in March 1999, users were unable to access
Table Talk for approximately two weeks as we upgraded our technology to
compensate for unexpected growth in user activity. In addition, our users
depend on Internet service providers, online service providers and other Web
site operators for access to our Web sites. Many of these providers and
operators have experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems. Any of these system failures could harm our business.
Governmental regulation of the Internet may restrict our business
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including user privacy, pricing,
and the characteristics and quality of products and services. An increase in
regulation or the application of existing laws to the Internet could
significantly increase our costs of operations and harm our business. For
example, the Communications Decency Act of 1996 sought to prohibit the
transmission of certain types of information and content over the Web.
Additionally, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and
to impose access fees on these companies. Imposition of access fees could
increase the cost of transmitting data over the Internet.
14
<PAGE>
Possible state sales and other taxes could affect our results of operations
We generally do not collect sales or other taxes in respect of goods sold to
users on our network of Web sites. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
reduce our ability to derive revenue from electronic commerce. Moreover, if any
state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on our network, our
financial results could be harmed.
We may have year 2000 readiness issues
We may discover year 2000 readiness problems in our internally developed
systems that will require substantial revision. In addition, third-party
software, hardware or services incorporated into our systems may need to be
revised or replaced, all of which could be time-consuming and expensive. If we
cannot fix or replace our internally developed proprietary software or third-
party software, hardware or services before January 1, 2000 our operating costs
could be increased and we could experience business interruptions which could
harm our business. Additionally, if we cannot adequately address year 2000
readiness issues in our internally developed proprietary software, we could be
subject to claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time consuming to defend.
In addition, the software and systems of governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control may not be year 2000 ready. If these entities are not
year 2000 ready, a systemic failure beyond our control could result, including
a prolonged Internet, telecommunications or general electrical failure. This
type of failure would make it difficult or impossible to use the Internet or
access our network of Web sites and would prevent us from publishing our
content. If a prolonged failure of this type occurred, our business would be
severely harmed. If our advertisers and sponsors are not year 2000 ready, they
may defer or cancel advertising scheduled to appear on our network of Web
sites, which could adversely affect our financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness" for more detailed information.
Risks Related to This Offering
Our executive officers, directors and major stockholders will retain
significant control over Salon after this offering, which may lead to conflicts
with other stockholders over corporate governance matters
After this offering, executive officers, directors and holders of 5% or more
of our outstanding common stock will, in the aggregate, own approximately 67.7%
of our outstanding common stock. These stockholders would be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also delay, deter or prevent
a change in control of Salon and may make some transactions more difficult or
impossible without the support of these stockholders.
Our stock price may be volatile which may lead to losses by investors and
securities litigation
The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. Investors may not be
able to resell their shares at or above the initial public offering price. See
"Plan of Distribution" for more detailed information.
In the past, securities class action litigation has often been instituted
against a company following periods of volatility in the company's stock price.
This type of litigation could result in substantial costs and could divert our
management's attention and resources.
15
<PAGE>
Our management will retain broad discretion in the use of proceeds from this
offering
We intend to use the net proceeds from the sale of our common stock for
expansion of sales and marketing, brand promotion, working capital and general
corporate purposes, including content development or expansion of our offices
and possible acquisitions. Accordingly, our management will have significant
flexibility in applying the net proceeds of this offering. Until the proceeds
are needed, we plan to invest them in investment-grade, interest-bearing
securities. The failure of our management to apply such funds effectively could
harm our business. See "Use of Proceeds" for more detailed information.
Sales of additional shares of our common stock could cause our stock price to
decline and could harm our ability to raise funds from stock offerings in the
future
Sales of a large number of shares of our common stock in the market after the
offering, or the belief that such sales could occur, could cause a drop in the
market price of our common stock and could impair our ability to raise capital
through offerings of our equity securities. Upon completion of this offering,
there will be 10,730,623 shares of our common stock outstanding. All of the
2,500,000 shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by our "affiliates," as that term is defined under the
Securities Act. The remaining 8,230,623 shares of common stock held by existing
stockholders will be "restricted securities" as that term is defined in
Rule 144 of the Securities Act. These restricted shares will be available for
sale in the public market as follows:
. 75,000 restricted shares will be eligible for sale on the date of this
prospectus pursuant to Rule 144(k) of the Securities Act;
. 3,804,361 restricted shares will be eligible for sale 90 days after the
date of this prospectus pursuant to Rule 144 and Rule 701 of the
Securities Act; and
. the remainder of the restricted shares will be eligible for sale from
time to time thereafter upon expiration of one-year holding periods and
subject to the requirements of Rule 144.
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register 2,875,000 shares
reserved for issuance under our 1995 stock option plan and 500,000 shares
reserved for our issuance under our 1999 employee stock purchase plan. Upon
registration, all of these shares will be freely tradable when issued.
Prior to this offering there has been no public market for our common stock
While we have applied to list our common stock on the Nasdaq National Market,
a trading market for our common stock may not develop or, if a market does
develop, the common stock may still be difficult to trade. You may not be able
to resell your shares at or above the initial public offering price. See "Plan
of Distribution" for more detailed information.
Investors in this offering will suffer immediate dilution
The initial public offering price is expected to be substantially higher than
the pro forma net tangible book value per share of the outstanding common stock
immediately after the offering. Accordingly, purchasers of common stock in this
offering will experience immediate and substantial dilution of approximately
$8.06 in net tangible book value per share, or approximately 67% of the assumed
offering price of $12 per share. In contrast, existing stockholders paid an
average price of $2.87 per share. Investors will incur additional dilution upon
the exercise of outstanding stock options and warrants.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" as defined in Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934. These statements may include statements about our:
. business strategy;
. timing of and plans for the introduction or phase-out of services;
. enhancements;
. plans for hiring additional personnel;
. entering into sponsorships or distribution partnerships;
. anticipated sources of funds, including the proceeds from this offering,
to fund our operations for at least the 12 months following the date of
this prospectus; and
. plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, actual results could differ
materially from those expressed or implied by these forward-looking statements
for a number of reasons, including those discussed under "Risk Factors" and
elsewhere in this prospectus. We assume no obligation to update any forward-
looking statements.
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $27.3 million from the sale
of the 2,500,000 shares of common stock in this offering, assuming an initial
public offering price of $12 per share and after deducting estimated
underwriting discounts and offering expenses. While we cannot predict with
certainty how the proceeds of this offering will be used, we currently intend
to use them approximately as follows:
. $6.0 million for expansion of our sales force, marketing and distribution
activities;
. $9.0 million for expansion of our business operations, including
increased staffing, content production and technology infrastructure; and
. $12.3 million for general corporate purposes including working capital.
Pending these uses, the net proceeds of the offering will be invested in
short-term, interest-bearing investments or accounts.
The cost, timing and amount of funds we need cannot be precisely determined
at this time and will be based on numerous factors. Our board of directors has
broad discretion in determining how the proceeds of this offering will be
applied.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying such dividends in the foreseeable future. We currently intend to retain
any future earnings to develop and expand our business.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
(a) on an actual basis, (b) on a pro forma basis to reflect our proposed
reincorporation in Delaware and the net proceeds from the sale of 2,967,782
shares of Series C preferred stock at $3.88 per share on April 14, 1999, and
the conversion of all outstanding shares of convertible preferred stock to
common stock and (c) on an as-adjusted basis after giving effect to our receipt
of the estimated net proceeds from the sale of the 2,500,000 shares of common
stock in this offering at an assumed public offering price of $12 per share.
This table only presents summary information. In reading it, you should refer
to our financial statements and related notes, which are included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
----------------------------
Pro As
Actual Forma Adjusted
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Long-term debt--including current portion........ $ 554 $ 554 $ 554
-------- -------- --------
Stockholders' equity
Preferred stock, $0.001 par value; 5,000,000
shares authorized and none outstanding (pro
forma and as adjusted)........................ -- -- --
Convertible preferred stock, no par value;
8,717,500 shares authorized and 4,351,428
shares outstanding (actual) none authorized
and outstanding (pro forma and as adjusted)... 11,162 -- --
Common stock, $.001 par value; 12,500,000
shares authorized and 392,291 issued and
outstanding (actual); 50,000,000 authorized
(pro forma and as adjusted) 7,711,501 issued
and outstanding (as adjusted); 10,211,501
issued and outstanding (pro forma)............ -- 8 10
Additional paid in capital..................... 2,495 24,222 51,520
Unearned compensation.......................... (1,102) (1,102) (1,102)
Accumulated deficit............................ (10,544) (10,544) (10,544)
-------- -------- --------
Total stockholders' equity..................... $ 2,011 $ 12,584 $ 39,884
======== ======== ========
Total capitalization............................. $ 2,565 $ 13,138 $ 40,438
======== ======== ========
</TABLE>
The common stock outstanding as shown above is based on shares outstanding as
of December 31, 1998 and excludes (a) 1,813,645 shares of common stock reserved
for issuance pursuant to outstanding options granted under our 1995 stock
option plan; (b) 1,044,065 shares of common stock reserved for issuance
pursuant to future grants under our 1995 stock option plan; (c) 500,000 shares
of common stock reserved for issuance under our employee stock purchase plan;
and (d) 324,564 shares of common stock issuable upon exercise of outstanding
warrants or upon conversion of preferred stock issuable upon exercise of
outstanding warrants.
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<PAGE>
DILUTION
Pro forma net tangible book value per share represents total assets less
total liabilities, after giving effect to our receipt of the net proceeds from
our sale of 2,967,782 shares of Series C preferred stock at a price of $3.88
per share on April 14, 1999, divided by the number of shares outstanding as of
December 31, 1998, assuming the conversion into common stock of all of our
outstanding shares of preferred stock. Our pro forma net tangible book value at
December 31, 1998 was approximately $12,966,000 or approximately $1.68 per
share.
After giving effect to our sale of the 2,500,000 shares of common stock in
this offering at an assumed initial public offering price of $12 per share,
after deducting the estimated fee payable to the underwriters and offering
expenses payable by us, our as adjusted net tangible book value as of December
31, 1998 would have been approximately $40,266,000 million, or $3.94 per share.
This represents an immediate dilution of $8.06 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
------
Pro forma tangible book value per share as of December 31,
1998........................................................... $1.68
Increase per share attributable to new investors................ $2.26
-----
As adjusted net tangible book value after this offering......... $ 3.94
------
Dilution per share to new investors in this offering.............. $ 8.06
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31, 1998,
assuming conversion into common stock of all of our outstanding shares of
preferred stock including 2,967,782 shares of preferred stock issued on April
14, 1999, and after giving effect to this offering, the number of shares
purchased from us, the total consideration paid and the average price per share
paid by existing stockholders and by the new investors purchasing the shares
offered hereby assuming an initial public offering price of $12 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 7,711,501 76% $22,121,000 42% $ 2.87
New public investors....... 2,500,000 24% 30,000,000 58% $12.00
---------- --- ----------- ---
Total.................... 10,211,501 100% $52,121,000 100%
========== === =========== ===
</TABLE>
This information is based on pro forma shares outstanding as of December 31,
1998 and excludes (a) 1,813,645 shares of common stock reserved for issuance
pursuant to outstanding options granted under our 1995 stock option plan; (b)
1,044,065 shares of common stock reserved for issuance pursuant to future
grants under our 1995 stock option plan; (c) 500,000 shares of common stock
reserved for issuance under our employee stock purchase plan; and (d) 324,564
shares of common stock issuable upon exercise of outstanding warrants or upon
conversion of preferred stock issuable upon exercise of outstanding warrants.
20
<PAGE>
SELECTED FINANCIAL DATA
Our selected financial data set forth below as of March 31, 1997 and 1998 and
for the period July 27, 1995 (inception) to March 31, 1996, and the fiscal
years ended March 31, 1997 and 1998 are derived from our financial statements
that have been audited by PricewaterhouseCoopers LLP, independent accountants,
and are included elsewhere in this prospectus. Our selected financial data set
forth below as of March 31, 1996 are derived from our audited financial
statements not included elsewhere in this prospectus. Our selected financial
data as of December 31, 1998 and for the nine months ended December 31, 1997
and 1998 are derived from our unaudited financial statements that include, in
our opinion, all adjustments, consisting of only normal recurring adjustments,
necessary for the fair presentation of the financial condition and results of
operations for such period. The results of operations for the nine months ended
December 31, 1998 or any other period are not necessarily indicative of our
future results. The following information is qualified by reference to, and
should be read in connection with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes, included in this prospectus.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
FISCAL YEAR ENDED
JULY 27, 1995 ENDED MARCH 31, DECEMBER 31,
(INCEPTION) TO ---------------- ----------------
MARCH 31, 1996 1997 1998 1997 1998
-------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues................ $ 196 $ 280 $ 1,156 $ 689 $ 2,058
------ ------- ------- ------- -------
Operating expenses:
Production, content, and
product.................. 463 1,555 2,832 2,071 3,135
Sales and marketing....... 124 419 1,655 1,107 2,580
Research and development.. 52 176 276 203 305
General and
administrative........... 43 129 291 221 338
------ ------- ------- ------- -------
Total operating
expenses................ 682 2,279 5,054 3,602 6,358
------ ------- ------- ------- -------
Loss from operations........ (486) (1,999) (3,898) (2,913) (4,300)
Other income, net........... 10 55 73 52 2
------ ------- ------- ------- -------
Net loss.................... $ (476) $(1,944) $(3,825) $(2,861) $(4,298)
====== ======= ======= ======= =======
Basic and diluted net loss
per share.................. $(1.26) $ (3.84) $(10.20) $ (7.63) $(11.20)
====== ======= ======= ======= =======
Weighted average shares of
common stock outstanding
used in computing basic and
diluted net loss per
share...................... 376 507 375 375 384
====== ======= ======= ======= =======
Pro forma basic and diluted
net loss per share......... $ (1.20) $ (1.05)
======= =======
Shares of common stock used
in computing pro forma
basic and diluted net loss
per share.................. 3,190 4,075
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31, 1998
-------------------- ---------------------------
AS
1996 1997 1998 ACTUAL PRO FORMA ADJUSTED
------ ------ ------ ------ ---------- --------
BALANCE SHEET DATA (IN THOUSANDS): (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents..... $1,231 $2,638 $1,926 $1,607 $12,562 $39,862
Working capital............... 1,150 2,560 1,894 1,522 12,477 39,777
Total assets.................. 1,340 2,834 2,707 3,386 14,341 41,641
Long-term liabilities......... -- -- 95 137 137 137
Total stockholders' equity.... 1,247 2,697 2,194 2,011 12,966 40,266
</TABLE>
The pro forma information above reflects the net proceeds from the sale of
2,967,782 shares of Series C preferred stock on April 14, 1999.
The as adjusted information above is adjusted to give effect to our receipt
of the estimated net proceeds from the sale of 2,500,000 shares of common stock
in this offering at an assumed public offering price of $12 per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus.
In addition to historical information, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties. Salon's actual results could differ materially from those
anticipated by these forward-looking statements due to factors discussed under
"Risk Factors," "Business" and elsewhere in this prospectus.
Overview
Salon.com is a leading Internet media company that produces a network of ten
subject-specific, demographically-targeted Web sites and a variety of online
communities. Salon was incorporated in July 1995 and launched its initial Web
sites in November 1995. Circulation of Salon's original content has grown
consistently since inception to a total of approximately 1.2 million unique
users and 13.2 million page views in March 1999. As of March 1999, Salon's
online communities included approximately 109,500 registered users, including
approximately 102,500 for Table Talk and 7,000 for The Well.
Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of December 31, 1998, Salon had an
accumulated deficit of approximately $10.5 million. Salon intends to continue
to make significant financial investments in content, marketing and promotion
and the development of technology and infrastructure. As a result, Salon
believes that it will incur additional operating losses and negative cash flows
from operations for the foreseeable future.
During the period from its inception in July 1995 to date, Salon's activities
have primarily involved the following:
. recruiting editorial and business personnel;
. creating and expanding content;
. licensing content to distribution partners;
. establishing relationships with advertisers and sponsors;
. developing and enhancing Salon's technical infrastructure;
. developing Salon's online retail capabilities; and
. raising capital.
To date, Salon's revenues have been derived primarily from the sale of banner
advertising, advertising sponsorships and electronic commerce sponsorships. To
a lesser extent, Salon has derived revenues from the sale of goods and services
through its online store, Salon Shopping, and from the syndication of its
original content to other media outlets.
Salon's advertising rates vary depending primarily on the particular content
site on which advertisements are placed, the total number of impressions
purchased and the length of the advertiser's commitment. Advertising revenue is
recognized in the period in which the advertisement is displayed, provided that
no significant obligations remain and collection of the resulting receivable is
probable. Revenues related to upfront or slotting fees in connection with
advertising sponsorships and electronic commerce sponsorships are recognized
ratably over the sponsorship term. Electronic commerce sponsorships may provide
that Salon receive commissions from electronic commerce transactions. These
commissions are recognized by Salon upon notification from the sponsor.
Advertising revenues include barter revenues, which are the exchange by Salon
of advertising space on Salon's Web sites for reciprocal advertising space on
other Web sites or the exchange of goods and services. Revenues from these
barter transactions are recorded as advertising revenues at the estimated fair
22
<PAGE>
value of the advertisements received or delivered, whichever is more reliably
measurable, and are recognized when the advertisements are run on Salon's Web
sites. Barter expenses are recorded when Salon's advertisements are run on the
reciprocal Web sites, which is typically in the same period as when
advertisements are run on Salon's Web sites. Salon believes that these barter
transactions have been important to the establishment of the Salon brand and
expects to continue to engage in these transactions in the future.
Revenues related to the sale of goods from Salon Shopping are recognized when
goods are shipped. Revenues related to the syndication of Salon content to
other media outlets are recognized on receipt of payment. Subscription revenues
are recognized ratably over the period that services are to be provided.
Substantially all of Salon's content, as well as participation in Table Talk
and Salon's third-party sponsored Internet communities are free of charge to
users. In October 1998, Salon launched Salon Members, a paid membership program
that provides subscribers with discounts on purchases through Salon, access to
a members-only live chat session, free e-mail and other benefits. In March
1999, Salon acquired The Well, a paid online community that charges its
participants a monthly subscription fee. Salon expects to continue to derive a
portion of its revenues from fees charged to Salon Members and subscribers to
The Well.
Recent Events
Sale of Series C Convertible Preferred Stock
In April 1999, Salon completed the sale of 2,967,782 shares of Series C
preferred stock at a price of $3.88 per share, with total proceeds of
approximately $11.5 million. Each share of Series C preferred stock is
convertible into one share of common stock upon closing of this offering. The
Series C preferred stock has identical anti-dilution and dividend preferences
to Salon's Series A and Series B preferred stock, and priority as to
liquidation over common stock and all other series of preferred stock. Upon the
closing of the sale of the Series C preferred stock on April 14, 1999, Salon's
cash and cash equivalents totaled approximately $12.3 million.
Acquisition of The Well LLC
Salon acquired The Well LLC in March 1999. Through this acquisition, Salon
obtained a long-standing online community business, increased its presence as a
provider of established online communities and created a stronger platform for
future growth in the development of online communities.
Salon's acquisition of The Well LLC was accounted for using the purchase
method of accounting. In connection with the acquisition, Salon recorded
intangibles and goodwill of approximately $1.9 million which are being
amortized on a straight line basis over 24 months. The future operating and
financial performance of Salon will depend in part on its ability to integrate
and operate The Well LLC successfully and to enhance the operating results of
The Well LLC's business.
Salon expects to continue to enter into similar business acquisitions that
may result in similar or greater non-cash charges. Because Internet business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of the intangible
assets acquired.
23
<PAGE>
Salon Results of Operations
The following table sets forth Salon's results of operations expressed as a
percentage of net revenues:
<TABLE>
<CAPTION>
Fiscal
Year For the Nine
Ended Months Ended
July 27, 1995 March 31, December 31,
(inception) to ----------- ---------------
March 31, 1996 1997 1998 1997 1998
-------------- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues.................... 100 % 100 % 100 % 100 % 100 %
---- ---- ---- ------ ------
Operating expenses:
Production, content and
product...................... 235 557 245 300 152
Sales and marketing........... 63 150 143 160 126
Research and development...... 27 63 24 30 15
General and administrative.... 22 46 25 32 16
---- ---- ---- ------ ------
Total operating expenses.... 347 816 437 522 309
---- ---- ---- ------ ------
Loss from operations............ (247) (716) (337) (422) (209)
Other income, net............... 5 20 6 7 --
---- ---- ---- ------ ------
Net loss........................ (242)% (696)% (331)% (415)% (209)%
==== ==== ==== ====== ======
</TABLE>
Nine Months Ended December 31, 1998 and 1997
Net Revenues
Salon's net revenues consist of the following:
. Banner advertising revenues and revenues related to sponsorship
advertising;
. Electronic commerce sponsorship revenues, including slotting fees and
commissions related to sales of products and services offered by online
retailing partners through Salon;
. Revenues from the sale of products through Salon Shopping;
. Revenues derived from the syndication of Salon's original content and the
development of content for media sources other than Salon's Web sites;
and
. Fees derived from paid subscription and membership programs.
Salon's net revenues increased 199% to $2.1 million in the nine months ended
December 31, 1998 from $688,991 in the nine months ended December 31, 1997. The
increase in net revenues is primarily attributable to an increase in revenues
derived from banner advertisements, advertising sponsorships and electronic
commerce sponsorships. Salon expects that sponsorship and advertising revenues
will continue to represent the most significant portion of its net revenues for
the foreseeable future. Net revenues derived from subscription fees are
expected to increase in future periods as subscription fees related to
membership in The Well are recognized by Salon.
Net revenues include revenues recognized from advertising barter transactions
of $306,867 in the nine months ended December 31, 1998 and $38,851 in the nine
months ended December 31, 1997.
Operating Expenses
Salon's operating expenses consist of the following:
. Production, content and product expenses;
. Sales and marketing expenses;
. Research and development expenses; and
. General and administrative expenses.
24
<PAGE>
Salon's operating expenses increased 77% to $6.4 million in the nine months
ended December 31, 1998 from $3.6 million in the nine months ended December 31,
1997, but decreased as a percentage of net revenues to 309% from 522% over
these respective periods. The increase in operating expenses for the nine
months ended December 31, 1998 is primarily attributable to increased
production, content and product expenses, as well as increased sales and
marketing expenses. The decrease in operating expenses as a percentage of net
revenues is primarily attributable to an increase in sales of sponsorships and
advertising without a corresponding increase in operational expenses and the
fact that some operating expenses are relatively fixed. Salon expects that
operating expenses will continue to increase substantially as it increases the
scope of its content and communities, expands its marketing efforts and further
develops its technology and infrastructure.
Production, Content and Product Expenses. Production, content and product
expenses consist primarily of payroll and related expenses for Salon's
editorial, artistic and production staff, payments to freelance writers and
artists, and telecommunications and computer related expenses for the support
and delivery of Salon's Web sites. Also included in production, content and
product expenses are costs associated with electronic commerce transactions,
including the costs of product inventory and distribution.
Production, content and product expenses increased 51% to $3.1 million in the
nine months ended December 31, 1998 from $2.1 million in the nine months ended
December 31, 1997, but decreased as a percentage of net revenues to 152% from
300% in these respective periods. The increase in production, content and
product expenses for the nine months ended December 31, 1998 is primarily
attributable to increased costs relating to growth in Salon's editorial and
production staff and payments to freelance writers and artists. The decrease in
production, content and product expenses as a percentage of net revenues is
primarily attributable to an increase in sales of sponsorships and advertising,
and due to the fact that some production and content expenses are relatively
fixed and may be utilized to deliver an expanding number of advertisements.
Salon anticipates that its production, content and product expenses will
continue to grow substantially as it increases staffing to expand the scope and
distribution of its Web sites and online communities and increases its online
retailing efforts.
Sales and Marketing Expenses. Sales and marketing expenses consist of payroll
and related expenses, including commissions, travel expenses and other costs
associated with Salon's advertising and sponsorship sales force, as well as
Salon related advertising, promotional and distribution costs. Sales and
marketing expenses increased 133% to $2.6 million in the nine months ended
December 31, 1998 from $1.1 million in the nine months ended December 31, 1997,
but decreased as a percentage of net revenues to 126% from 160% over these
respective periods. Sales and marketing expenses include expenses incurred from
barter transactions of $306,867 for the nine months ended December 31, 1998 and
$38,851 for the nine months ended December 31, 1997. The increase in sales and
marketing expenses is primarily attributable to additional hiring of sales and
marketing personnel and additional marketing costs associated with promoting
the Salon brand. The decrease in sales and marketing expenses as a percentage
of net revenues is primarily attributable to increased sales of advertisements
and sponsorships. Salon anticipates that sales and marketing expenses will
increase substantially in the future as it increases its sales force and
undertakes advertising and other marketing campaigns to further promote the
Salon brand and attempt to increase revenue.
Research and Development Expenses. Research and development expenses consist
of costs associated with the development of technology, including Salon's
publishing platform software and archival database. Research and development
expenses increased 50% to $304,701 in the nine months ended December 31, 1998
from $203,408 in the nine months ended December 31, 1997, but decreased as a
percentage of net revenues to 15% from 30% over these respective periods. The
increase in research and development expenses is primarily attributable to new
technological developments undertaken by Salon, including the design and
development of a new publishing platform and advertising delivery system, and
to a lesser extent, an increase in technical support staff. The decrease in
research and development expenses as a percentage of net revenues is primarily
attributable to an increase in sales of advertising and sponsorships. Salon
expects that research and development expenses will continue to increase
substantially in the future as it further develops and refines its publishing
platform, advertising delivery technology and online retailing capabilities.
25
<PAGE>
General and Administrative Expenses. General and administrative expenses
consist primarily of payroll and related expenses and related costs for general
corporate functions. General and administrative expenses increased 53% to
$337,908 in the nine months ended December 31, 1998 from $221,082 in the nine
months ended December 31, 1997, but decreased as a percentage of net revenues
to 16% from 32% over these respective periods. The increase in general and
administrative expenses is primarily attributable to salary and related
expenses for additional personnel, higher professional fees and recruitment
expenses. The decrease in general and administrative expenses as a percentage
of net revenues is primarily attributable to an increase in advertising and
sponsorship sales and due to the fact that certain general and administrative
expenses are relatively fixed. Salon expects that general and administrative
expenses will continue to increase as it expands its operations and incurs
additional costs related to becoming a public company.
Other Income, Net
Other income consists primarily of interest earned on Salon's cash, cash
equivalents and short term investments, offset by interest expense on
borrowings. Other income decreased to $1,657 in the nine months ended December
31, 1998 from $51,536 in the nine months ended December 31, 1997. The decrease
in other income in the aggregate is primarily attributable to a decrease in the
amount of interest earned by Salon due to a decrease in Salon's cash and cash
equivalents and an increase in interest expense associated with additional
borrowing under Salon's line of credit.
Fiscal Years Ended March 31, 1998 and 1997
Net Revenues
Net revenues increased 314% to approximately $1.2 million in the fiscal year
ended March 31, 1998 from $279,524 in the fiscal year ended March 31, 1997. The
increase in net revenues is primarily attributable to an increase in the number
of advertisements and sponsorships sold by Salon. Net revenues include revenues
recognized from barter transactions of $75,424 for the fiscal year ended March
31, 1998 and zero for the fiscal year ended March 31, 1997.
Operating Expenses
Operating expenses increased 122% to $5.1 million in the fiscal year ended
March 31, 1998 from $2.3 million in the fiscal year ended March 31, 1997, but
decreased as a percentage of net revenues to 437% from 815% over these
respective periods. The increase in operating expenses for the fiscal year
ended March 31, 1998 is primarily attributable to increased production, content
and product expenses as well as increased sales and marketing expenses. The
decrease in operating expenses as a percentage of net revenues is primarily
attributable to an increase in sales of sponsorships and advertising without a
corresponding increase in operational expenses and the fact that certain
production expenses are relatively fixed.
Production, Content and Product Expenses. Production, content and product
expenses increased 82% to $2.8 million for the fiscal year ended March 31, 1998
from $1.6 million in the fiscal year ended March 31, 1997, but decreased as a
percentage of net revenues to 245% from 557% in these respective periods. The
increase in production, content and product expenses for the year ended March
31, 1998 is primarily attributable to increased costs relating to growth in
Salon's editorial and production staff and payments to freelance writers and
artists. The decrease in production, content and product expenses as a
percentage of net revenues is primarily attributable to an increase in sales of
advertising and sponsorships and the fact that some production and content
expenses are relatively fixed and may be utilized to deliver an expanding
number of advertisements.
Sales and Marketing Expenses. Sales and marketing expenses increased 295% to
$1.7 million in the fiscal year ended March 31, 1998 from $418,708 in the
fiscal year ended March 31, 1997, but decreased as a percentage of net revenues
to 143% from 150% over these respective periods. Sales and marketing expenses
26
<PAGE>
include expenses incurred from barter transactions of $75,424 for the fiscal
year ended March 31, 1998 and zero for the fiscal year ended March 31, 1997.
The increase in sales and marketing expenses is primarily attributable to
additional hiring of sales and marketing personnel and additional marketing
costs associated with promoting the Salon brand.
Research and Development Expenses. Research and development expenses
increased 57% to $276,112 in the fiscal year ended March 31, 1998 from $175,614
in the fiscal year ended March 31, 1997, but decreased as a percentage of net
revenues to 24% from 63% over these respective periods. The increase in
research and development expenses is primarily attributable to new
technological developments undertaken by Salon. The decrease in research and
development expenses as a percentage of net revenues is primarily attributable
to an increase in sales of advertising and sponsorships.
General and Administrative Expenses. General and administrative expenses
increased 126% to $291,446 in the fiscal year ended March 31, 1998 from
$129,189 in the fiscal year ended March 31, 1997, but decreased as a percentage
of net revenues to 25% from 46% over these respective periods. The increase in
general and administrative expenses is primarily attributable to payroll and
related expenses for additional personnel and higher professional fees. The
decrease in general and administrative expenses as a percentage of net revenues
is primarily attributable to an increase in sales of advertising and
sponsorships and the fact that some general and administrative expenses are
relatively fixed.
Other Income, Net
Other income increased 33% to $72,768 in the fiscal year ended March 31, 1998
from $54,886 in the fiscal year ended March 31, 1997. The increase in other
income is primarily attributable to an increase in the amount of interest
earned by Salon due to an increase in Salon's cash and cash equivalents.
Income Taxes
No provision for federal and state income taxes has been recorded as Salon
has incurred net operating losses through the fiscal year ended March 31, 1998.
As of March 31, 1998, Salon had approximately $6.2 million of federal and state
net operating loss carryforwards available to offset future taxable income. Due
to the change in Salon's ownership interests in connection with this offering
and prior private placements, Salon's use of these federal and state net
operating loss carryforwards may be subject to certain annual limitations.
Fiscal Year Ended March 31, 1997 and Period from Inception to March 31, 1996
Net Revenues
Net revenues in the fiscal year ended March 31, 1997 were approximately
$279,524 as compared to $196,500 in the period from inception until March 31,
1996. Substantially all of Salon's net revenues in each of these periods were
derived from advertising revenues. The increase in net revenues is primarily
attributable to an increase in the number of advertisements sold by Salon and
also the fact that the fiscal year ended March 31, 1997 contains twelve months
as opposed to the fiscal year ended March 31, 1996, which contains
approximately eight months, due to Salon's inception in July 1995.
Operating Expenses
Operating expenses increased to $2.3 million and 815% of net revenues in the
fiscal year ended March 31, 1997 from $682,469 and 347% of net revenues in the
period from inception until March 31, 1996. The increase in operating expenses
is primarily attributable to increased production, content and product expenses
associated with the establishment of Salon's Web sites.
27
<PAGE>
Production, Content and Product Expenses. Production, content and product
expenses increased to $1.6 million and 557% of net revenues in the fiscal year
ended March 31, 1997 from $463,045 and 235% of net revenues in the period from
inception until March 31, 1996. The increase in production, content and product
expenses is primarily attributable to increased costs relating to growth in
Salon's editorial and production staff and payments to freelance writers and
artists.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$418,708 and 150% of net revenues in the fiscal year ended March 31, 1997 from
$124,090 and 63% of net revenues in the period from inception until March 31,
1996. The increase in sales and marketing expenses is primarily attributable to
additional hiring of sales and marketing personnel and additional marketing
costs associated with promoting the Salon brand.
Research and Development Expenses. Research and development expenses
increased to $175,614 and 63% of net revenues in the fiscal year ended March
31, 1997 from $52,374 and 27% of net revenues in the period from inception
until March 31, 1996. The increase in research and development expenses is
primarily attributable to technological developments related to the
establishment of Salon's Web sites.
General and Administrative Expenses. General and administrative expenses
increased to $129,189 and 46% of net revenues in the fiscal year ended March
31, 1997 from $42,960 and 22% of net revenues in period from inception until
March 31, 1996. The increase in general and administrative expenses is
primarily attributable to salary and related expenses for additional personnel
and higher professional fees.
Other Income, Net
Other income increased to $54,886 in the fiscal year ended March 31, 1997
from $9,919 in the period from inception until March 31, 1996. The increase in
other income is primarily attributable to an increase in the amount of interest
earned by Salon due to an increase in Salon's cash and cash equivalents.
The Well LLC Results of Operations
The following table sets forth The Well LLC's and its predecessor business'
results of operations expressed as a percentage of net revenues. For purposes
of the following discussion, results of operations for the predecessor business
for the period January 1, 1997 through June 30, 1997 and for The Well LLC for
the period July 1, 1997 through December 31, 1997 are combined.
<TABLE>
<CAPTION>
The Well LLC,
Predecessor period from The Well LLC,
Business, period July 1 to Combined, year year ended
from January 1 December 31, ended December December 31,
to June 30, 1997 1997 31, 1997 1998
---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Subscription revenues... 100% 100% 100% 100%
--- --- --- ---
Operating expenses
Cost of subscription
revenues............. 44 46 46 45
Selling and
marketing............ 19 17 18 16
General and
administrative....... 53 62 57 53
--- --- --- ---
Total operating
expenses........... 116 125 121 114
--- --- --- ---
Net loss................ (16)% (25)% (21)% (14)%
=== === === ===
</TABLE>
Fiscal Years Ended December 31, 1998 and 1997
Subscription Revenues
Subscription revenues consists of conferencing service revenues derived from
monthly subscription fees charged to members of The Well LLC's online
community. Net revenues decreased 6% to $484,660 in the year
28
<PAGE>
ended December 31, 1998 from $517,602 in the year ended December 31, 1997. The
decrease in subscription revenues is primarily attributable to a decrease in
subscription fees resulting from a decrease in registered members of The Well
LLC's online community.
Cost of Subscription Revenues
Cost of subscription revenues consists primarily of telecommunications and
computer expenses. Cost of revenues decreased to $217,537 or 45% of
subscription revenues in the year ended December 31, 1998 from $236,529 or 46%
of subscription revenues in the year ended December 31, 1997. The decrease in
cost of subscription revenues is primarily attributable to reduced fees from
The Well LLC's server maintenance provider.
Selling and Marketing Expenses
Selling and marketing expenses consist of payroll and related expenses,
including commissions and other costs associated with The Well LLC's
advertising and promotional costs. Sales and marketing expenses decreased to
$78,044 or 16% of subscription revenues in the year ended December 31, 1998
from $92,546 or 18% of subscription revenues in the year ended December 31,
1997. The decrease in selling and marketing expenses in the aggregate and as a
percentage of subscription revenues is primarily attributable to reduced
expenses for community development and promotional materials.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and related
expenses for general corporate functions. General and administrative expenses
decreased to $258,067 or 53% of subscription revenues in the year ended
December 31, 1998 from $296,900 or 57% of subscription revenues in the year
ended December 31, 1997. The decrease in general and administrative expenses in
the aggregate and as a percentage of subscription revenues is primarily
attributable to operating efficiencies in general corporate functions.
29
<PAGE>
Selected Quarterly Results of Operations
The following table presents Salon's results of operations for each of the
last six quarters. The quarterly information is unaudited, but management
believes that the information regarding these quarters has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments have been
included to present fairly the unaudited quarterly results when read in
conjunction with the financial statements and related notes appearing elsewhere
in this prospectus.
Salon Quarterly Results of Operations
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30, September 30, December 31,
1997 1997 1998 1998 1998 1998
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 212 $ 381 $ 467 $ 408 $ 619 $ 1,031
------- ------ ------ ------- ------- -------
Production, content and
product................ 715 684 764 913 1,032 1,190
Sales and marketing..... 416 396 446 747 850 983
Research and
development............ 70 66 75 88 101 116
General and
administrative......... 75 72 79 98 111 129
------- ------ ------ ------- ------- -------
Total operating
expenses............. 1,276 1,218 1,364 1,846 2,094 2,418
------- ------ ------ ------- ------- -------
Loss from operations.... (1,064) (837) (897) (1,438) (1,475) (1,387)
Other income (expense),
net.................... 27 10 19 13 (9) (2)
------- ------ ------ ------- ------- -------
Net loss................ $(1,037) $ (827) $ (878) $(1,425) $(1,484) $(1,389)
======= ====== ====== ======= ======= =======
</TABLE>
Salon has experienced seasonal and quarterly fluctuations in sales, operating
expenses and net loss. Because Salon manages its business to achieve long-term
strategic objectives, it may make decisions that it believes will enhance its
long-term growth and profitability, even if such decisions adversely affect
quarterly earnings. Salon believes that advertising sales in traditional media,
such as television, generally are lower in the first and third calendar
quarters of each year, and that advertising expenditures fluctuate
significantly with economic cycles. Depending on the extent to which the
Internet is accepted as an advertising medium, seasonality and cyclicality in
the level of Internet advertising expenditures could become more pronounced.
These factors could have a material adverse affect on Salon's business, results
of operations and financial condition. The results of operations for any
quarter are not necessarily indicative of the results of any future period. The
market price of Salon's common stock may fluctuate significantly in response to
these quarter-to-quarter variations.
Liquidity and Capital Resources
Salon has funded its capital requirements primarily through the sale of
preferred stock and a mix of short-term and long-term borrowing. Cash and cash
equivalents totaled approximately $1.6 million at December 31, 1998, as
compared to $1.9 million at March 31, 1998.
Net cash used for operations was $3.8 million in the nine months ended
December 31, 1998, as compared to $2.6 million in the nine months ended
December 31, 1997. Net cash used for operations was $3.5 million in the fiscal
year ended March 31, 1998, as compared to $1.8 million in the fiscal year ended
March 31, 1997. The principal use of cash from operations was the net loss
generated from operations due to the expansion of Salon's editorial, marketing,
sales and production staff.
Net cash used for investing activities totaled $394,152 in the nine months
ended December 31, 1998, as compared to $295,030 for the nine months ended
December 31, 1997. Net cash used for investing activities was $381,665 in the
fiscal year ended March 31, 1998, as compared to $81,022 for the fiscal year
ended March 31, 1997. Net cash used for investing activities in each of these
respective periods consisted primarily of purchases of certain property and
equipment, including computer equipment.
30
<PAGE>
Net cash provided by financing activities was $3.8 million in the nine months
ended December 31, 1998, as compared to $3.2 million in the nine months ended
December 31, 1997. Net cash provided by financing activities was $3.2 million
in the fiscal year ended March 31, 1998 as compared to $3.3 million in the
fiscal year ended March 31, 1997. The principal sources of cash provided by
financing activities in each of these respective periods was the sale of shares
of Salon's preferred stock, as described below. To a lesser extent, cash
provided by financing activities also resulted from borrowings under Salon's
line of credit in the fiscal year ended March 31, 1998 and the nine months
ended December 31, 1997 and 1998.
In September and November 1998 and April 1999, Salon raised approximately
$2.75 million, $750,000 and $11.5 million through the issuance of 3,869,844
shares of its Series C preferred stock at a price of $3.88 per share. Each
share of Series C preferred stock is convertible into one share of common
stock. The Series C preferred stock has anti-dilution and dividend preferences
similar to Salon's Series A and Series B preferred stock, and priority as to
liquidation over common stock and all other series of preferred stock. The
Series C preferred stock will convert into common stock upon closing of this
offering.
In November 1997, Salon raised approximately $3.0 million through the
issuance of 949,365 shares of its Series B preferred stock at a price of $3.16
per share. Each share of Series B preferred stock is convertible into one share
of common stock. The Series B preferred stock has anti-dilution and dividend
preferences similar to Salon's Series A and Series C preferred stock, and
shares liquidation preferences with shares of Salon's Series A preferred stock.
The Series B preferred stock will convert into common stock upon closing of
this offering.
In December 1995, August 1996, and February 1997 Salon raised an aggregate of
approximately $5.0 million through the issuance of 2,500,000 shares of its
Series A preferred stock at a price of $2.00 per share. Each share of Series A
Preferred stock is convertible into one share of common stock. The Series A
preferred stock has anti-dilution and dividend preferences similar to Salon's
Series B and Series C preferred stock, and shares liquidation preferences with
shares of Salon's Series B preferred stock. The Series A preferred stock will
convert into common stock upon closing of this offering.
Salon's capital requirements depend on numerous factors, including the
success of Salon's strategies for generating revenues and the amount of
resources it devotes to investments in its network, sales, marketing and brand
promotion. Salon's expenditures have substantially increased since inception as
its operations and staff have grown and Salon anticipates that its expenditures
will continue to increase substantially for the foreseeable future. In
addition, Salon will continue to evaluate possible investments in businesses,
products and technologies complementary to its existing business.
Salon currently anticipates that its available cash resources, combined with
the net proceeds of this offering, will be sufficient to meet its anticipated
needs for working capital and capital expenditures for at least the 12 months
following the date of this prospectus. Salon may need to raise additional
funds, however, in order to fund more rapid expansion, to develop new or
enhance existing services, to respond to competitive pressures or to acquire
complementary businesses, products or technologies. If Salon raises additional
funds by selling equity securities, the percentage ownership of Salon's
stockholders will be reduced and its stockholders may experience additional
dilution. Salon cannot be sure that additional financing will be available on
terms favorable to Salon, or at all. If adequate funds are not available on
acceptable terms, Salon's ability to fund expansion, react to competitive
pressures, or take advantage of unanticipated opportunities would be
substantially limited. If this occurred, Salon's business would be
significantly harmed.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with these year 2000 requirements or risk system
failure or miscalculations that could cause disruptions of normal business
activities.
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State of Readiness
Salon has made a preliminary assessment of the year 2000 readiness of its
operating financial and administrative systems, including the hardware and
software that support Salon's systems. Salon's assessment plan consists of:
. quality assurance testing of its internally developed proprietary
software;
. contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of Salon's services to its users;
. contacting vendors of third-party systems;
. assessing repair or replacement requirements;
. implementing repair or replacement; and
. creating contingency plans in the event of year 2000 failures.
Salon's year 2000 task force is currently conducting an inventory of and
developing testing procedures for all software and other systems that it
believes might be affected by year 2000 issues. Since third parties developed
and currently support many of the systems that Salon uses, a significant part
of this effort will be to ensure that these third-party systems are year 2000
ready. Salon plans to confirm this compliance through a combination of the
representation by these third parties of their products' year 2000 readiness,
as well as specific testing of these systems. Salon plans to complete this
process prior to the end of the third calendar quarter of 1999. Until such
testing is completed and such vendors and providers are contacted, Salon will
not be able to completely evaluate whether its systems will need to be revised
or replaced.
Costs
To date, Salon has spent an immaterial amount on year 2000 readiness issues,
but expects to incur an additional $350,000 to $500,000 in the future in
connection with identifying, evaluating and addressing year 2000 readiness
issues. Most of Salon's expenses have related to, and are expected to continue
to relate to, the operating costs associated with time spent by employees and
consultants in the evaluation process and year 2000 readiness matters
generally. Such expenses, if higher than anticipated, could have a material
adverse effect on Salon's business, results of operations and financial
condition.
Risks
Salon is not currently aware of any year 2000 readiness problems relating to
its internally-developed proprietary systems that would have a material adverse
effect on Salon's business. Salon may discover year 2000 readiness problems in
these systems that will require substantial revision. In addition, third-party
software, hardware or services incorporated into Salon's material systems may
need to be revised or replaced, all of which could be time-consuming and
expensive. The failure of Salon to fix or replace its internally developed
proprietary software or third-party software, hardware or services on a timely
basis could result in lost revenues, increased operating costs, the loss of
users, advertisers or sponsors and other business interruptions, any of which
could have a material adverse effect on Salon's business, results of operations
and financial condition. Moreover, the failure to adequately address year 2000
readiness issues in its internally developed proprietary software could result
in claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
Salon is heavily dependent on a significant number of third-party vendors to
provide both network services and equipment. A significant year 2000-related
disruption of the services or equipment that third-party vendors provide to
Salon could cause Salon's users, advertisers or sponsors to consider seeking
alternate content providers or cause an unmanageable burden on its technical
support, which in turn could materially and adversely affect Salon's business.
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In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of Salon's control
may not be year 2000 ready. The failure by such entities to be year 2000 ready
could result in a systemic failure beyond the control of Salon, such as a
prolonged Internet, telecommunications or electrical failure, which could also
prevent Salon from delivering its services to its customers, decrease the use
of the Internet or prevent users from accessing its Web sites which could have
a material adverse effect on Salon's business.
Contingency Plan
As discussed above, Salon is engaged in an ongoing year 2000 assessment and
has not yet developed any contingency plans. The results of Salon's year 2000
simulation testing and the responses received from third-party vendors and
service providers will be taken into account in determining the nature and
extent of any contingency plans Salon adopts.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure About Segments of an Enterprise and Required Information, which
established standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic area and major customers.
SFAS No. 131 has been adopted by Salon at March 31, 1999. Salon does not expect
the adoption of SFAS No. 131 to have an impact on Salon's results of
operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. Salon does not expect the adoption of this standard
to have a material impact on Salon's results of operations, financial position
or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As Salon has historically
expensed these costs, the adoption of SOP 98-5 is not expected to have a
significant impact on Salon's results of operations, financial position or cash
flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, which are collectively referred to as derivatives,
and for hedging activities. SFAS No. 133 is effective for all fiscal quarters
for fiscal years beginning after June 15, 1999. Salon is assessing the
potential impact of this pronouncement on its financial statements; however,
Salon does not expect any significant impact since Salon currently does not
have any derivative instruments and does not anticipate acquiring any.
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BUSINESS
Overview
Salon.com is a leading Internet media company that produces a network of ten
subject-specific, demographically-targeted Web sites and a variety of online
communities. Salon believes that its network of Web sites combines the
thoughtfulness of print, the timeliness of television and the interactivity of
talk radio. Salon's ten content sites provide news, features, interviews and
regular columnists on specific topics, from arts and entertainment to parenting
and health. The main entry and navigation point to Salon's various content
sites is Salon's home page at www.salon.com. Salon's online communities allow
users to interact and discuss Salon content and other topics via electronic
messaging. Salon's online communities include Table Talk, a free interactive
forum, and The Well, a paid subscription community. Because of Salon's
reputation for community building, Salon also has agreed with third parties to
host communities within its network. Salon's users can access Table Talk or The
Well through www.salon.com or through Salon's ten content Web sites.
Salon believes that its original, award-winning content and highly regarded
interactive communities allow Salon to attract and retain users who are
younger, more affluent, better educated and more likely to make online
purchases than typical Internet users. Salon believes its user profile makes
its network of Web sites and online communities a valuable media property for
advertisers and retailers who are increasingly allocating marketing resources
to target consumers online.
In March 1999, approximately 1.2 million unique users visited Salon's network
of Web sites, generating about 13.2 million page views, compared to
approximately 790,000 unique users and 7.7 million page views in March 1998. As
of March 1999, Salon's interactive communities consisted of approximately
109,500 registered users. Salon's Table Talk forum had approximately 102,500
registered users as of March 1999, compared to approximately 81,000 registered
users as of March 1998. As of Salon's acquisition of The Well in March 1999,
The Well had approximately 7,000 paid subscribers.
As of March 1999, Salon had more than 175 advertisers and advertising
sponsors. Salon has also recently begun to extend its electronic commerce
efforts throughout its network and to develop electronic commerce sponsorships
and its own online retailing capabilities through Salon Shopping. Salon
believes that the online spending habits of its users present opportunities for
Salon to capture additional revenues, both within Salon Shopping and on the Web
pages of its commercial partners.
Industry Background
Growth in Internet Usage
The Internet is fast becoming one of the most important mediums for global
communication and business, allowing millions of people to gather and transfer
information instantly. International Data Corporation, a market research firm,
predicts that worldwide Internet use will grow to 319.8 million users in 2002
from 68.7 million users in 1997, representing 366% growth over this period. The
growth in Internet users is driven by numerous factors, including:
. increased public awareness of the Internet;
. the growing base of personal computers and improved Internet access;
. increased quantity and quality of Web content; and
. growing selection and acceptance of electronic commerce.
The Internet provides a unique opportunity for content providers to reach a
broad base of readers on a real-time basis with a diverse body of information.
Unlike traditional media, the Internet permits dissemination of content without
geographic limits, print production costs or broadcast capacity constraints.
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Growth in Online Advertising
The Internet is an attractive medium for advertisers because it allows more
flexibility, interactivity and measurement capabilities than traditional media,
including print, television and radio, and provides users with immediate access
to information about advertisers and their products. For example, the Internet
allows advertisers to change messages frequently in response to market
developments or current events. The Internet also allows advertisers to gather
demographic information about users and to deliver targeted messages to
specific consumer groups. According to Jupiter Communications, an independent
industry research firm, total Internet advertising revenues grew from $300
million in 1996 to $1.9 billion in 1998. Jupiter Communications projects total
Internet advertising revenues will grow to $7.7 billion in 2002, representing
an average annual growth rate of 45% from 1998 to 2002.
[GRAPH OF TOTAL INTERNET ADVERTISING REVENUES]
Source: Jupiter Communications
According to International Data Corporation, of the $187 billion spent on
advertising in 1997, 0.3% was spent on Internet media. In 1998, 0.8% of all
dollars spent on advertising were spent on Internet media. Salon believes that
the potential to shift advertising spending away from traditional media to the
Internet presents a significant growth opportunity for Internet advertising.
Growth in Electronic Commerce
The growing popularity of the Internet represents a substantial opportunity
for companies to take advantage of the potential for conducting commercial
transactions online, or "electronic commerce." IDC estimates that commerce over
the Internet will increase from over $12 billion worldwide at the end of 1997
to approximately $425 billion worldwide by the end of 2002. Jupiter
Communications predicts that by 2002, 44% of Internet users will make purchases
online, as compared to the 22% who did so in 1998. While electronic commerce is
expected to have broad application, industry experts believe that the most
significant growth in electronic commerce activity will be in the markets for
computer products, travel, entertainment, apparel, financial services and
information services.
The Need for Compelling Internet Destinations
As Internet companies compete to attract and retain users, unique content has
become increasingly valuable. Salon believes compelling, original content
produced by talented editorial staff is a principal feature that distinguishes
Web sites from each other.
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Web sites built around focused, proprietary content provide advertisers with
targeted channels for reaching their desired market. To date, online
advertisers and retailers have spent most of their marketing budgets on Web
sites with the highest traffic volume, including "portals," which bring
together and organize a wide variety of content, and "search engines," which
allow users to search for specific information. As Internet advertising and
electronic commerce mature, however, Salon believes online advertisers and
retailers will increasingly spend their marketing dollars on more focused Web
sites to reach specific demographic groups, as has occurred in traditional
advertising media.
According to a 1998 study by Forrester Research, a market research firm, a
major shift in online advertising spending will occur as advertisers move media
campaigns from generalized portals toward more narrowly targeted Web sites.
Targeted sites provide content on designated topics, and therefore attract
users looking for subject-specific information. Because targeted sites are
usually the direct source of information the user wants, rather than simply a
gateway to other collections of information like a portal or search engine,
these sites are frequently referred to as "destination sites." Forrester
estimates that portals currently receive 59% of all Internet advertising
dollars while only accounting for 15% of Web traffic. However, Forrester
predicts that by 2002, destination sites will attract 70% of online advertising
dollars. Destination sites are attractive to advertisers and retailers because
these sites allow more seamless integration of marketing campaigns and product
sales with related content, and more effectively target the advertisers' and
retailers' most likely customers. In addition, destination sites tend to have
longer use periods, or "stickiness," further enhancing marketing and retailing
opportunities.
To address the perceived lack of compelling content available through
portals, a number of skillfully produced destination sites have been developed
to target specific demographic groups. Examples of such sites include
technology-oriented sites such as C/Net and ZDNet, financial news sites
including MarketWatch.com and TheStreet.com, sports-related sites such as
Sportsline.com and ESPN.com and women-oriented sites including iVillage and
Women.com.
While Internet destinations like these provide advertisers and retailers with
targeted marketing opportunities, they also lack the varied appeal necessary to
facilitate broad-based marketing campaigns. Salon believes that the best
opportunity for matching users' needs with those of advertisers and retailers
on the Internet is to develop a network of destination sites that combines the
quality and depth of subject-specific destination sites with the broad reach of
portals and search engines. Salon believes its network of ten subject-specific
Web sites and communities offers advertisers and retailers these benefits.
Salon's Strategy: To Build a Network of Premier Destination Sites
Salon's strategy is to build a network of leading destination sites with
compelling content and engaging interactive communities that will attract
demographically valuable users, premier Internet advertisers and electronic
commerce partners. To establish itself as a leading Internet network, Salon is
pursuing the following goals:
Broaden Revenue Base in Advertising and Electronic Commerce
As of March 1999, Salon derived revenues from a customer base of
approximately 175 online advertisers. Salon believes it can substantially
increase its advertiser base by targeting the more than 4,000 companies that
currently advertise online. Salon intends to increase its revenue from
advertising and electronic commerce through new editorial, marketing and
technological initiatives.
Salon has and intends to continue to develop content-driven, long-term
advertising sponsorships with leading corporate clients. These sponsorships go
beyond simple banner advertising to focus on the advertiser's broader marketing
objectives including branding or product introduction. Salon's sponsorships
also occasionally involve offline marketing events in addition to advertising
on the Salon network. Salon believes that forming these types of arrangements
forges more valuable relationships between Salon and its advertisers.
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To increase its electronic commerce revenues, Salon has developed strategic
arrangements with sponsors including Visa International, barnesandnoble.com,
Microsoft Expedia, drkoop.com and 911gifts.com. Salon will continue to pursue
electronic commerce sponsorships with premier online retailers to expand the
breadth of its electronic commerce offerings. Salon has created a marketplace
designed to sell Salon-branded products as well as high-quality third-party
products through Salon Shopping.
Expand Content and Communities
With the recent launch of its Web sites Salon Health & Body and Salon People,
Salon has expanded its network to ten subject-specific Web sites. Salon
believes that by regularly introducing new editorial categories it will
continue to draw and retain new users and advertisers. In addition, Salon
recently changed its publishing cycle. Instead of publishing new items only
once each day, Salon now posts headline stories, features, columns, reviews and
news updates throughout the day on all ten of its Web sites. This dynamic
publishing strategy is designed to attract a more consistent flow of users
during the daily news cycle, and to significantly increase traffic to Salon's
network of sites.
Salon has recently expanded its online community offerings through its
acquisition of The Well, a paid membership community. Salon intends to further
its focus on developing online communities by aggregating its community
offerings under a primary gateway URL. This new structure will consist of The
Well along with Table Talk, Salon's existing free interactive forum. Salon also
intends to use its expertise in developing interactive communities to custom-
build forums for corporate, professional and educational clients.
Expand Salon's Distribution Partnerships
Building on its strength as a premier Internet content producer, Salon has
established distribution relationships with major portals including America
Online, Lycos, Go.com, AltaVista, @Home and Snap! These arrangements typically
place Salon's logo and content on the distribution partner's site, and provide
links back to Salon's network. Salon also has distribution arrangements with
other major content sites and distributors, including CNN.com and Reuters.
Online and print versions of leading technology publications including Wired
Digital and the Industry Standard also link or refer to Salon content. In order
to further broaden awareness of the Salon brand and drive more users to Salon's
network, Salon continues to pursue distribution arrangements with additional
portals and other leading Internet destination sites.
Grow Salon's Brand Recognition Through Advertising and Syndication
Salon believes that the further establishment of the Salon brand is critical
to drawing more users to its network. Salon believes it has derived
considerable publicity through its award-winning content and can significantly
grow its brand awareness through increased advertising and syndication.
To date, Salon has made limited investments in advertising to promote the
Salon brand. In April 1999, Salon launched its first national marketing
campaign to increase its brand awareness within key consumer groups and urban
markets. Salon's efforts will include online, radio and print advertising
introducing the slogan "Salon. . . Makes You Think." Salon believes this
campaign will capitalize on its appeal to high-value users.
Salon currently licenses its content to magazines around the world through
Salon's own syndication efforts and to daily newspapers through United Features
Syndicate. In addition, Salon has arranged for the publication of two books
derived from Salon's original content: Mothers Who Think: Tales of Real-Life
Parenthood, published in April 1999, and The Salon Readers Guide to
Contemporary Literature, expected to be published in 2000. Salon believes that
continued exposure through these and other traditional media outlets will be
crucial to increasing awareness of the Salon brand.
Enhance Salon Technology to Improve Production, User Experience, Advertising
Delivery and Circulation Analysis
Salon has begun to substantially invest in personnel and software development
tools to create a state-of-the-art online publishing system. This system is
designed to optimize the Salon network's user experience and
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advertising performance. Salon believes its new custom-built, Linux-based
platform will give Salon the ability to store Salon's content in a database and
automatically assemble pages. This system facilitates easier navigation of
Salon's Web sites as well as printing, bookmarking and e-mailing of Salon
content for users. Salon's technological upgrade also includes new circulation
management software to improve user traffic analysis and reporting as well as
an enhanced advertising delivery system.
The Salon Network
Salon's network consists of ten subject-specific destination sites as well as
free and subscription-based interactive communities. The main gateway to these
Web sites and communities is the Salon home page at www.salon.com.
Destination Sites
Salon's subject-specific Web sites provide a continuously updated array of
news, features, interviews and regular columnists.
News Salon News provides headline stories, investigative
features and commentary on daily events. Salon's news
operation distinguished itself in 1998 by breaking
national news stories on the independent counsel's
investigation of President Clinton and the resulting
impeachment proceedings. Salon is investing further in
its news-gathering operations by opening a Washington
news bureau and adding experienced political reporters to
its staff.
Technology Salon Technology posts news stories, exclusive features
and commentary on the business and culture of the digital
world. Salon believes its technology site offers users an
understandable perspective on major trends, including the
Linux "open source" movement, the MP3 format for digital
music and Microsoft's antitrust case. Salon believes that
its technology coverage goes beyond the headlines and
"trade talk" content of other technology Web sites, and
is an important reason that popular sites like C/Net link
to Salon content on a regular basis.
Arts & Salon Arts & Entertainment publishes up-to-the-minute
Entertainment coverage of movies, television and music. Salon's staff
of entertainment critics and reporters is based in
Salon's New York office, and was assembled from
established publications including The New Yorker, Vanity
Fair and the Boston Phoenix. Salon believes its coverage
of popular culture is more insightful and edgy than that
of other online and traditional media.
Mothers Who Salon Mothers Who Think is a critically acclaimed
Think parenting site that features the work of well-known
writers including Anne Lamott, Jayne Anne Phillips,
Bobbie Ann Mason, Julia Alvarez, Katie Roiphe and Sallie
Tisdale. Salon Mothers Who Think publishes essays and
reporting with an honest, unsentimental view of family
life and related social issues. An anthology of Salon
Mothers Who Think stories was published in April 1999 by
Random House/Villard.
Health & Body Salon Health & Body features reporting, commentary and
headline news on the healthcare industry, biomedical
research, alternative medicine, sexual health, nutrition
and fitness. In addition, Salon Health & Body users can
access a database of health information, as well as buy
pharmaceutical products online through Salon's
partnership with drkoop.com, the health services Web site
developed by the former U.S. Surgeon General.
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Books Salon Books publishes daily reviews of fiction and non-
fiction titles as well as author interviews and exclusive
news coverage of the publishing industry. Salon believes
its presence in the book industry is highlighted and
reinforced each year by the Salon Book Awards, an online
and offline event recognizing Salon editors' choices for
the ten best books of the year. Salon Books is sponsored
by barnesandnoble.com, Salon's electronic commerce
partner for book retailing.
Media Salon Media covers the broadcast, print and electronic
press in a critical and irreverent manner. The site
features the work of three columnists who offer scoops as
well as timely analysis on the media industry.
Travel Salon Travel is an award-winning site known for its
literary quality, featuring well-known writers including
Paul Theroux, Peter Mayle, Isabel Allende and Jan Morris.
Salon Travel also offers service features including a
traveler's advice column, a readers' tips department and
a flight attendant's diary. In addition, the site
provides users the opportunity to buy airline tickets and
hotel accommodations through Salon's electronic commerce
partnership with Microsoft Expedia.
People Salon People focuses on the world of celebrities,
covering notable figures in entertainment, politics,
business, technology and other fields that compel public
interest. Salon People includes a weekly profile series,
Brilliant Careers, sponsored by Lexus, as well as a daily
column of celebrity "dish," obituaries and interviews.
Comics Salon Comics serves as a showcase for regular Salon
cartoonists including Tom Tomorrow and Ruben Bolling, as
well as Bob Callahan and Spain Rodriguez's original comic
serial, "Dark Hotel."
Online Communities
Salon's online communities allow users to discuss Salon content, as well as
to interact with other users and Salon's editorial staff. Salon's network of
communities is accessible through www.salon.com and Salon's ten subject-
specific sites. These communities help foster user loyalty and stickiness,
qualities valued by Internet advertisers and online retailers.
Table Talk
Salon's Table Talk is a free interactive community where Salon users can
share their opinions on a wide variety of topics with Salon editors and with
each other. Salon also frequently arranges for featured guests, including well-
known commentators and writers, to join Table Talk discussions. Salon's Table
Talk is one of the most popular communities on the Web, according to a survey
conducted in May 1998 by Forum One, an Internet community measurement service,
which ranked online discussion groups by their number of postings. As of March
1999, Table Talk had approximately 102,500 registered members and more than
4,000 different ongoing Table Talk discussions on a wide range of subjects.
The Well
The Well, a community which Salon acquired in March 1999, has been operating
since 1985 and is one of the most established Internet community brands, with
approximately 7,000 registered users as of March 1999. In contrast to Table
Talk, The Well is a paid subscription community that provides Salon with direct
revenues from its users. Active members of The Well pay a fee of $10 to $15 per
month to participate in private discussion groups. Salon intends to build on
The Well's established reputation as a premier interactive community and
promote The Well on Salon's network to its established user base as a forum for
highly focused and engaged discussion.
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Community Partnerships
Salon's reputation for building online communities creates opportunities to
establish communities for other content providers. Recently, Salon entered into
agreements to establish communities for National Public Radio and Go.com. Salon
believes that building third-party communities provides it with attractive
cross-marketing opportunities. It also gives Salon the opportunity to derive
additional advertising, sponsorship and electronic commerce transaction
revenues by providing user-driven forums outside of Salon's natural user base.
Salon intends to develop additional community partnerships to establish Salon
as the preferred destination for compelling online discussions.
Distribution Agreements
Salon has entered into a number of distribution agreements to generate
traffic and to promote the Salon brand name. Many of these agreements are
"content-for-carriage," in which Salon provides its proprietary content to a
distribution partner and receives prominent placement of its logo and content
on the distribution partner's site, as well as links back to Salon's network.
Salon has entered into distribution and content relationships with many of
the major portal and content aggregation sites on the Web, including:
<TABLE>
<S> <C> <C>
. America Online . TheStreet.com . EchoStar
. AltaVista . CNN.com . PointCast
. Lycos . @Home . WebTV
. Go.com . C/Net . Snap!
. Netscape . Rocket eBook . Reuters
</TABLE>
In August 1998, Salon entered into a two-year interactive services agreement
with America Online. Under the agreement, Salon has an anchor tenancy position
on the AOL service, including a dedicated Salon home page. Salon pays AOL a
carriage fee and AOL guarantees Salon a minimum number of impressions per year.
In September 1998, Salon entered into a three-year content distribution
arrangement with One Zero Media Inc. Under the agreement, Salon receives top-
level positioning within AltaVista's entertainment channel, and is guaranteed a
minimum number of click-throughs from the AltaVista service. Salon pays One
Zero Media a carriage fee, consisting of a combination of cash and barter
advertising.
In March 1999, Salon entered into a one-year content distribution agreement
with Lycos. Under the agreement, Salon content is co-branded and marketed
throughout the Lycos site. The resulting traffic is directed to Salon's
servers. Salon receives a percentage of advertising revenue generated on these
co-branded pages and numerous links from top level pages on Lycos' site to
Salon's network.
In November 1998, Salon entered into a one-year content distribution
arrangement with Go.com. Under the agreement, Salon became the anchor tenant of
Go.com's books area, providing book-oriented content that appears on co-branded
pages on the Go.com site. In addition, Salon arranges for and moderates guest
"chats" in the co-branded area. Salon receives a percentage of advertising
revenue generated on these co-branded pages and numerous links from top level
pages on Go.com to Salon's network.
In April 1998, Salon entered into a one-year agreement with Netscape. Under
the agreement, Salon receives prominent placement in Netscape's In-Box Direct
program. Netscape users can subscribe to an e-mail version of Salon featuring
links to Salon's network. In March 1999, Salon extended its relationship with
Netscape to provide headlines to Netscape's My Netscape area. In exchange,
Salon receives links back to Salon's network.
In March 1999, Salon entered into a one-year agreement with TheStreet.com.
Under the agreement, Salon receives TheStreet.com content and presents it in
Salon News. Salon receives a percentage of advertising revenue generated on
these co-branded pages.
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In October 1998, Salon entered into a month-to-month agreement with CNN
Interactive. Under the agreement, Salon Books content is co-branded on
CNN.com's books area. Salon also receives links back to Salon's network.
In December 1996, Salon entered into an agreement with @Home under which
Salon content and headlines appear on the @Home service, and Salon receives
links back to Salon's network.
In February 1999, Salon entered into a three-month, renewable agreement with
C/Net. Under this agreement, links to two Salon Technology stories per week are
presented on C/Net's News.com site, and Salon links to one News.com story per
day.
In December 1998, Salon entered into a two-year agreement with NuvoMedia's
Rocket eBook. Under the agreement, Salon content is distributed to users of the
Rocket eBook service via a Web site operated by Rocket eBook. Salon receives
prominent branding on the NuvoMedia Web site and has the right to sell Rocket
eBooks from Salon's network. Salon will receive a percentage of sales of Rocket
eBooks sold on Salon's network.
In January 1999, Salon entered into a three-year data broadcasting agreement
with EchoStar. Under the agreement, Salon content, including multimedia
components, will be distributed via satellite as a paid "interactive channel"
available to EchoStar's 1.7 million subscribers through PCs and televisions.
Salon receives a share of the subscription revenue generated by the paid
interactive channel.
In July 1997, Salon entered into a agreement with PointCast under which Salon
content is "pushed" to PointCast users via headlines provided by Salon to
PointCast on a daily basis.
In June 1997, Salon entered into a month-to-month agreement with WebTV, under
which Salon content is distributed on WebTV's entertainment channel.
In July 1997, Salon entered into a month-to-month agreement with Snap!, under
which Salon provides headlines which are featured on Snap!'s Web site, in
exchange for links back to Salon's network.
In April 1999, Salon entered into an two-year agreement with Reuters, under
which Salon provides technology-related content to Reuters' new digital news
service in exchange for links back to Salon's network.
Revenue Sources
Salon has derived a significant amount of its revenues to date from Internet
advertising and sponsorships from electronic commerce partners and advertisers.
For the fiscal year ended March 31, 1998, advertising and sponsorship revenues
accounted for 99% of Salon's net revenues, and for the nine months ended
December 31, 1998, advertising and sponsorship revenues accounted for 93% of
Salon's net revenues.
Advertising Sponsorships and Banner Advertising
Salon has adopted a strategy of selling long-term advertising sponsorships in
addition to short-term banner advertising. Salon's sponsorship arrangements
differ from traditional banner advertising in that they are designed to achieve
broad marketing objectives including brand awareness, product introduction and
occasional editorial content integration. Salon's sponsors often place their
advertising adjacent to related editorial content to enhance their marketing
campaigns. Salon's sponsorship arrangements generally have longer terms than
typical banner advertising placements and provide for value-added components.
Salon also offers exclusive category opportunities to sponsors, including
Lexus' sponsorship of Salon's Brilliant Careers editorial series.
Salon has a large and growing base of advertisers and consistently sells a
high percentage of its advertising space. Due to the high-value demographics of
its users, Salon believes that it is able to attract premier Internet
advertisers willing to pay higher CPM's, or cost per thousand impressions, than
are paid to other Internet destinations. Salon's average CPM of $23 per
contract is approximately 53% higher than most portals, for which Jupiter
Communications estimates a CPM average of $15.
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According to a user survey conducted by Cyber Dialogue, an independent
research firm, the Salon user base includes the following valuable
demographics:
. 90% are between the ages of 18 and 49;
. 44% earn $60,000 or more per year;
. 32% earn $75,000 or more per year;
. 19% earn $100,000 or more per year;
. 98% have earned a college degree, or are pursuing one;
. 45% have earned a post-graduate degree, or are pursuing one;
. 69% have professional, managerial or technical positions; and
. At least 77% have conducted electronic commerce transactions.
Additionally, the Cyber Dialogue survey also found that Salon users spend an
average of 23 minutes on Salon's network each time they visit.
For the fiscal year ended March 31, 1998, IBM accounted for approximately 16%
of Salon's revenues and Borders accounted for approximately 37% of Salon's
revenues. For the nine months ended December 31, 1998, Borders accounted for
approximately 18% of Salon's revenues. Some of Salon's 175 premier advertisers
and sponsors include:
<TABLE>
<S> <C> <C> <C>
. Mercedes-Benz . Visa International . Starbucks . Apple
. Lexus . Discover Brokerage . Macy's . IBM
. Ford . Ameritrade . PolyGram . Intel
. Budget Rent-a-Car . AT&T . JCPenney's . Microsoft
</TABLE>
In April 1999, Salon significantly revised the design of its network of Web
sites to increase advertising space per page, including new space for network-
wide and content-specific sponsorships. Salon believes the increased
advertising inventory provided by the redesign of its network will enable it to
deliver significantly more advertising impressions and revenue opportunities in
the future.
Electronic Commerce Sponsorships and Transactions
Salon believes that the buying patterns of its user base make its network of
Web sites uniquely suited to online retailing. According to Cyber Dialogue, at
least 77% of Salon's users have made purchases over the Internet, compared to
an industry average of 22% in 1998, as estimated by Jupiter Communications.
Salon's strategy for capturing electronic commerce revenues is to enter into
sponsorships with premium online retailers that provide for slotting fees and
revenue-sharing on transactions. Slotting fees are paid to Salon by a
particular retailer for a measure of exclusivity in the retailer's industry
segment.
In April 1999, Salon entered into a one-year agreement with 911gifts.com,
under which 911gifts.com was granted the right to become the exclusive third-
party gift product retailer for Salon. The agreement requires Salon to provide
a guaranteed number of impressions and links to 911gifts.com. In addition to
slotting fees, Salon receives a percentage of net profits from the sale of gift
products through a co-branded storefront on Salon's site, and a percentage of
advertising revenue on co-branded pages.
In March 1999, Salon entered into a three-year agreement with drkoop.com.
Under the agreement, Salon Health & Body content is presented in a co-branded
fashion on both Salon's and drkoop.com's sites. Salon receives a percentage of
net sales of pharmaceutical products through a co-branded storefront on Salon's
site, and a percentage of advertising revenues from the co-branded pages on
Salon's site. Salon guarantees a minimum number of impressions over the term of
the agreement.
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In November 1998, Salon entered into a two-year agreement with
barnesandnoble.com under which barnesandnoble.com was granted the right to
become the exclusive book retailer for Salon. The agreement requires Salon to
provide a guaranteed number of impressions and links to the barnesandnoble.com
site. In addition to slotting fees, barnesandnoble.com has agreed to provide
Salon with a percentage of all purchases made through Salon beyond a minimum
amount of purchases.
In October 1998, Salon entered into a six-month agreement with online travel
service Microsoft Expedia, under which Expedia was granted the right to become
the exclusive Internet travel agency for Salon. The agreement requires Salon to
provide a guaranteed number of transfers to Expedia and the establishment of
accounts. In addition to slotting fees, Expedia has agreed to pay Salon a
royalty for each Expedia account opened through Salon and a fee for airline
tickets purchased by Salon users.
Salon intends to continue to develop similar electronic commerce partnerships
with retailers that provide goods and services tied closely to specific areas
of its content. Salon's architectural design provides each of its destination
sites with opportunities for electronic commerce tie-ins.
In addition to electronic commerce sponsorships, Salon has established its
own online store, Salon Shopping. Salon Shopping offers an expanding range of
upscale Salon-branded and third party products, as well as goods offered by its
retailing partners. As Salon expands its relationships with online retailing
sponsors, it expects Salon Shopping to provide a destination where Salon users
can benefit from the range of commerce opportunities available throughout the
Salon network.
Syndication and Licensing
Since its inception, Salon has syndicated and licensed its content to media
companies worldwide for publication on Web sites, and in newspapers and
magazines. In addition to revenues, syndication and licensing provide Salon
with valuable exposure for the Salon brand and additional traffic to Salon's
network. These arrangements also require prominent placement of Salon's logo
and primary Internet address in reproductions of its content.
Since 1997, Salon has maintained a worldwide agreement with United Features
Syndicate to distribute Salon content to newspapers, both in print and on the
Internet. As of March 1999, Salon content had been syndicated in 72 newspapers.
Salon also directly licenses and syndicates to publications not associated with
United Features Syndicate. Salon has generated syndication revenues from more
than 53 domestic and international magazines and other reprint vehicles.
In addition to its syndication efforts, Salon has entered into agreements
with publishers to produce two books created by Salon's editors. Mothers Who
Think: Tales of Real-Life Parenting was published by Random House/Villard in
April 1999 and The Salon Readers Guide to Contemporary Literature is to be
published by Viking/Penguin in 2000. In addition to creating additional
revenues from previously produced content, Salon believes that such
arrangements are tremendously valuable in promoting the Salon brand beyond its
traditional user base.
Subscription Services
Salon derives revenue from two paid subscription services: The Well and Salon
Members. The Well, a paid subscription online community, was acquired by Salon
in March 1999. As of March 1999, The Well had approximately 7,000 registered
users and generated approximately $485,000 in revenues in its fiscal year ended
December 31, 1998. Salon intends to generate additional subscription revenues
from The Well by promoting the community on Salon's network as a forum for
highly focused and engaging discussions.
Salon has also established Salon Members, an annual membership program, to
provide specific products and services to its user base. Salon Members receive
discounts on purchases from Salon Shopping, Salon's online store, access to the
Members Lounge, a live chat session, free e-mail and Salon merchandise. As of
March 1999, there were approximately 1,050 members enrolled in the Salon
Members program.
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Sales and Marketing
Sales
In order to reach a broad range of potential sponsors, advertisers and
electronic commerce partners, Salon has built its own direct sales organization
of 13 employees located in San Francisco, New York City, Chicago and Los
Angeles. Salon believes its direct sales approach allows it to form stronger
relationships with its advertisers and sponsors. The sales force consists of
regional sales managers, account executives, sales planners and sales
operations staff, under a senior vice president of sales. Salon's sales
organization consults regularly with advertisers, sponsors and their agencies
on design and placement of advertisements and the production and management of
sponsorship campaigns. Salon hires and continues to seek out sales force
representatives with experience in selling advertising in a variety of media.
Salon intends to continue to expand its sales force to establish additional
advertising and sponsorship arrangements.
The majority of Salon's banner advertising and advertising sponsorship sales
are conducted through media buying divisions of advertising agencies. These
agencies determine whether to recommend advertising on Salon's network. In some
instances, Salon may conduct its sales activities directly with banner
advertisers and advertising sponsors. The time between the date of initial
contact with a potential banner advertiser or advertising sponsor and receipt
of a purchase order from the advertiser may range from as little as one week to
up to nine months.
Salon's electronic commerce sponsorships are sold as joint projects by
Salon's sales, business development and electronic commerce staff. These
agreements are typically negotiated directly with the electronic commerce
sponsor, and have a similar sales cycle to advertising sponsorships. Salon's
sales staff works closely with electronic commerce sponsors to integrate
advertising, branding and buying opportunities throughout the Salon network.
Marketing
Over the last three years, Salon's visibility has increased through extensive
publicity. Salon and its staff have been featured on some of the nation's
leading media outlets and programs, including:
<TABLE>
<S> <C> <C>
. ABC .The Wall Street Journal .Meet the Press
. MSNBC .The Washington Post .Good Morning America
. CNBC .The New York Times .Politically Incorrect
. NPR .Time .Morning Edition
. CNNfn .Newsweek .Crossfire
</TABLE>
Salon also uses event marketing to build awareness among influential opinion
leaders in the publishing, advertising and entertainment industry. In January
1999, Salon sponsored the Third Annual Salon Book Awards, celebrating top books
selected by Salon editors. For its new Brilliant Careers editorial series,
Salon will host, with advertising sponsor Lexus, an event honoring successful
individuals from different fields including science, technology, arts and
culture.
Salon has increased its investment in building brand awareness on and off the
Internet and currently has five employees dedicated to marketing. Salon intends
to utilize online advertising, traditional print, radio and television
advertising as well as local and national events to communicate its marketing
message and has engaged an advertising firm to assist in this effort. As part
of its efforts to increase awareness for the Salon brand and drive additional
users to its network, Salon has developed a significant media plan for the
promotion of the Salon brand. This media effort will include online, radio and
print advertising introducing the slogan "Salon . . . Makes You Think."
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Competition
The market for Internet content is relatively new, rapidly changing and
intensely competitive. Traditional media companies, such as television
broadcasters, magazine publishers and radio stations, are constantly refining
their content and strategies to increase their audiences and advertising and
sponsorship revenues. Additionally, the number of Web sites competing for the
attention and spending of users, advertisers and sponsors has increased, and
Salon expects it to continue to increase, particularly because there are so few
barriers to entry on the Internet. Salon competes for users, advertisers and
sponsors with the following types of companies:
. portals, including Excite, Infoseek, Lycos, Yahoo! and Netscape, which
are increasingly trying to deepen their sites with content as a way of
encouraging user stickiness;
. mass consumer online services including America Online and the Microsoft
Network and online services focused on news, politics, technology,
parenting, health and pop culture including CNN.com, MSNBC.com, Slate,
iVillage, Women.com, Feed, Nerve, Thrive, Entertainment Weekly Online,
TimeDigital, C/Net and ZDNet;
. community sites including Cafe Utne, Tripod, Talk City and GeoCities;
. electronic commerce services including Amazon.com, Epicurious Travel and
Sharper Image; and
. traditional print and broadcast media outlets and programs targeted at
high-value audiences, including the New York Times, The Washington Post,
Vanity Fair, Time, Newsweek, Entertainment Weekly, the New Yorker,
Dateline, Politically Incorrect, Entertainment Tonight and Biography.
Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm
Salon's business. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services. Many
of Salon's present and potential competitors are likely to enjoy substantial
competitive advantages, including the following:
. larger numbers of users;
. larger numbers of advertisers;
. greater brand recognition;
. more fully-developed electronic commerce opportunities;
. larger technical, production and editorial staffs; and
. substantially greater financial, marketing, technical and other
resources.
If Salon does not compete effectively or if it experiences any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, its business could be adversely affected.
Infrastructure and Operations
Salon has developed a flexible publishing structure that enables it to
develop compelling and original content while responding quickly to news events
and taking advantage of the ease of distribution provided by the Internet.
Editors work with staff writers as well as with a variety of experienced
contributing writers, freelance contributors and columnists. Ideas for Salon
content flow from editor to writer and writer to editor, as well as from
readers to editors. Weekly editorial meetings serve as a filter for content
proposals and determine what content will occupy the featured position on
Salon's home page at www.salon.com. All content that appears on Salon's network
of Web sites goes through a rigorous editorial process. Site editors work with
writers from assignment through final editing of material.
Salon has deployed a versatile technical infrastructure and backend systems
to support its mission of providing first-rate content, community and commerce
on the Internet. Salon content is developed on a proprietary software platform
and captured in an Oracle database for reuse in Web and other formats. This
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system allows Salon content to be easily redistributed to other Web sites,
newspapers and magazines, electronic devices including electronic books, pagers
and handheld devices, and other print or electronic media.
Salon's Web sites are served from a mixed environment including a variety of
servers using the Windows NT, Solaris and Linux operating systems. Salon's top
technical priority is the fast delivery of pages to its users. Salon's systems
are designed to handle significant traffic growth through the use of load-
balancing among multiple servers. Salon also relies on server redundancy to
help Salon achieve its goal of 24 hour, seven-day-a-week site availability.
Regular automated backups protect the integrity of Salon data.
Salon servers are maintained at Frontier GlobalCenter's media distribution
center in Sunnyvale, California. Salon's contract with Frontier GlobalCenter
provides bandwidth on demand to meet the fluctuating needs of Salon's network.
Frontier GlobalCenter offers high-speed connections to major Internet network
access points, helping ensure fast serving and delivery of Salon's Web sites,
and monitors all servers via human or technical means on a continuous basis.
Salon follows strict password management procedures to protect access to its
servers. Salon technical staff monitors alerts from Frontier GlobalCenter and,
where relevant, undertakes recommended actions to address security issues and
vulnerabilities. All of Salon's servers are supported by uninterruptable power
supplies for protection against power outages.
Frontier GlobalCenter provides the following features to protect against
natural disaster, human error, and malicious acts:
. Multi-level card key system to control all areas of its facility;
. Visitor and vendor escorts;
. Redundant air conditioning systems;
. Intruder alarms and fire system alarms, monitored 24 hours a day;
. Dual zone, dual sensor, gas-based suppression system;
. Floors, racks, and other support systems with seismic reinforcements to
protect against earthquakes; and
. Redundant power systems consisting of uninterruptable power supplies and
a high-capacity diesel generator.
Although Salon does not yet have a formal disaster recovery plan, one is
currently in development. At Salon's San Francisco and New York offices and
Frontier GlobalCenter, nightly, weekly and monthly backups are performed and
sent to an off-site facility.
Proprietary Rights
Salon's success and ability to compete are significantly dependent on its
proprietary content. Salon relies exclusively on copyright law to protect its
content. While Salon actively takes steps to protect its proprietary rights,
such steps may not be adequate to prevent the infringement or misappropriation
of its content. Infringement or misappropriation of Salon's intellectual
property could materially harm Salon's business. Salon also licenses content
from various freelance providers and other third-party content providers. While
Salon attempts to insure that third-party content may be freely licensed to
Salon, other parties may assert claims of infringement against Salon relating
to this content.
Salon has licensed in the past, and expects to license in the future,
proprietary rights such as trademarks and copyrighted material to third
parties. While Salon attempts to insure that the quality of its brand is
maintained by these licensees, its licensees may take actions that adversely
affect the value of the Salon brand or Salon's other proprietary rights. Any
such adverse acts could materially harm Salon's reputation and its business.
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Salon recently acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to Salon's network of sites
and incorporates Salon's company name, it is a vital part of Salon's
intellectual property assets. Salon does not have a registered trademark on the
address, and therefore it may be difficult for Salon to prevent a third party
from infringing its intellectual property rights in the address. If Salon fails
to adequately protect its rights in the address, or if a third party infringes
its rights in the address or otherwise dilutes the value of www.salon.com,
Salon's business could be harmed.
Legal Proceedings
There are no material legal proceedings pending to which Salon is a party.
Salon's management knows of no legal actions being contemplated against Salon.
Employees
As of April 15, 1999, Salon had 74 full-time employees, including 45 in
production and content, 21 in sales and marketing, three in research and
development and five in administration. As of April 15, 1999, 56 employees were
located in San Francisco, 13 employees were located in New York City, three
were located in Washington, D.C. and one was located in each of Chicago and Los
Angeles.
None of Salon's employees are represented by a union. Salon believes that its
relationship with its employees is good.
Facilities
Salon leases approximately 9,277 square feet of space at 706 Mission Street,
2nd floor, San Francisco, California. The rent for this space is currently
$13,916 per month, and the lease expires on July 31, 2002. Salon has an option
to renew its lease for this space for one five-year term.
Salon leases approximately 3,903 square feet of space at 1500 Broadway, Suite
1402, New York, New York. The rent for this space is currently $13,036 per
month, and the lease expires in March 2004.
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MANAGEMENT
Executive Officers and Directors
Salon's executive officers and directors and their ages as of April 15, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
David Talbot............... 47 Chairman of the board, editor-in-chief and
director
Michael O'Donnell.......... 35 Chief executive officer, president and
director
Andrew Ross................ 52 Vice president of business and strategic
development
Todd Hagen................. 39 Chief financial officer, vice president of
finance and administration and secretary
Bruce Roberts.............. 41 Senior vice president of sales
Patrick Hurley............. 37 Vice president of marketing
Chad Dickerson............. 26 Vice president of technology
Ron Celmer................. 37 Director
Sada Chidambaram........... 54 Director
Norman Lear................ 76 Director
Standish O'Grady........... 38 Director
Jim Rosenfield............. 69 Director
</TABLE>
David Talbot co-founded Salon in 1995. He has served as editor-in chief and
director since Salon's incorporation. He served as chief executive officer from
Salon's incorporation through April 1999. He became chairman of the board in
April 1999. From 1990 to 1995, Mr. Talbot was the arts & features editor for
the San Francisco Examiner newspaper. Mr. Talbot has co-authored three books
and written for numerous publications including The New Yorker, Rolling Stone
and Playboy. Mr. Talbot holds a bachelor of arts degree in sociology from the
University of California at Santa Cruz.
Michael O'Donnell has served as Salon's president and director since December
1996. He became chief executive officer in April 1999. In 1996, he served as
vice president of sales and merchandising at SegaSoft, Inc., a consumer
software publisher. From 1995 to 1996, Mr. O'Donnell was vice president of
worldwide sales at Rocket Science Games, Inc., a consumer software publisher.
From 1993 to 1995, he served as Vice President of Retail Sales at Mindscape,
Inc., a consumer software publisher. Mr. O'Donnell holds a bachelor of arts
degree in political science from the University of California at Berkeley.
Andrew Ross co-founded Salon in 1995. He has served as vice president of
business and strategic development since 1998. From 1995 to 1998, he served as
Salon's managing editor. From 1994 to 1995, Mr. Ross was the foreign/national
editor of the San Francisco Examiner newspaper. Mr. Ross holds a bachelor of
science degree in economics and politics from the University of London and also
attended Columbia University's Graduate School of Journalism.
Todd Hagen has served as Salon's chief financial officer, vice president of
finance and administration and secretary since April 1999. From 1998 to 1999,
he was chief financial officer, vice president, finance and administration at
Worldtalk Corp., an Internet security software company. From 1994 to 1998, he
was chief financial officer and vice president, finance and administration at
HyperMedia Communications, Inc., an Internet publishing company. Mr. Hagen
holds a bachelor of science degree in finance and marketing from The Wharton
School at the University of Pennsylvania and a master of business
administration in finance and accounting from the Anderson Graduate School of
Management at the University of California at Los Angeles.
Bruce Roberts has served as Salon's senior vice president of sales since
April 1999. From 1995 to 1999, he was the general sales manager of KGO-TV/ABC,
Inc., a broadcast affiliate of ABC owned by Disney. From 1989 to 1995 he was a
sales manager at KABC-TV/ABC, Inc., a broadcast affiliate of ABC. Mr. Roberts
holds a bachelor of science degree in physical education from Springfield
College.
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Patrick Hurley has served as Salon's vice president of marketing since March
1999. From 1998 to 1999, he served as Salon's marketing director. From 1996 to
1998, he was management supervisor at Hal Riney & Partners, an advertising
agency. From 1994 to 1996, he served as account supervisor for the J. Walter
Thompson advertising agency. Mr. Hurley holds a bachelor of arts degree in
journalism from Marquette University.
Chad Dickerson has served as Salon's vice president of technology since July
1998. From 1997 until joining Salon, Mr. Dickerson served as director of
applications development for CNN/SI Interactive, an Internet content provider.
From 1996 to 1997, he was the technical product manager for CNN Interactive.
From 1995 to 1996, Mr. Dickerson served as webmaster for the Atlanta Journal-
Constitution newspaper. Mr. Dickerson holds a bachelor of arts degree in
English literature from Duke University.
Ron Celmer has served as a director of Salon since April 1999. Mr. Celmer has
been a managing director of Bear, Stearns & Co. Inc., an investment bank, and a
general partner of Constellation Ventures, a venture capital firm, since 1998.
In 1998 he was president of Airmedia, a software company. From 1994 to 1998 he
was a general partner of Prospect Street Ventures, a venture capital firm. Mr.
Celmer holds bachelor of arts degrees in economics and psychology from the
University of Pennsylvania.
Sada Chidambaram has served as a director of Salon since November 1997. Mr.
Chidambaram has served as president and director of ASCII Investment
Management, Inc., the venture investment manager for DOTCOM Ventures, L.P.,
(formerly ASCII Ventures, L.P.), since 1998. From 1988 to 1998, he served as
president and director of ASCII of America, Inc., the U.S. representative of
ASCII Corporation, an information, entertainment and education publishing
company. Mr. Chidambaram holds a bachelor of science degree in chemistry from
Loyola College University in Madras, India and a master of science degree in
chemical engineering from the Tokyo Institute of Technology in Japan.
Norman Lear has served as a director of Salon since April 1999. Mr. Lear has
been the chairman of Act III Communications Holdings, LP, a multimedia
entertainment company, since it was founded in 1986. He founded Tandem
Productions, Inc. in 1959 and produced television programs including All in the
Family, Sanford & Son and The Jeffersons. Mr. Lear is a member of the
Television Academy Hall of Fame.
Standish O'Grady has served as a director of Salon since December 1995. Mr.
O'Grady has been a managing member of H&Q Venture Associates, LLC, a venture
capital firm, since its formation in 1998. From 1996 to 1998, he was a managing
director in the venture capital department of Hambrecht & Quist Group, an
investment banking firm. Mr. O'Grady holds a bachelor of science degree in
chemical engineering from Princeton University and a master of business
administration from the Amos Tuck School of Business Administration at
Dartmouth College.
Jim Rosenfield has served as a director of Salon since April 1998. Mr.
Rosenfield has been the president of JHR & Associates, a media consulting firm,
since 1998. From 1994 to 1998, Mr. Rosenfield was managing director at the
investment banking firm of Veronis Suhler & Associates. From 1987 to 1994, he
was chairman and chief executive officer of John Blair Communications, Inc., a
television sales and syndication company. From 1965 to 1985, Mr. Rosenfield
held various executive positions at CBS Corporation, a television broadcasting
and media company, including executive vice president of the Broadcast Group.
Mr. Rosenfield holds a bachelor of arts degree in English from Dartmouth
College.
The board of directors is divided into three classes, with each class holding
office for staggered three-year terms. The terms of Messrs. O'Grady and
Chidambaram will expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2000, the terms of Messrs. Celmer
and Talbot will expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2001 and the terms of Messrs.
O"Donnell, Lear and Rosenfield will expire upon the election and qualification
of directors at the annual meeting of stockholders to be held in 2002. Officers
are elected by the board of directors and serve at the direction of the board
of directors. There are no family relationships among any of Salon's directors
or officers.
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Audit Committee
The board of directors has established an audit committee consisting of Mr.
Chidambaram and Mr. Celmer. The audit committee reviews with Salon's
independent auditors the scope and timing of their audit services and any other
services that they are asked to perform, the auditor's report on Salon's
financial statements following completion of their audit, and Salon's policies
and procedures with respect to internal accounting and financial controls. In
addition, the audit committee makes annual recommendations to the board of
directors for the appointment of independent auditors for the ensuing year.
Compensation Committee
The board of directors has established a compensation committee consisting of
Mr. O'Grady, Mr. Chidambaram, Mr. Rosenfield and Mr. Celmer. The compensation
committee makes recommendations to the board concerning salaries and incentive
compensation for Salon's officers and employees and administers Salon's
employee benefit plans.
Director Compensation
Directors receive no compensation for serving as directors of Salon, except
that Mr. Rosenfield receives $2,500 for each board meeting he attends. Salon
also granted to Mr. Rosenfield options to purchase 37,500 shares of common
stock on April 28, 1998, at an exercise price of $0.32 per share, and options
to purchase 7,500 shares of common stock on April 8, 1999, at an exercise price
of $2.92 per share. The options are subject to vesting over four years.
Compensation Committee Interlocks and Insider Participation
None of Salon's executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of Salon's board of directors.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
In November 1996, Salon entered into an employment agreement with Mr.
O'Donnell under which he currently receives an annual salary of $175,000, and
an annual bonus of up to $50,000. Mr. O'Donnell also received options to
purchase 8% of Salon's then-outstanding capital stock at a purchase price of
$0.20 per share, as well as the right to participate in future sales of stock
by Salon to maintain his percentage ownership at 8%. This participation right
will terminate upon the closing of this offering. If Mr. O'Donnell voluntarily
resigns from his employment with Salon or is terminated for cause by Salon, he
will be entitled to no compensation or benefits from Salon other than those
earned through the date of his resignation. If Mr. O'Donnell is terminated
without cause, he will be entitled to salary payments until the earlier of nine
months following his termination or until he begins other employment. If Mr.
O'Donnell resigns within one year of a change of control of Salon because of
(a) a decrease in his base salary or a material decrease in any of his then-
existing bonus plans or employee benefits; or (b) a material adverse change in
his title, authority, responsibilities or duties, then he will be entitled to
salary payments until the earlier of nine months following his resignation or
change in title or authority or until he begins other employment.
In March 1999, Salon entered into a letter agreement with Mr. Hagen under
which he receives an annual salary of $140,000, and an annual bonus of up to
$35,000. Mr. Hagen also received options to purchase 75,000 shares of Salon's
common stock at an exercise price of $2.92 per share. If Salon is acquired
within one year of the date Mr. Hagen began working for Salon and Mr. Hagen is
terminated by the acquiror, Salon agreed to accelerate the vesting of
Mr. Hagen's options by one year. If Salon is acquired more than one year
following the date Mr. Hagen began working for Salon and Mr. Hagen is
terminated by the acquiror, Salon will accelerate Mr. Hagen's options to the
next year anniversary of the date he began working for Salon.
50
<PAGE>
In April 1999, Salon entered into a letter agreement with Mr. Roberts under
which he received an annual salary of $175,000, and an annual bonus of up to
$50,000. Mr. Roberts also received options to purchase 87,500 shares of Salon's
common stock at an exercise price of $2.92 per share. If Mr. Roberts is
terminated by Salon without cause within one year of the date he began working
for Salon, he will be entitled to salary payments until the earlier of one year
following his termination or the date he begins other employment, and his
options will immediately become fully vested. If Mr. Roberts is terminated by
Salon without cause more than one year following the date he began working for
Salon, he will be entitled to salary payments until the earlier of six months
following his termination or the date he begins other employment, and the
vesting of his options will accelerate by one year.
Mr. Roberts' options will immediately become fully vested if, within two
years of a change of control of Salon, he is terminated without cause, or
resigns because of:
. a decrease in his base salary or a material decrease in any of his then-
existing bonus plans or employee benefits;
. a material adverse change in his title, authority, responsibilities or
duties; or
. the relocation of his work place for Salon to a location that is more
than 75 miles from San Francisco.
Executive Compensation
The following table contains summary information for the fiscal year ended
March 31, 1998 regarding the compensation earned by Salon's chief executive
officer and each of Salon's most highly compensated executive officers other
than the chief executive officer whose salary plus bonus exceeded $100,000 for
the fiscal year ended March 31, 1998. In accordance with the rules of the SEC,
the compensation described in this table does not include perquisites and other
personal benefits received by the executive officers named in the table below
which do not exceed the lesser of $50,000 or 10% of the total salary and bonus
reported for these officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options/SARs
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
David Talbot.................................. $130,312 -- 175,000
Chairman of the board and editor-in-chief
Michael O'Donnell............................. 130,312 -- 100,000
Chief executive officer and president
Marc Wernick.................................. 90,040 $15,000 52,500
Vice president of marketing
</TABLE>
Mr. Wernick was Salon's vice president of marketing from January 1997 to
February 1998.
51
<PAGE>
Option Grants
The following table sets forth certain information concerning grants of stock
options to each of the executive officers named in the table above during the
fiscal year ended March 31, 1998. All options granted to these executive
officers in the last fiscal year were granted under the 1995 stock option plan.
Each option vests and becomes exercisable over a period of four years. The
percentage of total options set forth below is based on an aggregate of
1,135,000 options granted to employees in fiscal 1998. All options were granted
at a fair market value as determined by the board of directors on the date of
grant. The exercise price may in some cases be paid by delivery of other shares
or by offset of the shares subject to options. The deemed value for the date of
grant has been adjusted solely for financial accounting purposes. Potential
realizable values are net of exercise price, but before taxes associated with
exercise. Amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option term. The assumed 0%, 5% and 10%
rates of stock price appreciation are provided in accordance with rules of the
SEC and do not represent Salon's estimate or projection of the future common
stock price. The assumed rate of 0% indicates the value at the effective date
of the offering based on the deemed value for financial accounting purposes
less the exercise price.
Options Granted in Fiscal Year Ended March 31, 1998
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
--------------------------------- --------------------------
Number of % of Total Deemed
Securities Options Value Per
Underlying Granted to Exercise Share For
Options Employees in Price Expiration Date
Granted in Year ($/Share) Date of Grant 0% 5% 10%
---------- ------------ --------- ---------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Talbot............ 175,000 15.4% $0.20 06/12/07 $0.80 $105,000 $193,045 $328,123
Chairman of the board
and editor-in-chief
Michael O'Donnell....... 100,000 8.8 0.20 06/12/07 0.80 60,000 110,311 187,499
Chief executive
officer and president
Marc Wernick............ 42,500 3.7 0.20 06/12/07 0.80 25,500 46,882 79,687
Vice president 10,000 0.9 0.20 08/07/07 0.80 6,000 11,031 18,749
of marketing
</TABLE>
Aggregate Option Exercises in Fiscal Year Ended March 31, 1998 and Option
Values at March 31, 1998
The following table sets forth-certain information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at March 31, 1998.
Fiscal Year Ended March 31, 1998 Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Shares Options at March 31, 1998 at March 31, 1998
Acquired on Value ------------------------- -------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David Talbot ........... -- -- 51,041 123,958 $ 86,770 $210,729
Chairman of the board
and editor-in chief
Michael O'Donnell....... -- -- 79,166 180,833 134,582 307,416
Chief executive officer
and president
Marc Wernick ........... -- -- 11,510 -- 19,567 --
Vice president of
marketing
</TABLE>
All options were granted under Salon's 1995 stock option plan. These options
vest over four years and otherwise generally conform to the terms of Salon's
1995 stock option plan. The value of unexercised options
52
<PAGE>
set forth above is calculated on the basis of the deemed fair value of the
underlying securities on March 31, 1998 of $1.90 per share, determined for
financial accounting purposes, minus the exercise price.
Stock Plans
1995 Stock Option Plan. Salon's 1995 stock option plan was approved by
Salon's board of directors in December 1995 and was later approved by
stockholders. The plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code, to employees,
and for grants of nonstatutory stock options to employees, including officers,
non-employee directors and consultants.
The plan is administered by Salon's board of directors or a committee of the
board. Under the plan, the board or its committee has the authority to select
the persons to whom options are granted and determine the terms of each option,
including:
. the number of shares of common stock covered by the option;
. when the option becomes exercisable;
. the per share option exercise price, which in the case of incentive stock
options must be at least equal to the fair market value of a share of
common stock on the grant date or 110% of such fair market value for
incentive stock options granted to 10% stockholders, and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value
of a share of common stock on the grant date; and
. the duration of the option, which may not exceed ten years, or, with
respect to incentive stock options granted to 10% stockholders, five
years.
Generally, options granted under the plan become exercisable as the
underlying shares vest. Options granted under the plan generally vest over four
years, although the board or its committee may specify a different vesting
schedule for a particular grant. Options granted under the plan are non-
transferable other than by will or the laws of descent and distribution.
In the event of a change in control of Salon, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the plan. The outstanding options will terminate if these options are neither
exercised nor assumed or substituted for by the acquiring corporation.
Currently, the maximum number of shares issuable under the plan is 2,875,000.
The share reserve will automatically be increased on the first day of each
calendar year of Salon beginning on and after January 1, 2001 by 5% of the
number of shares of Salon's common stock that was issued and outstanding on the
last day of the preceding fiscal year. As of March 31, 1999, 54,998 shares have
been issued upon the exercise of options, options to purchase of a total of
1,759,686 shares at a weighted average exercise price of $0.24 per share were
outstanding and 1,115,314 shares were available for future option grants.
1999 Employee Stock Purchase Plan. Currently, a total of 500,000 shares of
common stock have been reserved for issuance under Salon's 1999 employee stock
purchase plan, none of which have been issued as of the effective date of this
offering. The plan's share reserve will automatically be increased on June 1 of
each year by (a) 250,000 shares, or (b) a lower number of shares determined by
the board. The first annual increase will occur on June 1, 2000 and the last
annual increase will occur on June 1, 2009. The plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, is administered by
Salon's board or by a committee of the board. Employees, including officers and
employee directors, of Salon or any subsidiary designated by the board for
participation in the plan are eligible to participate in the plan if they are
customarily employed for more than 20 hours per week and more than five months
per year.
The plan will be implemented by sequential offerings of approximately six
months duration, the first of which will commence on the effective date of this
offering and will terminate on January 31, 2000. Shares will be purchased on
the last day of each offering period. After the effective date of this
offering, offering periods
53
<PAGE>
under the plan will generally begin on February 1 and August 1 of each year.
The board may change the dates or duration of one or more offerings, but no
offering may exceed 27 months. The plan permits eligible employees to purchase
common stock through payroll deductions at a price no less than 85% of the
lower of the fair market value of the common stock on (a) the first day of the
offering, or (b) the purchase date. Participants generally may not purchase
more than 1,000 shares in a six-month offering period or stock having a value
greater than $25,000 in any calendar year as measured at the beginning of the
offering. In the event of a change in control of Salon, the board may
accelerate the purchase date of the then current offering period to a date
prior to the change in control, unless the acquiring or successor corporation
assumes or replaces the purchase rights outstanding under the plan.
401(k) Savings Plan
Salon provides a tax-qualified employee savings and retirement plan, commonly
known as a 401(k) plan, which covers its eligible employees. Pursuant to the
401(k) plan, employees may elect to reduce their current annual compensation up
to the lesser of 15% or the statutorily prescribed limit, which is $10,000 in
calendar year 1999, and have the amount of the reduction contributed to the
401(k) plan. The 401(k) plan is intended to qualify under Sections 401(a) and
401(k) of the Internal Revenue Code, so that contributions by Salon or its
employees to the 401(k) plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan, and so that
contributions will be deductible by Salon when made. The trustee of the 401(k)
plan invests the assets of the 401(k) plan in the various investment options as
directed by the participants.
Limitation of Liability and Indemnification
Salon's certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for (a) any breach of
their duty of loyalty to the corporation or its stockholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) unlawful payments of dividends or unlawful stock
repurchases or redemptions or (d) any transaction from which the director
derived an improper personal benefit. This limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Salon's certificate of incorporation and bylaws provide that Salon will
indemnify its directors and executive officers and may indemnify its other
officers and employees and other agents to the fullest extent permitted by law.
Salon believes that indemnification under its bylaws covers at least negligence
and gross negligence on the part of indemnified parties. Salon's bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether Delaware law would permit indemnification.
In addition to indemnification provisions in Salon's bylaws, upon the closing
of this offering, Salon will have entered into agreements to indemnify its
directors and executive officers. These agreements will provide for
indemnification of Salon's directors and executive officers for some types of
expenses, including attorneys' fees, judgments, fines and settlement amounts
incurred by persons in any action or proceeding, including any action by or in
the right of Salon, arising out of their services as a director or executive
officer of Salon. Salon believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
54
<PAGE>
CERTAIN TRANSACTIONS
Since April 1, 1997 there has been no transaction or series of transactions
to which Salon was a party involving $60,000 or more and in which any director,
executive officer or holder of more than five percent of Salon's capital stock
had a material interest other than (a) agreements which are described where
required under the caption "Management" and (b) the transactions described
below.
On November 28, 1997, Salon sold an aggregate of 949,365 shares of Series B
preferred stock at a price of $3.16 per share for an aggregate of approximately
$3.0 million to four investors, including Adobe Ventures II, L.P., DOTCOM
Ventures, L.P., formerly ASCII Ventures, L.P., and H&Q Salon Investors, L.P.
On September 18, 1998, November 3, 1998 and April 14, 1999, Salon sold an
aggregate of 3,869,844 shares of Series C preferred stock at a price of $3.88
per share for an aggregate of approximately $15.0 million to thirty-five
investors, including Adobe Ventures II, L.P., DOTCOM Ventures, L.P., entities
affiliated with Constellation Ventures, H&Q Salon Investors, L.P., Wasserstein
Adelson Ventures, L.P. and entities affiliated with Bruce R. Katz. In addition,
on September 18, 1998, Salon issued warrants to purchase an aggregate of
219,582 shares of common stock to Adobe Ventures II, L.P., DOTCOM Ventures,
L.P. and H&Q Salon Investors, L.P. at an exercise price of $0.52 per share.
On March 29, 1999, Salon issued 463,918 shares of Series C preferred stock to
Whole Earth Lectronic Link, Inc. and Bruce R. Katz in exchange for all of the
membership interests of The Well LLC.
On April 14, 1999, Salon issued warrants to purchase an aggregate of 148,389
shares of Series C preferred stock at an exercise price of $3.88 to entities
affiliated with Daiwa Securities America Inc., as well as a warrant to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share to Act III Communications.
Upon the consummation of this offering, all outstanding shares of Series A
preferred stock, Series B preferred stock and Series C preferred stock will
automatically convert into shares of common stock on a one-for-one basis.
Salon intends to enter into indemnification agreements with each of its
directors and officers. These indemnification agreements will require Salon to
indemnify such individuals to the fullest extent permitted by Delaware law.
Salon believes that all transactions with affiliates described above were
made on terms no less favorable to Salon than could have been obtained from
unaffiliated third parties. Salon's charter documents require that any
transactions between Salon and its directors, officers or other affiliates must
be no less favorable to Salon than would be identical arm's length transactions
with an unrelated third party. Such transactions will continue to be on terms
no less favorable to Salon than could obtain from unaffiliated third parties.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Salon's common
stock as of April 15, 1999 and as adjusted to reflect the sale of the shares of
common stock offered hereby by:
. the chief executive officer, each of the executive officers named in the
summary compensation table and each of Salon's directors;
. all executive officers and directors as a group; and
. each person or entity who is known by Salon to beneficially own more than
5% of Salon's outstanding common stock.
Unless otherwise indicated, the address for each of the named individuals is
c/o Salon.com, 706 Mission Street, 2nd Floor, San Francisco, California 94103.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 8,230,623 shares of
common stock outstanding as of April 15, 1999 and 10,730,623 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. Shares of common stock
subject to options or warrants that are presently exercisable or exercisable
within 60 days of April 15, 1999 are deemed outstanding for the purpose of
computing the percentage ownership of the person or entity holding options or
warrants, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity. If any shares are issued
upon exercise of options, warrants or other rights to acquire Salon's capital
stock that are presently outstanding or granted in the future or reserved for
future issuance under Salon's stock plans, there will be further dilution to
new public investors.
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
-----------------
Number of Shares Prior to After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Named Executive Officers and Directors
David Talbot............................ 402,083 4.8% 3.7%
Michael O'Donnell....................... 158,333 1.9 1.5
Marc Wernick............................ 11,510 * *
Standish O'Grady........................ 3,777,863 44.9 34.6
Sada Chidambaram........................ 476,690 5.8 4.4
Jim Rosenfield.......................... 10,156 * *
Norman Lear............................. 283,505 3.4 2.6
Ronald Celmer........................... 644,330 7.8 6.0
All executive officers and directors as
a group (12 persons)................... 5,866,084 66.2 51.6
5% Stockholders
Adobe Ventures.......................... 2,833,397 33.8 26.1
c/o H&Q Venture Associates, LLC
One Bush Street,
San Francisco, CA, 94104
Bruce R. Katz........................... 973,003 11.8 9.1
c/o Rosewood Stone Group
2320 Marinship Way, Ste. 240
Sausalito, CA 94965
H&Q Salon Investors, L.P................ 944,466 11.4 8.8
c/o H&Q Venture Associates, LLC
One Bush Street,
San Francisco, CA 94104
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
OUTSTANDING
-----------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Constellation Venture Capital............. 644,330 7.8 6.0
575 Lexington Avenue,
New York, NY 10022
Wasserstein Adelson Ventures, L.P......... 515,464 6.3 4.8
31 W. 52nd Street, 26th Floor,
New York, NY 10019
DOTCOM Ventures, L.P...................... 476,690 5.8 4.4
3945 Freedom Circle, Suite 730,
Santa Clara, CA 95054
</TABLE>
- --------
* Less than 1%
Shares listed as held by Mr. Talbot include 102,083 shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. O'Donnell are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. O'Grady consist of 2,112,341 shares held by
Adobe Ventures, L.P., 579,896 shares held by Adobe Ventures II, L.P., 897,413
shares held by H&Q Salon Investors, L.P., 141,160 shares issuable upon exercise
of warrants held by Adobe Ventures, L.P. and 47,053 shares issuable upon
exercise of warrants held by H&Q Salon Investors, L.P. Mr. O'Grady is the
manager of Adobe Ventures Management, LLC, which is a general partner of Adobe
Ventures II, L.P. and he is also the manager of Salon Investors Management,
LLC, which is a general partner of H&Q Salon Investors, L.P. Mr. O'Grady has
voting and investment power with respect to the shares held by Adobe Ventures
II, L.P. and H&Q Salon Investors, L.P. and may be deemed to beneficially own
these shares. Mr. O'Grady disclaims beneficial ownership of these shares,
except to the extent of his proportionate interest in them.
Shares held by Mr. Chidambaram consist of 445,321 shares held DOTCOM
Ventures, L.P. and 31,369 shares subject to warrants held by DOTCOM Ventures,
L.P. Mr. Chidambaram is president and director of ASCII Investment Management,
Inc., the venture investment manager for DOTCOM Ventures, L.P. Mr. Chidambaram
has voting and investment power with respect to the shares held by DOTCOM
Ventures, L.P. and may be deemed to beneficially own these shares. Mr.
Chidambaram disclaims beneficial ownership of these shares, except to the
extent of his proportionate interest in them.
Shares listed as held by Mr. Rosenfield are shares subject to options
exercisable within 60 days of April 15, 1999.
Shares listed as held by Mr. Lear consist of 257,732 shares and 25,773 shares
subject to warrants held by ACT III Communications. Mr. Lear is the chairman of
ACT III Communications, has voting and investment power with respect to the
shares held by it, and may be deemed to beneficially own these shares. Mr. Lear
disclaims beneficial ownership of these shares, except to the extent of his
proportionate interest in them.
Shares listed as held by Mr. Celmer consist of 530,192 shares held by
Constellation Venture Capital, L.P. and 114,138 shares held by Constellation
Venture Offshore, L.P. Mr. Celmer is the general partner of Constellation
Ventures. Mr. Celmer has voting and investment power with respect to the shares
held by Constellation Venture Capital and Constellation Venture Offshore and
may be deemed to beneficially own these shares. Mr. Celmer disclaims beneficial
ownership of these shares, except to the extent of his proportionate interest
in them.
57
<PAGE>
Shares listed as held by Adobe Ventures consist of 2,112,341 shares and
141,160 shares issuable upon exercise of warrants held by Adobe Ventures, L.P.
and 579,896 shares held by Adobe Ventures II, L.P.
Shares listed as held by Bruce R. Katz include 46,392 shares held by Bruce R.
Katz, as trustee of Bruce R. Katz and Whole Earth Lectronic Link, Inc. escrow
account and 408,382 shares held by Whole Earth Lectronic Link, Inc.
Shares listed as held by H&Q Salon Investors, L.P. include 47,053 shares
issuable upon exercise of warrants.
Shares listed as held by Constellation Venture Capital consist of 530,192
shares held by Constellation Venture Capital, L.P. and 114,138 shares held by
Constellation Venture Capital Offshore, L.P.
Shares listed as held by DOTCOM Ventures, L.P. include 31,369 shares subject
to warrants.
Shares listed as held by all directors and executive officers as a group
include 383,696 shares subject to options exercisable within 60 days of April
15, 1999.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, Salon's authorized capital stock will
consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The following summary of certain provisions of the common stock and the
preferred stock is subject to, and qualified in its entirety by Salon's
certificate of incorporation and bylaws and by the provisions of applicable
law.
Common Stock
As of April 15, 1999 there were 447,496 shares of common stock outstanding
held of record by 12 stockholders. Subject to preferences that may be
applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
board from time to time may determine in its sole discretion. Holders of common
stock are entitled to one vote for each share held on all matters submitted to
a vote of stockholders. Cumulative voting for the election of directors is not
authorized by Salon's certificate of incorporation, which means that the
holders of a majority of the shares voted can elect all of the directors then
standing for election. The common stock is not entitled to preemptive rights
and is not subject to conversion or redemption. Upon liquidation, dissolution
or winding-up of Salon, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation of any preferred stock. Each outstanding share of common stock is,
and all shares of common stock to be outstanding upon completion of this
offering will be, upon payment, duly and validly issued, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock which Salon may issue in the future.
Preferred Stock
Upon completion of this offering, all outstanding shares of preferred stock
will be converted on a one-to-one one basis into 7,783,127 shares of common
stock. However, following this conversion, under Salon's certificate of
incorporation, the board of directors will have the authority, without further
action by the stockholders, to issue up to 5,000,000 shares of preferred stock
in one or more series. The board can fix the rights, preferences and privileges
of the shares of each series and any qualifications, limitations or
restrictions on these shares.
The board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes could, under certain circumstances, have the effect of
delaying, deferring or preventing a change in control of Salon. Salon has no
current plans to issue any shares of preferred stock.
Warrants
In April 1997, Salon issued a warrant to Imperial Bancorp to purchase 8,750
shares of Series A preferred stock at an exercise price of $2.00 per share. The
April 1997 warrant may be exercised at any time within five years after
issuance of the warrant. In April 1998, Salon issued a warrant to Imperial
Bancorp to purchase 11,867 shares of Series B preferred stock at an exercise
price of $3.16 per share. In December 1998, Salon issued a warrant to Imperial
Bancorp to purchase 14,439 shares of Series C preferred stock at an exercise
price of $3.88 per share. Under the terms of the December 1998 warrant,
additional shares become subject to the terms of the December 1998 warrant
under certain circumstances. The April and December 1998 warrants may be
exercised at any time within seven years after issuance. Upon completion of
this offering, all warrants held by Imperial Bancorp will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share.
59
<PAGE>
In July 1998, Salon issued a warrant to America Online Inc. to purchase
79,114 shares of Series B preferred stock at an exercise price of $3.16 per
share. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share. The warrant may be exercised at any time within
five years after issuance.
In September 1998, Salon issued a warrant to Adobe Ventures II L.P. to
purchase 141,160 shares of common stock at an exercise price of $0.52 per
share. The warrant may be exercised at any time within ten years after
issuance.
In September 1998, Salon issued a warrant to DOTCOM Ventures, L.P. to
purchase 31,369 shares of common stock at an exercise price of $0.52 per share.
The warrant may be exercised at any time within ten years after issuance.
In September 1998, Salon issued a warrant to H&Q Salon Investors, L.P. to
purchase 47,053 shares of common stock at an exercise price of $0.52 per share.
The warrant may be exercised at any time within ten years after issuance.
In April 1999, Salon issued warrants to entities affiliated with Daiwa
Securities America Inc. to purchase an aggregate of 148,389 shares of Series C
preferred stock at an exercise price of $3.88 per share. The warrant may be
exercised at any time within five years after issuance. Upon completion of this
offering, the warrant will convert into the right to purchase an equivalent
number of shares of Salon's common stock at the same exercise price per share.
In April 1999, Salon issued a warrant to ACT III Communications to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share. The warrant may be exercised at any time within five years after
issuance. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share.
Registration Rights of Certain Holders
Following the sale of the common stock offered hereby, the holders of
approximately 8,158,127 shares of common stock and 288,332 shares of stock
issuable upon exercise of warrants will have certain rights to register those
shares under the Securities Act and an amended and restated rights agreement.
Subject to certain limitations in the rights agreement, (a) the holders of at
least 25% of such shares, (b) the holders of at least 20% of the then-
outstanding shares issued upon conversion of the Series C preferred stock, or
(c) shares with an expected aggregate offering price to the public of at least
$5 million, may require, on three occasions, that Salon use its best efforts to
register such shares for public resale. If Salon registers any of its common
stock for its own account or for the account of other security holders, the
holders of such shares are entitled to include their shares of common stock in
the registration, subject to the ability of the underwriters to limit the
number of shares included in the offering. Any holder or holders of such shares
may also require Salon to register all or a portion of their registrable
securities in a registration statement on form S-3 when Salon is eligible to
use that form, provided, among other limitations, that the proposed aggregate
price to the public is at least $500,000 and that Salon has not effected two of
these registrations in any 12-month period. Salon will bear all fees, costs and
expenses of these registrations, other than underwriting discounts and
commissions.
All of the registration rights described above are subject to conditions and
limitations, among them the right of the underwriters in any underwritten
offering to limit the number of shares of common stock to be included in a
registration. Registrations of any shares of common stock held by holders with
registration rights would result in these shares being freely tradable without
restriction under the Securities Act upon the effective date of the
registration. Under the rights agreement Salon also agreed to indemnify the
holders of registration rights.
60
<PAGE>
Delaware Law and Provisions of Salon's Certificate of Incorporation and Bylaws
Provisions of Delaware law and Salon's certificate of incorporation and
bylaws could make more difficult the acquisition of Salon by means of a tender
offer, a proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Salon to first negotiate with its board
of directors. Salon believes that the benefits of increased protection of
Salon's potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Salon outweighs the
disadvantages of discouraging these proposals, including proposals that are
priced above the then current market value of its common stock, because, among
other things, negotiation of these proposals could result in an improvement of
their terms.
Salon is subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date the stockholder became an interested stockholder,
unless:
. prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
. on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Salon's certificate of incorporation provides that, upon the closing of this
offering, the board of directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
Salon and may maintain the incumbency of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. Salon's certificate of incorporation
eliminates the right of stockholders to call special meetings of stockholders.
The certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. The authorization of undesignated
preferred stock makes it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of Salon. These and other provisions may have
the effect of deferring hostile takeovers or
61
<PAGE>
delaying changes in control or management of Salon. The amendment of any of
these provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for Salon's common stock is .
Listing
Salon has applied to list its common stock on the Nasdaq National Market
under the trading symbol "SALN."
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, Salon will have outstanding an aggregate
of 10,730,623 shares of common stock. Of these shares, the 2,500,000 shares
sold in this offering will be freely tradable without restrictions or further
registration under the Securities Act unless such shares are purchased by
"affiliates" of Salon, as that term is defined under Rule 144 under the
Securities Act. The remaining 8,230,623 shares of common stock held by existing
stockholders will be "restricted securities" as that term is defined in Rule
144 under the Securities Act. Restricted shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144, or Rule 701 under the Securities Act.
The restricted shares will be available for sale in the public market as
follows:
. 75,000 restricted shares will be available for sale in the public market
immediately following the closing of this offering pursuant to Rule
144(k);
. 3,804,361 restricted shares will become eligible for sale in the public
market 90 days after the closing of this offering under Rule 144 and Rule
701 of the Securities Act; and
. the remaining restricted shares will begin to be eligible for sale from
time to time thereafter upon expiration of one-year holding periods and
subject to the requirements of Rule 144.
In general, under Rule 144, a person, or persons whose shares are aggregated,
including an affiliate who has beneficially owned shares for at least one year,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of (a) 1% of the number of then-outstanding shares of
common stock or (2) the average weekly trading volume of the common stock
during the four calendar weeks preceding the date on which notice of such sale
is filed, subject to certain restrictions. In addition, a person who is not
deemed to have been an affiliate of Salon at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. If shares were acquired
from an affiliate of Salon, that affiliate's holder period to effect a sale
under Rule 144 commences on the date of transfer from the affiliate. The
foregoing is only a summary of Rule 144 and is not intended to be a complete
description of it.
429,996 of the restricted shares were issued in reliance upon Rule 701.
Securities issued in reliance upon Rule 701 may be sold by persons that are not
affiliates subject to the manner of sale provisions of Rule 144 and by
affiliates subject to Rule 144 without compliance with its one-year minimum
holding period requirement.
As of March 31, 1999, 1,759,686 shares of common stock subject to outstanding
options were issuable pursuant to the 1995 stock option plan. After the
completion of this offering, Salon intends to file a registration statement
under the Securities Act to register 2,875,000 shares of common stock reserved
for issuance under the 1995 stock option plan and 500,000 shares of common
stock reserved for issuance under the employee stock purchase plan. This
registration statement will become effective immediately upon filing.
Prior to this offering, there has been no public market for the common stock
of Salon, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of the common
stock cannot be predicted. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could adversely affect the trading price of the common stock and could impair
Salon's future ability to raise capital through an offering of its equity
securities.
63
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, W.R.
Hambrecht & Company, LLC and Daiwa Securities America Inc., as underwriters,
have agreed to purchase from Salon the following respective number of shares of
common stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
W.R. Hambrecht & Company, LLC......................................
Daiwa Securities America Inc.......................................
---------
Total.......................................................... 2,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in Salon's business, and the receipt of certificates, opinions and letters from
Salon and its counsel and independent accountants. Subject to those conditions,
the underwriters are committed to purchase all shares of common stock offered
if any of the shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus, as
this price is determined by the process described below, and to certain dealers
at this price less a concession not in excess of $ per share. Any dealers
or agents that participate in the distribution of the common stock may be
deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided by the
sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After the completion of the initial
public offering of the shares, the public offering price and other selling
terms may be changed by the underwriters.
The public offering price set forth on the cover page of this prospectus will
be based on the results of an auction process, rather than solely through
negotiations between Salon and the underwriters. The plan of distribution of
the offered shares differs somewhat from traditional underwritten public
offerings of equity securities.
The auction process will proceed as follows:
. Prior to effectiveness of the registration statement relating to this
offering, the underwriters and participating dealers will solicit
indications of interest from prospective investors through the Internet
as well as by traditional means. The indications of interest will specify
the number of shares the potential investor proposes to purchase and the
price the investor is willing to pay for the shares. The public offering
price will ultimately be determined by negotiation between the
underwriters and Salon. The principal factor in establishing the public
offering price will be the price per share, or clearing price, that
equals the highest price set forth in valid indications of interest at
which all of the shares may be sold to potential investors. The public
offering price may be lower than the clearing price based on negotiations
between the underwriters and Salon. Valid indications of interest are
those that meet the requirements, including suitability, account status
and size, established by the underwriters or participating dealers.
. In determining the validity of indications of interest, in addition to
minimum account balances, a prospective investor submitting indications
of interest through a W.R. Hambrecht & Company, LLC brokerage account may
be required to maintain an account balance equal to or in excess of the
aggregate dollar amount of the prospective investor's indications of
interest. Although funds may be required to be in an account, the funds
will not be transferred to the underwriters until the closing of the
offering. Conditions for valid indications of interest, including
suitability standards and account funding requirements, of other
underwriters or participating dealers may vary.
64
<PAGE>
. The offered shares will be purchased from Salon by the underwriters and
offered through the underwriters and participating dealers to investors
who have submitted indications of interest at or in excess of the public
offering price. The number of shares offered to an investor submitting an
indication of interest precisely at the public offering price may be
subject to a pro rata reduction. Each participating dealer has agreed
with the underwriters to offer shares they purchase from the underwriters
in this manner, unless otherwise consented to by the underwriters. Shares
issued upon exercise of the underwriters' over-allotment option will be
allocated in the same manner. The underwriters reserve the right, in
exceptional circumstances, to alter this method of allocation as they
deem necessary to effect a fair and orderly distribution of the offered
shares. For example, large orders may be reduced to insure a public
distribution and indications of interest may be rejected by the
underwriters or participating dealers based on suitability or
creditworthiness criteria.
Price and volume volatility in the market for Salon's common stock may result
from the somewhat unique nature of the proposed plan of distribution. Price and
volume volatility in the market for Salon's common stock after the completion
of this offering may adversely affect the market price of Salon's common stock.
Salon has granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to an aggregate of
375,000 additional shares of common stock at the offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will have a
firm commitment to purchase the additional shares, and Salon will be obligated
to sell the additional shares to the underwriters. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of shares offered.
The underwriting agreement provides that Salon will indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make.
Salon has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares of common stock or options to acquire common stock
issued under Salon's 1995 stock option plan, employee stock purchase plan or
upon the conversion of outstanding warrants, for a period of 90 days after the
date of this prospectus, except with the prior written consent of W.R.
Hambrecht & Company, LLC.
Prior to the offering, there has been no public market for Salon's common
stock. The initial public offering price for the common stock will be
determined by the process described above and does not necessarily bear any
direct relationship to Salon's assets, current earnings or book value or to any
other established criteria of value, although these factors were considered in
establishing the initial public offering price range. Other factors considered
in determining the initial public offering price range include:
. market conditions;
. the industry in which Salon operates;
. an assessment of Salon's management;
. Salon's operating results;
. Salon's capital structure;
. the business potential of Salon;
. the demand for similar securities of comparable companies; and
. other factors deemed relevant.
65
<PAGE>
Persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of Salon's common stock,
including over-allotment, stabilizing and short-covering transactions in
Salon's common stock, and the imposition of a penalty bid, in connection with
the offering.
W.R. Hambrecht & Company, LLC is an investment banking firm formed as a
limited liability company in February 1998. In addition to this offering, W.R.
Hambrecht & Company, LLC has engaged in the business of public and private
equity investing and financial advisory services since its inception. The
manager of W.R. Hambrecht & Company, LLC, William R. Hambrecht, has 40 years of
experience in the securities industry. Persons affiliated and associated with
W.R. Hambrecht & Company, LLC have an interest in gains realized on shares of
Salon common stock held by Adobe Ventures, L.P. and H&Q Salon Investors, L.P.
In connection with services as placement agent for the sale of Series C
preferred stock in April 1999, entities affiliated with Daiwa Securities
America Inc. acquired warrants to purchase an aggregate of 148,389 shares of
Series C preferred stock at an exercise price of $3.88 per share.
66
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Salon by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain
legal matters in connection with the offering will be passed upon for the
underwriters by Morrison & Foerster LLP, San Francisco, California.
Members of Gray Cary Ware & Freidenrich LLP beneficially own an aggregate of
10,309 shares of Salon common stock.
EXPERTS
The balance sheets as of March 31, 1997 and 1998 and the statements of
operations, of stockholders' equity and of cash flows for the period July 27,
1995 (inception) to March 31, 1996 and each of the two years in the period
ended March 31, 1998, are included in this prospectus in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
The balance sheets as of December 31, 1997 and 1998 and the statements of
operations, of member's interest and of cash flows for the period July 1, 1997
(inception) to December 31, 1997 and the year ended December 31, 1998 for The
Well LLC, are included in this prospectus in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The balance sheets as of June 30, 1997 and the statements of operations and
changes in owner's net equity and cash flows for the period January 1, 1997
(inception) to June 30, 1997 for Online Conferencing Business, predecessor
business of The Well LLC, are included in this prospectus in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
WHERE TO FIND ADDITIONAL INFORMATION ABOUT SALON
Salon has filed with the SEC a registration statement on form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed therewith. For
further information with respect to Salon and the common stock, reference is
made to the registration statement and the exhibits and schedules filed with
it. With respect to statements contained in this prospectus regarding the
contents of any agreement or any other document, in each instance, reference is
made to the copy of such agreement or other document filed as an exhibit to the
registration statement. Each statement is qualified in all respects by the
exhibits and schedules.
For further information with respect to Salon and the common stock, reference
is made to the registration statement and its exhibits and schedules. You may
read and copy any document Salon files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information about the public reference rooms.
Salon's SEC filings are also available to the public from the SEC's Web site at
http://www.sec.gov.
Upon completion of this offering, Salon will become subject to the
information and periodic reporting requirements of the Exchange Act, and will
file periodic reports, proxy statements and other information with the SEC.
These periodic reports, proxy statements and other information will be
available for inspection and copying at the SEC's public reference rooms and
the SEC's Web site, which is described above.
67
<PAGE>
SALON.COM
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Salon.com
Report of Independent Accountants........................................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Stockholders' Equity....................................... F-5
Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
The Well LLC
Report of Independent Accountants........................................ F-21
Balance Sheets........................................................... F-22
Statements of Operations................................................. F-23
Statements of Members' Interest.......................................... F-24
Statements of Cash Flows................................................. F-25
Notes to Financial Statements............................................ F-26
Online Conferencing Business (Predecessor Business)
Report of Independent Accountants........................................ F-31
Balance Sheet............................................................ F-32
Statement of Operations and Changes in Owner's Net Equity................ F-33
Statement of Cash Flows.................................................. F-34
Notes to Financial Statements............................................ F-35
Pro Forma Consolidated Financial Statements
Pro Forma Consolidated Financial Statements (unaudited).................. F-38
Pro Forma Consolidated Balance Sheet (unaudited)......................... F-39
Pro Forma Consolidated Statement of Operations (unaudited)............... F-40
Notes to Pro Forma Consolidated Financial Statements (unaudited)......... F-42
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Salon.com
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Salon.com (the "Company") at March
31, 1997 and 1998, and the results of its operations and cash flows for the
period from July 27, 1995 (inception) to March 31, 1996 and for each of the two
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the 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 audits provide a
reasonable basis for the opinion expressed above.
San Francisco, California
April 14, 1999
- --------------------------------------------------------------------------------
To the Board of Directors and
Stockholders of Salon.com
The financial statements included herein have been adjusted to give effect to
the reincorporation of the company in Delaware as described more fully in Note
10 to the financial statements. The above report is in the form that will be
signed by PricewaterhouseCoopers LLP upon effectiveness of such reincorporation
assuming that, from April 14, 1999 to the effective date of such
reincorporation, no other events shall have occurred that would affect the
accompanying financial statements or notes thereto.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 14, 1999
F-2
<PAGE>
SALON.COM
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
March 31, Equity at
------------------------ December 31, December 31,
1997 1998 1998 1998
----------- ----------- ------------ -------------
Assets (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equiva-
lents ............... $ 2,637,710 $ 1,925,664 $ 1,607,271
Accounts receivable,
net ................. 19,979 248,113 844,186
Prepaid expenses and
other current assets
..................... 39,322 138,232 307,765
----------- ----------- ------------
Total current assets
.................... 2,697,011 2,312,009 2,759,222
Property and equip-
ment, net ........... 119,749 371,632 597,344
Other assets ......... 17,186 23,567 29,359
----------- ----------- ------------
Total assets ........ $ 2,833,946 $ 2,707,208 $ 3,385,925
=========== =========== ============
Liabilities and Stock-
holders' Equity
Current liabilities:
Accounts payable ..... $ 84,596 $ 197,610 $ 424,305
Accrued liabilities .. 37,495 79,393 181,895
Deferred revenue ..... 14,583 45,832 214,198
Bank borrowings ...... -- 94,991 416,834
----------- ----------- ------------
Total current
liabilities ........ 136,674 417,826 1,237,232
Bank borrowings, net
of current portion... -- 94,991 137,475
----------- ----------- ------------
Total liabilities ... 136,674 512,817 1,374,707
----------- ----------- ------------
Commitments (Note 8)
Stockholders' Equity:
Convertible preferred
stock, no par value;
5,000,000, 6,917,500
and 8,717,500
(unaudited) shares
authorized at March
31, 1997 and 1998 and
December 31, 1998,
respectively;
2,500,000, 3,449,366
and 4,351,428
(unaudited) shares
were issued and
outstanding at
March 31, 1997 and
1998 and December 31,
1998, respectively;
none were issued and
outstanding for pro
forma (liquidation
preference
$11,499,997
(unaudited) at
December 31, 1998)... 4,989,027 7,954,706 11,161,857 $ --
Common stock, $0.001
par value, 5,000,000,
12,500,000 and
50,000,000
(unaudited) shares
authorized at March
1997 and 1998 and
December 31, 1998,
respectively;
375,000, 375,000 and
392,291 (unaudited)
and 4,743,719
(unaudited) shares
were issued and
outstanding at March
31, 1997 and 1998,
December 31, 1998 and
pro forma,
respectively......... 375 375 392 4,744
Additional paid in
capital ............... 291,250 1,109,184 2,495,416 13,652,921
Unearned compensation .. (163,095) (623,734) (1,102,390) (1,102,390)
Accumulated deficit .... (2,420,285) (6,246,140) (10,544,057) (10,544,057)
----------- ----------- ------------ ------------
2,697,272 2,194,391 2,011,218 $ 2,011,218
----------- ----------- ------------ ============
Total liabilities and
stockholders' equity
.................... $ 2,833,946 $ 2,707,208 $ 3,385,925
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SALON.COM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
July 27, 1995 Year ended March 31, Ended December 31,
(inception) to ------------------------ ------------------------
March 31, 1996 1997 1998 1997 1998
-------------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues ........... $ 196,500 $ 279,524 $ 1,155,931 $ 688,991 $ 2,058,024
---------- ----------- ----------- ----------- -----------
Operating expenses:
Production, content,
and product........... 463,045 1,555,134 2,832,006 2,070,436 3,134,810
Sales and marketing ... 124,090 418,708 1,654,990 1,106,717 2,580,179
Research and
development .......... 52,374 175,614 276,112 203,408 304,701
General and
administrative ....... 42,960 129,189 291,446 221,082 337,908
---------- ----------- ----------- ----------- -----------
Total operating
expenses ............ 682,469 2,278,645 5,054,554 3,601,643 6,357,598
---------- ----------- ----------- ----------- -----------
Loss from operations ... (485,969) (1,999,121) (3,898,623) (2,912,652) (4,299,574)
Interest expense ....... -- (185) (16,340) (10,758) (36,701)
Other income ........... 9,919 55,071 89,108 62,294 38,358
---------- ----------- ----------- ----------- -----------
Net loss ............. $ (476,050) $(1,944,235) $(3,825,855) $(2,861,116) $(4,297,917)
========== =========== =========== =========== ===========
Basic and diluted net
loss per share......... $ (1.26) $ (3.84) $ (10.20) $ (7.63) $ (11.20)
========== =========== =========== =========== ===========
Weighted average shares
used in computing basic
and diluted net loss
per share ............. 376,438 506,918 375,000 375,000 383,684
========== =========== =========== =========== ===========
Pro forma basic and
diluted net loss per
share (Note 2) ........ $ (1.20) $ (1.05)
=========== ===========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share .... 3,189,721 4,075,248
=========== ===========
</TABLE>
The accompanying notes are an integrated part of these financial statements.
F-4
<PAGE>
SALON.COM
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------------- ---------------- Paid-In Unearned Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
--------- ----------- -------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 27, 1995
(inception)............ -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders ........... -- -- 600,000 600 400 -- -- 1,000
Issuance of Series A
convertible preferred
stock for cash ........ 850,000 1,693,025 -- -- -- -- -- 1,693,025
Unearned compensation .. -- -- -- -- 183,000 (183,000) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 28,722 -- 28,722
Net loss ............... -- -- -- -- -- -- (476,050) (476,050)
--------- ----------- -------- ----- ---------- ----------- ------------ ----------
Balance, March 31,
1996................... 850,000 1,693,025 600,000 600 183,400 (154,278) (476,050) 1,246,697
Repurchase of common
stock ................. -- -- (225,000) (225) (150) -- -- (375)
Issuance of Series A
convertible preferred
stock for cash ........ 1,650,000 3,296,002 -- -- -- -- -- 3,296,002
Unearned compensation .. -- -- -- -- 108,000 (108,000) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 99,183 -- 99,183
Net loss ............... -- -- -- -- -- -- (1,944,235) (1,944,235)
--------- ----------- -------- ----- ---------- ----------- ------------ ----------
Balance, March 31,
1997................... 2,500,000 4,989,027 375,000 375 291,250 (163,095) (2,420,285) 2,697,272
Issuance of Series B
convertible preferred
stock for cash ........ 949,366 2,965,679 -- -- -- -- -- 2,965,679
Issuance of preferred
stock warrants in
connection with bank
borrowings............. -- -- -- -- 11,871 -- -- 11,871
Unearned compensation .. -- -- -- -- 806,063 (806,063) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 345,424 -- 345,424
Net loss ............... -- -- -- -- -- -- (3,825,855) (3,825,855)
--------- ----------- -------- ----- ---------- ----------- ------------ ----------
Balance, March 31,
1998................... 3,449,366 7,954,706 375,000 375 1,109,184 (623,734) (6,246,140) 2,194,391
Issuance of Series C
convertible preferred
stock and common stock
warrants for cash...... 902,062 3,207,151 -- -- 231,892 -- -- 3,439,043
Issuance of common stock
upon stock option
exercise .............. -- -- 17,291 17 3,591 -- -- 3,608
Issuance of preferred
stock warrants in
connection with bank
borrowings............. -- -- -- -- 32,634 -- -- 32,634
Issuance of preferred
stock warrants in
connection with online
distribution
agreement.............. -- -- -- -- 217,179 -- -- 217,179
Unearned compensation .. -- -- -- -- 900,936 (900,936) -- --
Amortization of unearned
compensation .......... -- -- -- -- -- 422,280 -- 422,280
Net loss ............... -- -- -- -- -- -- (4,297,917) (4,297,917)
--------- ----------- -------- ----- ---------- ----------- ------------ ----------
Balance, December 31,
1998 (unaudited) ...... 4,351,428 $11,161,857 392,291 $ 392 $2,495,416 $(1,102,390) $(10,544,057) $2,011,218
========= =========== ======== ===== ========== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SALON.COM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 27, 1995 For the Nine Months
(inception) to Year Ended March 31, Ended December 31,
March 31, ------------------------ ------------------------
1996 1997 1998 1997 1998
-------------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss ............... $ (476,050) $(1,944,235) $(3,825,855) $(2,861,116) $(4,297,917)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Expense recognized in
connection with
issuance of warrants
and stock options ... 28,722 99,183 345,424 239,560 422,280
Depreciation and
amortization......... 11,511 38,923 114,894 80,978 168,440
Loss on disposal of
property and
equipment -- -- 14,888 14,888 --
Amortization of
discount on bank
borrowings -- -- 3,627 2,638 9,495
Changes in operating
assets and
liabilities:
Accounts receivable .. 3,750 (19,979) (228,134) (215,876) (596,073)
Prepaid expenses and
other assets ........ (35,648) (20,860) (105,291) (40,112) 41,854
Accounts payable ..... 42,205 42,391 113,014 146,797 226,695
Accrued liabilities .. 37,769 (274) 41,898 18,787 102,502
Deferred revenue ..... 13,750 (2,917) 31,249 46,249 168,366
---------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities.......... (373,991) (1,807,768) (3,494,286) (2,567,207) (3,754,358)
---------- ----------- ----------- ----------- -----------
Cash flows from invest-
ing activities:
Purchase of property and
equipment ............. (89,161) (81,022) (381,665) (295,030) (394,152)
---------- ----------- ----------- ----------- -----------
Net cash used in
investing activities (89,161) (81,022) (381,665) (295,030) (394,152)
---------- ----------- ----------- ----------- -----------
Cash flows from financ-
ing activities:
Proceeds from issuance
of preferred stock,
net.................. 1,693,025 3,296,002 2,965,679 2,965,679 3,439,043
Proceeds from issuance
of common stock, net
..................... 1,000 -- -- -- 3,608
Repurchase of common
stock ............... -- (375) -- -- --
Proceeds from bank
borrowings .......... -- -- 247,783 247,783 461,797
Repayments of bank
borrowings .......... -- -- (49,557) (24,778) (74,331)
---------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities
.................... 1,694,025 3,295,627 3,163,905 3,188,684 3,830,117
---------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents.......... 1,230,873 1,406,837 (712,046) 326,447 (318,393)
Cash and cash equiva-
lents--beginning of
period............... -- 1,230,873 2,637,710 2,637,710 1,925,664
---------- ----------- ----------- ----------- -----------
Cash and cash equiva-
lents--end of peri-
od................... $1,230,873 $ 2,637,710 $ 1,925,664 $ 2,964,157 $ 1,607,271
========== =========== =========== =========== ===========
Cash paid for interest
..................... $ -- $ -- $ 12,713 $ 8,120 $ 27,206
========== =========== =========== =========== ===========
Cash paid for taxes .. $ 800 $ 800 $ 800 $ 800 $ 800
========== =========== =========== =========== ===========
Non-cash investing and
financing transactions:
Unearned compensation
in connection with the
issuance of stock
options .............. $ 183,000 $ 108,000 $ 806,063 $ 660,400 $ 900,936
========== =========== =========== =========== ===========
Value assigned to
warrants issued in
connection with bank
borrowings ........... $ -- $ -- $ 11,871 $ 11,871 $ 32,634
========== =========== =========== =========== ===========
Value assigned to
warrants issued in
connection with
distribution agreement
...................... $ -- $ -- $ -- $ -- $ 217,179
========== =========== =========== =========== ===========
Value assigned to
reciprocal advertising
agreements............ $ -- $ -- $ 75,424 $ 38,851 $ 306,867
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--ORGANIZATION:
Salon.com ("Salon") is an Internet media company that produces a network of
ten subject-specific, demographically targeted Web sites and a variety of
online communities designed to attract premium Internet advertisers and
electronic commerce partners. Salon was originally incorporated in July 1995 in
the State of California.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim financial statements (unaudited)
The financial statements as of December 31, 1998 and for the nine months
ended December 31, 1997 and 1998 are unaudited but have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the rules of the Securities and Exchange Commission and do not
include all disclosures required by generally accepted accounting principles
for annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
have been included. The results of operations of any interim period are not
necessarily indicative of the results of operations for the full year.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
Salon considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The majority of
Salon's cash and cash equivalents are held in checking, money market accounts
or certificates of deposits with one bank. As of December 31, 1998, the balance
exceeded existing federally insured limits.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed on the straight-line basis over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Computer and network equipment and software.......................... 3 years
Furniture and office equipment....................................... 5 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the life
of the lease, or the useful life of the assets; which ever is shorter.
Maintenance and repairs are charged to expense as incurred. When assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in operations.
F-7
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue recognition
To date, Salon's revenues have been derived primarily from the sale of
advertising sponsorships and advertising contracts. Sponsorship and advertising
revenues were approximately 100%, 99%, 99% and 93% of total revenues for the
period from July 27, 1995 (inception) to March 31, 1996, and for the years
ended March 31, 1997 and 1998 and the nine months ended December 31, 1998
(unaudited), respectively. Sponsorship revenues are derived principally from
contracts ranging from six to thirty-six months in which Salon commits to
provide sponsors enhanced promotional opportunities beyond traditional banner
advertising. Sponsorship agreements typically include the delivery of
impressions, exclusive relationships and the design and development of
customized co-branded pages designed to enhance the promotional objective of
the sponsor. Revenues are recognized ratably in the period in which the
advertisement is displayed provided that no significant obligations remain. To
the extent that minimum guaranteed page deliveries are not met, Salon defers
recognition of the corresponding revenues until the guaranteed page deliveries
are achieved.
Advertising revenues are derived principally from short-term advertising
contracts in which Salon typically guarantees a minimum number of impressions
to be delivered to users over a specified period of time for a fixed fee.
Advertising revenues are recognized ratably in the period in which the
advertising is displayed, provided that no significant obligations remain. To
the extent that minimum guaranteed page deliveries are not met, Salon defers
recognition of the corresponding revenues until the guaranteed page deliveries
are achieved.
Advertising revenues include barter revenues, which are the exchange by Salon
of advertising space on Salon's Web sites for reciprocal advertising space on
other Web sites or the exchange of goods or services. Revenues from these
barter transactions are recorded as advertising revenues at the estimated fair
value of the advertisements received or delivered, whichever is more reliably
measurable, and are recognized when the advertisements are run on Salon's Web
sites. Barter expenses are recorded when Salon's advertisements are run on the
reciprocal Web sites, which is typically in the same period as when
advertisements are run on Salon's Web sites. There was no barter revenue in
1996 and 1997. Barter revenues represented 6.5% of net revenues for the year
ended March 31, 1998 and 14.9% of net revenues for the nine months ended
December 31, 1998 (unaudited).
Slotting fees are paid to Salon by a particular retailer for a measure of
exclusivity in the retailers industry segment. Slotting fees obtained for
promoting the sale of goods and services through Salon are recognized ratably
over the course of the contract. The agreements may provide that Salon receive
commissions from electronic commerce transactions. These commissions are
recognized by Salon upon notification from the advertiser.
Revenues related to sales from Salon's online store are recognized when goods
are shipped. Revenues related to the syndication of Salon content to other
media outlets are recognized on receipt of payment. Subscription revenues are
recognized ratably over the period that services are to be provided.
Research and development
Research and development expenditures are charged to expense as incurred.
Advertising Costs
Salon expenses advertising costs as they are incurred. Advertising expense
was zero, $9,000, $75,512, $44,032 and $387,867 for the period from July 27,
1995 to March 31, 1996, for the years ended March 31, 1997 and 1998, and for
the nine months ended December 31, 1997 and 1998 (unaudited), respectively.
F-8
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes
Salon recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax basis of assets and liabilities at enacted statutory tax rates in effect
for the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Stock-based compensation
Salon accounts for its stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and presents disclosure required by
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation."
Financial instruments
The carrying amounts of Salon's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities. Fair
value of bank borrowings approximates carrying value because borrowings bear
interest at current market rates.
Concentrations
Financial instruments which potentially subject Salon to concentrations of
credit risk consist principally of trade accounts receivable. Salon performs
ongoing credit evaluations, but does not require collateral. Salon provides an
allowance for credit losses. The credit losses have not been significant to
date.
Salon relies on a number of third party suppliers for various services,
including Web hosting, banner advertising, delivery software, Internet traffic
measurement software and electronic commerce fulfillment services. While Salon
believes it could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in the supply of these services by
the current suppliers could materially harm the business.
Salon currently has the following concentrations of net revenues and trade
accounts receivable:
Net revenues
<TABLE>
<CAPTION>
July 27, 1995 Nine Months
(inception) to Year Ended March 31, Ended
March 31, ---------------------------- December 31,
Customer 1996 1997 1998 1998
-------- -------------- ---------- ---------- ------------
(unaudited)
<S> <C> <C> <C> <C>
A 81% -- -- --
B 29% 71% 37% 18%
C -- -- 16% --
</TABLE>
F-9
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trade accounts receivable
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------ December 31,
Customer 1996 1997 1998 1998
-------- ---- ---- ---- ------------
(unaudited)
<S> <C> <C> <C> <C>
A 100% 42% -- 13%
B -- 21% -- --
C -- 21% -- --
D -- 16% -- --
E -- -- 58% 12%
F -- -- 11% 11%
</TABLE>
Net loss per share and pro forma earnings per share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common and common stock
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is antidilutive. The pro forma
earnings per share is computed by dividing the net loss by the sum of the
weighted-average number of shares of common stock outstanding and the weighted-
average number of shares resulting from the automatic conversion of all
outstanding shares of convertible preferred stock upon the closing of a sale of
Salon's securities in an underwritten registered public offering with proceeds
of at least $15 million and an offering price per share to the public equal to
or greater than $10.00 appropriately adjusted for stock dividends, stock splits
and the like.
Diluted net loss per share for the period ended July 27, 1995 (inception) to
March 31, 1996 and the years ended March 31, 1997 and 1998 and the nine months
ended December 31, 1997 and 1998 (unaudited) does not include the effect of
305,000, 485,000, 1,561,510, 1,474,010 and 1,813,645 stock options,
respectively, and zero, zero, 8,750, 8,750 and 323,186 common stock warrants,
respectively or 850,000, 2,500,000, 3,449,366, 3,449,366 and 4,351,428 shares
of convertible preferred stock on an "as if converted" basis, respectively, as
the effect of their inclusion is antidilutive during each period.
Pro forma stockholders' equity (unaudited)
The pro forma stockholders' equity as of December 31, 1998 reflects the
conversion of all outstanding convertible preferred stock into an aggregate of
4,351,428 shares of common stock.
Comprehensive income
Salon adopted the provisions of SFAS No. 130, Reporting Comprehensive Income,
("SFAS No. 130"). This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. To date Salon has not had any transactions that are
required to be reported in comprehensive income.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosure About Segments of an Enterprise and Required Information,
("SFAS No. 131"), which established standards for reporting information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic area
and major customers. SFAS No. 131 will be adopted by Salon at March 31, 1999.
Salon does not expect the adoption of SFAS No. 131 to have an impact on Salon's
results of operations, financial position or cash flows.
F-10
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. Salon does not expect the
adoption of this standard to have a material impact on Salon's results of
operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As Salon has
historically expensed these costs, the adoption of SOP 98-5 is not expected to
have a significant impact on Salon's results of operations, financial position
or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters for fiscal years beginning after June 15,
1999. Salon is assessing the potential impact of this pronouncement on its
financial statements; however, they do not expect any significant impact since
Salon currently does not have any derivative instruments and does not
anticipate acquiring any.
Note 3--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
March March 31, December 31,
31, 1997 1998 1998
-------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable.................... $ 19,979 $ 248,113 $ 863,353
Less: Allowance for doubtful accounts.. -- -- (19,167)
-------- --------- ---------
$ 19,979 $ 248,113 $ 844,186
======== ========= =========
Property and equipment, net:
Computer and network equipment and
software.............................. $122,221 $ 391,133 $ 743,791
Furniture and office equipment......... 40,656 115,923 150,684
Leasehold improvements................. -- 21,122 27,855
-------- --------- ---------
$162,877 528,178 922,330
Less accumulated depreciation and
amortization.......................... (43,128) (156,546) (324,986)
-------- --------- ---------
$119,749 $ 371,632 $ 597,344
======== ========= =========
Accrued liabilities:
Accrued compensation and related
benefits.............................. $ 23,755 $ 43,707 $ 69,263
Other accruals......................... 13,740 35,686 112,632
-------- --------- ---------
$ 37,495 $ 79,393 $ 181,895
======== ========= =========
</TABLE>
F-11
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--BANK BORROWINGS:
In April 1997, Salon entered into a borrowing agreement with a bank which
provides for borrowings up to $500,000 for working capital and equipment
advances. Borrowings bear interest at the bank's prime rate plus 0.5% and are
collateralized by all assets of Salon, including intellectual property. As of
March 31, 1998 and December 31, 1998, the principal balances for equipment
advances outstanding under this agreement were $198,226 and $123,891
(unaudited) bearing interest at 9%. Borrowings are repayable in monthly
installments of principal plus accrued interest through March 31, 2000.
According to the terms of the agreement, Salon is required to meet certain
financial covenants including minimum net worth and working capital levels.
In connection with the borrowing agreement, Salon issued a warrant to
purchase 8,750 shares of its Series A preferred stock at an exercise price of
$2.00 per share. The warrant expires on April 14, 2002. Salon valued the
warrant, using the Black-Scholes option pricing model. The fair value was
recorded as a discount to the amount borrowed and is being amortized to
interest expense over the term of the borrowing agreement using the effective
interest method.
In April 1998, Salon entered into an additional borrowing agreement with the
same bank which provides for revolving loans of the lesser of $250,000 plus 80%
of eligible accounts receivable as defined by the bank or $500,000. The
revolving borrowing amount will be increased to a maximum of $1,000,000 if
Salon obtains additional equity financing. The agreement also provides for an
equipment term loan up to $300,000. Borrowings bear interest at the bank's
prime rate plus 0.5%. As of December 31, 1998, Salon has drawn $240,960 against
the equipment loan and $220,841 against the revolving borrowing amount.
In connection with this borrowing agreement, Salon issued a warrant to
purchase 11,867 shares of Salon's Series B preferred stock at an exercise price
of $3.16 per share. The warrant expires on June 8, 2005. Salon valued the
warrant, using the Black-Scholes option pricing model. The fair value was
recorded as a discount to the amount borrowed and is being amortized to
interest expense over the term of the borrowing agreement using the effective
interest method.
In connection with the borrowing agreements, Salon issued a warrant to
purchase 5,250 shares of Salon's Series C preferred stock at an exercise price
of $3.88 per share. The actual number of shares subject to the terms of the
warrant shall be determined according to financing thresholds described in the
warrant (Note 8). The warrant expires December 17, 2005. Salon valued the
warrant, using the Black-Scholes option pricing model. The fair value was
recorded as a discount to the amount borrowed and is being amortized to
interest expense over the term of the borrowing agreement using the effective
interest method.
Scheduled annual repayments of principal subsequent to March 31, 1998 and
December 31, 1998, respectively, are as follows:
<TABLE>
<CAPTION>
March December 31,
31, 1998 1998
-------- ------------
(unaudited)
<S> <C> <C>
1999............................................... $ 99,113 $ 440,434
2000............................................... 99,113 145,258
-------- ---------
198,226 585,692
Less unamortized discount.......................... (8,244) (31,383)
-------- ---------
189,982 554,309
Less current portion............................... (94,991) (416,834)
-------- ---------
$ 94,991 $ 137,475
======== =========
</TABLE>
F-12
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--STOCKHOLDERS' EQUITY:
Convertible preferred stock is composed of the following:
<TABLE>
<CAPTION>
Shares Issued and Outstanding
--------------------------------
March 31,
Shares ------------------- December 31,
Series Authorized 1997 1998 1998
------ ---------- --------- --------- ------------
(unaudited)
<S> <C> <C> <C> <C>
A................................ 2,508,750 2,500,000 2,500,000 2,500,000
A-1.............................. 2,508,750 -- -- --
B................................ 1,100,000 -- 949,366 949,366
B-1.............................. 1,100,000 -- -- --
C................................ 1,500,000 -- -- 902,062
--------- --------- --------- ---------
8,717,500 2,500,000 3,449,366 4,351,428
========= ========= ========= =========
</TABLE>
The liquidation amounts for the Series A, B, and C preferred stocks as of
December 31, 1998 were $5,000,000, $2,999,998 and $3,499,999, respectively.
The holders of preferred stock have various rights and preferences as
follows:
Dividends and participation rights
The holders of Series A and Series A-1 preferred stock are entitled to
receive dividends in preference to any dividend on common stock, at an annual
rate equal to $0.16 per share, the holders of Series B and Series B-1 preferred
stock are entitled to receive dividends in preference to any dividend on common
stock, at an annual rate equal to $0.252 per share, and the holders of Series C
preferred stock are entitled to receive dividends in preference to any dividend
on common stock, at an annual rate of $0.31 per share. In addition, preferred
stockholders are entitled to participate in distributions to common
stockholders in an amount per share as would be payable on the number of shares
of common stock into which each share of preferred stock could be converted.
Such dividends are noncumulative and no dividends have been declared or paid to
date.
Liquidation preference
In the event of any liquidation, dissolution, or winding up of Salon, either
voluntarily or involuntarily, the holders of Series C preferred stock are
entitled to receive, in preference to the holders of Series A, Series A-1,
Series B, Series B-1 preferred stock and common stock, an amount equal to $3.88
per share of Series C preferred stock, plus all declared but unpaid dividends,
if any. The holders of Series A and Series A-1 preferred stock are entitled to
receive, in preference to the holders of common stock, an amount equal to $2.00
per share of Series A and Series A-1 preferred stock plus all declared but
unpaid dividends, if any. The holders of Series B and Series B-1 preferred
stock are entitled to receive in preference to the holders of common stock, an
amount equal to $3.16 per share of Series B and Series B-1 preferred stock plus
all declared but unpaid dividends. Once such liquidation preference has been
paid, holders of Series A, Series A-1, Series B, Series B-1, and Series C
preferred stock are entitled to receive assets and funds of Salon in proportion
to the number of shares of common stock as if converted pursuant to the
following paragraph.
F-13
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversion rights
Each share of Series A, Series A-1, Series B, Series B-1, and Series C
preferred stock shall be convertible at the option of the holder into shares of
common stock at any time. The number of shares of common stock into which each
share of Series A, Series A-1, Series B, Series B-1, or Series C preferred
stock may be converted shall be determined dividing $2.00, $2.00, $3.16, $3.16
and $3.88, respectively, by the conversion price in effect on the date the
stock certificate is surrendered for conversion. The conversion price per share
of Series A and Series A-1 preferred stock initially shall be $2.00, the
conversion price per share of Series B and Series B-1 preferred stock initially
shall be $3.16, and the conversion price per share of Series C preferred stock
initially shall be $3.88. Each share of preferred stock shall automatically be
converted into fully paid and nonassessable shares of common stock of Salon at
the conversion price then in effect for such series of preferred stock at any
time during the conversion period immediately upon the earlier of: (i) the
closing of a sale of Salon's securities in an underwritten registered public
offering with proceeds to Salon of at least $15 million and an offering price
per share to the public equal to or greater than $11.64 appropriately adjusted
for stock dividends, stock splits, stock combinations and the like; (ii) the
date on which the holders of at least two-thirds of the then outstanding shares
of preferred stock and the holders of at least two-thirds of the then
outstanding shares of Series C preferred stock (determined on an as-converted
basis) consent in writing to such conversion; or (iii) at such time as less
than an aggregate of 250,000, 90,000 or 375,000 shares of Series A, Series B or
Series C preferred stock, respectively, are outstanding.
The preferred stock also carries provisions which protect the holders of such
securities from dilution caused by capital reorganization, stock splits, or
other such capital changes.
Voting rights
The holders of preferred stock are entitled to vote on all matters and are
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted pursuant to the conversion
rights.
As long as more than 250,000 shares of Series A and Series A-1 preferred
stock are outstanding, the holders of Series A and Series A-1 preferred stock,
voting as a separate class, have the right to elect one member of the Board of
Directors. As long as more than 250,000 shares of Series B and Series B-1
preferred stock are outstanding, the holders of Series B and Series B-1
preferred stock, voting as a separate class, have the right to elect one member
of the Board of Directors. As long as more than 250,000 shares of Series C
preferred stock are outstanding, the holders of Series C preferred stock,
voting as a separate class, have the right to elect one member of the Board of
Directors.
Holders of common stock, voting as a separate class, have the right to elect
two members of the Board of Directors. The holders of common stock and
preferred stock, voting together as a separate class, have the right to elect
the remaining members of the Board of Directors.
F-14
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common stock reserved
Salon had reserved shares of common stock for the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
--------- ------------
(unaudited)
<S> <C> <C>
Stock option plan..................................... 1,875,000 1,875,000
Warrants.............................................. 8,750 323,186
Convertible preferred stock........................... 3,449,366 4,351,428
--------- ---------
5,333,116 6,549,614
========= =========
</TABLE>
Warrants
In July 1998, Salon issued a warrant to purchase 79,114 shares of Series B
preferred stock at an exercise price of $3.16 per share in connection with an
online distribution agreement. The warrant may be exercised at any time within
5 years after issuance.
Salon valued the warrant using the Black-Scholes option pricing model. The
fair value of $217,179 was recorded in prepaid expenses and other current
assets and is amortized to sales and marketing expense over the term of the
agreement.
In September 1998, Salon issued warrants to purchase up to 219,582 shares of
common stock at an exercise price of $0.52 per share. The actual number of
shares subject to the terms of the warrants shall be determined according to
certain financing thresholds described in the warrants (Note 8). The warrants
may be exercised at any time within 10 years after issuance. As of December 31,
1998, warrants to purchase 73,194 shares of common stock were exercisable and
the fair value of $231,892 was recorded as additional paid in capital. The
warrants expire September 2008.
Note 6--EMPLOYEE STOCK OPTION PLAN:
In 1995, Salon's Board of Directors adopted the 1995 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of Salon. Options granted under the Plan may be either incentive
stock options ("ISO") or non-qualified stock options ("NSO"). ISOs may be
granted only to Salon employees (including officers and directors who are also
employees). NSOs may be granted to Salon employees as well as non-employee
consultants. The exercise price of each option is determined by the Board of
Directors and the maximum term for each option is 10 years. Options generally
vest over a four year period.
F-15
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under Salon's Plan from inception
through December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------
Weighted- Weighted-
Shares Average Average
Available Number of Price Per Aggregate Exercise Deemed
for Grant Shares Share Price Price Fair Value
---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares reserved for
grant.................. 1,875,000
Options granted......... (355,000) 355,000 $ .20 $ 71,000 $.20 $ .80
Options terminated...... 50,000 (50,000) $ .20 (10,000) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1996.. 1,570,000 305,000 $ .20 61,000 $.20 $ .80
Options granted......... (190,000) 190,000 $ .20 38,000 $.20 $ .80
Options terminated...... 10,000 (10,000) $ .20 (2,000) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1997.. 1,390,000 485,000 $ .20 97,000 $.20 $ .80
Options granted......... (1,135,000) 1,135,000 $.20-$.32 239,600 $.22 $ .90
Options terminated...... 58,490 (58,490) $ .20 (11,698) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance March 31, 1998.. 313,490 1,561,510 $.20-$.32 324,902 $.20 $ .86
Options granted......... (376,250) 376,250 $.32-$.52 146,650 $.38 $2.72
Options terminated...... 106,825 (106,825) $.20-$.52 (27,815) $.26 $1.04
Options exercised....... -- (17,290) $.20-$.52 (3,608) $.20 $ .80
---------- --------- --------- -------- ---- -----
Balance December 31,
1998 (unaudited)....... 44,065 1,813,645 $.20-$.52 $440,129 $.24 $1.20
========== ========= ========= ======== ==== =====
</TABLE>
In connection with the grant of options for the purchase of common stock to
employees during the period from July 27, 1995 (inception) through December 31,
1998, Salon recorded aggregate deferred compensation of $1,631,397 representing
the difference between the deemed fair value of the common stock and the option
exercise price at date of grant. Such deferred compensation will be amortized
over the vesting period relating to these options. Accordingly, Salon amortized
$28,722, $99,183, $321,428, $229,598 and $336,249 for the period from July 27,
1995 (inception) to March 31, 1996, for the years ended March 31, 1997 and
1998, and for the nine months ended December 31, 1997 and 1998 (unaudited),
respectively.
In connection with the grant of options for the purchase of common stock to
non-employees during the period from April 1, 1997 through December 31, 1998,
Salon recorded compensation in accordance with Emerging Issues Task Force 96-18
and SFAS No. 123. As of December 31, 1998, Salon has recorded aggregate
deferred compensation of $366,602 related to these options. Accordingly, Salon
amortized $23,996, $9,962, and $86,031 for the year ended March 31, 1998, and
for the nine months ended December 31, 1997 and 1998 (unaudited), respectively.
The following table summarizes information about stock options outstanding at
March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding at March 31, Options Exercisable at
1998 March 31, 1998
-------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.20 1,426,510 8.84 years $0.20 424,732 $0.20
0.32 135,000 9.95 years 0.30 -- --
--------- ---------- ----- ------- -----
1,561,510 8.90 years $0.20 424,732 $0.20
========= ========== ===== ======= =====
</TABLE>
F-16
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1998 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding at December Options Exercisable
31, 1998 at December 31, 1998
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.20 1,457,395 8.07 years $0.20 652,915 $0.20
0.32 225,000 9.37 years 0.32 7,548 0.32
0.32 131,250 9.84 years 0.52 -- 0.52
--------- ---------- ----- ------- -----
1,813,645 8.39 years $0.24 660,463 $0.40
========= ========== ===== ======= =====
</TABLE>
At March 31, 1996 and 1997 options to purchase zero and 90,651 shares of
common stock, respectively, were exercisable. The weighted-average exercise
price of the 1997 options was $0.20
The weighted-average grant date fair value of stock options granted was $.04,
$.04 and $.08 for the years ended March 31, 1997 and 1998 and the nine months
ended December 31, 1998, respectively.
Salon accounts for the options in accordance with APB No. 25. The following
information concerning the Plan is provided in accordance with SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
minimum value method with the following weighted-average assumptions used for
grants in years ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
Year
Ended
March 31,
----------
1997 1998
---- ----
<S> <C> <C>
Risk-free interest rates...................................... 5.88% 6.10%
Expected lives (in years)..................................... 4.00 4.00
Dividend yield................................................ 0 0
</TABLE>
Using the above method and assumptions, had Salon accounted for compensation
expense according to SFAS No. 123, the pro forma net loss would be as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net loss:
As reported..................................... $(1,944,235) $(3,825,855)
Pro forma....................................... $(1,953,294) $(3,846,385)
Basic and diluted net loss per share:
As reported..................................... $ (3.84) $ (10.20)
Pro forma....................................... $ (3.85) $ (10.26)
</TABLE>
Note 7--401(k) SAVINGS PLAN:
Salon's 401(k) Savings Plan (the "401(k) Plan") is a defined contribution
retirement plan intended to qualify under Sections 401(a) and 401(k) of the
Internal Revenue Code. All full-time employees of Salon are eligible to
participate in the 401(k) Plan pursuant to the terms of the plan. Participants
may contribute from 1%
F-17
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to 15% of compensation, subject to statutory limitations. Employer matching
contributions are discretionary based on a certain percentage of a
participant's contributions as determined by management of Salon. Salon has not
made any discretionary contributions to the 401(k) Plan for the period from
July 27, 1995 (inception) to March 31, 1996, the years ended March 31, 1997 and
1998 or the nine months ended December 31, 1997 and 1998 (unaudited).
Note 8--COMMITMENTS:
Lease obligations
Salon has entered into two separate non-cancelable operating lease agreements
for office space. The contracts provide for adjustments or escalations based
upon changes in consumer price indices or operating expenses.
Rent expenses under operating lease agreements was $19,063, $64,750,
$147,710, $108,283 and $200,592 for the period from July 27, 1995 (inception)
to March 31, 1996, for the years ended March 31, 1997 and 1998, and for the
nine months ended December 31, 1997 and 1998 (unaudited), respectively.
Future minimum rental payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
---------------------
<S> <C>
1999........................................................... $ 319,203
2000........................................................... 332,695
2001........................................................... 346,305
2002........................................................... 367,876
2003........................................................... 177,899
----------
Thereafter..................................................... $1,726,834
==========
</TABLE>
Warrants
In connection with the issuance of the warrants to purchase up to 219,582
shares of common stock to certain preferred stockholders (Note 5), warrants to
purchase 146,388 shares of common stock are contingent upon Salon completing
certain equity financing goals as defined in the agreement. Subsequent to
December 31, 1998, these warrants became exercisable.
In connection with the issuance of the warrant to purchase 5,250 shares of
Series C preferred stock in connection with the borrowing agreement (Note 4),
the number of shares is increased to 13,127 as of February 28, 1999 plus an
additional 10% for each month thereafter that Salon has not completed certain
equity financing goals as defined in the agreement. Subsequent to December 31,
1998, an additional 9,189 warrants became exercisable.
F-18
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--INCOME TAXES:
Salon has no income tax provision for the period from July 27, 1995
(inception) to March 31, 1996, and for the years ended March 31, 1997 and 1998
and the nine months ended December 31, 1997 and 1998 due to the net operating
loss.
Salon's deferred tax assets are as follows:
<TABLE>
<CAPTION>
March 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Net operating loss carryforward................... $ 959,000 $ 2,460,000
Accrued vacation.................................. -- 12,000
--------- -----------
959,000 2,472,000
Valuation allowance............................... (959,000) (2,472,000)
--------- -----------
Net deferred tax asset.......................... $ -- $ --
========= ===========
</TABLE>
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, a valuation allowance has been provided
against deferred tax assets as March 31, 1997 and 1998.
At March 31, 1998, Salon has net operating loss carryforwards of
approximately $6,200,000 for federal and state income tax purposes. These
carryforwards expire by 2013 and 2006, respectively.
For federal and state tax purposes, a portion of Salon's net operating loss
carryforward may be subject to certain limitations on annual utilization due to
changes in ownership, as defined by federal and state tax laws.
Note 10--SUBSEQUENT EVENTS:
Offering of Series C preferred stock
On April 14, 1999, Salon completed an additional offering of Series C
preferred stock. Pursuant to this offering, a total of 2,967,782 additional
shares of Series C preferred stock were sold at a price of $3.88 per share, for
total proceeds to Salon of approximately $11,515,000. The holders of these
Series C preferred stock have the same rights as those holders of the Series C
shares issued prior to December 31, 1998 as discussed in Note 5.
In April 1999, Salon issued warrants to entities affiliated with Daiwa
Securities America Inc. to purchase an aggregate of 148,389 shares of Series C
preferred stock at an exercise price of $3.88 per share. The warrants may be
exercised at any time within five years after issuance. Upon completion of this
offering, the warrants will convert into the right to purchase an equivalent
number of shares of Salon's common stock at the same exercise price per share.
In April 1999, Salon issued a warrant to ACT III Communications to purchase
25,773 shares of Series C preferred stock at an exercise price of $3.88 per
share. The warrant may be exercised at any time within five years after
issuance. Upon completion of this offering, the warrant will convert into the
right to purchase an equivalent number of shares of Salon's common stock at the
same exercise price per share.
Acquisition of The Well
Salon completed the acquisition of The Well LLC, an online community
business, in March 1999 for 463,918 shares of Series C preferred stock valued
at $1,800,000. Salon's acquisition of The Well LLC was accounted for using the
purchase method of accounting.
F-19
<PAGE>
SALON.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allocation of Salon's aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with this acquisition were based primarily on preliminary estimates by
independent appraisers of fair values. The preliminary allocation is summarized
below:
<TABLE>
<S> <C>
Intangibles, including proprietary technology and
tradename................................................. $1,555,000
Goodwill................................................... 396,860
Property and equipment..................................... 87,295
Net current liabilities assumed............................ (58,155)
----------
Total purchase price....................................... $1,981,000
==========
</TABLE>
The excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired has been recorded as goodwill.
Intangibles and goodwill are being amortized on a straight-line basis over a
period of two years.
Employee Stock Purchase Plan and Option Plan
Effective April 1999, Salon adopted an Employee Stock Purchase Plan (the
"ESPP") to provide substantially all employees whose customary employment is
more than 20 hours per week for more than five months in any calendar year
eligibility to purchase shares of its common stock through payroll deductions,
up to 10% of eligible compensation. Participant account balances are used to
purchase shares of Salon common stock at the lesser of 85 percent of the fair
market value of shares on either the first day or the last day of the
designated payroll deduction period (the Offering Period), as chosen by the
Board of Directors at is discretion, whichever is lower. The aggregate number
of shares purchased by an employee may not exceed 1,000 shares in any one
Offering Period, generally 12 months or less (subject to limitations imposed by
the Internal Revenue Code). A total of 500,000 shares are available for
purchase under the ESPP.
On April 8, 1999, Salon's board of directors and stockholders approved a
1,000,000 share increase in the number of shares issuable under the 1995 Stock
Option Plan.
Reincorporation and stock split
On April 8, 1999, Salon's Articles of Incorporation were amended to (i)
increase the amount of authorized shares of preferred stock to 8,108,750 and
common stock to 12,500,000 and (ii) increase the number shares of preferred
stock designated as Series C to 4,500,000. In conjunction with the increase in
Series C preferred stock, 4,500,000 shares of Salon's common stock were
reserved for issuance upon conversion of the Series C preferred stock.
In April 1999, Salon approved reincorporating in Delaware, changing the name
to Salon.com, and effected a one for two split of its common and preferred
stock. In connection with the reincorporation, Salon authorized (i) an increase
in the amount of authorized shares of common stock to 50,000,000 and (ii)
5,000,000 shares of a new class of preferred stock. All share data and stock
option plan information has been restated to reflect the split and the
reincorporation.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of The Well LLC
In our opinion, the accompanying balance sheets and the related statements of
operations, of members' interest and of cash flows present fairly, in all
material respects, the financial position of The Well LLC at December 31, 1997
and 1998 and the results of its operations and its cash flows for the period
from July 1, 1997 to December 31, 1997 and for the year ended December 31, 1998
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 3, 1999
F-21
<PAGE>
THE WELL LLC
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Assets
Current assets
Cash ................................................... $ 10,661 $ 11,455
Accounts receivable, net of allowance for doubtful
accounts of $1,600
and $1,800, respectively............................... 8,733 4,427
Related party receivables .............................. 29,824 24,650
Prepaid expenses and other current assets .............. 2,100 1,213
-------- ---------
Total current assets ................................. 51,318 41,745
Property and equipment, net .............................. 121,636 87,295
-------- ---------
Total assets ......................................... $172,954 $ 129,040
======== =========
Liabilities
Current liabilities:
Accounts payable ....................................... $ 4,998 $ 2,647
Related party payables ................................. 2,100 9,703
Accrued liabilities .................................... 69,337 87,550
Deferred revenue ....................................... 9,037 10,646
-------- ---------
Total current liabilities ............................ 85,472 110,546
-------- ---------
Members' Interest
Members' interest ...................................... 154,909 154,909
Accumulated deficit .................................... (67,427) (136,415)
-------- ---------
Total members' interest .............................. 87,482 18,494
-------- ---------
Total liabilities and members' interest .............. $172,954 $ 129,040
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
THE WELL LLC
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JULY 1, 1997 TO DECEMBER 31, 1997 AND FOR
THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Period from
July 1, 1997 Year ended
to December 31, December 31,
1997 1998
--------------- ------------
<S> <C> <C>
Subscription revenues.............................. $ 267,022 $ 484,660
Operating expenses:
Cost of subscription revenues.................... 124,685 217,537
Selling and marketing ........................... 45,475 78,044
General and administrative....................... 164,289 258,067
--------- ---------
Total operating expenses....................... 334,449 553,648
--------- ---------
Net loss........................................... $ (67,427) $ (68,988)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
THE WELL LLC
STATEMENTS OF MEMBERS' INTEREST
FOR THE PERIOD FROM JULY 1, 1997 TO DECEMBER 31, 1997 AND FOR
THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Members' Interest
-------------------
Whole Earth
Lectronic Bruce Accumulated
Link, Inc. Katz Deficit Total
----------- ------- ----------- --------
<S> <C> <C> <C> <C>
Capital contributions .............. $144,909 $10,000 $ -- $154,909
Net loss for the period July 1, 1997
to December 31, 1997 .............. -- -- (67,427) (67,427)
-------- ------- --------- --------
Balance at December 31, 1997 ....... 144,909 10,000 (67,427) 87,482
Net loss ........................... -- -- (68,988) (68,988)
-------- ------- --------- --------
Balance at December 31, 1998 ....... $144,909 $10,000 $(136,415) $ 18,494
======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
THE WELL LLC
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JULY 1, 1997 TO DECEMBER 31, 1997 AND FOR
THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Period from
July 1, 1997 to Year ended
December 31, December 31,
1997 1998
--------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net loss ....................................... $(67,427) $(68,988)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Bad debt expense ............................. 1,600 200
Depreciation ................................. 26,902 44,001
Write-off of property and equipment .......... 4,237 2,378
Changes in operating assets and liabilities:
Accounts receivable ........................ (10,333) 4,106
Related party receivables .................. (29,824) 11,469
Prepaid expenses and other current assets .. (1,378) (5,408)
Accounts payable ........................... 4,998 (2,351)
Related party receivables .................. 2,100 7,603
Accrued liabilities ........................ 55,405 18,213
Deferred revenue ........................... 9,037 1,609
-------- --------
Net cash provided by (used in) operating
activities............................... (4,683) 12,832
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment .......... (9,764) (12,038)
-------- --------
Net cash used in investing activities .... (9,764) (12,038)
-------- --------
Cash flows from financing activities:
Contributions from members on formation ........ 25,108 --
-------- --------
Net cash provided by financing activities
......................................... 25,108 --
-------- --------
Net increase in cash ..................... 10,661 794
Cash at beginning of year ........................ -- 10,661
-------- --------
Cash at end of year .............................. $ 10,661 $ 11,455
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS
Note 1--FORMATION AND BUSINESS OF THE COMPANY:
The Well LLC (the "Company") is a California Limited Liability Company that
is in the business of providing international online conferencing services to
subscribers for a monthly fee. Its members are comprised of Whole Earth
'Lectronic Link, Inc. ("Link"), a California S corporation owning 1,500,000
membership units, and Bruce Katz, an individual owning 10,000 membership units.
Link is wholly owned by Bruce Katz.
The Company was initially formed in September 1996 and was dormant until July
1, 1997, when it acquired its business from Link as a capital contribution. As
consideration for 1,500,000 membership units in the Company, Link contributed
its online conferencing services division which had the following net assets at
July 1, 1997:
<TABLE>
<S> <C>
Cash............................................................... $ 15,108
Prepaid expenses .................................................. 722
Property and equipment, net........................................ 143,011
Accrued liabilities................................................ (13,932)
--------
$144,909
========
</TABLE>
Link also contributed intellectual property, primarily in the form of
existing technology, technical know-how, and the customer base. This
contribution has been recorded at its historical carrying amount, which is
zero. The Company recorded the tangible and intangible assets contributed by
Link at their historical carrying amounts as there was effectively no change in
ownership.
As consideration for 10,000 membership units in the Company, Bruce Katz
contributed $10,000 in cash.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Concentration of credit risk
Cash and cash equivalents are deposited in one domestic bank. With respect to
accounts receivable, the Company's customer base is dispersed across many
geographic areas. The Company monitors customer's payment history and
establishes reserves for bad debt as warranted.
F-26
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve
or extend the life of the assets are charged to expense. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
Revenue recognition
Subscription revenues for online conferencing services are recognized over
the period that services are provided. Deferred revenue consists primarily of
monthly prepaid subscription fees billed in advance.
Cost of subscription revenues
Cost of subscription revenues includes connectivity charges, systems co-
location and administrative costs, depreciation expense relating to network
equipment, credit card charges, and costs of personnel responsible for the
operation of network equipment and systems.
Income taxes
The Company was not subject to income taxes during the period from January 1,
1997 to December 31, 1997 and the year ended December 31, 1998 since it
operated as a partnership and any taxes are payable by its members.
Comprehensive income
The Company has adopted the accounting treatment prescribed by SFAS No. 130
"Reporting Comprehensive Income." The adoption of this statement has no impact
on the Company's financial statements for the periods presented.
Note 3--PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Computer equipment..................................... $ 252,253 $ 252,951
Furniture.............................................. 21,392 20,006
--------- ---------
273,645 272,957
Accumulated depreciation............................... (152,009) (185,662)
--------- ---------
$ 121,636 $ 87,295
========= =========
</TABLE>
F-27
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4--ACCRUED LIABILITIES:
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Accrued payroll.............................................. $12,981 $ 4,731
Accrued vacation............................................. 17,333 13,319
Other........................................................ 39,023 69,500
------- -------
$69,337 $87,550
======= =======
</TABLE>
Note 5--RELATED PARTY TRANSACTIONS:
Insurance
During the period from July 1, 1997 to December 31, 1998, the Company was
covered by an insurance policy held by Rosewood Stone Group, Inc. ("RSG"), an S
corporation wholly owned by one of its members, Bruce Katz. The insurance
policy covers property, general liability, and workers compensation.
Rent and other operating expenses
During 1998, the Company entered into an arrangement to rent office space
from Well Engaged LLC, a limited liability company whose members are also Bruce
Katz and Link. The Company pays $1,350 per month plus its prorata share of
related operating costs.
Billing and collection services
The Company entered into a billing and services agreement with Whole Earth
Networks ("WeNet"), a limited liability company. The Company's members are
majority owners of WeNet. WeNet was an Internet service provider and also
formerly a division of Link. Prior to the Company and WeNet's separation from
Link, the customer base had received one bill for both the conferencing and
Internet access services. The billing and services agreement appoints Link to
act as an agent in disbursing the revenue generated from The Well members who
were subscribers prior to the Company commencing operations on July 1, 1997.
The Company receives a fixed amount of revenue for each customer based on the
subscriber's plan. The Company also pays to WeNet for billing services
rendered. WeNet sold substantially all of its assets in March 1998 to Whole
Earth Network, Inc. ("GST WeNet"), an unrelated third party. GST WeNet assumed
the rights and obligations of the existing billing and services agreement and
continues to act as the billing agent for the Company.
Co-location services agreement
During the period from July 1, 1997 to December 31, 1998, the Company also
had an agreement with WeNet to provide certain types of services to the
Company. The services provided included storage space for some of the Company's
computer hardware, a high bandwidth Internet connection, and system
administration. The costs for these services vary depending on the services
provided in any given month. The rights and obligations of the co-location
services agreement were also specifically assumed by GST WeNet as part of the
purchase of WeNet in March 1998.
F-28
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Transactions with related parties are as follows:
<TABLE>
<CAPTION>
Period from
July 1, 1997 to Year ended
December 31, December 31,
Related Entity Transaction 1997 1998
-------------- ----------- --------------- ------------
<C> <S> <C> <C>
Amounts received from:
Well Engaged LLC Sale of equipment....... $ -- $ 721
WeNet Sale of equipment....... 6,295 --
Amounts paid to:
WeNet/GST WeNet Billing fees............ 8,357 11,702
WeNet/GST WeNet Co-location services.... 62,580 22,290
Rosewood Stone Group Insurance............... 1,050 5,194
Well Engaged LLC Purchase of equipment... -- 3,610
Well Engaged LLC Rent.................... -- 12,150
</TABLE>
In addition, the Company received certain management and accounting services
from RSG at no cost to the Company. The value of these services is estimated at
approximately $4,200 and $8,400 for the period from July 1, 1997 to December
31, 1997 and for the year ended December 31, 1998, respectively.
Balances outstanding with related parties at December 31, 1997 and 1998 are
as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Amounts due from:
Whole Earth 'Lectronic Link................................ $22,492 $18,355
Well Engaged LLC .......................................... 1,037 --
Whole Earth Networks Link ................................. 6,295 6,295
------- -------
$29,824 $24,650
======= =======
Amounts payable to:
Rosewood Stone Group ...................................... $ 2,100 $ 5,915
Well Engaged LLC .......................................... -- 3,788
------- -------
$ 2,100 $ 9,703
======= =======
</TABLE>
Note 6--PROFIT SHARING PLAN:
The Company's qualifying employees are covered by a multi-employer profit
sharing plan ("the Plan") under Internal Revenue Code Section 401(k).
Participating employees may defer a portion of their pretax earnings, up to the
maximum percentage allowable under the Internal Revenue Code. The Company may
make matching contributions equal to a discretionary percentage of the
participating employees' salary reductions. The Company made no contributions
to the Plan during the period from July 31, 1997 to December 31, 1998.
Note 7--STOCK OPTION PLAN:
In 1997, the Company adopted the 1997 Option Plan (the "Plan") under which
300,000 shares were reserved for issuance to employees, consultants and
directors. As defined under the Plan, a share is equivalent to one membership
unit of the Company.
F-29
<PAGE>
THE WELL LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1997, the Company granted options to purchase 225,000 shares to two
employees. All options granted to these employees have been cancelled and all
vested options, none of which were exercised, have expired since these
employees are no longer with the Company. As of December 31, 1998, there were
no options outstanding or exercisable.
Note 8--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Period from
July 1, 1997 to Year ended
December 31, December 31,
1997 1998
--------------- ------------
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for state income
taxes....................................... $ -- $800
======== ====
Supplemental disclosures of noncash investing
and financing transactions:
Assets and liabilities contributed by Whole
Earth 'Lectronic Link:
Prepaid expenses ........................... $ 722
Property and equipment, net ................ 143,011
Accrued liabilities ........................ (13,932)
--------
Total .................................... $129,801
========
</TABLE>
Note 9--SUBSEQUENT EVENT:
In March 1999, the Board of Directors approved the sale of the Company to
Salon.com for approximately $1.8 million.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Whole Earth 'Lectronic Link, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and changes in owner's net equity and of cash flows present fairly,
in all material respects, the financial position of the Online Conferencing
Business, a division of Whole Earth 'Lectronic Link, Inc., (the "Business") at
June 30, 1997 and the results of its operations and its cash flows for the
period from January 1, 1997 to June 30, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Business' 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 generally accepted auditing
standards 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.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 3, 1999
F-31
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash................................................................ $ 15,108
Prepaid expenses and other current assets........................... 722
--------
Total current assets.............................................. 15,830
Property and equipment, net........................................... 143,011
--------
Total assets...................................................... $158,841
========
LIABILITIES AND OWNER'S NET EQUITY
Current liabilities:
Accrued liabilities................................................. $ 13,932
Owner's net equity.................................................. 144,909
--------
Total liabilities and owner's net equity.......................... $158,841
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
STATEMENT OF OPERATIONS AND CHANGES IN OWNER'S NET EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 30, 1997
<TABLE>
<S> <C>
Subscription revenues................................................. $250,580
Operating expenses:
Cost of subscription revenues....................................... 111,844
Selling and marketing............................................... 47,071
General and administrative.......................................... 132,611
--------
Total operating expenses.......................................... 291,526
--------
Net loss.............................................................. (40,946)
Owner's net equity, beginning of period............................... 185,855
--------
Owner's net equity, end of period..................................... $144,909
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO JUNE 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................... $(40,946)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation..................................................... 26,703
Changes in operating assets and liabilities:
Prepaid expenses and other current assets........................ 3,810
Accrued liabilities.............................................. 2,904
--------
Net cash used in operating activities.......................... (7,529)
--------
Net decrease in cash........................................... (7,529)
Cash at beginning of period.......................................... 22,637
--------
Cash at end of period................................................ $ 15,108
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS
Note 1--FORMATION AND BUSINESS OF THE COMPANY:
The accompanying financial statements and related notes reflect the carve-out
historical results of operations and financial position of the online
conferencing business ("the Business") of Whole Earth 'Lectronic Link, Inc.
("Link"). The Statement of Operations includes all revenues and costs directly
attributable to the online conferencing business, including costs for
facilities, functions, and services used by the Business at shared sites and
allocations of costs for certain administrative functions and services
performed by Link. Costs have been allocated to the Business based on Link
management's estimates of costs attributable to the operation of the online
conferencing business. Such costs are not necessarily indicative of the costs
that would have been incurred if the online conferencing business had been a
separate entity.
The Business provides international online conferencing services to
subscribers for a monthly fee. Link is wholly owned by Bruce Katz.
Note 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Business considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Fair value of financial instruments
The reported amounts of certain of the Business' financial instruments
including cash and accrued liabilities approximate fair value due to their
short maturities.
Concentration of credit risk
Cash is deposited in one domestic bank. The Business' customer base is
dispersed across many geographic areas. The Business monitors customers'
payment history and establishes reserves for bad debt as warranted.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of five to seven years. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve
or extend the life of the assets are charged to expense. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
F-35
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition
Subscription revenues for online conferencing services are recognized over
the period that services are provided. Deferred revenue consists primarily of
monthly prepaid subscription fees billed in advance.
Cost of subscription revenues
Cost of subscription revenues includes connectivity charges, systems co-
location and administrative costs, depreciation expense relating to network
equipment, credit card charges, and costs of personnel responsible for the
operation of network equipment and systems.
Income taxes
The Business is a division of Link, which operated as an S corporation and
any taxes are payable by Link's shareholder.
Note 3--PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at June 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment............................................... $ 255,056
Furniture........................................................ 21,392
----------
276,448
Accumulated depreciation......................................... (133,437)
----------
$ 143,011
==========
</TABLE>
Note 4--RELATED PARTY TRANSACTIONS:
Insurance
During the period from January 1, 1997 to June 30, 1997, the Business was
covered by an insurance policy held by Rosewood Stone Group, Inc. ("RSG"), an S
corporation wholly owned by Bruce Katz. The insurance policy covers property,
general liability, and workers compensation. The Business paid RSG $1,200 in
connection with this insurance coverage.
Billing and collection services
The Business entered into a billing and services agreement with Whole Earth
Networks ("WeNet"), a limited liability company in which Bruce Katz was a
majority beneficial owner. WeNet is an Internet service provider and an
affiliate of Link. The customer base received one bill for both the
conferencing and Internet access services. The Business paid WeNet $12,432 for
billing services rendered during the period from January 1, 1997 to June 30,
1997.
F-36
<PAGE>
ONLINE CONFERENCING BUSINESS
(PREDECESSOR BUSINESS)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Co-location services agreement
During the period from January 1, 1997 to June 30, 1997, the Business had an
agreement with WeNet to provide certain types of services to the Business. The
services provided included storage space for some of the Business' computer
hardware, a high bandwidth Internet connection, and system administration. The
costs for these services vary depending on the services provided in any given
month. For the period from January 1, 1997 to June 30, 1997, the Business paid
WeNet $37,400 for these co-location services.
In addition, the Company received certain management and accounting services
from RSG at no cost to the Company. The value of these services is estimated at
approximately $4,200 for the period from January 1, 1997 to June 30, 1997.
Note 5--PROFIT SHARING PLAN:
The Business' qualifying employees are covered by a multi-employer profit
sharing plan ("the Plan") under Internal Revenue Code Section 401(k).
Participating employees may defer a portion of their pretax earnings, up to the
maximum percentage allowable under the Internal Revenue Code. The Company may
make matching contributions equal to a discretionary percentage of the
participating employees' salary reductions. The Business made no contributions
to the Plan during the period from January 1, 1997 to June 30, 1997.
Note 6--SUBSEQUENT EVENT:
On July 1, 1997, Link transferred the Business into The Well LLC ("The Well")
in return for 1,500,000 membership units in The Well.
F-37
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following financial pro forma consolidated statements present the Salon
Internet, Inc. pro forma consolidated balance sheet as of December 31, 1998 and
the pro forma consolidated statements of operations for the year ended March
31, 1998 and the nine months ended December 31, 1998.
Salon's acquisition of The Well LLC has been accounted for under the
"purchase" method of accounting, which requires the purchase price to be
allocated to the acquired assets and liabilities of The Well LLC on the basis
of their estimated fair values as of the date of acquisition. The following pro
forma consolidated statements of operations for the year ended March 31, 1998
and the nine months ended December 31, 1998 give effect to the acquisition of
The Well LLC as if it occurred on April 1, 1997, and include adjustments
directly attributable to the acquisition of The Well LLC and expected to have a
continuing impact on the combined company.
The pro forma information is based on historical financial statements. The
pro forma results of operations for the year ended March 31, 1998 includes the
results of operations of Online Conferencing Business (predecessor business)
from January 1, 1997 to June 30, 1997 and The Well LLC from July 1, 1997 to
December 31, 1997. The pro forma results of operations for the nine months
ended December 31, 1998 includes the results of operations of The Well LLC from
January 1, 1998 to September 30, 1998. The assumptions give effect to the
business combination with The Well LLC under the purchase method of accounting.
The information has been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission and is provided for comparative
purposes only. The pro forma information does not purport to be indicative of
the results that actually would have occurred had the combination been effected
at the beginning of the periods presented.
F-38
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------
The Well
Salon.com LLC Adjustments Pro Forma
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents
......................... $ 1,607,271 $ 11,455 $ -- $ 1,618,726
Accounts receivable, net
......................... 844,186 4,427 -- 848,613
Related party receivables
......................... -- 24,650 -- 24,650
Prepaid expenses and other
current assets........... 307,765 1,213 -- 308,978
------------ --------- ---------- ------------
Total current assets ... 2,759,222 41,745 -- 2,800,967
Property and equipment, net
........................... 597,344 87,295 -- 684,639
Intangible assets, net ..... -- -- 1,851,960 1,851,960
Other assets ............... 29,359 -- -- 29,359
------------ --------- ---------- ------------
Total assets ........... $ 3,385,925 $ 129,040 $1,851,960 $ 5,366,925
============ ========= ========== ============
LIABILITIES AND STOCKHOLD-
ERS' EQUITY
Current Liabilities:
Accounts payable ......... $ 424,305 $ 2,647 $ -- $ 426,952
Related party payables ... -- 9,703 -- 9,703
Accrued liabilities ...... 181,895 87,550 -- 269,445
Deferred revenue ......... 214,198 10,646 75,348 300,192
Bank borrowings .......... 416,834 -- (10,646) 406,188
------------ --------- ---------- ------------
Total current
liabilities ........... 1,237,232 110,546 64,702 1,412,480
Bank borrowings, net of
current portion ......... 312,677 -- -- 137,475
------------ --------- ---------- ------------
1,374,707 110,546 64,702 1,549,955
------------ --------- ---------- ------------
Stockholders' Equity:
Convertible preferred
stock ................... 11,161,857 -- 1,805,752 12,967,609
Common stock.............. 392 -- -- 392
Additional paid in capital
......................... 2,495,416 -- -- 2,495,416
Members' interest ........ -- 154,909 (154,909) --
Unearned compensation .... (1,102,390) -- -- (1,102,390)
Accumulated deficit ...... (10,544,057) (136,415) 136,415 (10,544,057)
------------ --------- ---------- ------------
Total stockholders'
equity ................ 2,011,218 18,494 1,787,258 3,816,970
------------ --------- ---------- ------------
Total liabilities and
stockholders' equity.. $ 3,385,925 $ 129,040 $1,851,960 $ 5,366,925
============ ========= ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the period
Year Ended For the period July 1, 1997 to Year Ended
March 31, January 1, 1997 to December 31, March 31,
1998 June 30, 1997 1997 1998
----------- ------------------ --------------- -----------
Online
Conferencing
Business
(Predecessor
Salon.com Business) The Well, LLC Adjustments Pro Forma
----------- ------------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Sponsorship and
advertising.......... $ 1,155,931 $ -- $ -- $ -- $ 1,155,931
Subscription.......... -- 250,580 267,022 -- 517,602
----------- --------- --------- --------- -----------
1,155,931 250,580 267,022 -- 1,673,533
----------- --------- --------- --------- -----------
Operating expenses:
Production, content,
and product.......... 2,832,006 -- -- -- 2,832,006
Cost of subscription
revenues............. -- 111,844 124,685 -- 236,529
Sales and marketing... 1,654,990 47,071 45,475 -- 1,747,536
Research and
development.......... 276,112 -- -- -- 276,112
General and
administrative....... 291,446 132,611 164,289 -- 588,346
Amortization of
acquired
intangibles.......... -- -- -- 925,980 925,980
----------- --------- --------- --------- -----------
Total operating
expenses........... 5,054,554 291,526 334,449 925,980 6,606,509
----------- --------- --------- --------- -----------
Loss from operations.... (3,898,623) (40,946) (67,427) (925,980) (4,932,976)
Interest expense........ (16,340) -- -- -- (16,340)
Other income............ 89,108 -- -- -- 89,108
----------- --------- --------- --------- -----------
Net loss............ $(3,825,855) $ (40,946) $ (67,427) $(925,980) $(4,860,208)
=========== ========= ========= ========= ===========
Basic and diluted net
loss per share......... $ (10.20) $ -- $ -- $ -- $ (12.96)
=========== ========= ========= ========= ===========
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 375,000 375,000
=========== ===========
Pro forma basic and
diluted net loss per
share................ $ (1.20) $ (1.33)
=========== ===========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share..... 3,189,721 3,655,121
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
SALON.COM
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the
Nine Months Nine Months Nine Months
Ended Ended Ended
December September 30, December
31, 1998 1998 31, 1998
----------- ------------- -----------
Salon.com The Well LLC Adjustments Pro Forma
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sponsorship and
advertising............. $ 2,058,024 $ -- $ -- $ 2,058,024
Subscription............. -- 379,638 -- 379,638
----------- -------- --------- -----------
2,058,024 379,638 -- 2,437,662
----------- -------- --------- -----------
Operating expenses:
Production, content, and
product................. 3,134,810 -- -- 3,134,810
Cost of subscription
revenues................ -- 162,209 -- 162,209
Sales and marketing...... 2,580,179 58,194 -- 2,638,373
Research and
development............. 304,701 -- -- 304,701
General and
administrative.......... 337,908 192,431 -- 530,339
Amortization of acquired
intangibles............. -- -- 694,485 694,485
----------- -------- --------- -----------
Total operating
expenses ............. 6,357,598 412,834 694,485 7,464,917
----------- -------- --------- -----------
Loss from operations....... (4,299,574) (33,196) (694,485) (5,027,255)
Interest expense........... (36,701) -- -- (36,701)
Other income............... 38,358 -- -- 38,358
----------- -------- --------- -----------
Net loss............... $(4,297,917) $(33,196) $(694,485) $(5,025,598)
=========== ======== ========= ===========
Basic and diluted net loss
per share................. $ (11.20) $ -- $ -- $ (13.10)
=========== ======== ========= ===========
Weighted average shares
used in computing basic
and diluted net loss per
share..................... 383,684 383,684
=========== ===========
Pro forma basic and diluted
net loss per share ....... $ (1.05) $ (1.11)
=========== ===========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share........ 4,075,248 4,540,648
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
SALON.COM
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--BASIS OF PRESENTATION:
In March 1999, Salon acquired The Well LLC, a privately held company that has
experience in providing international online conferencing services to
subscribers.
The unaudited pro forma information presented is not necessarily indicative
of the future consolidated financial position or results of operations of Salon
or the consolidated financial position or results of operations that would have
resulted had the acquisition taken place on April 1, 1997. The unaudited pro
forma consolidated balance sheet as of December 31, 1998 reflects the effects
of the acquisition, assuming the related event occurred as of December 31,
1998. The unaudited pro forma statements of operations for the year ended March
31, 1998 and the nine months ended December 31, 1998 reflect the effects of the
acquisition, assuming the related events occurred as of April 1, 1997.
Note 2--UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL ADJUSTMENTS:
The unaudited pro forma consolidated financial statements reflect a total
purchase price of $1.9 million, and the acquisition was recorded under the
purchase method of accounting. In connection with the acquisition, Salon
recorded goodwill of $396,860 and other intangibles of $1,555,000 including
proprietary technology and tradename, which are being amortized on a straight-
line basis over two years following the acquisition.
Note 3--UNAUDITED PRO FORMA CONSOLIDATED NET LOSS PER SHARE:
The net loss per share and shares used in computing the net loss per share
for the year ended March 31, 1998 and the nine months ended December 31, 1998
is based upon the historical weighted average common shares outstanding. The
Salon common stock issuable upon the exercise of the stock options and warrants
have been excluded as the effect would be antidilutive. In addition to the
shares used in computing the net loss per share above, pro forma net loss per
share is calculated using the convertible preferred stock outstanding as if
such shares were converted to common stock at the time of issuance.
Note 4--PURCHASE ADJUSTMENTS:
Pro forma adjustments have been prepared to reflect the acquisition of The
Well LLC and the related amortization of other intangible assets and goodwill.
F-42
<PAGE>
[LOGO OF SALON.COM]
Until , 1999, which is 25 days after the date of this prospectus, all
dealers that buy, sell or trade Salon's common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions to be paid by Salon, in connection with
this offering. All amounts shown are estimates except for the SEC registration
fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 10,790
NASD filing fee.................................................. 4,382
Nasdaq National Market listing fee............................... 43,750
Blue sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 300,000
Accounting fees and expenses..................................... 250,000
Director and officer Securities Act liability insurance.......... 150,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous expenses........................................... 21,078
----------
Total.......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents under certain circumstances and subject
to certain limitations. Salon's certificate of incorporation and bylaws
provide that Salon shall indemnify its directors, officers, employees and
agents to the full extent permitted by Delaware General Corporation Law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. In addition, Salon intends to enter into separate
indemnification agreements with its directors, officers and certain employees
which would require Salon, among other things, to indemnify them against
certain liabilities which may arise by reason of their status as directors,
officers or certain other employees. Salon also intends to maintain director
and officer liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between Salon and its officers and directors may be sufficiently
broad to permit indemnification of Salon's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Salon and its
officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities
(a) Since April 1, 1996, Salon has issued and sold the following
unregistered securities:
(1) From inception to April 1, 1999, Salon issued options to purchase an
aggregate of 2,056,250 shares of common stock under the 1995 stock option
plan, of which 54,998 have been exercised.
(2) On December 22, 1995, August 2, 1996 and February 6, 1997, Salon sold
an aggregate of 2,500,000 shares of its Series A preferred stock to two
investors, Adobe Ventures, L.P. and H&Q Salon Investors, L.P., for an
aggregate of $5,000,000.
II-1
<PAGE>
(3) In April 1997, Salon issued a warrant to purchase 8,750 shares of
Series A preferred stock at an exercise price of $2.00 per share to
Imperial Bancorp. This warrant may be exercised at any time within five
years after its issuance.
(4) On November 28, 1997, Salon sold an aggregate of 949,365 shares of
its Series B preferred stock to four investors, including Adobe Ventures
II, L.P., DOTCOM Ventures, L.P. and H&Q Salon Investors, L.P. for an
aggregate of approximately $3.0 million.
(5) In April 1998, Salon issued a warrant to purchase 11,867 shares of
Series B preferred stock at an exercise price of $3.16 per share to
Imperial Bancorp. This warrant may be exercised at any time within seven
years after its issuance.
(6) In July 1998, Salon issued a warrant to purchase 79,114 shares of its
Series B preferred stock at an exercise price of $3.16 per share to America
Online Inc. This warrant may be exercised at any time within five years
after its issuance.
(7) On September 18, 1998, November 3, 1998 and April 14, 1999, Salon
sold an aggregate of 3,869,843 shares of Series C preferred stock to
thirty-five investors including Adobe Ventures II, L.P., DOTCOM Ventures,
L.P., entities affiliated with Constellation Ventures, H&Q Salon Investors,
L.P., Wasserstein Adelson Ventures, L.P. and entities affiliated with Bruce
Katz for an aggregate of $15,014,991. In addition, on September 18, 1998,
Salon issued warrants to purchase an aggregate of 219,582 shares of common
stock with an exercise price per share of $0.52 to Adobe Ventures II, L.P.,
DOTCOM Ventures, L.P. and H&Q Salon Investors, L.P.
(8) In December 1998, Salon issued a warrant to purchase 14,439 shares of
Series C preferred stock at an exercise price of $3.88 per share to
Imperial Bancorp. This warrant may be exercised at any time within seven
years after its issuance.
(9) On March 29, 1999, Salon issued 463,918 shares of Series C preferred
stock to Whole Earth Lectronic Link and Bruce Katz in exchange for all of
the membership interests of The Well LLC.
(10) On April 14, 1999, Salon issued a warrant to purchase an aggregate
of 148,389 shares of Series C preferred stock at an exercise price of $3.88
per share to entities affiliated with Daiwa Securities America Inc. and a
warrant to purchase 25,773 shares of Series C preferred stock at an
exercise price of $3.88 per share to ACT III Communications.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
For additional information concerning these equity investment transactions,
see the section entitled "Certain Transactions" in the prospectus.
The issuances described in Items 15(a)(1) through 15(a)(10) were deemed
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. Certain issuances described in Item 15(a)(1) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Salon or had access, through
employment or other relationships, to such information.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
2.1 Membership Interest Purchase Agreement dated March 29, 1999.
3.1 Amended and Restated Articles of Incorporation of Salon, as amended to
date.
3.2+ Form of Certificate of Incorporation of Salon, as proposed to be
filed.
3.3 Bylaws of Salon.
3.4+ Form of Bylaws, as proposed to be filed.
4.1 Third Amended and Restated Rights Agreement dated April 14, 1999.
4.2 Second Amended and Restated Voting Agreement dated April 14, 1999.
5.1+ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 1995 Stock Option Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.3 Form of Indemnity Agreement.
10.4 Commercial Office Lease between T/W Associates and Salon dated June
25, 1997.
10.5 Agreement of Lease between ZAPCO 1500 Investment L.P. and Salon dated
March 1998.
10.6 Employment Agreement between Michael O'Donnell and Salon dated
November 7, 1996.
10.7 Employment Agreement between Bruce Roberts and Salon dated April
2,1999.
10.8 Letter Agreement between Todd Hagen and Salon dated March 25, 1999, as
amended.
10.9 Warrant to Purchase Stock issued to Imperial Bancorp dated December
17, 1998.
10.10 Warrant to Purchase Stock issued to Imperial Bancorp dated April 13,
1998.
10.11 Warrant to Purchase Stock issued to Imperial Bancorp dated April 14,
1997.
10.12 Warrant to Purchase Stock issued to America Online Inc. dated July 31,
1998.
10.13 Warrant to Purchase Stock issued to Adobe Ventures II L.P. dated
September 18, 1998.
10.14 Warrant to Purchase Stock issued to ASCII Ventures, L.P. dated
September 18, 1998.
10.15 Warrant to Purchase Stock issued to H&Q Salon Investors, L.P. dated
November 3, 1998.
10.16+ Form of Warrant to Purchase Stock issued to entities affiliated with
Daiwa Securities America Inc. dated April 1999.
10.17+ Warrant to Purchase Stock issued to ACT III Communications dated April
1999.
10.18 Loan Agreement between Imperial Bank and Salon dated April 13, 1998,
as amended.
10.19 Series A Preferred Stock Purchase Agreement dated December 22, 1995.
10.20 First Amendment to the Series A Preferred Stock Purchase Agreement
dated August 2, 1996.
10.21 Second Amendment to the Series A Preferred Stock Purchase Agreement
dated February 6, 1997.
10.22 Series B Preferred Stock Purchase Agreement dated November 28, 1997.
10.23 Series C Preferred Stock Purchase Agreement dated September 18, 1998.
10.24 Series C Preferred Stock Purchase Agreement dated April 14, 1999.
21.1 Subsidiaries of Salon.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2+ Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-5).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- --------
+ To be filed by amendment
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings
Salon hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification by Salon for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Salon pursuant to the provisions described in Item 14 above or otherwise,
Salon 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 Salon
of expenses incurred or paid by a director, officer, or controlling person of
Salon 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, Salon will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Salon 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 Salon pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, Salon
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of San
Francisco, State of California, on the 19th day of April, 1999.
SALON INTERNET, INC.
/s/ Michael O'Donnell
By: _________________________________
Michael O'Donnell
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Michael O'Donnell as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him in any
and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, with full power to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael O'Donnell Chief Executive Officer, April 16, 1999
____________________________________ President and Director
Michael O'Donnell (Principal Executive
Officer)
/s/ David Talbot Chairman of the Board and April 16, 1999
____________________________________ Editor-in Chief and
David Talbot Director
/s/ Todd Hagen Chief Financial Officer, April 16, 1999
____________________________________ Vice President of Finance
Todd Hagen and Administration and
Secretary (Principal
Financial and Accounting
Officer)
/s/ Sada Chidambaram Director April 16, 1999
____________________________________
Sada Chidambaram
/s/ Standish O'Grady Director April 16, 1999
____________________________________
Standish O'Grady
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jim Rosenfield Director April 16, 1999
____________________________________
Jim Rosenfield
/s/ Norman Lear Director April 16, 1999
____________________________________
Norman Lear
Director April , 1999
____________________________________
Ron Celmer
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Salon.com
In connection with our audits of the financial statements of Salon.com as of
March 31, 1997 and 1998, and for the period from July 27, 1995 (inception) to
March 31, 1996 and for each of the two years in the period ended March 31,
1998, which financial statements are included in the Prospectus, we have also
audited the financial statement schedule listed in Item 16(b) herein. In our
opinion, this financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included herein.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 14, 1999
S-1
<PAGE>
SCHEDULE II
SALON.COM
VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ----------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Valuation allowance for deferred
tax assets
For the period July 27, 1995
(inception) to March 31, 1996.... $ -- $ 174 $ -- $ 174
Year ended March 31, 1997......... 174 785 -- 959
Year ended March 31, 1998......... 959 1,513 -- 2,472
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
2.1 Membership Interest Purchase Agreement dated March 29, 1999.
3.1 Amended and Restated Articles of Incorporation of Salon, as amended to
date.
3.2+ Form of Certificate of Incorporation of Salon, as proposed to be
filed.
3.3 Bylaws of Salon.
3.4+ Form of Bylaws, as proposed to be filed.
4.1 Third Amended and Restated Rights Agreement dated April 14, 1999.
4.2 Second Amended and Restated Voting Agreement dated April 14, 1999.
5.1+ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 1995 Stock Option Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.3 Form of Indemnity Agreement.
10.4 Commercial Office Lease between T/W Associates and Salon dated June
25, 1997.
10.5 Agreement of Lease between ZAPCO 1500 Investment L.P. and Salon dated
March 1998.
10.6 Employment Agreement between Michael O'Donnell and Salon dated
November 7, 1996.
10.7 Employment Agreement between Bruce Roberts and Salon dated April
2,1999.
10.8 Letter Agreement between Todd Hagen and Salon dated March 25, 1999, as
amended.
10.9 Warrant to Purchase Stock issued to Imperial Bancorp dated December
17, 1998.
10.10 Warrant to Purchase Stock issued to Imperial Bancorp dated April 13,
1998.
10.11 Warrant to Purchase Stock issued to Imperial Bancorp dated April 14,
1997.
10.12 Warrant to Purchase Stock issued to America Online Inc. dated July 31,
1998.
10.13 Warrant to Purchase Stock issued to Adobe Ventures II L.P. dated
September 18, 1998.
10.14 Warrant to Purchase Stock issued to ASCII Ventures, L.P. dated
September 18, 1998.
10.15 Warrant to Purchase Stock issued to H&Q Salon Investors, L.P. dated
November 3, 1998.
10.16+ Form of Warrant to Purchase Stock issued to entities affiliated with
Daiwa Securities America Inc. dated April 1999.
10.17+ Warrant to Purchase Stock issued to ACT III Communications dated April
1999.
10.18 Loan Agreement between Imperial Bank and Salon dated April 13, 1998,
as amended.
10.19 Series A Preferred Stock Purchase Agreement dated December 22, 1995.
10.20 First Amendment to the Series A Preferred Stock Purchase Agreement
dated August 2, 1996.
10.21 Second Amendment to the Series A Preferred Stock Purchase Agreement
dated February 6, 1997.
10.22 Series B Preferred Stock Purchase Agreement dated November 28, 1997.
10.23 Series C Preferred Stock Purchase Agreement dated September 18, 1998.
10.24 Series C Preferred Stock Purchase Agreement dated April 14, 1999.
21.1 Subsidiaries of Salon.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2+ Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-5).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- --------
+ To be filed by amendment
<PAGE>
EXHIBIT 2.1
MEMBERSHIP INTEREST PURCHASE AGREEMENT
--------------------------------------
THIS MEMBERSHIP INTEREST PURCHASE AGREEMENT (this "Agreement") is dated as
of March 29, 1999 between SALON INTERNET, INC., a California corporation (the
"Buyer"), and WHOLE EARTH LECTRONIC LINK, INC., a California corporation ("Whole
Earth"), and Bruce R. Katz ("Katz," and together with Whole Earth, the
"Sellers").
R E C I T A L S
---------------
A. The Sellers own directly, beneficially and of record, 100% of the
issued and outstanding membership interests (the "Units") of The WELL, a
California limited liability company (the "Company").
B. The Buyer desires to acquire the Units from the Sellers, and the
Sellers desire to sell the Units to the Buyer, all upon the terms and subject to
the conditions set forth in this Agreement.
A G R E E M E N T
-----------------
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained in this Agreement and for other valuable consideration the Buyer and
the Sellers agree as follows:
ARTICLE ONE
TERMS OF THE TRANSACTION
SECTION 1.1. SALE AND PURCHASE.
-----------------
The Sellers, on the Closing Date (as defined in Section 1.4 below), shall
sell to the Buyer the number of Units set forth opposite each Seller's name
below:
Name Units
---- -----
Whole Earth: 1,500,000
Katz: 10,000
SECTION 1.2. PURCHASE PRICE.
--------------
Subject to adjustment as set forth in Section 1.3 hereof, the Buyer, on the
Closing Date, shall deliver to the Sellers, in payment of the purchase price
(the "Purchase Price") for the Units, certificates representing an aggregate of
684,412 shares (the "Shares") of Series C Preferred Stock of Seller (the "Series
C Preferred Stock"), payable as follows: to Whole Earth 611,891 Shares, to Katz
4,079 Shares, and deposited with U.S. Bank, as escrow agent (the "Escrow
Agent"), 68,442 Shares (the "Escrow Amount"). The Escrow Amount shall be held in
escrow in accordance with the terms of this Agreement and the escrow agreement
to be entered into among the Escrow Agent, Buyer and Sellers in the form
attached as Exhibit A hereto (the "Escrow Agreement").
---------
1
<PAGE>
SECTION 1.3. PURCHASE PRICE ADJUSTMENTS.
---------------------------
(a) On the Closing Date, the Sellers shall deliver a balance sheet, which
conforms to the requirements of Section 2.7(b) hereof, as of a date no earlier
than three business days before the Closing Date (the "Closing Balance Sheet").
In the event that the Company's total members' equity as of the date of the
Closing Balance Sheet is less than the Company's total members' equity as of the
Balance Sheet Date (as defined in Section 2.7(a) hereof), then the Purchase
Price shall be reduced by the number of shares of Series C Preferred Stock which
is equal to the quotient of (i) the difference between the Company's total
members' equity as of the Balance Sheet Date and the Company's total members'
equity as of the date of the Closing Balance Sheet, divided by (ii) $2.63 per
share, rounded to the nearest whole share (the "Adjusted Purchase Price"). In
the event of any adjustment pursuant to this Section 1.3, the Escrow Amount and
the number of Shares to be received by each Seller shall be reduced
proportionately.
(b) In the event that the Buyer does not effectuate, (1) prior to an
underwritten registered initial public offering of Buyer Common Stock, (2) prior
to a merger or consolidation of the Buyer in which the Buyer shall not survive
and in which the shareholders of the Buyer do not own a majority of the Buyer's
outstanding stock following such merger or consolidation, (3) prior to the sale
of all or substantially all of the assets of the Buyer, or (4) within ninety
(90) days of the Closing Date, a stock split, stock dividend or similar event of
recapitalization exclusively with respect to its outstanding shares of Series C
Preferred Stock in connection with the issuance of additional shares of Series C
Preferred Stock (the "Financing Shares") in an equity financing to raise at
least $5,000,000 in working capital (a "Recapitalization Event") so that,
following such Recapitalization Event, each holder of Series C Preferred Stock
prior to such Recapitalization Event holds at least 1.35 times the number of
shares of Series C Preferred Stock following such Recapitalization Event (having
a liquidation price and conversion price equal to the liquidation price and
conversion price of the Financing Shares), then the Purchase Price (or Adjusted
Purchase Price, as the case may be) shall be increased by 76,044 shares of
Series C Preferred Stock (the "Additional Shares"). The Company shall issue the
Additional Shares to the Sellers and Escrow Agent in the same proportion as set
forth in Section 1.2 hereof.
SECTION 1.4. THE CLOSING.
-----------
The closing of the purchase and sale of the Shares (the "Closing") shall be
held at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue,
Palo Alto, CA 94301, or at such other place as the parties may agree upon, on
March 25, 1999, or on such other date as the parties may agree upon.
SECTION 1.5. FURTHER ASSURANCES.
------------------
The Buyer and the Sellers, at their sole cost and expense, will do such
further acts and execute and deliver such further documents regarding their
obligations hereunder as may be required solely for the purpose of accomplishing
the purposes of this Agreement.
2
<PAGE>
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each of the Sellers, jointly and severally, represents and warrants to the
Buyer (except as set forth on the Schedule of Exceptions attached hereto as
Exhibit B (the "Sellers' Schedule of Exceptions"), which exceptions shall be
- ---------
deemed to be representations and warranties as if made hereunder) as follows:
SECTION 2.1. POWER AND CAPACITY.
------------------
Whole Earth is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. Such Seller has all
requisite power and legal capacity to execute and deliver this Agreement, to
perform Seller's obligations hereunder and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by such Seller, constitutes the valid and binding agreement of such
Seller and is enforceable against such Seller in accordance with its terms.
This Agreement has been duly authorized by the members of the Company.
SECTION 2.2. THE UNITS.
----------
Each Seller is the beneficial and record owner of the number of Units set
forth opposite such Seller's name in Section 1.1. The Units are held by the
Sellers as record owners thereof, free and clear of all liens, charges,
encumbrances, equities and claims whatsoever (other than encumbrances created by
this Agreement) and are not subject to any restriction with respect to their
transferability (other than restrictions on transfer under applicable federal
and state securities laws). No third party has grounds for any claims against
the Units, the Company or the Sellers with respect to the transactions
contemplated hereby.
SECTION 2.3. CONFLICTING INSTRUMENTS; CONSENTS.
---------------------------------
(a) The execution and delivery by each Seller of this Agreement does not,
and the consummation of the transactions contemplated hereby will not, violate
any provision of the articles of organization or the operating agreement of the
Company (or the articles of incorporation or bylaws of Whole Earth), or result
in the creation of any lien, security interest, charge or encumbrance upon the
Units (other than encumbrances created by this Agreement) or any of the assets
or properties of the Company under, conflict with or result in a breach of,
create an event of default (or event that, with the giving of notice or lapse of
time or both, would constitute an event of default) under, or give any third
party the right to accelerate any obligation under, any order, award, judgment
or decree to which the Company is a party or by which the Company or any assets
or properties of the Company are bound or any Company Contract (as defined in
Section 2.13).
(b) The execution and delivery by each Seller of this Agreement does not,
and the consummation of the transactions contemplated hereby will not, result in
a violation of, or require any authorization, approval, consent or other action
by, or registration, declaration or filing with or notice to, any court or
administrative or governmental body pursuant to, any statute, law, rule,
3
<PAGE>
regulation or ordinance applicable to the Company or such Seller. There is no
pending action, suit, proceeding or, to the knowledge of such Seller,
investigation before or by any court or governmental body or agency to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
SECTION 2.4. ORGANIZATION AND AUTHORITY.
--------------------------
(a) The Company is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of California. The
Company has all requisite power and authority to own or lease and operate its
properties and assets and to carry on its business as now conducted.
(b) The articles of organization and the operating agreement and all
amendments thereto, and the minute books and membership unit transfer records of
the Company furnished to the Buyer for review are accurate and complete.
SECTION 2.5. SUBSIDIARIES.
------------
The Company does not own, either directly or indirectly, any capital stock
or other equity interests of any corporation, partnership, limited liability
company, joint venture or other entity.
SECTION 2.6. CAPITALIZATION.
--------------
The Company has 1,510,000 Units issued and outstanding, all of which have
been duly authorized and validly issued, are fully paid and non-assessable and
were issued by the Company in compliance with all applicable federal and state
securities laws, rules and regulations. There is no outstanding or authorized
option, subscription, warrant, call, right, commitment or other agreement of any
character obligating the Company to sell or issue any additional membership
interests or any other securities convertible into or exercisable for or
evidencing the right to subscribe for any membership interests.
SECTION 2.7. FINANCIAL STATEMENTS.
--------------------
(a) The Sellers have furnished the Buyer with copies of the audited
financial statements of the Company for the fiscal year ended December 31, 1998,
including a balance sheet as at December 31, 1998 (the "Balance Sheet" and such
date, the "Balance Sheet Date"), and the related statement of income for the
twelve-month period then ended (collectively, the "Financial Statements").
(b) The Financial Statements: (i) are correct and complete in all material
respects and have been prepared in accordance with the books and records of the
Company; (ii) have been prepared in accordance with generally accepted
accounting principles ("GAAP"); (iii) reflect and provide adequate reserves in
respect of all known liabilities of the Company as of such date; and (iv)
present fairly the financial condition of the Company at such date and the
results of its operations for the fiscal period then ended. The Company
maintains a standard system of accounting established and administered in
accordance with GAAP.
4
<PAGE>
SECTION 2.8. REAL PROPERTY.
-------------
The Company does not own any real property. Section 2.8 of the Sellers'
-----------
Schedule of Exceptions lists a description of each lease of real property under
which the Company is a sub-lessee (the "Leased Property") and, to the knowledge
of such Seller, holds valid leasehold interest free and clear of any liens,
claims or encumbrances created by the Company. No breach or event of default on
the part of the Company and no event that, with the giving of notice or lapse of
time or both, would constitute such breach or event of default, has occurred and
is continuing unremedied that could reasonably be expected to have a material
adverse affect on the business, prospects, condition, affairs or operations of
the Company or on its properties or assets (a "Company Material Adverse
Effect").
SECTION 2.9. PERSONAL PROPERTY AND INTELLECTUAL PROPERTY.
-------------------------------------------
(a) Except as described in subsection (b) hereof, the Company owns all
personal property reflected on the Balance Sheet and all personal property
acquired by the Company since the date of the Balance Sheet (except such
personal property as has been disposed of in the ordinary course of business),
free and clear of any liens, security interests, charges or encumbrances created
by the Company ("Liens"), except for (i) Liens for property taxes not yet due
and payable and (ii) Liens that, either individually or in the aggregate, could
not reasonably be expected to have a Company Material Adverse Effect.
(b) The Company owns and possesses or is licensed under all patents, patent
applications, licenses, trademarks, trade names, brand names, trade secrets,
inventions and copyrights employed in the operation of its business as now
conducted and as proposed to be conducted by the Company, with no infringement
of or conflict with the rights of others respecting any of the same. To the
knowledge of such Seller, the operation of the Company's business as now
conducted or as proposed to be conducted by the Company does not infringe any
patent, copyright, trade secret or other proprietary rights of any third
parties. There are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to patents, patent
applications, licenses, trademarks, trade names, brand names, inventions,
proprietary rights and copyrights of any other person or entity. The Company is
not obligated to make any payments by way of royalties, fees or otherwise to any
owner, licensor of, or other claimant to any patent, trademark, trade name,
copyright or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business, or otherwise. The Company has not
received any communications alleging that it has violated or, by conducting its
business as proposed by the Company, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity, nor is such Seller aware of
any basis for the foregoing. There are no agreements, understandings,
instruments, contracts, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound which involve indemnification by the Company
with respect to infringements of proprietary rights.
5
<PAGE>
SECTION 2.10. EMPLOYEE AND LABOR MATTERS.
--------------------------
(a) Set forth in Section 2.10 of the Sellers' Schedule of Exceptions is a
------------
true and complete list of: (i) the name of each person employed by the Company,
the title or job classification of each such person and the current rate of
compensation of each such person; (ii) the name of each person, if any, holding
tax or other powers of attorney from the Company and a summary of the terms
thereof; and (iii) the name of each director and officer of the Company.
(b) Set forth in Section 2.10 of the Sellers' Schedule of Exceptions is a
------------
true and complete list of each current employment contract and consulting
agreement entered into by the Company, or by which the Company is bound, and
each deferred compensation, bonus, incentive compensation, savings, severance or
termination pay agreement or plan and any other employee benefit plan,
agreement, arrangement or commitment, whether formal or informal, not required
to be listed in Section 2.11 of the Sellers' Schedule of Exceptions, maintained,
------------
entered into or contributed to by the Company for the benefit of any current or
former director, officer or employee of the Company (the "Non-ERISA Plans").
The Sellers have delivered to the Buyer true and correct copies of each such
Non-ERISA Plan. The Company is not in default under any such Non-ERISA Plan.
(c) The Company is not a party to any contract or collective bargaining
agreement with any labor organization.
(d) All obligations of the Company for unemployment compensation benefits,
pension benefits, salaries, wages, bonuses, sick leave, vacation and other forms
of compensation payable to the officers, directors and other employees and
independent contractors of the Company through the Balance Sheet Date have been
paid or adequate accruals therefore have been made in the Balance Sheet.
(e) There is no controversy pending between the Company and any of its
employees that, individually or in the aggregate, could reasonably be expected
to have a Company Material Adverse Effect, and no complaint is pending against
the Company before the National Labor Relations Board or any state or local
agency.
(f) Each employee of the Company has executed an agreement regarding
confidentiality and proprietary information, the form of which has been provided
to special counsel to the Buyer. To the knowledge of such Seller, none of the
Company's employees is in violation thereof. To the knowledge of such Seller,
the employees of the Company are not obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with the use of his or her best efforts to promote the interests
of the Company or that would conflict with the Company's business as conducted
or as proposed to be conducted by the Company or that would prevent any such
employee from assigning inventions to the Company. Neither the execution nor
delivery of this Agreement, nor the carrying on of the Company's business as
proposed to be conducted by the Company, will conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
any contract, covenant or instrument under which any of
6
<PAGE>
such employees is now obligated. The Company and such Seller do not believe
that it is or will be necessary for the Company to utilize any inventions of any
of its employees made prior to their employment by the Company.
SECTION 2.11. ERISA PLANS.
-----------
(a) Set forth in Section 2.11 of the Sellers' Schedule of Exceptions is a
------------
complete list of each employee benefit plan as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974 ("ERISA") (collectively referred
to as the "ERISA Plans") established, maintained or contributed to by the
Company or any ERISA Affiliate or to which the Company or any ERISA Affiliate
has an obligation to contribute amounts. As used herein, the term "ERISA
Affiliate" means a corporation which is a member of a controlled group of
corporations with the Company within the meaning of Section 414(b) of the
Internal Revenue Code of 1986 (the "Code"), a trade or business (including a
sole proprietorship, partnership, trust, estate or corporation) which is under
common control with the Company within the meaning of Section 414(c) of the
Code, or a member of an affiliated service group with the Company within the
meaning of Section 414(m) or Section 414(o) of the Code.
(b) Full payment has been made of all amounts that the Company is required
under applicable law or any ERISA Plan to have paid as contributions to or
benefits under any ERISA Plan as of the last day of the most recent fiscal year
of such ERISA Plan ended prior to the date hereof. The Company has made
adequate provision in accordance with GAAP for liabilities to meet current
contributions or benefit payments.
(c) A favorable determination has been issued by the IRS with respect to
the qualified status of each of the ERISA Plans intended to be qualified under
Section 401(a) of the Code, and with respect to the tax exempt status under
Section 501(a) of the Code of any trust through which such ERISA Plans are
funded and any trust or other entity established with respect to an ERISA Plan
and intended to be qualified as a tax exempt organization under Section 501(c)
of the Code. Nothing has occurred since the date of each such determination or
recognition letter that would adversely affect such qualification or exemption.
SECTION 2.12. COMPLIANCE AND LITIGATION.
-------------------------
(a) The Company has complied with all applicable federal, state, local or
other governmental statutes, regulations, orders and restrictions in respect of
the conduct of the Company's business and ownership of its properties, except
for such failures to comply as, individually or in the aggregate, could not
reasonably be expected to have a Company Material Adverse Effect. The Company
has all federal, state and local franchises, licenses, permits and other
governmental approvals necessary for the conduct of the Company's business and
the ownership of its properties, except for such franchises, license, permits or
governmental approvals as, individually or in the aggregate, could not
reasonably be expected to have a Company Material Adverse Effect.
(b) There is no action, proceeding or investigation pending, or, to the
knowledge of such Seller, threatened, against the Company or its officers,
directors or members, or to the knowledge of such Seller, against employees of
the Company (or, to the knowledge of such Seller, any basis
7
<PAGE>
therefor or threat thereof): (1) which could reasonably be expected to result,
either individually or in the aggregate, in (a) any material adverse change in
the business, prospects, conditions, affairs or operations of the Company or in
any of its properties or assets, or (b) any material impairment of the right or
ability of the Company to carry on its business as now conducted or as proposed
to be conducted by the Company, or (c) any material liability on the part of the
Company; or (2) which questions the validity of this Agreement, or any action
taken or to be taken in connection herewith, including in each case, without
limitation, actions pending or threatened involving the prior employment of any
of the Company's employees, the use in connection with the Company's business of
any information or techniques allegedly proprietary to any of the former
employers of such employees or their obligations under any agreements with prior
employers. The Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company currently intends to initiate.
SECTION 2.13. MATERIAL CONTRACTS.
------------------
(a) Set forth in Section 2.13 of the Sellers' Schedule of Exceptions is a
------------
list of any of the following written or oral agreements or arrangements to which
the Company is a party: (i) consulting agreements for the employment of any
officer, employee or other person on a full-time, part-time or consulting basis;
(ii) loans, credit agreements or other agreements relating to the borrowing or
lending of money by the Company; or (iii) licensing, development, joint venture
or similar agreements relating to intellectual property under which the Company
is the licensor or licensee or is entitled to receive or required to pay
royalties; or (iv) agreements calling for annual payments in excess of Ten
Thousand Dollars ($10,000).
(b) The Company is not in breach of or in default under its material
obligations under any of the agreements or arrangements set forth in Section
-------
2.13 of the Sellers' Schedule of Exceptions (collectively, the "Company
- ----
Contracts"), and no event has occurred that, with the giving of notice or lapse
of time or both, would constitute such a breach or default, which, individually
or in the aggregate, could reasonably be expected to have a Company Material
Adverse Effect. The Sellers have furnished the Buyer with a true and complete
copy of all written Company Contracts and with accurate descriptions of all oral
Company Contracts.
SECTION 2.14. CONDUCT OF BUSINESS.
-------------------
Since the Balance Sheet Date the Company has conducted its business in the
ordinary course, has maintained its assets and properties in at least as good
order and condition as existed on the Balance Sheet Date (other than wear as may
be accounted for by normal use) and as is necessary to continue to conduct it
business and has not:
(a) incurred any obligation or liability (absolute, accrued, contingent or
other), except in the ordinary course of business or in connection with the
performance of this Agreement, none of which individually or in the aggregate
could reasonably be expected to have a Company Material Adverse Effect;
8
<PAGE>
(b) discharged or satisfied any lien or encumbrance, or paid or satisfied
any obligation or liability (absolute, accrued, contingent or other), other than
liabilities reflected on the Balance Sheet or incurred since the Balance Sheet
Date in the ordinary course of business;
(c) mortgaged, pledged or subjected to any lien or encumbrance any of the
assets or properties of the Company;
(d) sold, assigned or transferred any assets or property, or canceled any
debt or claim or waived any right under any Company Contract, other than in the
ordinary course of business;
(e) made any capital expenditures in excess of $10,000 in each instance;
(f) made any loan to, or incurred any indebtedness from, any director,
officer or member, declared, set aside or paid to any member any distribution in
respect of its membership interests, or redeemed or repurchased any of its
membership interests;
(g) paid any commission, salary or bonus to any director, officer or
member, other than the payment of wages or salaries or other amounts owed in the
ordinary course of business;
(h) experienced any damage, destruction or loss (whether or not covered by
insurance) affecting the assets, properties or business which could reasonably
be expected to have a Company Material Adverse Effect;
(i) reclassified or changed in any manner the outstanding membership
interests of the Company or issued or agreed to issue any membership interest in
the Company; or
(j) incurred any material adverse change in its financial condition or
assets.
SECTION 2.15. TAX MATTERS.
-----------
(a) The Company has timely filed, or will have timely filed, all tax
returns and tax reports required to be filed by it prior to the Closing Date
under applicable federal, state and local tax laws and has timely paid all
taxes, assessments, fees and other governmental charges for periods prior to the
Closing Date shown due on such tax returns.
(b) The Company does not have any tax liability for periods ending on or
prior to the Balance Sheet Date for which an adequate tax reserve has not been
established on the Balance Sheet. Without limiting the foregoing, the books and
records of the Company include adequate provision for all taxes, assessments,
fees and other governmental charges that have been or may in the future be
assessed against the Company for all periods ending prior to the Closing Date,
and the Company is not, and will not be as of the Closing Date, liable for
taxes, assessments, fees and other governmental charges for which the Company
has not made adequate provision in its books and records.
(c) Set forth in Section 2.15 of the Sellers' Schedule of Exceptions is a
------------
true and complete list of tax returns filed by the Company pursuant to
applicable federal, state or local tax laws that have been examined or audited
by the IRS or other appropriate taxing authority during the preceding
9
<PAGE>
seven years. All deficiencies proposed as a result of such examinations or
audits have been paid or finally settled or are being challenged in good faith
by appropriate proceedings. The results of any settlement and the necessary
adjustments resulting therefrom properly are reflected in the Balance Sheet.
There is no tax examination or audit of the Company by any taxing authority
currently pending. There is no outstanding agreement or waiver made by or on
behalf of the Company for the extension of time for any applicable statute of
limitations and the Company has not requested any extension of time in which to
file any tax return.
SECTION 2.16. ABSENCE OF UNDISCLOSED LIABILITIES.
----------------------------------
The Company does not have any indebtedness or liability, whether accrued,
fixed or contingent, other than (a) liabilities reflected in the Balance Sheet,
(b) liabilities incurred in the ordinary course of business of the Company
consistent with past practice subsequent to the Balance Sheet Date, none of
which, individual or in the aggregate, could reasonably be expected to have a
Company Material Adverse Effect, (c) liabilities to be reflected in the Closing
Balance Sheet and (d) liabilities set forth in the Sellers' Schedule of
Exceptions.
SECTION 2.17. INSURANCE.
---------
The Company has in full force and effect fire and casualty insurance
policies, and insurance against other hazards, risks and liabilities to persons
and property to the extent and in the manner customary for companies in similar
businesses similarly situated. Set forth in Section 2.17 of the Sellers'
------------
Schedule of Exceptions is a true and complete list and description of all
policies of property, casualty, general business and other insurance covering
for the Company. There is no claim, action, suit or proceeding arising out of
or based upon any of such policies of insurance, and to the knowledge of such
Seller no basis for any such claim, action, suit or proceeding exists.
SECTION 2.18. BANK ACCOUNTS.
-------------
Set forth in Section 2.18 of the Sellers' Schedule of Exceptions is a true
------------
and complete list of all bank accounts of the Company, including the name and
address of each bank, the account numbers and the authorized signatories.
SECTION 2.19. TRANSACTIONS WITH RELATED PARTIES.
---------------------------------
Set forth in Section 2.19 of the Sellers' Schedule of Exceptions is a true
------------
and complete list or description of all notes, advances or accounts (other than
commission, salary, bonus reimbursements and other payments made by the Company
in the normal course of business) receivable or payable by the Company from or
to any director, officer, employee or member of the Company or any of their
affiliates, as well as all agreements or arrangements under which the Company
receives goods or services from any such persons. Since the Balance Sheet Date,
the Company has not incurred any obligation or liability to, or become a
creditor of any unit holder or former unit holder of the Company or any relative
or affiliate of any unit holder or former unit holder of the Company.
10
<PAGE>
SECTION 2.20 INVESTMENT INTENT.
The Shares and, the Shares of Common Stock issuable upon conversion thereof
are being acquired for the Seller's account, for investment and not with a view
to, or resale in connection with, any distribution or public offering thereof
within the meaning of the Securities Act of 1933, as amended or California law.
SECTION 2.21. BROKERS AND FINDERS.
-------------------
Neither the Sellers nor the Company has retained any broker or finder in
connection with the transactions contemplated by this Agreement.
SECTION 2.22 DISCLOSURE.
----------
No representation or warranty by the Sellers in this Agreement, or in any
document or certificate furnished or to be furnished to the Buyer pursuant
hereto or in connection with the transactions contemplated hereby, when taken
together, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
made herein and therein, in the light of the circumstances under which they were
made, not misleading. The Company has fully provided the Buyer with all the
information which the Buyer has requested for deciding whether to purchase the
Units.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents, warrants and covenants to each of the Sellers (except
as set forth on the Schedule of Exceptions attached hereto as Exhibit C (the
---------
"Buyer's Schedule of Exceptions"), which exceptions shall be deemed to be
representations and warranties as if made hereunder) as follows:
SECTION 3.1. ORGANIZATION AND STANDING.
-------------------------
The Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all requisite
corporate power and authority to carry on its business as now conducted and as
proposed to be conducted. The Buyer is qualified or licensed to do business as
a foreign corporation in all jurisdictions where such qualification or licensing
is required, except where the failure to so qualify could reasonably be expected
to have a material adverse effect on the business, prospects, condition, affairs
or operations of the Buyer or on its properties or assets (a "Buyer Material
Adverse Effect").
SECTION 3.2. CORPORATE POWER.
---------------
The Buyer has now, or will have at the Closing Date, all requisite
corporate power necessary for the authorization, execution and delivery of this
Agreement. This Agreement is a
11
<PAGE>
valid and binding obligation of the Company enforceable in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency, moratorium,
and other laws of general application affecting the enforcement of creditors'
rights.
SECTION 3.3. SUBSIDIARIES.
------------
The Buyer does not control, directly or indirectly, any other corporation,
association or business entity.
SECTION 3.4. CAPITALIZATION.
--------------
The authorized capital stock of the Buyer is 25,000,000 shares of Common
Stock and 20,435,000 shares of Preferred Stock, of which 5,017,500 have been
designated Series A Preferred Stock, 5,017,500 have been designated Series A-1
Preferred Stock, 2,200,000 have been designated Series B Preferred Stock,
2,200,000 have been designated Series B-1 Preferred Stock, 3,000,000 have been
designated Series C Preferred Stock and 3,000,000 have been designated Series C-
1 Preferred Stock. There are issued and outstanding 791,667 shares of the
Buyer's Common Stock, 5,000,000 shares of Series A Preferred Stock, no shares of
Series A-1 Preferred Stock, 1,898,733 shares of Series B Preferred Stock, no
shares of Series B-1 Preferred Stock, 1,330,798 shares of Series C Preferred
Stock and no shares of Series C-1 Preferred Stock. The holders of record of the
presently issued and outstanding Common Stock, options to purchase Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
immediately prior to the Closing are as set forth in Section 3.4 of the Buyer's
-----------
Schedule of Exceptions ("Shareholder and Optionholder List"). All such issued
and outstanding shares have been duly authorized and validly issued, are fully
paid and nonassessable, and were issued in compliance with all applicable state
and federal laws concerning the issuance of securities. The holders of any and
all rights, options, warrants or conversion rights to purchase or acquire from
the Buyer any of its capital stock, along with the number of shares of capital
stock issuable upon exercise of such rights, are set forth in Section 3.4 of the
-----------
Buyer's Schedule of Exceptions. The Buyer has reserved at least 5,017,500
shares of Common Stock for issuance upon conversion of the Series A and Series
A-1 Preferred Stock, 2,200,000 shares of Common Stock for issuance upon
conversion of the Series B and Series B-1 Preferred Stock, 3,000,000 shares of
Common Stock for issuance upon conversion of the Series C and Series C-1
Preferred Stock, and 3,750,000 shares of Common Stock for future issuance to
employees, consultants, officers or directors upon exercise of options granted
or to be granted under stock or other option plans or arrangements approved by
the Buyer's Board of Directors. Except for such rights, there are no
outstanding rights, options, warrants, conversion rights or agreements for the
purchase or acquisition from the Buyer of any shares of its capital stock. The
Buyer is not a party or subject to any agreement or understanding between any
persons or entities, which affects or relates to the voting or giving of written
consents with respect to any securities.
SECTION 3.5. AUTHORIZATION.
-------------
(a) Corporate Action. All corporate action on the part of the Buyer, its
----------------
officers, directors and stockholders necessary for the issuance of the Shares
and the issuance of the
12
<PAGE>
Common Stock issuable upon conversion of the Shares and the authorization,
execution and performance of the Buyer's obligations hereunder. The Buyer has
duly reserved an aggregate of at least 684,412 shares of Common Stock for
issuance upon conversion of the Shares.
(b) Valid Issuance. The Shares, when issued in compliance with the
--------------
provisions of this Agreement, and the shares of Common Stock issued upon
conversion of the Shares, when issued in accordance with the provisions of the
Articles of Incorporation, as amended to date (the "Buyer's Articles"), will be
validly issued, fully paid and nonassessable and will be free of any liens or
encumbrances created by the Buyer; provided, however, that all such shares may
-------- -------
be subject to restrictions on transfer under state and/or federal securities
laws, and as may be required by future changes in such laws. The rights,
preferences, privileges and restrictions of the Shares are as set forth in the
Buyer's Articles.
SECTION 3.6. NO PREEMPTIVE RIGHTS.
--------------------
No person has any right of first refusal or any preemptive rights in
connection with the issuance of the Shares or the issuance of the Common Stock
upon conversion of the Shares.
SECTION 3.7. PATENTS, TRADEMARKS, ETC.
------------------------
The Buyer owns and possesses or is licensed under all patents, patent
applications, licenses, trademarks, trade names, brand names, trade secrets,
inventions and copyrights employed in the operation of its business as now
conducted and as proposed to be conducted, with no infringement of or conflict
with the rights of others respecting any of the same. To the knowledge of the
Buyer, the operation of the Buyer's business as now conducted or as proposed to
be conducted does not infringe any patent, copyright, trade secret or other
proprietary rights of any third parties. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the Buyer
bound by or a party to any options, licenses or agreements of any kind with
respect to patents, patent applications, licenses, trademarks, trade names,
brand names, inventions, proprietary rights and copyrights of any other person
or entity. The Buyer is not obligated to make any payments by way of royalties,
fees or otherwise to any owner, licensor of, or other claimant to any patent,
trademark, trade name, copyright or other intangible asset, with respect to the
use thereof or in connection with the conduct of its business, or otherwise.
The Buyer has not received any communications alleging that it has violated or,
by conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity, nor is the Buyer aware of any
basis for the foregoing. There are no agreements, understandings, instruments,
contracts, judgments, orders, writs or decrees to which the Buyer is a party or
by which it is bound which involve indemnification by the Buyer with respect to
infringements of proprietary rights.
SECTION 3.8. COMPLIANCE WITH OTHER INSTRUMENTS.
---------------------------------
The Buyer is not in violation of any term of the Buyer's Articles or the
Buyer's bylaws, as amended to date (the "Buyer's Bylaws"), nor is the Buyer in
violation of or in default in any material respect under the terms of any
mortgage, indenture, contract, agreement, instrument,
13
<PAGE>
judgment or decree, the violation of which could reasonably be expected to have
a Buyer Material Adverse Effect on the Buyer, and to the knowledge of the Buyer,
is not in violation of any order, statute, rule or regulation applicable to the
Buyer, the violation of which could reasonably be expected to have a Buyer
Material Adverse Effect. The execution, delivery and performance of and
compliance with this Agreement, and the issuance of the Shares will not (a)
result in any such violation, or (b) be in conflict with or constitute a default
under any such term, or (c) result in the creation of any mortgage, pledge,
lien, encumbrance or charge upon any of the properties or assets of the Buyer
pursuant to any such term. To the knowledge of the Buyer, there is no such term
or any such order, statute, rule or regulation which adversely affects, or in
the future which could reasonably be expected to have a Buyer Material Adverse
Effect.
SECTION 3.9. PROPRIETARY AGREEMENTS; EMPLOYEES.
---------------------------------
Each employee of the Buyer has executed an agreement regarding
confidentiality and proprietary information. To the knowledge of the Buyer,
none of its employees is in violation thereof, and the Buyer will use its best
efforts to prevent such violations. To the knowledge of the Buyer, the
employees of the Buyer are not obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Buyer or that would conflict with the Buyer's business as conducted or as
proposed to be conducted or that would prevent any such employee from assigning
inventions to the Buyer. Neither the execution nor delivery of this Agreement,
nor the carrying on of the Buyer's business as proposed, will conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any of such
employees is now obligated. The Buyer does not believe that it is or will be
necessary for the Buyer to utilize any inventions of any of its employees made
prior to their employment by the Buyer.
SECTION 3.10. LITIGATION, ETC.
---------------
There is no action, proceeding or investigation pending, or, to the
knowledge of the Buyer, threatened, against the Buyer or its officers, directors
or shareholders, or to the knowledge of the Buyer, against employees of the
Buyer (or, to the knowledge of the Buyer, any basis therefor or threat thereof):
(1) which could reasonably be expected to result, either individually or in the
aggregate, in (a) any material adverse change in the business, prospects,
conditions, affairs or operations of the Buyer or in any of its properties or
assets, or (b) any material impairment of the right or ability of the Buyer to
carry on its business as now conducted or as proposed to be conducted, or (c)
any material liability on the part of the Buyer; or (2) which questions the
validity of this Agreement, or any action taken or to be taken in connection
herewith, including in each case, without limitation, actions pending or
threatened involving the prior employment of any of the Buyer's employees, the
use in connection with the Buyer's business of any information or techniques
allegedly proprietary to any of the former employers of such employees or their
obligations under any agreements with prior employers. The Buyer is
14
<PAGE>
not a party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality. There
is no action, suit, proceeding or investigation by the Buyer currently pending
or which the Buyer currently intends to initiate.
SECTION 3.11. GOVERNMENTAL CONSENT.
--------------------
Except for the filing of a Notice of Transaction pursuant to Section
25102(f) of the California Corporations Code, no consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Buyer is required in connection with: (a) the valid
execution and delivery of this Agreement; or (b) the issuance of the Shares or
the issuance of the shares of Common Stock issuable upon conversion of the
Shares.
SECTION 3.12. OFFERING.
--------
In reliance on the representations and warranties of the Purchasers in
Section 2 hereof, the offer, sale and issuance of the Shares in conformity with
the terms of this Agreement will not result in a violation of the requirements
of Section 5 of the Securities Act of 1933, as amended (the "Securities Act") or
the qualification or registration requirements of applicable blue sky laws.
SECTION 3.13. TAXES.
-----
The Buyer has filed all tax returns that are required to have been filed
with appropriate federal, state, county and local governmental agencies or
instrumentalities, except where the failure to do so, when taken together with
all other such failures, would not have a material adverse effect upon the
Buyer. The Buyer has not elected pursuant to the Code to be treated as a
Subchapter S corporation or a collapsible corporation pursuant to Section 341(f)
or Section 1362(a) of the Code, nor has it made any other elections pursuant to
the Code (other than elections which relate solely to methods of accounting,
depreciation or amortization) which could reasonably be expected to have a Buyer
Material Adverse Effect. The Buyer has paid or established reserves for all
income, franchise and other taxes, assessments, governmental charges, penalties,
interest and fines due and payable by it on or before the Closing.
SECTION 3.14. TITLE.
-----
The Buyer owns its property and assets free and clear of all liens,
mortgages, loans or encumbrances except liens for current taxes, and such
encumbrances and liens which arise in the ordinary course of business and do not
materially impair the Buyer's ownership or use of such property or assets. With
respect to the property and assets leased by the Buyer, the Buyer is in
compliance with such leases and, to the knowledge of the Buyer, holds valid
leasehold interests free and clear of any liens, claims or encumbrances.
15
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SECTION 3.15. MATERIAL CONTRACTS AND COMMITMENTS.
----------------------------------
All of the contracts, mortgages, indentures, agreements, instruments and
transactions to which the Buyer is a party or by which it is bound (including
purchase orders to the Buyer or placed by the Buyer) which involve obligations
of, or payments to, the Buyer in excess of Twenty-Five Thousand Dollars
($25,000) and all agreements between the Buyer and its officers, directors,
consultants and employees are set forth in Section 3.15 of the Buyer's Schedule
------------
of Exceptions (the "Buyer Contracts"). All of the Buyer Contracts are valid,
binding and in full force and effect in all material respects and enforceable by
the Buyer in accordance with their respective terms in all material respects,
subject to the effect of applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or affecting
enforcement of creditors' rights and rules or laws concerning equitable
remedies. The Buyer is not in material default under any of such contracts.
SECTION 3.16. FINANCIAL STATEMENTS.
--------------------
The Buyer has delivered to the Sellers the unaudited balance sheets and
related statements of operation as of December 31, 1998 and for the nine month
period then ended (the "Buyer's Financial Statements"). The Buyer's Financial
Statements are in accordance with the books and records of the Buyer, are
complete and correct, and fairly and accurately present the financial condition
and operating results of the Buyer for the periods indicated therein, all in
conformity with "GAAP", except that the unaudited Buyer's Financial Statements
do not contain footnotes or reflect the interperiod adjustments required by
GAAP. As of December 31, 1998, the Buyer did not have any liabilities,
absolute, contingent, or otherwise, which in accordance with GAAP are required
to be disclosed or reserved for other than as set forth in the Buyer's Financial
Statements. Other than a reduction in cash and cash equivalents in the ordinary
course of business, since December 31, 1998, there has been no material adverse
change in the Buyer's financial condition or assets. The Buyer maintains and
will continue to maintain a standard system of accounting established and
administered in accordance with GAAP.
SECTION 3.17. ABSENCE OF CHANGES.
------------------
Since December 31, 1998, (a) the Buyer has not entered into any transaction
which was not in the ordinary course of business, (b) there has been no material
adverse change in the condition (financial or otherwise) of the business,
property, assets or liabilities of the Buyer other than changes in the ordinary
course of its business, none of which, individually or in the aggregate, has
been materially adverse, (c) there has been no damage to, destruction of or loss
of physical property (whether or not covered by insurance) materially adversely
affecting the assets, prospects, financial condition, operating results,
business or operations of the Buyer, (d) the Buyer has not declared or paid any
dividend or made any distribution on its stock, or redeemed, purchased or
otherwise acquired any of its stock, (e) the Buyer has not materially changed
any compensation arrangement or agreement with any of its key employees or
executive officers, or materially changed the rate of pay of its employees as a
group, (f) the Buyer has not changed or amended any material contract by which
the Buyer or any of its assets are bound or subject, except as contemplated by
this Agreement, (g) there has been no resignation or termination of
16
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employment of any key officer or employee of the Buyer and the Buyer does not
know of any impending resignation or termination of employment of any such
officer or employee that if consummated could reasonably be expected to have a
Buyer Material Adverse Effect, (h) there has been no change, except in the
ordinary course of business, in the material contingent obligations of the Buyer
(nor in any contingent obligation of the Buyer regarding any director,
stockholder or key employee or officer of the Buyer) by way of guaranty,
endorsement, indemnity, warranty or otherwise, (i) there have been no loans made
by the Buyer to any of its employees, officers or directors other than travel
advances and other advances made in the ordinary course of business, (j) there
has been no waiver by the Buyer of a valuable right or of a material debt owing
to it, and (k) there has not been any satisfaction or discharge of any lien,
claims or encumbrance or any payment of any obligation by the Buyer, except in
the ordinary course of business and which could not be reasonably expected to
have a Buyer Material Adverse Effect.
SECTION 3.18. OUTSTANDING INDEBTEDNESS.
------------------------
The Buyer has no indebtedness for borrowed money which it has directly or
indirectly created, incurred, assumed or guaranteed, or with respect to which it
has otherwise become liable, directly or indirectly.
SECTION 3.19. CERTAIN TRANSACTIONS.
--------------------
The Buyer is not indebted, directly or indirectly, to any of its employees,
officers, directors or stockholders or to their spouses or children, in any
amount whatsoever; and none of said employees, officers, directors,
stockholders, or any member of their immediate families, are indebted to the
Buyer or have any direct or indirect ownership interest in any firm or
corporation with which the Buyer is affiliated or with which the Buyer has a
business relationship. No such employee, officer, director, stockholder, or any
member of their immediate families, is, directly or indirectly, interested in
any material contract with the Buyer. The Buyer is not guarantor or indemnitor
of any indebtedness of any other person, firm or corporation.
SECTION 3.20. EMPLOYEE BENEFIT PLANS.
----------------------
The Buyer does not have any "employee benefit plan" as defined in the
Employee Retirement Income Security Act of 1974, as amended.
SECTION 3.21. ENVIRONMENTAL AND SAFETY LAWS.
-----------------------------
To the knowledge of the Buyer, the Buyer is not in violation of any
applicable statute, law, or regulation relating to the environment or
occupational health and safety. To the knowledge of the Buyer, no material
expenditures are or will be required in order to comply with any such existing
statute, law, or regulation.
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SECTION 3.22. INSURANCE.
---------
The Buyer has in full force and effect fire and casualty insurance
policies, and insurance against other hazards, risks and liabilities to persons
and property to the extent and in the manner customary for companies in similar
businesses similarly situated.
SECTION 3.23. LABOR AGREEMENTS AND ACTIONS.
----------------------------
The Buyer is not aware that any officer or key employee intends to
terminate his or her employment with the Buyer, nor does the Buyer have a
present intention to terminate the employment of any of the foregoing. Subject
to general principles related to wrongful termination of employees, the
employment of each officer and employee of the Buyer is terminable at the will
of the Buyer.
SECTION 3.24. BROKERS AND FINDERS.
-------------------
The Buyer has not retained any broker or finder in connection with the
transactions contemplated by this Agreement.
SECTION 3.25. REGISTRATION RIGHTS.
-------------------
Other than as granted pursuant to that certain Second Amended and Restated
Rights Agreement dated September 18, 1998, between Buyer and certain investors
in Buyer (the "Rights Agreement") the Buyer has not granted or agreed to grant
any right to register (as that term is defined in the Rights Agreement)
securities, including piggyback registration rights, to any person or entity.
SECTION 3.26. CORPORATE DOCUMENTS; MINUTE BOOKS.
---------------------------------
Except for amendments necessary to satisfy representations and warranties
or conditions contained herein (the form of which amendments has been approved
by Purchaser), the Bylaws of the Buyer are in the form previously provided to
the Sellers. The minute books of the Buyer previously provided to the Sellers
contain a complete summary of all meetings of directors and stockholders since
the time of incorporation of the Buyer.
SECTION 3.27. DISCLOSURE.
----------
No representation or warranty by the Buyer in this Agreement, or in any
document or certificate furnished or to be furnished to the Sellers pursuant
hereto or in connection with the transactions contemplated hereby, when taken
together, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
made herein and therein, in the light of the circumstances under which they were
made, not misleading. The Buyer has fully provided the Seller with all the
information which the Seller has requested for deciding whether to purchase the
Shares.
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ARTICLE FOUR
MUTUAL COVENANTS
SECTION 4.1. ACCESS; COOPERATION RE TAXES.
----------------------------
From the date hereof through the Closing Date, the parties hereto will give
one another and their respective financial advisors, legal counsel, independent
accountants and other representatives reasonable access during normal business
hours to all properties, documents, contracts, employees and records of the
Company or Buyer, as the case may be, and will furnish one another with copies
of such documents and with such information with respect to the Company or the
Buyer, as the case may be, any such party may reasonably request from time to
time. Sellers shall be entitled to all losses or other income tax credits
attributable to the Company's operations during the period from January 1, 1999
through the Closing Date. After the Closing Date, the Buyer will give Sellers
and their financial advisors, legal counsel, independent accountants and other
representatives reasonable access during normal business hours to such records
of the Company, and will furnish Sellers with copies of such documents and with
such information with respect to the Company as Sellers may reasonably request
in order for Sellers to complete tax returns for the period from January 1, 1999
through the Closing Date.
SECTION 4.2. THIRD PARTY CONSENTS.
--------------------
From the date hereof through the Closing Date, each party hereto will use
reasonable commercial efforts to obtain or cause to be obtained all consents,
approvals and authorizations that are necessary under applicable law or the
Contracts to be obtained by such party in connection with the consummation of
the transactions contemplated by this Agreement; provided, however, that neither
-------- -------
the Sellers nor the Company shall be required to pay or provide any monetary or
other consideration in kind for any such consents, approvals and authorizations
under the Contracts.
SECTION 4.3. NOTICE OF DEFAULT.
-----------------
From the date hereof through the Closing Date, each party will take all
actions reasonably necessary to render accurate as of the Closing Date their
representations and warranties contained herein and to perform or cause to be
satisfied each covenant or condition to be performed or satisfied as
contemplated by this Agreement. Each party hereto will promptly give notice to
the other parties of the occurrence of any event known to such party of that
results in a breach of any representation or warranty by such party or the
failure of such party to comply with any covenant, condition or agreement
contained herein. From the date hereof through the Closing Date, each party
hereto will promptly disclose to the other parties all information that comes to
such party's attention that, to such party's knowledge, is material to an
understanding of the assets, properties, business, financial condition or
results of operations of the Company or Buyer, as the case may be.
19
<PAGE>
SECTION 4.4. OTHER AGREEMENTS.
----------------
On the Closing Date, the Sellers shall become parties to, and shall have
all the rights and benefits of a Preferred Holder under the Rights Agreement
with respect to the Shares, which shall be considered part of the Series C
Shares for purposes of the Rights Agreement.
ARTICLE FIVE
CONDUCT OF BUSINESS
SECTION 5.1. COVENANTS OF THE COMPANY.
------------------------
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Closing Date, the Sellers
agree (except to the extent that the Buyer shall otherwise consent in writing),
to cause the Company to carry on its business in the usual, regular and ordinary
course in substantially the same manner as previously conducted, to pay its
debts and taxes when due, , to pay or perform its other obligations when due
(subject in all cases to good faith disputes), and, to the extent consistent
with such business, to use all reasonable efforts consistent with past practices
and policies to (i) preserve intact its present business organization, (ii) keep
available the services of its present officers and key employees and (iii)
preserve its relationships with customers, suppliers, distributors, licensors,
licensees and others having business dealings with it. The Sellers shall
promptly notify the Buyer of any event or occurrence not in the ordinary course
of business of the Company where such event or occurrence would result in a
breach of any covenant of the Company set forth in this Agreement or cause any
representation or warranty of the Sellers set forth in this Agreement to be
untrue as of the date of, or giving effect to, such event or occurrence. Except
as expressly contemplated by this Agreement, the Sellers shall not allow the
Company to, without the prior written consent of the Buyer:
(a) Grant any options under any employee plan of the Seller, accelerate,
amend or change the period of exercisability under any outstanding options, or
authorize cash payments in exchange for any options granted under any of such
plans except as required by the terms of such plans or any related agreements in
effect as of the date of this Agreement;
(b) Transfer or license to any person or entity or otherwise extend, amend
or modify any rights to the Company's intellectual property rights other than in
the ordinary course of business consistent with past practices;
(c) Make any distributions (whether in cash or other property) in respect
of any of its securities;
(d) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership or
other business organization or division, or otherwise acquire or agree to
acquire any assets other than acquisitions involving aggregate consideration of
not more than Ten Thousand Dollars ($10,000);
20
<PAGE>
(e) Sell, lease, license or otherwise dispose of any of its properties or
assets which are material, individually or in the aggregate, to the business of
the Company;
(f) Take any action to (i) increase or agree to increase the compensation
payable or to become payable to its officers or employees, (ii) grant any
additional severance or termination pay to, or enter into any employment or
severance agreements with, officers, (iii) grant any severance or termination
pay to, or enter into any employment or severance agreement, with any non-
officer employee, except in accordance with past practices, (iv) enter into any
collective bargaining agreement, or (v) establish, adopt, enter into or amend in
any material respect any bonus, profit sharing, thrift, compensation, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, trust, fund, policy or arrangement for the benefit of any members,
officers or employees;
(g) Revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable other than in the ordinary
course of business;
(h) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities or guarantee any debt securities of others, other
than indebtedness incurred under outstanding lines of credit consistent with
past practice;
(i) Amend or propose to amend its Articles of Organization or operating
agreement, except as contemplated by this Agreement;
(j) Incur or commit to incur any individual capital expenditure other than
the existing commitments set forth on Exhibit B;
---------
(k) Enter into or commit to enter into any data or marketing agreement
involving any revenue guarantees or revenue-sharing arrangements;
(l) Amend or terminate any Company Contract , except in the ordinary course
of business;
(m) Waive or release any material right or claim, except in the ordinary
course of business;
(n) Initiate any litigation or arbitration proceeding; or
(o) Take or agree to take, in writing or otherwise, any of the actions
described in Sections (a) through (n) above, or any action which is reasonably
likely to make any of the Sellers' representations or warranties contained in
this Agreement untrue or incorrect in any material respect (without regard to
any materially qualifications contained therein) on the date made (to the extent
so limited) or as of the Closing Date.
21
<PAGE>
SECTION 5.2. NO SOLICITATION BY SELLERS.
--------------------------
During the period from the date of this Agreement until the earlier of the
termination of this Agreement or the Closing Date, the Sellers and the Company
shall not, directly or indirectly, through any officer, director, employee,
representative or agent, (i) solicit, initiate, or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock or similar transactions
involving the Company, other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals being referred to in this
Agreement as a "Company Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity relating to, any Company Acquisition Proposal, or (iii) agree to, approve
or recommend any Company Acquisition Proposal.
ARTICLE SIX
INDEMNIFICATION
SECTION 6.1. INDEMNIFICATION OBLIGATION.
--------------------------
(a) Subject to the limitations set forth in Section 6.2, the Sellers (for
the purposes of this Section 5.1(a) the "Seller Indemnifying Parties") shall
indemnify and hold harmless the Company, the Buyer and their affiliates
(collectively, the "Buyer Indemnified Parties") in respect of any and all
claims, actions, causes of action, arbitrations, proceedings, losses, damages,
liabilities and expenses (including, without limitation, settlement costs,
reasonable attorneys' fees and any other out-of-pocket costs of investigation),
incurred by the Buyer Indemnified Parties in connection with each and all of the
following:
(i) Any breach of any representation or warranty of the Sellers
contained herein or in any instrument delivered at the Closing by the Sellers;
(ii) Any breach of any covenant, agreement or obligation of the
Sellers contained herein or in any instrument delivered at the Closing by the
Sellers; and
(iii) Any and all liabilities and obligations of the Company of any
nature, whether known or unknown, arising from or as a result of the operation
of the Company's business prior to the Closing, other than liabilities referred
to in Section 2.16 of this Agreement.
(b) The Buyer shall indemnify and hold harmless the Sellers and their
affiliates (collectively, the "Seller Indemnified Parties") in respect of any
and all claims, actions, causes of action, arbitrations, proceedings, losses,
damages, liabilities and expenses (including, without limitation, settlement
costs, reasonable attorneys' fees and any other out-of-pocket costs of
investigation), incurred by the Seller Indemnified Parties in connection with
each and all of the following:
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<PAGE>
(i) any breach of any representation or warranty of the Buyer
contained herein or in any instrument delivered at the Closing by the Buyer;
(ii) any breach of any covenant, agreement or obligation of the Buyer
contained herein or in any instrument delivered at the Closing by the Buyer; and
(iii) all liabilities and obligations of the Company of any nature,
whether known or unknown, arising from or as a result of the operation of the
Company's business after the Closing.
SECTION 6.2. LIMITATIONS.
-----------
(a) The Buyer Indemnified Parties shall not be permitted to enforce any
claim for indemnification pursuant to this Agreement until the aggregate of all
Buyer Indemnified Parties' claims for indemnification exceed the amount of
$25,000 (the "Buyer Threshold Amount"). Once claims in excess of the Buyer
Threshold Amount have been asserted by the Buyer Indemnified Parties, the total
amount of the claims, including the Buyer Threshold Amount, may be pursued or
recovered against the Sellers; provided, however, that the maximum liability of
-------- -------
the Sellers for indemnification pursuant to this Agreement shall in no event
exceed the Escrow Amount.
(b) The Seller Indemnified Parties shall not be permitted to enforce any
claim for indemnification pursuant to Sections 6.1(b)(i) and (ii) of this
Agreement until the aggregate of all Seller Indemnified Parties' claims for
indemnification pursuant to such sections exceed the amount of $25,000 (the
"Seller Threshold Amount"). Once claims in excess of the Seller Threshold
Amount have been asserted by the Seller Indemnified Parties, the total amount of
the claims pursuant to such sections, including the Seller Threshold Amount, may
be pursued or recovered against the Buyer; provided, however, that the maximum
-------- -------
liability of the Buyer for indemnification pursuant to Sections 6.1(b)(i) and
(ii) of this Agreement shall in no event exceed Two Hundred Thousand Dollars
($200,000). Nothing in this Section 6.2(b) shall limit the Seller Indemnified
Parties' claims for indemnification pursuant to Section 6.1(b)(iii).
(c) Claims for indemnification made under this Agreement may be made during
the period from the Closing Date until the first anniversary of the Closing
Date; provided, however, that claims pursuant to Section 6.1(b)(iii) may be made
-------- -------
at any time after the Closing Date.
(d) The provisions of this Article Six shall be the exclusive rights and
remedies of the Buyer and Seller.
SECTION 6.3. NOTICE OF CLAIMS.
----------------
Whenever any claim shall arise for indemnification, the indemnified parties
shall promptly notify the indemnifying parties in writing of the claim and, when
known, the facts constituting the basis for such claim and the amount or
estimate of the amount of the liability arising from such claim; provided,
--------
however, that failure of the indemnified parties to timely give such notice
- -------
shall not be a defense to the liability of the indemnifying parties for such
claim, but the indemnifying parties
23
<PAGE>
may recover from the indemnified parties any actual damages arising from the
indemnified parties' failure to give such timely notice. A copy of any notice
of claims by a Buyer Indemnified Party shall be concurrently delivered by such
Buyer Indemnified Party to the Escrow Agent.
SECTION 6.4. MANNER OF DEFENSE OF THIRD PARTY CLAIMS.
---------------------------------------
In connection with any claim giving rise to indemnity hereunder resulting
from or arising out of any claim or legal proceeding by a person other than the
indemnified parties, the indemnifying parties at their sole cost and expense,
may, upon written notice to the indemnified parties assume the defense of any
such claim or legal proceeding. If the indemnifying parties assume the defense
of any such claim or legal proceeding, the indemnifying parties shall select
counsel reasonably acceptable to the indemnified parties to conduct the defense
of such claims or legal proceedings and, at their sole cost and expense, shall
take all steps necessary in the defense or settlement thereof. The indemnifying
parties shall not consent to a settlement of, or the entry of any judgment
arising from, any such claim or legal proceeding, without the prior written
consent of the indemnified parties, unless the indemnifying parties admit in
writing their liability to hold the indemnified parties harmless from and
against any losses, damages, expenses and liabilities arising out of such
settlement. The indemnified parties shall be entitled to participate in (but
not control) the defense of any such action, with their own counsel and at their
own expense. If the indemnifying parties do not assume the defense of any such
claim or litigation resulting therefrom in accordance with the terms hereof, the
indemnified parties may defend against such claim or litigation in such manner
as they may deem appropriate, including, but not limited to, settling such claim
or litigation, after giving notice of the same to the indemnifying parties on
such terms as the indemnified parties may deem appropriate. The indemnifying
parties shall be entitled to participate in the defense of any action by the
indemnified parties, which participation shall be limited to contributing
information to the defense and being advised of its status. In any action by
the indemnified parties seeking indemnification from the indemnifying parties in
accordance with the provisions of this Section, the indemnifying parties shall
not be entitled to question the manner in which the indemnified parties defended
such claim or litigation or the amount of or nature of any such settlement.
SECTION 6.5. MANNER OF INDEMNIFICATION FOR INDEMNIFYING PARTY CLAIMS.
-------------------------------------------------------
Within thirty (30) days of receipt of notice by the indemnifying parties of
a claim by the indemnified parties (or such longer period not to exceed sixty
(60) days as may be required to investigate such claim), including, without
limitation, a claim for damages, settlement and attorneys fees or costs not
assumed or paid by the indemnified parties under Section 6.4, the indemnifying
parties shall either satisfy such claim by the payment of cash (or, at the
option of Sellers, Shares out of the Escrow Amount) to the indemnified parties
for the full amount of such claim or notify the indemnifying parties in writing
that it contests such claim (a copy of any notice of contest by Sellers shall be
concurrently delivered by Sellers to the Escrow Agent). If the indemnifying
parties fail to satisfy such claim or provide such written notice of contest,
the claim shall be deemed contested. If the parties, acting in good faith,
cannot reach an agreement within ninety (90) days after notice was first given
by the indemnifying parties hereunder, then such parties may seek any remedy
available to them at law or equity.
24
<PAGE>
SECTION 6.6. DISPOSITION OF ESCROW AMOUNT.
-----------------------------
The obligations of Sellers pursuant to this Article Six shall may be satisfied,
at the option of Sellers, by the payment of cash or Shares out of the Escrow
Amount; provided, however, that the maximum liability of the Sellers for
-------- -------
indemnification pursuant to this Agreement shall in no event exceed the Escrow
Amount. No later than twelve months after the Closing, the Escrow Agreement
shall instruct the Escrow Agent to pay over to Sellers the Escrow Amount then
being held pursuant to the Escrow Agreement, unless at such time there is
pending against Sellers one or more indemnifiable claims, in which case that
portion of the Escrow Amount equal to the aggregate amount of indemnifiable
claims shall continue to be held by the Escrow Agent in accordance with this
Agreement and the Escrow Agreement and the remainder shall be paid over to
Sellers. If and to the extent that, from time to time pursuant to the
provisions of this Agreement, it is determined in accordance with this Article
Six that Buyer is entitled to indemnification, the Escrow Agreement shall
instruct the Escrow Agent to pay over to the Buyer the Escrow Amount, or portion
thereof, necessary to satisfy, to the extent possible, such claim or claims.
ARTICLE SEVEN
CONDITIONS TO THE BUYER'S OBLIGATIONS
The obligations of the Buyer hereunder shall be subject to the
satisfaction, as of the Closing Date, of the following conditions (any of which
may be waived in writing, in whole or in part, by the Buyer):
SECTION 7.1. REPRESENTATIONS AND WARRANTIES; COVENANTS.
-----------------------------------------
The representations and warranties of the Sellers contained in this
Agreement shall be true and correct in all respects as of the Closing Date as if
made on the Closing Date. The Sellers shall have duly performed and satisfied
all covenants and agreements required by this Agreement to be performed or
satisfied by the Sellers at or prior to the Closing Date. The Buyer shall have
been furnished with certificates of the Sellers, dated the Closing Date,
certifying the fulfillment of the foregoing conditions.
SECTION 7.2. CERTAIN DOCUMENTS.
-----------------
The Sellers shall have furnished the Buyer with the following documents:
(a) the articles of organization of the Company, as amended to date, duly
certified by the Secretary of State of the State of California as of the most
recent practical date;
(b) certificates as to the good standing of the Company and payment of all
taxes as of the most recent practical date, executed by the Secretary of State
of the State of California;
(c) the operating agreement of the Company, duly certified by the Secretary
of the Company as being in full force and effect on the Closing Date;
25
<PAGE>
(d) resignations, effective on the Closing Date, of all directors and
officers of the Company;
(e) originals or copies of all consents, approvals and authorizations that
are necessary under applicable law or the Company Contracts to be obtained by
the Sellers or the Company in connection with the consummation of the
transactions contemplated by this Agreement;
(f) the Closing Balance Sheet, certified by the Sellers as being true and
correct in all material respects as of the Closing Date; and
(g) such other documents relating to the Company as the Buyer may
reasonably request.
SECTION 7.3. LEGAL MATTERS.
-------------
All legal matters, and the form and substance of all documents to be
delivered by the Sellers to the Buyer at the Closing, shall be satisfactory to
counsel for the Buyer.
SECTION 7.4. LEGAL PROCEEDINGS.
-----------------
No action, suit, claim, proceeding, inquiry or investigation by or before
any federal, state, local or other governmental court, arbitrator or agency
shall have been initiated or, to the knowledge of the Buyer, threatened, seeking
to prevent or enjoin the transactions contemplated by this Agreement.
SECTION 7.5. COMPANY EMPLOYEES.
-----------------
Gail Williams shall have executed an offer letter with the Company in
substantially the form attached hereto as Exhibit D.
---------
SECTION 7.6. LEGAL OPINION.
-------------
The Buyer shall have received an opinion of legal counsel to the Sellers in
the form and substance attached hereto as Exhibit E.
---------
SECTION 7.7 SUBLEASE.
--------
The Company shall have entered into a written sublease for its current
facility in form and substance reasonably acceptable to the Buyer.
SECTION 7.8 AMENDMENT TO ARTICLES OF INCORPORATION.
--------------------------------------
The Buyer shall have amended its Articles of Incorporation to increase the
number of authorized shares of Series C Preferred Stock and Series C-1 Preferred
Stock each to 3,000,000.
26
<PAGE>
ARTICLE EIGHT
CONDITIONS TO THE SELLERS' OBLIGATIONS
The obligations of the Sellers hereunder shall be subject to the
satisfaction, as of the Closing Date, of the following conditions (any of which
may be waived in writing, in whole or in part, by the Sellers):
SECTION 8.1. REPRESENTATIONS AND WARRANTIES; COVENANTS.
-----------------------------------------
The representations and warranties of the Buyer contained in this Agreement
shall be true and correct in all material respects (without regard to any
materiality qualifications contained therein) as of the Closing Date as if made
on the Closing Date. The Buyer shall have duly performed and satisfied all
covenants and agreements required by this Agreement to be performed or satisfied
by the Buyer at or prior to the Closing Date. The Sellers shall have been
furnished with a certificate of the Buyer, dated the Closing Date, certifying
the fulfillment of the foregoing conditions.
SECTION 8.2. CERTAIN DOCUMENTS.
-----------------
The Buyer shall have furnished the Sellers with the following documents or
certificates:
(a) the articles of incorporation of the Buyer as amended to date, duly
certified by the Secretary of State of the State of California as of the most
recent practical date;
(b) certificates as to the good standing of the Buyer and payment of all
taxes as of the most recent practical date, executed by the Secretary of State
of the State of California;
(c) the bylaws of Buyer, duly certified by the Secretary of Buyer as being
in full force and effect on the Closing Date;
(d) copies of the resolutions of the Board of Directors approving the
transactions contemplated by this Agreement, including, without limitation, the
authorization and issuance of the Shares;
(e) originals or copies of all consents, approvals and authorizations that
are necessary under applicable law or the Buyer Contracts to be obtained by the
Buyer in connection with the consummation of the transactions contemplated by
this Agreement;
(f) such other documents relating to the Buyer as the Sellers may
reasonably request; and
(g) certificates in the respective names of the Sellers evidencing the
Shares.
SECTION 8.3. LEGAL MATTERS.
-------------
All legal matters, and the form and substance of all documents to be
delivered by the Buyer to the Sellers at the Closing, shall be satisfactory to
counsel for the Sellers.
27
<PAGE>
SECTION 8.4. LEGAL PROCEEDINGS.
-----------------
No action, suit, claim, proceeding, inquiry or investigation by or before
any federal, state, local or other governmental court, arbitrator or agency
shall have been initiated or, to the knowledge of the Sellers, threatened,
seeking to prevent or enjoin the transactions contemplated by this Agreement.
SECTION 8.5. LEGAL OPINION.
-------------
The Sellers shall have received an opinion of legal counsel to the Buyer in
the form and substance attached hereto as Exhibit F.
---------
SECTION 8.6. EMPLOYEES.
----------
Buyer shall have offered employment to all current employees of the Company
as of the Closing. All Company employees who have accepted employment by the
Buyer will be eligible for participation in Buyer's health, life, and disability
insurance programs, in accordance with the existing terms and conditions of such
programs, and be given year-for-year credit for years of service with the
Company, and retain all accrued vacation time or pay and sick time, through the
Closing Date.
ARTICLE NINE
MISCELLANEOUS
SECTION 9.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS.
----------------------------------------------------------------
The representations and warranties of the Sellers made in this Agreement
(including the Schedules) or any certificate, instrument or other document
delivered in connection herewith shall survive the Closing Date for a period of
one year.
SECTION 9.2. PUBLICITY.
Neither party will make any public announcement regarding the subject
matter of this Agreement without the prior written consent of the other party.
SECTION 9.3 Expenses.
--------
In the event the Closing is completed, the expenses incurred by the Company
will be borne by the Sellers, except that the following expenses relating to the
transaction will be accrued by the Company and become post-closing obligations
of the surviving company to be paid on the Closing Date: the accounting and
legal fees and expenses of the Company in an amount not to exceed Seventy-Five
($75,000) Dollars. In the event the Closing does not take place, each party
shall pay its own expenses in connection with the preparation and performance of
this Agreement and the
28
<PAGE>
consummation of the transactions contemplated hereby, including without
limitation all fees and expenses of investment bankers, financial advisors,
legal counsel, independent accountants and actuaries.
SECTION 9.4. GOVERNING LAW.
-------------
This Agreement shall be governed by and construed and enforced in
accordance with the internal, substantive laws of the State of California,
without giving effect to the conflict of laws rules thereof.
SECTION 9.5. NOTICES.
-------
All notices, consents, requests, instructions, approvals and other
communications provided for herein shall be deemed validly given, made or served
if in writing and delivered personally or sent by certified mail, postage
prepaid, or by overnight courier, or by telex, telecopier or telegraph, charges
prepaid:
(a) if to the Buyer, addressed to:
Salon Internet, Inc.
706 Mission Street, 2nd Floor
San Francisco, CA 94103
Attention: Chief Executive Officer
Telephone:
Telecopier:
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Ave.
Palo Alto, CA 94301
Attention: Tom Furlong
Telephone: (650)833-2359
Telecopier: (650)327-3699
(b) if to the Sellers, addressed to:
c/o Rosewood Stone Group
2320 Marinship Way, Suite 240
Sausalito, California 94965-2812
Attention: Claudia Stroud
Telephone: (415) 331-4400
Telecopier: (415) 331-4481
29
<PAGE>
with a copy to:
Gibson, Dunn & Crutcher LLP
One Montgomery Street, Telesis Tower
San Francisco, California 94104-4505
Attention: Douglas Smith
Telephone: (415) 393-8200
Telecopier: (415) 986-5309
or such other address as shall be furnished in writing by any party to the
others.
SECTION 9.6. JURISDICTION; AGENT FOR SERVICE.
-------------------------------
Legal proceedings commenced by the Sellers or the Buyer arising out of any
of the transactions or obligations contemplated by this Agreement shall be
brought exclusively in the federal courts, or in the absence of federal
jurisdiction in state courts, in either case in the State of California. The
Buyer and the Sellers irrevocably and unconditionally submit to the jurisdiction
of such courts and agree to take any and all future action necessary to submit
to the jurisdiction of such courts. The Buyer and the Sellers irrevocably waive
any objection that they now have or hereafter may have to the laying of venue of
any suit, action or proceeding brought in any such court and further irrevocably
waive any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum. Final judgment against the
Sellers or the Buyer in any such suit shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment, a certified or true copy of which
shall be conclusive evidence of the fact and the amount of any indebtedness or
liability of the Sellers or the Buyer therein described, or by appropriate
proceedings under any applicable treaty or otherwise.
SECTION 9.7. ENTIRE AGREEMENT.
----------------
This Agreement represents the entire agreement between the parties and
supersedes and cancels any prior oral or written agreement, letter of intent or
understanding related to the subject matter hereof.
SECTION 9.8. BINDING EFFECT.
--------------
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement.
SECTION 9.9. AMENDMENTS; WAIVERS.
-------------------
No provision of this Agreement may be terminated, amended, supplemented,
waived or modified other than by an instrument in writing signed by the party
against whom the enforcement of the termination, amendment, supplement, waiver
or modification is sought.
30
<PAGE>
SECTION 9.10. COUNTERPARTS.
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original and all of which together shall be deemed to
be one and the same instrument, and shall become effective when one or more
counterparts have been signed by each of the parties.
SECTION 9.11. SEVERABILITY.
------------
In the event any provision, or portion thereof, of this Agreement is held
by a court having proper jurisdiction to be unenforceable in any jurisdiction,
then such portion or provision shall be deemed to be severable as to such
jurisdiction (but, to the extent permitted by law, not elsewhere) and shall not
affect the remainder of this Agreement, which shall continue in full force and
effect. If any provision of this Agreement is held to be so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as is
necessary for it to be enforceable.
SECTION 9.12. KNOWLEDGE.
----------
For the purposes of this Agreement, the phrase (i) "to the knowledge of
such Seller" shall mean the actual knowledge, after due inquiry within the
Company, of any of the Sellers or the Company's directors and executive
officers, and (ii) "to the knowledge of the Buyer" shall mean the actual
knowledge, after due inquiry within the Buyer, of any of the Buyer's executive
officers.
(The remainder of this page has been left blank intentionally.)
31
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year first above written.
BUYER:
SALON INTERNET, INC.
By: /s/ Authorized Officer
------------------------------
Name: Authorized Officer
Title:
SELLERS:
WHOLE EARTH LECTRONIC LINK, INC.
By: /s/ Authorized Officer
-------------------------------
Name: Authorized Officer
Title:
/s/ Bruce R. Katz
-----------------------------------
BRUCE R. KATZ
32
<PAGE>
EXHIBIT A
---------
Form of Escrow Agreement
<PAGE>
EXHIBIT B
---------
SELLERS' SCHEDULE OF EXCEPTIONS
2.3(a) Discussions 1.5 license from Well Engaged 2/25/99
Sublease, effective as of March 22, 1999, for approximately 424 sf of
office space at 2320 Marinship Way, Sausalito, California; from Well
Engaged LLC
Certain commercial shrinkwrap licenses held by the Company may, by their
terms, limit the transfer of the license in connection with a change in
control. (see Schedule 2.9)
2.4(b) The Company does not maintain membership unit transfer records, except
for Exhibit A to the Operating Agreement.
2.8 Sublease, effective as of March 22, 1999, for approximately 424 sf of
office space at 2320 Marinship Way, Sausalito, California; from Well
Engaged LLC
2.9 (b) Intellectual Property
Reprint permissions:
6/1/98 to Cliff Figallo to use a webpage in his book Hosting Web Communities
-----------------------
1/28/98 to Lucent Books to use a webpage in the book The Internet
------------
4/16/97 to Course Technology to use several web pages in the books,
The World Wide Web Featuring Netscape Communicator 4 Software and
---------------------------- ---------------------------------
The World Wide Web Featuring Internet Explorer 4 by Barker+Barker
------------------------------------------------
9/4/96 to Harry Henderson to use several web pages in his book
2/28/96 to Owen Seitel to use the Members' Agreement as part of
a seminar "Doing Business on the Internet"
4/24/95 to IDG Books to use a logo and webpage in its book Creating Cool
-------------
Web Pages with HTML
-------------------
5/15/95 to the U.S. Distance Learning Association to use portions of
user manual for their online documentation 7/12/95 to Mary Carter/Black
Point Group to use a quote in the book Electronic Highway Robbery
--------------------------
10/20/98 email to Mary Eisenhart regarding an acknowledgment for use of the
common-law mark, "yoyow". (You own your own words.) Mary has
acknowledged the foregoing pursuant to an email to the Company, but it
has not been put in a final agreement.
1
<PAGE>
Copyrights - The Company does not hold copyright to
individual postings by subscribers. As per general Internet
publishing principles, the individuals hold the rights to their
postings.
Trademarks -
Assignment dated March 10, 1999 from Whole Earth Lectronic Link to The WELL
LLC, assigning the U.S. registered service mark.
Assignment dated March 10, 1999 from Whole Earth Lectronic Link to The WELL
LLC, assigning the foreign registered service marks and pending service mark
applications.
Domain names -
2/23/99 The Company requested Network Solutions to correct the domain name
records for well.org and well.sf.ca.us, which are still registered under the
name of Whole Earth Lectronic Link. This request is still pending with Network
Solutions.
6/4/98 Network Solutions advised the Company that it placed the domain name
"thewell.net" on hold after the Company disputed a third-party registration.
12/14/98 The registrant of the domain name welll.com (note three l's) has agreed
in email to sign over that url to the Company. Final documentation is pending.
Whole Earth Network, Inc. continues to use the domain name well.net in the
provision of web services to former Whole Earth Lectronic Link customers. The
Asset Purchase Agreement by which Link and others sold Whole Earth Networks LLC
to GST/Whole Earth Network, Inc. (dated 3/12/98) provides that such use will be
terminated within a reasonable time. The Company has not requested Whole Earth
Network to do so.
Technology licenses -
Picospan license from Whole Earth Lectronic Link 7/1/97
Discussions 1.5 license from Well Engaged 2/25/99
sendmail (freeware)
mail.local (freeware)
qpopper (freeware
imapd (freeware)
comsat (freeware)
Berkeley Mail (freeware)
fetchmail (freeware)
pine (freeware)
ipine (freeware)
mail (freeware)
elm (freeware)
Zmail licensed from vendor
2
<PAGE>
Netscape Communications and Commerce Servers (shrinkwrap license)
ImageClub Clip Art licensed from Adobe (shrinkwrap)
NcFTPD licensed from vendor (shrinkwrap)
Solaris 2.5.1, licensed from Sun (shrinkwrap)
Unix version of PGP licensed from vendor (shrinkwrap)
PC version of PGP (shareware)
Access Watch license
Cybercash provided as part of Colocation Services Agreement (ISP)
RBASE licensed from Microrim
Filemaker licensed from vendor (shrinkwrap)
Desktop applications such as MsWord, Excel licensed from vendor
(shrinkwrap)
Indemnifications:
Colocation Services Agreement with Whole Earth Networks
Reference is made to Section 2.12(b) of this Schedule of Exceptions
Year 2000. The Company is currently working to resolve the potential impact
of the Year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. Based on preliminary
information, costs of addressing potential corrections are not currently
expected to have material adverse impact on the Company's financial
position, results of operations, or cash flows in future periods. However,
if the Company, its customers or vendors are unable to resolve such
processing issues in a timely manner, it could result in material financial
risk.
2.10 (a)
Employee List
<TABLE>
<CAPTION>
LAST FIRST TITLE DOH SALARY
<S> <C> <C> <C> <C>
Branstetter Katherine Helpdesk 10/08/97 $13.00/hr
Dyer-Bennett Cynthia Asst. Conference Manager 11/23/98 $15.87/hr
Gray Thomas Customer Service/Billing Rep 06/08/98 $13.50/hr
Hanson Pete Programmer 01/16/94 $48,630.00
Mara Janis Marketing Director 07/01/98 $33,000.00
Siino Anthony Helpdesk/Technical Assistant 10/06/97 $15.00/hr
Williams Gail Executive Director 12/16/91 $65,000.00
</TABLE>
3
<PAGE>
Officers: Bruce R. Katz, Chairman
Gail Williams, Executive Director
John Hallett, Chief Financial Officer
Claudia Stroud, Secretary
Directors: Bruce Katz
Kevin Kelly
Claudia Stroud
ADP has a Limited Power of Attorney to file employment tax returns and make
deposits electronically, in connection with the Company's payroll processing
2.10 (b)
Offer letter to Katherine Branstetter dated 10/2/98
Offer letter to Cynthia Dyer-Bennett dated 11/11/98
Offer letter to Thomas Gray dated 5/29/98
Offer letter to Janis Mara dated 7/1/98
Offer letter to Anthony Siino dated 5/15/98
Offer letter to Pete Hanson dated 3/16/99
Whole Earth has entered into a letter agreement with Gail Williams, on
9/20/98, as amended on March 15, 1999, which provides for the payment of
cash or other consideration upon the sale of the Company. Pursuant to the
letter agreement, Ms. Williams will be entitled to receive 10,456 of the
Shares issuable to Whole Earth under the Agreement.
Certain former employees and directors were promised lifetime complimentary
accounts on The WELL. Gail Williams is the only current employee who has
been promised a lifetime account. The total comprises 40 accounts, of which
12 are held by Sellers.
Current employees receive a free Internet connectivity account during the
term of their employment. They also receive a free Well account for
themselves and for one guest. If they leave the company in good standing,
they are allowed to maintain one complimentary Well account for a period of
time depending upon their length of service to the company (i.e. six months
comp for 1 year of service, 1 year comp for 2 years of service, and 1 year
for each additional year of service thereafter)
Volunteer hosts receive complimentary accounts, some of which include
Internet connectivity.
Consulting agreement dated 12/16/98 with Neil Harkins, pursuant to which he
provides
4
<PAGE>
part-time system administration services at the rate of $50 per hour.
<TABLE>
<CAPTION>
BENEFITS TYPE GROUP NUMBER
CARRIER
<S> <C> <C>
HIPC Medical 2009689
Delta Dental Dental 000162 0003
Vision Service Plan Vision 12017037 01
Reliance Standard Life Life GL 2880 001
UNUM Disability 513000 003
</TABLE>
Note that, except for the HIPC plan, these benefit policies are not
assignable to purchaser.
2.10 (d) No accruals are booked for sick leave or unemployment benefits.
2.11(a) Rosewood Stone Group, Inc. and Related Companies
Profit-Sharing 401(k) Plan (as amended)
Note that Seller has only requested copy of the IRS determination letter
relating to this Plan.
2.12(a) The applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and make take years to resolve.
For example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in online commerce, and new state
tax regulations may subject the Company to additional state sales and income
taxes. Any such new legislation or regulations, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and commercial online services could have a material adverse effect on
the Company's business, operating results, and financial condition.
2.12 (b) 4/6/98 letter from MCI alleging "spam" originating from the Company's
servers; we informed MCI by telephone on 4/10/98 that we would
cooperate with any investigation 5/6/98 letter to Postal Inspector
regarding customer complaint and refund 6/25/98 email in response to
email from NSKinsella alleging that a subscriber was libelling his
client, advising that the Company's policy is that it is not
responsible for such matters and that such dispute should be resolved
between such parties.
8/9/97 email from subscriber regarding alleged libel.
The Company from time to time receives communications from subscribers or third
parties alleging libel, defamation, harassment, intellectual property
infringement, or other claims. Like other Internet companies, the Company's
policy is that it is not responsible for such matters and the disputes should be
resolved between the parties. Without limiting the foregoing, in the event
5
<PAGE>
of intellectual property infringement claims, the Company has in the past
attempted to contact the alleged infringer and ask that the infringing material
be removed.
Prior to the Company's formation in July 1997, its operations were conducted
through Whole Earth Lectronic Link, Inc. Whole Earth received communications
similar to the foregoing from time to time.
2.13(a)
Colocation Services Agreement with GST/Whole Earth Network dated 2/26/98
Billing and Services Agreement among The WELL, Whole Earth Lectronic Link, and
GST/Whole Earth Network dated 2/18/98
Agreement between Public Conference Hosts and The WELL
Members' Agreement (with individual subscribers)
Proprietary Rights Assignment dated as of 7/1/97 from Whole Earth Lectronic
Link, Inc.
Consulting agreement dated 9/25/96 with Jennifer Long (work is completed but
ongoing obligation to maintain a link to her website)
Consulting agreement dated 12/16/98 with Neil Harkins
Sun Microsystems Support Agreement (effective 7/16/98 to 7/15/99)
Paymentech Merchant Agreement dated 2/12/98
National Writers Union letter agreement dated 1/15/99
Sirius Connections letter agreement dated 11/5/98
The Writer's Club letter agreement dated 10/15/98
Sublease agreement with Well Engaged (described above)
Consent to Sublease agreement dated March 17, 1999
Client Account Agreement and Authorization to Debit with ADP dated 8/8/97
Technology licenses -
Picospan license from Whole Earth Lectronic Link 7/1/97
Discussions 1.5 license from Well Engaged 2/25/99
sendmail (freeware)
mail.local (freeware)
qpopper (freeware
imapd (freeware)
comsat (freeware)
Berkeley Mail (freeware)
fetchmail (freeware)
pine (freeware)
ipine (freeware)
mail (freeware)
elm (freeware)
Zmail licensed from vendor
Netscape Communications and Commerce Servers (shrink wrap license)
ImageClub Clip Art licensed from Adobe (shrinkwrap)
6
<PAGE>
NcFTPD licensed from vendor (shrinkwrap)
Solaris 2.5.1, licensed from Sun (shrink wrap)
Unix version of PGP licensed from vendor (shrinkwrap)
PC version of PGP (shareware)
Access Watch license
RBASE licensed from Microrim
Filemaker licensed from vendor (shrinkwrap)
Desktop applications such as MsWord, Excel licensed from vendor
(shrinkwrap)
Offer letters -
Offer letter to Katherine Branstetter dated 10/2/98
Offer letter to Cynthia Dyer-Bennett dated 11/11/98
Offer letter to Thomas Gray dated 5/29/98
Offer letter to Janis Mara dated 7/1/98
Offer letter to Anthony Siino dated 5/15/98
Offer letter to Pete Hanson dated 3/16/99
Certain former employees and directors were promised lifetime complimentary
accounts on The WELL. Gail Williams and Pete Hanson are current employee
who are entitled to lifetime accounts. The total comprises 40 accounts, of
which 12 are Sellers'.
2.14 Since the Balance Sheet Date (12/31/98)
2/22/99 Engaged Price Waterhouse Coopers to conduct an audit of 1997-98
2/22/99 Engaged Pisenti&Brinker, CPA's, to provide assistance in the
audit Sublease, effective as of March 22, 1999, for approximately 424 sf of
office space at 2320 Marinship Way, Sausalito, California; from Well
Engaged LLC; and
Consent to Sublease Agreement dated March 17, 1999
Signed standard form offer letter with Pete Hanson March 16, 1999
Will terminate Amazon.com Associates Agreement dated 9/29/98 immediately
prior to Closing.
2.15(a) It is anticipated that extensions of time to file 1998 income tax
return (federal and state) will be applied for on April 15, 1999.
2.15(b) County property taxes are not accrued; the forms are due on April 1,
1999 and payment is not due until August 1, 1999.
2.15(c) None
2.17 *Atlantic Mutual Insurance Co., Policy No. 486-30-45-31
Commercial Package covering Property, General Liability, Commercial
Crime, with $5M Umbrella Liability
*E-Risk Services, LLC Policy No. 90000175, for Employment Practices
Liability
7
<PAGE>
*Republic Indemnity, Policy No. 031870-03, covering Worker's
Compensation
*Lloyd's of London, Policy No. MC45735, Professional Liability policy
*Note: These policies are not assignable to Purchaser.
State of Washington Unemployment Insurance Business ID#601-816-790
State of Colorado Unemployment Insurance Account No. 476306.00-8
State of California EDD Account No. 432-5719-5
2.18 West America Bank
checking account no. 0506-358175
One Harbor Drive
Sausalito CA 94965
Signatories: John Hallett, Claudia Stroud
2.19 Interco liabilities as of 3/25/99
Account receivable from Whole Earth Lectronic Link
under the Billing + Services Agreement $16,130
Account payable to Well Engaged
for rent (net of misc charges) $ 3,780
Account payable to Rosewood Stone Group
for insurance from inception $ 290
Colocation Services Agreement with GST/Whole Earth Network, Inc.* dated
2/26/98 Billing and Services Agreement among The WELL, Whole Earth
Lectronic Link, and
GST/Whole Earth Network, Inc.* dated 2/18/98
Picospan license from Whole Earth Lectronic Link 7/1/97
Discussions 1.5 license from Well Engaged 2/25/99
Sublease, effective as of March 22, 1999, for approximately 424 sf of
office space at
2320 Marinship Way, Sausalito, California; from Well Engaged LLC
8
<PAGE>
EXHIBIT C
---------
Buyer's Schedule of Exceptions
Pursuant to Article Three of that certain Membership Interest Purchase
Agreement dated March ___, 1999 (the "Agreement") between Salon Internet, Inc.
(the "Company") and Whole Earth Lectronic Link, Inc. ("Whole Earth") and Bruce
R. Katz ("Katz," together with Whole Earth, the "Sellers"), the Buyer hereby
delivers this Schedule of Exceptions (the "Schedule"). The section numbers in
this Schedule correspond to the section numbers in the Agreement. Any
information disclosed under any section in this Schedule is deemed to be
disclosed and incorporated in any other section of this Schedule where such
disclosure would be appropriate. Capitalized terms used in this Schedule,
unless otherwise specified, have the meanings given them in the Agreement.
Section 3.1
- -----------
The Company currently is qualified to do business in California, Massachusetts
and New York. The Company employs one person working out of an office which is
not leased by the Company in Washington, D.C. The Company employs ten people in
New York City and leases office space in the building known as 1500 Broadway, in
the Borough of Manhattan, City, County and State of New York.
Section 3.4
- -----------
The Company's Shareholder and Optionholder List is attached hereto.
- -------------------------------------------------------------------
The Company has issued warrants to purchase (1) 17,500 shares of Series A
Preferred Stock, 23,734 shares of Series B Preferred Stock and up to 19,365
shares of Series C Preferred Stock to Imperial Bank, (2) 158,228 shares of
Series B Preferred Stock to America Online ("AOL") and (3) up to 282,320, 62,738
and 94,106 shares of Common Stock to each of Adobe Ventures II, L.P., ASCII
Ventures, L.P. and H&Q Salon Investors, L.P., respectively.
Pursuant to his employment agreement with the Company, Michael O'Donnell, the
Company's President, has a right of first refusal to participate in certain
future sales of equity securities by the Company to maintain his pro rata share
of the Company's common stock prior to such offering. Mr. O'Donnell has waived
this right in connection with the transactions contemplated by the Agreement.
Pursuant to the Rights Agreement, certain stockholders have rights to purchase
certain future sales of equity securities by the Company to maintain their pro
rata share of the Company's capital stock prior to such offering. Such rights
are not applicable to the transactions contemplated by the Agreement.
The Company has engaged Daiwa Securities America Inc. to assist the Company in
raising additional funding. The projections contained in the Private Placement
Memorandum (the "PPM") assume that additional funding is obtained by the
Company. No commitment for such funding exists as of the date hereof, there can
be no assurance that such funding will be obtained, and the projections
contained in the PPM are not likely to be achieved without such additional
funding. The Company's failure to obtain such funding would have a material
adverse affect on the Company's financial condition.
1
<PAGE>
The Company and certain of the holders of the Company's Preferred Stock have
entered into a Voting Agreement dated September 18, 1998 pursuant to which these
holders agree to vote to elect certain designees of such holders.
Section 3.7
- -----------
Borders has a license to reproduce Salon book and music reviews in any of its
stores or electronically display reviews on its Web site.
Barnesandnoble.com has a license to reproduce Salon book and music reviews in
any of its stores or electronically display reviews on its Web site.
The Company has an agreement with DrKoop.com pursuant to which the parties each
provide the other with proprietary content.
Pursuant to an agreement (the "UFS Agreement"), United Features Syndicate
("UFS") has the worldwide right to syndicate the Company's proprietary content
to print and online newspapers, and in return the Company receives fifty percent
(50%) of the revenues that UFS receives from such syndication.
The Company has agreements with AOL and AltaVista whereby the Company pays these
parties to publish the Company's proprietary content on their Web sites.
The Company has an agreement with Penguin Books pursuant to which the Company
has agreed to author an anthology, using some content previously published by
the Company.
The Company has an agreement with Random House/Villard pursuant to which the
Company has agreed to author a book, using some content previously published by
the Company.
The Company has written arrangements with C/Net, Netscape, Snap!, CNN, Go.com,
WebTV, PointCast, Echostar and RocketBook whereby these vendors publish the
Company's proprietary content on their respective Web sites or in their
respective electronic information products and provide links to the Company's
Web site without charge. The Company and the aforementioned third parties
mutually agree on the content to be provided on such third parties' Web sites.
The Company is a party to a Membership and E-Commerce Systems Development
Agreement dated August 14, 1998 with eMergingMedia, Inc., as amended by a letter
agreement last signed August 15, 1998 (the "eMergingMedia Agreement"), pursuant
to which eMergingMedia has agreed to perform certain e-commerce development
services for the Company. Under the terms of the eMergingMedia Agreement, (i)
eMergingMedia grants the Company a limited license with respect to certain
eMergingMedia intellectual property used in the development process and (ii) the
Company grants eMergingMedia a limited license with respect to certain
intellectual property necessary for eMergingMedia to fulfill its obligations
under the eMergingMedia Agreement.
From time to time, the Company publishes on its Web site the copyrighted works
of third parties such as excerpts from copyrighted books, with the permission of
the copyright owner(s), such as publishing houses, or otherwise in compliance
with copyright laws including the `fair use' exception.
As part of its regular business, the Company engages freelance writers and
artists as independent contractors, mostly pursuant to written agreements
entered into in advance between the Company and
2
<PAGE>
each such party. Pursuant to these agreements, the Company has a perpetual, non-
exclusive right to reproduce any content produced by the writer or artist within
the scope of his or her agreement with the Company. All content published by the
Company has been either produced by employees who have signed the Company's
standard assignment of inventions agreement, freelance artists subject to
written agreements described in the first sentence of this paragraph, or by
freelance writers who generally are subject to the written agreements describe
in the first sentence of this paragraph.
The Company currently pays approximately a 25% royalty fee to freelance writers
and artists when the Company receives a license fee for a reprint of material in
print publications. Such royalty fees totaled approximately $3,000 in the
fiscal year ended March 31, 1998.
The Company uses commercially available third-party software to construct and
present its Web site and for internal office applications.
Section 3.8
- -----------
The Company is in violation of certain financial covenants under its Loan
Agreement with Imperial Bank. With respect to such violations through November
30, 1998, the Company received a forebearance letter from Imperial Bank, and
issued a warrant to Imperial Bank to purchase up to 19,365 shares of its Series
C Preferred Stock.
Section 3.14
- ------------
In connection with the Company's Loan Agreement with Imperial Bank, Imperial
received a security interest in all of the Company's intellectual property and
certain capital equipment.
Section 3.15
- ------------
Series A Preferred Stock Purchase Agreement dated December 22, 1995, as amended
August 2, 1996 and February 6, 1997.
Series B Preferred Stock Purchase Agreement dated November 28, 1997.
Series C Preferred Stock Purchase Agreement dated September 18, 1998.
First Amended and Restated Voting Agreement dated September 18, 1998.
Reference is made to the outstanding warrants listed in Section 3.4 of the
Schedule of Exceptions.
Loan Agreement with Imperial Bank dated April 13, 1998.
Services Agreement with Jim Wickett dated August 2, 1998 (six month equity
financing brokerage agreement)
Affiliate Agreement with barnesandnoble.com dated November 1, 1998.
Letter of Agreement with DrKoop.com dated January 26, 1999.
America Online Anchor Tenancy Agreement dated August 1, 1998
3
<PAGE>
Alta Vista Content Agreement dated August 6, 1998
Penguin Putnam Inc. book publishing agreement dated April 15, 1998
Random House/Villard book publishing agreement dated October 16, 1998.
United Features Syndicate Agreement.
Odiorne Wilde Narraway and Partners Agency Agreement dated November 13, 1998.
Microsoft Corporation Expedia Promotion Agreement dated October 22, 1998.
Insertion Orders for more than $25,000:
1. BBDO dated August 26, 1998 for $300,000
2. Lowe Interactive dated June 1998 for $223,600
3. US Access Bank dated September 23, 1998 for $54000
4. Lexus dated September 28, 1998 for $225,000
5. Ford Motor Media The New Hollywood Sponsorship dated November 11, 1998 for
$129,500
5. Ford Motor Media Explorer dated November 25, 1998 for $75,000
6. Discover Brokerage dated January 26, 1999 for $53,200
Lease agreement with TW Associates dated June 25, 1997 (lease for office space
at 706 Mission Street, 2nd Floor, San Francisco, CA 94103).
Lease agreement with ZAPCO 1500 Investment dated March 1998 (lease for office
space at 1500 Broadway, New York, NY 10036)
Agreements with Directors and Officers:
1. Employment Agreement with Michael O'Donnell dated November 7, 1997.
2. Common Stock Purchase Agreement with David Talbot dated July 5, 1995.
3. Stock option agreements with Michael O'Donnell and David Talbot.
4. Employee inventions and confidentiality agreements with Messrs. O'Donnell
and Talbot.
5. Agreement with James Rosenfield pursuant to which the Company pays Mr.
Rosenfield Board fees and agreed to grant him an option to purchase 75,000
shares of common stock.
The Company has numerous ordinary course agreements with non-officer employees
and consultants, including stock option agreements, inventions and
confidentiality agreements, and freelance writer and artist consulting
agreements.
The Company has entered into an Agency Agreement with Daiwa Securities America,
Inc. to assist the Company in obtaining additional financing. Pursuant to this
agreement, Daiwa will receive cash compensation and warrants to purchase Company
stock based on the amount of financing Daiwa obtains for the Company.
Outstanding Accounts Receivable over $25,000: Borders owes the Company
approximately $108,000, Andersen and Lembke owes the Company approximately
$53,281, Empower Health Organization owes the Company approximately $75,000,
Ford Motor Media owes the Company approximately $89,574,
4
<PAGE>
Lowe & Partners owes the Company approximately $82,283, and Saatchi & Saatchi
owes the Company approximately $60,520.
Outstanding Accounts Payable over $25,000: The Company owes AOL approximately
$125,000, Accrue Software approximately $25,500, and Value Click approximately
$51,000.
Section 3.16
- ------------
Since November 30, 1998, the Company has continued to use cash to finance
operations in the ordinary course. Consequently, as of the Closing, the
Company's financial condition has been materially adversely affected relative to
its financial condition at November 30, 1998.
Section 3.17
- ------------
The Company's Vice President of Advertising Sales, Liza Parker, terminated her
employment with the Company effective February 5, 1999.
Section 3.18
- ------------
The Company currently has a loan agreement with Imperial Bank for capital
equipment and a line of credit based on the Company's accounts receivable. The
outstanding balance on this loan as of January 28, 1999 is $575,652.
Section 3.20
- ------------
Employee benefits offered to employees include a 401(K) plan, health, dental and
long-term disability insurance, and paid holidays and vacation time.
Section 3.22
- ------------
The Company currently has the following insurance: (i) property insurance in the
coverage amount of $660,000; (ii) general liability insurance in the coverage
amount of $2 million (other than Products-Completed Operations which is in the
amount of $1 million) and umbrella insurance in the amount of $2 million; (iii)
workers compensation insurance, and (iv) Errors and Omissions insurance for
employees and freelance contractors in the amount of $5 million. The Company is
investigating directors and officers insurance and key man life insurance on
Michael O'Donnell and David Talbot.
Section 3.23
- ------------
Michael O'Donnell's employment with the Company is subject to an employment
agreement.
5
<PAGE>
EXHIBIT D
---------
Form of Offer Letter
<PAGE>
DATE
Name
ADDRESS
Dear (NAME),
I am pleased to offer you a position with The Well as its [Executive
Director], reporting to (SUPERVISOR). If you decide to join us, here's a
summary of the compensation package:
. You will receive a monthly salary of (MONTHLY SALARY), less applicable
withholding, which will be paid semi-monthly in accordance with the The
Well's normal payroll procedures.
. You will be granted (NUMBER) employee incentive options, subject to
approval from the company's Board of Directors. The options are in
accordance with Salon Internet, Inc.'s stock option plan (4 year
vesting).
As an employee of The Well, you are also eligible to receive certain employee
benefits including those on the enclosed list below:
. Health Care Insurance
. Dental Insurance with Phoenix Home Life
. Paid vacation and the standard Salon Paid Holiday program
. 401K Investment Plan
. Disability coverage through UNUM
Further details of the plan are available from Donna DeLuca (415-882-8755 or
[email protected])
<PAGE>
If you choose to accept this offer, your employment with The Well will be
voluntarily entered into and will be for no specified period. As a result, you
will be free to resign at any time, for any reason or for no reason, as you deem
appropriate. The Well will have a similar right and may conclude its employment
relationship with you at any time, with or without cause.
For purposes of federal immigration law, you will be required to provide to The
Well documentary evidence of your identity and eligibility for employment in the
United States. Such documentation must be provided to us within three (3)
business days of your date of hire, or our employment relationship with you may
be terminated.
In the event of any dispute or claim relating to or arising out of our
employment relationship, this agreement, or the termination of our employment
relationship (including, but not limited to, any claims of wrongful termination
or age, sex, disability, race or other discrimination), you and The Well agree
that all such disputes shall be fully, finally and exclusively resolved by
binding arbitration conducted by the American Arbitration Association in San
Jose, California. However, we agree that this arbitration provision shall not
apply to any disputes or claims relating to or arising out of the misuse or
misappropriation of Salon's trade secrets or proprietary information.
To indicate your acceptance of The Well's offer, please sign and date this
letter in the space provided below and return it to me. A duplicate original is
enclosed for your records. You will be required to sign a Employee Inventions
and Proprietary Rights Assignment Agreement as a condition of your employment.
This letter, along with any agreements relating to proprietary rights between
you and The Well, set forth the terms of your employment with The Well's and
supersede any prior representations or agreements, whether written or oral. This
letter may not be modified or amended except by a written agreement, signed by
The Well and by you.
We look forward to working with you at The Well. Welcome aboard!
Sincerely,
The Well AGREED TO AND ACCEPTED
_____________________________ ____________________________
MICHAEL O'DONNELL NAME
<PAGE>
EXHIBIT E
---------
Form of Sellers' Legal Opinion
<PAGE>
EXHIBIT F
---------
Form of Buyer's Legal Opinion
1. The Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. The Buyer has all requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted.
2. The Buyer has all requisite corporate power to enter into the Agreement,
the Escrow Agreement and the Rights Agreement (collectively, the "Agreements"),
to sell the Shares and to carry out and perform its obligations under the terms
thereof. The Agreements have been duly authorized by all necessary corporate
action on the part of the Buyer and have been duly executed and delivered by the
Buyer. The Agreements are valid and binding obligations of the Buyer,
enforceable in accordance with their terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting the enforcement of creditors' rights.
3. The authorized capital stock of the Buyer consists of 25,000,000 shares of
Common Stock (the "Common Stock") and 20,435,000 shares of Preferred Stock, of
which 5,017,500 have been designated Series A Preferred Stock; 5,017,500 have
been designated Series A-1 Preferred Stock; 2,200,000 have been designated
Series B Preferred Stock; 2,200,000 have been designated Series B-1 Preferred
Stock; 3,000,000 have been designated Series C Preferred Stock and 3,000,000
have been designated Series C-1 Preferred Stock. Prior to the issuance of the
Shares at the Closing there were issued and outstanding 791,667 shares of Common
Stock, 5,000,000 shares of Series A Preferred Stock, 1,898,733 shares of Series
B Preferred Stock and 1,330,798 shares of Series C Preferred Stock. All such
issued and outstanding shares have been duly authorized and are validly issued,
fully paid and nonassessable. The rights, preferences and privileges of, and
restrictions on, the Shares are as stated in the Buyer's Articles of
Incorporation, as amended (the "Articles"). To our knowledge, except as
described or disclosed in the Agreements or in Exhibits thereto, there are no
outstanding rights, options, warrants, conversion rights or agreements for the
purchase or acquisition from the Buyer of any shares of its capital stock or any
securities convertible into or ultimately exchangeable or exercisable for any
shares of its capital stock.
4. The Shares, when issued in compliance with the provisions of the
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable. Except as described or disclosed in the Agreements or in the
Articles, the issuance of the Shares is not subject to any preemptive rights or,
to our knowledge, rights of first refusal created by the Buyer. The shares of
Common Stock issuable upon conversion of the Shares have been duly and validly
reserved and are not subject to any preemptive rights or, to our knowledge,
rights of first refusal created by the Buyer in its bylaws or in any material
agreement and, upon conversion of the Shares in accordance with the Articles and
cancellation of the Shares, will be duly authorized, validly issued, fully paid
and nonassessable.
<PAGE>
5. Neither the execution, delivery or performance of the Agreement, nor the
issuance of the Shares, nor the issuance of the Common Stock issuable upon
conversion of the Shares, will violate any term of the Articles or the Buyer's
bylaws; and, to our knowledge, such transactions will not, in any material
respect, violate or conflict with or constitute a default under the provisions
of any material agreement, judgment, decree or order binding upon the Buyer.
6. To our knowledge, except as described or disclosed in the Agreement or in
Exhibits thereto, no action, suit, proceeding or investigation is pending or
threatened against the Buyer or its properties, which might have a material
adverse effect on the Buyer's financial condition.
7. All consents, approvals and authorizations of and filings with any federal
or California governmental authority required on the part of the Buyer, if any,
in connection with the valid execution and delivery of the Agreement or the
consummation of the transactions contemplated thereby have been obtained or
made, except, if required, filings to be made under the Securities Act of 1933,
as amended, and the California Corporate Securities Law of 1968, as amended,
after the sale of the Shares.
8. Subject to the accuracy of your representations and warranties set forth
in Section 2 of the Agreement, the offer and sale of the Shares in conformity
with the terms of the Agreement are in compliance with or exempt from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SALON INTERNET, INC.
Michael O'Donnell and David Talbot certify that:
1. They are the President and Secretary, respectively, of Salon
Internet, Inc., a California corporation.
2. The Articles of Incorporation of the corporation are amended and
restated in their entirety, to read as follows:
ARTICLE I
The name of the corporation is Salon Internet, Inc.
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
The Corporation is authorized to issue two classes of shares to be
designated respectively "Preferred" and "Common." The total number of Preferred
shares authorized is 16,217,500 and the total number of Common shares authorized
is 25,000,000.
The Preferred shares authorized by these Articles of Incorporation may
be issued from time to time in one or more series. The first series of
Preferred shares shall be designated Series A Preferred Stock and shall be
comprised of 5,017,500 shares. The second series of Preferred shares shall be
designated Series B Preferred Stock and shall be comprised of 2,200,000 shares.
The third series of Preferred shares shall be designated Series C Preferred
Stock and shall be comprised of 9,000,000 shares.
Each share of Series C Preferred Stock issued and outstanding as of
the date of filing of these Amended and Restated Articles of Incorporation is
hereby converted into 1.35567 shares of Series C Preferred Stock. No fractional
shares shall be issued as a result of such stock split,
1
<PAGE>
provided, however, that the number of shares to be received by a shareholder as
a result of such stock split shall be rounded to the nearest whole share, and
the number of full shares of Series C Preferred Stock to be issued upon
conversion of a shareholder's previously outstanding Series C Preferred Stock
shall be computed on the basis of the aggregate number of shares of the Series C
Preferred Stock held by such shareholder prior to the date of filing of these
Amended and Restated Articles of Incorporation.
Relative rights, preferences, privileges and restrictions granted to
or imposed upon the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock (collectively, the "Preferred Stock") and the Common
Stock are as follows:
1. Dividends.
---------
(a) The holders of outstanding Series A, Series B and Series
C Preferred Stock shall be entitled to receive in any fiscal year, when and as
declared by the Board of Directors, out of any assets at the time legally
available therefor, distributions (as defined below) at the rate per annum of
$0.08 per share of Series A Preferred Stock, $0.126 per share of Series B
Preferred Stock and $0.155 per share of Series C Preferred Stock, respectively,
payable in preference and priority to any payment of any dividend on Common
Stock. Each share of Preferred Stock shall rank on a parity with every other
Preferred share which may be issued in the future, irrespective of series, with
regard to distributions at the respective rates fixed for such series. No
distributions shall be declared or paid or set apart for payment on the
Preferred shares of any series unless at the time a distribution shall also be
declared or paid or set apart for payment, as the case may be, on the Preferred
shares of each other series then outstanding at the respective fixed rates for
such series. The right to such distributions on Series A, Series B and Series C
Preferred Stock shall not be cumulative and no right shall accrue to holders of
Preferred Stock by reason of the fact that distributions on said shares are not
declared in any prior year, nor shall any undeclared or unpaid distribution bear
or accrue interest. After distributions shall have been paid to or declared and
set apart upon the Preferred Stock at the respective rate for each series, for
any one fiscal year of the Corporation, if the Board of Directors elects to
declare additional distributions out of any assets legally available therefor,
such additional distributions shall be declared on all shares of Preferred Stock
and Common Stock, with the amount of such distribution for each share of
Preferred Stock equal to the amount of such distribution for one share of Common
Stock multiplied by the number of shares of Common Stock into which such share
of Preferred Stock is convertible as of the record date fixed for declaration of
such distribution.
(b) For purposes of this Section 1, unless the context otherwise
requires, "distribution" shall mean the transfer of cash or other property
without consideration, whether by way of dividend or otherwise, payable other
than in Common Stock, or the purchase or redemption of shares of the Corporation
(other than pursuant to a liquidation, dissolution or winding up of the
Corporation pursuant to Section 2 below, other than pursuant to the
Corporation's Third Amended and Restated Rights Agreement dated on or about the
effective date of this filing (the "Rights Agreement"), and other than
repurchases of Common Stock held
2
<PAGE>
by employees or consultants of the Corporation upon termination of their
employment or services pursuant to agreements providing for such repurchase) for
cash or other property, including any such transfer, purchase or redemption by a
subsidiary of the Corporation.
Each holder of shares of Preferred Stock shall be deemed to have
consented, for purposes of Sections 503 and 506 of the General Corporation Law
of the State of California, to distributions made by the Corporation in
connection with the repurchase of shares (i) of Common Stock issued to or held
by employees, officers, directors or consultants upon termination of their
employment or services pursuant to agreements providing for such repurchase and
(ii) pursuant to the Rights Agreement.
2. Preference on Liquidation.
-------------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation the assets and surplus funds of the
Corporation available for distribution to shareholders shall be distributed as
follows:
(i) First, the holders of shares of the Series C
Preferred Stock then outstanding shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of Series A and Series B Preferred Stock and Common
Stock by reason of their ownership of such stock, an amount for each share of
Series C Preferred Stock then held by them equal to the sum of (a) $1.94 and (b)
the aggregate amount of all declared but unpaid dividends per share, if any, on
the shares of Series C Preferred Stock, in each case appropriately adjusted for
any stock combinations, consolidations, stock distributions, reclassifications,
stock dividends, stock splits or the like with respect to such shares
(hereinafter such amounts shall be referred as the "Series C Liquidation
Preference Amounts"). If upon occurrence of such event of liquidation,
dissolution or winding up, the assets and property legally available to be
distributed among the holders of the Series C Preferred Stock shall be
insufficient to permit the payment to such holders of the full preferential
amount aforesaid, then the entire assets and property of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series C Preferred Stock in proportion to their preferential amounts described
above;
(ii) Second, the holders of shares of the Series A and
Series B Preferred Stock then outstanding shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the Corporation to the holders of Common Stock by reason of their ownership of
such stock, an amount for each share of Series A and Series B Preferred Stock
then held by them equal to the sum of (a) $1.00 for each share of Series A
Preferred Stock, (b) $1.58 for each share of Series B Preferred Stock and (c)
the aggregate amount of all declared but unpaid dividends per share, if any, on
the shares of Series A and Series B Preferred Stock, in each case appropriately
adjusted for any stock combinations, consolidations, stock distributions,
reclassifications, stock dividends, stock splits or the like with respect to
such shares (hereinafter such amounts shall be referred as the "Series A and B
Liquidation Preference Amounts").
3
<PAGE>
If upon occurrence of such event of liquidation, dissolution or
winding up, the assets and property legally available to be distributed among
the holders of the Series A and Series B Preferred Stock shall be insufficient
to permit the payment to such holders of the full preferential amount aforesaid,
then the entire assets and property of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Series A and
Series B Preferred Stock in proportion to their preferential amounts described
above.
(iii) After the distributions described in subsections
2(a)(i) and (ii) have been paid, all remaining assets available for
distribution, if any, shall be distributed ratably among the holders of Common
Stock and Preferred Stock on an as-converted basis.
(b) The merger or consolidation of the Corporation into or
with another corporation or a transaction or series of related transactions
pursuant to which merger, consolidation or transaction or series of transactions
the shareholders of the Corporation immediately prior to such merger,
consolidation, transaction or series of transactions do not own a majority of
the outstanding stock or at least 50% of the voting control of the surviving
corporation following such merger, consolidation transaction or series of
transactions, or the sale, transfer, lease or other conveyance of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation as those terms are
used in this Section 2; and in any such case the liquidation preference which
the holders of Preferred Stock shall be entitled to receive shall be computed in
the same manner as if the Corporation's available assets were actually being
distributed to shareholders (even though holders of Common Stock and other
classes or series of Preferred Stock which may be issued in the future are not
or may not be entitled to receive any actual distribution upon such deemed
liquidation or dissolution), and the value of the Corporation's assets for
purposes of computing the amount of such liquidation preference shall be deemed
to be (i) the fair market value of all consideration proposed to be paid or
exchanged for all of the Corporation's outstanding capital stock upon any such
merger or consolidation, or (ii) the fair market value of all consideration
proposed to be paid to the Corporation upon any sale, transfer, or other
conveyance of all or substantially all of the assets of the Corporation, as
applicable.
(c) Notwithstanding subsections 2(a) and (b), the holders of
Preferred Stock shall have no priority or preference with respect to
distributions made by the Corporation in connection with the repurchase of
shares of capital stock pursuant to the Rights Agreement or Common Stock issued
to or held by employees, directors or consultants upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase between the Corporation and such persons.
3. Voting Rights. In connection with any vote or consent
-------------
requirement hereunder, and except as otherwise required by law, the holder of
each share of the Preferred Stock shall be entitled to the number of votes equal
to the number of shares of Common Stock into which such share of Preferred Stock
could be converted on the record date for the vote or consent of shareholders
and shall have voting rights and powers equal to the voting rights and powers of
the Common Stock. As long as more than an aggregate of 500,000 shares of Series
A Preferred Stock (appropriately adjusted for stock combinations,
consolidations, stock distributions, reclassifications, stock dividends, stock
splits and the like) are outstanding, the holders of the Series A
4
<PAGE>
Preferred Stock, voting as a single class, shall have the right to elect one
member of the Board of Directors of the Corporation. As long as more than an
aggregate of 500,000 shares of Series B Preferred Stock (appropriately adjusted
for stock combinations, consolidations, stock distributions, reclassifications,
stock dividends, stock splits and the like) are outstanding, the holders of the
Series B Preferred Stock, voting as a single class, shall have the right to
elect one member of the Board of Directors of the Corporation. As long as more
than an aggregate of 500,000 shares of Series C Preferred Stock (appropriately
adjusted for stock combinations, consolidations, stock distributions,
reclassifications, stock dividends, stock splits and the like) are outstanding,
the holders of the Series C Preferred Stock, voting as a single class, shall
have the right to elect one member of the Board of Directors of the Corporation.
The holders of the Common Stock, voting as a single class, shall have the right
to elect two members of the Board of Directors of the Corporation. The holders
of Common Stock and Preferred Stock, voting as a single class, shall have the
right to elect the remaining members of the Board of Directors. The holders of
the Preferred Stock shall vote with holders of the Common Stock upon any other
matter submitted to a vote of shareholders, except those matters required by law
or these articles to be submitted to a class or series vote.
4. Conversion Rights.
-----------------
(a) Optional Conversion; Conversion Rate; Conversion Price. Each
------------------------------------------------------
share of Preferred Stock shall be convertible, at the option of the holder
thereof, into shares of Common Stock at any time after the issuance of such
share. The number of shares of Common Stock into which each share of Series A,
Series B and Series C Preferred Stock may be converted shall be determined by
dividing $1.00, $1.58 and $1.94 respectively, by a price, hereinafter referred
to as the "Conversion Price," in effect for such series of Preferred Stock at
the time of the conversion. The Conversion Price per share of Series A
Preferred Stock initially shall be $1.00, the Conversion Price per share of
Series B Preferred Stock initially shall be $1.58, and the Conversion Price per
share of Series C Preferred Stock initially shall be $1.94, each subject to
adjustment as provided in Section 5 below.
(b) Automatic Conversion.
--------------------
(i) Conversion of Preferred Shares. Each share of a given
series of Preferred Stock shall automatically be converted into fully paid and
nonassessable shares of Common Stock of the Corporation at the Conversion Price
then in effect for such series of Preferred Stock (subject to adjustment
pursuant to Section 5 below) at any time during the Conversion Period
immediately (as defined below) upon the earlier to occur of:
(A) the closing of a sale of the Corporation's
securities in an underwritten registered public offering on the NASDAQ National
Market with proceeds to the Corporation of at least Twenty Million Dollars
($20,000,000) and an offering price per share to the public equal to or greater
than Five Dollars and Eighty-Two Cents ($5.82), appropriately
5
<PAGE>
adjusted for stock dividends, stock splits, stock combinations,
recapitalizations, reclassifications, exchanges and the like ("Initial Public
Offering");
(B) the date on which the holders of two-thirds of the
then outstanding shares of all series of Preferred Stock (determined on an as-
converted basis) consent in writing to such conversion; provided, that no shares
of Series C Preferred Stock shall convert pursuant to this Section 4(b)(i)(B)
unless holders of two-thirds of the then outstanding Series C Preferred Stock
consent in writing to such conversion, and provided, further, that all shares of
Series C Preferred Stock shall convert pursuant to this Section 4(b)(i)(B) if
holders of two-thirds of the then outstanding Series C Preferred Stock consent
in writing to such conversion; or
(C) at such time as there are outstanding less than an
aggregate of 500,000 shares of Series A Preferred Stock, 180,000 shares of
Series B Preferred Stock or 750,000 shares of Series C Preferred Stock,
appropriately adjusted for stock combinations, consolidations, stock
distributions, reclassifications, stock dividends, stock splits and the like.
(c) Conversion Mechanics. The holder of any shares of Preferred
--------------------
Stock may exercise the conversion rights as to such shares or any part thereof
by delivering to the Corporation during regular business hours, at the office of
any transfer agent of the Corporation for the Preferred Stock, or at the
principal office of the Corporation or at such other place as may be designated
by the Corporation, the certificate or certificates for the shares to be
converted, duly endorsed for transfer to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares. Except as set forth above, conversion shall be deemed to have been
effected on the date when such delivery is made, and such date is referred to
herein as the "Conversion Date." As promptly as practicable thereafter the
Corporation shall issue and deliver to or upon the written order of such holder,
at such office or other place designated by the Corporation, a certificate or
certificates for the number of full shares of Common Stock to which such holder
is entitled and a check for cash with respect to any fractional interest in a
share of Common Stock as provided in subsection 4(d) below. The holder shall be
deemed to have become a shareholder of record for the Common Stock on the
applicable Conversion Date unless the transfer books of the Corporation are
closed on the date, in which event such holder shall be deemed to have become a
shareholder of record for the Common Stock on the next succeeding date on which
the transfer books are open. Upon conversion of only a portion of the number of
shares of Series A, Series B or Series C Preferred Stock, as the case may be,
represented by a certificate surrendered for conversion, the Corporation shall
issue and deliver to or upon the written order of the holder of the certificate
so surrendered for conversion, at the expense of the Corporation, a new
certificate for the number of shares of Series A, Series B or Series C Preferred
Stock representing the unconverted portion of the certificate so surrendered.
(d) No Fractional Shares. No fractional shares of Common Stock or
--------------------
scrip shall be issued upon conversion of shares of Preferred Stock. If more than
one share of
6
<PAGE>
Preferred Stock shall be surrendered for conversion at any one time by the same
holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Preferred Stock so surrendered. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of any shares of Preferred
Stock, the Corporation shall pay a cash adjustment in respect of such fractional
interest equal to the fair market value of such fractional interest as
determined in good faith by the Corporation's Board of Directors.
(e) Taxes. The Corporation shall pay any and all issue and other
-----
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion pursuant hereto of Preferred Stock. The Corporation
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of shares of Common Stock in
a name other than that in which the Preferred Stock so converted were
registered, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Corporation the amount of any such
tax, or has established, to the satisfaction of the Corporation, that such tax
has been paid.
(f) Share Reserve. The Corporation shall at all times reserve and
-------------
keep available, out of its authorized but unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Stock, the full number of
shares of Common Stock deliverable upon the conversion of all Preferred Stock
from time to time outstanding. The Corporation shall from time to time (subject
to obtaining necessary director and shareholder approval), in accordance with
the laws of the State of California, increase the authorized amount of its
Common Stock if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of all of
the shares of Preferred Stock at the time outstanding.
(g) Registration or Listing. If any shares of Common Stock to be
-----------------------
reserved for the purpose of conversion of shares of Preferred Stock require
registration or listing with, or approval of, any governmental authority, stock
exchange or other regulatory body under any federal or state law or regulation
or otherwise, before such shares may be validly issued or delivered upon
conversion, the Corporation will in good faith and as expeditiously as possible
endeavor to secure such registration, listing or approval, as the case may be.
(h) Status Upon Issuance. All shares of Common Stock which may be
--------------------
issued upon conversion of the shares of Preferred Stock will upon issuance by
the Corporation be validly issued, fully paid and non-assessable and free from
all taxes, liens and charges created by the Corporation with respect to the
issuance thereof.
5. Adjustments. The number of shares of Common Stock to be issued
-----------
upon conversion of the Preferred Stock shall be subject to adjustment from time
to time as follows:
(a) Stock Splits, Dividends and Combinations. In case the
----------------------------------------
Corporation shall at any time subdivide the outstanding Common Stock, or shall
issue a stock
7
<PAGE>
dividend on its outstanding Common Stock, the number of shares of Common Stock
issuable upon conversion of the Preferred Stock immediately prior to each such
subdivision or issuance of such stock dividend shall be proportionately
increased (with appropriate adjustments in the applicable Conversion Price) and
in case the Corporation shall at any time combine the outstanding Common Stock,
the number of shares of Common Stock issuable upon conversion of the Preferred
Stock immediately prior to each such combination shall be proportionately
decreased (with appropriate adjustments in the applicable Conversion Price),
effective at the close of business on the date of each such subdivision, stock
dividend or combination, as the case may be.
(b) Capital Reorganizations. In case of any capital
-----------------------
reorganization (other than in connection with a merger or other reorganization
in which the Corporation is not the continuing or surviving entity) or any
reclassification of the Common Stock of the Corporation, the Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
of the Corporation deliverable upon conversion of the shares of Preferred Stock
immediately prior to each such reorganization or recapitalization would have
been entitled upon such reorganization, or reclassification; and, in any such
case, appropriate adjustment (as determined by the Board of Directors) shall be
made in the application of the provisions herein set forth with respect to the
rights and interests thereafter of the holders of Preferred Stock, to the end
that the provisions set forth herein shall thereafter be applicable, as nearly
as reasonably may be, in relation to any share of stock or other property
thereafter deliverable upon the conversion.
(c) Noncash Dividends, Stock Purchase Rights, Capital
-------------------------------------------------
Reorganizations and Dissolutions. In case:
- --------------------------------
(i) the Corporation shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a dividend, or any
other distribution, payable otherwise than in cash; or
(ii) the Corporation shall take a record of the holders of
its Common Stock for the purpose of entitling them to subscribe for or purchase
any shares of stock of any class or to receive any other rights; or
(iii) of any capital reorganization of the Corporation,
reclassification of the capital stock of the Corporation (other than a
subdivision or combination of its outstanding shares of Common Stock),
consolidation or merger of the Corporation with or into another corporation or
conveyance of all or substantially all of the assets of the Corporation to
another corporation; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
8
<PAGE>
then, and in any such case, the Corporation shall cause to be mailed to the
transfer agent for Preferred Stock, and to the holders of record of the
outstanding Preferred Stock, at least ten days prior to the date hereinafter
specified, a notice stating the date on which (x) a record is to be taken for
the purpose of such dividend, distribution or rights, or (y) such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up is to take place and the date, if any is
to be fixed, as of which holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
(d) Other Issuances. Upon the issuance by the Corporation of any
---------------
Equity Securities (as defined below) for consideration per share of Common Stock
issued or issuable upon exchange, exercise or conversion of such Equity
Securities of less than the Conversion Price of the Series C Preferred Stock
then in effect, then the Conversion Price for the Series C Preferred Stock shall
be reduced to equal the consideration per share of Common Stock issued or
issuable upon exchange, exercise or conversion of such Equity Securities
received by the Corporation for such Equity Securities. Upon the issuance by the
Corporation, on or after the effective date of these Amended and Restated
Articles of Incorporation, of Equity Securities for a consideration per share of
Common Stock issued or issuable upon exchange, exercise or conversion of such
Equity Securities of less than the Conversion Price of the Series B Preferred
Stock in effect immediately prior to the time of such issue or sale, then
forthwith upon such issue or sale, the Conversion Price of Series B Preferred
Stock shall be reduced to equal the consideration per share of Common Stock
issuable upon exchange, exercise or conversion of such Equity Securities
received by the Corporation for such Equity Securities. Upon the issuance by
the Corporation, on or after the effective date of these Amended and Restated
Articles of Incorporation, of Equity Securities for a consideration per share of
Common Stock issued or issuable upon exchange, exercise or conversion of such
Equity Securities of less than the Conversion Price of the Series A Preferred
Stock in effect immediately prior to the time of such issue or sale, then
forthwith upon such issue or sale, the Conversion Price of Series A Preferred
Stock shall be reduced to equal the consideration per share of Common Stock
issuable upon exchange, exercise or conversion of such Equity Securities
received by the Corporation for such Equity Securities.
For purposes of this subsection 5(d) the following provisions will be
applicable:
(A) In the case of an issue or sale for cash of shares
of Common Stock, the "consideration per share" received by the Corporation
therefor shall be deemed to be the amount of cash received, before deducting
therefrom any commissions or expenses paid by the Corporation.
(B) In case of the issuance (otherwise than upon
conversion or exchange of obligations or shares of stock of the Corporation) of
additional shares of Common Stock for a consideration other than cash or a
consideration partly other than cash, the amount of the consideration other than
cash received by the Corporation for such shares shall
9
<PAGE>
be deemed to be the fair market value of such consideration as determined in
good faith by the Board of Directors.
(C) In case of the issuance by the Corporation in any
manner of any rights to subscribe for or to purchase shares of Common Stock, or
any options for the purchase of shares of Common Stock or stock convertible into
Common Stock, all shares of Common Stock or stock convertible into Common Stock
to which the holders of such rights or options shall be entitled to subscribe
for or purchase pursuant to such rights or options shall be deemed "outstanding"
as of the date of the offering of such rights or the granting of such options,
as the case may be, and the minimum aggregate consideration named in such rights
or options for the shares of Common Stock or stock convertible into Common Stock
covered thereby, plus the consideration, if any, received by the Corporation for
such rights or options, shall be deemed to be the "consideration per share"
received by the Corporation (as of the date of the offering of such rights or
the granting of such options, as the case may be) for the issuance of such
shares.
(D) In case of the issuance or issuances by the
Corporation in any manner of any obligations or of any shares of stock of the
Corporation that shall be convertible into or exchangeable for Common Stock, all
shares of Common Stock issuable upon the conversion or exchange of such
obligations or shares shall be deemed issued as of the date such obligations or
shares are issued, and the amount of the "consideration per share" received by
the Corporation for such additional shares of Common Stock shall be deemed to be
the total of (X) the amount of consideration received by the Corporation upon
the issuance of such obligations or shares, as the case may be, plus (Y) the
minimum aggregate consideration, if any, other than such obligations or shares,
receivable by the Corporation upon such conversion or exchange, except in
adjustment of dividends.
(E) The amount of the "consideration per share" received
by the Corporation upon the issuance of any rights or options referred to in
subsection (C) above or upon the issuance of any obligations or shares which are
convertible or exchangeable as described in subsection (D) above, and the amount
of the consideration, if any, other than such obligations or shares so
convertible or exchangeable, receivable by the Corporation upon the exercise,
conversion or exchange thereof shall be determined in the same manner provided
in subsections (A) and (B) above with respect to the consideration received by
the Corporation in case of the issuance of additional shares of Common Stock;
provided, however, that if such obligations or shares of stock so convertible or
exchangeable are issued in payment or satisfaction of any dividend upon any
stock of the Corporation other than Common Stock, the amount of the
"consideration per share" received by the Corporation upon the original issuance
of such obligations or shares or stock so convertible or exchangeable shall be
deemed to be the value of such obligations or shares of stock, as of the date of
the adoption of the resolution declaring such dividend, as determined by the
Board of Directors at or as of that date. On the expiration of any rights or
options referred to in subsection (C), or the termination of any right of
conversion or exchange referred to in subsection (D), or any change in the
number of shares of Common Stock deliverable upon exercise of such options or
rights or upon conversion of or exchange of such convertible or exchangeable
securities, the Conversion Price then in effect shall
10
<PAGE>
forthwith be readjusted to such Conversion Price as would have obtained had the
adjustments made upon the issuance of such options, rights or convertible or
exchangeable securities been made upon the basis of the delivery of only the
number of shares of common stock actually delivered or to be delivered upon the
exercise of such rights or options or upon the conversion or exchange of such
securities.
(F) Anything herein to the contrary notwithstanding, the
Corporation shall not be required to make any adjustment of a Conversion Price
as a result of the issuance after the effective date of these Amended and
Restated Articles of Incorporation, (x) of shares of Common Stock (or any
options, warrants or rights to purchase such shares) to officers, directors,
employees or consultants of the Corporation or its subsidiaries pursuant to
stock option or stock purchase plans or agreements or other employee benefit
plans and any shares of Common Stock issued upon exercise or conversion pursuant
to such plans or agreements, or (y) up to 500,000 shares of Common Stock (or any
options, warrants or rights to purchase such shares), appropriately adjusted for
any stock combinations, consolidations, stock distributions, reclassifications,
stock dividends, stock splits or the like, which have been approved by the Board
of Directors in connection with an equipment leasing or other financing
arrangements with banks or other financial institutions, or (z) of shares
issuable upon conversion or exercise of securities which are outstanding as of
the date of these Amended and Restated Articles.
(G) In the event the Corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons or options or rights not referred to
in this Section 5, then, in each such case, the holders of the Series A, Series
B and Series C Preferred Stock shall be entitled to the distributions at the
rate provided for in Section 1 above before any distribution shall be made to
the holders of the Common Stock, and no adjustment to the Conversion Prices
provided for in this Section 5 shall be applicable
(H) For purposes of this Section 5, "Equity Securities"
shall mean any securities having voting rights in the election of the Board of
Directors not contingent upon default, or any securities evidencing an ownership
interest in the Company, or any securities convertible into or exercisable for
any shares of the foregoing, or any agreement or commitment to issue any of the
foregoing.
(e) Protection of Conversion Rights. The Corporation will not, by
-------------------------------
amendment of its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 5 and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of the
holders of the Series A, Series B and Series C Preferred Stock against
impairment.
11
<PAGE>
(f) Certificate of Adjustment. Upon the occurrence of each
-------------------------
adjustment or readjustment of a Conversion Price pursuant to this Section 5, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof, and prepare and furnish to
each holder of Preferred Stock affected thereby a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment or
readjustment, (B) the Conversion Price at the time in effect for the Series A,
Series B and Series C Preferred Stock as the case may be, and (C) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of his shares.
6. Changes Affecting the Preferred Stock. So long as any shares of
-------------------------------------
Series A, Series B or Series C Preferred Stock are outstanding, the Corporation
shall not, without first obtaining the approval by vote or written consent, in
the manner provided by law, of the holders of at least a two-thirds of the total
number of shares of Preferred Stock then outstanding, voting together as a
single class, (i) alter or change any or all of the rights, preferences,
privileges and restrictions granted to or imposed upon the Series A, Series B or
Series C Preferred Stock; or (ii) increase or decrease the authorized number of
shares of Series A, Series B or Series C Preferred Stock or Common Stock; or
(iii) create any new class or series of shares of preferred stock senior to or
on a par with the Series A, Series B or Series C Preferred Stock as to voting
rights, dividends, anti-dilution protection or a distribution of assets of the
Corporation in liquidation; or (iv) sell, lease, convey, exchange, license,
transfer or otherwise dispose of all or substantially all of its assets (other
than for the purposes of securing payment of any contract or obligation); or (v)
effect any merger or consolidation with or into any other corporation such that
the shareholders of the Corporation do not own the majority of the outstanding
stock following such merger or consolidation except into or with a wholly-owned
subsidiary; or (vi) amend the provisions of this Section 6.
ARTICLE IV
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach of duty
to the Corporation and its shareholders through bylaw provisions or through
agreements with the agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code.
Any amendment, repeal or modification of any provision of this Article IV
shall not adversely affect any right or protection of a director or officers of
the Corporation existing at the time of such amendment, repeal or modification.
12
<PAGE>
1. The foregoing Amendment and Restatement of Articles of
Incorporation has been duly approved by the board of directors.
2. The foregoing Amendment and Restatement of Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Sections 902 and 903 of the California Corporations Code. The
total number of outstanding shares of Common Stock is 859,998. The total number
of outstanding shares of Series A Preferred Stock is 5,000,000. The total
number of outstanding shares of Series B Preferred Stock is 1,898,733. The
total number of outstanding shares of Series C Preferred Stock is 2,015,210.
There are no outstanding shares of Series A-1 Preferred Stock, Series B-1
Preferred Stock and Series C-1 Preferred Stock. The number of shares voting in
favor of the amendment equaled or exceeded the vote required, such required vote
being a majority of the outstanding shares of Common Stock and two-thirds of the
outstanding shares of each of the Series A, Series B and Series C Preferred
Stock.
[REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE>
The undersigned each declares under penalty of perjury that the
matters set forth in the foregoing certificate are true of his own knowledge.
Executed at San Francisco, California, on April 7, 1999.
/s/ Michael O'Donnell
------------------------------------
Michael O'Donnell, President
/s/ David Talbot
------------------------------------
David Talbot, Secretary
<PAGE>
EXHIBIT 3.3
AMENDED
BYLAWS
OF
SALON INTERNET, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I OFFICES......................................................... 1
Section 1.1 Principal Executive Office................................... 1
Section 1.2 Other Offices................................................ 1
ARTICLE II MEETINGS OF SHAREHOLDERS....................................... 1
Section 2.1 Place of Meetings............................................ 1
Section 2.2 Annual Meetings.............................................. 1
Section 2.3 Special Meetings............................................. 2
Section 2.4 Notice of Meetings or Reports................................ 2
Section 2.5 Adjourned Meetings and Notice Thereof........................ 2
Section 2.6 Voting....................................................... 3
Section 2.7 Quorum....................................................... 3
Section 2.8 Consent of Absentees......................................... 4
Section 2.9 Action Without Meeting....................................... 4
Section 2.10 Proxies..................................................... 5
ARTICLE III DIRECTORS..................................................... 5
Section 3.1 Powers....................................................... 5
Section 3.2 Number of Directors.......................................... 5
Section 3.3 Election and Term of Office.................................. 5
Section 3.4 Resignation.................................................. 6
Section 3.5 Removal...................................................... 6
Section 3.6 Vacancies.................................................... 6
Section 3.7 Organization Meeting......................................... 7
Section 3.8 Other Regular Meetings....................................... 7
Section 3.9 Calling Meetings............................................. 7
Section 3.10 Place of Meetings........................................... 7
Section 3.11 Telephonic Meetings......................................... 7
Section 3.12 Notice of Special Meetings.................................. 7
Section 3.13 Waiver of Notice............................................ 8
Section 3.14 Action Without Meeting...................................... 8
Section 3.15 Quorum...................................................... 8
Section 3.16 Adjournment................................................. 8
Section 3.17 Inspection Rights........................................... 8
Section 3.18 Fees and Compensation....................................... 9
Section 3.19 Loans to Officers........................................... 9
ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES....................... 9
Section 4.1 Executive Committee.......................................... 9
Section 4.2 Other Committees............................................. 9
</TABLE>
<PAGE>
TABLE OF CONTENTS (cont'd)
--------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 4.3 Minutes and Reports.......................................... 10
Section 4.4 Meetings..................................................... 10
Section 4.5 Term of Office of Committee Members.......................... 10
ARTICLE V OFFICERS........................................................ 10
Section 5.1 Officers..................................................... 10
Section 5.2 Election..................................................... 10
Section 5.3 Subordinate Officers, etc.................................... 11
Section 5.4 Removal and Resignation...................................... 11
Section 5.5 Vacancies.................................................... 11
Section 5.6 Chairman of the Board........................................ 11
Section 5.7 Chief Executive Officer...................................... 11
Section 5.8 President.................................................... 12
Section 5.9 Vice President............................................... 12
Section 5.10 Secretary................................................... 12
Section 5.11 Chief Financial Officer..................................... 12
ARTICLE VI MISCELLANEOUS.................................................. 13
Section 6.1 Record Date.................................................. 13
Section 6.2 Inspection of Corporate Records.............................. 13
Section 6.3 Execution of Corporate Instruments........................... 14
Section 6.4 Ratification by Shareholders................................. 14
Section 6.5 Annual Report................................................ 14
Section 6.6 Representation of Shares of Other Corporations............... 15
Section 6.7 Inspection of Bylaws......................................... 15
ARTICLE VII SHARES OF STOCK............................................... 15
Section 7.1 Form of Certificates......................................... 15
Section 7.2 Transfer of Shares........................................... 15
Section 7.3 Lost Certificates............................................ 15
ARTICLE VIII INDEMNIFICATION.............................................. 16
Section 8.1 Indemnification by Corporation............................... 16
Section 8.2 Right of Claimant to Bring Suit.............................. 16
Section 8.3 Indemnification of Employees and Agents of the Corporation... 17
Section 8.4 Rights Not Exclusive......................................... 17
Section 8.5 Indemnity Agreements......................................... 17
Section 8.6 Insurance.................................................... 17
Section 8.7 Amendment, Repeal or Modification............................ 18
ARTICLE IX AMENDMENTS..................................................... 18
Section 9.1 Power of Shareholders........................................ 18
Section 9.2 Power of Directors........................................... 18
</TABLE>
ii
<PAGE>
AMENDED
BYLAWS
OF
SALON INTERNET, INC.
ARTICLE I
OFFICES
-------
Section 1.1 Principal Executive Office.
----------- ---------------------------
The principal executive office for the transaction of the business of the
corporation is hereby fixed and located at 1510 Eddy Street, #PH-2B, San
Francisco, California, 94115, County of San Francisco, State of California. The
Board of Directors is hereby granted full power and authority to change said
principal office from one location to another.
Section 1.2 Other Offices.
----------- --------------
Branch or subordinate offices may at any time be established by the Board
of Directors at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
Section 2.1 Place of Meetings.
----------- ------------------
All meetings of shareholders shall be held either at the principal
executive office or at any other place within or without the State of California
which may be designated either by the Board of Directors or by the written
consent of a majority of the shareholders entitled to vote thereat as determined
pursuant to Section 6.1 of these Bylaws given either before or after the
meeting.
Section 2.2 Annual Meetings.
----------- ----------------
The annual meetings of shareholders shall be held on such day and at such
hour as may be fixed by the Board of Directors. At such meeting, Directors shall
be elected, and any other proper business may be transacted.
<PAGE>
Section 2.3 Special Meetings.
----------- -----------------
Special meetings of the shareholders may be called at any time by the Board
of Directors, the Chairman of the Board, the President, or by the holders of
shares entitled to cast not less than ten percent (10%) of the votes at the
meeting. Notice of such special meeting shall be given in the same manner as for
the annual meeting of shareholders. Notices of any special meetings shall
specify in addition to the place, date and hour of such meeting, the general
nature of the business to be transacted thereat.
Section 2.4 Notice of Meetings or Reports.
----------- ------------------------------
Written notice of each meeting of shareholders shall be given not less than
ten (10) days nor more than sixty (60) days before the date of the meeting to
each shareholder entitled to vote thereat. Such notice shall be given either
personally or by mail or other means of written communication, addressed or
delivered to each shareholder entitled to vote at such meeting at the address of
such shareholder appearing on the books of the corporation or given by him to
the corporation for the purpose of such notice. If no such address appears or is
given, notice shall be given either personally or by mail or other means of
written communication addressed to the shareholder at the place where the
principal executive office of the corporation is located, or by publication at
least once in a newspaper of general circulation in the county in which said
office is located. The notice shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by other means of
written communication.
The same procedure for the giving of notice shall apply to the giving of
any report to shareholders.
All such notices shall state the place, the date and the hour of such
meeting, and shall state such matters, if any, as may be expressly required by
the California Corporations Code.
Upon request by any person or persons entitled to call a special meeting,
the Chairman of the Board, President, Vice President or Secretary shall within
twenty (20) days after receipt of the request cause notice to be given to the
shareholders entitled to vote that a special meeting will be held at a time
requested by the person or persons calling the meeting, but not less than
thirty-five (35) nor more than sixty (60) days after receipt of the request.
All other notices shall be sent by the Secretary or an Assistant Secretary,
or if there be no such officer, or in the case of his neglect or refusal to act,
by any other officer, or by persons calling the meeting.
Section 2.5 Adjourned Meetings and Notice Thereof.
----------- --------------------------------------
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of a majority of the
shares, represented either in person or by proxy, but in the absence of a
quorum, no other business may be transacted at such meeting, except as provided
in Section 2.7 of these Bylaws.
<PAGE>
When a shareholders' meeting is adjourned to another time or place, notice
of the adjourned meeting need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken; except that if the
adjournment is for more than forty-five (45) days or if after the adjournment a
new record date is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote thereat.
At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting.
Section 2.6 Voting.
----------- -------
Except as otherwise provided in the Articles of Incorporation and subject
to Section 6.1 of these Bylaws, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote of
shareholders. Vote may be viva voce or by ballot; provided, however, that
elections for directors must be by ballot upon demand made by a shareholder at
the meeting and before the voting begins.
Every shareholder entitled to vote at any election for Directors may
cumulate his votes and give one candidate a number of votes equal to the number
of directors to be elected, multiplied by the number of votes to which his
shares are entitled, or to distribute his votes on the same principle among as
many candidates as he thinks fit, provided that no shareholder shall be entitled
to cumulate votes unless such candidate or candidates names have been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting, prior to the voting, of the shareholder's intention to cumulate the
shareholder's votes. If any one shareholder has given such notice, all
shareholders may cumulate their votes for candidates in nomination. The
candidates receiving the highest number of votes of the shares entitled to be
voted for them, up to the number of directors to be elected by such shares,
shall be elected.
Any holder of shares entitled to vote on any matter may vote part of the
shares in favor of the proposal and refrain from voting the remaining shares or
vote them against the proposal, other than elections to office, but, if the
shareholder fails to specify the number of shares such shareholder is voting
affirmatively, it shall be conclusively presumed that the shareholder's
approving vote is with respect to all shares said shareholder is entitled to
vote.
Section 2.7 Quorum.
----------- -------
A majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is
present, the affirmative vote of a majority of the shares represented at the
meeting and entitled to vote on any matter shall be the act of the shareholders,
unless otherwise required by the Articles of Incorporation.
The shareholders present at a duly called or held meeting at which a quorum
is present may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
<PAGE>
Section 2.8 Consent of Absentees.
----------- ---------------------
The transactions of any meeting of shareholders, if not duly called and
noticed, and wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum is present either in person or
by proxy, and if, either before or after the meeting, each of the shareholders
entitled to vote, not present in person or by proxy, signs a written waiver of
notice, or a consent to the holding of such meeting, or an approval of the
minutes thereof. All such waivers, consents, or approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of notice of
such meeting, except when a person objects, at the beginning of the meeting, to
the transaction of any business because the meeting is not lawfully called or
convened; provided, that attendance at a meeting is not a waiver of any right to
object to the consideration of matters required by law or these Bylaws to be
included in the notice but not so included if such objection is expressly made
at the meeting.
Section 2.9 Action Without Meeting.
----------- -----------------------
Any action which may be taken at any meeting of shareholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the actions so taken, shall be signed by the holders of outstanding shares
having not less than the minimum number of votes which would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted; provided, that except to fill a vacancy as
provided in Section 3.6 of these Bylaws, Directors may not be elected by written
consent except by unanimous written consent of all shares entitled to vote for
the election of Directors.
Unless the consents of all shareholders entitled to vote have been
solicited in writing, notice of the following actions approved by shareholders
without a meeting by less than unanimous written consent shall be given to those
shareholders entitled to vote who have not consented in writing at least ten
(10) days before the consummation of the action authorized by such approval:
1. Approval of a contract or other transaction between the corporation
and one or more of its Directors, or between the corporation and any
corporation, firm or association in which one or more of its Directors has a
material financial interest.
2. Approval of any indemnification to be made by the corporation of a
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that such person was or is an agent of the
corporation.
3. Approval of the principal terms of a reorganization.
4. Approval of a plan of distribution of the shares, obligations or
securities of any other corporation, or assets other than money, which is not in
accordance with the liquidation
<PAGE>
rights of the preferred shares as specified in the Articles of Incorporation or
a Certificate of Determination.
Unless the consents of all shareholders entitled to vote have been
solicited in writing, prompt notice of the taking of any corporate action not
listed above which is approved by shareholders without a meeting by less than
unanimous written consent, shall be given to those shareholders entitled to vote
who have not consented in writing.
Such notice shall be given as provided in Section 2.4 of these Bylaws.
Section 2.10 Proxies.
------------ --------
Every person entitled to vote shares may authorize another person or
persons to act by proxy with respect to such shares. No proxy shall be valid
after the expiration of eleven (11) months from the date thereof unless
otherwise provided in the proxy.
ARTICLE III
DIRECTORS
---------
Section 3.1 Powers.
----------- -------
Subject to the limitations stated in the Articles of Incorporation, these
Bylaws, and the California Corporations Code as to actions which shall be
approved by the shareholders or by the affirmative vote of a majority of the
outstanding shares entitled to vote, and subject to the duties of Directors as
prescribed by the California Corporations Code, all corporate powers shall be
exercised by, or under the direction of, and the business and affairs of the
corporation shall be managed by, the Board of Directors.
Section 3.2 Number of Directors.
----------- --------------------
The authorized number of directors of the corporation shall be not less
than four (4) nor more than seven (7) and the exact number of Directors
initially authorized shall be seven (7). The exact number of Directors may be
fixed within the limits specified in this Section 3.2 by a Bylaw duly adopted by
the shareholders or by resolution of the Board of Directors. The minimum or
maximum number of Directors provided in this Section 3.2 may be changed or a
definite number fixed without provision for an indefinite number, by a Bylaw
duly adopted by the affirmative vote of a majority of the outstanding shares
entitled to vote.
Section 3.3 Election and Term of Office.
----------- ----------------------------
The Directors shall be elected at each annual meeting of shareholders, but
if any such annual meeting is not held, or the Directors are not elected
thereat, the Directors may be elected at any special meeting of the shareholders
held for that purpose. All Directors shall hold office until the expiration of
the term for which elected and until their respective successors are elected,
<PAGE>
except in the case of the death, resignation or removal of any Director. A
Director need not be a shareholder.
Section 3.4 Resignation.
----------- ------------
Any Director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board of Directors of
the corporation, unless the notice specifies a later time for the effectiveness
of such resignation. If the resignation is effective at a future time, a
successor may be elected to take office when the resignation becomes effective.
Section 3.5 Removal.
----------- --------
The entire Board of Directors or any individual Director may be removed
from office, prior to the expiration of their or his term of office only in the
manner and within the limitations provided by the California Corporations Code.
No reduction of the authorized number of Directors shall have the effect of
removing any Director prior to the expiration of such Director's term of office.
Section 3.6 Vacancies.
----------- ----------
A vacancy in the Board of Directors shall be deemed to exist (i) in case of
the death, resignation or removal of any Director, (ii) if the Board of
Directors by resolution declares vacant the office of a Director who has been
declared of unsound mind by an order of court or convicted of a felony, (iii) if
the authorized number of Directors is increased, or (iv) if the shareholders
fail at any annual or special meeting of shareholders at which any Director or
Directors are elected to elect the full authorized number of Directors to be
voted for at that meeting.
Vacancies in the Board of Directors may be filled by a majority of the
remaining Directors, or if the number of Directors then in office is less than a
quorum by (i) unanimous written consent of the Directors then in office, (ii)
the affirmative vote of a majority of the Directors then in office at a meeting
held pursuant to notice or waivers of notice, or (iii) a sole remaining
Director; however, a vacancy created by the removal of a Director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum), or by the unanimous
written consent of all shares entitled to vote thereon. Each Director so elected
shall hold office until the expiration of the term for which he was elected and
until his successor is elected at an annual or a special meeting of the
shareholders, or until his death, resignation or removal.
The shareholders may elect a Director or Directors at any time to fill any
vacancy or vacancies not filled by the Directors. Any such election by written
consent other than to fill a vacancy created by removal requires the consent of
the holders of a majority of the outstanding shares entitled to vote.
<PAGE>
Section 3.7 Organization Meeting.
----------- ---------------------
Immediately after each annual meeting of shareholders, the Board of
Directors shall hold a regular meeting for the purpose of organization, the
election of officers and the transaction of other business. No notice of such
meeting need be given.
Section 3.8 Other Regular Meetings.
----------- -----------------------
The Board of Directors may provide by resolution the time and place for the
holding of regular meetings of the Board; provided, however, that if the date so
designated falls upon a legal holiday, then the meeting shall be held at the
same time and place on the next succeeding day which is not a legal holiday. No
notice of such regular meetings of the Board need be given.
Section 3.9 Calling Meetings.
----------- -----------------
Meetings of the Board of Directors for any purpose or purposes shall be
held whenever called by the Chairman of the Board, the President or the
Secretary or any two Directors of the corporation.
Section 3.10 Place of Meetings.
------------ ------------------
Meetings of the Board of Directors shall be held at any place within or
without the State of California which may be designated in the notice of the
meeting, or, if not stated in the notice or there is no notice, designated by
resolution of the Board. In the absence of such designation, meetings of the
Board of Directors shall be held at the principal executive office of the
corporation.
Section 3.11 Telephonic Meetings.
------------ --------------------
Members of the Board may participate in a regular or special meeting
through use of conference telephone or similar communications equipment, so long
as all members participating in such meeting can hear one another.
Participation in a meeting pursuant to this Section 3.11 constitutes presence in
person at such meeting.
Section 3.12 Notice of Special Meetings.
------------ ---------------------------
Written notice of the time and place of special meetings of the Board of
Directors shall be delivered personally to each Director, or sent to each
Director by mail, telephone or telegraph. In case such notice is sent by mail,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone or telegraph, it shall be so delivered at least
forty-eight (48) hours prior to the time of the holding of the meeting. Such
notice may be given by the Secretary of the corporation or by the persons who
called said meeting. Such notice need not specify the purpose of the meeting,
and notice shall not be necessary if appropriate waivers, consents and/or
approvals are filed in accordance with Section 3.13 of these Bylaws.
<PAGE>
Section 3.13 Waiver of Notice.
------------ -----------------
Notice of a meeting need not be given to any Director who signs a waiver of
notice, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to such
Director.
The transactions of any meeting of the Board of Directors, however called
and noticed or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice if a quorum is present and if, either before
or after the meeting, each of the Directors not present signs a written waiver
of notice, a consent to holding the meeting or an approval of the minutes
thereof. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 3.14 Action Without Meeting.
------------ -----------------------
Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting, if all members of the Board shall individually or
collectively consent in writing to such action. Such written consent or consents
shall be filed with the minutes of the proceedings of the Board. Such action by
written consent shall have the same force and effect as a unanimous vote of such
Directors.
Section 3.15 Quorum.
------------ -------
A majority of the authorized number of Directors shall constitute a quorum
for the transaction of business. Every act or decision done or made by a
majority of the Directors present at a meeting duly held at which a quorum is
present shall be the act of the Board of Directors, unless the Articles of
Incorporation, or the California Corporations Code, specifically requires a
greater number. In the absence of a quorum at any meeting of the Board of
Directors, a majority of the Directors present may adjourn the meeting as
provided in Section 3.16 of these Bylaws. A meeting at which a quorum is
initially present may continue to transact business, notwithstanding the
withdrawal of enough Directors to leave less than a quorum, if any action taken
is approved by at least a majority of the required quorum for such meeting.
Section 3.16 Adjournment.
------------ ------------
Any meeting of the Board of Directors, whether or not a quorum is present,
may be adjourned to another time and place by the vote of a majority of the
Directors present. Notice of the time and place of the adjourned meeting need
not be given to absent Directors if said time and place are fixed at the meeting
adjourned.
Section 3.17 Inspection Rights.
------------ ------------------
Every Director shall have the absolute right at any time to inspect, copy
and make extra copies of, in person or by agent or attorney, all books, records
and documents of every kind and to inspect the physical properties of the
corporation.
<PAGE>
Section 3.18 Fees and Compensation.
------------ ----------------------
Directors shall not receive any stated salary for their services as
directors, but, by resolution of the Board, a fixed fee, with or without
expenses of attendance, may be allowed for attendance at each meeting. Nothing
herein contained shall be construed to preclude any Director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation therefor.
Section 3.19 Loans to Officers./1/
------------ ---------------------
The Board may approve loans of money or property from the corporation to,
and guaranties by the corporation of the obligations of, any officer, whether or
not a director, of the corporation, and may adopt employee benefit plans
authorizing such loans and/or guaranties, without the approval of the
shareholders of the corporation, provided that:
(a) the corporation has outstanding shares held of record by more than 100
persons on the date of approval by the Board;
(b) the vote for approval is sufficient without counting the vote of any
interested director or directors; and
(c) the Board determines that such loan, guaranty, or plan may reasonably
be expected to benefit the corporation.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
----------------------------------------
Section 4.1 Executive Committee.
----------- --------------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of Directors, appoint an executive committee, consisting of
two or more Directors. The Board may designate one or more Directors as an
alternate member of such committee, who may replace any absent member of any
meeting of the committee. The executive committee, subject to any limitations
imposed by the California Corporations Code, or by resolution adopted by the
affirmative vote of a majority of the authorized number of Directors, or imposed
by the Articles of Incorporation or by these Bylaws, shall have and may exercise
all of the powers of the Board of Directors.
Section 4.2 Other Committees.
----------- -----------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of Directors, designate such other committees, each consisting
of 2 or more Directors, as
________________________
/1/ This section is effective only if it has been approved by the shareholders
in accordance with Sections 315(b) and 152 of the Code.
<PAGE>
it may from time to time deem advisable to perform such general or special
duties as may from time to time be delegated to any such committee by the Board
of Directors, subject to the limitations contained in the California
Corporations Code, or imposed by the Articles of Incorporation or by these
Bylaws. The Board may designate one or more Directors as alternate members of
any committee, who may replace any absent member at any meeting of the
committee.
Section 4.3 Minutes and Reports.
----------- --------------------
Each committee shall keep regular minutes of its proceedings, which shall
be filed with the Secretary. All action by any committee shall be reported to
the Board of Directors at the next meeting thereof, and, insofar as rights of
third parties shall not be affected thereby, shall be subject to revision and
alteration by the Board of Directors.
Section 4.4 Meetings.
----------- ---------
Except as otherwise provided in these Bylaws or by resolution of the Board
of Directors, each committee shall adopt its own rules governing the time and
place of holding and the method of calling its meetings and the conduct of its
proceedings and shall meet as provided by such rules, and it shall also meet at
the call of any member of the committee. Unless otherwise provided by such rules
or by resolution of the Board of Directors, committee meetings shall be governed
by Sections 3.11, 3.12 and 3.13 of these Bylaws.
Section 4.5 Term of Office of Committee Members.
----------- ------------------------------------
The term of office of any committee member shall be as provided in the
resolution of the Board of Directors designating him but shall not exceed his
term as a Director. Any member of a committee may be removed at any time by
resolution adopted by Directors holding a majority of the directorships, either
present at a meeting of the Board or by written approval thereof.
ARTICLE V
OFFICERS
--------
Section 5.1 Officers.
----------- ---------
The Officers of the corporation shall be a Chairman of the Board, a Chief
Executive Officer, a President, a Secretary and a Chief Financial Officer. The
corporation may also have, at the discretion of the Board of Directors, one or
more Vice Presidents, one or more Assistant Secretaries and such other Officers
as may be appointed in accordance with the provisions of Section 3 of this
Article. One person may hold two or more offices.
Section 5.2 Election.
----------- ---------
The Officers of the corporation, except such Officers as may be appointed
in accordance with the provisions of Section 3 or Section 5 of this Article,
shall be chosen annually by the
<PAGE>
Board of Directors, and each shall hold his office until he shall resign or
shall be removed or otherwise disqualified to serve, or his successor shall be
elected and qualified.
Section 5.3 Subordinate Officers, etc.
----------- --------------------------
The Board of Directors may appoint such other Officers as the business of
the corporation may require, each to whom shall hold office for such period,
have such authority and perform such duties as the Board of Directors may from
time to time determine.
Section 5.4 Removal and Resignation.
----------- ------------------------
Any Officer may be removed, with or without cause, by a majority of the
Directors at any time in office, at any regular or special meeting of the Board,
or, except in case of an Officer chosen by the Board of Directors, by any
Officer upon whom such chosen by the Board of Directors, by any Officer upon
whom such powers of removal may be conferred by the Board of Directors.
Any Officer may resign at any time by giving written notice to the Board of
Directors, or to the Chief Executive Officer, or to the Secretary of the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein. Unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 5.5 Vacancies.
----------- ----------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled by the Board of Directors.
Section 5.6 Chairman of the Board.
----------- ----------------------
The Chairman of the Board, if there shall be such an Officer, shall, if
present, preside at all meetings of the Board of Directors, and shall exercise
and perform such other powers and duties as may be from time to time assigned to
him by the Board of Directors.
Section 5.7 Chief Executive Officer.
----------- ------------------------
Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman of the Board, if there be such an Officer, the Chief
Executive Officer shall be the general manager of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and Officers of the corporation. He shall
preside at all meetings of the shareholders and, in the absence of the Chairman
of the Board, or if there be none, at all meetings of the Board of Directors. He
shall be ex-officio a member of all the standing committees, including the
Executive Committee, if any. He shall have such other powers and duties as may
be prescribed by the Board of Directors.
<PAGE>
Section 5.8 President.
----------- ----------
Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman of the Board, if there be such an Officer, and subject
to the supervision of the Chief Executive Officer, if such Office is held by
another person, the President shall have responsibility for the day-to-day
management of the business and affairs of the corporation. In the absence or
disability of the Chief Executive Officer, if such Office is held by another
person, the President shall perform all duties of the Chief Executive Officer,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President. He shall have such other powers and duties as
may be prescribed by the Board of Directors.
Section 5.9 Vice President.
----------- ---------------
In the absence or disability of the President, the Vice Presidents, in
order of their rank as fixed by the Board of Directors, or if not ranked, the
Vice President designated by the Board of Directors, shall perform all the
duties of the President, and when so acting shall have all the powers of, and be
subject to, all the restrictions upon, the President. The Vice Presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors, these Bylaws, the
Chief Executive Officer, the President or the Chairman of the Board.
Section 5.10 Secretary.
------------ ----------
The Secretary shall keep, or cause to be kept, a book of minutes at the
principal office or such other place as the Board of Directors may order, of all
meetings of Directors and Shareholders, with the time and place of holding,
whether regular or special, and if special, how authorized, the notice thereof
given, the names of those present at Directors' meetings, the number of shares
present of represented at Shareholders' meetings and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the corporation's transfer agent, a share register, or
duplicate share register, showing the names of the Shareholders and their
addresses; the number and classes of shares held by each; the number and date of
certificates issued for the same; and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the Shareholders and of the Board of Directors required by these Bylaws or by
law to be given. He shall keep the seal of the corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors.
Section 5.11 Chief Financial Officer.
------------ ------------------------
This Officer shall keep and maintain, or cause to be kept and maintained in
accordance with generally accepted accounting principles, adequate and correct
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts,
<PAGE>
disbursements, gains, losses, capital, earnings (or surplus) and shares. The
books of account shall at all reasonable times be open to inspection by any
Director.
This Officer shall deposit all monies and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the Board of Directors. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, shall render to the Chief Executive
Officer, the President and Directors, whenever they request it, an account of
all of his transactions and of the financial condition of the corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1 Record Date.
----------- ------------
The Board of Directors may fix, in advance, a time in the future as the
record date for the determination of shareholders entitled to notice of any
meeting or to vote or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any other lawful action. Shareholders on the record date are
entitled to notice and to vote or receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares in the books of the corporation after
the record date, except as otherwise provided by law. Said record date shall
not be more than sixty (60) or less than ten (10) days prior to the date of such
meeting, nor more than sixty (60) days prior to any other action.
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board fixes a new record date for the adjourned meeting, but the
Board shall fix a new record date if the meeting is adjourned for more than
forty-five (45) days from the date set for the original meeting.
If no record date is fixed by the Board of Directors, the record date shall
be fixed pursuant to the California Corporations Code.
Section 6.2 Inspection of Corporate Records.
----------- --------------------------------
The accounting books and records, and minutes of proceedings of the
shareholders and the Board of Directors and committees of the Board shall be
open to inspection upon written demand made upon the corporation by any
shareholder or the holder of a voting trust certificate, at any reasonable time
during usual business hours, for a purpose reasonably related to his interest as
a shareholder, or as the holder of such voting trust certificate. The record of
shareholders shall also be open to inspection by any shareholder or holder of a
voting trust certificate at any time during usual business hours upon written
demand on the corporation, for a purpose reasonably related to such holder's
interest as a shareholder or holder of a voting trust certificate. Such
inspection may be made in person or by an agent or attorney, and shall include
the right to copy and to make extracts.
<PAGE>
Section 6.3 Execution of Corporate Instruments.
----------- -----------------------------------
The Board of Directors may, in its discretion, determine the method and
designate the statutory officer or officers, or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law, and such execution
or signature shall be binding upon the corporation. Unless otherwise
specifically determined by the Board of Directors, formal contracts of the
corporation, promissory notes, mortgages, evidences of indebtedness, conveyances
or other instruments in writing, and any assignment or endorsement thereof,
executed or entered into between the corporation and any person, may be signed
by the Chairman of the Board, the President, any Vice President, the Secretary
or the Treasurer of the corporation.
Section 6.4 Ratification by Shareholders.
----------- -----------------------------
The Board of Directors may, subject to applicable notice requirements, in
its discretion, submit any contract or act for approval or ratification of the
shareholders at any annual meeting of shareholders, or at any special meeting of
shareholders called for that purpose; and any contract or act which shall be
approved or ratified by the affirmative vote of a majority of the shares
entitled to vote represented at a duly held meeting at which a quorum is
present, or by the written consent of shareholders, shall be as valid and
binding upon the corporation and upon the shareholders thereof as though
approved or ratified by each and every shareholder of the corporation, unless a
greater vote is required by law for such purpose.
Section 6.5 Annual Report.
----------- --------------
For so long as the corporation has less than 100 holders of record of its
shares, the mandatory requirement of an annual report is hereby expressly
waived. The Board of Directors may, in its discretion, cause an annual report
to be sent to the shareholders. Such reports shall contain at least a balance
sheet as of the close of such fiscal year and an income statement and statement
of changes in financial position for such fiscal year, and shall be accompanied
by any report thereon of independent accountants, or if there is no such report,
the certificate of an authorized officer of the corporation that such statements
were prepared without audit in the books and records of the corporation.
A shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement and/or a balance sheet of the
corporation for the three-month, six-month or nine-month period of the current
fiscal year ended more than thirty (30) days prior to the date of the request,
and such statement shall be delivered or mailed to the person making the request
within thirty (30) days thereafter. Such statements shall be accompanied by the
report thereon, if any, of any independent accountants engaged by the
corporation or the certificates of an authorized officer of the corporation that
such financial statements were prepared without audit from the books and records
of the corporation.
<PAGE>
Section 6.6 Representation of Shares of Other Corporations.
----------- -----------------------------------------------
The President and Vice President of this corporation are authorized to
vote, represent and exercise on behalf of the corporation all rights incident to
any and all shares of any other corporation or corporations standing in the name
of this corporation. The authority herein granted to said officers to vote or
represent on behalf of this corporation any and all shares held by this
corporation and any other corporation or corporations may be exercised either by
such officers in person or by any person authorized so to do by proxy or power
of attorney and duly executed by said officers.
Section 6.7 Inspection of Bylaws.
----------- ---------------------
The corporation shall keep in its principal executive office in this State
the original or a copy of the Bylaws as amended or otherwise altered to date,
which shall be open to inspection by the shareholders at all reasonable times
during office hours.
ARTICLE VII
SHARES OF STOCK
Section 7.1 Form of Certificates.
----------- ---------------------
Certificates for shares of stock of the corporation shall be in such form
and design as the Board of Directors shall determine and shall be signed in the
name of the corporation by the Chairman of the Board, or the President or Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or any
Assistant Secretary. Each certificate shall state the certificate number, the
date of issuance, the number, class or series and the name of the record holder
of the shares represented thereby, the name of the corporation, and, if the
shares of the corporation are classified or if any class of shares has two or
more series, there shall appear the statement required by the California
Corporations Code.
Section 7.2 Transfer of Shares.
----------- -------------------
Shares of stock may be transferred in any manner permitted or provided by
law. Before any transfer of stock is entered upon the books of the corporation,
or any new certificate issued therefor, the older certificate, properly
endorsed, shall be surrendered and cancelled, except when a certificate has been
lost, stolen or destroyed.
Section 7.3 Lost Certificates.
----------- ------------------
The Board of Directors may order a new certificate for shares of stock to
be issued in the place of any certificate alleged to have been lost, stolen or
destroyed, but in every such case, the owner or the legal representative of the
owner of the lost, stolen or destroyed certificates may be required to give the
corporation a bond (or other adequate security) in such form and amount as the
Board may deem sufficient to indemnify it against any claim that may be made
against the
<PAGE>
corporation (including any expense or liability) on account of the alleged loss,
theft or destruction of any such certificate or issuance of such new
certificate.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 8.1 Indemnification by Corporation.
----------- -------------------------------
Each person who was or is made a party or is threatened to be made a party
to or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative ("Proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a
director or officer of the corporation or is or was serving at the request of
the corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, or was a director, officer, employee or
agent of a corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of such predecessor corporation, whether
the basis of such Proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the fullest extent authorized by the California General
Corporation Law, against all expenses, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that, except as provided in Section 8.2 of this Article VIII, the corporation
shall indemnify any such person seeking indemnity in connection with a
Proceeding (or part thereof) initiated by such person only if such Proceeding
(or part thereof) was authorized by the board of directors of the corporation.
The right to indemnification conferred by this Section shall include the right
to be paid by the corporation expenses incurred in defending any such Proceeding
in advance of its final disposition to the fullest extent authorized by the
California General Corporation Law; provided, however, that, if required by the
California General Corporation Law, the payment of such expenses incurred by
such person in advance of the final disposition of such Proceeding shall be made
only upon delivery to the corporation of an undertaking, by or on behalf of such
person, to repay all amounts so advanced if it should be determined ultimately
that such person is not entitled to be indemnified under this Section or
otherwise.
Section 8.2 Right of Claimant to Bring Suit.
----------- --------------------------------
If a claim under Section 8.1 of this Article VIII is not paid in full by
the corporation within ninety (90) days after a written claim has been received
by the corporation, the claimant may at any time thereafter bring suit against
the corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action
<PAGE>
brought to enforce a claim for expenses incurred in defending any Proceeding in
advance of its final disposition where the required undertaking, if any, has
been tendered to the corporation) that the claimant has not met the standards of
conduct which make it permissible under the California General Corporation Law
for the corporation to indemnify the claimant for the amount claimed. Neither
the failure of the corporation (including its board of directors, independent
legal counsel, or it shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the California General Corporation Law, nor an actual determination
by the corporation (including its board of directors, independent legal counsel,
or its shareholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
Section 8.3 Indemnification of Employees and Agents of the
----------- ----------------------------------------------
Corporation.
------------
The corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and to the advancement of
expenses to any employee or agent of the corporation to the fullest extent of
the provisions of this Article with respect to the indemnification of and
advancement of expenses to directors and officers of the corporation.
Section 8.4 Rights Not Exclusive.
----------- ---------------------
The rights conferred on any person by this Article VIII above shall not be
exclusive of any other right which such person may have or hereafter acquire
under any statute, provision of the Articles of Incorporation, Bylaw, agreement,
vote of shareholders or disinterested directors or otherwise.
Section 8.5 Indemnity Agreements.
----------- ---------------------
The Board of Directors is authorized to enter into a contract with any
Director, officer, employee or agent of the corporation, or any person who is or
was serving at the request of the corporation as a Director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, or any person who was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation, providing for indemnification rights equivalent to or, if the Board
of Directors so determines, greater than, those provided for in this Article
VIII.
Section 8.6 Insurance.
----------- ----------
The corporation may purchase and maintain insurance, at its expense, to
protect itself and any Director, officer, employee or agent of the corporation
or another corporation (including a predecessor corporation), partnership, joint
venture, trust or other enterprise against any such expense, liability or loss,
whether or not the corporation would have the power to indemnify such person
against such expense, liability or loss under the California Corporations Code.
<PAGE>
Section 8.7 Amendment, Repeal or Modification.
----------- ----------------------------------
Any amendment, repeal or modification of any provision of this Article VIII
by the shareholders or the Directors of the corporation shall not adversely
affect any right or protection of a Director or officer of the corporation
existing at the time of such amendment, repeal or modification."
ARTICLE IX
AMENDMENTS
----------
Section 9.1 Power of Shareholders.
----------- ----------------------
New Bylaws may be adopted or these Bylaws may be amended or repealed by the
affirmative vote of a majority of the outstanding shares entitled to vote or by
the written consent thereof, except as otherwise provided by law or by the
Articles of Incorporation.
Section 9.2 Power of Directors.
----------- -------------------
Subject to the right of shareholders as provided in Section 9.1 of these
Bylaws, Bylaws other than a Bylaw or amendment thereof specifying or changing
the authorized number of Directors, or the minimum or maximum number of a
variable Board of Directors, or changing from a fixed to a variable Board of
Directors or vice versa, may be adopted, amended or repealed by the approval of
the Board of Directors.
<PAGE>
EXHIBIT 4.1
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
This THIRD AMENDED AND RESTATED RIGHTS AGREEMENT (this "Agreement") is
entered into as of April 14, 1999 by and among Salon Internet, Inc., a
California corporation (the "Company"), and the holders of the Company's
securities listed on Exhibit A hereto as Series A Holders, Series B Holders,
---------
Prior Series C Holders, New Series C Holders and Common Holders. The Prior
Series C Holders and New Series C Holders are sometimes referred to herein
collectively as the "Series C Holders." The Company, the Series A Holders,
Series B Holders, Prior Series C Holders, New Series C Holders and Common
Holders are sometimes referred to herein collectively as the "Parties" or each
individually as a "Party."
RECITALS
--------
WHEREAS, the New Series C Holders, Series B Holders, Prior Series C Holders
and the Common Holders possess registration and other rights under that certain
Second Amended and Restated Rights Agreement dated September 18, 1998 (the
"Prior Rights Agreement");
WHEREAS, the New Series C Holders are parties to the Series C Preferred
Stock Purchase Agreement of even date herewith (the "Series C Agreement"),
pursuant to which the New Series C Holders are purchasing shares of the
Company's Series C Preferred Stock; and
WHEREAS, in order to induce the Company to enter into the Series C
Agreement and to induce the Series C Holders to invest funds in the Company
pursuant to the Series C Agreement, the parties hereto desire to enter into this
Agreement to amend, restate and supersede the Prior Rights Agreement and to
extend registration and other rights to the New Series C Holders.
AGREEMENT
---------
In consideration of the foregoing and of the mutual promises and covenants
contained herein, the Parties agree as follows:
1. Registration Rights.
-------------------
1.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
(a) "Commission" shall mean the Securities and Exchange
----------
Commission or any other federal agency at the time administering the Securities
Act.
(b) "Conversion Stock" means the Common Stock issued or issuable
----------------
upon conversion of the Warrant Stock, Series A Shares, Series B Shares and
Series C Shares.
(c) "Holder" means any person or persons to whom Registrable
------
Securities were originally issued or permitted transferees under Section 1.11
hereof who hold Registrable Securities.
<PAGE>
(d) "Initiating Holders" shall mean any Holder or Holders of at
------------------
least forty percent (40%) of the Registrable Securities (excluding Registrable
Securities owned by the Common Holders).
(e) "Preferred Holders" means the holders of Series A Shares,
-----------------
Series B Shares and Series C Shares.
(f) "Registrable Securities" means (i) the Conversion Stock and
----------------------
(ii) stock issued in respect of the stock referred to in (i) as a result of a
stock split, stock dividend, recapitalization or the like, which have not been
sold to the public. Except for subsections 1.2, 1.4, 1.5, 1.10 and 5.4 of this
Agreement, Registrable Securities shall also mean shares of Common Stock owned
by the Common Holders. Notwithstanding anything herein to the contrary,
securities held by a Holder shall not be Registrable Securities in the event,
following the initial public offering of the Company's securities, such Holder
would be able to sell all shares of the Company it holds on an unrestricted
basis and without volume limitation pursuant to Rule 144 promulgated under the
Securities Act (or any successor rule).
(g) The terms "register," "registered" and "registration" refer
-------- ---------- ------------
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(h) "Registration Expenses" shall mean all expenses, except as
---------------------
otherwise stated below, incurred by the Company in complying with Sections 1.2,
1.3 and 1.4 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company) and including the reasonable fees and costs
of one special counsel for the Holders whose shares are being registered.
(i) "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
(j) "Selling Expenses" shall mean all underwriting discounts,
----------------
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and all reasonable fees and disbursements of counsel
for the selling Holders (other than those included in Registration Expenses).
(k) "Series A Shares" means the shares of the Company's Series A
---------------
Preferred Stock.
(l) "Series B Shares" means the shares of the Company's Series B
---------------
Preferred Stock.
(m) "Series C Shares" means the shares of the Company's Series C
---------------
Preferred Stock.
2
<PAGE>
(n) "Warrant Stock" means the shares of the Company's capital
-------------
stock issuable upon exercise of outstanding warrants issued to Imperial Bank,
America Online, ACT III Communications, Daiwa Securities America, Inc. and the
Prior Series C Holders.
1.2 Requested Registration.
----------------------
(a) Request for Registration. If the Company receives from
------------------------
Initiating Holders a written request that the Company effect a registration
covering either (i) not less than 25% of the Registrable Securities, or (ii)
Registrable Securities having an anticipated aggregate offering price of at
least $5,000,000, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to take any
-------- -------
action to effect any such registration, qualification or compliance pursuant to
this Section 1.2(a):
(A) Before the earlier of December 22, 2000, or 180
days after the closing of its initial public offering of its Common Stock;
(B) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(C) After the Company has effected two such
registrations pursuant to this Section 1.2(a), and such registrations have been
declared or ordered effective;
(D) If the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.2 shall be deferred for a period not to
exceed ninety days from the date of receipt of written request from the
Initiating Holders, provided that the Company may not use this right more than
once in any twelve month period; and
3
<PAGE>
(E) Within 180 days after the effective date of any
registration of the Company under the Securities Act, other than a registration
relating solely to employee benefit plans or a registration relating solely to a
transaction under Rule 145 under the Securities Act.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Request for Registration (Series C). If the Company receives
-----------------------------------
from Series C Holders representing not less than 20% of the then outstanding
Series C Shares (the "Initiating Series C Holders"), a written request that the
Company effect a registration in which the Registrable Securities shall have an
anticipated offering price of at least $1,500,000, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within 20 days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to take any
-------- -------
action to effect any such registration, qualification or compliance pursuant to
this Section 1.2(b):
(A) Before 180 days after the closing of its initial
public offering of its Common Stock;
(B) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(C) After the Company has effected two such
registrations pursuant to this Section 1.2(b), and such registrations have been
declared or ordered effective;
(D) If the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best
4
<PAGE>
efforts to register, qualify or comply under this Section 1.2 shall be deferred
for a period not to exceed ninety days from the date of receipt of written
request from the Initiating Holders, provided that the Company may not use this
right more than once in any twelve month period; and
(E) Within 180 days after the effective date of any
registration of the Company under the Securities Act, other than a registration
relating solely to employee benefit plans or a registration relating solely to a
transaction under Rule 145 under the Securities Act.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Series C Holders.
(c) Underwriting. In the event that a registration pursuant to
------------
Section 1.2 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.2(a)(i) or 1.2(b)(i). In such event, the right of any Holder to
participate in such registration shall be conditioned upon such Holder's
participation in the underwriting arrangements required by this Section 1.2, and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent requested shall be limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders or Initiating Series C Holders,
as applicable, but subject to the Company's reasonable approval.
Notwithstanding any other provision of this Section 1.2, if the managing
underwriter advises the Initiating Holders or Initiating Series C Holders, as
applicable, in writing that, in its good faith judgment, marketing factors
require a limitation of the number of shares to be underwritten, then the
Company shall so advise all participating Holders and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all Holders thereof in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. If the underwriter
has not limited the number of Registrable Securities to be underwritten, the
Company may include securities for its own account (or for the account of other
shareholders) in such registration if the underwriter so agrees and if the
number of Registrable Securities that would otherwise have been included in such
registration and underwriting will not thereby be limited.
If the number of Registrable Securities excluded from the underwriting
exceeds fifty percent (50%) of the total Registrable Securities requested to be
included in such underwriting by the Holders, then Holders of a majority of the
Registrable Securities requested to be included in such underwriting may elect
to terminate the registration and underwriting and such terminated registration
shall not count as a registration effected under this Section 1.2.
5
<PAGE>
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders or Initiating
Series C Holders, as applicable.
1.3 Company Registration.
--------------------
(a) Notice of Registration. If, at any time prior to the
----------------------
fifth anniversary of the closing date of the Company's initial public offering
of its Common Stock in a firm commitment underwritten public offering pursuant
to a registration statement under the Securities Act, the Company shall
determine to register any of its securities, either for its own account or the
account of a security holder or holders, other than (i) a registration relating
solely to employee benefit plans, (ii) a registration relating solely to a
transaction under Rule 145 under the Securities Act, or (iii) a registration
effected pursuant to Sections 1.2 or 1.4 hereof, the Company will:
(i) promptly give to each Holder written notice
thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 20 days after receipt of such written notice from the
Company, by any Holder.
(b) Underwriting. If the registration of which the Company
------------
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.3(a)(i). In such event the right of any Holder to
registration pursuant to Section 1.3 shall be conditioned upon such Holder's
participation in such underwriting to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other Holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company, but subject to the reasonable approval of Holders holding a majority of
the Registrable Securities to be included in such registration. Notwithstanding
any other provision of this Section 1.3, if the managing underwriter determines
in its good faith judgment that marketing factors require limitation of the
number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such registration. The Company shall so
advise all Holders and the number of shares of securities that may be included
in the registration and underwriting (other than in behalf of the Company) shall
first be allocated on a pro rata basis among all Preferred Holders and then, if
additional Registrable Securities may be included, among all other Holders, in
each case in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities held by such Holders; provided, however, unless otherwise
-------- -------
agreed upon by the holders of a majority of the shares desiring to participate
in the offering, in no event shall the amount of Registrable Securities of the
Preferred Holders included in the offering be reduced below twenty percent (20%)
of the total amount of securities included in such offering, unless such
offering is the initial public offering of the Company's securities in which
case the Preferred Holders may be excluded in part or entirely as long as the
underwriters make the determination described above and no securities of the
Company held by parties other
6
<PAGE>
than the Preferred Holders or the Company are included in such registration. No
securities of the Company held by parties other than the Holders or the Company
shall be included in any registration and underwriting to which this section
applies if the number of Registrable Securities that would otherwise have been
included in such registration and underwriting will thereby be limited. If any
Holder disapproves of the terms of any such underwriting, he may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter.
1.4 Registration on Form S-3.
------------------------
(a) If any Holder or Holders holding in the aggregate not
less than ten percent of the then outstanding Registrable Securities, or if any
Series C Holder or Holders holding in the aggregate not less than ten percent of
the then outstanding Series C Shares which are Registrable Securities, request
that the Company file a registration statement on Form S-3 (or any successor
form to Form S-3) for a public offering of shares of the Registrable Securities
the reasonably anticipated aggregate price to the public of which would exceed
$500,000, and the Company is a registrant entitled to use Form S-3 to register
the Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form and to cause such Registrable Securities to be qualified in such
jurisdictions as the Holder or Holders may reasonably request; provided,
however, that the Company shall not be required to effect more than one
registration pursuant to this Section 1.4(a) in any six month period. The
substantive provisions of Section 1.2(c) shall be applicable to each
registration initiated under this Section 1.4(a).
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to Section 1.4(a):
(i) in any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(ii) within 180 days after the effective date of any
registration of the Company under the Securities Act, other than a registration
relating solely to employee benefit plans or a registration relating solely to a
transaction under Rule 145 under the Securities Act; or
(iii) if the Company shall furnish to such Holder a
certificate signed by the President of the Company stating that in good faith
judgment of the Board of Directors it would be seriously detrimental to the
Company or its shareholders for registration statements to be filed in the near
future, then the Company's obligation to use its best efforts to
7
<PAGE>
file a registration statement shall be deferred for a period not to exceed
ninety days from the receipt of the request to file such registration by such
Holder, provided that the Company may not use this right more than once in any
twelve month period.
1.5 Limitations on Subsequent Registration Rights. From and
---------------------------------------------
after the date hereof, without the approval of the holders of a majority of each
series of Preferred Stock the Registrable Securities, the Company shall not
enter into any agreement granting any holder or prospective holder of any
securities of the Company registration rights with respect to such securities
unless such new registration rights, including standoff obligations, are
subordinate to the registration rights granted to Preferred Holders hereunder.
1.6 Expenses of Registration. All Registration Expenses shall
------------------------
be borne by the Company. All Selling Expenses relating to securities registered
on behalf of the Holders shall be borne by the Holders of such securities pro
rata on the basis of the number of shares so registered.
1.7 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration and such amendment thereof and as to the completion thereof.
At its expense the Company will:
(a) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
twenty days or until the distribution described in the Registration Statement
has been completed;
(b) Furnish to the Holders participating in such
registration and to the underwriters of the securities being registered such
reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such Holders or
underwriters may reasonably request in order to facilitate the public offering
of such securities.
(c) Prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the
<PAGE>
managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
1.8 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its
officers and directors and partners, and each person controlling such within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of the
Securities Act or any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder,
each of its officers and directors, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable to any such person
9
<PAGE>
in any such case to the extent that any such claim, loss, damage, liability
or expense arises out of or is based on any untrue statement or omission
(or alleged untrue statement or omission), made in reliance upon and in
conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter
and stated to be specifically for use therein or the preparation thereby.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each
of its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15
of the Securities Act, and each other such Holder, each of its officers and
directors and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of any untrue
statement (or alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such Holders, such
directors, officers, persons, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission)
is made in such registration statement, prospectus, offering circular or
other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein or the preparation thereby.
Notwithstanding the foregoing, the liability of each Holder under this
subsection (b) shall be limited to an amount equal to the aggregate
proceeds received by such Holder from the sale of Registrable Securities in
such registration.
(c) Each party entitled to indemnification under this Section 1.8
(the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Section 1 unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action and provided
further, that the Indemnifying Party shall not assume the defense for
matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. Notwithstanding the foregoing, if (i)
the Company
10
<PAGE>
and the Indemnified Party have mutually agreed in writing to the retention
of such counsel or (ii) the named parties in any such action, suit or
proceeding (including impleaded parties) include the Company and the
Indemnified Party, and representation of the Company and the Indemnified
Party by the same counsel would, in the opinion of counsel to the
Indemnified Party, create a conflict; provided further that, unless
otherwise agreed by the Company, if the Company is obligated to pay the
fees and expenses of such counsel, the Company shall be obligated to pay
only the fees and expenses associated with one attorney or law firm, as
applicable, for the Indemnified Party, as well as the fees and expenses
associated with local counsel.
1.9 Information by Holder. The Holders of securities included in any
---------------------
registration shall furnish to the Company such information regarding such
Holders, the Registrable Securities held by them and the distribution
proposed by such Holders as the Company may reasonably request in writing
and as shall be required in connection with any registration, qualification
or compliance referred to in this Section 1.
1.10 Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time
permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common
Stock of the Company, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date that the Company becomes subject to the
reporting requirements of the Securities Act or the Securities Exchange Act
of 1934 (the "Exchange Act").
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements);
(c) So long as a Holder owns any Registrable Securities to
furnish to the Holder forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule
144 (at any time after ninety days after the effective date of the first
registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the Company as
a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration. The Company will take action reasonably requested by
a Holder to facilitate the transfer of Registrable Securities pursuant to
Rule 144 of the Securities Act of 1933.
1.11 Transfer of Registration Rights. The rights to cause the Company
-------------------------------
to register securities granted to the Holders under this Agreement may be
assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by a Holder provided that: (i) such
assignment or transfer may otherwise be effected in accordance with
11
<PAGE>
applicable securities laws, (ii) such assignee or transferee agrees to be
bound by the terms and conditions of this Agreement, and (iii) either (A)
such assignee or transferee acquires at least 100,000 shares of Registrable
Securities (appropriately adjusted for stock splits, combinations,
dividends, distributions and recapitalizations) not sold to the public, or
(B) such assignee or transferee is a partner or limited partner,
shareholder, subsidiary, affiliate, family member, family trust or the
estate of the Holder.
1.12 Standoff Agreement. Each Holder hereby agrees that in connection
------------------
with the Company's initial public offering of the Company's securities
that, upon request of the underwriters managing any underwritten offering
of the Company's securities, Holder shall not sell, make any short sale of,
grant any option for the purchase of, or otherwise dispose of any
securities of the Company (other than those included in the registration)
without the prior written consent of such underwriters for such period of
time (not to exceed one hundred eighty days) from the effective date of
such registration as may be requested by the underwriters; provided, that
the officers, directors of the Company who own stock of the Company and any
shareholder holding more than two percent of the outstanding voting
securities of the Company shall also have agreed to such restrictions.
2. Right of First Refusal Upon Issuance of Securities by the Company.
-----------------------------------------------------------------
2.1 The Company hereby grants to each Series A Holder, each Series B
Holder and each Series C Holder (the "Rights Holders") the right of first
refusal to purchase, pro rata, in order to maintain the Rights Holder's
percentage ownership interest in the Company, all or any part of New
Securities (as defined in Section 2.3 below) which the Company may, from
time to time, propose to sell and issue. A pro rata share, for purposes of
this right of first refusal, is the ratio that the number of shares of
Common Stock issued or issuable to each Rights Holder bears to the sum of
the total number of shares of Common Stock then outstanding (assuming
conversion of all preferred stock of the Company into Common Stock).
2.2 "Equity Securities" shall mean any securities having voting
rights in the election of the Board of Directors not contingent upon
default, or any securities evidencing an ownership interest in the Company,
or any securities convertible into or exercisable for any shares of the
foregoing, or any securities issuable pursuant to any agreement or
commitment to issue any of the foregoing.
2.3 Except as set forth below, "New Securities" shall mean any Equity
Securities, whether now authorized or not, and rights, options or warrants
to purchase said Equity Securities. Notwithstanding the foregoing, "New
Securities" does not include (i) Common Stock issued to employees,
officers, consultants or directors of the Company; (ii) securities offered
to the public generally pursuant to a registration statement effective
under the Securities Act; (iii) securities issued pursuant to the
acquisition of another corporation by the Company by merger, purchase of
substantially all of the assets or other reorganization whereby the Company
or its shareholders own not less than fifty-one (51%) percent of the voting
power of the surviving or successor corporation; (iv) the Conversion Stock;
(v) stock issued in connection with any stock split, stock dividend or
recapitalization or the like by the Company; (vi) the Warrant Stock;
12
<PAGE>
or (vii) with respect to a particular series of Preferred Stock of the Company,
stock issued in a transaction as to which holders of two-thirds of such series
shall have waived the right of first refusal.
2.4 In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Rights Holder written notice of its intention,
describing the type of New Securities, and the price and terms upon which the
Company proposes to issue the same. Each Rights Holder shall have 15 business
days from the date of receipt of any such notice to agree to purchase up to its
respective pro rata share of such New Securities for the price and upon the
applicable terms specified in the notice by giving written notice to the Company
and stating therein the quantity of New Securities to be purchased.
2.5 In the event a Rights Holder fails to exercise the right of first
refusal within said 15 day period, the Company shall have 90 days thereafter to
sell or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within 60 days from the date of said
agreement) to sell the New Securities not elected to be purchased by Rights
Holders at the price and upon the terms no more favorable to the purchasers of
such securities than specified in the Company's notice. In the event the Company
has not sold the New Securities within said 90 day period (or sold and issued
New Securities in accordance with the foregoing within 60 days from the date of
said agreement) or the terms of such purchase change such that such sale no
longer complies with the first sentence of this Section 2.5, the Company shall
not thereafter issue or sell any New Securities, without first offering such
securities in the manner provided above.
2.6 The right of first refusal granted under this Agreement shall
expire on the effective date of the Company's initial public offering pursuant
to an effective registration statement under the Securities Act.
2.7 The right of first refusal hereunder may be assigned to a
transferee or assignee in connection with any transfer or assignment of Equity
Securities by a Rights Holder provided that: (i) such assignment or transfer may
otherwise be effected in accordance with applicable securities laws, (ii) such
assignee or transferee agrees to be bound by the terms and conditions of this
Agreement, and (iii) either (A) such assignee or transferee acquires at least
100,000 shares of Registrable Securities (appropriately adjusted for stock
splits, combinations, dividends, distributions and recapitalizations) not sold
to the public, or (B) such assignee or transferee is a partner or limited
partner, shareholder, subsidiary, affiliate, family member, family trust or the
estate of the Rights Holder.
3. Right of First Refusal Upon Proposed Transfer by Common Holders.
---------------------------------------------------------------
Before any equity securities of the Company registered in the name of a Common
Holder (who is a Common Holder on the date hereof or their permitted transferees
or designees) may be sold or transferred (including transfer by operation of
law) other than to a partner, shareholder, subsidiary, affiliate, family member,
family trust or the estate of the Common Holder (provided that such permitted
transferees shall agree, as a condition of the transfer, to be bound by the
provisions of this
13
<PAGE>
Section 3), such shares shall first be offered to the Company and then to the
Common Holders and then to the Preferred Holders in the following manner:
3.1 Notice. The Common Holder intending to sell securities of the
------
Company ("Selling Party") shall first deliver a written notice ("Common Notice")
to the Company, the Preferred Holders and the other Common Holders stating (i)
the Selling Party desires to sell or transfer such equity securities, (ii) the
number of equity securities proposed to be sold or transferred, and (iii) the
price and other terms of the proposed sale or transfer.
3.2 Company Right. Within ten days after receipt of the Common
-------------
Notice, the Company may elect to purchase all (but not less than all) of the
equity securities to which the Common Notice refers, on the same terms and
conditions specified in the Common Notice, by delivering to the Selling Party a
written notice of such election.
3.3 Common Holder Right. In the event the Company does not elect to
-------------------
purchase the equity securities to which the Common Notice refers within the ten
day period, then the Company shall notify each Common Holder (other than the
Selling Party) of this fact within 15 days after receipt of the Common Notice.
Each such Common Holder may elect within 25 days after receipt of the Common
Notice to purchase its pro rata share (but not less than its pro rata share) of
such equity securities, on the same terms and conditions specified in the Common
Notice, by delivering to the Company written notice of such election. Each
Common Holder's pro rata share of these equity securities shall be a fraction
calculated by dividing (i) the number of shares of Common Stock issued and
issuable upon exercise, conversion or exchange of all outstanding equity
securities held by the Common Holder as of the date of delivery of the Common
Notice by (ii) the total number of shares of Common Stock issued and issuable
upon exercise, conversion or exchange of all outstanding equity securities held
by the Common Holders (other than the Selling Party) as of that date.
3.4 Over-allotment. If, within 25 days after receipt of the Common
--------------
Notice, a Common Holder does not notify the Company that it desires to purchase
its pro-rata share (or any part thereof) of the equity securities, those Common
Holders who have elected to purchase equity securities during the 25 day period
(the "First Over-allotment Purchasers") may elect to purchase those equity
securities not so purchased. The Company shall provide written notice to the
First Over-allotment Purchasers not later than 30 days after receipt of the
Common Notice of the number of shares of equity securities of the Selling Party
available for purchase pursuant to this over-allotment right. Each of these
First Over-allotment Purchasers shall have until 40 days after receipt of the
Common Notice to notify the Company in writing that it elects to purchase at
least its pro rata share (but not less than its pro rata share) of the equity
securities so offered. Each First Over-allotment Purchaser's pro rata share of
the equity securities shall be a fraction calculated by dividing (i) the number
of shares of Common Stock issued and issuable upon exercise, conversion or
exchange of all outstanding equity securities of the Company held by the First
Over-allotment Purchaser as of the date of the Common Notice by (ii) the total
number of shares of Common Stock issued and issuable upon exercise, conversion
or exchange of all outstanding equity securities of the Company held by all
First Over-allotment Purchasers as of the date of the Common Notice.
14
<PAGE>
3.5 Preferred Holder Right. In the event the Common Holders do not
----------------------
elect to purchase all of the equity securities to which the Common Notice refers
within the 40 day period, then the Company shall notify each Preferred Holder of
this fact within 45 days after receipt of the Common Notice. Each such Preferred
Holder may elect within 55 days after receipt of the Common Notice to purchase
its pro rata share (but not less than its pro rata share) of such equity
securities, on the same terms and conditions specified in the Common Notice, by
delivering to the Company written notice of such election. Each Preferred
Holder's pro rata share of these equity securities shall be a fraction
calculated by dividing (i) the number of shares of Common Stock issued and
issuable upon exercise, conversion or exchange of all outstanding equity
securities held by the Preferred Holder as of the date of delivery of the Common
Notice by (ii) the total number of shares of Common Stock issued and issuable
upon exercise, conversion or exchange of all outstanding equity securities held
by the Preferred Holders as of that date.
3.6 Over-allotment. If, within 55 days after receipt of the Common
--------------
Notice, a Preferred Holder does not notify the Company that it desires to
purchase its pro-rata share (or any part thereof) of the equity securities,
those Preferred Holders who have elected to purchase equity securities during
the 55 day period (the "Second Over-allotment Purchasers") may elect to purchase
those equity securities not so purchased. The Company shall provide written
notice to the Second Over-allotment Purchasers not later than 60 days after
receipt of the Common Notice of the number of shares of equity securities of the
Selling Party available for purchase pursuant to this over-allotment right. Each
of these Second Over-allotment Purchasers shall have until 70 days after receipt
of the Common Notice to notify the Company in writing that it elects to purchase
at least its pro rata share (but not less than its pro rata share) of the equity
securities so offered. Each Second Over-allotment Purchaser's pro rata share of
the equity securities shall be a fraction calculated by dividing (i) the number
of shares of Common Stock issued and issuable upon exercise, conversion or
exchange of all outstanding equity securities of the Company held by the Second
Over-allotment Purchaser as of the date of the Common Notice by (ii) the total
number of shares of Common Stock issued and issuable upon exercise, conversion
or exchange of all outstanding equity securities of the Company held by all
Second Over-allotment Purchasers as of the date of the Common Notice.
3.7 Company Purchase. In the event the Company elects to acquire all
----------------
of the equity securities pursuant to Section 4, the Company and the Selling
Party shall complete the sale and purchase of such equity securities shares
within 30 days after the Company receives the Common Notice.
3.8 Preferred Holder and Common Holder Purchases. In the event the
--------------------------------------------
Common Holders elect to acquire all of the equity securities offered pursuant to
Section 4, the Common Holders and the Selling Party shall complete the sale and
purchase of such equity securities within 60 days after the Company receives the
Common Notice. In the event the Preferred Holders elect to acquire all of the
equity securities offered pursuant to Section 4, the Preferred Holders and the
Selling Party shall complete the sale and purchase of such equity securities
within 90 days after the Company receives the Common Notice.
15
<PAGE>
3.9 Selling Party Right. If all of the equity securities to which the
-------------------
Common Notice refers are not elected to be purchased by the Company or the
Preferred Holders and the Common Holders, the Selling Party may sell all such
shares at the price and on the terms specified in the Common Notice, provided
that (i) such sale or transfer is consummated within one hundred twenty days of
the date of the Common Notice, and (ii) that prior to the transfer, the
transferee of such equity securities agrees in writing (in a form satisfactory
to the Company) that such transferee shall receive and hold such securities
subject to the provisions of this Section 4.
3.10 Termination. The rights and obligations of the Company, the
-----------
Preferred Holders and the Common Holders under this Section 3 shall terminate
upon the earlier to occur of (and shall not apply to transfers upon) (i) the
closing of the Company's first underwritten public offering registered under the
Securities Act, or (ii) shareholder approval of any merger or consolidation of
the Company with any other corporation in which more than 50% of the voting
control of the Company is transferred to a party or parties not affiliated with
the Company or any shareholder of the Company, provided that, if such merger or
consolidation is not consummated, the rights and obligations of this Section 3
shall be deemed restored and reinstated to full force and effect.
4. Amendment of Rights of Series A Holders, Series B Holders and Prior
-------------------------------------------------------------------
Series C Holders Under Prior Rights Agreement; Waiver of Rights of First
- ------------------------------------------------------------------------
Refusal.
- -------
4.1 Termination of Prior Rights Agreement. Pursuant to Section 6.4 of
-------------------------------------
the Prior Rights Agreement, the Company and the undersigned Series A Holders,
Series B Holders and Prior Series C Holders, who are the holders of at least
two-thirds of the Series A Shares, the Series B Shares and Series C Shares
outstanding immediately prior to the date of this Agreement, on behalf of
themselves and all other Series A Holders, Series B Holders and Prior Series C
Holders, agree that all rights and obligations under the Prior Rights Agreement
shall be amended and restated as set forth in this Agreement and that the Prior
Rights Agreement shall be of no further force and effect.
4.2 Waiver of Right of First Refusal. The undersigned Series A
--------------------------------
Holders, Series B Holders and Prior Series C Holders, who are the holders of at
least two-thirds of the Registrable Securities (as defined in the Prior Rights
Agreement), hereby waive the rights of holders of the Series A Shares, the
Series B Shares and Series C Shares outstanding immediately prior to the date of
this Agreement to acquire, pursuant to the Prior Rights Agreement and this
Agreement, the Series C Shares that are the subject of the Series C Agreement.
5. Observation Rights.
------------------
5.1 Attendance at Board Meetings. The Company shall permit a
----------------------------
representative of Wasserstein Adelson Ventures, L.P. and a representative of MD
Co. (each of Wasserstein Adelson Ventures, L.P. and MD Co. an "Observer") to
attend all meetings of its Board of Directors in a nonvoting observer capacity
and to participate in discussions and, in this respect, shall give such
representative timely copies of all notices, minutes, consents, and other
material that it provides to its directors.
16
<PAGE>
5.2 Confidentiality. Observer agrees, and will cause any
---------------
representative of Observer to agree, to hold in confidence and trust and not use
or disclose any confidential information provided to or learned by it in
connection with its rights under this Agreement. Observer further agrees such
representative of Observer may be excluded from access to any material or
meeting or portion thereof if the Company believes (based on a good faith vote
of the Company's Board of Directors) that such exclusion is reasonably necessary
to preserve the attorney-client privilege or other similar reasons.
5.3 Termination. The rights described in this Section 5 shall
-----------
terminate and be of no further force or effect upon the earlier of (i) the
consumatoin sale of the Company's securities pursuant to a registration
statement filed by the Company under the Securities Act in connection with the
firm commitment underwritten offering of its securities to the public, (ii)
consummation of a merger or reorganization of the Company that is made for
independent business reasons unrelated to extinguishing the rights granted
hereunder or (iii) Observer holds fewer than 100,000 Series C Shares or shares
of Common Stock issued or issuable upon conversion of such Series C Shares (as
adjusted for stock dividends, stock splits, reorganizations and the like). The
confidentiality provisions hereof will survive any such termination.
6. Miscellaneous.
-------------
6.1 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as applied to transactions taking place
between California residents and wholly within the State of California
6.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any Preferred
Holder and the closing of the transactions contemplated hereby.
6.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
6.4 Entire Agreement; Amendment. This Agreement constitutes the full
---------------------------
and entire understanding and agreement between the parties with regard to the
subjects hereof, and no party shall be liable or bound to any other party in any
manner by any warranties, representations or covenants except as specifically
set forth herein. With the written consent of the Company and beneficial Holders
of at least two-thirds of the then outstanding Registrable Securities, the
obligations of the Company and the rights of the Holders of the Registrable
Securities under this Agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively, and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that no such modification, amendment or waiver shall reduce
- -------- -------
the aforesaid percentage of Registrable Securities without the consent of all of
the Holders of the Registrable Securities, and provided,
--------
17
<PAGE>
however, that no modification, amendment or waiver of the rights of the Holders
- -------
of Series C Shares under Sections 1 and 2 of this Agreement shall be effective
without the consent of the Holders of at least two-thirds of the then
outstanding Series C Shares. Upon the effectuation of each such waiver, consent,
agreement of amendment or modification, the Company shall promptly give written
notice thereof to the record holders of the Registrable Securities who have not
previously consented thereto in writing. This Agreement or any provision hereof
may be changed, waived, discharged of terminated only by a statement in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought, except to the extent provided in this Section 6.4
6.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally,
mailed by certified or registered mail, postage prepaid, return receipt
requested, or by courier, addressed (a) if to any Preferred Holder or Holder, at
such Holder's address as set forth in the Company's records, or at such other
address as such Holder shall have furnished to the Company in writing, or (b) if
to the Company, at 706 Mission Street, 2nd Floor, San Francisco, CA 94103, or at
such other address as the Company shall have furnished to such Holders in
writing. Notices that are mailed shall be deemed to have been given five days
after deposit in the United States mail and notices delivered personally or by
courier shall be deemed to have been given upon delivery to recipient's address.
6.6 Delays or Omissions. Except as expressly provided herein, no
-------------------
delay or omission to exercise any right, power or remedy accruing to any Holder,
upon any breach or default of the Company under this Agreement, shall impair any
such right, power or remedy of such Holder nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of or in
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 any Holder of any breach or default under
this Agreement, or any waiver on the part of any Holder of any provisions or
conditions of this agreement, must be 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 any Holder, shall be
cumulative and not alternative.
6.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.8 Severability. If any provision of this Agreement, or the
------------
application thereof, shall for any reason and to any extent be invalid or
unenforceable the remainder of this Agreement and application of such provision
to persons or circumstances shall be interpreted so as best to reasonably effect
the intent of the parties hereto, the parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision which will achieve to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Third Amended and
Restated Rights Agreement as of the date first written above.
COMPANY:
SALON INTERNET, INC.
By:/s/ Michael O'Donnell
--------------------------------
Michael O'Donnell, President
19
<PAGE>
COUNTERPART SIGNATURE PAGE TO
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
SERIES A HOLDERS
ADOBE VENTURES, L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
----------------------------------
Standish O'Grady
H&Q SALON INVESTORS, L.P.
By: /s/ Authorized Signatory
----------------------------------
Title: Title
-------------------------------
<PAGE>
COUNTERPART SIGNATURE PAGE TO
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
SERIES B HOLDERS
ADOBE VENTURES, L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
----------------------------------
Standish O'Grady
H&Q SALON INVESTORS, L.P.
By: /s/ Authorized Signatory
----------------------------------
Title: Title
-------------------------------
ASCII VENTURES, L.P.
By: /s/ Authorized Signatory
----------------------------------
Title: Title
-------------------------------
BORDERS GROUP, INC.
By: /s/ Authorized Signatory
----------------------------------
Title: Title
-------------------------------
<PAGE>
COUNTERPART SIGNATURE PAGE TO
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
PRIOR SERIES C HOLDERS
ADOBE VENTURES, L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
----------------------------------
Standish O'Grady
H&Q SALON INVESTORS, L.P.
By: /s/ Authorized Signatory
----------------------------------
Title: Title
-------------------------------
ASCII VENTURES, L.P.
By: /s/ Authorized Signatory
----------------------------------
Title: Title
-------------------------------
/s/ Bruce Katz
--------------------------------------
Bruce Katz
WHOLE EARTH LECTRONIC LINK, INC.
By: /s/ Authorized Signatory
----------------------------------
Title: Title
-------------------------------
/s/ Gail Williams
--------------------------------------
Gail Williams
<PAGE>
COUNTERPART SIGNATURE PAGE TO
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
COMMON HOLDERS
/s/ David Talbot
--------------------------------------
David Talbot
/s/ David Zweig
--------------------------------------
David Zweig
<PAGE>
COUNTERPART SIGNATURE PAGE TO
THIRD AMENDED AND RESTATED RIGHTS AGREEMENT
NEW SERIES C HOLDERS
IF HOLDER IS AN ENTITY:
/s/ Authorized Signatory
- --------------------------------------
Print Name of Investor
By: /s/ Authorized Signatory
----------------------------------
Signature
Title: Title
-------------------------------
IF HOLDER IS AN INDIVIDUAL
/s/ Authorized Signatory
- --------------------------------------
Signature
Name
- --------------------------------------
Print Name
<PAGE>
EXHIBIT A
---------
SERIES A HOLDERS Number of Shares
- ---------------- ----------------
Adobe Ventures L.P. 3,750,000
H&Q Salon Investors, L.P. 1,250,000
=================
Series A TOTAL: 5,000,000
SERIES B HOLDERS
- ----------------
Adobe Ventures, L.P. 474,683
H&Q Salon Investors, L.P. 158,228
ASCII Ventures, L.P. 632,911
Borders Group, Inc. 632,911
=================
Series B TOTAL: 1,898,733
PRIOR SERIES C HOLDERS
- ----------------------
Adobe Ventures II, L.P. 1,159,793
ASCII Ventures, L.P. 257,732
H&Q Salon Investors, L.P. 386,598
Whole Earth Lectronic Link, Inc. 909,550
Bruce Katz 5,530
Gail Williams 12,757
=================
Series C TOTAL: 2,731,960
<PAGE>
NEW SERIES C HOLDERS
- --------------------
[Constellation Ventures Entities] 1,546,392
Wasserstein Adelson Ventures, L.P. 1,030,928
Bruce Katz 1,030,928
ACT III Communications 515,464
MD Co. 773,196
McKay Foundation 515,464
John DeCsepel, M.D. 64,433
David Chazen 103,093
Lynn Quarcini 28,351
Brian Shniderson 12,887
John Cahill 12,887
Ralph DiFiore 12,887
Jeffrey Block 77,320
Stephen Block 38,660
Joel J. Matcovsky 6,444
Daniel Maclean 6,444
Mark R. Ross 6,444
Albert Vasquez 6,444
Larry Kernon 7,732
R. Schorr Berman 7,732
Charles Levin 7,732
Jay Senerchia 7,732
Michael O'Malley 2,578
Leonardo Mondoderi 77,320
Jim Goldberger 15,464
GCWF Investment Partners 12,887
GCWF Investment Associates 7,732
2
<PAGE>
EXHIBIT 4.2
SALON INTERNET, INC.
SECOND AMENDED AND RESTATED VOTING AGREEMENT
THIS SECOND AMENDED AND RESTATED VOTING AGREEMENT (this "Agreement") is
made as of April 14, 1999, by and among Salon Internet, Inc., a California
corporation (the "Company"), and the holders (the "Series A Investors") of the
------------------
Company's Series A Preferred Stock (the "Series A Preferred"), the holders (the
------------------
"Series B Investors") of the Company's Series B Preferred Stock (the "Series B
------------------ --------
Preferred"), the holders of the Company's Series C Preferred Stock (the "Series
- --------- ------
C Preferred") outstanding prior to the date of this Agreement (the "Prior Series
- ----------- ------------
C Investors") and the purchasers (the "New Series C Investors") of Series C
- ----------- ----------------------
Preferred (the Series A Investors, the Series B Investors, the Prior Series C
Investors and the New Series C Investors are listed on Schedule A hereto and are
----------
collectively referred to herein as the "Investors").
---------
WHEREAS, the Series A Investors, the Series B Investors and the Prior
Series C Investors are parties to that certain Voting Agreement dated September
18, 1998 (the "Prior Voting Agreement"); and
----------------------
WHEREAS, in order to induce the New Series C Investors to purchase
securities of the Company, the Company, the Series A Investors, the Series B
Investors and the Prior Series C Investors have agreed to enter into this
Agreement to amend, restate and supersede the Prior Voting Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED by and among the parties as
follows:
1. Agreement to Vote. The Investors hereby agree to hold all of their
-----------------
respective shares of Series A Preferred, Series B Preferred and Series C
Preferred (collectively referred to hereafter as the "Preferred Stock")
---------------
registered in their name (and any securities of the Company issued with respect
to, upon conversion of, or in exchange or substitution for the Preferred Stock,
and any other voting securities of the Company subsequently acquired by such
Investor) (hereinafter collectively referred to as the "Investor Shares")
---------------
subject to, and to vote the Investor Shares in accordance with, the provisions
of this Agreement.
2. Voting; Board Composition. Subject to Section 7 hereof, the holders
-------------------------
of the Investor Shares agree that, during the term of this Agreement, each
Investor agrees to vote all Investor Shares in such manner as may be necessary
to elect (and maintain in office), as members of the Company's Board of
Directors, the following designees:
(a) Two (2) individuals designated from time to time in a writing
delivered to the Company and signed by shareholders representing, at the time in
question, at least a majority of the voting power of all outstanding shares of
Common Stock of the Company (the "Common Stock Designees");
----------------------
1
<PAGE>
(b) One (1) individual designated from time to time in a writing
delivered to the Company and signed by shareholders representing, at the time in
question, at least a majority of voting power of all shares of Series A
Preferred Stock then outstanding and held by Adobe Ventures L.P. and Adobe
Ventures II, L.P. (the "Series A Designee");
-----------------
(c) One (1) individual designated from time to time in a writing
delivered to the Company and signed by shareholders representing, at the time in
question, a majority of the Series B Preferred Stock then outstanding and held
by ASCII Ventures, L.P. (the "Series B Designee");
-----------------
(d) One (1) individual designated from time to time in a writing
delivered to the Company and signed by shareholders representing, at the time in
question, a majority of the Series C Preferred Stock then outstanding and held
by Constellation Ventures (the "Series C Designee");
-----------------
(e) In the event that the number of authorized directors of the
Company is increased to eight (8), then one (1) individual designated from time
to time in writing delivered to the Company and signed by the shareholders
representing, at the time in question, a majority of outstanding Series C
Preferred (the "Additional Series C Designee"); and
(f) Except as provided in Section 2(e) hereof, such additional
individual or individuals as may be designated to serve as a director of the
Company (the "Remaining Director(s)") from time to time by a majority of the
---------------------
Common Stock Designees, the Series A Designee, the Series B Designee, the Series
C Designee and the Additional Series C Designee, if any.
For purposes of this Agreement: (i) any individual who is designated
for election to the Company's Board of Directors pursuant to the foregoing
provisions of this Section 2 is hereinafter referred to as a "Board Designee";
--------------
and (ii) any individual, entity, or group of individuals and/or entities who,
with respect to the Common Stock Designees, the Series A Designee, the Series B
Designee, the Series C Designee and the Additional Series C Designee, if any,
has the right to designate one or more Board Designees for election to the
Company's Board of Directors or, with respect to the Remaining Director(s), the
Common Stock Designees, the Series A Designee, the Series B Designee, the Series
C Designee and the Additional Series C Designee, if any, acting pursuant to the
foregoing provisions of this Section 2, is hereinafter referred to as a
"Designator" or as "Designators," as applicable.
---------- -----------
3. Initial Board Members. As of the date hereof, the Common Stock Designees
---------------------
are Michael O'Donnell and David Talbot, the Series A Designee is Standish
O'Grady, the Series B Designee is Sada Chidambarum, the Series C Designee is
Ronald Celmer and the Remaining Directors are James Rosenfield and Norman Lear.
4. Changes in Board Designees. Subject to the provisions hereof, from time
--------------------------
to time during the term of this Agreement, a Designator or Designators may, in
their sole discretion:
2
<PAGE>
(a) elect to remove from the Company's Board of Directors any
incumbent Board Designee who occupies a Board seat for which such Designator or
Designators are entitled to designate the Board Designee under Section 2; and/or
(b) designate a new Board Designee for election to a Board seat for
which such Designator or Designators are entitled to designate the Board
Designee under Section 2 (whether to replace a prior Board Designee or to fill a
vacancy in such Board seat); provided such removal and/or designation of a Board
--------
Designee is approved in a writing signed by such Designators who are entitled to
designate such Board Designee under Section 3. In the event of such removal
and/or designation of a Board Designee under this Section 4, the Investors shall
vote the Investor Shares as provided in Section 2 to cause: (a) the removal from
the Company's Board of Directors of the Board Designee or Designees so
designated for removal by the appropriate Designator or Designators; and (b) the
election to the Company's Board of Directors of any new Board Designee or
Designees so designated for election to the Company's Board of Directors by the
appropriate Designator or Designators.
Any action by the Common Stock Designees, the Series A Designee, the Series
B Designee, the Series C Designee and the Additional Series C Designee, if any,
with respect to the Remaining Directors must be by a majority of such parties.
In the event that there is a vacancy in the seat held by any of each of the
Common Stock Designees, the Series A Designee, the Series B Designee, the Series
C Designee or the Additional Series C Designee, if any, the Designator(s) of
such Designee(s) may take action with respect to the Remaining Directors under
Section 4 by written notice signed by the requisite majority or majorities of
such Designator(s), as applicable. The Designators of the Remaining Directors
will cooperate in good faith in connection with the actions set forth in this
Section 4.
5. Notice; Cumulative Voting. The Company shall promptly give each of the
-------------------------
Investors written notice of any change in composition of the Company's Board of
Directors and of any proposal by a Designator or Designators to remove or elect
a new Board Designee. In any election of directors pursuant to this Agreement,
the Investors shall vote their shares in a manner sufficient to elect to the
Company's Board of Directors the individuals to be elected thereto as provided
in this Agreement, utilizing cumulative voting, if and to the extent necessary
to do so.
6. Successors in Interest.
----------------------
(a) The provisions of this Agreement shall be binding upon the
successors in interest to any of the Investor Shares. The Company shall not
permit the transfer of any of the Investor Shares on its books or issue new
certificates representing any of the Investor Shares unless and until the
person(s) to whom such shares are to be transferred shall have executed a
written agreement, pursuant to which such person becomes a party to this
Agreement, and agrees to be bound by all the provisions hereof as if such person
was a party hereunder.
(b) Each certificate representing any of the Investor Shares shall
bear a legend reading as follows:
3
<PAGE>
THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT (A COPY
OF WHICH MAY BE OBTAINED WITHOUT CHARGE FROM THE ISSUER) THAT CONTAINS
CERTAIN VOTING OBLIGATIONS IMPOSED ON THE HOLDER OF THESE SHARES, AND
BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH
INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE
PROVISIONS OF SUCH VOTING AGREEMENT.
7. Termination. This Agreement shall terminate in its entirety and be of
-----------
no further force or effect upon the consummation by the Company of a public
offering of its Common Stock under the Securities Act of 1933, as amended. The
parties' rights and obligations with respect to: (i) Section 2(b) hereof shall
terminate when there are less than or equal to five hundred thousand (500,000)
shares of Series A Preferred outstanding (adjusted for stock splits, stock
combinations, stock dividends and the like), (ii) Section 2(c) hereof shall
terminate when there are less than or equal to five hundred thousand (500,000)
shares of Series B Preferred outstanding (adjusted for stock splits, stock
combinations, stock dividends and the like), and (iii) Sections 2(d) and 2(e)
hereof shall terminate when there are less than or equal to five hundred
thousand (500,000) shares of Series C Preferred outstanding (adjusted for stock
splits, stock combinations, stock dividends and the like).
8. Amendments and Waivers. Any term hereof may be amended and the
----------------------
observance of any term hereof may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of the Company and the Investors or their assigns holding not less than
two-thirds of each of the Series A, Series B and Series C Preferred held by all
parties hereto; provided, however, that in no event shall Sections 2(d) and
-------- -------
7(iii) be amended or waived without the consent of Constellation Ventures. Any
amendment or waiver so effected shall be binding upon the Company, all parties
hereto, any assignee of any such party, and any other shareholder of the Company
subject to the terms of this Agreement.
9. Stock Splits, Stock Dividends, etc. In the event of any stock split,
----------------------------------
stock dividend, recapitalization, reorganization, or the like, any securities
issued with respect to the Investor Shares shall become "Investor Shares" for
purposes of this Agreement and shall be endorsed with the legend set forth in
Section 3(b) hereof and all numbers set forth herein shall be appropriately
adjusted.
10. Enforceability/Severability. The parties hereto agree that each
---------------------------
provision of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law. If any provision of this Agreement
shall nevertheless be held to be prohibited by or invalid under applicable law,
(a) such provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement, and (b) the parties shall, to the extent
permissible by applicable law, amend this Agreement, or enter into a voting
trust agreement under which the Investor Shares shall be transferred to the
voting trust created thereby, so as to make effective and enforceable the intent
of this Agreement.
4
<PAGE>
11. Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of California without reference to conflict of law provisions.
12. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be delivered personally, mailed by first
class mail, postage prepaid, or delivered by courier or overnight delivery,
addressed (a) if to an Investor, at such address as such Investor shall have
furnished to the Company, (b) if to the Company, at 760 Mission Street, 2nd
Floor, San Francisco, CA 94103, or at such other address as the Company shall
have furnished to the Investors in writing. Notices that are mailed shall be
deemed received five (5) days after deposit in the United States mail. Notices
sent by courier or overnight delivery shall be deemed received two (2) days
after they have been so sent.
13. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
14. Injunctive Relief. Each holder of Investor Shares agrees and
-----------------
acknowledges that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that each holder may, in its sole
discretion, apply for specific performance and injunctive relief in any court of
competent jurisdiction in order to enforce or prevent any violations of the
provisions of this Agreement.
15. Amendment of Rights of Series A Investors, Series B Investors and
-----------------------------------------------------------------
Prior Series C Investors Under Prior Voting Agreement. Pursuant to Section 8 of
- -----------------------------------------------------
the Prior Voting Agreement, the Company and the undersigned Series A Investors,
Series B Investors and Prior Series C Investors, who are the holders of not less
than two-thirds of the Series A Preferred, the Series B Preferred and the Series
C Preferred outstanding as of the date of the Prior Voting Agreement, on behalf
of themselves and all other Series A Investors, Series B Investors and Prior
Series C Investors, agree that all rights and obligations under the Prior Voting
Agreement shall be amended and restated as set forth in this Agreement and that
the Prior Voting Agreement shall be of no further force and effect.
[REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amended and Restated Voting Agreement as of the day and year first above
written.
COMPANY:
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
-------------------------------
Michael O'Donnell, President
<PAGE>
COUNTERPART SIGNATURE PAGE TO
SECOND AMENDED AND RESTATED VOTING AGREEMENT
SERIES A INVESTORS
ADOBE VENTURES, L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
--------------------------
Standish O'Grady
H&Q SALON INVESTORS, L.P.
By: /s/ Authorized Signatory
--------------------------
Title: Title
-----------------------
<PAGE>
COUNTERPART SIGNATURE PAGE TO
SECOND AMENDED AND RESTATED VOTING AGREEMENT
SERIES B INVESTORS
ADOBE VENTURES, L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
----------------------------
Standish O'Grady
H&Q SALON INVESTORS, L.P.
By: /s/ Authorized Signatory
----------------------------
Title: Title
------------------------
ASCII VENTURES, L.P.
By: /s/ Authorized Signatory
----------------------------
Title: Title
------------------------
BORDERS GROUP, INC.
By: /s/ Authorized Signatory
---------------------------
Title: Title
------------------------
<PAGE>
COUNTERPART SIGNATURE PAGE TO
SECOND AMENDED AND RESTATED VOTING AGREEMENT
PRIOR SERIES C INVESTORS
ADOBE VENTURES, L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
----------------------------
Standish O'Grady
H&Q SALON INVESTORS, L.P.
By: /s/ Authorized Signatory
----------------------------
Title: Title
-------------------------
ASCII VENTURES, L.P.
By: /s/ Authorized Signatory
----------------------------
Title: Title
-------------------------
WHOLE EARTH LECTRONIC LINK, INC.
By: /s/ Authorized Signatory
----------------------------
Title: Title
-------------------------
/s/ Bruce Katz
--------------------------------
Bruce Katz
/s/ Gail Williams
--------------------------------
Gail Williams
<PAGE>
COUNTERPART SIGNATURE PAGE TO
SECOND AMENDED AND RESTATED VOTING AGREEMENT
NEW SERIES C INVESTORS
IF THE INVESTOR IS AN ENTITY:
Authorized Signatory
- -----------------------------------------
Print Name of Entity
By: /s/ Authorized Signatory
--------------------------------------
Signature
Title: Title
-----------------------------------
IF THE INVESTOR IS AN INDIVIDUAL:
/s/ Authorized Signatory
- -----------------------------------------
Signature
Authorized Signatory
- -----------------------------------------
Print Name
<PAGE>
EXHIBIT A
---------
<TABLE>
<CAPTION>
SERIES A HOLDERS Number of Shares
- ---------------- ----------------
<S> <C>
Adobe Ventures L.P. 3,750,000
H&Q Salon Investors, L.P. 1,250,000
================
Series A TOTAL: 5,000,000
SERIES B HOLDERS
- ----------------
Adobe Ventures, L.P. 474,683
H&Q Salon Investors, L.P. 158,228
ASCII Ventures, L.P. 632,911
Borders Group, Inc. 632,911
================
Series B TOTAL: 1,898,733
PRIOR SERIES C HOLDERS
- ----------------------
Adobe Ventures II, L.P. 1,159,793
ASCII Ventures, L.P. 257,732
H&Q Salon Investors, L.P. 386,598
Whole Earth Lectronic Link, Inc. 909,550
Bruce Katz 5,530
Gail Williams 12,757
================
Series C TOTAL: 2,731,960
</TABLE>
<PAGE>
EXHIBIT 10.1
SALON INTERNET, INC.
1995 STOCK OPTION PLAN
(AS AMENDED THROUGH JANUARY 27, 1997)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Salon Internet, Inc. 1995 Stock Option Plan
(the "PLAN") is hereby established effective as of December 12, 1995 (the
"EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
shareholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Salon Internet, Inc., a California
corporation, or any successor corporation thereto.
1
<PAGE>
(e) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee (including
an officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a
share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(j) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(k) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(m) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(n) "OPTIONEE" means a person who has been granted one or more
Options.
(o) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(p) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(q) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(r) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
2
<PAGE>
(s) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(t) "STOCK" means the common stock, without par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.
(u) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(v) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions
of interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax
3
<PAGE>
withholding obligation arising in connection with the Option or such shares,
including by the withholding or delivery of shares of stock, (iv) the timing,
terms and conditions of the exercisability of the Option or the vesting of any
shares acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to amend the exercisability of any Option or the vesting of
any shares acquired upon the exercise thereof, including with respect to the
period following an Optionee's termination of employment or service with the
Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of,
the Plan, including, without limitation, as the Board deems necessary or
desirable to comply with the laws of, or to accommodate the tax policy or custom
of, foreign jurisdictions whose citizens may be granted Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
3.3 DISINTERESTED ADMINISTRATION. With respect to participation by
Insiders in the Plan, at any time that any class of equity security of the
Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall
be administered in compliance with the "disinterested administration"
requirements of Rule 16b-3.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be three million seven hundred fifty thousand
(3,750,000) and shall consist of authorized but unissued or reacquired shares of
Stock or any combination thereof. If an outstanding Option for any reason
expires or is terminated or canceled or shares of Stock acquired, subject to
repurchase, upon the exercise of an Option are repurchased by the Company, the
shares of Stock allocable to the unexercised portion of such Option, or such
repurchased shares of Stock, shall again be available for issuance under the
Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar
4
<PAGE>
change in the capital structure of the Company, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and to any
outstanding Options and in the exercise price of any outstanding Options. If a
majority of the shares which are of the same class as the shares that are
subject to outstanding Options are exchanged for, converted into, or otherwise
become (whether or not pursuant to an Ownership Change Event, as defined in
Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the outstanding Options to provide that such Options are
exercisable for New Shares. In the event of any such amendment, the number of
shares subject to, and the exercise price per share of, the outstanding Options
shall be adjusted in a fair and equitable manner as determined by the Board, in
its sole discretion. Notwithstanding the foregoing, any fractional share
resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or
down to the nearest whole number, as determined by the Board, and in no event
may the exercise price of any Option be decreased to an amount less than the par
value, if any, of the stock subject to the Option. The adjustments determined by
the Board pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option.
5.2 DIRECTORS SERVING ON COMMITTEE. At any time that any class of
equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, no member of a Committee established to administer the Plan in
compliance with the "disinterested administration" requirements of Rule 16b-3,
while a member, shall be eligible to be granted an Option.
5.3 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted on the date such person commences service with a Participating Company,
with an exercise price determined as of such date in accordance with Section
6.1.
5.4 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate
Fair Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.4, options designated as Incentive
Stock Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of stock shall be determined as of the time
the option with respect to such stock is
5
<PAGE>
granted. If the Code is amended to provide for a different limitation from that
set forth in this Section 5.4, such different limitation shall be deemed
incorporated herein effective as of the date and with respect to such Options as
required or permitted by such amendment to the Code. If an Option is treated as
an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by
reason of the limitation set forth in this Section 5.4, the Optionee may
designate which portion of such Option the Optionee is exercising and may
request that separate certificates representing each such portion be issued upon
the exercise of the Option. In the absence of such designation, the Optionee
shall be deemed to have exercised the Incentive Stock Option portion of the
Option first.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
-------------------------------
Option Agreements specifying the number of shares of Stock covered thereby, in
such form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
and (c) no Option granted to a prospective Employee or prospective Consultant
may become exercisable prior to the date on which such person commences service
with a Participating Company.
6
<PAGE>
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
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<PAGE>
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject
to a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
7. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Incentive Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as a "Nonstatutory
Stock Option" shall comply with and be subject to the terms and conditions set
forth in such standard form of Nonstatutory Stock Option Agreement as may be
adopted by the Board and as amended from time to time.
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, any Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the
8
<PAGE>
terms and conditions of any such new, revised or amended standard form or forms
of Option Agreement shall be in accordance with the terms of the Plan. Such
authority shall include, but not by way of limitation, the authority to grant
Options which are immediately exercisable subject to the Company's right to
repurchase any unvested shares of Stock acquired by an Optionee upon the
exercise of an Option in the event such Optionee's employment or service with
the Participating Company Group is terminated for any reason, with or without
cause and the authority to grant Options which are exercisable for a number of
shares having a Fair Market Value (as determined by the Company) equal to the
difference between the exercise price for the total number of shares of Stock
then available under the Option and the Fair Market Value of the total number of
shares of Stock then available under the Option.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation
9
<PAGE>
thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the
Company's rights and obligations under outstanding Options or substitute for
outstanding Options substantially equivalent options for the Acquiring
Corporation's stock. Any Options which are neither assumed or substituted for by
the Acquiring Corporation in connection with the Transfer of Control nor
exercised as of the date of the Transfer of Control shall terminate and cease to
be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Transfer of Control and any consideration received pursuant to the
Transfer of Control with respect to such shares shall continue to be subject to
all applicable provisions of the Option Agreement evidencing such Option except
as otherwise provided in such Option Agreement. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the outstanding
Options immediately prior to an Ownership Change Event described in Section
8.1(a)(i) constituting a Transfer of Control is the surviving or continuing
corporation and immediately after such Ownership Change Event less than fifty
percent (50%) of the total combined voting power of its voting stock is held by
another corporation or by other corporations that are members of an affiliated
group within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its sole discretion.
9. PROVISION OF INFORMATION. At least annually, copies of the
------------------------
Company's balance sheet and income statement for the just completed fiscal year
shall be made available to each Optionee and purchaser of shares of Stock upon
the exercise of an Option. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assure them
access to equivalent information.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the
-----------------------------
Optionee, an Option shall be exercisable only by the Optionee or the Optionee's
guardian or legal representative. No Option shall be assignable or transferable
by the Optionee, except by will or by the laws of descent and distribution.
11. TRANSFER OF COMPANY'S RIGHTS. In the event any Participating
----------------------------
Company assigns, other than by operation of law, to a third person, other than
another Participating Company, any of the Participating Company's rights to
repurchase any shares of Stock acquired upon the exercise of an Option, the
assignee shall pay to the assigning Participating Company the value of such
right as determined by the Company in the Company's sole discretion. Such
consideration shall be paid in cash. In the event such repurchase right is
exercisable at the time of such assignment, the value of such right shall be not
less than the Fair Market Value of the shares of Stock which may be repurchased
under such right (as determined by the Company) minus the repurchase price of
such shares. The requirements of this Section 11 regarding the minimum
consideration to be received by the assigning Participating Company shall not
inure to the benefit of the Optionee whose shares of Stock are being
repurchased. Failure of a Participating Company to comply with the provisions
of this Section 11 shall not constitute a defense or otherwise prevent the
exercise of the repurchase right by the assignee of such right.
12. INDEMNIFICATION. In addition to such other rights of indemnification
---------------
as they may have as members of the Board or officers or employees of the
Participating Company Group,
10
<PAGE>
members of the Board and any officers or employees of the Participating Company
Group to whom authority to act for the Board is delegated shall be indemnified
by the Company against all reasonable expenses, including attorneys' fees,
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or
--------------------------------
amend the Plan at any time. However, subject to changes in the law or other
legal requirements that would permit otherwise, without the approval of the
Company's shareholders, there shall be (a) no increase in the maximum aggregate
number of shares of Stock that may be issued under the Plan (except by operation
of the provisions of Section 4.2), (b) no change in the class of persons
eligible to receive Incentive Stock Options, and (c) no expansion in the class
of persons eligible to receive Nonstatutory Stock Options. In any event, no
termination or amendment of the Plan may adversely affect any then outstanding
Option or any unexercised portion thereof, without the consent of the Optionee,
unless such termination or amendment is required to enable an Option designated
as an Incentive Stock Option to qualify as an Incentive Stock Option or is
necessary to comply with any applicable law or government regulation.
14. SHAREHOLDER APPROVAL. The Plan or any increase in the maximum
--------------------
number of shares of Stock issuable thereunder as provided in Section 4.1 (the
"MAXIMUM SHARES") shall be approved by the shareholders of the Company within
twelve (12) months of the date of adoption thereof by the Board. Options
granted prior to shareholder approval of the Plan or in excess of the Maximum
Shares previously approved by the shareholders shall become exercisable no
earlier than the date of shareholder approval of the Plan or such increase in
the Maximum Shares, as the case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing is the Salon Internet, Inc. 1995 Stock Option Plan as duly
adopted by the Board on December 12, 1995, and amended by the Board through
January 27, 1997.
/s/ Secretary
----------------------------------
Secretary
11
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PLAN HISTORY
------------
December 12, 1995 Board adopts Plan, with an initial reserve of 800,000
shares.
December 12, 1995 Shareholders approve Plan, with an initial reserve of
800,000 shares.
December 2, 1996 Board approves increase in share reserve to 1,750,000
shares.
December 2, 1996 Shareholders approve increase in share reserve to 1,750,000
shares.
January 27, 1997 Board approves increase in share reserve to 3,750,000
shares.
January 27, 1997 Shareholders approve increase in share reserve to 3,750,000
shares.
<PAGE>
EXHIBIT 10.3
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of __________, 1999, is made by and
between Salon.com, a Delaware corporation (the "Company"), and (the
"Indemnitee").
RECITALS
--------
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of
directors and officers are often difficult to apply, ambiguous, or conflicting,
and therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers
and agents and the directors, officers and agents of its subsidiaries to assume
the risk of huge judgments and other expenses which may occur in cases in which
the director, officer or agent received no personal profit and in cases where
the director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company
1
<PAGE>
and its subsidiaries, it is necessary for the Company to contractually indemnify
its directors, officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for itself maximum liability for expenses and
damages in connection with claims against such directors, officers and agents in
connection with their service to the Company and its subsidiaries, and has
further concluded that the failure to provide such contractual indemnification
could result in great harm to the Company and its subsidiaries and the Company's
stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions.
-----------
(a) Agent. For the purposes of this Agreement, "agent" of the
-----
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include
--------
all out of pocket expenses costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or enforcing a
right to indemnification under this Agreement or Section 145 or otherwise;
provided,
2
<PAGE>
however, that "expenses" shall not include any judgments, fines, ERISA excise
taxes or penalties, or amounts paid in settlement of a proceeding.
(c) Proceeding. For the purposes of this Agreement, "proceeding"
----------
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
----------
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
------------------
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Liability Insurance.
-------------------
(a) Maintenance of D&O Insurance. The Company hereby covenants and
----------------------------
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
-------------------
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
---------------------------------------------------
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
-------------------------
shall indemnify the Indemnitee as follows:
3
<PAGE>
(a) Successful Defense. To the extent the Indemnitee has been
------------------
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
-------------------
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is a
------------------
party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
------------------------------------
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement)
4
<PAGE>
for which payment is actually made to Indemnitee under a valid and collectible
insurance policy of D&O Insurance, or under a valid and enforceable indemnity
clause, by-law or agreement.
5. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the
---------------------------------
Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
7. Notice and Other Indemnification Procedures.
-------------------------------------------
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense; or (C) the
5
<PAGE>
Company shall not, in fact, have employed counsel to assume the defense of such
proceeding, the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
------------------------
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. Non-exclusivity. The provisions for indemnification and advancement of
---------------
expenses set forth in this Agreement shall not be deemed exclusive of any other
rights which the Indemnitee may have under any provision of law, the Company's
Certificate of Incorporation or Bylaws, the vote of the Company's stockholders
or disinterested directors, other agreements, or otherwise, both as to action in
his official capacity and to action in another capacity while occupying his
position as an agent of the Company, and the Indemnitee's rights hereunder shall
continue after the Indemnitee has ceased acting as an agent of the Company and
shall inure to the benefit of the heirs, executors and administrators of the
Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by this
-----------
Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in
any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has been tendered to the Company)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation
(including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the
6
<PAGE>
circumstances, nor an actual determination by the Company (including its Board
of Directors or its stockholders) that such indemnification is improper, shall
be a defense to the action or create a presumption that Indemnitee is not
entitled to indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. Survival of Rights.
------------------
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties hereto
---------------------------
intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
------------
be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or amendment of
-----------------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
7
<PAGE>
16. Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
17. Governing Law. This Agreement shall be governed exclusively by and
-------------
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
18. Consent to Jurisdiction. The Company and the Indemnitee each hereby
-----------------------
consent to the jurisdiction of the courts of the State of Delaware with respect
to any action or proceeding which arises out of or relates to this Agreement.
8
<PAGE>
The parties hereto have entered into this Indemnity Agreement effective
as of the date first above written.
THE COMPANY:
Salon.com
By _______________________________
Its ______________________________
Address: 706 Mission Street
San Francisco, California 94103
INDEMNITEE:
__________________________________
[NAME]
Address: __________________________________
__________________________________
9
<PAGE>
EXHIBIT 10.4
COMMERCIAL OFFICE
LEASE
between
T/W ASSOCIATES, LESSOR,
and
SALON INTERNET, INC., LESSEE
PREMISES: 706 Mission Street
San Francisco, California
2nd Floor
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Premises............................................................... 1
2. Term; Tenant Improvements Allowance.................................... 1
3. Rental................................................................. 1
4. Use.................................................................... 4
5. Services............................................................... 5
6. Taxes Payable by Lessee................................................ 6
7. Alterations, Additions or Improvements................................. 7
8. Liens.................................................................. 7
9. Repairs................................................................ 7
10. Destruction or Damage.................................................. 8
11. Insurance; Waiver of Subrogation....................................... 9
12. Indemnity.............................................................. 9
13. Compliance with Legal Requirements..................................... 10
14. Assignment and Subletting.............................................. 10
15. Rules.................................................................. 12
16. Entry by Lessor........................................................ 12
17. Events of Default...................................................... 13
18. Lessor's Right to Terminate............................................ 13
19. Continuous Notwithstanding Default..................................... 14
20. Additional Remedies.................................................... 14
21. Lessor's Right to Cure Defaults........................................ 14
22. Attorneys' Fees........................................................ 14
</TABLE>
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
23. Eminent Domain......................................................... 15
24. Subordination.......................................................... 15
26. Sale................................................................... 16
27. Estoppel Certificate................................................... 16
28. No Light, Air or View Easement......................................... 16
29. Holding Over........................................................... 17
30. Abandonment............................................................ 17
31. Surrender.............................................................. 17
32. Waiver................................................................. 17
33. Notice................................................................. 17
34. Complete Agreement..................................................... 18
35. Corporate Authority.................................................... 18
36. Miscellaneous Provisions............................................... 18
37. Exhibits............................................................... 19
38. Option to Renew........................................................ 19
39. Lessor Warranty........................................................ 19
40. Deposit................................................................ 19
41. Additional Security.................................................... 20
</TABLE>
Exhibit A - Premises
Exhibit B - Tenant Improvements
Lessor's Work
Exhibit C - Tenant Improvements
Lessee's Work
Rules and Regulations Attached to and Made a Part of This Lease
Hazardous Materials
<PAGE>
COMMERCIAL OFFICE LEASE
-----------------------
BASIC LEASE INFORMATION
-----------------------
Lease Section
- -------------
<TABLE>
<S> <C> <C>
Introductory Date: June 25, 1997
Paragraph
Lessor: T/W Associates, a general partnership
Lessee: Salon Internet, Inc.
Section 1 Premises: 9277 sq. ft., 2nd Flr.
Building: 706 Mission Street
San Francisco, CA
Section 2 Term Upon substantial completion of Tenant
Commencement: Improvements in accordance with plans
and specifications approved by Lessor no
later than September 1, 1997.
Term Expiration: July 31, 2002
Section 3 Base Rent: Yr. 1 - $17.00/sq. ft./yr.
Yr. 2 - $18.00/sq. ft./yr.
Yr. 3 - $19.00/sq. ft./yr.
Yr. 4 - $20.00/sq. ft./yr.
Yr. 5 - $21.00/sq. ft./yr.
Section 3(b) Base year (for Operating
Expense increases): 1998
Section 3(c) Base Year (for Property Tax
increases): 1998
Section 3(b) and 3(c) Lessee's Percentage Share
of increases in Operating
Exp., Property Taxes: 8.8%
Section 5 Services: Electrical cap of $0.13/sf per month.
Tenant pay overage.
Section 34 Lessee's Address for 706 Mission St., 2nd floor
Notices: San Francisco, CA 94103
Section 34 Lessor's Address for 86 Third St.
Notices: San Francisco, CA 94103
Section 36(X) Miscellaneous Tenant upon signing of lease, will
Provisions: prepay first month rent of $13,142.42.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C> <C>
Section 38 Option to Renew: One (1) five (5) year term at 95% of
then Fair Market value. New base year.
Section 40 Security Deposit: $16,235.00
Section 41 Additional $60,000.00 deposit account in favor of
Security: T/W Associates to be executed within
seven (7) business days after signing of
Lease.
Exhibit B Tenant Lessor to provide $12.00 per sq. ft. for
Improvements: TI
</TABLE>
The provisions of the Lease identified above in the margin are those provisions
where references to particular Basic Lease Information appear. Each such
reference shall incorporate the applicable Basic Lease Information.
LESSOR: LESSEE:
T/W ASSOCIATES SALON INTERNET, INC.
By:___________________________________ By: ______________________________
General Partner
Date:_________________________________ Date: ____________________________
2
<PAGE>
COMMERCIAL OFFICE LEASE
-----------------------
THIS LEASE, dated June 25, 1997 is made and entered into by and between T/W
ASSOCIATES, a general partnership ("Lessor"), and SALON INTERNET, INC.
("Lessee").
1. Premises. Lessor hereby leases to Lessee, and Lessee hereby Leases
--------
from Lessor the Premises, as specified in the Basic Lease Information and as
more particularly described in Exhibit A attached hereto, located within the
Building as specified in the Basic Lease Information for the term and subject to
the terms, covenants, agreements and conditions hereinafter set forth, to each
and all of which Lessor and Lessee hereby mutually agree.
2. Term; Tenant Improvements Allowance.
-----------------------------------
(a) Term. The term of this Lease shall commence and, unless sooner
----
terminated as hereinafter provided, shall end on the dates specified in the
Basic Lease Information. If Lessor, for any reason whatsoever, cannot deliver
possession of the Premises to Lessee at the commencement of the term, this Lease
shall not be void or voidable, the term of this Lease shall not be extended by
such delay, and the Lessor shall not be liable to Lessee for any loss or damage
resulting therefrom, but in that event rental shall be waived for the period
between the commencement of the term and the time when Lessor delivers
possession. In the event the delay is caused by Lessee, its agents or
employees, Lessee shall not be relieved of any of its rent obligations under
this Lease.
(b) Tenant Improvements Allowance. The Premises are leased to Lessee
-----------------------------
in their present "as-is" condition, except that Lessor shall provide to Lessee
the tenant improvements allowance as set forth in Exhibit B attached hereto.
3. Rental. Lessee shall pay to Lessor through the term of this Lease the
------
following sums as rental for the Premises:
(a) Base Rent. The Base Rent payable during the term of the Lease
---------
shall be the sum specified in the Basic Lease Information as the Base Rent
subject to the further provisions hereof.
(b) Additional Rent on Account of Increases in Operating Expenses. In
-------------------------------------------------------------
addition to Base Rent, Lessee shall pay to Lessor as additional rent with
respect to each successive calendar year of the term of this Lease subsequent to
the Base Year (including any extended term hereof) for Operating Expenses
increases as specified in the Basic Lease Information Lessee's percentage share
of the total dollar increase, if any, in Operating Expenses paid or incurred by
Lessor in such subsequent calendar year over the Base Year Operating Expenses.
For purposes hereof, "Operating Expenses" shall mean (i) all direct and
indirect costs of management, operation and maintenance of the Building
(including rentable areas occupied by
1
<PAGE>
Lessor) and including, without limiting the foregoing: wages, salaries, employee
benefits, and payroll burden of personnel directly engaged in management,
operation and maintenance of the Building, power, heat, light, air conditioning,
gas, water, garbage, sewage and waste disposal and other utilities, equipment,
tools, materials and supplies, maintenance and repairs, insurance, license,
permit and inspection fees, janitorial services, maintenance contracts and
general services, and depreciation on personal property, and (ii) the cost of
any capital improvements made to the Building by Lessor after the Base Year that
reduce Operating Expenses or that reduce or conserve the amount of utilities
consumed (e.g., electricity, gas or other fuels), or made to the Building by
Lessor after the date of this Lease that are required under any governmental law
or regulation that was not applicable to the Building at the time this Lease was
entered into, such cost or allocable portion thereof to be amortized over such
reasonable period as Lessor shall determine together with interest on the
unamortized balance at the rate of 10 percent per year or such higher rate as
may have been paid by Lessor on funds borrowed for the purpose of constructing
such capital improvements; provided, however, that Operating Expenses shall not
include Property Taxes, depreciation on the Building other than depreciation on
personal property, costs of tenants' improvements, interest and capital items
other than those referred to in clause (ii) above. Actual Operating Expenses for
both the Base Year and each subsequent year of the term of this Lease shall be
adjusted to equal Lessor's reasonable estimate of Operating Expenses had the
total rentable area of the Building been occupied for both years. The
determination of the costs of management, operation, and maintenance of the
Building and the costs of the capital improvements referred to in clause (ii)
above shall be in accordance with generally accepted accounting principles
consistently applied.
(c) Additional Rent on Account of Increases in Property Taxes. In
---------------------------------------------------------
addition to Base Rent, Lessee shall pay to Lessor as additional rent with
respect to each successive calendar year of the term of this Lease subsequent to
the Base Year for Property Taxes increases as specified in the Basic Lease
Information Lessee's percentage share (as specified in the Basic Lease
Information) of the total dollar increase, if any, in Property Taxes paid or
incurred by Lessor in such subsequent calendar year over the Base Year Property
Taxes; provided that Lessee's obligation on account of such Property Taxes
increase is subject to the limitation set forth in Sections 3(b) and 38(c)
hereof. For purposes hereof, "Property Taxes" shall mean all real property
taxes, assessments (general or special), property tax reassessments caused by a
change in ownership of the Building or the Premises and all other taxes
(including any tax levied wholly or partly in lieu thereof) levied against the
Building (or this Lease, the occupancy of Lessee, the sums payable by Lessee
hereunder, or in any manner relative to the subject matter hereof), excluding
only taxes covered by Section 6 hereof and federal and California income and
death taxes imposed with respect to Lessor. For purposes hereof, "taxes" is
meant to be interpreted in its most comprehensive sense and to include any
impost, levy or the like levied by any governmental jurisdiction; and without
limiting the generality of the foregoing, "taxes" shall include any tax, fee,
excise, levy or other impost imposed by the United States, the State of
California or any political subdivision of the State (including any county,
city, city and county, public corporation, district or any other political
entity or public corporation thereof), however described (including any so-
called value-added tax) as a direct substitution in whole or in part for, or in
addition to, real property taxes and assessments.
2
<PAGE>
(d) Procedure. The additional rent provided under paragraphs (b) and
---------
(c) above shall be made in accordance with the following procedures:
(i) As soon as is practicable following the end of the Base
Year and each respective calendar year referred to in paragraphs (b) and (c)
above occurring during the term of this Lease subsequent to the Base Year,
Lessor shall give Lessee written notice of its estimate of any increase amounts
payable under paragraphs (b) and/or (c) above for such subsequent calendar year
of the Lease. On or before the first day of the calendar month next succeeding
such notice, Lessee shall pay to Lessor an amount equal to such estimated
amounts multiplied by a fraction, the numerator of which is the number of months
of such subsequent calendar year of the Lease which have elapsed and the
denominator of which is 12; on or before the first day of each calendar month
thereafter occurring during such subsequent calendar year, Lessee shall pay to
Lessor 1/12 of such estimated amounts. If for any reason such notice is not
given as provided above, Lessee shall continue to pay on the basis of the then
applicable rental until the month after such notice is given. If at any time or
times it appears to Lessor that the increased amounts payable under paragraphs
(b) and/or (c) above for such subsequent calendar year will vary from its
estimate by more than 10 percent, Lessor shall, by notice to Lessee, revise its
estimate for such year, and subsequent payments by Lessee for such year shall be
based upon such revised estimate.
(ii) Within 90 days after the close of each Base Year and each
respective calendar year during the term of this Lease subsequent to the Base
Year (or as soon after such 90-day period as practicable), Lessor shall deliver
to Lessee a statement of the adjustments to be made pursuant to paragraphs (b)
and/or (c) above for such calendar year prepared according to generally
acceptable accounting principles, and such statement shall be final and binding
upon Lessor and Lessee. If on the basis of such statement Lessee owes an amount
that is less than the estimated payments for such year previously made by
Lessee, Lessor shall refund such excess to Lessee. If on the basis of the
statement Lessee owes an amount that is more than the estimated payments for
such year previously made by Lessee, Lessee shall pay the deficiency to Lessor
within 30 days after delivery of the statement.
(iii) If this Lease shall terminate on a day other than the last
day of a full year of the term of this Lease, the amount of adjustment to be
made pursuant to paragraphs (b) and/or (c) above that is applicable to the
calendar year in which such termination occurs shall be prorated on the basis
that the number of days from the commencement of such year to and including the
termination date bears to 365. The termination of this Lease shall not affect
the obligations of Lessor and Lessee pursuant to subparagraph (ii) of this
paragraph (d) to be performed after such termination.
Lessee and Lessee's auditors shall have the right upon reasonable notice to
inspect Lessor's books and records, at Lessor's office, showing the amounts
alleged to be payable by Lessee as additional rent. If Lessee's auditors
conclude that Lessor has overcharged (by more than three percent (3%) of all
additional rent) for any additional rent, Lessor shall promptly refund to Lessee
the amount of such overcharge, plus Lessee's out-of-pocket costs (including
auditing costs) incurred in connection with such inspection and the
determination of such
3
<PAGE>
overcharge. If no overcharge (by more than three percent) is determined, Lessee
is responsible for out-of pocket costs, including auditing costs.
(e) Rental Commencement. Base Rent shall be paid to Lessor upon the
-------------------
execution of this Lease for the first full calendar month of the term of this
Lease, and on or before the first day of each and every successive calendar
month after the first full calendar month during the term hereof.
(f) No Deduction or Offset; Interest. All rental and all other sums
--------------------------------
due and payable by Lessee to Lessor under any of the provisions of this Lease
shall be paid to Lessor, without abatement, deduction, offset, prior notice or
demand, in lawful money of the United States at Lessor's address for notices or
to such other person or at such other place as Lessor, from time to time, may
designate in writing. If not paid within 10 days following the date when due,
all rental and any and all other sums payable by Lessee to Lessor under any of
the provisions of this Lease shall bear interest from the date due until paid at
the rate of 10% per annum. Lessee acknowledges that late payment by Lessee to
Lessor of rental or such sums will cause Lessor to incur costs not contemplated
by this Lease, the exact amount of such costs being extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Lessor by the terms
of any encumbrance and note secured by and encumbrance covering the Building
and/or the Premises. Therefore, if any installment of rental or other sum due
and payable by Lessee to Lessor is not paid to and received by Lessor within 10
days following the date when due, Lessee shall pay to Lessor an additional sum
of 5 percent of the overdue amount as a late charge. The parties agree that
this late charge represents a fair and reasonable estimate of the costs that
Lessor will incur by reason of late payment by Lessee. Acceptance of any late
charge shall not constitute a waiver of Lessee's default on the overdue amount,
or prevent Lessor from exercising any of the other rights and remedies available
to Lessor.
4. Use. The Premises shall be used for general office purposes and no
---
others. Lessee shall neither do or permit to be done in or about the Premises,
nor bring or permit to be brought or kept therein, anything which is prohibited
by or will in any way conflict with any law, statute, ordinance or governmental
rule or regulation now in force or which may hereafter be enacted or
promulgated, or which now or hereafter is prohibited by the standard form of
fire insurance policy, or will in any way increase the existing rate of or
affect any fire or any other insurance upon the Building or any of its contents,
or cause a cancellation of any insurance policy covering the Building or any
part thereof or any of its contents. Lessee, in its own respect and in respect
of its agents, servants and invitees, shall neither do nor permit anything to be
done in or about the Premises or the Building or any part thereof which will in
any way obstruct or interfere with the rights of other tenants of the Building
(including any noise audible or any vibrations observable from outside the
Premises), or injure or annoy them, or use or allow the Premises or the Building
or any part thereof to be used for any improper, immoral, unlawful or
objectionable purpose, nor shall Lessee cause, maintain or permit any nuisance
in, on or about the Premises or the Building or any portion thereof, or commit
or suffer to be committed any waste or damage in or about the Premises or the
Building or any portion thereof. Lessee shall not permit any materials to be
placed or stored in the common areas of the Building and shall not permit debris
to be placed therein, except in appropriate receptacles provided thereof.
Lessee, its agents,
4
<PAGE>
servants and invitees shall have the right on a 24 hour per day - seven day per
week basis during the term hereof, subject to compliance with Lessor's security
procedures, to the (a) non-exclusive use of the entrance lobby of the Building,
its passenger elevators, and the common area of the floor of the Building in
which the Premises are located, for purposes of ingress to and egress from the
Premises, and (b) the restrooms located on the floor of the Building in which
the Premises are located, and (c) the exclusive use of the Premises. The
provisions of Sections 11 and 12 of this Lease shall apply to all such areas.
Lessee shall not use any portion of the Building (including, without limitation,
the Building roof or portions of the Building leased to other tenants) other
than the Premises, excepting only as set forth in the preceding sentence and
such other portions of the Building as are necessary for fire and other
emergency ingress and egress purposes in accordance with applicable law. Lessee
shall not place any equipment in or otherwise utilize the Premises in a manner
that would exceed the floor load limits specified by Lessor.
5. Services.
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(a) Reasonable Services. Lessor shall furnish the Premises (i) 24
-------------------
hours per, seven days a week, or such shorter period as may be prescribed by any
applicable policies or regulations adopted by any utility or governmental
agency, electrical circuitry for the use of a reasonable amount of electricity
for lighting and the operation of office machines, a reasonable amount of water
and heat and facilities for air conditioning, (ii) non-attended elevator
service, and (iii) daily (one shift) janitor service Monday through Friday
(except holidays) all in the manner that such services are customarily furnished
in comparable office buildings in the area. Lessor shall provide 12 hour per
day guard service, 7:00 AM to 7:00 PM, in the lobby of the Building Monday
through Friday (except holidays) . Lessor shall not be in default hereunder or
be liable for any damage directly or indirectly resulting from, nor shall the
rental herein reserved be abated by reason of, (i) the installation, use or
interruption of use of any equipment in connection with the furnishing of any of
the foregoing services, (ii) failure to furnish or delay in furnishing any such
services when such failure or delay is caused by accident or any condition
beyond the reasonable control of Lessor or by the making of necessary repairs or
improvements to the Premises or to the Building, or (iii) the limitation,
curtailment, rationing or restrictions on use of water, electricity, gas, or any
other form of services serving the Premises or the Building. Lessee shall be
responsible for electricity cost above $0.13 per sq. ft. per month; Lessee shall
pay the costs above the $0.13 cap thereof directly to Landlord upon receipt of
invoice.
Lessor shall notify Lessee in writing at least forty-eight (48) hours
before any intentional shut-down of electrical power or HVAC serving the
Premises, except in the case of an emergency.
Notwithstanding the terms of this Lease to the contrary, if electrical
power is interrupted for a period of five (5) consecutive days due to the gross
negligence or willful acts of Lessor, its agents, servants, employees,
contractors or subcontractors or for a period of seven (7) consecutive days due
to any other reason except Lessor's, its agents, servants, employees,
contractors or subcontractors negligence or willful acts, and such failure
adversely affects Lessee's use of the Premises for Lessee's normal business
operations, then there shall be an abatement of Base Rent from and after said
fifth day or seventh day, as the case may be, until
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such service is restored. However, if such failure lasts for thirty (30)
consecutive days, Lessee shall have the option, upon written notice to Lessor,
to terminate this Lease. Lessor agrees to use its best efforts to restore such
service as soon as possible.
(b) Extraordinary Services. Lessee will not, without the prior
----------------------
written consent of Lessor, use any apparatus or device in the Premises,
including without limitation electronic data processing machines, punch card
machines and machines using current that will in any way increase the amount of
water or air conditioning reasonably required for use of the Premises as general
office space and in no event shall Lessee consume water or power in excess of
the capacity of the existing Building systems; nor shall Lessee connect with
electric current, except through existing electrical outlets in the Premises, or
water pipes, any apparatus or device, for the purpose of using electric current
or water. If Lessee shall require water in excess of that usually furnished or
supplied for use of the Premises as general office space, Lessee shall first
procure the written consent of Lessor, which Lessor may withhold, to the use
thereof. Lessor, as a condition of Lessor's consent, may cause a water meter to
be installed in the Premises, so as to measure the amount of water consumed.
The cost of any such meter and of installation, maintenance and repair thereof
shall be paid by Lessee, and Lessee agrees to pay to Lessor promptly upon demand
thereof by Lessor for all such water so used. Unless and until Lessor installs
such separate meters, Lessee shall pay to Lessor promptly upon demand Lessor's
reasonable estimate of the excess of the amount of water used by Lessee over
that usually furnished or supplied by Lessor for use of the Premises as general
office space and Lessor's estimate based upon the independent judgment of
Lessor's engineer, the manufacturer of the equipment involved, or the utility
providing the service shall be final, binding, and conclusive upon Lessee.
6. Taxes Payable by Lessee. In addition to the monthly rental and other
-----------------------
charges that are payable by Lessee hereunder, Lessee shall reimburse Lessor upon
demand for any and all taxes payable by Lessor (other than net income taxes)
whether or not now customary or within the contemplation of the parties hereto:
(a) upon, measured by, or reasonably attributable to the cost or value of
Lessee's equipment, furniture, fixtures, and other personal property located in
the Premises or by the cost or value of any leasehold improvements made in or to
the Premises by or for Lessee, other than tenant improvements made and paid for
by Lessor hereunder, regardless of whether title to such improvements shall be
in Lessee or Lessor; (b) upon or measured by the monthly rental payable
hereunder, including without limitation, any gross income tax or excise tax
levied by the United States Government, the State of California, any county, any
city, or any other political subdivision of any of the foregoing with respect to
the receipt of such rental; (c) upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use, or occupancy by
Lessee of the Premises or any portion thereof; (d) upon this transaction or any
document to which Lessee is a party creating or transferring an interest or an
estate in the Premises. If it should not be lawful for Lessee to so reimburse
Lessor, the monthly rental payable to Lessor under this Lease shall be revised
to net Lessor the same net rental after imposition of any such tax upon Lessor
as would have been payable to Lessor prior to the imposition of any such tax.
7. Alterations, Additions or Improvements. Excluding Lessee's initial
--------------------------------------
Tenant Improvements, Lessee shall not make or suffer to be made any alterations,
additions, or
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improvements to or of the Premises or any part thereof, or attach any fixtures
or equipment thereto, without Lessor's prior written consent, provided that
Lessee from time to time, without Lessor's prior written consent, may make
alterations, additions and improvements of an aggregate cost of $20,000
(excluding nevertheless any alterations and the like involving the Building
structure or the Building systems). All such alterations, additions or
improvements shall become Lessor's property immediately and, at the end of the
term hereof, shall remain on the Premises without compensation to Lessee unless
Lessor elects by notice to Lessee, at the time approval is given, to have Lessee
remove the same, in which event Lessee shall promptly remove such alterations,
additions or improvements and restore the Premises to their condition prior to
the installation of such alterations, additions or improvements.
All alterations made by Lessee with the prior written consent of Lessor
shall be effected through the use of contractors approved by Lessor who shall
furnish to Lessor upon demand such completion bonds and labor and material bonds
as Lessor may require so as to assure completion of such alterations, additions
or improvements on a lien-free basis (and the furnishing of the same shall not
relieve Lessee of its obligation under Section 8 hereof).
8. Liens. Lessee shall keep the Premises and the Building free and clear
-----
of and from any and all mechanics', materialmen's and other liens for work or
labor done, services performed and for materials used or furnished in or about
the Premises by or on behalf of Lessee. Lessee at all times shall pay and
discharge, promptly and fully, any and all claims upon which any such lien may
or could be based (provided that Lessee may contest any such claims or liens,
provided that Lessee shall obtain and record a release bond with respect to any
recorded mechanics lien in accordance with the provisions of California Code
Section 3143), and Lessee shall save and hold Lessor, the Premises and the
Building free and harmless of and from any and all such liens or claims of liens
or claims of liens or suits or other proceedings pertaining thereto.
9. Repairs. By entry hereunder, Lessee accepts the Premises as being in
-------
the condition in which Lessor is obligated to deliver the Premises. Lessee, at
all times during the term hereof and at Lessee's sole cost and expense, shall
keep the Premises and every part thereof in good condition and repair, ordinary
wear and tear, damage thereto by fire, earthquake, act of God or the elements
excepted. Lessee hereby waives all right to make repairs at the expense of
Lessor or in lieu thereof to vacate the Premises as provided by California Civil
Code Section 1941 and 1942 or any other law, statute or ordinance now or
hereafter in effect. Lessor has no obligation and has made no promise to alter,
remodel, improve, repair, decorate, or paint the Premises or any part thereof
except as specifically herein set forth in Exhibit B. Except as specifically
set forth herein, Lessor has not made any representations respecting the
condition of the Premises to Lessee.
Lessor, at Lessor's sole cost and expense, agrees to maintain all
structural portions of the Building, all systems servicing the Building and
Premises, including but not limited to HVAC, plumbing, electrical, elevators and
all common areas and all exterior portions of the Building.
7
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10. Destruction or Damage.
---------------------
(a) Damage. If the Premises and/or the portion of the Building
------
necessary for Lessee's occupancy are damaged by fire, earthquake, act of God,
the elements, or other casualty, Lessor shall forthwith repair the same, subject
to the provisions of this Section hereinafter set forth, if such repairs, in
Lessor's opinion, can be made within 90 days following the issuance of any
building permit required by relevant governmental authority (the "Rebuilding
Period"). This Lease shall remain in full force and effect except that, if such
damage is not the result of the negligence or willful misconduct of Lessee or
Lessee's employees or invitees, a proportional abatement of rental (based upon
square footage) shall be allowed Lessee for such part of the Premises as shall
be rendered unusable by Lessee in the conduct of its business during the time
such part is so unusable. Lessor's determination that such repair may be made
within the Rebuilding Period shall not obligate Lessor to complete the same
within such period.
Notwithstanding anything in this Paragraph 10 to the contrary, if the
Premises have been rendered inaccessible or untenantable by the damage and the
Premises cannot be repaired to the condition that the Premises were in prior to
the damage within 180 days after the date on which the damage has occurred,
Lessee may, provided Lessee is not then in default under this Lease, by written
notice to Lessor within 30 days after the damage, elect to terminate this Lease
as of the date of damage. If there has been no termination of this Lease, such
repairs and restoration shall be made. A full destruction of the Building as
determined by Lessor will automatically terminate this Lease as of the date of
destruction. Upon any termination of this Lease under any provisions of this
Section, the parties will be released from any further obligations hereunder
except for any obligations which may have accrued prior to the damage or
destruction.
(b) Repair. If such repairs, in Lessor's opinion, cannot be made
------
within the Rebuilding Period, Lessor may elect, upon notice to Lessee within 30
days after the date of such fire or other casualty: (i) to repair or restore
such damage, in which event this Lease shall continue in full force and effect
(except that the rent shall be partially abated as hereinabove provided) and
Lessor shall repair and restore such damage with reasonable diligence, or (ii)
to terminate this Lease, in which event this Lease shall terminate as of the
date of such fire or other casualty.
(c) Waiver. Lessee waives California Civil Code Sections 1932(2) and
------
1933(4) providing for termination of hiring upon destruction of the thing hired.
(d) Costs of Repair. If the Premises are to be repaired under this
---------------
Section, Lessor shall repair at its cost any injury or damage to the Building
itself and the tenant improvements in the Premises paid for by Lessor hereunder.
Lessee shall repair and pay the cost of repairing Lessee's alterations, Lessee's
improvements, Lessee's trade fixtures, Lessee's personal property and any other
tenant improvements in the Premises and shall be responsible for carrying such
casualty insurance as it deems appropriate with respect to such other tenant
improvements.
8
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11. Insurance; Waiver of Subrogation.
--------------------------------
(a) Insurance. Each party, at its respective expense, shall maintain
---------
in full force during the term hereof a policy or policies of comprehensive broad
form general public liability insurance against claims and liability for
personal injury, death and property damage arising in or about the Premises, the
Building and adjoining areas or ways, with a carrier or carriers acceptable to
the other party, and which carrier or carriers in any event shall have a rating
of not less than A Plus XIII by Best's Insurance Guide. The liability under
such insurance shall not be less than $1,000,000 combined single limit bodily
injury and property damage. Such policy or policies of insurance shall (a) name
the other party and Lessor as an additional insured, (b) be nonassessable,
primary and noncontributory with any policies carried by the other party, and
(c) provide that the same may not be canceled or materially amended except upon
30 days prior written notice to the other party. Each party shall provide the
other with a certificate or certificates of said policy or policies. The amount
of insurance coverage provided for in this Section shall be increased from time
to time during the term hereof upon demand of the other party to the extent
reasonably required by circumstances then existing (including, but not limited
to increases in the cost of living as reflected in the Consumer Price Index
published by the U.S. Department of Labor and increases in personal injury and
wrongful death judgments or awards in the City and County of San Francisco).
(b) Subrogation. Each party shall obtain from its insurers under all
-----------
policies of fire, theft, public liability, worker's compensation, and other
insurance maintained by such party at any time during the term hereof insuring
or covering the Building or any portion thereof or operations therein, a waiver
of all rights of subrogation which the insurer might have against such party and
such party's Lender.
12. Indemnity. Lessee covenants and agrees that Lessor shall not at any
---------
time or to any extent whatsoever be liable, responsible or in anywise
accountable for any loss, injury, death or damage to persons or property which
at any time may be suffered or sustained by Lessee or by any person whosoever
may at any time be using or occupying or visiting the Premises or be in, on or
about the same, whether such loss, injury, death or damage shall be caused by or
in anyway result from or arise out of any act or omission of Lessor, Lessee or
of any occupant, subtenant, visitor or user of any portion of the Premises, or
shall result from or be caused by any other matter or thing whether of the same
kind as or of a different kind than the matters or things above set forth,
except to the extent caused by the Breach of this Lease by Lessor or the
negligence or willful act of Lessor, its agents or employees, and Lessee shall
forever indemnify, defend, hold and save Lessor and Lessor's Lender free and
harmless of, from and against any and all claims, liability, loss or damage
whatsoever on account of any such loss, injury, death or damage, except to the
extent caused by the negligence or willful act of Lessor, its agents or
employees. Lessee hereby waives all claims against Lessor for damages to the
Building and any other improvements that are hereafter placed or built upon the
Premises and to the property of Lessee in, upon or about the Premises, and for
injuries to persons or property in or about the Premises, from any cause arising
at any time, except to the extent caused by the Breach of this Lease by Lessor
or the negligence or willful act of Lessor, its agents or employees. The
foregoing indemnity obligation of Lessee shall include reasonable attorneys'
fees, investigation costs, and all other reasonable costs and expenses incurred
by Lessor from the first notice that any claim or demand is to be
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<PAGE>
made or may be made. The provisions of this Section shall survive the
termination of this Lease with respect to any damage, injury, or death occurring
prior to such termination.
13. Compliance with Legal Requirements. During the term of this Lease,
----------------------------------
Lessee, at its sole cost and expense shall comply promptly with (i) all laws,
statutes, regulations, ordinances, governmental rules, or requirements now in
force or which may hereafter be in force, (ii) the requirements of any board of
fire underwriters or other similar body now or hereafter constituted, (iii) any
direction or occupancy certificate issued pursuant to any law by any public
officer or officers, and (iv) the provisions of all recorded documents affecting
the Building or the Premises insofar as any of them relate to or affect the
Lessee's use or occupancy of the premises, excluding requirements of structural
changes not related to or affected by improvements made by or for Lessee or not
necessitated by Lessee's acts.
14. Assignment and Subletting.
-------------------------
(a) General. Except as expressly permitted pursuant to this Section,
-------
Lessee shall not, without the prior written consent of Lessor, assign this
Lease, or any interest herein, or sublet the Premises, or any part thereof, or
permit the use or occupancy of the Premises (or any right or privilege
appurtenant thereto) by any party other than Lessee. For purposes hereof,
"assignment" shall include any proposed disposition or transfer, voluntary or
involuntary, or hypothecation; and where Lessee is a corporation or partnership,
"assignment" shall include a transfer of 25% or more of the equity interest
therein (but shall exclude any transfer of the equity interest of any parent of
Lessee). Any of the foregoing acts without such consent of Lessor shall be void
and shall, at the option of Lessor, terminate this Lease. This Lease shall not,
nor shall any interest herein, be transferable or assignable as to the interest
of Lessee by operation of law without the written consent of Lessor (except as
provided by state or federal laws governing savings and loan associations).
Subject to the further provisions of the Section,
Lessor's consent to any assignment or subletting of all or any part of the
Premises shall not be unreasonably withheld.
Notwithstanding any provision of this Lease to the contrary, Lessee may
assign this Lease at any time, or sublease all or part of the Premises, with
written consent from Lessor, which shall not be unreasonably withheld or
delayed, to any entity which acquires all or part of Lessee (by merger,
consolidation or otherwise), or which is acquired in whole or in part by Lessee,
or which is controlled directly or indirectly by Lessee, or which is acquired in
whole or in part by Lessee, or which is controlled directly or indirectly by
Lessee, or which is under common control with Lessee, or which entity controls,
directly or indirectly, Lessee (an "Affiliate"), or which owns or is owned by
the Affiliate. Lessor's consent shall be deemed granted unless, within seven
days from notice, Lessor denies consent in writing.
(b) Notice to Lessor. If at any time, or from time to time, during
----------------
the term of this Lease, Lessee desires to assign, sublet or permit the occupancy
or use by another of all or any part of the Premises, Lessee shall give notice
to Lessor setting forth the following: (a) the name, address, and legal
composition of the proposed sublessee, occupier or user; (b) the nature of the
business proposed to be carried on in the Premises (including proposed number of
employees to
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<PAGE>
be located in the Premises, the proposed equipment to be used therein, proposed
floor loads and proposed electrical loads); (c) a copy of the proposed
assignment or sublease agreement; and (d) any other documentation or information
reasonably requested by Lessor, including financial information covering the
proposed assignee, sublessee, occupier or user with respect to such proposed
subletting. All such information may be considered by Lessor in making Lessor's
permitted determinations hereunder, including the granting or withholding of
consent in respect of a proposed assignment or subletting.
(c) Conditions. Lessee may assign or sublet, subject to Lessor's
----------
consent which shall not be unreasonably withheld, such space to any third party
subject in any event to the following conditions:
(i) in the case of a sublease, the same shall be subject and
subordinate to all of the provisions, terms and conditions of this Lease,
including a current financial statement from the prospective sublessee or
assignee, prepared by a CPA;
(ii) no assignment or sublease shall be valid and no assignee or
sublessee shall take possession of the Premises assigned or subleased until an
executed counterpart of such assignment or sublease, in form and substance
satisfactory to Lessor, shall have been delivered to Lessor, and Lessor shall
have expressly consented thereto in writing,
(iii) no assignee or sublessee shall have a further right to
assign or sublet,
(iv) an amount equal to 50% of all sums or other economic
consideration received by Lessee as a result of such assignment or subletting
other than an assignment or sublease to an Affiliate, however denominated
(whether as consideration for the assignment, rentals under a sublease, or
otherwise), which exceed in aggregate the total sums which Lessee (or Lessee's
assignee in case of an assignment) is obligated to pay Lessor under this Lease
or otherwise pays in the form of real estate brokerage, attorney's fees, tenant
improvements costs and electrical power in connection with such assignment or
sublease prorated to reflect obligations allocable to that portion of the
Premises subject to such assignment or sublease, shall be payable to Lessor as
additional rental under this Lease without affecting or reducing any other
obligations of Lessee hereunder, provided that in no event shall Lessee be
obligated to pay Lessor less than the rental specified in this Lease.
(v) Lessee immediately and irrevocably assigns to Lessor, as
security for Lessee's obligations under this Lease, all rental from any
subletting of all or a part of the Premises as permitted by this Lease, and
Lessor, as assignee and as attorney in-fact for Lessee, or a receiver for Lessee
appointed on Lessor's application, may collect such rental and apply it towards
Lessee's obligations under this Lease; except that, until Lessor terminates the
Lease pursuant to Section 18, Lessee shall have the exclusive right to collect
such rental.
(d) Primary Liability. Regardless of Lessor's consent, no subletting
-----------------
or assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rental and to perform all other obligations to be
performed by Lessee hereunder. The
11
<PAGE>
acceptance of rental by Lessor from any other person shall not be deemed to be a
waiver by Lessor of any provision hereof. Consent to one assignment or
subletting shall not be deemed consent to any subsequent assignment or
subletting. In the event of default by any assignees of Lessee or any successor
of Lessee in the performance of any of the terms hereof, Lessor may proceed
directly against Lessee without the necessity of exhausting remedies against
such assignee or successor. Lessor may consent to subsequent assignments or
subletting of this Lease or amendments or modifications to this Lease with
assignees of Lessee, without notifying Lessee, or any successor of Lessee, and
without obtaining its or their consent thereto and such action shall not relieve
Lessee of liability under this Lease.
(e) Attorneys Fees. If Lessee shall assign or sublet the Premises or
--------------
request the consent of Lessor to any assignment or subletting, or if Lessee
shall request the consent of Lessor for any act that Lessee proposes to do, then
Lessee shall pay Lessor's reasonable attorneys' fees, not to exceed $2,000.00,
incurred in connection therewith.
(f) Conflicting Provisions. The provisions of this Section shall
----------------------
prevail and govern over any conflicting provision in any assignment or
subletting to which Lessor gives written consent. Any modification of the terms
of this Lease as between Lessee and Sublessee shall be void and will not be
binding on the Lessor.
15. Rules. Lessee shall faithfully observe and comply with the rules and
-----
regulations annexed to this Lease and, after notice thereof, all reasonable
modifications thereof and additions thereto from time to time promulgated in
writing by Lessor. Lessor shall not be responsible to Lessee for the
nonperformance by any other tenant or occupant of the Building of any of said
rules and regulations.
16. Entry by Lessor. Upon 24 hour prior notice, unless it is an
---------------
emergency, Lessor may enter the Premises at reasonable hours to (a) inspect the
same, (b) exhibit the same to prospective purchasers, lenders, or tenants, (c)
determine whether Lessee is complying with all its obligations hereunder, (d)
supply janitor service and any other service to be provided by Lessor to Lessee
hereunder, (e) post notices of nonresponsibility and (f) make repairs required
of Lessor under the terms hereof or repairs to any adjoining space or utility
services or make repairs, alterations or improvements to any other portion of
the Building; provided, however, that all such work shall be done as promptly as
reasonably and so as to cause as little interference to Lessee as reasonably
possible. Lessee hereby waives any claim for damages for any injury or
inconvenience to or interference with Lessee's business, any loss of occupancy
or quiet enjoyment of the Premises or any other loss occasioned by such entry.
Lessor shall at all times have and retain keys with which to unlock all of the
doors in, on or about the Premises (excluding Lessee's vaults, safes and similar
areas designated in writing by Lessee and approved by Lessor in advance); and
Lessor shall have the right to use any and all means which Lessor may deem
proper to open such doors in an emergency in order to obtain entry to the
Premises, and any entry to the Premises obtained by Lessor by any of said means,
or otherwise, shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Lessee from the Premises, or any portion thereof.
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17. Events of Default. The occurrence of any one or more of the following
-----------------
events (an "Event of Default") shall constitute a breach of this Lease by
Lessee: (a) if Lessee shall fail to pay any rent when and as the same becomes
due and payable; or (b) if Lessee shall fail to pay any other sum when and as
the same becomes due and payable and such failure shall continue for more than
10 days after written notice to Lessee or (c) if Lessee shall default in the
performance or observance of any other term hereof or of the rules and
regulations described in Section 15 to be performed or observed by Lessee, and
within 30 days following written notice from Lessor to Lessee, Lessee shall have
failed to completely cure such default, or if the nature of such default is such
that it cannot reasonably be cured within such 30 day period, Lessee shall not
within such 30 day period have commenced with prompt diligence the curing of
such default, or, having so commenced, shall thereafter have failed to prosecute
with prompt diligence the complete curing of such default; or (d) if Lessee
shall make a general assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts as they become due, or shall file a
petition in bankruptcy, or shall be adjudicated a bankrupt or as insolvent, or
shall file a petition in any proceeding seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution, or similar relief under any
present or future statute, law, or regulation, or shall file an answer
admitting, or fail to protest timely the material allegations of a petition
filed against it in any such proceeding, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver, or liquidator of Lessee
or any material part of its properties; or (e) if within 30 days after the
commencement of any proceeding against Lessee seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution, or similar
relief under any present or future statute, law, or regulation, such proceeding
shall not have been dismissed, or if, within 30 days after the appointment
without the consent or acquiescence of Lessee, of any trustee, receiver, or
liquidator of Lessee or of any material part of its properties, such appointment
shall not have been vacated; or (f) if this Lease or any estate of Lessee
hereunder shall be levied upon under any attachment or execution and such
attachment or execution is not vacated within 30 days; or (g) if Lessee shall
abandon or surrender the Premises, or be dispossessed by process of law or
otherwise, or shall vacate or fail to take possession of the Premises.
18. Lessor's Right to Terminate. If an Event of Default shall occur,
---------------------------
Lessor at any time thereafter may give a written termination notice to Lessee,
and on the date specified in such notice (which shall be not less than three
days after the giving of such notice) Lessee's right to possession shall
terminate, unless on or before such date all delinquent rent and all other sums
payable by Lessee under this Lease and all costs and expenses incurred by or on
behalf of Lessor hereunder shall have been paid by Lessee and all other breaches
of this Lease by Lessee at the time existing shall have been fully remedied to
the satisfaction of Lessor. Lessor may remove all persons and property located
therein and store such property in a public warehouse for the account and risk
and at the expense of Lessee. Lessor may do all things Lessor deems necessary
in order to relet the Premises, including, without limitation any alterations,
repair and/or restoration of the Premises. Upon such termination, Lessor may
recover from Lessee: (a) the worth at the time of award of the unpaid rental
which had been earned at the time of termination; (b) the worth at the time of
award of the amount by which the unpaid rental which would have been earned
after termination until the time of award exceeds the amount of such rental loss
that Lessee proves could have been reasonably avoided; (c) the worth at the time
of award of the
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<PAGE>
amount by which the unpaid rental for the balance of the term of this Lease
after the time of award exceeds the amount of such rental loss that Lessee
proves could be reasonably avoided; and (d) any other amount necessary to
compensate Lessor for all the detriment proximately caused by Lessee's failure
to perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom. The "worth at the time of award" of
the amounts referred to in clauses (a) and (b) above is computed by allowing
interest at the highest rate legally permitted under applicable law. The "worth
at the time of award" of the amount referred to in clause (c) above is computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus 1% (one percent). Notwithstanding any
other provisions hereof, any efforts by Lessor to mitigate damages caused by
Lessee's breach of this Lease shall not constitute a waiver of Lessor's right to
recover damages hereunder and shall not affect the right of Lessor to
indemnification pursuant to the provisions of Section 12 hereof.
19. Continuous Notwithstanding Default. Even though Lessee has breached
----------------------------------
this Lease and abandoned the Premises, this Lease shall continue in effect for
so long as Lessor does not terminate Lessee's right to possession, and Lessor
may enforce all its rights and remedies under this Lease, including the right to
recover the rental as it becomes due under this Lease. Acts of maintenance or
preservation or efforts to relet the Premises or the appointment of a receiver
upon the initiative of Lessor to protect Lessor's interest under this Lease
shall not constitute a termination of Lessee's right to possession.
20. Additional Remedies. The remedies provided for in this Lease are in
-------------------
addition to any other remedies available to Lessor at law or in equity by
statute or otherwise.
21. Lessor's Right to Cure Defaults. All agreements and provisions to be
-------------------------------
performed by Lessee under any of the terms of this Lease shall be at its sole
cost and expense and without any abatement of rental. If Lessee shall fail to
pay any sum of money, other than rental, required to be paid by it hereunder, or
shall fail to perform any other act on its part to be performed hereunder and
such failure shall continue for 10 days after notice thereof by Lessor, Lessor
may, but shall not be obligated to do so, and without waiving or releasing
Lessee from any obligations of Lessee, make any such payment or perform any such
other act on Lessee's part to be made or performed as in this Lease provided.
All sums so paid by Lessor and all necessary incidental costs shall be deemed
additional rent hereunder and shall be payable to Lessor on demand, and Lessor
shall have (in addition to any other right or remedy of Lessor) the same rights
and remedies in the event of the nonpayment thereof by Lessee as in the case of
default by Lessee in the payment of rental.
22. Attorneys' Fees. If as a result of any breach or default in the
---------------
performance of any of the provisions of this Lease, Lessor uses the services of
an attorney in order to secure compliance with such provisions or recover
damages thereof, or to terminate this Lease or evict Lessee, Lessee shall
reimburse Lessor upon demand for any and all attorneys' fees and expenses so
incurred by Lessor, provided that if Lessee shall be the prevailing party in any
legal action brought by Lessor against Lessee, Lessee shall be entitled to
recover for the fees of its attorneys in such amount as the court may adjudge
reasonable.
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23. Eminent Domain. If any part of the Premises shall be taken as a
--------------
result of the exercise of the power of eminent domain, this Lease shall
terminate as to the part of the Premises so taken as of the date of taking, and
either Lessor or Lessee shall have the right to terminate this Lease as to the
balance of the Premises remaining after a partial taking by written notice to
the other within 30 days after such date, provided, however, that a condition to
the exercise by Lessee of such right to terminate shall be that such partial
taking shall be to such extent and nature as substantially to handicap, impede,
or impair the conduct of Lessee's business therein. If all of the Premises are
taken as a result of the exercise of the power of eminent domain, this Lease
shall terminate upon the date of taking. If any part of the Building (other
than the Premises) shall be taken as a result of the exercise of the power of
eminent domain, Lessor shall have the right to terminate this Lease by written
notice to Lessee within 30 days from the date of such taking; in the event that
Lessor does not so elect, this Lease shall continue in full force and effect,
provided that Lessee is afforded continuous access to the Premises.
Lessor shall be entitled to any and all compensation, damages, income,
rent, awards, or any interest therein whatsoever which may be paid or made in
connection with any exercise of the power of eminent domain, and Lessee shall
have no claim, against Lessor for the value of any unexpired term of this Lease
or otherwise. In the event of a partial taking of the Premises which does not
result in a termination of this Lease, the monthly rental thereafter to be paid
shall abate in proportion to that portion of the Premises that is rendered
unusable by Lessee in the conduct of its business.
It is understood and agreed that the foregoing provisions of this section
are intended to and do fully define and set forth the respective rights and
obligations of the parties in the event of a taking of the Premises or a part
thereof, including without limitation the circumstances under which this Lease
shall or may be terminated, and the disposition of any proceeds of any insurance
or award, and Lessor and Lessee each expressly waives the benefit and effect of
any rights and/or obligations whether purporting to arise by law, by
governmental order, under any insurance contract, or otherwise (including the
provisions of the California Code of Civil Procedure 1265.130), which are
inconsistent with the rights and obligations set forth herein.
For purposes hereof the "date of taking" shall be deemed to be the date
that physical possession of the property taken is delivered to the condemning
authority.
24. Subordination. This Lease shall be subject and subordinate at all
-------------
times to (a) all ground or underlying leases which may hereafter be executed
affecting the Building and (b) the liens of all mortgages and deeds of trust in
any amount or amounts whatsoever now or hereafter placed on or against the
Building or on or against Lessor's interest or estate therein or on or against
all such ground or underlying leases, all without the necessity of having
further instruments executed on the part of Lessee to effect such subordination.
Notwithstanding the foregoing: (i) in the event of termination for any reason
whatsoever of any such ground or underlying lease, this Lease shall not be
barred, terminated, cut off or foreclosed nor shall the rights and possession of
Lessee hereunder be disturbed if Lessee is not then in default in the payment of
rental or other sums or be otherwise in default under the terms of this Lease,
and Lessee shall attorn to the Lessor of any such ground or underlying lease,
or, if requested, enter into a new lease for the balance of the original or
extended term thereof then remaining upon the
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same terms and provisions as are in this Lease contained; (ii) in the event of a
foreclosure of any such mortgage or deed of trust or of any other action or
proceeding for the enforcement thereof, or of any sale thereunder, this Lease
will not be barred, terminated, cut off or foreclosed, nor will the rights and
possession of Lessee thereunder be disturbed if Lessee shall not then be in
default in the payment of rental or other sums or be otherwise in default under
the terms of this Lease and Lessee shall attorn to the purchaser at such
foreclosure, sale, or other action or proceeding, and (iii) Lessee agrees to
execute and deliver upon demand such further instruments evidencing such
subordination of this Lease to such ground or underlying leases, and to the
liens of any such mortgages or deeds of trust as may reasonably be requested by
Lessor. Lessee's covenant to subordinate this Lease to ground or underlying
leases and/or mortgages or deeds of trust hereafter executed is conditioned upon
each senior instrument containing the commitments specified in the preceding
clauses (i) and (ii).
25. No Merger. The voluntary or other surrender of this Lease by Lessee,
---------
or a mutual cancellation thereof, shall not work a merger, and, at the option of
Lessor, either shall operate (a) to terminate all or any existing subleases or
subtenancies under the Lease or (b) as an assignment to Lessor of any or all
such subleases and subtenancies.
26. Sale. If the original Lessor hereunder, or any successor owner of the
----
Building, shall sell or convey the Building, all liabilities and obligations on
the part of the original Lessor, or such successor owner, under this Lease
accruing thereafter shall terminate, and thereupon all such liabilities and
obligations shall be binding upon the new owner. Lessee agrees to attorn to
such new owner.
27. Estoppel Certificate. At any time and from time to time within 15
--------------------
working days following written request by Lessor, Lessee will execute,
acknowledge and deliver to Lessor, promptly upon request, a certificate
certifying (a) that this Lease is unmodified and in full force and effect (or if
there have been modifications, that this Lease is in full force and effect as
modified and stating the date and nature of each modification), (b) the date, if
any, to which rental and other sums payable hereunder have been paid, (c) that
no notice has been received by Lessee of any default which has not been cured,
except as to defaults specified in said certificate and (d) such other matters
as may be reasonably requested by Lessor. Any such certificate may be relied
upon by any prospective purchaser, mortgagee, or beneficiary under any deed of
trust on the Building or any part thereof.
28. No Light, Air or View Easement. Any diminution or shutting off of
------------------------------
light, air or view by any structure which may be erected on lands adjacent to
the Building shall in no way affect this Lease or impose liability on Lessor.
29. Holding Over. If, without objection by Lessor, Lessee holds
------------
possession of the Premises after expiration of the term of this Lease, Lessee
shall become a tenant from month to month upon the terms, conditions and
provisions herein specified but at a monthly rental equivalent to the then
prevailing fair market rental as determined in good faith by the Lessor but in
no event less than the rental being paid by Lessee in the last month of the term
of this Lease, payable in advance on or before the first day of each month.
Each party shall give the other
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notice at least one month prior to the date of termination of such monthly
tenancy of its intention to terminate such tenancy.
30. Abandonment. Lessee shall not abandon any part or all of the
-----------
Premises. If Lessee shall abandon, or surrender the Premises, or be
dispossessed by process of law or otherwise, any personal property belonging to
Lessee and left on the Premises shall be deemed to be abandoned, at the option
of the Lessor, except such property as may be mortgaged to Lessor.
31. Surrender. Subject to the provisions of Section 7, Lessee shall at
---------
the end of the term hereof surrender to Lessor the Premises and all alterations,
additions and improvements thereto in the same condition as when received,
ordinary wear and tear and damage by fire, earthquake, act of God, or the
elements excepted. All improvements on the Premises at the expiration of the
term or sooner termination of this Lease, shall, without compensation to Lessee,
then become Lessor's property free and clear of all claims to or against them by
Lessee or any third person, and Lessee shall defend and indemnify Lessor against
all liability and loss arising from such claims or from Lessor's exercise of the
rights conferred by this Section.
32. Waiver. The waiver by Lessor or Lessee of any term, agreement,
------
condition, or provision herein contained shall not be deemed to be a waiver of
any subsequent breach of the same or any other term, agreement, condition, or
provision herein contained, nor shall any custom practice which may grow between
the parties in the administration of the terms hereof be construed to waive or
to lessen the right of Lessor or Lessee to insist upon the performance by the
other party in strict accordance with said terms. The subsequent acceptance or
payment of rental hereunder by Lessor or Lessee, respectively, shall not be
deemed to be a waiver of any preceding breach by Lessee or Lessor of any term,
agreement, condition, or provision of this Lease, other than the failure of
Lessee to pay particular rental so accepted, regardless of Lessor's or Lessee's
knowledge of such preceding breach at the time of acceptance or payment of such
rental.
33. Notice. All notices, demands or other writings provided in this Lease
------
to be given or made or sent, or which may be given or made or sent by either
party to the other, shall be deemed to have been fully given or made or sent
when made in writing and upon personal delivery or after 72 hours following
deposit in the United States mail, registered or certified, postage prepaid, and
addressed as follows: to Lessee at the address specified in the Basic Lease
Information, or to such other place as Lessee may from time to time designate in
a notice to Lessor; to Lessor at the address specified in the Basic Lease
Information, or to such other place as Lessor may from time to time designate in
a notice to Lessee. Lessee hereby appoints as its agent to receive the service
of all dispossessory or distraint proceedings and notices thereunder the person
in charge of or occupying the Premises at the time, and, if no person shall be
in charge of or occupying the same, then such service may be made by attaching
the same on the main entrance of the Premises.
34. Complete Agreement. Except as set forth in a separate letter between
------------------
Lessor and Lessee of even date herewith, there are no oral or written agreements
between Lessor and Lessee affecting this Lease, and this Lease supersedes and
cancels any and all previous negotiations, arrangements, brochures, agreements,
and understandings, oral or written, if any, between Lessor
17
<PAGE>
and Lessee or displayed by Lessor to Lessee with respect to the subject matter
of this Lease. There are no representations between Lessor and Lessee other than
those contained in this Lease, and all reliance with respect to any
representations is solely upon such representations.
35. Corporate Authority. If Lessee signs as a corporation, each of the
-------------------
persons executing this Lease on behalf of Lessee does hereby covenant and
warrant that Lessee is a duly authorized and existing corporation, that Lessee
has and is qualified to do business in California, that the corporation has full
right and authority to enter into this Lease, and that the persons signing on
behalf of the corporation were authorized to do so.
36. Miscellaneous Provisions.
------------------------
(i) The words "Lessor" and "Lessee" as used herein shall
include the plural as well as the singular.
(ii) If there be more than one Lessee, the obligations
hereunder imposed upon Lessee shall be joint and several.
(iii) Time is of the essence of this Lease and each and all of
its provisions.
(iv) Submission of this instrument for examination or signature
by Lessee does not constitute a reservation of or option for lease, and it is
not effective as a lease or otherwise until execution and delivery by both
Lessor and Lessee.
(v) The agreements, conditions and provisions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
executors, administrators, successors and assigns of the parties hereto.
(vi) If any provision of this Lease shall be determined to be
illegal or unenforceable, such determination shall not affect any other
provision of this Lease and all such other provisions shall remain in full force
and effect.
(vii) This Lease shall be governed by and construed pursuant to
the laws of the State of California.
(viii) All remedies hereinbefore and hereafter conferred upon
either party shall be deemed cumulative and no one shall be exclusive of the
other, or shall in any way limit the availability to such party of any other
remedy conferred by law, whether or not specifically conferred by the provisions
of this Lease.
(ix) All indemnities of Lessee contained in this Lease shall
survive the expiration or other termination hereof with respect to any act,
condition or event which is the subject matter of such indemnity and which
occurs prior to such expiration or other termination.
(x) Tenant, upon signing of the Lease will prepay first month
rent.
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37. Exhibits. The exhibit(s) and addendum, if any, specified in any of
--------
the Sections of this Lease are attached to this Lease and by this reference made
a part hereof.
38. Option to Renew. Provided that Lessee is not then in default, Lessee
---------------
shall have the option to renew this Lease for an extended term commencing August
------
1, 2002, and ending July 31, 2007. In order to exercise such option to renew,
- ------- -------------
Lessee shall give written notice of its election to exercise such option on or
prior to 180 (one hundred and eighty days) prior to Lease Expiration. If such
---------------------------------
notice is so given, Lessor and Lessee shall be deemed to have entered into an
agreement for the extension of the Lease for such extended term without any
further writing; and in the event that Lessee for any reason does not give such
notice to Lessor by such date, such option to renew shall terminate and lapse
for all purposes. Such option to renew shall be on the same terms and
conditions as set forth in the Lease except as follows:
(a) Lessor shall not be obligated to make any payment in respect of
tenant improvements.
(b) The monthly Base Rent for each year of the extended term shall be
as follows: 95% of then Fair Market Value.
(c) New Base Year.
39. Lessor Warranty. Lessor warrants that as of the date of execution of
---------------
this Lease, Lessor has not received from any applicable governmental authority
notice that either the Premises or the Building is in violation of any
requirement concerning health and safety, fire and disaster, access by
handicapped and disabled persons or otherwise is not in compliance with
applicable building codes.
40. Deposit. The Lessee has deposited with the Lessor the sum of sixteen
------- -------
thousand, two hundred thirty five dollars ($16,235.00), as security for the
- ------------------------------------------------------
faithful performance by Lessee of all the covenants and conditions of this
Lease. If Lessee shall default in the performance of any covenant or condition
of this Lease, Lessor may apply or retain the whole or any part of such security
deposit for the payment of any rental arrearages, repairs, cleaning, or for any
other sums which Lessor may have spent on damages which Lessor may incur by
reason of Lessee's default. If Lessee should default in the performance of the
terms and provisions of this Lease and the amount of such security deposit be
credited to Lessor as a result of such default as provided by this paragraph,
and if this Lease is not by reason of such default terminated by Lessor, upon
written demand by Lessor to Lessee, Lessee shall forthwith deliver and pay to
Lessor an amount sufficient to restore said security deposit to the original
amount. Should Lessee comply with all the covenants and conditions of this
Lease, the security deposit, less any sums expended by Lessor that are
reasonably necessary to remedy Lessee's defaults under the terms of this Lease
including, without limitation, the payment of rent, repairing damages to the
demised premises caused by Lessee, and cleaning the demised premises upon the
vacation thereof by Lessee, shall be returned to Lessee within fourteen (14)
days of Lessee's vacation of the demised premises. Lessee shall not be entitled
to any interest on the security deposit and Lessor shall have the right to
commingle said security deposit with other funds of the Lessor. Under no
circumstances may
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<PAGE>
the security deposit or any part thereof be used or assigned by Lessee as
payment of a part or all of the last month's rent due hereunder.
41. Additional Security. Tenant shall post a security interest in Deposit
-------------------
Account in favor of T/W Associates in the amount of Sixty thousand dollars
($60,000.00). Such amount shall decrease by ten thousand ($10,000.00) at the
end of each lease year, beginning with the end of the first year of the lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the respective
dates indicated below:
LESSOR: LESSEE:
T/W ASSOCIATES SALON INTERNET, INC.
By: /s/ General Partner By: /s/ Authorized Officer
-------------------- ------------------------
General Partner
Date: June 25, 1997 Date: June 25, 1997
------------------ ---------------------
20
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EXHIBIT A
---------
<PAGE>
EXHIBIT B
---------
TENANT IMPROVEMENTS - LESSOR'S WORK
706 MISSION ST., 2ND FLOOR
Premises for this Lease Agreement to be delivered to Tenant in "as is"
condition.
Lessor will not provide any alterations or improvements to the Premises.
Lessor shall provide a Tenant Improvement contribution (Contribution) of up
to a maximum of ONE HUNDRED ELEVEN THOUSAND AND THREE HUNDRED TWENTY FOUR
DOLLARS ($111,324.00) towards the refurbishment of the Premises. Such
Contribution shall be inclusive of all costs, including, but not limited to
demolition, code work within the Premises, lighting, HVAC, permits,
architectural drawings and consultations.
Lessor shall reimburse Tenant based upon verifiable receipts, in amounts
not to exceed the prepared cost list submitted as required under Exhibit C.
<PAGE>
EXHIBIT C
---------
TENANT IMPROVEMENT - LESSEE'S WORK
706 MISSION ST., 2ND FLOOR
Lessee shall inspect the Premises in its "as is" condition.
Lessee shall engage a licensed Architect to prepare drawings showing the
improvements to be made and shall submit all improvement documents including
cost amount for each phase of work to Lessor for Lessor's approval prior to
doing work.
All improvements shall be performed in compliance with the San Francisco
Building Code and Title 24, State of California Administrative Code.
All work shall be performed by a bonded California licensed contractor
engaged by the Lessee.
Sub-contractors for the following work shall be approved by Lessor prior to
work:
1. HVAC work
2. Electrical Work
3. Plumbing
<PAGE>
RULES AND REGULATIONS ATTACHED
------------------------------
TO AND MADE A PART OF THIS LEASE
--------------------------------
1. In case of invasion, mob, riot, public excitement, or other
circumstances rendering such action advisable in Lessor's opinion, Lessor
reserves the right to prevent access to the building during the continuance of
the same by closing the doors or any other means for the safety of the occupants
and protection of the building and property in the building.
2. The sidewalks, hallways, passages, exits, entrances, elevators, and
stairways shall not be obstructed by any of the Lessees or used by them for any
purpose other than for ingress to and egress from their respective premises.
The halls, passages, exits, entrances, elevators, stairways and roof are not for
the use of the general public and Lessor shall in all cases retain the right to
control and prevent access thereto by all persons whose presence in the judgment
of Lessor shall be prejudicial to the safety, character, reputation and
interests of the building and its Lessees, provided that nothing herein
contained shall be construed to prevent such access to persons with whom any
Lessee normally deals in the ordinary course of such Lessee's business unless
such persons are engaged in illegal activities. No Lessee and no employees or
invitees of any Lessee shall go upon the roof of the building.
3. No sign, placard, picture, name, advertisement or notice, visible from
the exterior of the leased premises shall be inscribed, painted, affixed or
otherwise displayed by any Lessee on the leased Premises or any part of the
building without the prior written consent of Lessor, and Lessor shall have the
right to remove any such sign, placard, picture, name, advertisement or notice
without notice to and at the expense of the Lessee.
If Lessor shall have given such consent to any Lessee at any time, whether
before or after the execution of the lease, such consent shall in no way operate
as a waiver or release of any of the provisions hereof or of such lease, and
shall be deemed to relate only to the particular sign, placard, picture, name,
advertisement or notice so consented to by Lessor and shall not be construed as
dispensing with the necessity of obtaining the specific written consent of
Lessor with respect to any other such sign, placard, picture, name,
advertisement or notice.
All approved signs or lettering on doors shall be printed, painted, affixed
or inscribed at the expense of the Lessee by a person approved of by Lessor.
4. The bulletin board or directory of the building will be provided
exclusively for the display of the name and location of the Lessees only and
Lessor reserves the right to exclude any other names therefrom.
5. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, hangings or decorations shall be attached, to, hung or placed in, or
used in connection with any window or any leased Premises without the prior
written consent of Lessor, said above items shall be installed in board of
Lessor's standard draperies and shall in no way be visible from the exterior of
the building.
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<PAGE>
6. No Lessee shall employ any person or persons other than the janitor of
Lessor for the purpose of cleaning the Premises unless otherwise agreed to by
Lessor in writing. Except with the written consent of Lessor no person or
persons other than those approved by Lessor shall be permitted to enter the
building for the purpose of cleaning the same. No Lessee shall cause any
unnecessary labor by reason of such Lessee's carelessness or indifference in the
preservation of good order and cleanliness. Janitor service shall include
ordinary dusting, cleaning and vacuuming by the janitor assigned to such work
and shall not include beating of carpets or rugs or moving of furniture or other
special services. Window cleaning shall be done only by Lessor, and at such
intervals and such hours as Lessor shall deem appropriate.
7. No Lessee shall obtain for sale or use upon the leased Premises, ice,
drinking water, food, beverage, towel, hot water generator or other similar
machines or services, or accept barbering or bootblacking services in the leased
Premises, except from persons authorized by Lessor, which authorization shall
not be unreasonably withheld. Notwithstanding the foregoing, no cooking shall
be done or permitted by any Lessee in the Premises, nor shall the Premises be
used for lodging. Lessee at Lessee's expense may provide lunchroom facilities
for its employees, provided that no cooking is done therein. In no event may a
sandwich vending machine be used.
8. Each Lessee shall see that the doors of its Premises are closed and
securely locked and must observe strict care and caution that all water faucets
or water apparatus are entirely shut off before Lessee or Lessee's employees
leave the Premises, and that all utilities shall likewise be carefully shut off,
so as to prevent waste or damage, and for any default or carelessness Lessee
shall make good all injuries sustained by other Tenants or occupants of the
building or Lessor. On multiple-tenancy floors all Lessees shall keep the door
or doors to the building corridors closed at all times except for ingress and
egress.
9. No Lessee shall alter any lock or install a new or additional lock or
any bolt on any door of the leased Premises without prior written consent of
Lessor. If Lessor shall give its consent, the Lessee at its expense shall in
each case furnish Lessor with a key for any and all such locks installed or
altered by Lessee. Lessor at its expense shall furnish to Lessee 2 sets of keys
for each lock as may be necessary for access to the Premises; Lessor shall
furnish additional sets upon Lessee's request at Lessee's expense.
10. Each Lessee upon the termination of the tenancy, shall deliver to
Lessor all the keys of or to the building, offices, rooms and toilet rooms which
shall have had made, and in the event of the loss of any keys so furnished by
Lessor, shall pay Lessor therefor.
11. The toilet rooms, toilets, urinals, washbowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the Lessee who, or whose employees or
invitees shall have caused it.
12. No Lessee shall use or keep in the Premises or the building any
kerosene, gasoline or combustible fluid or material, or use any method of
heating or air-conditioning other than that supplied by Lessor.
2
<PAGE>
No Lessee shall use, keep or permit to be used or kept any foul or noxious
gas or substance in the Premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to Lessor or other
occupants of the building by reason of noise, odors and/or vibrations, or
interference in any way with other Lessees or those having business therein, nor
shall any animals or birds be brought in or kept about the Premises or the
building.
13. Except with the prior written consent of Lessor, no Lessee shall sell,
or permit the sale of newspapers, magazines, periodicals, theatre tickets or any
other goods or merchandise in or on the Premises, nor shall any Lessee carry on,
or permit to allow any employee or other person to carry on, the business of
stenography, typewriting or any similar business in or from the Premises for the
service or accommodation of occupants of any other portion of the building, nor
shall the Premises of any Lessee be used for the storage of merchandise (except
supplies and uniforms used by Lessee in the ordinary course of its business) or
manufacturing of any kind, or the business of a public barber shop, beauty
parlor, or any business or activity other than that specifically provided for in
such Lessee's lease.
14. Lessor will direct electricians as where and how telephone, telegraph
and electrical wires are to be introduced or installed. No boring or cutting for
wires will be allowed without the written consent of Lessor. The location of
telephones, call boxes and other office equipment affixed to the Premises shall
be subject to the written approval of Lessor, which approval will not
unreasonably be withheld.
15. No Lessee shall install any radio or television antenna, loudspeaker
or any other devices on the roof or exterior walls of the building.
16. No Lessee shall lay linoleum, tile, carpet, or any other floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved in writing by Lessor. The expense of repairing any
damage resulting from a violation of this rule or removal of any floor covering
shall be borne by the Lessee by whom, or by whose contractors, employees or
invitees, the damage shall have been caused.
17. No furniture, freight, equipment, packages or merchandise permitted
hereby will be received in the building or carried up or down the elevators,
except between such hours and in such elevators as shall be designated by
Lessor, and such designation shall not be unreasonably withheld.
Lessor shall have the right to prescribe the weight, size and position of
all safes and other heavy equipment brought into the building. Safes or other
heavy objects shall, if considered necessary by Lessor, stand on wood strips of
such thickness as is necessary to properly distribute the weight. Lessor will
not be responsible for loss of or damage to any such safe or property from any
cause and all damage done to the building by moving or maintaining any such safe
or other property shall be repaired at the expense of the Lessee.
18. No Lessee shall mark, drive nails, hang pictures and other works of
art, screw or drill into the partitions, woodwork or plaster or in any way
deface the Premises or any part
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thereof without the consent of the Lessor, which consent will not be
unreasonably withheld, and no Lessee shall overload the floor of the Premises.
19. There shall not be used in any space, or in the public halls of the
building, either by any Lessee or others, any hand trucks except those equipped
with rubber tires and side guards. No other vehicles of any kind shall be
brought by any Lessee into or kept in or about any leased Premises.
20. Each Lessee shall store all its trash and garbage within the interior
of the leased Premises. No material shall be placed in or on the trash boxes or
waste receptacles if such material is of such nature that it may not be disposed
of in the ordinary and customary manner of removing and disposing of trash and
garbage in the City of San Francisco without being in violation of any law or
ordinance governing such disposal. All garbage and refuse disposal shall be made
only through entryways and elevators provided for such purposes and at such
times as Lessor shall designate, which designation shall not be unreasonably
withheld.
21. Enter and exit the building by passenger elevators and stairway
through the front lobby only. Freight elevator for freight and deliveries only;
not to be used for passenger(s).
22. No parking for automobile, motorcycles, bicycles, or any other type of
vehicles used for transportation in the building or building grounds.
23. Canvassing, soliciting, and peddling in the building are prohibited
and each Lessee shall cooperate to prevent the same.
24. Lessor shall have the right, exercisable without notice and without
liability to any Lessee, to change the name and address of the building.
25. The requirements of the Lessees will be attended to only upon
application at the office of the building. Employees of Lessor shall not perform
any work or do anything outside of their regular duties unless under special
instructions from Lessor, and no employee will admit any person (Lessee or
otherwise) to any office without specific instructions from Lessor.
26. Lessor may waive any one or more of these Rules and Regulations for
the benefit of any particular Lessee or Lessees, but no such waiver by Lessor
shall be construed as a waiver of such Rules and Regulations in favor of any
other Lessee or Lessees, nor prevent Lessor from thereafter enforcing any such
Rules and Regulations against any or all of the Lessees in the building.
27. Lessor reserves the right to exclude or expel from the building any
person who, in the judgment of Lessor, is intoxicated or under the influence of
liquor or drugs, or who shall in any manner do any act in violation of any of
the rules and regulations of the building.
28. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the terms,
covenants and conditions of the lease.
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<PAGE>
HAZARDOUS MATERIALS
-------------------
ATTACHED TO AND MADE PART OF THIS LEASE
---------------------------------------
1. Use of Hazardous Materials Prohibited. Tenant will not use, generate,
--------------------------------------
manufacture, produce, store, release, discharge, or dispose of, on, under or
about the Premises or the Building or transport to or from the Premises or the
Building any Hazardous Materials (as defined below) or allow its employees,
agents, contractors, invitees or any other person or entity to do so, and Tenant
shall keep and maintain the Premises and the Building in compliance with, and
shall not cause or permit the Premises or the Building to be in violation of any
Environmental Laws (as defined below).
2. Indemnification. Tenant shall protect, defend, indemnify and hold
---------------
harmless Landlord from and against any and all losses, damages, costs, expenses
or liability (including attorneys' fees and costs) directly or indirectly
arising out of or attributable to any Hazardous Materials released by Tenant or
its employees, agents or invitees on, under or about premises or building on,
under or about the Premises or the Building. This indemnity shall survive the
expiration or termination of this Lease. Landlord shall have the right to join
and participate in, as a party if it so elects, any legal proceedings or actions
affecting the premises or the Building initiated in connection with any
violation by Tenant or its employees or agents of any Environmental Law and
shall have its attorneys' fees in connection therewith paid by Tenant.
3. Definition of Hazardous Materials. As used herein, the term
---------------------------------
"Hazardous Materials" means any hazardous or toxic substance, material or waste
which is or becomes regulated by any local governmental authority, the State of
California or the United States Government, or is or becomes classified as
hazardous or toxic under federal, state, or local laws or regulations.
"Hazardous Materials" shall also include without limitation, petroleum,
asbestos, polychlorinated biphenyls, flammable explosives or radioactive
materials.
4. Definition of Environmental Laws. "Environmental Laws" shall mean any
--------------------------------
federal, state or local law, statute, ordinance, or regulation pertaining to
health, industrial hygiene, or the environmental conditions on, under or about
the premises, or the Building, including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") as
amended, 42 U.S.C. Section 9601 et seq., and the Resource Conservation and
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Recovery Act of 1976 ("RCRA"), 42 U.S.C. Sections 6901 et seq.
------
<PAGE>
FIRST AMENDMENT TO
706 MISSION STREET
OFFICE LEASE
THIS FIRST AMENDMENT TO 706 MISSION STREET OFFICE LEASE, made as of August
1, 1997, by and between T/W ASSOCIATES ("Landlord") and SALON INTERNET, INC., a
California Corporation ("Tenant"),
WITNESSETH:
Whereas Landlord and Tenant are parties to that certain 706 Mission Street
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Office Lease dated as of June 25, 1997 (said lease is herein called the "Lease")
of certain premises more particularly described therein located at 706 Mission
Street, San Francisco, California; and
Whereas Landlord and Tenant desire to further amend the Lease as herein
-------
provided:
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
Landlord and Tenant agree as follows:
1. Paragraph 41, Additional Security of the Lease is hereby amended by
adding the following language to the end of the paragraph:
Tenant may, with Landlord's approval, provide a Letter of Credit in lieu of
the above mentioned Security Interest in Deposit Account. However, if for
any reason such Letter of Credit is not extended through to July 31, 2002
and if Tenant does not provided an acceptable alternative Security Interest
in Deposit account in lieu of the Letter of Credit then fifteen (15) days
prior to the date the Letter of Credit or any extension thereof terminates,
Tenant will be deemed in default of the Lease and Landlord may exercise its
right to collect its funds under the Letter of Credit.
2. Capitalized terms used herein, unless otherwise defined, shall have
the meanings given them in the Lease.
3. Except as amended hereby, the Lease remains unamended, and as amended
hereby the Lease remains in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
------------------
day and year first hereinabove set forth.
T/W ASSOCIATES SALON INTERNET, INC.
By /s/ Authorized Officer By /s/ Authorized Officer
---------------------- -----------------------
Its Authorized Officer Its: Authorized Officer
--------------------- ---------------------
Date August 1, 1997 Date August 1, 1997
-------------------- ---------------------
<PAGE>
EXHIBIT 10.5
AGREEMENT OF LEASE
Between
ZAPCO 1500 INVESTMENT L.P.
Landlord,
and
SALON INTERNET, INC.
Tenant.
PREMISES:
Portion of Fourteenth (14th) Floor
1500 Broadway
New York, New York
Lease Date:
March ___, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. DEMISE, PREMISES, TERM, RENT....................................................................... 1
2. USE AND OCCUPANCY.................................................................................. 3
3. ALTERATIONS........................................................................................ 5
4. REPAIRS-FLOOR LOAD................................................................................. 9
5. WINDOW CLEANING.................................................................................... 10
6. REQUIREMENTS OF LAW................................................................................ 10
7. SUBORDINATION...................................................................................... 12
8. RULES AND REGULATIONS.............................................................................. 13
9. INSURANCE.......................................................................................... 14
10. DESTRUCTION OF THE PREMISES: PROPERTY LOSS OR DAMAGE............................................... 16
11. EMINENT DOMAIN..................................................................................... 18
12. ASSIGNMENT AND SUBLETTING.......................................................................... 18
13. CONDITION OF THE PREMISES.......................................................................... 27
14. ACCESS TO PREMISES................................................................................. 28
15. CERTIFICATE OF OCCUPANCY........................................................................... 32
16. LANDLORD'S LIABILITY............................................................................... 32
17. DEFAULT............................................................................................ 33
18. REMEDIES AND DAMAGES............................................................................... 35
19. FEES AND EXPENSES.................................................................................. 37
20. NO REPRESENTATIONS BY LANDLORD..................................................................... 38
21. END OF TERM........................................................................................ 39
22. QUIET ENJOYMENT.................................................................................... 40
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
23. FAILURE TO GIVE POSSESSION......................................................................... 40
24. NO WAIVER.......................................................................................... 40
25. WAIVER OF TRIAL BY JURY............................................................................ 41
26. INABILITY TO PERFORM............................................................................... 42
27. BILLS AND NOTICES.................................................................................. 42
28. ESCALATION......................................................................................... 42
29. SERVICES........................................................................................... 46
30. PARTNERSHIP TENANT................................................................................. 52
31. VAULT SPACE........................................................................................ 53
32. SECURITY DEPOSIT/LETTER OF CREDIT.................................................................. 53
33. CAPTIONS........................................................................................... 54
34. ADDITIONAL DEFINITIONS............................................................................. 54
35. PARTIES BOUND...................................................................................... 55
36. BROKER............................................................................................. 55
37. INDEMNITY.......................................................................................... 55
38. ADJACENT EXCAVATION-SHORING........................................................................ 56
39. MISCELLANEOUS...................................................................................... 56
40. TENANT RELOCATION.................................................................................. 57
</TABLE>
ii
<PAGE>
AGREEMENT OF LEASE, made as of this _______ day of March, 1998 between
ZAPCO 1500 INVESTMENT L.P., a Delaware limited partnership, having an office c/o
Intertech Corporation, 1301 Pennsylvania Avenue, Washington, D.C. 20004
(hereinafter called "LANDLORD") and SALON INTERNET, INC., a California
corporation, having an office at 706 Mission Street, 2nd Floor, San Francisco,
California 94103 (hereinafter called "TENANT").
W I T N E S S E T H:
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
1. DEMISE, PREMISES, TERM, RENT.
1.1 Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord a portion of the fourteenth (14th) floor also known as Suite 1402 as
indicated on Exhibit 1 annexed hereto and made a part hereof (hereinafter called
the "PREMISES") in the building known as 1500 Broadway, in the Borough of
Manhattan, City, County and State of New York (said building is hereinafter
called the "BUILDING" and the Building, together with the plot of land upon
which it stands, is hereinafter called the "REAL PROPERTY") for a term
(hereinafter called the "TERM") to commence on the Commencement Date
(hereinafter defined) and to end on the Expiration Date (hereinafter defined)
both dates inclusive unless the Term shall sooner end pursuant to any of the
terms, covenants or conditions of this Lease or pursuant to law for the Rent
herein reserved. Tenant agrees to pay the Rent provided for herein in lawful
money of the United States which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment. in equal monthly
installments, in advance, on the first (lst) day of each calendar month during
the Term from and after the Rent Commencement Date at the office of Landlord or
such other place as Landlord may designate, without any set-off, offset,
abatement or deduction whatsoever (except as otherwise expressly provided in
this Lease), provided, however, that Tenant shall pay the first monthly
installment on the execution of this Lease. The Rent for any portion of a
calendar month included in the Term shall be prorated in the ratio that the
number of days in such portion bears to the actual number of days in such month.
In the event that, on the Rent Commencement Date, or thereafter, Tenant shall be
in default in the payment of Rent to Landlord pursuant to the terms of another
lease of space in the Building with Landlord or with Landlord's predecessor-in-
interest, Landlord may, at Landlord's option and without notice to Tenant add
the amount of such arrearages to any monthly installment of the Rent and the
same shall be payable to Landlord as additional rent.
1.2 The following definitions contained in this subsection 1.2 of this
Article 1 shall have the meanings hereinafter set forth used throughout this
Lease, Exhibits, Schedules, and Riders (if any).
(i) "COMMENCEMENT DATE" shall mean the date upon which Landlord
delivers possession of the Premises to the Tenant, provided that upon such date
(i) Landlord shall have substantially completed construction of the demising
wall located within the Premises and (ii) electrical service to the Premises
shall be in good working order, subject to the provisions of subsection 1.3 of
this Article 1.
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<PAGE>
(ii) "EXPIRATION DATE" shall mean the last day of the month in which
the sixth (6th) anniversary of the Commencement Date occurs, or such earlier or
later date on which the Term shall sooner or later end pursuant to any of the
terms or provisions of this Lease or pursuant to law.
(iii) "RENT" shall mean:
(a) One Hundred Fifty-Two Thousand Two Hundred Seventeen and
No/1 Dollars ($152,217.00) annually, payable in equal monthly installments, in
advance, of Twelve Thousand Six Hundred Four and 75/100 Dollars ($12,684.75),
from the Commencement Date through and including the last day preceding the one
(1) year anniversary of the Commencement Date;
(b) One Hundred Fifty-Six Thousand Four Hundred Thirty-Two and
24/100 Dollars ($156,432.24) annually, payable in equal monthly installments, in
advance, of Thirteen Thousand Thirty-Six and 02/100 Dollars ($13,036.02), from
the one (1) year anniversary of the Commencement Date through and including the
last day preceding the two (2) year anniversary of the Commencement Date;
(c) One Hundred Sixty Thousand Seven Hundred Sixty-Four and
57/100 Dollars ($160,764.57) annually, payable in equal monthly installments, in
advance, of Thirteen Thousand Three Hundred Ninety-Seven and 05/100 Dollars
($13,397.05), from the two (2) year anniversary of the Commencement Date through
and including the last day preceding the three (3) year anniversary of the
Commencement Date;
(d) One Hundred Seventy-Three Thousand Fifty-Nine and 02/100
Dollars ($173,059.02) annually, payable in equal monthly installments, in
advance, of Fourteen Thousand Four Hundred Twenty-One and 59/100 Dollars
($14,421.59), from the three (3) year anniversary of the Commencement Date
through and including the last day preceding the four (4) year anniversary of
the Commencement Date;
(e) One Hundred Seventy-Seven Thousand Eight Hundred Ninety-
Eight and 74/100 Dollars ($177,898.74) annually, payable in equal monthly
installments, in advance, of Fourteen Thousand Eight Hundred Twenty-Four and
90/100 Dollars ($14,824.90) from the four (4) year anniversary of the
Commencement Date through and including the last day preceding the five (5) year
anniversary of the Commencement Date; and
(f) One Hundred Eighty-Two Thousand Eight Hundred Fifty-Five
and 55/100 Dollars ($182,855.55) annually, payable in equal monthly
installments, in advance, of Fifteen Thousand Two Hundred Thirty-Seven and
96/100 Dollars ($15,237.96), from the five (5) year anniversary of the
Commencement Date through and including the Expiration Date;
together with any increases in Rent provided for in this Lease, all additional
rent and any other sums payable hereunder.
(iv) "PERMITTED USES" shall mean as executive and general offices,
and for no other purpose.
2
<PAGE>
(v) "BASE TAX YEAR" shall mean the fiscal tax year commencing July
1, 1998 and ending June 30, 1999.
(vi) "BASE TAXES" shall mean an amount equal to the Taxes payable
for the Base Tax Year.
(vii) "TENANT'S PROPORTIONATE SHARE" shall mean nine hundred eighty-
seven thousandths percent (.987%).
(viii) "ELECTRICAL INCLUSION FACTOR" shall mean $11,709.00.
(ix) "SECURITY DEPOSIT" shall mean the sum of $35,127.00.
(x) "BROKER" shall mean, collectively, (a) Cushman & Wakefield,
Inc. and (b) Williamson, Picket, Gross, Inc.
(xi) "RENT COMMENCEMENT DATE" shall mean the date which is two (2)
months after the Commencement Date.
1.3 Tenant agrees, upon demand of Landlord, to execute, acknowledge
and deliver to Landlord an instrument, in form reasonably satisfactory to
Landlord and Tenant, setting forth the Commencement Date, the Rent Commencement
Date and the Expiration Date, provided that Tenant's failure or refusal to
deliver such instrument shall have no effect on such dates.
1.4 Anything in subsections 1.1 or 1.2 of this Lease to the contrary
notwithstanding, the Rent described in subsection 1.2 above shall be partially
abated in the amount of Eleven Thousand Seven Hundred Nine and No/100 Dollars
($11,709.00) per month for the period (the "PARTIAL ABATEMENT PERIOD")
commencing on the Commencement Date and ending on the day immediately preceding
the Rent Commencement Date so that, during the Partial Abatement Period Tenant
shall be required to pay Rent in the amount of Nine Hundred Seventy-Five and
75/100 Dollars ($975.75) per month; provided that, if at any time during the
first eighteen (18) months of the term of this Lease Tenant shall be in default
in the payment of Rent or any other monetary obligation due hereunder beyond any
applicable grace or cure period hereunder, the Rent so abated shall immediately
be due and payable.
2. USE AND OCCUPANCY.
2.1 Tenant shall use and occupy the Premises for the Permitted Uses,
and for no other purpose. Tenant may use a portion of the Premises for a pantry
installed for use by Tenant's employees, subject to the terms and provisions of
this Lease, including the Building Rules and Regulations.
2.2 Anything contained herein to the contrary notwithstanding, Tenant
shall not use the Premises or any part thereof, or permit the Premises or any
part thereof to be used in a manner or for a purpose that (a) violates any
certificate of occupancy in force for the Premises, or the Building; (b) causes
or is likely to cause damage to the Building, the Premises or any equipment,
facilities or other systems therein; (c) impairs the character, reputation,
image or
3
<PAGE>
appearance of the Building as a first-class office building, (d) interferes with
the proper, efficient and economic maintenance, operation and repair of the
Building or its equipment, facilities or systems, including without limitation,
the Building service systems; (e) constitutes a nuisance, annoyance or
inconvenience to other tenants or occupants of the Building or interferes with
or disrupts the use or occupancy of any area of the Building (other than the
Premises) by other tenants or occupants; (f) results in demonstrations, bomb
threats or other events that require evacuation of or increased security for the
Building or otherwise disrupts the use, occupancy or quiet enjoyment of the
Building by other tenants and occupants; (g) interferes with the transmission or
reception of microwave, television, radio or other communication signals by
antennae located on the roof of, or elsewhere in, the Building; (h) violates any
provision of any financing documents from time to time encumbering the Building,
all covenants, conditions and restrictions affecting the Building, or any
modifications, amendments, substitutions. replacements, supplements or additions
to any of the foregoing; or (i) violates any requirement or condition of any
insurance policy maintained by Landlord in connection with the Building or of
the standard fire insurance policy issues for office building in the City of New
York or the rules and regulations of the New York Board of Fire Underwriters or
Insurance Services Office (or similar bodies). In addition to the foregoing,
prohibited uses also include the use of any part of the Premises for: (i) a
restaurant or bar; (ii) the preparation, consumption, storage, manufacture or
sale of food, beverages, liquor, tobacco or drugs (excluding the sale, storage
and consumption of food or beverages from or in connection with vending machines
or the pantry installed for use by Tenant's employees); (iii) the business of
photocopying, multilith or offset printing (but Tenant may use part of the
Premises for photocopying in connection with its own business); (iv) a typing or
stenography business; (v) a school or classroom; (vi) cooking, lodging or
sleeping; (vii) the operation of retail facilities of a savings and loan
association or retail facilities of any financial, lending, securities brokerage
or investment activity; (viii) medical or dental offices or laboratories; (ix) a
barber, beauty or manicure shop; (x) an employment agency, executive search firm
or similar enterprise; (xi) a consulate; (xii) the manufacture, retail sale,
storage of merchandise or auction of merchandise, goods or property of any kind;
or (xiii) any immoral or illegal purposes.
2.3 Tenant, at its expense, shall procure and at all times comply with the
terms and conditions of any license or permit required for the proper and lawful
conduct of the Permitted Uses in the Premises. Tenant shall pay to any taxing
authority any fee, tax or other charge levied or assessed by any governmental
authority in connection with Tenant's use and/or occupancy of the Premises,
including the New York City commercial occupancy tax.
2.4 Tenant acknowledges that its use of the Premises in contravention
of the limitations in this Article 2, or the Building's Rules and Regulations,
would cause irreparable harm to Landlord, and acknowledges that Landlord is
entitled to interim and permanent injunctive relief against Tenant and any other
person so using the Premises, as a remedy in addition to all of Landlord's other
rights and remedies. Tenant shall cooperate with Landlord in seeking an
injunction against any use other than permitted herein by any other person
Tenant may have admitted to the Premises.
3. ALTERATIONS.
4
<PAGE>
3.1 Tenant shall not make or perform or permit the making or performance
of, any alterations, installations, improvements, additions or other physical
changes in or about the Premises (hereinafter collectively called "ALTERATIONS")
without Landlord's prior consent, provided, however, that Landlord's consent
shall not be required for Alterations consisting only of painting, installing or
removing wall covering or carpeting and other similar minor alterations costing
less than $15,000 in the aggregate, in each case, which are solely of a cosmetic
or decorative nature ("DECORATIVE ALTERATIONS") so long as such Decorative
Alterations are not visible from the exterior of the Building and provided
Tenant shall notify Landlord of the nature of such Decorative Alteration and the
contractors to be performing the same at least fifteen (15) days prior to
commencement and perform such Decorative Alteration in accordance with all other
provisions of this Article 3. Landlord's consent to Alterations may be withheld
for any reason or for no reason, provided, however, that with respect to
nonstructural Alterations which do not require electrical, plumbing, or HVAC
work and which do not affect any other Building systems or space outside of the
Premises ("NON-STRUCTURAL ALTERATIONS"), Landlord's consent shall not be
unreasonably withheld or delayed.
3.2 All Alterations shall be done in compliance with all applicable
laws, regulations and codes, at Tenant's expense and at such times and in such
manner as Landlord may from time to time reasonably designate. All Alterations
made and installed by Tenant, or at Tenant's expense, upon or in the Premises
which are of a permanent nature and which cannot be removed without damage to
the Premises or Building shall become and be the property of Landlord, and shall
remain upon and be surrendered with the Premises as a part thereof at the end of
the term of this Lease, except that Landlord may require as a condition of
Landlord granting its consent to any of such Alterations (which requirement
Landlord may exercise no later than ten (10) business days after Landlord grants
such consent) that, prior to the termination of the Lease and Tenant's surrender
of the Premises, any of such Alterations shall be removed and, in the event of
service of such notice, Tenant will, at Tenant's own cost and expense, remove
the same in accordance with such request, and restore the Premises to its
original condition, ordinary wear and tear and casualty excepted. All
furniture, furnishings and movable fixtures and partitions installed by Tenant
and all Alterations in and to the Premises which may be made by Tenant at its
own cost and expense prior to and during the Term, or any renewal thereof, shall
remain the property of Tenant and upon the Expiration Date or earlier end of the
Term or any renewal thereof, shall be removed from the Premises by Tenant,
provided, however, that Tenant shall repair any damage to the Premises or the
Building caused by such removal.
3.3 Prior to making any Alterations, Tenant (i) shall submit to Landlord
detailed plans and specifications (including layout, architectural, mechanical,
electrical, plumbing and structural drawings) for each proposed Alteration
(other than Decorative Alterations not requiring plans to be submitted to, or
permits to be obtained from, any governmental authority) and shall not commence
any such Alteration (other than a Decorative Alteration not requiring Landlord's
consent) without first obtaining Landlord's approval of such plans and
specifications, (ii) shall, at its expense, obtain all permits, approvals and
certificates required by any governmental or quasi-governmental bodies and
furnish copies of the same to Landlord, and (iii) shall furnish to Landlord
duplicate original policies of worker's compensation (covering all persons to be
employed by Tenant, and Tenant's contractors and subcontractors in connection
with such Alteration), comprehensive public liability insurance (including
property damage coverage,
5
<PAGE>
completed operations/product liability),and builder's risk insurance (issued on
a completed value basis), all in such form, with such companies, for such
periods and in such amounts as Landlord may reasonably require, naming Landlord
and its agents as additional insureds. With respect only to the plans and
specifications for the initial Alterations to be performed by Tenant in the
Premises in connection with Tenant's initial build-out of the Premises ("Initial
-------
Alterations"), Landlord shall notify Tenant of its approval or disapproval of
- -----------
the same within five (5) business days after Landlord's receipt thereof. Tenant
shall pay to Landlord an amount equal to ten percent (10%) of the cost of the
Alterations (other than Tenant's Initial Alterations and any Decorative
Alterations) to compensate Landlord for Landlord's indirect costs, field
supervision and coordination in connection with the work. In addition, Tenant
agrees to reimburse Landlord for Landlord's out-of-pocket expenses incurred in
connection with Landlord's (or Landlord's agents) review of the proposed
Alteration within ten (10) days of receipt of an invoice. Before commencing any
work, Tenant shall furnish to Landlord such bonds for payment and completion or
such other security for completion thereof and payment therefor as Landlord
shall reasonably require and in such form as is reasonably satisfactory to
Landlord and in an amount which shall be 120% of Landlord's estimate of the cost
of performing such work. Upon completion of such Alteration, Tenant, at Tenant's
expense, shall obtain certificates of final approval of such Alteration required
by any governmental or quasi-governmental bodies and shall furnish Landlord with
copies thereof, together with copies of "as-built" plans for such Alteration.
3.4 Prior to commencing any Alteration (including a Decorative
Alteration), Tenant shall submit to Landlord for its approval (which shall not
be unreasonably withheld or delayed) a list of the contractors and
subcontractors (categorized by trade) which Tenant proposes to use or from which
Tenant proposes to solicit bids in connection therewith. Tenant shall not
commence any Alteration until Landlord has approved of Tenant's proposed
contractors or subcontractors. If, prior to or after commencement of any
Alteration, there is a change in the contractors or subcontractors, Tenant shall
submit a new or supplemental list and the foregoing provisions shall be
applicable thereto. Notwithstanding anything to the contrary contained herein,
connections to, and disconnections from, the Building's fire safety system, the
Building's sprinkler, and the Building's condenser or chilled water system shall
be performed, in each case, solely at Tenant's expense, and only by contractors
designated by Landlord charging market rates. All Alterations shall be made and
performed in accordance with the Rules and Regulations (hereinafter defined);
all materials and equipment to be incorporated in the Premises as a result of
all Alterations shall be new and first quality; no such materials or equipment
shall be subject to any lien, encumbrance, chattel mortgage or title retention
or security agreement. Any mechanic's lien filed against the Premises, or the
Real Property, for work claimed to have been done for, or materials claimed to
have been furnished to, Tenant shall be discharged by Tenant within thirty (30)
days thereafter, at Tenant's expense, by payment or filing the bond required by
law. Notice is hereby given that Landlord shall not be liable for any labor or
materials furnished or to be furnished to Tenant upon credit, and that no
mechanic's or other lien for any such labor or materials shall attach to or
affect the reversion or other estate or interest of Landlord in and to the
Premises, and Tenant agrees to so notify any contractor performing work in the
Premises. Tenant shall not, at any time prior to or during the Term, directly or
indirectly employ, or permit the employment of, any contractor, mechanic or
laborer in the Premises, whether in connection with any Alteration or otherwise,
if, in Landlord's sole discretion, such employment will interfere or
6
<PAGE>
cause any conflict with other contractors, mechanics, or laborers engaged in the
construction, maintenance or operation of the Building by Landlord, Tenant or
others. In the event of any such interference or conflict or if any union
establishes a picket line with respect to such employment, and Tenant does not,
within 24 hours and without expense to Landlord, obtain an order from a court or
governmental agency enjoining such picketing, Tenant, upon demand of Landlord,
shall cause all contractors, mechanics or laborers causing such interference or
conflict to leave the Building immediately.
3.5 All Alterations performed by Tenant in and to the Premises shall
be done in a fashion such that the Premises and the Building shall be in
compliance with the requirements of Local Law 5 of 1973 of The City of New York,
as heretofore and hereafter amended ("LOCAL LAW 5 LAWS"). The foregoing shall
include, without limitation, (i) compliance with the compartmentalization
requirements of Local Law 5, (ii) relocation of existing fire detection devices,
alarm signals and/or communication devices necessitated by such Alterations and
(iii) installation of such additional fire control or detection devices as may
be required by applicable governmental or quasi-governmental rules, regulations
or requirements (including, without limitation, any requirements of the New York
Board of Fire Underwriters) as a result of Tenant's manner of use of the
Premises or the Alterations. Landlord shall not be responsible for any damages
to Tenant's fire control or detection devices nor shall Landlord have any
responsibility for the maintenance or replacement thereof unless any such damage
shall have been caused directly by the negligence or wilful misconduct of
Landlord or its agents or employees. Tenant shall submit to Landlord for
Landlord's approval all design specifications and requirements prepared in
connection with Tenant's installation of said fire control or detection devices.
Notwithstanding the foregoing, Landlord will determine what modifications, if
any, to the base building fire alarm system will be required as a result of
Tenant's fire control system and peripheral devices. Such modifications shall
be performed by Landlord at Tenant's sole, but reasonable, cost and expense.
All such fire control devices shall be manufactured by a company designated by
Landlord charging market rates. In the event a local panel is required to be
installed in the Premises in accordance with the foregoing provisions, such
local panel shall be a type designated by Landlord.
3.6 (A) Subject to the provisions of this Section 3.6, Landlord shall
contribute an amount not to exceed Thirty-Nine Thousand Thirty and 00/100
Dollars ($39,030.00) (the "TENANT FUND") toward (x) the cost of the performance
of Tenant's Initial Alterations (other than Soft Costs) to be performed by
Tenant in the Premises and (y) the fees of architects, engineers, expediters and
consultants incurred in connection with the performance of the Initial
Alterations (the costs described in this clause (y) being collectively referred
to herein as "SOFT COSTS"). Notwithstanding, the foregoing, Landlord shall not
be required to contribute toward Soft Costs an amount in excess of twenty
percent (20%) of the Tenant Fund.
(B) Landlord shall disburse a portion of the Tenant Fund to Tenant
from time to time, within fifteen (15) business days after receipt of the items
set forth in Section 3.6(C) hereof, provided that such request is received by
Landlord by the tenth (10th) day of the calendar month in which Landlord
receives such request, and further provided that on the date of a request and on
the date of disbursement from the Tenant Fund, no Event of Default shall have
occurred and be continuing. Disbursements from the Tenant Fund shall not be
made more frequently than
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monthly, and shall be in an amount equal to ninety percent (90%) of the
aggregate amount theretofore paid or which is then due (as certified by the
chief executive or financial officer of Tenant and Tenant's independent,
licensed architect) to Tenant's contractors, subcontractors and materialmen, or
on account of Soft Costs which in either case have not been the subject of a
previous disbursement from the Tenant Fund; provided, however, that in no event
shall Tenant be entitled to a disbursement from the Tenant Fund on account of
any Soft Costs (other than architect's and engineer's fees and expenses) unless
and until the performance of the Initial Alterations has been completed, and all
of the costs incurred in connection therewith (other than Soft Costs) shall have
been paid in fall.
(C) Landlord's obligation to make disbursements from the Tenant Fund
shall be subject to receipt of: (a) a request for such disbursement from Tenant
signed by the chief executive or financial officer of Tenant, together with the
certification required by Section 3.6(B) hereof, (b) copies of all receipts,
invoices and bills for the work completed and materials furnished in connection
with the Initial Alterations and incorporated in the Premises, or with respect
to Soft Costs, which in either case have been paid by Tenant or which is then
due and for which Tenant is seeking reimbursement, (c) with respect to
disbursements of the Tenant Fund to cover costs other than Soft Costs, a
certificate of Tenant's independent licensed architect stating (i) that, in his
opinion, the portion of the Initial Alterations theretofore completed and for
which the disbursement is requested was performed in a good and workerlike
manner in accordance with the final detailed plans and specifications for such
Initial Alterations, as approved by Landlord, (ii) the percentage of completion
of the initial Alteration as of the date of such certificate, and (iii) the
estimated total cost to complete the performance of the Initial Alterations, and
(d) partial lien waivers, to the extent permitted by law, from each contractor,
subcontractor and materialman who performed work in connection with the Initial
Alterations, to the extent of the amount theretofore paid to such contractor,
subcontractor or materialman.
(D) In no event shall the aggregate amount paid by Landlord to Tenant
under this Section 3.6 exceed the amount of the Tenant Fund. Upon the
completion of the Initial Alterations (which shall include completion of all
"punch list" items and payment of Soft Costs, and satisfaction of the conditions
set forth in Section 3.6(E) hereof), any amount of the Tenant Fund which has not
been previously disbursed shall be credited by Landlord against the ensuing Rent
payments. Upon the disbursement or credit of the entire Tenant Fund, Landlord
shall have no further obligation or liability whatsoever to Tenant for further
disbursement of any portion of the Tenant Fund to Tenant. It is expressly
understood and agreed that Tenant shall complete, at its sole cost and expense,
the Initial Alterations, and pay Soft Costs, whether or not the Tenant Fund is
sufficient to fund such completion and Soft Costs: provided that, subject to
Landlord's reasonable prior approval, in the event of some unforeseen expense,
Tenant may eliminate some improvements to keep costs within the amount of the
Tenant Fund. Any costs to complete the Initial Alterations and pay Soft Costs
in excess of the Tenant Fund shall be the sole responsibility and obligation of
Tenant.
(E) Within thirty (30) days after completion of the Initial
Alterations, Tenant shall deliver to Landlord final waivers of lien from all
contractors, subcontractors and materialmen involved in the performance of the
Initial Alterations and the materials furnished in connection therewith, and a
certificate from Tenant's independent licensed architect certifying
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that (i) in his opinion the Initial Alterations have been performed in a good
and workerlike manner and completed in accordance with the final detailed plans
and specifications for such Initial Alterations as approved by Landlord, and
(ii) all contractors, subcontractors and materialmen have been paid for the
Initial Alterations and materials furnished through such date.
4. REPAIRS-FLOOR LOAD.
Landlord shall maintain and repair the public portions of the Building,
both exterior and interior, including the roof in conformance with the standards
of non-institutional office buildings in Manhattan comparable to the Building.
In making such repairs, Landlord shall use reasonable efforts to minimize
interference with Tenant's occupancy of the Premises, provided that (i) the
Landlord shall not be obligated to use overtime or premium pay labor, and (ii)
the foregoing shall not apply to repairs in an emergency situation. Tenant
shall, throughout the Term, take good care of the Premises and the fixtures and
appurtenances therein and at Tenant's sole cost and expense, make all
nonstructural repairs thereto as and when needed to preserve them in good
working order and condition, reasonable wear and tear and damage for which
Tenant is not responsible under the terms of this Lease excepted. Tenant shall
pay Landlord the reasonable cost of all replacements to the lamps, tubes,
ballasts and starters in the lighting fixtures installed in the Premises.
Notwithstanding the foregoing, all damage or injury to the Premises or to any
other part of the Building, or to its fixtures, equipment and appurtenances,
whether requiring structural or nonstructural repairs, caused by or resulting
from carelessness, omission, neglect or improper conduct of or Alterations made
by Tenant, Tenant's servants, employees, invitees or licensees, shall be
repaired promptly by Landlord at Tenant's sole cost and expense, to the
reasonable satisfaction of Landlord. Tenant also shall repair all damage to the
Building and the Premises caused by the moving of Tenant's fixtures, furniture
or equipment. All the aforesaid repairs shall be of quality or class equal to
the original work or construction and shall be made in accordance with the
provisions of Article 3 hereof. If Tenant fails after ten (10) days' notice to
proceed with due diligence to make repairs required to be made by Tenant or if
such repairs are structural in nature or affect a Building system, the same may
be made by Landlord, at the expense of Tenant and the expenses thereof incurred
by Landlord, shall be collectible by Landlord as additional rent within ten (10)
days after rendition of a bill or statement therefor. Tenant shall give Landlord
prompt notice of any defective condition in any plumbing, electrical, air-
cooling or heating system located in, servicing or passing through the Premises.
Tenant shall not place a load upon any floor of the Premises exceeding the floor
load per square foot area which such floor was designed to carry and which is
allowed by law. Landlord reserves the right to prescribe the weight and position
of all safes, business machines and heavy equipment and installations. Business
machines and mechanical equipment shall be placed and maintained by Tenant at
Tenant's expense in settings sufficient in Landlord's reasonable judgment to
absorb and prevent vibration, noise and annoyance. Except as provided in Article
10 hereof or if directly caused by the negligence or wilful misconduct of
Landlord or its agents or employees, there shall be no allowance to Tenant for a
diminution of rental value and no liability on the part of Landlord by reason of
inconvenience, annoyance or injury to business arising from Landlord, Tenant or
others making, or failing to make, any repairs, alterations, additions or
improvements in or to any portion of the Building, or the Premises, or in or to
fixtures, appurtenances, or equipment thereof. If the Premises are or become
infested with vermin, Tenant, at Tenant's expense, shall cause the same to be
exterminated from time to time
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to the satisfaction of Landlord and shall employ such exterminators and such
exterminating company or companies as shall be approved by Landlord. The water
and wash closets and other plumbing fixtures shall not be used for any purposes
other than those for which they were designed or constructed, and no sweepings,
rubbish, rags, acids or other substances shall be deposited therein.
5. WINDOW CLEANING.
Tenant shall not clean, nor require, permit, suffer or allow any
window in the Premises to be cleaned, from the outside in violation of Section
202 of the Labor Law, or any other applicable law, or of the rules of the Board
of Standards and Appeals, or of any other board or body having or asserting
jurisdiction.
6. REQUIREMENTS OF LAW.
6.1 Tenant at its sole expense shall comply with all existing or future
laws, orders and regulations of federal, state, county and municipal authorities
and with any existing or future direction of any public officer or officers,
pursuant to law, and all existing or future rules, orders, regulations or
requirements of the New York Board of Fire Underwriters, or any other similar
body which shall impose any violation, order or duty upon Landlord or Tenant
with respect to the Premises or Tenant's occupancy of the Premises.
Notwithstanding the foregoing, Tenant's obligations under the preceding sentence
shall impose no obligation on Tenant to make any alterations to the Premises or
the Building, whether structural or otherwise, or to otherwise comply with any
of such laws, orders and regulations, unless such obligations under the
preceding sentence arise as a result of (i) the manner of conduct of Tenant's
business or operation of its equipment therein, but excluding any use of the
Premises merely as general office space; (ii) any cause or condition created by
or at the instigation of Tenant, including, without limitation, any Alteration;
(iii) the breach of any of Tenant's obligations hereunder; or (iv) any Hazardous
Material brought into the Building by Tenant, any subtenant of Tenant or any of
their agents, contractors or invitees. Tenant shall promptly forward to Landlord
any notice it receives of the violation of any law involving the Premises.
Tenant shall pay, within twenty (20) days after demand thereof, all the costs,
expenses, fines, penalties and damages that may be imposed upon Landlord by
reason of or arising out of Tenant's failure to comply with the provisions of
this Subsection 6. 1.
6.2 Landlord represents, that to the best of its knowledge, no asbestos
containing materials ("ACM") exist in the Premises. Notwithstanding the
foregoing, to the extent any ACM is found to exist in the Premises during the
term of the Lease (other than any ACM placed in the Premises by Tenant), which
ACM shall be required to be removed, encapsulated or otherwise treated as a
result of Alterations being performed by Tenant, or pursuant to applicable law,
then Landlord, at Landlord's sole cost and expense, shall remove, treat or
encapsulate such ACM in accordance with applicable law and Landlord shall use
reasonable efforts to minimize interference with Tenant's occupancy of the
Premises, provided that the (i) Landlord shall not be obligated to use overtime
or premium pay labor, and (ii) the foregoing shall not apply to repairs in an
emergency situation.
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6.3 Tenant shall not do or permit to be done any act or thing upon
the Premises which will invalidate or be in conflict with any insurance policies
covering the Building and fixtures and property therein; and shall not do, or
permit anything to be done in or upon the Premises, or bring or keep anything
therein, except as now or hereafter permitted by the New York City Fire
Department, New York Board of Fire Underwriters, New York Fire Insurance Rating
Organization or other authority having jurisdiction and then only in such
quantity and manner of storage as not to increase the rate for fire insurance
applicable to the Building, or use the Premises in a manner which shall increase
the rate of fire insurance on the Building or on property located therein, over
that in similar type buildings or in effect prior to this Lease. Any work or
installations made or performed by or on behalf of Tenant or any person claiming
through or under Tenant pursuant to this Article shall be made in conformity
with, and subject to the provisions of, Article 3 hereof. If by reason of
failure of Tenant to comply with the provisions of this Article, the fire
insurance rate shall at the beginning of this Lease or at any time thereafter be
higher than it otherwise would be, then Tenant shall reimburse Landlord, as
additional rent hereunder, for that part of all fire insurance premiums
thereafter paid by Landlord which shall have been charged because of such
failure or use by Tenant, and shall make such reimbursement upon the first day
of the month following such outlay by Landlord. In any action or proceeding
wherein Landlord and Tenant are parties, a schedule or "make up" of rates for
the Building or the Premises issued by the New York Fire Insurance Rating
Organization, or other body fixing such fire insurance rates, shall be
conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates then applicable to the Premises. If either
Landlord or Tenant is required to provide cleaning and/or rubbish removal
services at the Premises, Tenant shall take such steps, and shall cause its
employees, agents, contractors and business visitors to observe such rules,
regulations and requirements as may, from time to time. be imposed or enacted by
Landlord by notice to Tenant with respect to such cleaning or rubbish removal,
as are, in Landlord's reasonable judgment, necessary to ensure that such
cleaning and/or rubbish removal services are performed in accordance with all
applicable ordinances, laws, statutes or other rules, regulations or
requirements related thereto as are, or shall be, enacted or imposed in
connection with the Building or the Premises. Tenant shall indemnify and hold
Landlord harmless from and against any loss, cost, liability or expense of any
kind or nature incurred by Landlord as a result of the Tenant's failure to
comply, or cause its employees, agents, contractors or business visitors to
comply with all such rules, regulations and requirements as may be imposed or
enacted by Landlord in connection herewith.
6.4 Neither Tenant nor any of its officers, partners, employees,
agents, subtenants, contractors or invitees shall cause or permit any Hazardous
Material (including asbestos or asbestos containing materials) to be used,
stored, released, handled, produced or installed in, on or from the Premises or
the Building, other than customary amounts of office and cleaning supplies for
which no special governmental permit, approval or license is required and only
so long as the same are stored, used and disposed of in strict compliance with
all laws. For purposes of this Lease, "HAZARDOUS MATERIALS" shall mean any
element, compound, chemical mixture, contaminant, pollutant, material, waste or
other substance which is defined, determined or identified as a "hazardous
substance", "hazardous waste" or "hazardous material" under any federal, state
or local statute, regulation or ordinance applicable to the Premises, as well as
any
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amendments and successors to such statutes and regulations, as may be enacted
and promulgated from time to time.
6.5 Tenant shall promptly comply with all requirements relating to
the Americans with Disabilities Act, 42 U. S. C. (S) 12,101 et seq.., and the
-- ----
regulations promulgated thereunder as in effect from time to time and with all
similar state and local laws ("ADA REQUIREMENTS"). Tenant shall have exclusive
responsibility for compliance with ADA Requirements pertaining to the interior
of the Premises, including for the design and construction of the access thereto
and egress therefrom. Landlord shall have responsibility for compliance with
ADA Requirements which affect the public areas of the Building to the extent
failure to comply will affect Tenant's use or occupancy of the Premises or the
performance by Tenant of Alterations. Tenant shall comply with any reasonable
plan adopted by Landlord which is designed to comply with ADA Requirements.
7. SUBORDINATION.
7.1 This Lease is subject and subordinate to each and every ground or
underlying lease of the Real Property or the Building heretofore or hereafter
made by Landlord (collectively the "SUPERIOR LEASES") and to each and every
trust indenture and mortgage (collectively the "MORTGAGES") which may now or
hereafter affect the Real Property, the Building or any such Superior Lease and
the leasehold interest created thereby, and to all renewals, extensions,
supplements, amendments, modifications, consolidations, and replacements thereof
or thereto, substitutions therefor, and advances made thereunder. This clause
shall be self-operative and no further instrument of subordination shall be
required to make the interest of any lessor under a Superior Lease, or trustee
or mortgagee of a Mortgage superior to the interest of Tenant hereunder. In
confirmation of such subordination, however, Tenant shall execute promptly any
certificate that Landlord may reasonably request and Tenant hereby irrevocably
constitutes and appoints Landlord as Tenant's attorney-in-fact to execute any
such certificate or certificates for and on behalf of Tenant. If the date of
expiration of any Superior Lease shall be the same day as the Expiration Date,
the Term shall end and expire twelve (12) hours prior to the expiration of the
Superior Lease. Tenant covenants and agrees that, except as expressly provided
herein, Tenant shall not do anything that would constitute a default under any
Superior Lease or Mortgage, or omit to do anything that Tenant is obligated to
do under the terms of this Lease so as to cause Landlord to be in default under
any of the foregoing. If, in connection with the financing of the Real
Property, the Building or the interest of the lessee under any Superior Lease,
any lending institution shall request reasonable modifications of this Lease
that do not materially increase the obligations or materially and adversely
affect the rights of Tenant under this Lease, Tenant covenants to make such
modifications.
7.2 If at ant time prior to the expiration of the Term (i) any
Superior Lease shall terminate or be terminated for any reason or (ii) any
mortgagee shall foreclose upon Landlord's interest in the Building, Tenant
agrees, at the election and upon demand of any owner of the Real Property or the
Building, or the lessor under any such Superior Lease, or of any mortgagee in
possession of the Real Property or the Building, to attorn, from time to time,
to any such owner, lessor or mortgagee, upon the then executory terms and
conditions of this Lease, for the remainder of the term originally demised in
this Lease. The provisions of this subsection 7.2
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shall inure to the benefit of any such owner, lessor or mortgagee, shall apply
notwithstanding that, as a matter of law, this Lease may terminate upon the
termination of any such Superior Lease, and shall be self-operative upon any
such demand, and no further instrument shall be required to give effect to said
provisions. Tenant, however, upon demand of any such owner, lessor or mortgagee,
agrees to execute, from time to time, instruments in confirmation of the
foregoing provisions of this subsection 7.2, satisfactory to any such owner,
lessor or mortgagee, acknowledging such attornment and setting forth the terms
and conditions of its tenancy. Nothing contained in this subsection 7.2 shall be
construed to impair any right otherwise exercisable by any such owner, lessor or
mortgagee.
7.3 If any act or omission of Landlord would give Tenant the right,
immediately or after the giving of notice and/or a lapse of time, to cancel or
terminate this Lease, or to claim a partial or total eviction, Tenant shall not
exercise such right until: (i) it has given written notice of the act or
omission to Landlord and each owner, lessor or mortgagee whose name and address
had been furnished to Tenant, which notice shall describe Landlord's default
with reasonable detail, specifying the section of this Lease as to which
Landlord is in default, and a reasonable period for remedying the act or
omission shall have elapsed following the giving of such notice and no remedy
shall have been commenced. If within such reasonable period, such owner, lessor
or mortgagee gives Tenant notice of its intention to remedy the act or omission
and thereafter commences and diligently prosecutes the required remedial action
to completion, Tenant shall have no right to terminate this Lease on account of
the act or omission.
8. RULES AND REGULATIONS.
Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations annexed hereto and made a part hereof as Schedule A (the "RULES AND
REGULATIONS"), and such other and further reasonable Rules and Regulations as
Landlord or Landlord's agents may from time to time adopt on such notice to be
given as Landlord may reasonably elect. Nothing in this Lease contained shall
be construed to impose upon Landlord any duty or obligation to enforce the Rules
and Regulations or terms, covenants or conditions in any other lease, against
any other tenant and Landlord shall not be liable to Tenant for violation of the
same by any other tenant, its servants. employees, agents, visitors or
licensees, provided that Landlord shall endeavor to apply the Rules and
Regulations in a non-discriminatory manner. No sign, advertisement, object,
notice or lettering shall be exhibited, inscribed, painted or affixed by Tenant,
in or on the windows or doors, or on any part of the outside of the Premises or
the Building, or on any point inside the Premises where the same might be
visible outside of the Premises, without the prior written consent of Landlord
in each instance. Signs and lettering on doors shall be inscribed, painted or
affixed for Tenant by Landlord at the expense of Tenant, and shall be of a size
and color reasonably acceptable to Landlord. Tenant acknowledges that Landlord
intends to have a uniform signage program for the Building and all signage in
the elevator lobby on the floor on which the Premises is located, as well as all
signage within the Premises which is visible from public portions of the
Building, shall be required to conform to such program. Landlord may remove any
such signage and lettering which does not conform to such program or which has
not been approved by Landlord without any liability and may charge the expense
incurred by such removal to Tenant.
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9. INSURANCE.
9.1 Tenant shall obtain and keep in full force and effect during the
Term:
(i) a policy of commercial general public liability insurance,
including bodily injury and property damage coverage, with a broad form
contractual liability endorsement or its equivalent, naming, Tenant as insured
and protecting Landlord, Landlord's employees and agents, and any mortgagees or
lessors having an interest in the Real Property of which Tenant shall have been
notified, as additional insureds (issued on an "occurrence" basis and not a
"claims made" basis) against claims for personal injury, death and/or third-
party property damage occurring in or about the Premises or the Building, and
under which the insurer agrees to waive any right of recovery such insurer may
have had against Landlord, Landlord's employees and agents, and any mortgagees
or lessors having an interest in the Real Property and to indemnify, defend and
hold Landlord harmless from and against, among other things, all cost, expense
and/or liability (including, without limitation, reasonable attorneys' fees)
arising out of or based upon any and all claims, accidents, injuries and damages
mentioned in Article 37 hereof. Such policy shall contain a provision that no
act or omission of Tenant shall affect or limit the obligation of the insurance
company to pay the amount of any loss sustained to Landlord. The minimum limits
of liability applicable exclusively to the Premises shall be a combined single
limit with respect to each occurrence in an amount of not less than $3,000,000
(or in any increased amount (or in the form of an umbrella liability policy for
"excess" liability coverage) required by Landlord in the exercise of Landlord's
commercially reasonable discretion); and
(ii) insurance against loss or damage by fire and such other risks and
hazards (including burglary, theft, vandalism, sprinkler leakage, breakage of
glass within the Premises and, if the Premises are located at or below grade,
broad form flood insurance) as are insurable under then available standard forms
of "all risk" insurance policies, to Tenant's personal property and business
equipment and fixtures (hereinafter, "TENANT'S PROPERTY") and, whether or not
such alterations or tenant improvements had been paid for or performed by
Tenant, any Alterations and tenant improvements in and to the Premises
(hereinafter, "TENANT'S WORK") for the full replacement cost value thereof (with
such policy having a deductible not in excess of an amount to be determined by
Landlord in the exercise of Landlord's commercially reasonable discretion)
protecting Tenant, Landlord, Landlord's employees and agents, and any mortgagees
or lessors having an interest in the Real Property of which Tenant shall have
been notified; and
(iii) business interruption insurance in an amount sufficient to
prevent Tenant from becoming a co-insurer.
9.2 Prior to the time such insurance is first required to be carried
by Tenant and thereafter, at least thirty (30) days prior to the expiration or
other termination of any such policies, Tenant agrees to deliver to Landlord,
upon Landlord's request therefor, evidence of payment for the policies and true
and complete copies of the actual policies together with certificates evidencing
such insurance. All such policies shall contain endorsements that (a) such
insurance may not be modified or canceled or allowed to lapse except upon thirty
(30) days' written notice to Landlord containing the policy number and the names
of the insured and the certificate holder, and (b) Tenant shall be solely
responsible for payment of all premiums under
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such policies and Landlord shall have no obligation for the payment thereof
notwithstanding that Landlord is or may be named as an additional insured.
Tenant's failure to provide and keep in force the aforementioned insurance shall
be regarded as a material default hereunder, entitling Landlord to exercise any
or all of the remedies as provided in this Lease in the event of Tenant's
default. All insurance required to be carried by Tenant pursuant to the terms of
this Lease shall be effected under valid and enforceable policies issued by
reputable and independent insurers permitted to do business in the State of New
York which rate, in Best's Insurance Guide, or any successor thereto (or if
there be none, an organization having a national reputation), as having a
general policy-holder rating of "A" and a financial rating of at least "XIII".
Tenant shall not carry separate or additional insurance, whether concurrent or
contributing, in the event of any loss or damage, with any insurance required to
be obtained by Tenant under this Lease.
9.3 The parties hereto shall procure an appropriate clause in, or
endorsement on, any "all risk" or fire or extended coverage insurance covering
the Premises, the Building, the personal property, fixtures or equipment located
thereon or therein, pursuant to which the insurance companies waive subrogation
or consent to a waiver of right of recovery by the insured prior to any loss.
The waiver of subrogation or permission for waiver of the right of recovery in
favor of Tenant shall also extend to all other persons or entities occupying or
using the Premises in accordance with the terms of the Lease. If the payment of
an additional premium is required for the inclusion of such waiver of
subrogation provisions or consent to a waiver of right of recovery, each party
shall advise the other of the amount of any such additional premiums by written
notice and the other party shall pay the same or shall be deemed to have agreed
that the party obtaining the insurance coverage in question shall be free of any
further obligations under the provisions hereof relating to such waiver or
consent. It is expressly understood and agreed that Landlord will not be
obligated to carry insurance on and will not be responsible for Tenant's
Property or any Alterations performed by Tenant or insurance against
interruption of Tenant's business.
9.4 As to each party hereto, provided such party's right of full
recovery under the applicable policy is not adversely affected, such party
hereby releases the other (along with its servants, agents, employees and
invitees) with respect to any claim (including a claim for negligence) which it
might otherwise have against the other party for loss, damages or destruction
with respect to its property by fire or other casualty i.e. in the case of
----
Landlord, as to the Building, and, in the case of Tenant, as to Tenant's
Property and Tenant's Work (including rental value or business interruption, as
the case may be) occurring during the Term of this Lease.
9.5 Nothing in this Article 9 shall prevent Tenant from taking out
insurance of the kind and in the amounts provided for under this Article 9 under
a blanket insurance policy or policies covering other properties as well as the
Premises provided, however, that any such policy or policies of blanket
insurance (i) shall specify therein, or Tenant shall furnish Landlord with a
written statement from the insurers under such policy or policies specifying,
the amount of the total insurance allocated to the Premises, which amounts shall
not be less than the amounts required by this Article 9, and (ii) such amounts
so specified shall be sufficient to prevent Tenant from becoming a co-insurer
within the terms of the applicable policy or policies, and provided further,
however, that any such policy or policies of blanket insurance shall, as to the
Premises, otherwise comply as to endorsements and coverage with the provisions
of this Article 9.
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10. DESTRUCTION OF THE PREMISES: PROPERTY LOSS OR DAMAGE.
10.1 If the Premises shall be damaged by fire or other casualty, and
if Tenant shall give prompt notice thereof to Landlord, the damages shall be
repaired by and at the expense of Landlord and the Rent until such repairs shall
be made shall be reduced in the proportion which the area of the part of the
Premises which is not usable by Tenant bears to the total area of the Premises.
Notwithstanding anything to the contrary contained herein, Landlord shall have
no obligation to repair any damage to, or to replace, any of Tenant's Property,
any Alterations performed by Tenant or other property or effects of Tenant.
10.2 (a) Anything in subsection 10:1 of this Article 10 to the
contrary notwithstanding, if the Premises are totally damaged or are rendered
wholly untenantable, and if Landlord shall decide not to restore the Premises,
or if the Building shall be so damaged by fire or other casualty that, in
Landlord's opinion, substantial alteration, demolition, or reconstruction of the
Building shall be desirable (whether or not the Premises shall have been damaged
or rendered untenantable), then in any of such events, Landlord, at Landlord's
option, may, not later than sixty (60) days following the damage, give Tenant a
notice in writing terminating this Lease. If Landlord elects to terminate this
Lease, the Term shall expire upon the tenth (10th) day after such notice is
given, and Tenant shall vacate the Premises and surrender the same to Landlord.
Upon the termination of this Lease under the conditions provided for in the next
preceding sentence, Tenant's liability for Rent due from and after the date of
such damage shall cease as of the day following such damage.
(b) If the Premises are totally damaged or are rendered wholly
untenantable, and if Landlord shall decide to restore the Premises, Landlord
shall, within the aforesaid sixty (60) day period, give notice to Tenant of the
date by which Landlord reasonably believes the restoration of the Premises shall
be substantially completed (the "RESTORATION DATE"). If such notice shall
indicate that such restoration shall not be completed on or before a date which
shall be twelve (12) months following the date of such damage, then Tenant shall
have the right to terminate this Lease by giving notice to Landlord no later
than ten (10) days after receiving such notice. If Tenant shall not so elect to
terminate this Lease, but Landlord shall thereafter fail to substantially
complete the restoration of the Premises on or before the Restoration Date
(subject, however, to extension of such restoration period and deferral of such
Restoration Date on account of force majeure as to which Tenant shall be
notified), Tenant shall have the right to terminate this Lease by giving written
notice (the "TERMINATION NOTICE") to Landlord not later than ten (10) days
following the Restoration Date (as so extended) and if Landlord shall fail to so
complete such restoration within thirty (30) days following Landlord's receipt
of such Termination Notice, this Lease shall be deemed canceled and terminated
as of the date of the Termination Notice as if such date were the Expiration
Date of this Lease. Upon the termination of this Lease under the conditions
provided for in this Section, Tenant's liability for Rent and additional rent
from and after the date of such total casualty (but not for any period prior to
the date of such casualty) shall cease as of the day following such casualty.
10.3 No penalty shall accrue for reasonable delay which may arise by
reason of adjustment of fire insurance on the part of Landlord and/or Tenant,
and for reasonable delay on account of "labor troubles" or any other cause
beyond Landlord's control.
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10.4 The parties agree that this Article 10 constitutes an express
agreement governing any case of damage or destruction of the Premises or the
Building by fire or other casualty, and that Section 227 of the Real Property
Law of the State of New York, which provides for such contingency in the absence
of an express agreement, and any other law of like import now or hereafter in
force shall have no application in any such case.
10.5 Any Building employee to whom any property shall be entrusted by
or on behalf of Tenant shall be deemed to be acting as Tenant's agent with
respect to such property and neither Landlord nor its agents shall be liable for
any damage to property of Tenant or of others entrusted to employees of the
Building, nor for the loss of or damage to any property of Tenant by theft or
otherwise. Neither Landlord nor its agents shall be liable for any injury or
damage to persons or property or interruption of Tenant's business resulting
from fire, explosion, falling plaster, steam, gas, electricity, water, rain or
snow or leaks from any part of the Building or from the pipes, appliances or
plumbing works or from the roof, street or subsurface or from any other place or
by dampness or by any other cause of whatsoever nature; nor shall Landlord or
its agents be liable for any such damage caused by other tenants or persons in
the Building or caused by construction of any private, public or quasi-public
work; nor shall Landlord be liable for any latent defect in the Premises or in
the Building. Anything in this Article 10 to the contrary notwithstanding,
nothing in this Lease shall be construed to relieve Landlord from responsibility
directly to Tenant for any loss or damage caused directly to Tenant wholly or in
part by the negligence or willful misconduct of Landlord. Nothing in the
foregoing sentence shall affect any right of Landlord to the indemnity from
Tenant to which Landlord may be entitled under Article 37 hereof in order to
recoup for payments made to compensate for losses of third parties. If at any
time any windows of the Premises are temporarily closed, darkened or bricked-up
for any reason whatsoever including, but not limited to, Landlord's own acts, or
any of such windows are permanently closed, darkened or bricked-up if required
by law or related to any construction upon the Building or the Real Property or
upon property adjacent to the Real Property by Landlord or others, (including,
without limitation the construction of any signage on the Building), Landlord
shall not be liable for any damage Tenant may sustain thereby and Tenant shall
not be entitled to any compensation therefor nor abatement of Rent nor shall the
same release Tenant from its obligations hereunder nor constitute an eviction.
Tenant shall reimburse and compensate Landlord as additional rent within ten
(10) days after rendition of a statement for all expenditures made by, or
damages or fines sustained or incurred by, Landlord due to non-performance or
non-compliance with or breach or failure to observe any term, covenant or
condition of this Lease upon Tenant's part to be kept, observed, performed or
complied with. Tenant shall give immediate notice to Landlord in case of fire
or accident in the Premises or in the Building. Tenant shall not move any safe,
heavy machinery, heavy equipment, freight, bulky matter or fixtures into or out
of the Building without Landlord's prior consent and payment to Landlord of
Landlord's reasonable costs in connection therewith.
11. EMINENT DOMAIN.
11.1 If the whole of the Real Property or the Building or the whole
or any material part of the Premises shall be acquired or condemned for any
public or quasi-public use or purpose, this Lease and the Term shall end as of
the date of the vesting of title with the same effect as if said date were the
Expiration Date. In the event of any termination of this Lease and the Term
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pursuant to the provisions of this subsection 11.1, the Rent shall be
apportioned as of the date of sooner termination and any prepaid portion of Rent
for any period after such date shall be refunded by Landlord to Tenant.
11.2 In the event of any such acquisition or condemnation of all or
any part of the Real Property, Landlord shall be entitled to receive the entire
award for any such acquisition or condemnation, Tenant shall have no claim
against Landlord or the condemning authority for the value of any unexpired
portion of the Term and Tenant hereby expressly assigns to Landlord all of its
right in and to any such award. Nothing contained in this subsection 11.2 shall
be deemed to prevent Tenant from making a separate claim in any condemnation
proceedings for the then value of any furniture, furnishings and fixtures
installed by and at the sole expense of Tenant and included in such taking,
provided that such award shall not reduce the amount of the award otherwise
payable to Landlord.
12. ASSIGNMENT AND SUBLETTING.
12.1 Except as otherwise set forth in this Article 12, Tenant, for
itself, its heirs, distributees, executors, administrators, legal
representatives, successors and assigns, expressly covenants that it shall not
assign, mortgage, pledge, encumber, or otherwise transfer this Lease, nor
underlet, nor suffer, nor permit the Premises or any part thereof to be used or
occupied by others (whether for desk space, mailing privileges or otherwise),
without the prior written consent of Landlord in each instance. If this Lease
be assigned, or if the Premises or any part thereof be underlet or occupied by
anybody other than Tenant, Landlord may, after default by Tenant, collect rent
from the assignee, undertenant or occupant, and apply the net amount collected
to the rent herein reserved, and after Tenant shall have defaulted in respect of
any of its obligations under this Lease, Tenant shall hold any amounts it
receives from any undertenant or occupant in constructive trust for payment of
Tenant's obligations hereunder; but no assignment, underletting, occupancy or
collection shall be deemed a waiver of the provisions hereof, the acceptance of
the assignee, undertenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained. The consent by Landlord to an assignment or underletting shall not
in any way be construed to relieve Tenant from obtaining the express consent in
writing of Landlord to any further assignment or underletting. In no event
shall any permitted sublessee assign or encumber its sublease or further sublet
all or any portion of its sublet space, or otherwise suffer or permit the sublet
space or any part thereof to be used or occupied by others, without Landlord's
prior written consent in each instance. Any assignment, sublease, mortgage,
pledge, encumbrance or transfer in contravention of the provisions of this
Article 12 shall be void.
12.2 If Tenant shall at any time or times during the Term desire to
assign this Lease or sublet all or part of the Premises and Landlord's consent
thereto is required under this Article 12, Tenant shall give notice thereof to
Landlord, which notice shall be accompanied by (i) the essential terms and
conditions of proposed assignment or sublease, including the effective or
commencement date thereof, which shall be not less than thirty (30) nor more
than one hundred and eighty (180) days after the giving of such notice, (ii) a
statement setting forth in reasonable detail the identity of the proposed
assignee or subtenant, the nature of its business and its proposed use of the
Premises, (iii) current financial information with respect to the proposed
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assignee or subtenant, and (iv) an agreement by Tenant to indemnify Landlord
against liability resulting from any claims that may be made against Landlord by
the proposed assignee or sublessee or by any brokers or other persons claiming a
commission or similar compensation in connection with the proposed assignment or
sublease. The aforesaid notice shall be deemed an offer from Tenant to Landlord
whereby Landlord (or Landlord's designee) may, at its option, (a) sublease such
space (hereinafter called the "LEASEBACK SPACE") from Tenant upon the terms and
conditions hereinafter set forth (if the proposed transaction is a sublease of
all or part of the Premises), or (b) terminate this Lease (if the proposed
transaction is an assignment or a sublease of all or substantially all of the
Premises). Said options may be exercised by Landlord by notice to Tenant at any
time within thirty (30) days after the aforesaid notice has been given by Tenant
to Landlord; and during such thirty (30) day period Tenant shall not assign this
Lease nor sublet such space to any person.
12.3 If Landlord exercises its option to terminate this Lease in the
case whereby Tenant desires either to assign this Lease or sublet all or
substantially all of the Premises, then, this Lease shall end and expire on the
date that such assignment or sublet was to be effective or commence, as the case
may be, and the Rent and additional rent due hereunder shall be paid and
apportioned to such date.
12.4 If Landlord exercises its option to terminate this Lease
pursuant to subsection 12.2 of this Article 12, Landlord shall be free to and
shall have no liability to Tenant if Landlord should lease the Premises (or any
part thereof) to Tenant's prospective assignee or subtenant.
12.5 If Landlord exercises its option to sublet the Leaseback Space,
such sublease to Landlord or its designee (as subtenant) shall be at a rental
rate equal to the lesser of (x) the rental rate provided for in the proposed
sublease and (y) the rental rate per rentable square foot of Rent and additional
rent then payable pursuant to this Lease, and shall be for the same term as that
of the proposed subletting, and such sublease:
(a) shall be expressly subject to all of the covenants, agreements,
terms, provisions and conditions of this Lease except such as are irrelevant or
inapplicable. and except as otherwise expressly set forth to the contrary in
this Article 12;
(b) shall be upon the same terms and conditions as those contained in
the proposed sublease, except such as are irrelevant or inapplicable and except
as otherwise expressly set forth to the contrary in this Article 12;
(c) shall give the sublessee the unqualified and unrestricted right,
without Tenant's permission, to assign such sublease or any interest therein
and/or to sublet the space covered by such sublease or any part or parts of such
space and to make any and all changes, alterations and improvements in the space
covered by such sublease, provided, however, that if such sublease is for less
than all or substantially all of the Term of the lease, then at the end of the
term of such sublease and if requested to do so by Tenant, the Premises shall be
restored by Landlord to a condition reasonably suitable for general office
purposes;
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(d) shall provide that any assignee or further subtenant of Landlord
or its designee, may, at the election of Landlord, be permitted to make
alterations, decorations and installations in such space or any part thereof and
shall also provide in substance that any such alterations, decorations and
installations in such space therein made by any assignee or subtenant of
Landlord or its designee may be removed, in whole or in part, by such assignee
or subtenant, at its option, prior to or upon the expiration or other
termination of such sublease provided that such assignee or subtenant, at its
expense, shall repair any damage and injury to such space so sublet caused by
such removal, provided, however, that if such sublease is for less than all or
substantially all of the Term of the lease, then at the end of the term of such
sublease and if requested to do so by Tenant, the Premises shall be restored by
Landlord to a condition reasonably suitable for general office purposes; and
(e) shall also provide that (i) the parties to such sublease expressly
negate any intention that any estate created under such sublease be merged with
any other estate held by either of said parties, (ii) any assignment or
subletting by Landlord or its designee (as the subtenant) may be for any purpose
or purposes that Landlord, in Landlord's uncontrolled discretion, shall deem
suitable or appropriate, (iii) Tenant, at Tenant's expense, shall and will at
all times provide and permit reasonably appropriate means of ingress to and
egress from such space so sublet by Tenant to Landlord or its designee, (iv)
Landlord, at Tenant's expense, to the extent required by the proposed sublease,
may make such alterations as may be required or deemed necessary by Landlord to
physically separate the subleased space from the balance of the Premises and to
comply with any legal or insurance requirements relating to such separation, and
(v) that at the expiration of the term of such sublease, Tenant will accept the
space covered by such sublease in its then existing conditions, subject to the
obligations of the sublessee to make such repairs thereto as may be necessary to
preserve the premises demised by such sublease in good order and condition.
12.6 (i) If Landlord exercises its option to sublet the Leaseback
Space, Landlord shall indemnify and save Tenant harmless from all obligations
under this Lease as to the Leaseback Space during the period of time it is so
sublet to Landlord.
(ii) Performance by Landlord, or its designee, under a sublease of the
Leaseback Space shall be deemed performance by Tenant of any similar obligation
under this Lease and any default under any such sublease shall not give rise to
a default under a similar obligation contained in this Lease nor shall Tenant be
liable for any default under this Lease or deemed to be in default hereunder if
such default is occasioned by or arises from any act or omission of the tenant
under such sublease or is occasioned by or arises from any act or omission of
any occupant holding under or pursuant to any such sublease.
(iii) Tenant shall have no obligation, at the expiration or earlier
termination of the Term, to remove any alteration, installation or improvement
made in the Leaseback Space by Landlord (or its designee).
12.7 In the event Landlord does not exercise either option provided
to it pursuant to subsection 12.2 and provided that Tenant is not in default of
any of Tenant's obligations under this Lease (after notice and the expiration of
any applicable grace period) as of the time of
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Landlord's consent, and as of the effective date of the proposed assignment or
commencement date of the proposed sublease, Landlord's written consent to the
proposed assignment or sublease shall be given within five (5) business days
after the expiration of the thirty (30) day period described in Section 12.2,
provided and upon condition that:
(i) Tenant shall have complied with the provisions of subsection
12.2 and Landlord shall not have exercised any of its options under said
subsection 12.2 within the time permitted therefor;
(ii) In Landlord's reasonable judgment the proposed assignee or
subtenant is engaged in a business or activity, and the Premises, or the
relevant part thereof, will be used in a manner, which (a) is in keeping with
the then standards of the Building, (b) is limited to the use of the Premises
for the Permitted Uses, and (c) will not violate any negative covenant as to use
contained in any other lease of office space in the Building;
(iii) The proposed assignee or subtenant is a reputable person of
good character and with sufficient financial worth considering the
responsibility involved, and Landlord has been furnished with reasonable proof
thereof;
(iv) Neither (a) the proposed assignee or sublessee nor (b) any
person which, directly or indirectly, controls, is controlled by, or is under
common control with, the proposed assignee or sublessee, is then an occupant of
any part of the Building provided Landlord has comparable space available in the
Building,
(v) The proposed assignee or sublessee is not a person with whom
Landlord is then negotiating to lease space in the Building or a person who has
leased or negotiated to lease space in the Building during the six (6) month
period ending on the date of the proposed assignment or sublet;
(vi) The form of the proposed sublease or instrument of assignment
shall be in form reasonably satisfactory to Landlord and shall comply with the
applicable provisions of this Article 12;
(vii) There shall not be more than two (2) subtenants (including
Landlord or its designee) of the Premises;
(viii) The rental and other terms and conditions of the sublease are
substantially similar to those contained in the notice furnished to Landlord
pursuant to subsection 12.2;
(ix) Tenant shall reimburse Landlord on demand for the reasonable
costs that may be incurred by Landlord in connection with said assignment or
sublease, including, without limitation, the costs of making investigations as
to the acceptability of the proposed assignee or subtenant, and reasonable legal
costs incurred in connection with the granting of any requested consent;
(x) Tenant shall not have advertised or publicized in any way the
availability of the Premises without prior notice to and approval by Landlord,
which approval shall not be
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unreasonably withheld, nor shall any advertisement state the name (as
distinguished from the address) of the Building or proposed rental rate lower
than the rental rate then payable under this Lease; provided, however, that
nothing contained herein shall preclude Tenant from entering into a sublease at
such a lower rental rate;
(xi) The proposed occupancy shall not increase the office cleaning
requirements or impose an extra burden upon services to be supplied by Landlord
to Tenant, unless Tenant agrees to pay any extra costs incurred thereby; and
(xii) The proposed subtenant or assignee shall not be entitled,
directly or indirectly, to diplomatic or sovereign immunity and shall be subject
to the service of process in, and the jurisdiction of the courts of New York
State.
Except for any subletting by Tenant to Landlord or its designee pursuant to
the provisions of this Article 12, each subletting pursuant to this subsection
12.7 shall be subject to all of the covenants, agreements, terms, provisions and
conditions contained in this Lease. Notwithstanding any such subletting to
Landlord or any such subletting to any other subtenant and/or acceptance of Rent
or additional rent by Landlord from any subtenant, Tenant shall and will remain
fully liable for the payment of the Rent and additional rent due and to become
due hereunder and for the performance of all the covenants, agreements, terms,
provisions and conditions contained in this Lease on the part of Tenant to be
performed and all acts and omissions of any licensee or subtenant or anyone
claiming under or through any subtenant which shall be in violation of any of
the obligations of this Lease shall be deemed to be a violation by Tenant.
Tenant further agrees that notwithstanding any such subletting, no other and
further subletting of the Premises by Tenant or any person claiming through or
under Tenant shall or will be made except upon compliance with and subject to
the provisions of this Article 12. If Landlord shall decline to give its consent
to any proposed assignment or sublease, or if Landlord shall exercise either of
its options under subsection 12.2, Tenant shall indemnify, defend and hold
harmless Landlord against and from any and all loss, liability, damages, costs,
and expenses (including reasonable counsel fees) resulting from any claims that
may be made against Landlord by the proposed assignee or sublessee or by any
brokers or other persons claiming a commission or similar compensation in
connection with the proposed assignment or sublease.
12.8 In the event that (i) Landlord fails to exercise either of its
options under subsection 12.2 and consents to a proposed assignment or sublease,
and (ii) Tenant fails to execute and deliver the assignment or sublease to which
Landlord consented within ninety (90) days after the giving of such consent,
then, Tenant shall again comply with all of the provisions and conditions of
subsection 12.2 before assigning this Lease or subletting all or part of the
Premises, subject to the provisions of Section 20.2 of this Lease.
12.9 With respect to each and every sublease or subletting authorized by
Landlord under the provisions of this Lease, it is further agreed that:
(i) No subletting shall be for a term ending later than one (1)
day prior to the Expiration Date of this Lease;
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(ii) No sublease shall be delivered, and no subtenant shall take
possession of the Premises or any part thereof, until an executed counterpart of
such sublease has been delivered to Landlord;
(iii) Each sublease shall provide that it is subject and subordinate
to this Lease and to the matters to which this Lease is or shall be subordinate,
and that in the event of termination, re-entry or dispossession by Landlord
under this Lease Landlord may, at its option, take over all of the right, title
and interest of Tenant, as sublessor, under such sublease, and such subtenant
shall, at Landlord's option, attorn to Landlord pursuant to the then executory
provisions of such sublease, except that Landlord shall not (a) be liable for
any previous act or omission of Tenant under such sublease, (b) be subject to
any counterclaim, offset or defense, or (c) be bound by any previous
modification of such sublease or by any previous prepayment of more than one (1)
month's rent. The provisions of this Article 12 shall be self-operative and no
further instrument shall be required to give effect to this provision; and
(iv) In the event that there is any purported assignment,
subletting or other occupancy of the Premises in violation of this Article 12,
then, in addition to and without waiver of any other of Landlord's rights and
remedies, such person agrees, by entering into such purported assignment, sublet
or other occupancy, without need for any further writing, to, at Landlord's
election, attorn to Landlord as if such person too was named as Tenant
hereunder.
12.10 If the Landlord shall give its consent to any assignment of
this Lease or to any sublease for which Landlord's consent is required under
this Article 12, Tenant shall in consideration therefor, pay to Landlord, as
additional rent:
(i) in the case of an assignment, an amount equal to fifty percent
(50%) of all sums and other considerations paid to Tenant by the assignee for or
by reason of such assignment (including, but not limited to, sums paid for the
sale of Tenant's fixtures, leasehold improvements, equipment, furniture,
furnishings or other personal property less, in the case of a sale thereof, the
then net unamortized or undepreciated cost thereof determined on the basis of
Tenant's federal income tax returns) less all reasonable expenses actually
incurred by Tenant including, without limitation, on account of brokerage
commissions, work allowances, advertising costs, and architect and legal fees in
connection with such assignment; and
(ii) in the case of a sublease, fifty percent (50%) of any rents,
additional charges or other consideration actually paid under the sublease to
Tenant by the subtenant which is in excess of the Rent and additional rent
accruing during the term of the sublease in respect of the subleased space (at
the rate per square foot payable by Tenant hereunder) pursuant to the terms
hereof (including, but not limited to, sums paid for the sale or rental of
Tenant's fixtures, leasehold improvements, equipment, furniture or other
personal property, less, in the case of the sale thereof, the then net
unamortized or undepreciated cost thereof determined on the basis of Tenant's
federal income tax returns), less all reasonable expenses actually incurred by
Tenant including, without limitation, on account of brokerage commissions, work
allowances, advertising costs, and architect and legal fees, and the cost of
demising the premises so sublet (including the cost of constructing any
necessary entranceways) in connection with such
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sublease. The sums payable under this subsection 12.10(ii) shall be paid to
Landlord as and when received by Tenant from the subtenant.
12.11 (i) If Tenant is a corporation, the provisions of subsection 12.1
shall apply to (x) a transfer (by one or more transfers occurring within any
twelve (12) month period) of a majority of the stock of Tenant, (y) the creation
of new stock (by one or more transactions occurring within any twelve (12) month
period) resulting in the vesting of a majority of the stock of Tenant in a party
or parties who are not stockholders as of the date immediately prior to such
transaction, as if such transfer or vesting of a majority of the stock of Tenant
were an assignment of this Lease or (z) an initial public offering of the stock
of the Tenant on a nationally recognized stock exchange; but said provisions
shall not apply to the circumstances set forth in clause (z) or to transactions
with a corporation into or with which Tenant is merged or consolidated or to
which substantially all of Tenant's assets are transferred, provided that in any
of such events (a) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles at least equal to the
greater of (1) the net worth of Tenant immediately prior to such merger,
consolidation, transfer or initial public offering, or (2) the net worth of
Tenant herein named on the date of this Lease, (b) proof satisfactory to
Landlord of such net worth shall have been delivered to Landlord at least ten
(10) days prior to the effective date of any such transaction, and (c) such
transaction is not entered into for the purpose of avoiding the provisions of
this Article 12.
(ii) If Tenant is a partnership, the provisions of subsection 12.1
shall apply to a transfer (by one or more transfers occurring within any twelve
(12) month period) of a majority interest in the partnership, as if such
transfer were an assignment of this Lease.
(iii) Notwithstanding anything to the contrary contained in this
Article 12, Tenant may assign this Lease and sublease all or any part of the
Premises to any Affiliate of Tenant without obtaining Landlord's consent but
subject to all of the other provisions of this Article 12. For purposes of this
Article 12 "AFFILIATE OF TENANT" shall mean any person or entity directly or
indirectly controlling, controlled by, or under common control with, Tenant. For
purposes of this definition "control" (including with correlative meanings, the
terms "controlling," "controlled by" and "under common control with"), as
applied to any person or entity, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
that person or entity, whether through the ownership of voting securities, by
contract, or otherwise, together with ownership of at least 51 % of the equity
and voting interests in such person or entity.
(iv) Notwithstanding anything to the contrary contained in this
Article 12, as long as Salon Internet, Inc. is the Tenant hereunder, Tenant
shall have the privilege, subject to the terms and conditions hereinafter set
forth, in connection with an on-going business relationship with Tenant, to
permit any temporary use or occupancy of desk space in the Premises of not more
than ten percent (10%) of the Premises by customers, clients or investors of
Salon Internet, Inc. (each individually, the "Desk Space Occupant") without (A)
obtaining the prior consent of Landlord and (B) such arrangement being subject
to the subletting and assignment provisions of this Lease, provided any such
occupancy is maintained in accordance with the following terms and conditions:
(1) such arrangement will terminate automatically upon the occurrence of a
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default continuing beyond any applicable notice and/or grace period under this
Lease; (2) the Desk Space Occupant shall use the Premises in conformity with all
applicable provisions of this Lease; (3) in no event shall the use of any
portion of the Premises by the Desk Space Occupant be deemed to create any
right, title or interest in or to the Premises; (4) the portion of the Premises
occupied by the Desk Space Occupant and the portion of the Premises occupied by
Tenant shall not be, shall not be required by law to be, separated by demising
wall so as to create a separate entrance from the elevator landing or public
corridors; (5) Tenant shall receive no rent, payment or other consideration in
connection with the occupancy by the Desk Space Occupant (except for any
expenses incurred by Tenant in connection with the Desk Space Occupant's use of
such Premises; and any such arrangement shall be for a bona fide and valid
business purpose, and the Desk Space Occupant shall be receiving substantial
services to or supplying substantial economic benefit to, the Tenant. Tenant
hereby represents and covenants that the Desk Space Occupant is substantially in
the same business as Tenant, and Tenant hereby agrees that the foregoing
provisions of this Section 12.11(iv) shall apply for only such period as the
Desk Space Occupant continues in such business, and that Tenant shall give
Landlord written notice of any change in the nature of the Desk Space Occupant's
business. In the event that the nature of the Desk Space Occupant's business
changes, Tenant's rights under this Section 12.11(iv) shall be contingent upon
Landlord's approval of such business, which approval may be withheld in
Landlord's sole discretion. Any such use of all or any portion of the Premises
by the Desk Space Occupant shall not relieve Tenant of any of its obligations or
liabilities under this Lease.
12.12 Any assignment or transfer, whether made with Landlord's consent
pursuant to subsection 12.1 or without Landlord's consent pursuant to subsection
12.11, shall be made only if, and shall not be effective until, the assignee
shall execute, acknowledge and deliver to Landlord an agreement in form and
substance reasonably satisfactory to Landlord whereby the assignee shall assume
the obligations of this Lease on the part of Tenant to be performed or observed
from and after the date of such assignment as if it was the original named
Tenant and whereby the assignee shall agree that the provisions in subsection
12.1 shall, notwithstanding such assignment or transfer, continue to be binding
upon it in respect of all future assignments and transfers. The original named
Tenant covenants that, notwithstanding (i) any assignment or transfer, whether
or not in violation of the provisions of this Lease, (ii) the acceptance of Rent
and/or additional rent by Landlord from an assignee, transferee or any other
party, (iii) any modification of this Lease entered into between Landlord and an
assignee, (iv) any exercise by an assignee of any option to extend, expand or
renew this Lease set forth herein, or (v) any default by an assignee, whether or
not the original named Tenant has notice thereof, the original named Tenant
shall remain fully liable for the payment of the Rent and additional rent and
for the other obligations of this Lease on the part of Tenant to be performed or
observed.
12.13 The joint and several liability of Tenant and any immediate or remote
successor in interest of Tenant and the due performance of the obligations of
this Lease on Tenant's part to be performed or observed shall not be discharged,
released or impaired in any respect by any agreement or stipulation made by
Landlord extending the time, or modifying any of the obligations, of this Lease,
or by any waiver or failure of Landlord to enforce any of the obligations of
this Lease.
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12.14 The listing of any name other than that of Tenant, whether on the
doors of the Premises or the Building directory, or otherwise, shall not operate
to vest any right or interest in this Lease or in the Premises, nor shall it be
deemed to be the consent of Landlord to any assignment or transfer of this Lease
or to any sublease of the Premises or to the use or occupancy thereof by others,
nor shall it be deemed notice to Landlord that anyone other than the original
named Tenant or an assignee or subtenant permitted hereunder is occupying the
Premises. Any such listing, shall constitute a privilege extended by Landlord,
revocable at Landlord's will by notice to Tenant.
12.15 INTENTIONALLY DELETED.
---------------------
12.16 If the Landlord shall recover or come into possession of the Premises
before the date herein fixed for the termination of this Lease, Landlord shall
have the right, at its option, to take over any and all subleases or sublettings
of the Premises or any part thereof made by Tenant and to succeed to all the
rights of said subleases and sublettings or such of them as it may elect to take
over. Tenant hereby expressly assigns and transfers to Landlord such of the
subleases and sublettings as Landlord may elect to take over at the time of such
recovery of possession, such assignment and transfer not to be effective until
the termination of this Lease or re-entry by Landlord hereunder or if Landlord
shall otherwise succeed to Tenant's estate in the Premises, at which time Tenant
shall upon request of Landlord, execute, acknowledge and deliver to Landlord
such further instruments of assignment and transfer as may be necessary to vest
in Landlord the then existing subleases and sublettings. Every subletting
hereunder is subject to the condition and by its acceptance of and entry into a
sublease, each subtenant thereunder shall be deemed conclusively to have thereby
agreed from and after the termination of this Lease or re-entry by Landlord
hereunder of or if Landlord shall otherwise succeed to Tenant's estate in the
Premises, that such subtenant shall waive any right to surrender possession or
to terminate the sublease and, at Landlord's election, such subtenant shall be
bound to Landlord for the balance of the term of such sublease and shall attorn
to and recognize Landlord, as its landlord, under all of the then executory
terms of such sublease, except that Landlord shall not (i) be liable for any
previous act, omission or negligence of Tenant under such sublease. (ii) be
subject to any counterclaim, defense or offset, (iii) be bound by any previous
modification or amendment of such sublease (unless Landlord shall have expressly
consented to such modification or amendment) or by any previous prepayment of
more than one (1) month's rent and additional rent which shall be payable as
provided in the sublease, (iv) be obligated to repair the subleased space or the
Building or any part thereof, in the event of total or substantial total damage
beyond such repair as can reasonably be accomplished from the net proceeds of
insurance actually made available to Landlord, (v) be obligated to repair the
subleased space or the Building or any part thereof, in the event of partial
condemnation beyond such repair as can reasonably be accomplished from the net
proceeds of any award actually made available to Landlord as consequential
damages allocable to the part of the subleased space or the Building not taken
or (vi) be obligated to perform any work in the subleased space of the Building
or to prepare them for occupancy beyond Landlord's obligations under this Lease,
and the subtenant shall execute and deliver to Landlord any instruments Landlord
may reasonably request to evidence and confirm such attornment. Each subtenant
or licensee of Tenant shall be deemed automatically upon and as a condition of
occupying or using the Premises or any part thereof, to have given a waiver of
the type described in and to the extent and upon the conditions set forth in
this Article 12.
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13. CONDITION OF THE PREMISES.
Tenant agrees (i) to accept possession of the Premises in the condition
which shall exist on the Commencement Date "AS IS", and further agrees that
Landlord shall have no obligation, to perform any work or make any installations
in order to prepare the Premises for Tenant's occupancy, unless otherwise
provided in this Lease, and (ii) Landlord and Landlord's agents have made no
representations, warranties or promises whatsoever with respect to the Premises,
the Building, the Real Property, the rents, leases, Taxes. or any other matter
or thing, except as herein expressly set forth, and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as expressly
set forth 'in this Lease. Tenant represents and warrants that it is fully
familiar with the Premises and has thoroughly inspected same. The taking of
possession of the Premises by Tenant shall be conclusive evidence as against
Tenant that, at the time such possession was so taken, the Premises were in good
and satisfactory condition, and that all of the Premises and appurtenances
thereto that are the subject of this Lease have been received by Tenant.
14. ACCESS TO PREMISES.
14.1 Landlord reserves the right, and Tenant shall permit Landlord,
without any of the same constituting an eviction and without incurring liability
to Tenant therefor, (a) to install, erect, use and maintain, repair and replace
pipes, ducts and conduits in and through the Premises; provided, however, that
-------- -------
Landlord shall, to the extent reasonably practicable under the circumstances,
disguise, conceal or camouflage the pipes, ducts and conduits; (b) to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the Building,
provided that any such changes will not materially decrease the useable square
feet of the Premises; (c) to change the Building name or address; and (d) to
impose such controls as it deems reasonably prudent with respect to access to
the Building by Tenant's visitors. Landlord or Landlord's agents shall have the
right to enter the Premises at all reasonable times and, where reasonably
feasible, upon reasonable advance notice to Tenant, to examine the same, to show
them to prospective or existing purchasers, mortgagees, lessors or lessees of
the Building or space therein, and to make such decorations, repairs,
alterations, improvements or additions as Landlord may deem reasonably necessary
or desirable to the Premises or to any other portion of the Building or which
Landlord may elect to perform following Tenant's failure to make repairs or
perform any work which Tenant is obligated to perform under this Lease, or for
the purpose of complying with laws, regulations or other requirements of
government authorities and Landlord shall be allowed to take all material into
and upon the Premises that may be required therefor without the same
constituting an eviction or constructive eviction of Tenant in whole or in part
and the rent shall in no wise abate while said repairs, alterations,
improvements, or additions are being made, by reason of loss or interruption of
business of Tenant, or otherwise. During the one year prior to the Expiration
Date or the expiration of any renewal or extended term, Landlord may exhibit the
Premises to prospective tenants thereof. If, during the last twelve (12) months
of the Term, Tenant shall have abandoned the Premises and removed all or
substantially all of Tenant's property therefrom, Landlord may immediately enter
and alter. renovate and redecorate the Premises, without elimination or
abatement of rent, or incurring liability to Tenant for any compensation, and
such acts shall not be deemed an actual or constructive eviction and shall have
no effect upon this
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Lease. If Tenant shall not be personally present to open and permit an entry
into the Premises, at any time, when for any reason an entry therein shall be
necessary or permissible, Landlord or Landlord's agents may enter the same by a
master key, or may, only in an emergency, forcibly enter the same, without
rendering Landlord or such agents liable therefor (if during such entry Landlord
or Landlord's agents shall accord reasonable care to Tenant's property), and
without in any manner affecting the obligations and covenants of this Lease.
Nothing herein contained, however, shall be deemed or construed to impose upon
Landlord any obligation, responsibility or liability whatsoever, for the care,
supervision or repair of the Building or any part thereof, other than as herein
provided, unless caused by Landlord's negligence or that of its agents.
14.2 (A) Tenant understands and agrees that the Landlord intends to
perform substantial renovation work in and to the public parts of the Building
and the mechanical systems serving the Building (which work may include the
repair or replacement of the building exterior facade, window glass, elevators,
electrical systems, air-conditioning and ventilating systems, plumbing systems,
common hallway or lobby, requiring access to the same from within the Premises)
at any time or from time to time during the Term, and that Landlord shall incur
no liability to Tenant, nor shall Tenant be entitled to any abatement of rent,
on account of any noise, vibration or other disturbance to Tenant's business at
the Premises (provided that Tenant is not denied access to the Premises) which
shall arise out of the performance by Landlord of the aforesaid renovations at
the Building; provided Landlord shall use reasonable efforts to minimize
interference with Tenant's occupancy of the Premises. Tenant agrees to grant
access to the Premises at all reasonable times, upon reasonable notice, for the
purpose of performing the aforesaid renovations. Tenant acknowledges and agrees
that neither the exterior walls of the Building nor the exterior of the windows
and the exterior areas created by the Building set-backs are part of the
Premises and Landlord reserves all rights with respect to those walls, windows
and set-back areas, including, without limitation, the right of access to such
set-back areas and the right to construct permanent signage or other
improvements on such set-back areas and elsewhere on the exterior of the
Building which may, among other things, obstruct views from the Premises.
Subject to the provisions of Section 14.2 (B) below, Landlord shall have no
liability to Tenant, nor shall Tenant be entitled to any abatement of rent or
claim of constructive eviction or other claim for damages on account of any
construction or operation of signage or other improvements on the Building or on
account of the loss of light or views from the Premises due to permanent or
temporary signage or signage improvements on the Building; provided, however,
that in the event that Landlord shall voluntarily construct any signage or other
improvement on the exterior of the Building (other than any improvement required
by any applicable law, rule or regulation or in the case of an emergency in
connection with any repair that Landlord or Landlord's agents is performing to
the Building), Landlord shall use all reasonable efforts to notify Tenant of the
same no later than five (5) business days prior to the initial construction
thereof.
(B) Notwithstanding anything in this Lease to the contrary, provided
that Tenant is not then in default beyond the expiration of any applicable
notice and cure periods, in the event that Landlord has voluntarily constructed
any signage or other improvement on the exterior of the Building (but excluding
any improvement required by any applicable law, rule or regulation or otherwise
reasonably necessary in connection with any repair that Landlord or Landlord's
agents is performing to the Building) which remains in place for longer than
three (3)
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months (the "TEMPORARY PERIOD") and which has the result of substantially
blocking Tenant's views from the Premises (it being understood and agreed that
"substantial blockage" or "substantially blocking," as such terms are used in
this Section, shall mean any blockage of more than thirty-three and one-third
percent (33 1/3%) of the windows of the Premises), Tenant shall have the right
no later than fifteen (15) business days after the expiration of the Temporary
Period (the "RELOCATION NOTIFICATION PERIOD") to elect to be relocated in the
Building to the Signage Substitution Space (as hereinafter defined), subject to
the following terms and provisions:
(i) Tenant shall provide Landlord with written notice ("TENANT'S
RELOCATION REQUEST") of its intention to exercise its right to relocation under
this Section 14.2(B) within the Relocation Notification Period (it being
understood that Landlord shall have the right to designate the Signage
Substitution Space in accordance with the terms and provisions of this Section),
which notice shall contain a certificate of an authorized officer of Tenant
certifying that the views and/or light from the Premises have been substantially
blocked as a result of such permanent signage or improvement on the exterior of
the Building.
(ii) Landlord shall provide Tenant, no later than fifteen (15)
business days after Landlord receives Tenant's Relocation Request, with written
notice ("LANDLORD'S SIGNAGE RELOCATION RESPONSE") describing the Signage
Substitution Space and specifying the rental rate therefor and the effective
date of such substitution of the Signage Substitution Space; provided that such
effective date shall be no earlier than fifteen (15) days and no later than
thirty (30) days after Tenant's receipt of Landlord's Signage Relocation
Response.
(iii) (1) Subject to the provisions herein, the Signage Substitution
Space shall (A) be located anywhere in the Building as Landlord shall determine
in its sole discretion, (B) contain at least the same number of offices as the
Premises, (C) have a similar or better layout as the Premises, (D) consist of at
least the same square footage as the Premises and (E) have any exposure and not
be substantially blocked by signage as of the date of Landlord's Signage
Relocation Response; provided, however, that Landlord will use reasonable
efforts to provide that such Signage Substitution Space shall (x) contain at
least the same number of windows as the Premises, (y) have the same or
substantially similar exposure and substantially similar views as the Premises,
and (z) be located on the fourteenth (14th) floor of the Building or higher.
(2) In the event that the Signage Substitution Space shall
either (A) be on a floor lower than the fourteenth (14th) floor of the Building
or (B) be on a higher floor of the Building but with an exposure other than the
Southwest exposure of the Premises, the Rent for such Signage Substitution Space
shall be the lesser of (x) the Rent set forth in subsection 1.2(iii) of this
Lease, or (y) the then fair market rent for the Signage Substitution Space, as
such rent shall be reasonably determined by Landlord.
(3) In the event that Landlord shall be unable to relocate
Tenant to any Signage Substitution Space anywhere in the Building which complies
with the provisions of Sections 14(B)(iii)(1)(A)(iii),(B), (C), (D) and (E)
above, Tenant shall have the right to elect to terminate this Lease; provided
that Tenant shall provide Landlord, no later than ten (10) business
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days after Tenant receives Landlord's Signage Relocation Response, written
notice exercising its termination right and specifying the effective date of
such termination, which effective date shall be no earlier than fifteen (15)
days and no later than sixty (60) days after Tenant's receipt of Landlord's
Signage Relocation Response, and whereupon such effective date this Lease shall
terminate and be of no further force and effect, except for such terms and
provisions which by their express terms survive the termination hereof.
(iv) Tenant may exercise its right to relocate to the Signage
Substitution Space by providing Landlord with notice, no later than ten (10)
business days after Tenant receives Landlord's Signage Relocation Response,
which notice shall be irrevocable after Landlord's receipt thereof. TIME IS OF
THE ESSENCE WITH RESPECT TO THE FOREGOING TIME PERIOD AND NO EXTENSIONS SHALL BE
GRANTED BY LANDLORD. If Tenant does not deliver to Landlord its written response
to Landlord's Signage Relocation Response in accordance with the foregoing
provisions and within the applicable time period, then (a) Tenant shall have
forever waived and relinquished its right to relocate to any substitute space by
virtue of any signage or other improvement blocking Tenant's views, (b) Landlord
shall at any time thereafter be entitled to lease the Signage Substitute Space
to others as Landlord in its sole discretion may desire, and (c) Tenant, upon
Landlord's request, shall promptly deliver to Landlord a notice acknowledging
that Tenant has forever waived and relinquished its right to exercise the
relocation right granted under this Section 14.2(B).
(v) If Tenant timely accepts Landlord's Signage Relocation
Response in accordance with subsection (iv) above, then Landlord shall
substitute, instead of the Premises, other space of at least the area of the
Premises and satisfying the other conditions set forth herein (such other space
being hereinafter referred to as the "SIGNAGE SUBSTITUTION SPACE") and, as of
the effective date specified in Landlord's Signage Relocation Response:
(1) The description of the Premises set forth in the Lease
shall, without further act on the part of Landlord and Tenant, be deemed amended
so that the Signage Substitution Space shall be deemed to be the Premises under
the Lease, and all of the terms, covenants, conditions and provisions and
agreements of the Lease shall continue in full force and effect and apply to the
Signage Substitution Space (it being understood and agreed that Tenant's Rent
shall not increase as a result of such relocation but that Tenant's Rent may
decrease in accordance with Section 14.2(B)(iii) above only); and
(2) Tenant shall move from the original Premises into the
Signage Substitution Space on or before the effective date of the Signage
Substitution Space in its "AS IS" condition as of the effective date stated in
Landlord's Signage Relocation Response, subject to the alterations Landlord is
required to perform pursuant to the provisions of this subsection 14(B)(v)(2).
If Tenant exercises this relocation right, Landlord shall pay directly, upon
presentation of invoices, for any of Tenant's actual and reasonable out-of-
pocket expenses for moving and installing Tenant's furniture, equipment,
supplies, telephones and telephone equipment and all of Tenant's other property
in the Premises from the original Premises to the Substitution Space, which move
and installation shall be accomplished during the period beginning with the
close of Tenant's business on a Friday and ending with the opening of Tenant's
business on the next following Monday, but Tenant shall not be compensated and
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Landlord shall not be liable for any inconvenience to the Tenant or for any
interruption of Tenant's business or affairs. Additionally, Landlord, at
Landlord's expense, shall alter the Signage Substitution Space in substantially
the same manner as the original Premises were initially constructed by Tenant in
connection with the Initial Alterations and the effective date of the
substitution of the Signage Substitution Space shall not be deemed to have
occurred until the substantial completion of such alterations, if any. If Tenant
requests materials or installations in the Signage Substitution Space other than
those originally installed by Landlord in the original Premises, if any, or if
Tenant shall make any changes in the work, Landlord's written consent thereto
shall be required and Tenant shall pay to Landlord, if Landlord so gives its
consent, the extra costs of any such materials, installations or changes in the
work. Landlord at its discretion may substitute materials of like quality for
the materials originally utilized in proceeding with any such work.
14.3 Landlord shall use reasonable efforts (which shall not include
any obligation to employ labor at overtime rates) to minimize disruption of
Tenant's business during any such entry upon the Premises by Landlord. It is
expressly understood and agreed by and between Landlord and Tenant that if
Tenant shall commence any action or proceeding seeking injunctive, declaratory
or monetary relief in connection with the rights reserved to Landlord under the
foregoing provision, or if Landlord shall commence any action or proceeding to
obtain access to the Premises in accordance with this Article 14, and if
Landlord shall prevail in any such action, then Tenant shall pay to Landlord, as
additional rent under this Lease, a sum equal to all legal fees, costs and
disbursements incurred by Landlord in any way related to or arising out of such
action or proceeding. Tenant understands and agrees that all parts (except
surfaces facing the interior of the Premises) of all walls, windows and doors
bounding the Premises (including exterior Building walls, core corridor walls,
doors and entrances), balconies, terraces and roofs adjacent to the Premises,
all space in or adjacent to the Premises used for shafts, stacks, stairways,
chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and
other mechanical facilities, service closets and other Building facilities are
not part of the Premises and, pursuant to this Article 14, Landlord shall have
the use thereof, as well as reasonable access thereto through the Premises for
the purposes of operation, maintenance, alteration and repair.
15. CERTIFICATE OF OCCUPANCY.
Tenant shall not at any time use or occupy the Premises in violation
of the certificate of occupancy issued for the Premises or for the Building and
in the event that any department of the City or State of New York shall
hereafter at any time contend and/or declare by notice, violation, order or in
any other manner whatsoever that the Premises are used for a purpose which is a
violation of such certificate of occupancy, Tenant shall, upon five (5) business
days' written notice from Landlord, immediately discontinue such use of the
Premises. Failure by Tenant to discontinue such use after such notice shall be
considered a default in the fulfillment of a covenant of this Lease and Landlord
shall have the right to terminate this Lease immediately, and in addition
thereto shall have the right to exercise any and all rights and privileges and
remedies given to Landlord by and pursuant to the provisions of Articles 17 and
18 hereof. Landlord shall not, during the Term, amend such Certificate of
Occupancy to preclude the Permitted Uses or reduce the number of persons who may
occupy the Premises.
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16. LANDLORD'S LIABILITY.
The obligations of Landlord under this Lease shall not be binding upon
Landlord named herein after the sale, conveyance, assignment or transfer by such
Landlord (or upon any subsequent landlord after the sale, conveyance, assignment
or transfer by such subsequent landlord) of its interest in the Building, or the
Real Property, as the case may be, provided that such purchaser, grantee,
assignee or transferee shall assume in writing the obligations of Landlord
hereunder, and in the event of any such sale, conveyance, assignment or
transfer, Landlord shall be and hereby is entirely freed and relieved of all
covenants and obligations of Landlord hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, grantee, assignee or other
transferee that such purchaser, grantee, assignee or other transferee has
assumed and agreed to carry out any and all covenants and obligations of
Landlord hereunder. Neither the shareholders, directors or officers of
Landlord, if Landlord is a corporation, nor the partners and members comprising
Landlord (nor any of the shareholders, directors or officers of such partners or
members), if Landlord is a partnership or limited liability company
(collectively, the "Parties"), shall be liable for the performance of Landlord's
obligations under this Lease. Tenant shall look solely to Landlord to enforce
Landlord's obligations hereunder and shall not seek any damages against any of
the Parties. The liability of Landlord for Landlord's obligations under this
Lease shall not exceed and shall be limited to Landlord's interest in the
Building and the Real Property and Tenant shall not look to any other property
or assets of Landlord or the property or assets of any of the Parties in seeking
either to enforce Landlord's obligations under this Lease or to satisfy a
judgment for Landlord's failure to perform such obligations. Tenant waives, to
the full extent permitted by law, any claim for indirect, consequential or
punitive damages, including loss of profits, in connection with any liability of
Landlord hereunder.
17. DEFAULT.
17.1 Upon the occurrence, at any time prior to or during the Term, of
any one or more of the following events (referred to as "EVENTS OF DEFAULT"):
(1) if Tenant shall default in the payment when due of any installment
of Rent or in the payment when due of any additional rent, and such default
shall continue for a period of five (5) days after notice by Landlord to Tenant
of such default; or
(2) if Tenant shall default in the observance or performance of any
term, covenant or condition of this Lease on Tenant's part to be observed or
performed (other than the covenants for the payment of Rent and additional rent)
and either (x) Tenant shall fail to remedy such default within fifteen (15) days
after notice by Landlord to Tenant of such default, or (y) if such default is of
such a nature that it cannot be completely remedied within said period of
fifteen (15) days, Tenant shall not commence the cure of such default within
said period of fifteen (15) days, thereafter diligently prosecute to completion
all steps necessary to remedy such default and completely remedy such default
within ninety (90) days of the notice from Landlord; or
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(3) if Tenant shall default in the observance or performance of any
term, covenant or condition on Tenant's part to be observed or performed under
any other lease with Landlord or Landlord's predecessor in interest of space in
the Building and such default shall continue beyond any grace period set forth
in such other lease for the remedying of such default; or
(4) if the Premises shall become deserted or abandoned; or
(5) if Tenant's interest in this Lease shall devolve upon or pass to
any person, whether by operation of law or otherwise, except as may be expressly
permitted under Article 12 hereof; or
(6) if Tenant shall file a voluntary petition in bankruptcy or
insolvency, or shall be adjudicated a bankrupt or insolvent, or shall file any
petition or answer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the present or
any future federal bankruptcy act or any other present or future applicable
federal, state or other statute or law, or shall make an assignment for the
benefit of creditors or shall seek or consent to or acquiesce in the appointment
of any trustee, receiver or liquidator of Tenant or of all or any part of
Tenant's property; or
(7) if, within sixty (60) days after the commencement of any
proceeding against Tenant, whether by the filing of a petition or otherwise,
seeking any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under the present or any future federal bankruptcy
act or any other present or future applicable federal, state or other statute or
law, such proceeding shall not have been dismissed, or if, within sixty (60)
days after the appointment of any trustee, receiver or liquidator of Tenant, or
of all or any part of Tenant's property, without the consent or acquiescence of
Tenant, such appointment shall not have been vacated or otherwise discharged, or
if any execution or attachment shall be issued against Tenant or any of Tenant's
property pursuant to which the Premises shall be taken or occupied or attempted
to be taken or occupied; or
(8) if within any 12 consecutive calendar month period, Tenant shall
have on three (3) or more occasions failed to pay Rent or additional rent when
due hereunder, or Landlord has had grounds to commence more than two summary
proceedings;
then, upon the occurrence, at any time prior to or during the Term, of any one
- ----
or more of such Events of Default, Landlord, at any time thereafter, at
Landlord's option, may give to Tenant a five (5) days' notice of termination of
this Lease and, in the event such notice is given, this Lease and the Term shall
come to an end and expire (whether or not the Term shall have commenced) upon
the expiration of said five (5) days with the same effect as if the date of
expiration of said five (5) days were the Expiration Date, but Tenant shall
remain liable for damages as provided in Article 18 hereof.
17.2 If, at any time, (i) Tenant shall be comprised of two (2) or
more persons, or (ii) Tenant's obligations under this Lease shall have been
guaranteed by any person other than Tenant, or (iii) Tenant's interest in this
Lease shall have been assigned, the word "Tenant", as
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used in clauses (6) and (7) of subsection 17. 1, shall be deemed to mean any one
or more of the persons primarily or secondarily liable for Tenant's obligations
under this Lease. Any monies received by Landlord from or on behalf of Tenant
during the pendency of any proceeding of the types referred to in said clauses
(6) and (7) shall be deemed paid as compensation for the use and occupation of
the Premises and the acceptance of any such compensation by Landlord shall not
be deemed an acceptance of rent or a waiver on the part of Landlord of any
rights under said subsection 17.1.
18. REMEDIES AND DAMAGES.
18.1 (1) If an Event of Default shall occur and be continuing, or if
any execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the Premises shall be taken or occupied or attempted to be
taken or occupied by someone other than Tenant, or if Tenant shall fail to move
into or take possession of the Premises within ninety (90) days after the
Commencement Date, or if this Lease and the Term shall expire and come to an end
as provided in Article 17:
(a) Landlord and its agents and servants may immediately, or at any
time after such default or after the date upon which this Lease and the Term
shall expire and come to an end, re-enter the Premises or any part thereof,
without notice, either by summary proceedings, or by any other applicable action
or proceeding, or by force or otherwise (without being liable to indictment,
prosecution or damages therefor), and may repossess the Premises and dispossess
Tenant and any other persons from the Premises and remove any and all of their
property and effects from the Premises; and
(b) Landlord, at Landlord's option, may relet the whole or any part or
parts of the Premises from time to time, either in the name of Landlord or
otherwise, to such tenant or tenants, for such term or terms ending before, on
or after the Expiration Date, at such rental or rentals and upon such other
conditions, which may include concessions and free rent periods, as Landlord, in
its sole discretion, may determine. Landlord shall have no obligation to relet
the Premises or any part thereof and shall in no event be liable for refusal or
failure to relet the Premises or any part thereof, or, in the event of any such
reletting, for refusal or failure to collect any rent due upon any such
reletting, and no such refusal or failure shall operate to relieve Tenant of any
liability under this Lease or otherwise to affect any such liability; Landlord,
at Landlord's option, may make such repairs, replacements, alterations,
additions, improvements, decorations and other physical changes in and to the
Premises as Landlord, in its sole discretion, considers advisable or necessary
in connection with any such reletting or proposed reletting, without relieving
Tenant of any liability under this Lease or otherwise affecting any such
liability.
(2) Tenant hereby waives the service of any notice of intention to re-
enter or to institute legal proceedings to that end which may otherwise be
required to be given under any present or future law. Tenant, on its own behalf
and on behalf of all persons claiming through or under Tenant, including all
creditors, does further hereby waive any and all rights which Tenant and all
such persons might otherwise have under any present or future law to redeem the
Premises, or to re-enter or repossess the Premises, or to restore the operation
of this
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Lease, after (i) Tenant shall have been dispossessed by a judgment or by
warrant of any court or judge. or (ii) any re-entry by Landlord, or (iii) any
expiration or termination of this Lease and the Term, whether such dispossess,
re-entry, expiration or termination shall be by operation of law or pursuant to
the provisions of this Lease. The words "RE-ENTER", "RE-ENTRY" and "RE-ENTERED"
as used in this Lease shall not be deemed to be restricted to their technical
legal meanings. In the event of a breach or threatened breach by Tenant, or any
persons claiming through or under Tenant, of any term, covenant or condition of
this Lease on Tenant's part to be observed or performed, Landlord shall have the
right to enjoin such breach and the right to invoke any other remedy allowed by
law or in equity as if re-entry, summary proceedings and other special remedies
were not provided in this Lease for such breach. The right to invoke the
remedies hereinbefore set forth are cumulative and shall not preclude Landlord
from invoking any other remedy allowed at law or in equity.
18.2 (1) If this Lease and the Term shall expire and come to an end
as provided in Article 17, or by or under any summary proceeding or any other
action or proceeding, or if Landlord shall re-enter the Premises as provided in
subsection 18.1, or by or under any summary proceeding or any other action or
proceeding, then, in any of said events:
(a) Tenant shall pay to Landlord all Rent, additional rent and other
charges payable under this Lease by Tenant to Landlord to the date upon which
this Lease and the Term shall have expired and come to an end or to the date of
re-entry upon the Premises by Landlord, as the case may be;
(b) Tenant also shall be liable for and shall pay to Landlord, as
damages, any deficiency (referred to as "DEFICIENCY") between the Rent reserved
in this Lease for the period which otherwise would have constituted the
unexpired portion of the Term and the net amount, if any, of rents collected
under any reletting effected pursuant to the provisions of subsection 18.l(l)
for any part of such period. The Deficiency shall also include all of
Landlord's reasonable expenses in connection with the termination of this Lease,
or Landlord's re-entry upon the Premises and with such reletting including, but
not limited to, all reasonable repossession costs, brokerage commissions, legal
expenses, attorneys' fees and disbursements, alteration costs and other expenses
of preparing the Premises for such reletting. Any such Deficiency shall be paid
in monthly installments by Tenant on the days specified in this Lease for
payment of installments of Rent, Landlord shall be entitled to recover from
Tenant each monthly Deficiency as the same shall arise, and no suit to collect
the amount of the Deficiency for any month shall prejudice Landlord's right to
collect the Deficiency for any subsequent month by a similar proceeding; and
(c) whether or not Landlord shall have collected any monthly
Deficiencies as aforesaid, Landlord shall be entitled to recover from Tenant,
and Tenant shall pay to Landlord, on demand, in lieu of any further Deficiencies
as and for liquidated and agreed final damages, a sum equal to the amount by
which the Rent reserved in this Lease for the period which otherwise would have
constituted the unexpired portion of the Term exceeds the then fair and
reasonable rental value of the Premises for the same period, less the aggregate
amount of Deficiencies theretofore collected by Landlord pursuant to the
provisions of subsection 18.2(1)(b) for the same period; if, before presentation
of proof of such liquidated
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damages to any court, commission or tribunal, the Premises, or any part thereof,
shall have been relet by Landlord for the period which otherwise would have
constituted the unexpired portion of the Term, or any part thereof, the amount
of rent reserved upon such reletting shall be deemed, prima facie, to be the
fair and reasonable rental value for the part or the whole of the Premises so
relet during the term of the reletting. For purposes of this calculation, (i)
all additional rent charges due hereunder shall be calculated on the assumption
that they would continue to increase at the average rate of increase of
additional rent charges in the 24 previous months (or during the prior term
hereunder if less); and, (ii) at Landlord's election, the "fair and reasonable
rate", if the Premises are not re-let, shall be deemed to be the rentable square
footage of the Premises multiplied by the discounted average rental per square
foot in the last three new leases (excluding renewals) written for space in the
Building, (or, if fewer than three leases have been written in the previous
three months, the most recent lease, or any leases in those three months)
discounting for brokerage fees, free rent periods, landlord work letters, and
similar expenses, and without reference to any additional rent, escalation or
percentage rent clauses therein.
(2) If the Premises, or any part thereof, shall be relet together with
other space in the Building, the rents collected or reserved under any such
reletting and the expenses of any such reletting shall be equitably apportioned
for the purposes of this subsection 18.2. Tenant shall in no event be entitled
to any rents collected or payable under any reletting, whether or not such rents
shall exceed the Rent reserved in this Lease. Solely for the purposes of this
Article, the term "Rent" as used in subsection 18.2(l) shall mean the Rent in
effect immediately prior to the date upon which this Lease and the Term shall
have expired and come to an end, or the date of re-entry upon the Premises by
Landlord, as the case may be, adjusted to reflect any increase or decrease
pursuant to the provisions of Article 28 hereof for the Comparison Year (as
defined in said Article 28) immediately preceding such event. Nothing contained
in Article 17 or this Article 18 shall be deemed to limit or preclude the
recovery by Landlord from Tenant of the maximum amount allowed to be obtained as
damages by any statute or rule of law, or of any sums or damages to which
Landlord may be entitled in addition to the damages set forth in subsection
18.2(l) of this Article 18.
18.3 All costs and expenses, including reasonable attorneys' fees
(whether or not legal proceedings are instituted), involved in collecting Rents
or enforcing the obligations of Tenant under this Lease, including the cost and
expense of instituting and prosecuting legal proceedings or recovering
possession of the Premises after a breach by Tenant or upon expiration or
earlier termination of this Lease, to the extent such costs and expenses have
not already been paid as a Deficiency or as liquidated damages under subsection
----------
18.2, shall be due and payable by Tenant as additional rent within 20 days of
- ----
demand.
19. FEES AND EXPENSES.
19.1 Curing Tenant's Defaults. If Tenant shall default in the
------------------------
observance or performance of any term or covenant on Tenant's part to be
observed or performed under or by virtue of any of the terms or provisions in
any Article of this Lease, after notice and the expiration of any applicable
grace period (except in the case of emergency where no such notice or grace
period shall apply) Landlord may immediately or at any time thereafter on ten
(10) days' notice perform the same for the account of Tenant, and if Landlord
makes any expenditures or
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incurs any obligations for the payment of money in connection therewith
including, but not limited to, reasonable attorneys' fees and disbursements in
instituting, prosecuting or defending any action or proceeding, such sums paid
or obligations incurred with interest and costs shall be deemed to be additional
rent hereunder and shall be paid by Tenant to Landlord within ten (10) days of
rendition of any bill or statement to Tenant therefor.
19.2 Late Charges. If Tenant shall fail to make payment of any
------------
installment of Rent or any additional rent within five (5) days after the date
when such payment is due, Tenant shall pay to Landlord, in addition to such
installment of Rent or such additional rent, as the case may be, as a late
charge and as additional rent, interest on such unpaid sum based on a rate equal
to the lesser of (i) three percent (3%) per annum above the then current prime
rate or base rate charged by Citibank, N.A. or its successor and (ii) the
maximum rate permitted by applicable law, computed from the date such payment
was due to and including the date of payment.
19.3 Attorneys' Fees. In the event of any litigation or arbitration
---------------
between Landlord and Tenant, and if Landlord shall substantially prevail on any
of Landlord's claims, defenses or counterclaims therein, or substantially defeat
or cause the dismissal (with or without prejudice) or severance of any claim,
defense or counterclaim advanced by Tenant, then Tenant shall be liable to and
shall pay to Landlord, Landlord's reasonable attorneys' fees in connection
therewith. This obligation shall survive the termination of this Lease, and
shall apply to any proceeding in which Landlord seeks recovery (including
judgment for liability, and all efforts to collect thereon) of liquidated
damages under Article 18.
19.4 Additional Rent. All payments due from Tenant hereunder shall
---------------
be deemed, at Landlord's option, additional rent, and all Landlord's rights and
remedies with respect to Tenant's obligation to pay Rent or Tenant's failure to
pay Rent shall apply also to Tenant's obligation to pay additional rent, or
failure to do so.
20. NO REPRESENTATIONS BY LANDLORD.
20.1 Landlord or Landlord's agents have made no representations or
promises with respect to the Building, the Real Property, the Premises or Taxes
(as defined in Article 28 hereof) except as herein expressly set forth and no
rights, easements or licenses are acquired by Tenant by implication or otherwise
except as expressly set forth herein. All references in this Lease to the
consent or approval of Landlord shall be deemed to mean the written consent of
Landlord or the written approval of Landlord and no consent or approval of
Landlord shall be effective for any purpose unless such consent or approval is
set forth in a written instrument executed by Landlord.
20.2 Wherever in this Lease Landlord's consent or approval is
required, if Landlord shall refuse such consent or approval, Tenant in no event
shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby
waives any claim, of money damages (nor shall Tenant claim any money damaged by
way of set-off, counterclaim or defense) based upon any claim or assertion by
Tenant that Landlord unreasonably withheld or unreasonably delayed its consent
or approval. Tenant's sole remedy shall be an action or proceeding to enforce
any such provision, for specific performance, injunction or declaratory
judgment. Notwithstanding the
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foregoing, Tenant shall be entitled to money damages only with respect to a
claim that Landlord has unreasonably withheld its consent if it is expressly
determined in a final non-appealable court action or proceeding (as opposed to
an arbitration, which the parties agree cannot result in an award for damages)
that Landlord has willfully and arbitrarily withheld its consent in bad faith
and without any good faith business justification.
20.3 Any escalation provisions herein shall be deemed arbitrary
formulas, and not efforts to measure recoupment by Landlord of any particular
expenses, and Landlord's actual expenses shall not limit the amounts due under
these arbitrary formulas. Any references herein to the square footage or
rentable square footage of the Premises or the Building are otherwise for
purposes of arbitrary formulas only, and not a representation as to the actual
square footage.
21. END OF TERM.
Upon the expiration or other termination of the Term, Tenant shall
quit and surrender to Landlord the Premises, broom clean, in good order and
condition, ordinary wear and tear and damage for which Tenant is not responsible
under the terms of this Lease excepted, and Tenant may remove all of its
property pursuant to Article 3 hereof. Tenant's obligation to observe or
perform this covenant shall survive the expiration or sooner termination of the
Term. If the last day of the Term or any renewal thereof falls on Saturday or
Sunday this Lease shall expire on the business day immediately preceding.
Tenant expressly waives, for itself and for any person claiming through or under
Tenant, any rights which Tenant or any such person may have under the provisions
of Section 2201 of the New York Civil Practice Law and Rules and of any
successor law of like import then in force in connection with any holdover
summary proceedings which Landlord may institute to enforce the foregoing
provisions of this Article 21. In addition, the parties recognize and agree
that the damage to Landlord resulting from any failure by Tenant to timely
surrender possession of the Premises as aforesaid will be substantial, will
exceed the amount of the monthly installments of the Rent theretofore payable
hereunder, and will be impossible to accurately measure. Tenant therefore
agrees that if possession of the Premises is not surrendered to Landlord by
Tenant or any subtenant or other occupant within twenty-four (24) hours after
the Expiration Date or sooner termination of the Term, in addition to any other
rights or remedy Landlord may have hereunder or at law, Tenant shall pay to
Landlord for each month and for each portion of any month during which Tenant
holds over in the Premises after the Expiration Date or sooner termination of
this Lease, a sum equal to the greater of (i) two (2) times the aggregate of
that portion of the Rent and all additional rent which was payable under this
Lease during the last month of the Term, or (ii) the then Fair Market Value of
the Premises, as determined by Landlord. Landlord may consider items of
Tenant's Property that remain in the Premises after the expiration or earlier
termination of the Term to have been abandoned. In that event, Landlord may, at
its option either (i) retain such items as its property or dispose of them
without accountability in such manner as Landlord shall determine, all at
Tenant's expense, or (ii) remove and store such items for Tenant. Tenant shall
reimburse Landlord for the reasonable expenses incurred in connection with such
disposal or removal and storage within 20 days after receipt for an invoice
therefor. The provisions of this subsection shall survive the expiration of the
----------
Term. If the Premises are not surrendered upon the expiration or earlier
termination of this Lease with respect to all or any portion of the Premises,
Tenant hereby indemnifies Landlord against loss, cost, injury, damage, claim,
expense, or liability (including attorneys' fees and
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disbursements) resulting from delay by Tenant in so surrendering the same,
including any claims made by any succeeding tenant or prospective tenant founded
upon such delay. Nothing herein contained shall be deemed to permit Tenant to
retain possession of the Premises after the Expiration Date or sooner
termination of this Lease and no acceptance by Landlord of payments from Tenant
after the Expiration Date or sooner termination of the Term shall be deemed to
be other than on account of the amount to be paid by Tenant in accordance with
the provisions of this Article 21, which provisions shall survive the Expiration
Date or sooner termination of this Lease.
22. QUIET ENJOYMENT.
Landlord covenants and agrees with Tenant that upon Tenant paying the
Rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the Premises subject, nevertheless, to the terms and
conditions of this Lease including, but not limited to, Article 16 hereof and to
all Superior Leases and Mortgages.
23. FAILURE TO GIVE POSSESSION.
Except as provided in subsection 1.3 hereof, Tenant waives any right
to rescind this Lease under Section 223-a of the New York Real Property Law or
any successor statute of similar import then in force and further waives the
right to recover any damages which may result from Landlord's failure to deliver
possession of the Premises on the date set forth in Article 1 hereof for the
Commencement of the Term. If Landlord shall be unable to give possession of the
Premises on such date, and provided Tenant is not responsible for such inability
to give possession, the Rent reserved and covenanted to be paid herein shall not
commence until the date specified in subsection 1.3 hereof, and no such failure
to give possession on such date shall in any wise affect the validity of this
Lease or the obligations of Tenant hereunder or give rise to any claim for
damages by Tenant or claim for rescission of this Lease, nor shall same be
construed in any wise to extend the Term except as otherwise provided in
subsection l.3 hereof. If permission is given to Tenant to enter into the
possession of the Premises or to occupy premises other than the Premises prior
to the Commencement Date, for the conduct of Tenants business, Tenant covenants
and agrees that such occupancy shall be deemed to be under all the terms,
covenants, conditions and provisions of this Lease, including the covenant to
pay Rent.
24. NO WAIVER.
If there be any agreement between Landlord and Tenant providing for
the cancellation of this Lease upon certain provisions or contingencies and/or
an agreement for the renewal hereof at the expiration of the Term, the right to
such renewal or the execution of a renewal agreement between Landlord and Tenant
prior to the expiration of the Term shall not be considered an extension thereof
or a vested right in Tenant to such further term, so as to prevent Landlord from
canceling this Lease and any such extension thereof during the remainder of the
original Term; such privilege, if and when so exercised by Landlord, shall
cancel and terminate this Lease and any such renewal or extension previously
entered into between Landlord and Tenant or the right of Tenant to any such
renewal or extension; any right herein contained on the part of Landlord to
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cancel this Lease shall continue during any extension or renewal hereof; any
option on the part of Tenant herein contained for an extension or renewal hereof
shall not be deemed to give Tenant any option for a further extension beyond the
first renewal or extended term. No act or thing done by Landlord or Landlord's
agents during the Term shall be deemed an acceptance of a surrender of the
Premises, and no agreement to accept such surrender shall be valid unless in
writing signed by Landlord. No employee of Landlord or of Landlord's agents
shall have any power to accept the keys of the Premises prior to the termination
of this Lease. The delivery of keys to any employee of Landlord or of
Landlord's agents shall not operate as a termination of this Lease or a
surrender of the Premises. In the event Tenant at any time desires to have
Landlord sublet the Premises for Tenant's account, Landlord or Landlord's agents
are authorized to receive said keys for such purpose without releasing Tenant
from any of the obligations under this Lease, and Tenant hereby relieves
Landlord of any liability for loss of or damage to any of Tenant's effects in
connection with such subletting. The failure of Landlord or Tenant to seek
redress for violation of, or to insist upon the strict performance, of. any
covenant or condition of this Lease, or any of the Rules and Regulations set
forth or hereafter adopted by Landlord; shall not prevent a subsequent act,
which would have originally constituted a violation, from having all force and
effect of an original violation. The receipt by Landlord of Rent with knowledge
of the breach of any covenant of this Lease shall not be deemed a waiver of such
breach. The failure of Landlord to enforce any of the Rules and Regulations set
forth, or hereafter adopted, against Tenant and/or any other tenant in the
Building shall not be deemed a waiver of any such Rules and Regulations. No
provision of this Lease deemed to have been waived by Landlord or Tenant, unless
such waiver be in writing signed by the party against which such waiver is
charged. No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly Rent herein stipulated shall be deemed to be other than on account
of the earliest stipulated Rent, or as Landlord may elect to apply same, nor
shall any endorsement or statement on any check or any letter accompanying any
check or payment as Rent be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such Rent or pursue any other remedy in this Lease provided.
This Lease contains the entire agreement between the parties and all prior
negotiations and agreements are merged in this Lease. Any executory agreement
hereafter made shall be ineffective to change, modify, discharge or effect an
abandonment of it in whole or in part unless such executory agreement is in
writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
25. WAIVER OF TRIAL BY JURY.
It is mutually agreed by and between Landlord and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the Premises, and/or any claim of injury or damage, or for the
enforcement of any remedy under any statute, emergency or otherwise. Tenant
shall not interpose any counterclaim it may otherwise assert in any summary
proceeding or any other action for possession whether such summary proceeding or
other action is based on nonpayment of Rents or on Tenant's holding over after
expiration of the Term or on any other basis whatsoever, unless such
counterclaim is a statutory mandatory counterclaim.
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26. INABILITY TO PERFORM.
Except as otherwise set forth in this Lease, this Lease and the
obligation of Tenant to pay rent hereunder and perform all of the other
covenants and agreements hereunder on the part of Tenant to be performed shall
in no wise be affected, impaired or excused because Landlord is unable to
fulfill any of its obligations under this Lease expressly or impliedly to be
performed by Landlord or because Landlord is unable to make, or is delayed in
making any repairs, additions, alterations, improvements or decorations or is
unable to supply or is delayed in supplying any equipment or fixtures if
Landlord is prevented or delayed from so doing by reason of strikes or labor
troubles or by accident or by any cause whatsoever reasonably beyond Landlord's
control, including but not limited to, laws, governmental preemption in
connection with a National Emergency or by reason of any rule, order or
regulation of any federal, state, county or municipal authority or any
department or subdivision thereof or any government agency or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency.
27. BILLS AND NOTICES.
Except as otherwise expressly provided in this Lease, any bills,
statements, notices, demands, requests or other communications given or required
to be given under this Lease shall be deemed sufficiently given or rendered if
in writing, sent by registered or certified mail (return receipt requested) or
by nationally recognized overnight courier addressed (a) to Tenant (i) at
Tenant's address set forth in this Lease if mailed prior to Tenant's taking
possession of the Premises, or (ii) at the Building if mailed subsequent to
Tenant's taking possession of the Premises, or (iii) at any place where Tenant
or any agent or employee of Tenant may be found if mailed subsequent to Tenant's
vacating, deserting, abandoning or surrendering the Premises, or (b) to Landlord
at Landlord's address set forth in this Lease, with a copy to: Sidley & Austin,
875 Third Avenue, New York, New York 10022, Attn: Alan S. Weil, Esq., or (c) to
such other address as either Landlord or Tenant may designate as its new address
for such purpose by notice given to the others in accordance with the provisions
of this Article 27. Any such bill, statement, demand, request or other
communication shall be deemed to have been rendered or given on the date which
is (i) two (2) business days after the date when it shall have been mailed, and
(ii) one (1) business day after the date when it shall have been sent by
overnight courier as provided in this Article 27.
28. ESCALATION.
28.1 In a determination of any increase or decrease in the Rent under
the provisions of this Article 28, Landlord and Tenant agree as follows:
(i) "TAXES" shall mean the aggregate amount of (a) all real estate
taxes, assessments (special or otherwise), sewer and water rents, rates and
charges and any other governmental levies, impositions or charges, whether
general, special, ordinary, extraordinary, foreseen or unforeseen, which may be
assumed, levied or imposed upon all or any part of the Real Property (including,
without limitation, (i) assessments made upon or with respect to any "air
rights", (ii) any assessments levied after the date of this Lease for public
benefits to the Real Property or the Building, and (iii) any assessments imposed
by the Times Square Business
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Improvements District or similar organization), and (b) any expenses (including
attorneys' fees and disbursements and experts' and other witness' fees) incurred
in contesting any of the foregoing or the Assessed Valuation of all or any part
of the Real Property but not in excess of the refund or reduction actually
received, but Taxes shall not include (x) any interest or penalties incurred by
Landlord as a result of Landlord's late payment of Taxes, or (y) any franchise,
estate or inheritance taxes. If at any time after the date hereof the methods of
taxation prevailing at the date hereof shall be altered so that in addition to,
in lieu of or as a substitute for the whole or any part of the taxes,
assessments, rents, rates, charges, levies or impositions now assessed, levied
or imposed upon all or any part of the Real Property, there shall be assessed,
levied or imposed (1) a tax, assessment, levy, imposition or charge based on the
income or rents received therefrom whether or not wholly or partially as a
capital levy or otherwise, or (2) a tax, assessment, levy, imposition or charge
measured by or based in whole or in part upon all or any part of the Real
Property and imposed upon Landlord, or (3) a license fee measured by the rents,
or (4) any other tax, assessment, levy, imposition. charge or license fee
however described or imposed, then all such taxes, assessments, levies,
impositions, charges or license fees or the part thereof so measured or based
shall be deemed to be Taxes.
(ii) "ASSESSED VALUATION" shall mean the actual amount (and not the so
called "target" amount) for which the Real Property is assessed pursuant to
applicable provisions of the New York City Charter and of the Administrative
Code of the City of New York for the purpose of imposition of Taxes.
(iii) "TAX YEAR" shall mean the period July I through June 30 (or
such other period as hereinafter may be duly adopted by the City of New York as
its fiscal year for real estate tax purposes).
(iv) "COMPARISON YEAR" shall mean any Tax Year commencing subsequent
to the first day of the Base Tax Year, for any part or all of which there is an
increase in the Rent pursuant to subsection 28.2 of this Article 28.
(v) "LANDLORD'S STATEMENT" shall mean an instrument or instruments
containing a comparison of any increase or decrease in the Rent for the
preceding Comparison Year pursuant to the provisions of this Article 28.
28.2 (1) If the Taxes payable for any Comparison Year (any part or
all of which falls within the Term) shall represent an increase above the Base
Taxes. then the Rent for such Comparison Year and continuing thereafter until a
new Landlord's Statement is rendered to Tenant, shall be increased by Tenant's
Proportionate Share of such increase. The Taxes shall be initially computed on
the basis of the Assessed Valuation in effect at the time Landlord's Statement
is rendered (as the Taxes may have been settled or finally adjudicated prior to
such time) regardless of any then pending application, proceeding or appeal
respecting the reduction of any such Assessed Valuation, but shall be subject to
subsequent adjustment as provided in subsection 28.4(l)(a).
(2) INTENTIONALLY DELETED.
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28.3 (1) At any time prior to, during or after any Comparison Year
Landlord shall render to Tenant a Landlord's Statement or Statements showing
separately or together (i) a comparison of the Taxes payable for the Comparison
Year with the Base Taxes, accompanied, upon Tenant's request therefor, by copies
of the applicable real property tax bills, and (ii) the amount of the increase
in the Rent resulting from each of such comparison. Landlord's failure to
render a Landlord's Statement during or with respect to any Comparison Year
shall not prejudice Landlord's right to render a Landlord's Statement during or
with respect to any subsequent Comparison Year, and shall not eliminate or
reduce Tenant's obligation to pay increases in the Rent pursuant to this Article
28 for such Comparison Year.
(2) (a) With respect to an increase in the Rent resulting from an
increase in the Taxes for any Comparison Year above the Base Taxes, Tenant, in
case of an increase, shall pay to Landlord, a sum equal to one-half (1/2) of
such increase on the first day of June and December of each calendar year. If
Landlord's Statement shall be furnished to Tenant after the commencement of the
Comparison Year to which it relates, then (i) until Landlord's Statement is
rendered for such Comparison Year, Tenant shall pay one-half (1/2) of Tenant's
Proportionate Share of Taxes for such Comparison Year on the first day of June
and December, as described above, based upon the last prior Landlord's Statement
rendered to Tenant with respect to Taxes, and (ii) Tenant shall, within ten (10)
business days after Landlord's Statement is furnished to Tenant, pay to Landlord
an amount equal to any underpayment of the installments of Taxes theretofore
paid by Tenant for such Comparison Year and, in the event of an overpayment by
Tenant, Landlord shall permit Tenant to credit the amount of such overpayment
against subsequent payments (i) of Taxes, and (ii) so long as Tenant shall not
be in default beyond any applicable notice and cure periods, of Rent. If during
the Term of this Lease, Taxes are required to be paid (either to the appropriate
taxing authorities or as tax escrow payments to a mortgagee or ground lessor) in
full or in monthly, quarterly, or other installments, on any other date or dates
than as presently required, then, at Landlord's option, Tenant's Proportionate
Share with respect to Taxes shall be correspondingly accelerated or revised so
that Tenant's Proportionate Share is due at least 30 days prior to the date
payments are due to the taxing authorities or the superior mortgagee or ground
lessor, as the case may be. The benefit of any discount for any early payment
or prepayment of Taxes shall accrue solely to the benefit of Landlord, and such
discount shall not be subtracted from Tenant's Proportionate Share of such
Taxes.
(b) Following each Landlord's Statement, a reconciliation shall be
made as follows: Tenant shall be debited with any increase in the Rent shown on
such Landlord's Statement and credited with the aggregate, if any, paid by
Tenant on account in accordance with the provisions of subsection 28.3(2)(a) for
the Comparison Year in question. Tenant shall pay any net debit balance to
Landlord within fifteen (15) days next following rendition by Landlord, either
in accordance with the provisions of Article 27 hereof or by personal delivery
to the Premises, of an invoice for such net debit balance, any net credit
balance shall be applied against the next accruing monthly installment of Rent.
28.4 (1) (a) In the event that, after a Landlord's Statement has been
sent to Tenant, an Assessed Valuation which had been utilized in computing the
Taxes for a Comparison Year is reduced (as a result of settlement, final
determination of legal proceedings or otherwise), and as a
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result thereof a refund of Taxes is actually received by or on behalf of
Landlord, then, promptly after receipt of such refund, Landlord shall send
Tenant a statement adjusting the Taxes for such Comparison Year (taking into
account the expenses mentioned in the last sentence of subsection 28.1(1)) and
setting forth Tenant's Proportionate Share of such refund and Tenant shall be
entitled to receive such Share by way of a credit against the Rent next becoming
due after the sending of such Statement or by refund to Tenant if such reduction
relates to the last Comparison Year of the Term; provided, however, that
Tenant's Share of such refund shall be limited to the amount, if any, which
Tenant had theretofore paid to Landlord as increased Rent for such Comparison
Year on the basis of the Assessed Valuation before it had been reduced and,
provided further that Tenant shall not be entitled to its share of such refund
if Tenant is then in default hereunder beyond the expiration of applicable
notice and grace periods. Only Landlord shall be eligible to institute tax
reduction or other proceedings to reduce the Assessed Valuation of the Real
Property or the Building and the filing of any such proceeding by Tenant without
Landlord's prior written consent shall constitute a default hereunder.
(b) In the event that, after a Landlord's Statement has been sent to
Tenant, the Assessed Valuation which had been utilized in computing the Base
Taxes is reduced (as a result of settlement, final determination of legal
proceedings or otherwise) then, and in such event: (i) the Base Taxes shall be
retroactively adjusted to reflect such reduction, and (ii) all retroactive
additional rent resulting from such retroactive adjustment shall be forthwith
payable when billed by Landlord. Landlord promptly shall send to Tenant a
statement setting forth the basis for such retroactive adjustment and additional
rent payments.
(2) Any Landlord's Statement sent to Tenant shall be conclusively
binding upon Tenant unless, within forty-five (45) days after such statement is
sent, Tenant shall (i) pay to Landlord the amount set forth in such statement,
without prejudice to Tenant's right to dispute the same, and (ii) send a written
notice to Landlord objecting to such statement and specifying the respects in
which such statement is claimed to be incorrect. If such notice is sent, the
parties recognize the unavailability of Landlord's books and records because of
the confidential nature thereof and hence agree that either party may refer the
decision of the issues raised to a reputable independent firm of certified
public accountants selected by Landlord and reasonably acceptable to Tenant, and
the decision of such accountants shall be conclusively binding upon the parties.
The fees and expenses involved in such decision shall be borne by the
unsuccessful party (and if both parties are partially unsuccessful, the
accountants shall apportion the fees and expenses between the parties based on
the degree of success of each party).
(3) Anything in this Article 28 to the contrary notwithstanding, under
no circumstances shall the rent payable under this Lease be less than the Rent
set forth in Article 1 hereof.
(4) The expiration or termination of this Lease during any Comparison
Year for any part or all of which there is an increase in the Rent under this
Article shall not affect the rights or obligations of the parties hereto
respecting such increase and any Landlord's Statement relating to such increase
may, on a pro rata basis, be sent to Tenant subsequent to, and all such rights
and obligations shall survive, any such expiration or termination. Any payments
due under such Landlord's Statement shall be payable within twenty (20) days
after such
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statement is sent to Tenant. In the event Tenant has made a payment for a period
beyond the expiration or termination of this Lease, Landlord, upon such
expiration or termination, shall promptly refund same to Tenant.
28.5 If any capital improvement is made to the Real Property during
any calendar year during the Term in compliance with requirements of any
Federal, state or local law or governmental regulation first effective after the
Commencement Date, whether or not such law or regulation is valid or mandatory
and whether or not such law or regulation is related to the Premises or to
Tenant's use or Tenant's occupancy of the Premises, then Tenant shall pay to
Landlord, immediately upon demand therefor, Tenant's Proportionate Share of the
annual amortization, with interest, of the cost of such improvement in each
calendar year during the Term during which such amortization occurs.
29. SERVICES.
29.1 Elevator.
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(1) Landlord shall provide passenger elevator facilities on business
days from 8:00 a.m. to 6:00 p.m. and shall have one elevator in the bank of
elevators servicing the Premises available at all other times.
(2) Tenant shall have the right to use the freight elevator in the
Building (on a priority but not exclusive) basis for four (4) hours on the date
of Tenant's move-in and such use shall be without charge to Tenant but which
shall be subject to Landlord's Rules and Regulations regarding such use
(including advance notice and reservation of such use). All other freight
elevator use shall be subject to Landlord's Rules and Regulations regarding such
use, including any charges for such use. At all other times, Tenant shall have
the right to use the freight elevator in the Building, on a non-priority and
non-exclusive basis which shall be subject to Landlord's building rules and
regulations regarding such use, including charges for overtime hour use.
29.2 Heating. Landlord shall furnish heat to the Premises when and
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as required by law, on business days from 8:00 a.m. to 6:00 p.m. in amounts and
at temperatures sufficient, in Landlord's reasonable judgment, for Tenant's
comfortable use and occupancy of the Premises.
29.3 Cooling. Landlord, at Landlord's expense, shall furnish air-
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cooling consistent with other comparable buildings in Manhattan on business days
from 8:00 a.m. to 6:00 p.m. from May 15 through September 15 of each year
during, the Term when, in the judgment of Landlord, reasonably exercised, it may
be required for the comfortable occupancy of the Premises, and shall ventilate
the Premises on business days and for similar hours during other months of the
year. Anything in this subsection 29.3 to the contrary notwithstanding,
Landlord shall not be responsible if the normal operation of the Building air
cooling system shall fail to provide cooled air at reasonable temperatures,
pressures or degrees of humidity or any reasonable volumes or velocities in any
parts of the Premises (i) which, by reason of any machinery or equipment
installed by or on behalf of Tenant or any person claiming through or under
Tenant, shall have an electrical load in excess of the average electrical load
and human occupancy factors for the
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Building air-cooling system as designed, or (ii) because of any rearrangement of
partitioning or other Alterations made or performed by or on behalf of Tenant or
any person claiming through or under Tenant other than in connection with
Landlord's Initial Construction. Tenant agrees to keep and cause to be kept
closed all of the windows in the Premises whenever the air-cooling system is in
operation and agrees to lower and close the blinds when necessary because of the
sun's position whenever the air-cooling system is in operation. Tenant at all
times agrees to cooperate fully with Landlord and to abide by the regulations
and requirements which Landlord may prescribe for the proper functioning and
protection of the air-cooling system. Landlord, throughout the Term, shall have
reasonable access pursuant to the terms of this Lease, to any and all mechanical
installations of Landlord, including but not limited to air cooling, fan,
ventilating, machine rooms and electrical closets.
29.4 After Hours Services. The Rent does not reflect or include any
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charge to Tenant for the furnishing or distributing of any necessary elevator
facilities, heat, cooled air or mechanical ventilation to the Premises during
periods other than the hours and days set forth above in this Article 29 for the
furnishing and distributing of such services (such other periods being referred
to as "OVERTIME PERIODS"). Accordingly, if Landlord shall furnish any such
elevator facilities (other than as required pursuant to Subsection 29.1 hereof),
heat, cooled air or mechanical ventilation to the Premises at the request of
Tenant during Overtime Periods, Tenant shall pay Landlord additional rent for
such services at the standard rates then fixed by Landlord for the Building.
Landlord shall not be required to furnish any such services during any Overtime
Periods unless Landlord has received advance notice from Tenant requesting such
services twenty-four (24) hours prior to the time when such services shall be
required. If Tenant fails to give Landlord such advance notice requesting such
services during any Overtime Periods, then, whether or not the Premises are
inhabitable during such Periods, failure by Landlord to furnish or distribute
any such services during such Periods shall not constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent, or relieve Tenant from any of its obligations under this
Lease, or impose any liability upon Landlord or its agents by reason of
inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's
business or otherwise.
29.5 Cleaning. Landlord, at Landlord's expense, shall cause the
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Premises to be kept clean in building standard manner by performing the cleaning
services set forth in the cleaning specifications attached hereto as Exhibit 2.
If, however, the Premises are to be kept clean by Tenant, it shall be done at
Tenant's sole expense, in a manner satisfactory to Landlord and no one other
than persons approved by Landlord shall be permitted to enter the Premises or
the Building for such purpose. Tenant shall pay to Landlord the cost of removal
of any of Tenant's refuse and rubbish from the Premises and the Building to the
extent that the same exceeds the refuse and rubbish usually attendant upon the
use of such Premises as offices. Bills for the same shall be rendered by
Landlord to Tenant at such time as Landlord may elect and shall be due and
payable within five (5) days after the same have been rendered and the amount of
such bills shall be deemed to be, and be paid as additional rent.
29.6 Sprinkler System. If there now is or shall be installed in the
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Building a "sprinkler system", and such system or any of its appliances shall be
damaged or injured or not in proper working order by reason of any act or
omission of Tenant, Tenant's agents, servants, employees,
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licensees or visitors, Tenant shall forthwith restore the same to good working
condition at its own expense; and if the New York Board of Fire Underwriters or
the New York Fire Insurance Rating Organization or any bureau, department or
official of the state or city government, shall require or recommend that any
changes, modifications, alterations or additional sprinkler heads or other
equipment be made or supplied by reason of Tenant's business, or the location of
the partitions, trade fixtures, or other contents of the Premises, Tenant shall,
at Tenant's expense, promptly make and supply such changes, modifications,
alterations, additional sprinkler heads or other equipment; otherwise, Landlord
shall maintain, at Tenant's expense, such sprinkler system.
29.7 Water. Landlord shall provide hot and cold water for ordinary
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drinking, cleaning and lavatory purposes. If Tenant requires, uses or consumes
water for any purpose in addition to ordinary drinking, cleaning or lavatory
purposes, Landlord may install a water meter and thereby measure Tenant's water
consumption for all purposes. In such event (a) Tenant shall pay Landlord for
the cost of the meter and the cost of the installation thereof and through the
duration of Tenant's occupancy Tenant shall keep said meter and installation
equipment in good working order and repair at Tenant's own cost and expense in
default of which Landlord may cause such meter and equipment to be replaced or
repaired and collect the reasonable cost thereof from Tenant; (b) Tenant agrees
to pay for water consumed, as shown on said meter as and when bills are
rendered, and on default in making such payment Landlord may pay such charges
and collect the same from Tenant; and (c) Tenant covenants and agrees to pay the
sewer rent, charge or any other tax, rent, levy or charge which now or hereafter
is assessed, imposed or shall become a lien upon the Premises or the realty of
which they are part pursuant to law, order or regulation made or issued in
connection with any such metered use, consumption, maintenance or supply of
water, water system, or sewage or sewage connection or system. The bill
rendered by Landlord for the above shall be based upon Tenant's consumption and
shall be payable by Tenant as additional rent within five (5) days of rendition.
Any such costs or expenses incurred or payments made by Landlord for any of the
reasons or purposes hereinabove stated shall be deemed to be additional rent
payable by Tenant and collectible by Landlord as such. Independently of and in
addition to any of the remedies reserved to Landlord hereinabove or elsewhere in
this Lease, Landlord may sue for and collect any monies to be paid by Tenant or
paid by Landlord for any of the reasons or purposes hereinabove set forth.
29.8 Electricity Service.
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(1) Landlord, at Landlord's expense, shall redistribute or furnish
electrical energy to or for the use of Tenant in the Premises for the operation
of the lighting fixtures and the electrical receptacles installed in the
Premises on the Commencement Date and the ordinary and customary office business
machines including, without limitation, word processing, typewriters and
photocopying machines, used by Tenant. There shall be no specific charge by way
of measuring such electrical energy on any meter or otherwise, as the charge for
the service of redistributing or furnishing such electrical energy has been
included in the Rent on a so-called "rent inclusion" basis. The parties agree
that although the charge for the service of redistributing or furnishing
electrical energy is included in the Rent on a so called "rent inclusion" basis,
the value to Tenant of such service may not be fully reflected in the Rent.
Accordingly, Tenant agrees that Landlord, at Landlord's expense, may cause an
independent electrical engineer or electrical consulting firm, selected by
Landlord, to make a determination,
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following the commencement of Tenant's normal business activities in the
Premises, of the full value to Tenant of such services supplied by Landlord, to
wit: the estimated actual electrical energy consumed by Tenant annually based
upon the estimated capacity of the electrical feeders, risers and wiring and
other electrical facilities serving the Premises and used by Tenant. Such
engineer or consulting firm shall certify such determination in writing to
Landlord and Tenant. Thereafter, Landlord may from time to time at its option
cause such engineer or consulting firm to make subsequent determinations of the
then full value of such services supplied to Tenant on the basis set forth in
the immediately preceding sentence. If it shall be determined that the full
value to Tenant of the electric service is in excess of the Electrical Inclusion
Factor, the parties shall enter into a written supplementary agreement, in form
satisfactory to Landlord and Tenant, modifying this Lease as of the Commencement
Date by increasing the Rent and the Electrical Inclusion Factor for the entire
Term by an annual amount equal to such excess. However, if it shall be so
determined that the full value to Tenant of such service does not exceed the
Electrical Inclusion Factor, no such agreement shall be executed and there shall
be no increase or decrease in the Rent or the Electrical Inclusion Factor by
reason of such determination. If either the quantity or character of electrical
service is changed by the public utility or other company supplying electrical
service to the Building or is no longer available or suitable for Tenant's
requirements, no such change, unavailability or unsuitability shall constitute
an actual or constructive eviction, in whole or in part, or entitle Tenant to
any abatement or diminution of rent, or relieve Tenant from any of its
obligations under this Lease, or impose any liability upon Landlord, or its
agents, by reason of inconvenience or annoyance to Tenant, or injury to or
interruption of Tenant's business, or otherwise.
(2) Subject to the provisions of subsection 29.8(3), any additional
feeders or risers to be installed to supply Tenant's additional electrical
requirements, and all other equipment proper and necessary in connection with
such feeders or risers, shall be installed by Landlord upon Tenant's request, at
the sole cost and expense of Tenant, provided that, in Landlord's judgment, such
additional feeders or risers are necessary and are permissible under applicable
laws and insurance regulations and the installation of such feeders or risers
will not cause permanent damage or injury to the Building or the Premises or
cause or create a dangerous or hazardous condition or entail excessive or
unreasonable alterations or interfere with or disturb other tenants or occupants
of the Building. Tenant covenants that at no time shall the use of electrical
energy in the Premises exceed the capacity of the existing feeders or wiring
installations then serving the Premises. Tenant shall not make or perform, or
permit the making, or performance of, any Alterations to wiring installations or
other electrical facilities in or serving the Premises or any additions to the
business machines, office equipment or other appliances in the Premises which
utilize electrical energy without the prior consent of Landlord in each
instance. Any such Alterations, additions or consent by Landlord shall be
subject to the provisions of subsection 29.8(3), as well as to other provisions
of this Lease including, but not limited to, the provisions of Article 3 hereof.
(3) If, at any time or times during the Term, electrical feeders,
risers, wiring or other electrical facilities serving the Premises shall be
installed by Landlord, Tenant or others, on behalf of Tenant or any person
claiming through or under Tenant in addition to the feeders, risers, wiring or
other electrical facilities necessary to serve the lighting fixtures and
electrical receptacles installed in the Premises on the Commencement Date and
the ordinary and
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customary office business machines used by Tenant, the Rent and Electrical
Inclusion Factor each shall be increased in an annual amount which shall reflect
the value to Tenant of the additional service to be furnished by Landlord in
accordance with Subsection 29.8(l). The amount of any such increase in the Rent
and the Electrical Inclusion Factor shall be determined by an independent
electrical engineer or electrical consulting firm selected by Landlord who shall
certify such determination in writing to Landlord and Tenant. Following any such
determination, Landlord and Tenant shall enter into a written supplementary
agreement, in form satisfactory to Landlord and Tenant, modifying this Lease by
increasing the Rent and the Electrical Inclusion Factor for the remainder of the
Term in an annual amount equal to the value of such additional service as so
determined. Any such increase shall be effective as of the date of the first
availability to Tenant of such additional service and shall be retroactive to
such date if necessary.
(4) If, at any time or times after the date hereof, the rates at which
Landlord purchases electrical energy from the public utility corporation
supplying electrical service to the Building or any charges incurred or taxes
payable by Landlord in connection therewith shall be increased, the Rent and the
Electrical Inclusion Factor shall be increased upon demand of Landlord by a
percentage equal to the percentage of such increase. Any such increase in the
Rent and the Electrical Inclusion Factor shall be effective as of the date of
such increase in rates, charges or taxes, and shall be retroactive to such date
if necessary. Anything in this subsection 29.8(4) to the contrary
notwithstanding, under no circumstances shall the Electrical Inclusion Factor be
an amount less than the amount set forth in subsection 29.8(l).
(5) Any increase in the Rent pursuant to the provisions of this
subsection 29.8 with respect to the period from the effective date of such
increase to the last day of the month in which such increase shall be fixed by
agreement or determination shall be payable by Tenant upon demand of Landlord.
The monthly installments of the Rent payable after the date upon which any such
increase is so fixed shall be proportionately adjusted to reflect such increase
in the Rent.
(6) Landlord shall have the option of installing submeters at
Landlord's expense to measure Tenant's consumption of electrical energy. In the
event Landlord exercises such option, the Rent shall be reduced by an amount
equal to the then Electrical Inclusion Factor with such reduction to be
effective as of the commencement of the operation of such submeters. If
Landlord exercises such option, Tenant shall pay to Landlord, as additional
rent, on demand, from time to time, but no more frequently than monthly, for its
use of electrical energy in the Premises, based upon both consumption and demand
factors, at the higher of (x) the seasonally adjusted rate then payable by
Landlord to the utility company, or (y) the seasonally adjusted rate which
Tenant would have been required to pay directly to the utility company had the
utility company provided such service directly to Tenant, plus Landlord's charge
for (i) a reimbursement for out-of-pocket expenses incurred by Landlord in
connection with the retention of a submetering company or other professionals to
monitor and measure Tenant's submeters, and (ii) a charge for Landlord's
overhead, administration and supervision in connection therewith equal to five
percent (5%) of the bill for such electricity services. In the event more than
one meter measures the electric service to Tenant, the electric service rendered
through each meter shall be computed and billed as if one (1) meter measured
such electric service. For the purpose of this subsection 29.8(6) the rate to
be paid by Tenant in the event of
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submetering shall include any taxes, energy charges, demand charges, fuel
adjustment charges, rate adjustment charges, or other charges imposed in
connection therewith. If any tax shall be imposed upon Landlord's receipts from
the sale or resale of electrical energy to Tenant by any federal, state, city or
local authority, the pro rata share of such tax allocable to the electrical
energy service received by Tenant shall be passed on to, included in the bill of
and paid by Tenant.
(7) Landlord reserves the right to discontinue furnishing electricity
to a majority of office tenants of the Building, including, without limitation,
Tenant's Premises on not less than thirty (30) days' notice to Tenant. If
Landlord exercises such right to discontinue, or is compelled to discontinue
furnishing electricity to Tenant, this Lease shall continue in full force and
effect and shall be unaffected thereby, except only that from and after the
effective date of such discontinuance, Landlord shall not be obligated to
furnish electricity to Tenant and the Rent shall be reduced by an amount equal
to the then Electrical Inclusion Factor. If Landlord so discontinues furnishing
electricity to Tenant, Tenant shall arrange to obtain electricity directly from
the public utility or other company servicing the Building. Such electricity
may be furnished to Tenant by means of the then existing electrical facilities
serving the Premises to the extent that the same are available, suitable and
safe for such purposes. All meters and all additional panel boards, feeders,
risers, wiring and other conductors and equipment which may be required to
obtain electricity, of substantially the same quantity, quality and character,
shall be installed by Landlord, at Tenant's sole cost and expense. Landlord
shall not voluntarily discontinue furnishing electricity to Tenant unless it
likewise discontinues furnishing electricity to all tenants of office space on
the same floor of the Building, or until Tenant is able to receive electricity
directly from the public utility or other company servicing the Building.
(8) Landlord shall not be liable to Tenant in any way for any
interruption, curtailment or failure, or defect in the supply or character of
electricity furnished to the Premises by reason of any requirement, act or
omission of Landlord or of any public utility or other company servicing the
Building with electricity or for any other reason except Landlord's negligence
or willful misconduct.
29.9 Interruption of Services. Landlord reserves the right to stop
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the service of the HVAC System or the elevator, electrical, plumbing, or other
mechanical systems or facilities in the Building when necessary, by reason of
accident or emergency, or for repairs, additions, alterations, replacements,
decorations or improvements in the reasonable judgment of Landlord desirable or
necessary to be made, until said repairs, alterations, replacements or
improvements shall have been completed; provided Landlord shall use reasonable
efforts to minimize interference with Tenant's occupancy of the Premises.
Landlord shall have no responsibility or liability for interruption, curtailment
or failure to supply cooled or outside air, heat, elevator, plumbing or
electricity when prevented by exercising its right to stop service or by
strikes, labor troubles or accidents or by any cause whatsoever reasonable
beyond Landlord's control, or by failure of independent contractors to perform
or by laws, orders, rules or regulations of any federal, state, county or
municipal authority, or failure of suitable fuel supply, or inability by
exercise of reasonable diligence to obtain suitable fuel or by reason of
governmental preemption in connection with a National Emergency or by reason of
the conditions of supply and demand which have been or are affected by war or
other emergency. The exercise of such right or such
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failure by Landlord shall not constitute an actual or constructive eviction, in
whole or in part, or entitle Tenant to any compensation or to any abatement or
diminution of rent, or relieve Tenant from any of its obligations under this
Lease, or impose any liability upon Landlord or its agents by reason of
inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's
business, or otherwise.
29.10 Outside Services. It is expressly agreed that only Landlord or
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any one or more persons, firms or corporations authorized in writing by Landlord
will be permitted to furnish laundry, linen, towels, drinking water, ice and
other similar supplies and services to tenants and licensees in the Building.
Landlord may fix, in its reasonable discretion, at any time and from time to
time, the hours during which and the regulations under which such supplies and
services are to be furnished and under which foods and beverages may be brought
into the Building by persons other than regular employees of Tenant.
29.11 Directory Listings. If a directory is installed by Landlord,
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Tenant shall have the right to its proportionate share of the Building's
directory listings for the names of Tenant and its employees. Any additional
listings shall be at the sole but reasonable expense of Tenant.
30. PARTNERSHIP TENANT.
If Tenant is a partnership (or is comprised of two (2) or more
persons, individually and as co-partners of a partnership) or if Tenant's
interest in this Lease shall be assigned to a partnership (or to two (2) or more
persons, individually and as co-partners of a partnership) pursuant to Article
12 (any such partnership and such persons are referred to in this Article 30 as
"PARTNERSHIP TENANT"), the following provisions of this Article 30 shall apply
to such Partnership Tenant: (i) the liability of each of the parties comprising
Partnership Tenant shall be joint and several, and (ii) each of the parties
comprising Partnership Tenant hereby consents in advance to, and agrees to be
bound by, any written instrument which may hereafter be executed, changing,
modifying or discharging this Lease, in whole or in part, or surrendering all or
any part of the Premises to Landlord, and by any notices, demands, requests or
other communications which may hereafter be given by Partnership Tenant or by
any of the parties comprising Partnership Tenant, and (iii) any bills,
statements, notices, demands, requests other communications given or rendered to
Partnership Tenant and to all such parties shall be binding upon Partnership
Tenant and all such parties, and (iv) if Partnership Tenant shall admit new
partners, all of such new partners shall, by their admission to Partnership
Tenant, be deemed to have assumed performance of all of the terms, covenants and
conditions of this Lease on Tenant's part to be observed and performed, and (v)
Partnership Tenant shall give prompt notice to Landlord of the admission of any
such new partners, and upon demand of Landlord, shall cause each such new
partner to execute and deliver to Landlord an agreement in form satisfactory to
Landlord, wherein each such new partner shall assume performance of all the
terms, covenants and conditions of this Lease on Tenant's part to be observed
and performed (but neither Landlord's failure to request any such agreement nor
the failure of any such new partner to execute or deliver any such agreement to
Landlord shall vitiate the provisions of subdivision (iv) of this Article 30).
31. VAULT SPACE.
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Any vaults, vault space or other space outside the boundaries of the
Real Property, notwithstanding anything contained in this Lease or indicated on
any sketch, blueprint or plan are not included in the Premises. Landlord makes
no representation as to the location of the boundaries of the Real Property.
All vaults and vault space and all other space outside the boundaries of the
Real Property which Tenant may be permitted to use or occupy is to be used or
occupied under a revocable license, and if any such license shall be revoked, or
if the amount of such space shall be diminished or required by any Federal,
State or Municipal authority or by any public utility company, such revocation,
diminution or requisition shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of rent, or relieve Tenant from any of its obligations under this Lease, or
impose any liability upon Landlord. Any fee, tax or charge imposed by any
governmental authority for any such vaults, vault space or other space shall be
paid by Tenant.
32. SECURITY DEPOSIT/LETTER OF CREDIT.
32.1 Tenant shall, upon the execution of this Lease by Tenant,
deliver to Landlord a letter of credit (the "LETTER OF CREDIT") issued in favor
of the Landlord in the sum of the Security Deposit ($35,127.00), as security for
the faithful performance and observance by Tenant of the terms, conditions and
provisions of this Lease, including without limitation the surrender of
possession of the Premises to Landlord as herein provided. In the event Tenant
defaults in respect of any of the terms of this Lease including, but not limited
to, the payment of Rent and additional rent after notice and the expiration of
any applicable cure period, Landlord may draw upon the Letter of Credit to the
extent required for the payment of any sum as to which Tenant is in default or
for any sum which Landlord may have expended or may be required to expend by
reason of Tenant's default, including any damages or deficiency accrued before
or after summary proceedings or other re-entry by Landlord. In addition,
Landlord may draw upon the Letter of Credit to the extent required to compensate
Landlord for the actual costs incurred by Landlord in leasing the Premises,
including, without limitation, the unamortized portion of Tenant's free rent
period, if any. In the event Landlord draws upon the Letter of Credit and
applies or retains any portion or all of the sum received upon such draw, Tenant
shall forthwith take such action as is necessary to restore the face amount of
the Letter of Credit so that at all times the amount of the Letter of Credit
shall be equal to the Security Deposit.
32.2 The Letter of Credit shall be an irrevocable, unconditional
letter of credit with an initial term of not less than one (1) year from the
Commencement Date of this Lease. Without further act or instrument required by
Landlord, the Letter of Credit shall be automatically renewed for successive one
(1) year periods throughout the remainder of the Term unless, not less than
forty-five (45) days prior to the then current expiration date of the Letter of
Credit the issuing bank notifies Landlord of its intention not to renew the
Letter of Credit. The Letter of Credit (or any renewal, extension or
replacement thereof) shall continue in full force and effect and shall be
maintained in its full face amount for two (2) calendar months beyond the
expiration of the Term of this Lease (including any extension of the Term
hereof). The Letter of Credit shall (i) be negotiable and freely transferable
in connection with a sale or transfer by Landlord as hereinafter described; (ii)
be issued or confirmed by a New York City banking institution reasonably
acceptable to Landlord which is a member of the New York Clearing House
Association; (iii) provide for payment of all or any portion of the face amount
of the Letter of
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Credit to Landlord upon the receipt by the issuing bank of a statement signed by
a representative of Landlord that Landlord is entitled to such amount pursuant
to the terms of this Lease and (iv) be otherwise in form and substance
reasonably satisfactory to Landlord. Landlord's receipt of notice from the
issuing bank of its intention not to renew the Letter of Credit or Tenant's
failure to deliver a renewal or replacement letter of credit shall entitle
Landlord to draw the full face amount of the Letter of Credit and retain such
sum as security hereunder in lieu of the Letter of Credit. Tenant's failure to
maintain the Letter of Credit or to substitute a cash security deposit as a
replacement therefor shall constitute a default under this Lease.
32.3 In the event that Tenant shall fully and faithfully comply with
all of the terms of this Lease, the Letter of Credit shall be returned to Tenant
promptly after the Expiration Date or sooner termination of this Lease (other
than a termination which results from Tenant's default hereunder). In the event
of a sale of the Building or leasing of the Building, of which the Premises form
a part, Landlord shall have the right to transfer the Letter of Credit to the
vendee or lessee. Landlord upon such transfer shall be released by Tenant from
all liability for the return of such security and Tenant agrees to look solely
to the new landlord for the return of said security. It is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new landlord.
33. CAPTIONS.
The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this Lease or the
intent of any provision thereof.
34. ADDITIONAL DEFINITIONS.
34.1 The term "OFFICE" or "OFFICES", wherever used in this Lease,
shall not be construed to mean premises used as a store or stores, for the sale
or display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing.
34.2 The words "RE-ENTER" and "RE-ENTRY" as used in this Lease are
not restricted to their technical legal meaning.
34.3 The term "BUSINESS DAYS," if and when used in this Lease, shall
exclude Saturdays, Sundays and all days observed by (i) the State or Federal
Government, or (ii) any applicable union, legal or trade holidays, as the case
may be.
35. PARTIES BOUND.
The covenants, conditions and agreements contained in this Lease shall
bind and inure to the benefit of Landlord and Tenant and their respective heirs,
distributees, executors, administrators, successors, and, except as otherwise
provided in this Lease, their assigns.
36. BROKER.
53
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Each of Landlord and Tenant represents to the other that it has dealt
with no broker in connection with this Lease other than the Broker.
Commissions, if any, due to the Broker shall be paid by Landlord pursuant to a
separate agreement. Each of Landlord and Tenant agrees to indemnify, defend and
hold harmless the other from and against any claims, based or alleged to be
based upon the acts or omissions of the indemnifying party, for any brokerage
commission or finder's fee with respect to this Lease by persons other than the
Broker, and for all costs, expenses and liabilities incurred in connection with
such claims, including reasonable attorneys' fees and disbursements arising out
of a breach of the foregoing representation.
37. INDEMNITY.
Tenant shall not do or permit any act or thing to be done upon the
Premises which may subject Landlord to any liability or responsibility for
injury, damages to persons or property or to any liability by reason of any
violation of law or of any legal requirement of public authority, but shall
exercise such control over the Premises as to fully protect Landlord against any
such liability. Tenant agrees to indemnify, defend, protect and hold harmless
Landlord and its agents from and against (a) all claims of whatever nature
against Landlord and its agents (including, without limitation, all claims
arising from any accident, injury or damage caused to any person or to the
property of any person) arising from any act, omission or negligence of Tenant,
or Tenant's assignees, sublessee, contractors, licensees, agents, servants,
employees, invitees or visitors, in the Premises, (b) all claims against
Landlord arising from any accident, injury or damage occurring outside of the
Premises but anywhere within or about the Real Property, where such accident,
injury or damage results or is claimed to have resulted from any act, omission
or negligence of only Tenant or Tenant's assignees, sublessee, contractors,
licensees, agents, servants, employees, invitees or visitors, and (c) any
breach, violation or nonperformance of any covenant, condition or agreement in
this Lease set forth and contained on the part of Tenant to be fulfilled, kept,
observed and performed. This indemnity and hold harmless agreement shall
include indemnity from and against any and all liability, fines, suits, demands,
costs and expenses of any kind or nature incurred in or in connection with any
such claim or proceeding brought thereon, and the defense thereof with counsel
approved by Landlord in writing, which approval shall not be unreasonably
withheld or delayed. In addition, Landlord shall have the right, at Tenant's
sole, but reasonable, cost and expense, to retain its own counsel in any such
actions brought against Landlord. This Article shall survive the expiration or
earlier termination of this Lease.
38. ADJACENT EXCAVATION-SHORING.
If an excavation shall be made upon land adjacent to the Premises, or
shall be authorized to be made, or if scaffolding shall be erected on or
adjacent to the Building, Tenant shall afford to the person causing or
authorized to cause such excavation or construction, license to enter upon the
Premises for the purpose of doing such work as said person shall deem necessary
to preserve the wall or the Building from injury or damage and to support the
same by improper foundations without any claim for damages or indemnity against
Landlord, or diminution or abatement of rent. Landlord shall use reasonable
efforts to cause the performance of such excavation to occur expeditiously and
with minimum interference to Tenant's occupancy of the Premises.
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39. MISCELLANEOUS.
39.1 No Offer. This Lease is not an offer by Landlord or Tenant and
--------
it is understood that this Lease shall not be binding upon Landlord or Tenant
unless and until Landlord and Tenant shall have executed and delivered a fully
executed copy of this Lease to the other party.
39.2 Signatories. If more than one person executes this Lease as
-----------
Tenant, each of them understands and hereby agrees that the obligations of each
of them under this Lease are and shall be joint and several, that the term
"Tenant" as used in this Lease shall mean and include each of them jointly and
severally and that the act of or notice from, or notice or refund to, or the
signature of, any one or more of them, with respect to the tenancy and/or this
Lease, including, but not limited to, any renewal, extension, expiration,
termination or modification of this Lease, shall be binding upon each and all of
the persons executing this Lease as Tenant with the same force and effect as if
each and all of them had so acted or so given or received such notice or refund
or so signed.
39.3 Certificates. From time to time, within ten (10) days next
------------
following Landlord's request, Tenant shall deliver to Landlord a written
statement executed and acknowledged by Tenant, in form reasonably satisfactory
to Landlord, (i) stating that this Lease is then in full force and effect and
has not been modified (or if modified, setting forth all modifications), (ii)
setting forth the date to which the Rent, additional rent and other charges
hereunder have been paid, together with the amount of fixed base monthly Rent
then payable, (iii) stating whether or not, to the best knowledge of Tenant,
Landlord is in default under this Lease, and, if Landlord is in default, setting
forth the specific nature of all such defaults, stating the amount of the
security deposit under this Lease, (iv) stating whether there are any subleases
affecting the Premises, (v) stating the address of Tenant to which all notices
and communication under the Lease shall be sent, the Commencement Date and the
Expiration Date, and (vi) as to any other matters requested by Landlord. Tenant
acknowledges that any statement delivered pursuant to this subsection 39.3 may
be relied upon by any purchaser or owner of the Real Property or the Building,
or Landlord's interest in the Real Property or the Building or any Superior
Lease, or by any mortgagee of a Mortgage, or by any assignee of any mortgagee of
a Mortgage, or by any lessor under any Superior Lease. So long as Tenant shall
not be in default beyond any applicable notice and cure period, within ten (10)
business days following Tenant's written request, Landlord shall deliver a
statement to Tenant regarding the matters set forth in clauses (i), (ii) and, to
the best knowledge of Landlord, (iii) of this Section 39.3, provided that
Landlord's failure to deliver such a statement shall not subject Landlord to any
liability to Tenant hereunder and shall not be deemed a default by Landlord
hereunder entitling Tenant to terminate this Lease or to refuse or fail to
perform any other obligation of Tenant hereunder.
39.4 Governing Law, Venue. (a) This Lease shall be governed by, and
--------------------
be construed in accordance with, the laws of the State of New York without
regard to the principles of conflicts of laws. To the fullest extent permitted
by law, Tenant hereby unconditionally and irrevocably waives any claims to
assert that the law of any other jurisdiction governs this Lease and agrees that
this Lease shall be governed by and construed in accordance with the laws of the
State of New York pursuant to (S) 5-1401 of the New York General Obligations
Law.
55
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(b) Any legal suit, action or proceeding against Tenant or Landlord
arising out of or relating to this Lease may be instituted in any federal or
state court in New York, New York, pursuant to (S) 5-1402 of the New York
General Obligations Law, and Tenant hereby waives any objection which it may now
or hereafter have to the laying of venue of any such suit, action or proceeding
including, without limitation, any claim of forum non conveniens pursuant to any
rule of common law and/or any applicable federal or state statute, law or
provision, and Tenant hereby irrevocably submits to the jurisdiction of any such
court in any suit, action or proceeding.
39.5 Rent Restrictions. If the amount of the Rents payable under
-----------------
this Lease exceeds that allowed by the terms of any valid government restriction
that limits the amount of rent or other charges that a commercial lessor may
charge or collect, the amount of Rents payable under this Lease shall be the
maximum permitted by such restriction for the period of time during which such
restriction remains in effect. All increases in Rents provided for in this
Lease shall, however, to the extent permitted by law, be calculated upon the
amount of the Rents that would have been payable in the absence of such
restriction, and, effective as of the expiration of such restriction, the Rents
payable hereunder shall be increased to the amount that would have prevailed had
such restriction never been in effect. Moreover, to the fullest extent
permitted by law, on the first due date for an installment of Rent following
expiration of such restriction, Tenant shall pay to Landlord, as additional
rent, an amount equal to the difference between the amount of Rents that Tenant
would have paid if such restriction had not been in force and the amount of
Rents actually paid by Tenant during the period in which such restriction
remained in effect.
40. TENANT RELOCATION.
It is specifically agreed between Landlord and Tenant that Landlord
shall have the one (1) time right at any time during the Term of this Lease
(including without limitation the primary or any renewal or extension term
thereof) to substitute, instead of the Premises, other space of at least the
area of the Premises (such other space being hereinafter referred to as the
"SUBSTITUTION SPACE") located anywhere in the Building; provided, however, that
such Substitution Space (i) contains at least the same number of windows (with
the same or substantially similar exposure) and at least the same number of
offices as the Premises, (ii) consists of at least the same square footage as
the Premises, (iii) has a similar or better layout as the Premises and (iv) is
not substantially blocked by signage. Landlord shall exercise such right by
giving Tenant at least thirty (30) days' prior written notice specifying the
effective date of such substitution of the Substitution Space, whereupon, as of
such effective date:
(a) The description of the Premises set forth in the Lease shall,
without further act on the part of Landlord or Tenant, be deemed amended so that
the Substitution Space shall be deemed to be the Premises under the Lease, and
all of the terms, covenants, conditions and provisions and agreements of the
Lease shall continue in full force and effect and apply to the Substitution
Space; and
56
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(b) Tenant shall move from the original Premises into the Substitution
Space on or before the effective date stated in Landlord's notice and shall
vacate and surrender possession to Landlord of the original Premises; and
(c) Subject to the other provisions of this subsection (c), Tenant
shall be deemed to have accepted possession of the Substitution Space in its "AS
IS" condition as of the effective date stated in Landlord's notice. If Landlord
exercises this relocation right, Landlord shall pay directly, upon presentation
of invoices, for any of Tenant's actual and reasonable out-of-pocket expenses
for moving and installing Tenant's furniture, equipment, supplies, telephones
and telephone equipment and all of Tenant's other property in the Premises from
the original Premises to the Substitution Space, which move and installation
(the "MOVE") shall be accomplished during the period beginning with the close of
Tenant's business on a Friday and ending with the opening of Tenant's business
on the next following Monday, but Tenant shall not be compensated and Landlord
shall not be liable for any inconvenience to the Tenant or for any interruption
of Tenant's business or affairs. Additionally, Landlord, at Landlord' s
expense, shall alter the Substitution Space in substantially the same manner as
the original Premises were initially constructed by Tenant in connection with
the Initial Alterations and the effective date of the substitution of the
Substitution Space shall not be deemed to have occurred until the substantial
completion of such alterations. If Tenant requests materials or installations
in the Substitution Space other than those originally installed by Landlord in
the original Premises or if Tenant shall make any changes in the work,
Landlord's written consent thereto shall be required and Tenant shall pay to
Landlord, if Landlord so gives its consent, the extra costs of any such
materials, installations or changes in the work. Landlord at its discretion may
substitute materials of like quality for the materials originally utilized in
proceeding with any such work.
(d) In the event that the Substitution Space shall either (A) be on a
floor lower than the fourteenth (14th) floor of the Building or (B) be on a
higher floor of the Building but with an exposure other than the Southwest
exposure of the Premises, the Rent for such Substitution Space shall be the
lesser of (x) the Rent set forth in subsection 1.2(iii) of this Lease, or (y)
the then fair market rent for the Substitution Space, as such rent shall be
reasonably determined by Landlord.
[NO FURTHER TEXT ON THIS PAGE]
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IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
LANDLORD:
ZAPCO 1500 INVESTMENT, L.P.
By: Intertech 1500 Co., LLC,
general partner
By: Zapco Holdings, Inc.,
member
By: /s/ Authorized Officer
-------------------------------
TENANT:
SALON INTERNET, INC.
By: /s/ Authorized Officer
------------------------------
Tenant's Federal I.D. Number: 943228750
58
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SCHEDULE A
RULES AND REGULATIONS
To the extent there is any conflict or inconsistency between any of the
Rules and Regulations and the provisions of the Lease, the provisions of the
Lease shall govern.
1. The rights of each tenant in the Building to the entrances, corridors
and elevators of the Building are limited to ingress to and egress from such
tenant's premises and no tenant shall use, or permit the use of the entrances,
corridors, or elevators for any other purpose. No tenant shall invite to its
premises, or permit the visit of persons in such numbers or under such
conditions as to interfere with the use and enjoyment of any of the plazas,
entrances, corridors, elevators and other facilities of the Building by other
tenants. No tenant shall encumber or obstruct, or permit the encumbrances or
obstruction of any of the sidewalks, plazas, entrances, corridors, elevators,
fire exits or stairways of the Building. No tenant shall permit the use of any
public areas in or adjacent to the Building for smoking. Tenants shall cause all
employees and visitors to comply with all state and local smoking regulations as
in effect from time to time. Landlord reserves the right to control and operate
the public portions of the Building, the public facilities, as well as
facilities furnished for the common use of the tenants, in such manner as
Landlord deems best for the benefit of the tenants generally.
2. Landlord may refuse admission to the Building outside of ordinary
business hours to any person not known to the watchman in charge or not having a
pass issued by Landlord or not properly identified, and may require all persons
admitted to or leaving the Building outside of ordinary business hours to
resister. Tenants' employees, agents and visitors shall be permitted to enter
and leave the Building whenever appropriate arrangements have been previously
made between Landlord and the tenant with respect thereto. Each tenant shall be
responsible for all persons for whom it requests such permission and shall be
liable to Landlord for all acts of such persons. Any person whose presence in
the Building at any time shall, in the judgment of Landlord, be prejudicial to
the safety, character, reputation or interests of the Building or its tenants
may be denied access to the Building or may be ejected therefrom. In case of
invasion, riot, public excitement or other commotion Landlord may prevent all
access to the Building during the continuance of the same, by closing the doors
or otherwise, for the safety of the tenants and protection of property in the
Building. Landlord may require any person leaving the Building with any package
or other object to exhibit a pass from the tenant from whose premises the
package or object is being removed, but the establishment and enforcement of
such requirement shall not impose any responsibility of Landlord for the
protection of any tenant against the removal of property from the premises of
tenant. Landlord shall, in no way, be liable to any tenant for damages or loss
arising from the admission, exclusion or ejection of any person to or from a
tenant's premises or the Building under the provisions of this rule.
3. No tenant shall obtain or accept for use in its premises ice, drinking
water, towels, barbering, boot blacking, floor polishing, lighting maintenance,
cleaning or other similar services from any persons not authorized by Landlord
in writing to furnish such services. Such services shall be furnished only at
such hours, in such places within the tenant's premises and under such
regulation as may be fixed by Landlord.
A-1
<PAGE>
4. No window or other air-conditioning units shall be installed by any
tenant, and only such window coverings as are supplied or permitted by Landlord
shall be used in a tenant's premises.
5. There shall not be used in any space, nor in the public halls of the
Building, either by any tenant or by jobbers, or other in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and side guards.
6. All entrance doors in each tenant's premises shall be left locked when
the tenant's premises are not in use. Entrance doors shall not be left open at
any time. All windows in each tenant's premises shall be kept closed at all
times and all blinds therein above the ground floor shall be lowered when and as
reasonably required because of the position of the sun, during the operation of
the Building air-conditioning system to cool or ventilate the tenants' premises.
7. No noise, including the playing of any musical instruments, radio or
television, which, in the judgment of Landlord, might disturb other tenants in
the Building, shall be made or permitted by any tenant. No dangerous,
inflammable, combustible or explosive object, material or fluid shall be brought
into the Building by any tenant or with the permission of any tenant.
8. All damages resulting from any misuse of the plumbing fixtures shall
be borne by the tenant who, or whose servants, employees, agents, visitors or
licensees, shall have caused the same. If, in Landlord's reasonable judgment,
tenant has on more than six occasions in any 12 month period violated any of the
Rules, then, in addition to all other rights and remedies, Landlord may engage
an outside security firm, at the tenant's expense, chargeable as additional rent
to such tenant, to monitor for a reasonable time tenant's compliance, and to
take such steps as it sees fit, without any liability to Landlord, to prevent
any further violation of the rules.
9. No signs, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any tenant on any part of the outside of the
premises or the Building without the prior written consent of Landlord. Signs
and lettering on doors shall be inscribed, painted, or affixed for each tenant
by Landlord at the expense of such tenant, and shall be of a size and color
reasonably acceptable to Landlord. Landlord may remove same without any
liability and may charge the expense incurred by such removal to the tenant or
tenants violating this rule. No tenant shall use any advertising which impairs
the reputation of the Building. Landlord will provide Tenant's proportionate
share of listings on the lobby directory board (if the Building shall have such
lobby directory board). All other listings on such lobby directory board shall
be installed by Landlord at Landlord's sole discretion.
10. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows in any tenant's premises and no lock on any door therein
shall be changed or altered in any respect. Duplicate keys for a tenant's
premises and toilet rooms shall be procured only from Landlord, which may make a
reasonable charge therefore. Upon the termination of a tenant's lease, all keys
of the tenant's premises and toilet rooms shall be delivered to Landlord.
A-2
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11. Each tenant, shall, at its expense, provide artificial light in the
premises for Landlord's agents, contractors and employees while performing
janitorial or other cleaning services and making repairs or alterations in said
premises.
12. No tenant shall install or permit to be installed any vending machines
without Landlord's prior written consent.
13. No animals or birds, bicycles, mopeds or vehicles of any kind shall be
kept in or about the Building or permitted therein.
14. No furniture, office equipment, packages or merchandise will be
received in the Building or carried up or down in the elevator, except between
such hours as shall be designated by Landlord. Landlord shall prescribe the
charge for freight elevator use and the method and manner in which any
merchandise, heavy furniture, equipment or safes shall be brought in or taken
out of the Building, and also the hours at which such moving shall be done.
15. All electrical fixtures hung in offices or spaces along the perimeter
of any tenant's Premises must be fluorescent, of a quality, type, design and
bulb color approved by Landlord unless the prior consent of Landlord has been
obtained for other lamping.
16. The exterior windows and doors that reflect or admit light and air
into any premises or the halls, passageways or other public places in the
Building, shall not be covered or obstructed by any tenant, nor shall any
articles be placed on the window sills.
17. Canvassing, soliciting and peddling in the Building is prohibited and
each tenant shall cooperate to prevent same.
18. No tenant shall do any cooking, conduct any restaurant, luncheonette
or cafeteria for the sale or service of food or beverages to its employees or to
others, except as expressly approved in writing by Landlord. In addition, no
tenant shall cause or permit any odors of cooking or other processes or any
unusual or objectionable odors to emanate from the premises. The foregoing shall
not preclude tenant from having food or beverages delivered to the premises,
provided that no cooking or food preparation shall be carried out at the
premises. Notwithstanding the foregoing, Tenant shall be permitted to install a
refrigerator, microwave oven and coffee maker in the Premises for the use solely
by Tenant, its employees and invitees.
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EXHIBIT 1
FLOOR PLAN OF PREMISES
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT 2
CLEANING SPECIFICATIONS
Contractor shall perform these services nightly between the hours of 5:00
P.M. and 8:00 A.M., Union Holidays excepted.
I. DAILY SERVICES
--------------
A. TENANT AREAS
------------
1. Dust sweep all stone, ceramic tile, marble, terrazzo, asphalt
tile, and other types of flooring.
2. Vacuum all carpet twice weekly, carpet sweep all areas three
times a week.
3. Empty and clean all waste baskets and disposal receptacles.
Remove trash to designated areas.
4. Empty and clean all ashtrays and screen sand urns. Contractor to
replace sand as necessary.
5. Dust all furniture, fixtures, chair rails, window unit covers and
trim.
6. Clean all glass furniture tops.
7. Dust telephone with anti-bacterial cloth
8. Wash clean all water fountains and coolers.
B. PUBLIC CORRIDORS
----------------
1. Damp mop tile, terrazzo and marble flooring.
2. Vacuum carpet in public corridors.
3. Clean all cigarette urns and replace sand as necessary.
(Contractor to furnish sand.)
4. Clean all wall surfaces of finger marks, smudges, writing, etc.
5. Dust elevator doors.
C. CORE LAVATORIES
---------------
1. Scour, wash and disinfect both sides of all toilet seats, basins,
bowls and urinals.
2. Wash floors, using proper disinfectants.
E-1
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3. Wash and polish all mirrors, powder shelves, bright work
including flushometers.
4. Dust and wash all partitions, tile walls dispensers and
receptacles.
5. Empty paper towel receptacles and remove trash to designated
areas.
6. Empty and clean sanitary disposal receptacles (Contractor to
furnish napkins).
7. Fill all paper towel, soap and tissue dispensers.
8. Report to Managing Agent any plumbing or mechanical deficiencies.
II. PERIODIC SERVICES
-----------------
Contractor will furnish the following services at the specified
frequency.
A. LAVATORY
--------
1. Machine scrub floors monthly, or more frequently as necessary.
2. Wash all partitions, tile walls and enamel surfaces monthly with
proper disinfectant.
3. High dust all lights, walls and grilles monthly.
B. GENERAL OFFICE AREAS
--------------------
1. Wipe clean all aluminum, chrome and other metal work around
exterior windows as necessary.
2. Dust all ventilating louvers and grilles within reach quarterly.
3. Wash all waste receptacles quarterly, public areas only.
4. Wash all lighting fixtures twice per year, public areas only.
5. Dust all vertical surfaces not reached nightly, venetian blinds,
picture frames, charts and other hangings, quarterly.
6. Wash all windows in the demised premises inside and outside,
quarterly.
II. EXCLUDED AREAS & MATERIALS
--------------------------
1. Private bathrooms.
2. Pantry area.
E-2
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3. Hazardous waste.
4. Medical waste.
E-3
<PAGE>
EXHIBIT 10.6
Michael O'Donnell
235 Pacheco
San Francisco, CA 94116
RE: EMPLOYMENT AGREEMENT
Dear Mike:
Pursuant to our recent discussions, this letter sets forth the terms
of your employment with Salon (the "Company") as well as our understanding with
respect to any termination of that employment relationship. The offer of
employment set forth in this letter will expire at 5:00 p.m. on November 7,
1996, unless it is accepted by you in writing prior to that time.
1. POSITIONS AND DUTIES. You will be employed by the Company as its
--------------------
Publisher and President, reporting to the Company's Board of Directors (the
"Board"). Upon your employment by the Company, you will become a member of the
Board. You accept employment with the Company on the terms and conditions set
forth in this Agreement, and you agree to devote your full business time, energy
and skill to your duties at the Company. Your duties will include those duties
described in the Company's by-laws for your position(s), as well as any other
reasonable duties assigned to you by the Board that are consistent with your
positions.
2. TERM OF EMPLOYMENT. Your employment with the Company will start
------------------
on December 2, 1996, will be for no specified term, and may be terminated by you
or the Company at any time, with or without cause, subject to the provisions of
Paragraphs 4 and 5 below.
3. COMPENSATION. You will be compensated by the Company for your
------------
services as follows:
(a) Salary. You will be paid at an annual base salary rate of
------
$130,000.00, less applicable withholding, in accordance with the Company's
normal payroll procedures. Your salary will be reviewed by the Board on an
annual basis, and may be subject to adjustment based upon various factors
including, but not limited to, your performance. Any adjustment to your salary
shall be in the sole discretion of the Board.
(b) MBO Bonus.
---------
(i) You will be entitled to receive an annual (fiscal year)
bonus of up to $50,000.00 based upon the Company's achievement of various
financial and/or other goals established by you, David Talbot and the Board. The
goals that govern your bonus eligibility will be communicated to you in writing
by the Board within 60 days following the start of each Company fiscal year. To
the extent earned, bonuses will be paid to you within 30 days after the end of
the applicable fiscal year. All MBO bonuses will be subject to applicable
withholding.
<PAGE>
(ii) If your employment terminates as a result of your death
or disability (as defined below), or your employment is terminated by the
Company without cause or by you for Good Reason (as defined below), you shall
receive a pro rated portion of your MBO bonus for the year in which such
termination occurs. That pro rated bonus will be determined by multiplying a
fraction, the numerator of which is the number of days that you are employed by
the Company in that year and the denominator of which is 365, times the bonus
that you would have earned under subparagraph (i) above had you been employed
for the entire year. Any prorated bonus earned by you under this subparagraph
will be paid to you within 30 days after the fiscal year in which your
employment terminates, and will be subject to applicable withholding.
(iii) If your employment is terminated by the Company for
cause (as defined below), or you resign from your employment for any reason
other than a Good Reason, you shall not be entitled to any MBO bonus, or pro
rated portion of such bonus, for the year in which your employment terminates.
(c) Overachievement Bonus. A bonus pool equal to 5% of the
---------------------
Company's gross annual revenues will be made available for distribution to you
and your staff (in amounts determined by the Board or a Compensation Committee
of the Board, based upon recommendations by you) based upon the Company's
"overachievement" of any fiscal year gross revenue goal that is established by
you, David Talbot and the Board. The overachievement goal that governs this
potential bonus will be communicated to you in writing by the Board within 60
days following the start of each Company fiscal year. To the extent earned
(which requires that you be employed by the Company on the last day of the
applicable fiscal year), this bonus pool will be made available to you (and your
staff) within 30 days after the end of the applicable fiscal year. All
overachievement bonuses will be subject to applicable withholding.
(d) Benefits. You will have the right, on the same basis as other
--------
employees of the Company, to participate in and to receive benefits under any
Company medical, disability or other group insurance plans, as well as under the
Company's vacation, business expense reimbursement, and other policies. To the
extent that you are subject to any waiting period before you are eligible to
participate in the Company's group health insurance plan, the Company will,
during such period, reimburse you for any COBRA premiums that you must actually
pay to continue the group health insurance coverage provided by your previous
employer.
(e) Stock Options.
-------------
(i) Subject to the Board's approval, you will be granted an
option to purchase 8% of the Company's currently outstanding common stock (the
"Option") under the Company's stock option plan at an exercise price of $.10 per
share. The Option will be exercisable and will vest over a four year period in
equal installments on a quarterly basis during your employment with the Company.
The Option will be governed by and subject to the terms and conditions of the
Company's standard form of incentive stock option agreement (which you will be
required to sign in connection with the issuance of the Option).
2
<PAGE>
(ii) In the event that within one year following any Change
of Control (as defined below), (A) your employment is terminated without cause,
or (B) you resign from your employment for Good Reason (as defined below), any
unvested portion of the Option shall become fully vested. In the event that the
purchaser/acquirer in any Change of Control transaction fails to assume the
Option or substitute an equivalent option, any unvested portion of the Option
shall become fully vested.
(iii) In the event that your employment terminates as a
result of your death or disability (defined in paragraph 4) within one year of
your start date (set forth in paragraph 2), you shall immediately become vested
(to the extent that you are not already vested) in one-fourth (25%) of the
shares that are subject to the Option.
(iv) You shall have the right of first refusal to
participate in any future sales by the Company of its equity securities in
private financing transactions to the extent necessary to maintain your pro rata
interest in the outstanding common stock of the Company prior to such offering
(calculated on an "as converted" basis). The Company shall give you notice of
the terms of such offering and the cost of maintaining your pro rata share.
Unless you respond in writing to the offer notice within five days asking to
exercise the option and tender payment at the closing, this option shall lapse.
This right of first refusal shall not apply to the issuance by the Company of
equity securities (i) to employees, officers, directors or consultants of the
Company, (ii) in connection with an acquisition by the Company of another
entity, or an interest in another entity, through a merger, exchange or similar
transaction, (iii) pursuant to debt financing, equipment financing or leasing
arrangements or in connection with strategic partnering transactions approved by
the Board, or (iv) in connection with a registered public offering of the
Company's equity securities. In addition, the right of first refusal shall not
apply if a majority in interest of the proposed investors object in writing to
your participation in the financing. This right shall terminate upon an initial
public offering of the stock of the Company.
(v) You shall have the right to sell up to 10% of the shares of
your Company stock in an initial public offering of the Company's stock, subject
to the approval of the Board and the underwriters, on the terms and in a manner
consistent with section 1.3 and sections 1.6-1.12 of the Rights Agreement of
December 22, 1995, between the Company, Adobe Ventures L.P. and H & Q Salon
Investors, L.P.
4. VOLUNTARY TERMINATION. In the event that you voluntarily resign
---------------------
from your employment with the Company (except for Good Reason as defined below),
or in the event that your employment terminates as a result of your death or
disability (meaning that you are unable to perform your duties for any 120 days
in any one year period as a result of a physical and/or mental impairment), you
will be entitled to no compensation or benefits from the Company other than
those earned under Paragraph 3 through the date of your termination. You agree
that in the event you voluntarily terminate your employment with the Company for
any reason, you shall provide the Company with 30 days' written notice of your
resignation. The Company may, in its sole discretion, elect to waive all or any
part of such notice period and accept your resignation at an earlier date.
3
<PAGE>
5. OTHER TERMINATION. Your employment may be terminated under the
-----------------
circumstances set forth below.
(a) Termination for Cause. If your employment is terminated by
---------------------
the Company for cause as defined below, you shall be entitled to no compensation
or benefits from the Company other than those earned under Paragraph 3 through
the date of your termination for cause.
For purposes of this Agreement, a termination "for cause" occurs if
you are terminated for any of the following reasons: (i) theft, dishonesty, or
intentional falsification of any Company documents or records; (ii) intentional
and improper disclosure of the Company's confidential or proprietary
information; (iii) any action by you which has a material detrimental effect on
the Company's reputation or business; (iv) your material failure or inability to
perform any assigned duties after written notice from the Company to you of, and
a reasonable opportunity to cure, such failure or inability; or (v) your
conviction (including any plea of guilty or nolo contendre) for any criminal act
that impairs your ability to perform your duties under this Agreement.
(b) Termination Without Cause. If your employment is terminated by
-------------------------
the Company without cause (and not as a result of your death or disability) and
you sign a release of known and unknown claims in a form satisfactory to the
Company, you shall receive severance payments at your final base salary rate,
less applicable withholding, until the earlier of (i) nine months after the date
of your termination without cause, or (ii) the date on which you first commence
other employment. Severance payments will be made in accordance with the
Company's normal payroll procedures.
(c) Resignation for Good Reason. If you resign from your
---------------------------
employment with the Company for Good Reason, you shall be entitled to receive
the severance payments described in subparagraph 5(b).
6. CHANGE OF CONTROL/GOOD REASON.
-----------------------------
(a) For purposes of this Agreement, a "Change of Control" of the
Company shall be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than Adobe Ventures, L.P., H & Q Salon Investors, L.P., or a
trustee or other fiduciary holding securities of the Company under an employee
benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule
13d-3 promulgated under the Exchange Act), directly or indirectly, of securities
of the Company representing 50% more of (A) the outstanding shares of common
stock of the Company or (B) the combined voting power of the Company's then-
outstanding securities entitled to vote generally in the election of directors;
or
(ii) the Company (A) is party to a merger, consolidation or
exchange of securities which results in the holders of voting securities of the
Company outstanding immediately prior thereto failing to continue to hold at
least 50% of the combined voting power
4
<PAGE>
of the voting securities of the Company, the surviving entity or a parent of the
surviving entity outstanding immediately after such merger, consolidation or
exchange, or (B) sells or disposes of all or substantially all of the Company's
assets (or any transaction having similar effect is consummated), or (C) the
individuals constituting the Board immediately prior to such merger,
consolidation, exchange, sale or disposition shall cease to constitute at least
50% of the Board, unless the election of each director who was not a director
prior to such merger, consolidation, exchange, sale or disposition was approved
by a vote of at least two-thirds of the directors then in office who were
directors prior to such merger, consolidation, exchange, sale or disposition.
(b) For purposes of this Agreement, "Good Reason" means any of the
following conditions, which are imposed upon you (and not upon the Company's
senior management generally) without your written consent, and which
condition(s) remain(s) in effect 10 days after written notice to the Board from
you of such condition(s):
(i) a decrease in your base salary and/or a material
decrease in any of your then-existing bonus plans or employee benefits;
(ii) a material, adverse change in your title, authority,
responsibilities or duties, as measured against your title, authority,
responsibilities or duties immediately prior to such change;
(iii) a substantial reduction, without good business reasons,
of the facilities and perquisites (including office space and location)
available to you as measured against those available immediately prior to such
reduction;
(iv) the relocation of your office at the Company to a
location that is more than 40 miles from its location at the outset of your
employment;
(v) any termination of your employment by the Company that
is not effected for death, disability or cause, or any termination by the
Company for which the grounds relied upon are not valid;
(vi) the failure by the Company to obtain the assumption of
this Agreement by any successor; or
(vii) any material breach by the Company of any material
provision of this Agreement.
7. CONFIDENTIAL AND PROPRIETARY INFORMATION. As a condition of your
----------------------------------------
employment, you agree to sign the Company's standard form of employee
confidentiality and assignment of inventions agreement.
8. DISPUTE RESOLUTION. In the event of any dispute or claim relating
------------------
to or arising out of your employment relationship with the Company, this
Agreement, or the termination of your employment with the Company for any reason
(including, but not limited to, any claims of breach of contract, wrongful
termination or age, disability or other discrimination), you and the Company
agree that all such disputes shall be fully, finally and exclusively resolved
5
<PAGE>
by binding arbitration conducted by the American Arbitration Association in San
Francisco County, California. You and the Company hereby knowingly and willingly
waive your respective rights to have any such disputes or claims tried to a
judge or jury. Provided, however, that this arbitration provision shall not
apply to any disputes or claims relating to or arising out of the actual or
alleged misuse or misappropriation of the Company's property, including, but not
limited to, its trade secrets or proprietary information.
9. ASSIGNMENT. In view of the personal nature of the services to be
----------
performed under this Agreement by you, you cannot assign or transfer any of your
obligations under this Agreement.
10. ATTORNEYS' FEES. The prevailing party shall be entitled to
---------------
recover from the losing party its reasonable costs and attorneys' fees in any
arbitration, litigation or other legal proceeding between the parties concerning
this Agreement, our employment relationship or the termination of that
relationship.
11. ENTIRE AGREEMENT. This Agreement and the agreements referred to
----------------
above constitute the entire agreement between you and the Company regarding the
terms and conditions of your employment, and they supersede all prior
negotiations, representations or agreements between you and the Company
regarding your employment, whether written or oral.
12. MODIFICATION. This Agreement may only be modified or amended by
------------
a supplemental written agreement signed by you and an authorized representative
of the Company.
By: /s/ David Talbot
----------------------------
David Talbot
I agree to and accept employment with Salon on the terms and
conditions set forth in this Agreement.
Date: November 7, 1996
/s/ Michael O'Donnell
----------------------------
Michael O'Donnell
6
<PAGE>
Mike, we look forward to working with you at Salon. Please sign and
date this letter on the spaces provided below to acknowledge your acceptance of
the terms of this Agreement.
7
<PAGE>
EXHIBIT 10.7
April 2, 1999
Bruce Roberts
1191 Camino Vallecito
Lafayette, CA 94549
RE: EMPLOYMENT AGREEMENT
Dear Bruce:
Pursuant to our recent discussions, this letter sets forth the terms of
your employment with Salon Internet, Inc. (the "Company") as well as our
understanding with respect to any termination of that employment relationship.
1. Position and Duties. You will be employed by the Company as its
-------------------
Senior Vice President of Sales, reporting to me. You accept employment with the
Company on the terms and conditions set forth in this Agreement, and you agree
to devote your full business time, energy and skill to your duties at the
Company. Your duties will include, but not be limited to, those duties normally
performed by a Senior Vice President of Sales, as well as any other reasonable
duties that may be assigned to you from time to time.
2. Term of Employment. Your employment with the Company will start on
------------------
April 12, 1999, will be for no specified term, and may be terminated by you or
the Company at any time, with or without cause, subject to the provisions of
Paragraphs 4, 5, and 6 below.
3. Compensation. You will be compensated by the Company for your
------------
services as follows:
(a) Salary: You will be paid a monthly salary of $14,583.33,
------
less applicable withholding, in accordance with the Company's normal payroll
procedures. Your salary will be reviewed by [me/the Company's Board of Directors
(the "Board")] from time to time (but no more frequently than annually), and may
be subject to adjustment based upon various factors including, but not limited
to, your performance and the Company's profitability. Any adjustment to your
salary shall be in the sole discretion of [me/the Board].
(b) MBO Bonus: You will be eligible to receive annual bonuses
---------
of up to $50,000 based upon the Company's and your achievement of various
financial and/or other goals established by you and me. The objectives that
govern your bonus eligibility for the first year of your employment will be
communicated to you in writing by me within 30 days following the start of your
employment. At the end of your first year of employment, you will receive a
bonus of at least $25,000; you will not have any guaranteed bonus component in
subsequent years. To the extent earned (which requires that you be employed by
the Company on the applicable anniversary of your start date), bonuses will be
paid on the later of 30 days after (i) the applicable anniversary date, or (ii)
the date on which the financial or other data
<PAGE>
Bruce Roberts
April 2, 1999
Page 2
necessary to determine your entitlement to the bonus becomes available. All MBO
bonuses will be subject to applicable withholding.
(c) Benefits: You will have the right, on the same basis as
--------
other employees of the Company, to participate in and to receive benefits under
any Company medical, disability or other group insurance plans, as well as under
the Company's business expense reimbursement and other policies. You will accrue
paid vacation in accordance with the Company's vacation policy at the rate of 15
days per year.
(d) Stock Options: Subject to the Board's approval, you will
-------------
be granted the following options to purchase the Company's common stock under
the Company's existing stock option plan at an exercise price equal to the fair
market value of that stock on the option grant date.
(i) Initial Option: As soon as practical following your
--------------
start date, you will be granted an option to purchase 175,000 shares of the
Company's common stock. Provided you remain employed by the Company, this option
will vest over a four year period in accordance with the Company's stock option
plan.
(ii) Additional Option: If you complete two years'
-----------------
employment with the Company and meet your MBO goals for the second year, which
will be established by you and me, you will be granted an additional option to
purchase the number of shares of Company common stock that is then equal to 10%
of the number of shares subject to the Initial Option described above.
Each of the foregoing options shall be governed by and subject to the terms and
conditions of the Company's existing stock option plan and standard form of
stock option agreement, which you will be required to sign in connection with
the issuance of each stock option. If you are terminated by the Company without
cause, you will receive one year's accelerated vesting of any unvested portion
of the stock option(s) previously granted to you under this Paragraph 3(d).
Notwithstanding the previous sentence, if within two years following any Change
of Control (as defined below), (A) your employment is terminated by the Company
without cause, or (B) you resign from your employment for Good Reason (as
defined below), any unvested portion of the stock option(s) previously granted
to you under this Paragraph 3(d) shall immediately become fully vested.
4. Voluntary Termination. In the event that you voluntarily resign
---------------------
from your employment with the Company, or in the event that your employment
terminates as a result of your death or disability (meaning that you are unable
to perform your duties for any 90 days in any one year period as a result of a
physical and/or mental impairment), you will be entitled to
<PAGE>
Bruce Roberts
April 2, 1999
Page 3
no compensation or benefits from the Company other than those earned under
Paragraph 3 through the date of your termination. You agree that if you
voluntarily terminate your employment with the Company for any reason, you will
provide the Company with sixty days' written notice of your resignation. The
Company may, in its sole discretion, elect to waive all or any part of such
notice period and accept your resignation at an earlier date.
5. Other Termination. Your employment may be terminated by the
-----------------
Company under the circumstances set forth below.
(a) Termination for Cause: If your employment is terminated by
---------------------
the Company for cause as defined below, you shall be entitled to no compensation
or benefits from the Company other than those earned under Paragraph 3 through
the date of your termination for cause.
For purposes of this Agreement, a termination "for cause" occurs if you
are terminated for any of the following reasons: (i) theft, dishonesty,
misconduct or falsification of any employment or Company records; (ii) improper
disclosure of the Company's confidential or proprietary information; (iii) your
failure or inability to perform any assigned duties after written notice from
the Company to you of, and a reasonable opportunity to cure, such failure or
inability; or (iv) your conviction (including any plea of guilty or no contest)
for any criminal act that impairs your ability to perform your duties under this
Agreement.
(b) Termination Without Cause Within One Year: If your
-----------------------------------------
employment is terminated by the Company without cause (and not as a result of
your death or disability) before your first anniversary, you will receive
severance payments at your final base salary rate, less applicable withholding,
until the earlier of (i) twelve months after the date of your termination
without cause, or (ii) the date on which you first commence other employment.
Severance payments will be made in accordance with the Company's normal payroll
procedures. You will also receive one year's accelerated vesting of any unvested
portion of the stock option(s) previously granted to you under Paragraph 3(d) as
described in that paragraph.
(c) Termination Without Cause After One Year: If your
----------------------------------------
employment is terminated by the Company without cause (and not as a result of
your death or disability) on or after your first anniversary, you will receive
severance payments at your final base salary rate, less applicable withholding,
until the earlier of (i) six months after the date of your termination without
cause, or (ii) the date on which you first commence other employment. Severance
payments will be made in accordance with the Company's normal payroll
procedures. You will also receive one year's accelerated vesting of any unvested
portion of the stock option(s) previously granted to you under Paragraph 3(d) as
described in that paragraph.
<PAGE>
Bruce Roberts
April 2, 1999
Page 4
6. Change of Control/Good Reason
-----------------------------
(a) Termination Without Cause Following Change in Control:
-----------------------------------------------------
If your employment is terminated by the Company without cause or you resign from
your employment for Good Reason (as defined below) and such termination without
cause/resignation for Good Reasons occurs within two years following any Change
in Control (as defined below), you shall be entitled to the severance payments
described in Paragraph 5(c). In addition, any unvested portion of the stock
option(s) previously granted to you under Paragraph 3(d) shall become fully
vested as described in that paragraph. If your employment is terminated by the
Company without cause either prior to, or more than two years after, any Change
in Control, you shall receive only the compensation and benefits described in
subparagraph 5(b) or (c), depending on the timing of your termination without
cause. If you resign from your employment with the Company for Good Reason at
any time prior to, or more than one year after, any Change in Control, you will
not be entitled to any severance payments or severance benefits, including
accelerated stock option vesting.
For purposes of this Agreement, a "Change in Control" of the Company
will be deemed to have occurred if:
(i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding securities of
the Company under an employee benefit plan of the Company, becomes the
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of (A) the outstanding shares of common stock of the Company or (B) the
combined voting power of the Company's then-outstanding securities entitled to
vote generally in the election of directors; or
(ii) the Company (A) is party to a merger,
consolidation or exchange of securities which results in the holders of voting
securities of the Company outstanding immediately prior thereto failing to
continue to hold at least 50% of the combined voting power of the voting
securities of the Company, the surviving entity or a parent of the surviving
entity outstanding immediately after such merger, consolidation or exchange, or
(B) sells or disposes of all or substantially all of the Company's assets (or
any transaction having similar effect is consummated), or (C) the individuals
constituting the Board immediately prior to such merger, consolidation,
exchange, sale or disposition shall cease to constitute at least 50% of the
Board, unless the election of each director who was not a director prior to such
merger, consolidation, exchange, sale or disposition was approved by a vote of
at least two-thirds of the directors then in office who were directors prior to
such merger, consolidation, exchange, sale or disposition.
<PAGE>
Bruce Roberts
April 2, 1999
Page 5
For purposes of this Agreement, "Good Reason" means any of the
following conditions, which condition(s) remain(s) in effect 10 days after
written notice to the Board from you of such condition(s):
(i) any decrease in your base salary and/or a material
decrease in any of your then-existing bonus plans or employee benefits;
(ii) a material, adverse change in your title, authority,
responsibilities or duties, as measured against your title, authority,
responsibilities or duties immediately prior to such change; or
(iii) the relocation of your work place for the Company to a
location that is more than 75 miles from San Francisco.
7. Confidential and Proprietary Information. As a condition of your
----------------------------------------
employment, you agree to sign the Company's standard form of employee
confidentiality and assignment of inventions agreement.
8. Dispute Resolution. In the event of any dispute or claim relating
------------------
to or arising out of your employment relationship with the Company, this
Agreement, or the termination of your employment with the Company for any reason
(including, but not limited to, any claims of breach of contract, wrongful
termination or age, disability or other discrimination), you and the Company
agree that all such disputes shall be fully, finally and exclusively resolved by
binding arbitration conducted by the American Arbitration Association in San
Francisco County, California. The Company will pay the costs of the arbitration,
and each party will bear its own attorneys' fees and expert and other witness
fees incurred in the arbitration. You and the Company hereby knowingly and
willingly waive your respective rights to have any such disputes or claims tried
to a judge or jury. Provided, however, that this arbitration provision shall not
apply to any claims for injunctive relief by you or the Company.
9. Assignment. In view of the personal nature of the services to be
----------
performed under this Agreement by you, you cannot assign or transfer any of your
obligations under this Agreement.
10. Entire Agreement. This Agreement and the agreements referred to
----------------
above constitute the entire agreement between you and the Company regarding the
terms and conditions of your employment, and they supersede all prior
negotiations, representations or agreements between you and the Company
regarding your employment, whether written or oral.
<PAGE>
Bruce Roberts
April 2, 1999
Page 6
11. Modification. This Agreement may only be modified or amended by a
------------
supplemental written agreement signed by you and an authorized representative of
the Company.
12. Interpretation. This Agreement will be governed by and
--------------
interpreted in accordance with the laws of the State of California.
This offer of employment will expire at 5:00 p.m. on April 5, 1999, if
you do not accept it prior to that time.
Bruce, we look forward to working with you at Salon. Please sign and
date this letter on the spaces provided below to acknowledge your acceptance of
the terms of this Agreement.
Sincerely,
Salon Internet, Inc.
By: /s/ Michael O'Donnell
-----------------------
Michael O'Donnell
I agree to and accept employment with Salon Internet, Inc. on the terms
and conditions set forth in this Agreement.
Date: April 2, 1999 /s/ Bruce Roberts
---------------------------
Bruce Roberts
<PAGE>
EXHIBIT 10.8
S A L O N
M A G A Z I N E
March 25, 1999
Todd Hagen
461 Starboard
Redwood City, CA
94065
Dear Todd,
I am pleased to offer you a position with Salon starting April 9, 1999, as the
Vice President, CFO reporting to the President. If you decide to join us,
here's a summary of the compensation package:
. You will receive a monthly salary of $11,666.66 less applicable withholding,
which will be paid semi-monthly in accordance with Salon's normal payroll
procedures.
. In addition, you will be eligible to receive a yearly bonus of up to $35,000,
based on attaining certain MBOs that will be mutually determined within your
first 45 days of employment.
. You will be granted 150,000 employee incentive options, subject to approval
from the company's Board of Directors. The options are in accordance with the
company's stock option plan (4 year vesting). Should Salon be acquired before
your vesting is complete and should the acquiring company not wish to retain
your employment services, your stock vesting will be accelerated to the next
yearly anniversary date. You will also have the chance to obtain up to 10%
additional shares of stock at the end of your first year anniversary and upon
successful attainment of certain MBOs.
As a Salon employee, you are also eligible to receive certain employee benefits
including those on the enclosed list below.
. Health Care Insurance
. Dental Insurance
. Paid vacation and the standard Salon Paid Holiday program
. 401K Investment Plan with The Patriot Group
. Disability coverage through UNUM
Further details of the plan are available through Donna DeLuca (415-882-8755 or
[email protected])
If you choose to accept this offer, your employment with Salon will be
voluntarily entered into and will be for no specific period. As a result, you
will be free to resign at any time, for any reason or for no reason, as you deem
appropriate. Salon will have a similar right and may conclude its employment
relationship with you at any time, with or without cause.
<PAGE>
For purposes of federal immigration law, you will be required to provide to
Salon documentary evidence of your identity and eligibility for employment in
the United States. Such documentation must be provided to us within three (3)
business days of your date of hire, or our employment relationship with you may
be terminated.
In the event of any dispute or claim relating to or arising out of our
employment relationship, this agreement, or the termination of our employment
relationship (including, but not limited to, any claims of wrongful termination
or age, sex, disability, race or other discrimination), you and Salon agree that
all such disputes shall be fully, finally and conclusively resolved by binding
arbitration conducted by the American Arbitration Association in San Jose,
California. However, we agree that this arbitration or provision shall not
apply to any disputes or claims relating to or arising out of the misuse or
misappropriation of Salon's trade secrets or proprietary information.
To indicate your acceptance of Salon's offer, please sign and date this letter
in the space provided below and return it to me. A duplicate original is
enclosed for our records. You will be required to sign a Employee Inventions
and Proprietary Rights Assignment Agreement as a condition of your employment.
This letter, along with any agreements relating to proprietary rights between
you and Salon, set forth the terms of your employment with Salon and supersede
any prior representations or agreements, whether written or oral. This letter
may not be modified or amended except by a written agreement signed by Salon and
by you. This offer is valid for 3 business days from the date written.
We look forward to working with you at Salon. Welcome aboard!
Salon Internet, Inc. AGREED TO AND ACCEPTED
\s\ Michael O.'Donnell \s\ Todd Hagen The attached Amendment Dated
- ----------------------- --------------------- 3/29/99 is incorporated into
Michael O'Donnell Tom E. Hagen offer letter.
President & Publisher \s\ TEH
-2-
<PAGE>
To: Todd Hagen
From: Jim Goldberger
Subject: Amendments to Employment Offer
Date: March 29, 1999
Fax: 650 595 2267
Dear Todd,
Per my conversation with Mike O'Donnell, Salon Magazine is willing to amend your
offer letter dated March 25, 1999 as follows:
1. Salon will provide you free parking at a facility near Salon's office.
2. Should Salon be acquired in the first year of your employment and should the
acquiring company not wish to retain your services; you will receive twelve
months accelerated vesting from the point in which the acquisition offer was
accepted by Salon. (Vesting after your first year anniversary with Salon
remains as stated in your March 25/th/ offer letter).
3. As part of the $35,000 in incentive compensation tied to your successful
attainment of MBOs; Salon agrees to pay you $5,000 immediately upon your
acquisition of a certified stock research analyst that agrees to cover Salon.
4. The time period for your acceptance of Salon's employment offer has been
extended 48 hours and is now 5:00pm April 1, 1999.
Please call me if you have any questions. I look forward to seeing you onboard
shortly.
\s\ J. Goldberger \s\ Todd Hagen
<PAGE>
EXHIBIT 10.9
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Salon Internet, Inc., a California Corporation
Number of Shares: 7,746 (subject to Section 1.8 and 1.9)
Class of Stock: Series C Preferred (subject to Section 1.9)
Initial Exercise Price: $2.63 per share (subject to Section 1.9)
Issue Date: December 17, 1998
Expiration Date: December 17, 2005 (Subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration, IMPERIAL BANCORP or registered
assignee ("Holder") is entitled to purchase the number of fully paid and
nonassessable shares of the class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per Share (the
"Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of
this Warrant, subject to the provisions and upon the terms and conditions set
forth of this Warrant.
ARTICLE 1. EXERCISE
--------
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
------------------
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 No Fractional Shares. No fractional shares shall be issued upon
--------------------
exercise or conversion of this Warrant. The Company shall, in lieu of issuing
any fractional share, pay the Holder entitled to such fraction a sum in cash
equal to the fair market value of a Share (as determined pursuant to Section
1.4) multiplied by such fraction.
1.4 Fair Market Value. If the Shares are traded regularly in a public
-----------------
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the
<PAGE>
Company's stock into which the Shares are convertible) reported for the business
day immediately before Holder delivers its Notice of Exercise to the Company. If
the Shares are not regularly traded in a public market, the Board of Directors
of the Company shall determine fair market value in its reasonable good faith
judgment. The foregoing notwithstanding, if Holder advises the Board of
Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors by an amount equal to or
greater than the lesser of (i) 10% of the valuation made by the Board of
Directors or (ii) $0.50 per share, then all fees and expenses of such investment
banking firm shall be paid by the Company. In all other circumstances, such fees
and expenses shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.7.1 "Acquisition." For the purpose of this Warrant, "Acquisition"
-----------
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2 Assumption of Warrant. If after the date hereof the Company
---------------------
shall enter into any Acquisition, then, as a condition of such Acquisition,
lawful provisions shall be made, and duly executed documents evidencing the same
from the Company or its successor shall be delivered to Holder, so that Holder
shall thereafter have the right to purchase, at a total price not to exceed that
payable upon the exercise of this Warrant in full, the kind and amount of shares
of stock and other securities and property receivable upon such Acquisition by a
holder of the number of Shares which might have been purchased by the Holder
immediately prior to such Acquisition, and in any such case appropriate
provisions shall be made with respect to the rights and interest of Holder to
the end that the provisions hereof (including without limitation, provisions for
the adjustment of the Warrant Price and the number of shares issuable hereunder)
shall thereafter be applicable in relation to any shares of stock or other
securities and property thereafter deliverable upon exercise hereof.
2
<PAGE>
1.7.3 Purchase Price. Notwithstanding the foregoing, at the election
--------------
of Holder, the Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant immediately before the record date for determining the shareholders
entitled to participate in the proceeds of the Acquisition, less (b) the
aggregate Warrant Price of the Shares, but in no event less than zero; provided,
however, that the purchase right under this Section 1.7.3 shall not be effective
if the accountants for the Company determine that it would result in the
disallowance of pooling of interest treatment.
1.8 Adjustment in Underlying Number of Shares. If the Company does not
-----------------------------------------
present to Bank a term sheet acceptable to Bank from a lead investor for a
minimum round of $5,000,000 of new equity prior to January 31, 1999, then the
number of such shares subject to this Warrant shall be adjusted to 12,910. If
the Company does not close a round of at least $5,000,000 of new equity prior to
February 28, 1999, then the number of such shares subject to this Warrant shall
be increased to 19,365. For each month thereafter that the Company fails to
close a round of at least $5,000,000 of new equity and there remain any amounts
outstanding to Holder under its credit facility to Company, then the number of
such shares subject to this Warrant shall be increased by ten percent (10.00%)
per month.
1.9 Adjustment in Underlying Preferred Stock Price and Exercise Price. If
-----------------------------------------------------------------
on or before February 28, 1999, the Company sells and issues to any investors,
equity securities with aggregate gross proceeds to the Company of at least
$5,000,000, this Warrant shall concurrent with the issuance of such securities
automatically be adjusted to instead be exercisable for shares of the same
series and class and bearing the same rights, preferences, and privileges, of
such shares of stock, with the Warrant Price hereunder adjusted to equal the per
share purchase price of such security and the number of shares subject to this
Warrant shall be adjusted to equal the result of the total number of shares
times the initial exercise price divided by the new Warrant Price.
ARTICLE 2. ADJUSTMENTS TO THE SHARES
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
-----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that
3
<PAGE>
Holder would have received for the Shares if this Warrant had been exercised
immediately before such reclassification, exchange, substitution, or other
event. Such an event shall include any automatic conversion of the outstanding
or issuable securities of the Company of the same class or series as the Shares
to common stock pursuant to the terms of the Company's Articles of Incorporation
upon the closing of a registered public offering of the Company's common stock.
The Company or its successor shall promptly issue to Holder a new Warrant for
such new securities or other property. The new Warrant shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
----------------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
----------------------------------
of Shares issuable upon exercise of this Warrant or, if the shares are Preferred
Stock, the number of shares of common stock issuable upon conversion of the
Shares, shall be subject to adjustment, from time to time, in the manner set
forth on Exhibit A attached hereto in the event of Diluting Issuances (as
defined on Exhibit A).
2.5 No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder as follows:
4
<PAGE>
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than the price per share at which the Shares were last
issued in an arms length transaction in which at least $500,000 of the shares
were sold.
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance in accordance with the terms of
this Warrant, be duly authorized, validly issued, fully paid and nonassessable,
and free of any liens and encumbrances except for restrictions on transfer
provided for herein or under applicable federal and state securities laws.
During the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Series C Preferred Stock (subject
to Article 1.8) to provide for the exercise of the rights represented by this
Warrant and a sufficient number of shares of its Common Stock to provide for the
conversion of such Preferred Stock into Common Stock.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the Company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least ten days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least ten days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
------------------
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 Omitted.
-------
ARTICLE 4. MISCELLANEOUS
-------------
5
<PAGE>
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or
---------------------------
in part, at any time and from time to time on or before the Expiration Date set
forth above. To the extent that this Warrant has not been exercised on or
before the Expiration Date, this Warrant shall automatically be deemed to be
exercised in full pursuant to the provisions of Section 1.2, without any further
action on behalf of Holder, on the Expiration Date.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION
IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
------------------
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth in the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to the
-------
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
6
<PAGE>
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorney's Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
SALON INTERNET, INC.
By: /s/ Authorized Officer
----------------------------
Name: Authorized Officer
--------------------------
Title: Title
--------------------------
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned elects to purchase _______________ shares of the
Series C Preferred Stock of Salon Internet, Inc., pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _______________ of the Shares covered by
the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bancorp
P.O. Box 92991
Los Angeles, CA 90009
or registered assignee
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANCORP or registered assignee
_____________________________
(Signature)
_____________________________
(Date)
8
<PAGE>
EXHIBIT A
---------
Anti-Dilution Provisions
------------------------
In the event of the issuance (a "Diluting Issuance") by the Company, after
the Issue Date of the Warrant, of securities at a price per share less than the
Conversion Price for the preferred stock then acquirable under the Warrant, then
the number of shares of common stock issuable upon conversion of the Shares
shall be adjusted in accordance with those provisions (the "Provisions") of the
Company's Articles (Certificate) of Incorporation which apply to Diluting
Issuances.
The Company agrees that the Provisions, as in effect on the Issue Date,
shall be deemed to remain in full force and effect during the term of the
Warrant notwithstanding any subsequent amendment, waiver or termination thereof
by the Company's shareholders, unless all holders of the class of preferred
stock then acquirable under Warrant are treated the same by such amendment,
waiver or termination.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
9
<PAGE>
EXHIBIT 10.10
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTTHIS WARRANT
AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Salon Internet, Inc., a California Corporation
Number of Shares: 23,734 (subject to Section 1.8)
Class of Stock: Series B Preferred (subject to Section 1.8)
Initial Exercise Price: $1.58 per share (subject to Section 1.8)
Issue Date: April, 13 1998
Expiration Date: April, 13 2005 (Subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration, IMPERIAL BANK ("Holder") is entitled
to purchase the number of fully paid and nonassessable shares of the class of
securities (the "Shares") of the corporation (the "Company") at the initial
exercise price per Share (the "Warrant Price") all as set forth above and as
adjusted pursuant to Article 2 of this Warrant, subject to the provisions and
upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
--------
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
------------------
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 No Fractional Shares. No fractional shares shall be issued upon
--------------------
exercise or conversion of this Warrant. The Company shall, in lieu of issuing
any fractional share, pay the Holder entitled to such fraction a sum in cash
equal to the fair market value of a Share (as determined pursuant to Section
1.4) multiplied by such fraction.
1.4 Fair Market Value. If the Shares are traded regularly in a public
-----------------
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the
<PAGE>
Company's stock into which the Shares are convertible) reported for the business
day immediately before Holder delivers its Notice of Exercise to the Company. If
the Shares are not regularly traded in a public market, the Board of Directors
of the Company shall determine fair market value in its reasonable good faith
judgment. The foregoing notwithstanding, if Holder advises the Board of
Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors by an amount equal to or
greater than the lesser of (i) 10% of the valuation made by the Board of
Directors or (ii) $0.50 per share, then all fees and expenses of such investment
banking firm shall be paid by the Company. In all other circumstances, such fees
and expenses shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.7.1 "Acquisition." For the purpose of this Warrant, "Acquisition"
-----------
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2 Assumption of Warrant. If after the date hereof the Company
---------------------
shall enter into any Acquisition, then, as a condition of such Acquisition,
lawful provisions shall be made, and duly executed documents evidencing the same
from the Company or its successor shall be delivered to Holder, so that Holder
shall thereafter have the right to purchase, at a total price not to exceed that
payable upon the exercise of this Warrant in full, the kind and amount of shares
of stock and other securities and property receivable upon such Acquisition by a
holder of the number of Shares which might have been purchased by the Holder
immediately prior to such Acquisition, and in any such case appropriate
provisions shall be made with respect to the rights and interest of Holder to
the end that the provisions hereof (including without limitation, provisions for
the adjustment of the Warrant Price and the number of shares issuable hereunder)
shall thereafter be applicable in relation to any shares of stock or other
securities and property thereafter deliverable upon exercise hereof.
2
<PAGE>
1.7.3 Purchase Price. Notwithstanding the foregoing, at the election
--------------
of Holder, the Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant immediately before the record date for determining the shareholders
entitled to participate in the proceeds of the Acquisition, less (b) the
aggregate Warrant Price of the Shares, but in no event less than zero; provided,
however, that the purchase right under this Section 1.7.3 shall not be effective
if the accountants for the Company determine that it would result in the
disallowance of pooling of interest treatment.
1.8 Adjustment in Underlying Preferred Stock Price and Exercise Price. If
-----------------------------------------------------------------
on or before August 31, 1998, the Company sells and issues to any investors,
preferred stock with aggregate gross proceeds to the Company of at least
$2,500,000, this Warrant shall concurrent with the issuance of such shares of
preferred stock automatically be adjusted to instead be exercisable for shares
of the same series and class and bearing the same rights, preferences, and
privileges, of such shares of stock, with the Warrant Price hereunder adjusted
to equal the per share purchase price of such stock and the number of such
shares subject to this Warrant adjusted to equal (i) thirty-seven thousand five
hundred dollars ($37,500), divided by (ii) such modified per share Warrant
Price.
ARTICLE 2. ADJUSTMENTS TO THE SHARES
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
-----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or
3
<PAGE>
property issuable upon exercise of the new Warrant. The provisions of this
Section 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
----------------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
----------------------------------
of Shares issuable upon exercise of this Warrant or, if the shares are Preferred
Stock, the number of shares of common stock issuable upon conversion of the
Shares, shall be subject to adjustment, from time to time, in the manner set
forth on Exhibit A attached hereto in the event of Diluting Issuances (as
defined on Exhibit A).
2.5 No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than the price per share at which the Shares were
last issued in an arms length transaction in which at least $500,000 of the
shares were sold.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance in accordance with the terms
of this Warrant, be duly authorized, validly issued, fully paid and
nonassessable, and free of any liens and encumbrances except for restrictions on
transfer provided for herein or under applicable federal and state securities
laws.
4
<PAGE>
During the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Series B Preferred Stock (subject
to Article 1.8) to provide for the exercise of the rights represented by this
Warrant and a sufficient number of shares of its Common Stock to provide for the
conversion of such Preferred Stock into Common Stock.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the Company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least ten days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least ten days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
------------------
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
-----------------------------------------------------
agrees that the Shares or, if the shares are convertible into common stock of
the Company, such common stock, shall be subject to the registration rights set
forth on Exhibit B hereto.
ARTICLE 4. MISCELLANEOUS
-------------
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or
---------------------------
in part, at any time and from time to time on or before the Expiration Date set
forth above. To the extent that this Warrant has not been exercised on or
before the Expiration Date, this Warrant shall automatically be deemed to be
exercised in full pursuant to the provisions of Section 1.2, without any further
action on behalf of Holder, on the Expiration Date.
5
<PAGE>
4.2 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION
IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
------------------
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth in the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to the
-------
Holder, or vice versa, shall be deemed and effective when given personally or
mailed by first-class registered or certified mail, postage prepaid, at such
address as may have been furnished to the Company or the Holder, as the case may
be, in writing by the Company or such Holder from time to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorney's Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to
6
<PAGE>
collect from the other party all costs incurred in such dispute, including
reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
SALON INTERNET, INC.
By: /s/ Authorized Signature
----------------------------
Name: Authorized Signature
--------------------------
Title: Title
--------------------------
7
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned elects to purchase _______________ shares of the
Series B Preferred Stock of Salon Internet, Inc., pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _______________ of the Shares covered by
the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bank or registered assignee
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANK or registered assignee
______________________________________________
(Signature)
___________________
(Date)
8
<PAGE>
EXHIBIT A
---------
Anti-Dilution Provisions
------------------------
In the event of the issuance (a "Diluting Issuance") by the Company, after
the Issue Date of the Warrant, of securities at a price per share less than the
Conversion Price for the preferred stock then acquirable under the Warrant, then
the number of shares of common stock issuable upon conversion of the Shares
shall be adjusted in accordance with those provisions (the "Provisions") of the
Company's Articles (Certificate) of Incorporation which apply to Diluting
Issuances.
The Company agrees that the Provisions, as in effect on the Issue Date,
shall be deemed to remain in full force and effect during the term of the
Warrant notwithstanding any subsequent amendment, waiver or termination thereof
by the Company's shareholders, unless all holders of the class of preferred
stock then acquirable under Warrant are treated the same by such amendment,
waiver or termination.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
9
<PAGE>
EXHIBIT B
---------
Registration Rights
-------------------
The Warrant and the Shares issuable upon exercise of the Warrant shall be
deemed to be "Registrable Right Securities" and the common stock issuable upon
conversion of the Shares, shall be deemed "Registrable Securities" under the
following agreement (the "Agreement") between the Company and its investor(s):
The Rights Agreement dated December 22, 1995 by and among Salon Internet,
-------------------------------------------------------------------------
Inc. and the holders of the Series A Preferred Stock and the holders of Common
- ------------------------------------------------------------------------------
Stock of the Company.
- --------------------
By acceptance of the Warrant to which this Exhibit B is attached, Holder
shall be deemed to be a party to the Agreement.
The Company represents and warrants that all consents necessary to make
Holder a party to the Agreement have been obtained.
10
<PAGE>
EXHIBIT 10.11
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTTHIS WARRANT
AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Salon Internet, Inc., a California Corporation
Number of Shares: 17,500
Class of Stock: Series A Preferred
Initial Exercise Price: $1.00 per share
Issue Date: April 14, 1997
Expiration Date: April 14, 2002 (Subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration, IMPERIAL BANCORP ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE
--------
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
------------------
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 No Fractional Shares. No fractional shares shall be issued upon
--------------------
exercise or conversion of this Warrant. The Company shall, in lieu of issuing
any fractional share, pay the Holder entitled to such fraction a sum in cash
equal to the fair market value of a Share (as determined pursuant to Section
1.4) multiplied by such fraction.
1.4 Fair Market Value. If the Shares are traded regularly in a public
-----------------
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the
<PAGE>
Company's stock into which the Shares are convertible) reported for the business
day immediately before Holder delivers its Notice of Exercise to the Company. If
the Shares are not regularly traded in a public market, the Board of Directors
of the Company shall determine fair market value in its reasonable good faith
judgment. The foregoing notwithstanding, if Holder advises the Board of
Directors in writing that Holder disagrees with such determination, then the
Company and Holder shall promptly agree upon a reputable investment banking firm
to undertake such valuation. If the valuation of such investment banking firm is
greater than that determined by the Board of Directors by an amount equal to or
greater than the lesser of (i) 10% of the valuation made by the Board of
Directors or (ii) $0.50 per share, then all fees and expenses of such investment
banking firm shall be paid by the Company. In all other circumstances, such fees
and expenses shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.7.1 "Acquisition." For the purpose of this Warrant, "Acquisition"
-----------
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2 Assumption of Warrant. If after the date hereof the Company
---------------------
shall enter into any Acquisition, then, as a condition of such Acquisition,
lawful provisions shall be made, and duly executed documents evidencing the same
from the Company or its successor shall be delivered to Holder, so that Holder
shall thereafter have the right to purchase, at a total price not to exceed that
payable upon the exercise of this Warrant in full, the kind and amount of shares
of stock and other securities and property receivable upon such Acquisition by a
holder of the number of Shares which might have been purchased by the Holder
immediately prior to such Acquisition, and in any such case appropriate
provisions shall be made with respect to the rights and interest of Holder to
the end that the provisions hereof (including without limitation, provisions for
the adjustment of the Warrant Price and the number of shares issuable hereunder)
shall thereafter be applicable in relation to any shares of stock or other
securities and property thereafter deliverable upon exercise hereof.
2
<PAGE>
1.7.3 Purchase Price. Notwithstanding the foregoing, at the election
--------------
of Holder, the Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant immediately before the record date for determining the shareholders
entitled to participate in the proceeds of the Acquisition, less (b) the
aggregate Warrant Price of the Shares, but in no event less than zero; provided,
however, that the purchase right under this Section 1.7.3 shall not be effective
if the accountants for the Company determine that it would result in the
disallowance of pooling of interest treatment.
ARTICLE 2. ADJUSTMENTS TO THE SHARES
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
-----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Section 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
----------------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
----------------------------------
of Shares issuable upon exercise of this Warrant or, if the shares are Preferred
Stock, the number of shares of common stock issuable upon conversion of the
Shares, shall be subject to adjustment, from
3
<PAGE>
time to time, in the manner set forth on Exhibit A attached hereto in the event
of Diluting Issuances (as defined on Exhibit A).
2.5 No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than the price per share at which the Shares were
last issued in an arms length transaction in which at least $500,000 of the
shares were sold.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance in accordance with the terms
of this Warrant, be duly authorized, validly issued, fully paid and
nonassessable, and free of any liens and encumbrances except for restrictions on
transfer provided for herein or under applicable federal and state securities
laws. During the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized, and reserved for
the purpose of the issue upon exercise of the purchase rights evidenced by this
Warrant, a sufficient number of shares of its Series A Preferred Stock to
provide for the exercise of the rights represented by this Warrant and a
sufficient number of shares of its Common Stock to provide for the conversion of
such Preferred Stock into Common Stock.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the
4
<PAGE>
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights; (c) to effect any reclassification or
recapitalization of common stock; (d) to merge or consolidate with or into any
other corporation, or sell, lease, license, or convey all or substantially all
of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of
registration rights the opportunity to participate in an underwritten public
offering of the Company's securities for cash, then, in connection with each
such event, the Company shall give Holder (1) at least ten days prior written
notice of the date on which a record will be taken for such dividend,
distribution, or subscription rights (and specifying the date on which the
holders of common stock will be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in
the case of the matters referred to in (c) and (d) above at least ten days prior
written notice of the date when the same will take place (and specifying the
date on which the holders of common stock will be entitled to exchange their
common stock for securities or other property deliverable upon the occurrence of
such event); and (3) in the case of the matter referred to in (e) above, the
same notice as is given to the holders of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
------------------
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
-----------------------------------------------------
agrees that the Shares or, if the shares are convertible into common stock of
the Company, such common stock, shall be subject to the registration rights set
forth on Exhibit B hereto.
ARTICLE 4. MISCELLANEOUS
-------------
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or
---------------------------
in part, at any time and from time to time on or before the Expiration Date set
forth above. To the extent that this Warrant has not been exercised on or
before the Expiration Date, this Warrant shall automatically be deemed to be
exercised in full pursuant to the provisions of Section 1.2, without any further
action on behalf of Holder, on the Expiration Date.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE
5
<PAGE>
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
------------------
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth in the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to the
-------
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorney's Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
SALON INTERNET, INC.
6
<PAGE>
By: /s/ Authorized Officer
----------------------------------
Name: Authorized Officer
---------------------------------
Title
Title:--------------------------------
7
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned elects to purchase _______________ shares of the
Series A Preferred Stock of Salon Internet, Inc., pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _______________ of the Shares covered by
the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Mr. Robert Franko
Chief Financial Officer
Controllers Department
Imperial Bancorp
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANCORP
___________________________________
(Signature)
___________________
(Date)
8
<PAGE>
EXHIBIT A
---------
Anti-Dilution Provisions
------------------------
In the event of the issuance (a "Diluting Issuance") by the Company, after
the Issue Date of the Warrant, of securities at a price per share less than the
Conversion Price for the preferred stock then acquirable under the Warrant, then
the number of shares of common stock issuable upon conversion of the Shares
shall be adjusted in accordance with those provisions (the "Provisions") of the
Company's Articles (Certificate) of Incorporation which apply to Diluting
Issuances.
The Company agrees that the Provisions, as in effect on the Issue Date,
shall be deemed to remain in full force and effect during the term of the
Warrant notwithstanding any subsequent amendment, waiver or termination thereof
by the Company's shareholders, unless all holders of the class of preferred
stock then acquirable under Warrant are treated the same by such amendment,
waiver or termination.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
9
<PAGE>
EXHIBIT B
---------
Registration Rights
-------------------
The Warrant and the Shares issuable upon exercise of the Warrant shall be
deemed to be "Registrable Right Securities" and the common stock issuable upon
conversion of the Shares, shall be deemed "Registrable Securities" under the
following agreement (the "Agreement") between the Company and its investor(s):
________________________________________________________________
[Identify Agreement by date, title and parties. If no Agreement
exists, indicate by "none."]
By acceptance of the Warrant to which this Exhibit B is attached, Holder
shall be deemed to be a party to the Agreement.
The Company represents and warrants that all consents necessary to make
Holder a party to the Agreement have been obtained.
If no Agreement exists, then the Company and the Holder shall enter into
Holder's standard form of Registration Rights Agreement as in effect on the
Issue Date of the Warrant.
10
<PAGE>
EXHIBIT 10.12
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: SALON INTERNET, INC.
Number of Shares: 158,228
Class of Stock: SERIES B PREFERRED STOCK
Initial Exercise Price: $ 1.58
Issue Date: JULY 31, 1998
Expiration Date: JULY 31, 2003
THIS WARRANT CERTIFIES THAT, for good and valuable consideration,
AMERICA ONLINE INC. ("Holder") is entitled to purchase the number of fully paid
and nonassessable shares of the class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per Share (the
"Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of
this Warrant, subject to the provisions and upon the terms and conditions set
forth in this Warrant.
ARTICLE 1. EXERCISE.
---------
1.1 Method of Exercise. Holder may exercise this Warrant by
------------------
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as
----------------
specified in Section 1.1, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise issuable
upon exercise of this Warrant minus the aggregate Warrant Price of such Shares
by (b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant Section 1.4.
1.3 No Rights as Shareholder. This Warrant does not entitle Holder
------------------------
to any voting rights as a shareholder of the Company prior to the exercise
hereof.
1.4 Fair Market Value. If the Shares are traded in a public market,
-----------------
the fair market value of the Shares shall be the closing price of the Shares on
the Business Day prior to the date of measurement (or the closing price of the
Company's stock into which the Shares are convertible) before Holder delivers
its Notice of Exercise to the Company. If the Shares are not traded in a public
market, the Board of Directors of the Company shall determine fair market value
in its reasonable good faith judgment.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares
1
<PAGE>
acquired and, if this Warrant has not been fully exercised or converted and has
not expired, a new Warrant representing the Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.7.1 "Acquisition". For the purpose of this Warrant,
-------------
"Acquisition" means any sale, or other disposition of all or substantially all
of the assets of the Company, or any reorganization, consolidation, or merger of
the Company where the holders of the Company's securities before the transaction
beneficially own less than 50% of the outstanding voting securities of the
surviving entity after the transaction.
1.7.2 Assumption of Warrant. Upon the closing of any
---------------------
Acquisition the successor entity shall assume the obligations of this Warrant,
and this Warrant shall be exercisable for the same securities, cash, and
property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing. The Warrant Price shall
be adjusted accordingly. In the event successor entity does not agree to assume
the obligations of this Warrant, then the Warrant shall terminate to the extent
not exercised at the date of the Acquisition.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2
<PAGE>
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Certificate of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Section 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares
---------------------------------
are combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The number of shares of
----------------------------------
common stock issuable upon conversion of the Shares shall be subject to
adjustment, from time to time, in the manner set forth in the Company's Articles
of Incorporation, as amended.
2.5 No Impairment. The Company shall not, by amendment of its
-------------
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying Holder an amount
computed by multiplying the fractional interest by the fair market value of a
full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the
-----------------------------
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is based.
The Company shall, upon written request, furnish Holder a certificate setting
forth the Warrant Price in effect upon the date thereof and the series of
adjustments leading to such Warrant Price.
3
<PAGE>
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
-------------------------------------------
3.1 Representations and Warranties. The Company hereby represents
------------------------------
and warrants to the Holder that all Shares which may be issued upon the exercise
of the purchase right represented by this Warrant, and all securities, if any,
issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws.
3.2 Registration Rights. The common stock issued or issuable upon
-------------------
conversion of the Shares shall be deemed "Registrable Securities" under, and
Holder shall become a party to, Section 1 ("Registration Rights") and Section 6
("Miscellaneous") of that certain First Amended and Restated Rights Agreement
dated November 28, 1997 among the Company and certain shareholders of the
Company.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Term. This Warrant is exercisable, in whole or in part, at any
----
time and from time to time on or before the Expiration Date set forth above.
4.2 Legends. This Warrant and the Shares (and the securities
-------
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer; Right of First
-----------------------------------------------------------
Refusal. This Warrant and the Shares issuable upon exercise this Warrant (and
- -------
the securities issuable, directly or indirectly, upon conversion of the Shares,
if any) may not be transferred or assigned in whole or in part without
compliance with applicable federal and state securities laws by the transferor
and the transferee (including, without limitation, the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, as reasonably requested by the Company). The Company shall not require
Holder to provide an opinion of counsel if the transfer is to an affiliate of
Holder or if there is no material question as to the availability of current
information as referenced in Rule 144(c), Holder represents that it has complied
with Rule 144(d) and (e) in reasonable detail, the selling broker represents
that it has complied with Rule 144(f), and the Company is provided with a copy
of Holder's notice of proposed sale. Holder further agrees that the Shares
issuable upon exercise of this Warrant (and the securities issuable, directly or
indirectly, upon conversion of the Shares, if any) will be transferred in
accordance with the right of first refusal set forth in Exhibit A hereto.
---------
4
<PAGE>
4.4 Transfer Procedure. Subject to the provisions of Section 4.3,
------------------
Holder may transfer all or part of this Warrant or Shares issuable upon exercise
of this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant or Shares being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering the Warrant or
Shares to the Company for reissuance to the transferee(s) (and Holder if
applicable). The Company shall have the right to refuse to transfer any portion
of the Warrant or Shares to any person who directly or indirectly competes with
the Company.
4.5 Notices. All notices and other communications from the Company
-------
to the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed,
------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.
4.7 Attorneys Fees. In the event of any dispute between the parties
--------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed
-------------
in accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
--------------------------------------
Michael O'Donnell, President
5
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase _____________ shares of the
Common/Series B Preferred Stock of Salon Internet, Inc. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _____________________ of the Shares
covered by the Warrant.
[Strike paragraph above that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
__________________________
(Name)
__________________________
__________________________
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
___________________________________________________
(Signature)
____________________
(Date)
6
<PAGE>
EXHIBIT A
RIGHT OF FIRST REFUSAL
Before any equity securities of the Company registered in the name of
Holder may be sold or transferred (including transfer by operation of law) other
than to a partner, shareholder, subsidiary, affiliate, family member, family
trust or the estate of the Holder (provided that such permitted transferees
shall agree, as a condition of the transfer, to be bound by the provisions of
this right of first refusal), such shares shall first be offered to the Company
in the following manner:
Notice. If the Holder intends to sell securities of the Company,
------
Holder shall first deliver a written notice ("Notice") to the Companystating (i)
theHolder desires to sell or transfer such equity securities, (ii) the number of
equity securities proposed to be sold or transferred, and (iii) the price and
other terms of the proposed sale or transfer.
Company Right. Within ten business days after receipt of the Notice,
-------------
the Company may elect to purchase all (but not less than all) of the equity
securities to which the Notice refers, on the same terms and conditions
specified in the Notice, by delivering to the Holder a written notice of such
election. The Company may assign this right to any third party.
Company Purchase. In the event the Company elects to acquire all of
----------------
the equity securities pursuant to this right of first refusal, the Company and
the Holder shall complete the sale and purchase of such equity securities shares
within thirty days after the Company receives the Notice.
Selling Party Right. If all of the equity securities to which the
-------------------
Notice refers are not elected to be purchased by the Company, the Holder may
sell all such shares at the price and on the terms specified in the Notice,
provided that (i) such sale or transfer is consummated within ninety days of the
date of the Notice, and (ii) that prior to the transfer, the transferee of such
equity securities agrees in writing (in a form satisfactory to the Company) that
such transferee shall receive and hold such securities subject to the provisions
of this right of first refusal.
Termination. The rights and obligations of the Company and the Holder
-----------
under this right of first refusal shall terminate upon the earlier to occur of
(and not apply to the transfer of shares upon) (i) the closing of the Company's
first firmly underwritten public offering registered under the Securities Act of
1933, or (ii) shareholder approval of any merger or consolidation of the Company
with any other corporation in which more than 50% of the voting control of the
Company is transferred to a party or parties not affiliated with the Company or
any shareholder of the Company, provided that, if such merger or consolidation
is not consummated, the rights and obligations of this right of first refusal
shall be deemed restored and reinstated to full force and effect.
7
<PAGE>
EXHIBIT 10.13
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTTHE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. THESE
SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR AN EXEMPTION THEREFROM UNDER SAID ACT AND LAWS.
THE SALE OF THESE SECURITIES HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFORE PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL UNLESS SUCH SALE OR TRANSFER IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS WARRANT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE COMPANY
AND LEGAL COUNSEL FOR THE COMPANY.
<TABLE>
<CAPTION>
<S> <C>
Void after 5:00 P.M., San Francisco (a) Right to Purchase up to 282,320 Shares of the
September 30, 2008 or (b) such earlier date Common Stock of Salon Internet, Inc.
as this Warrant may expire pursuant to
Section 1 hereof.
</TABLE>
SALON INTERNET, INC.
STOCK PURCHASE WARRANT
SEPTEMBER 18, 1998
SALON INTERNET, INC., a California corporation (the "Company"), hereby
certifies that for value received, Adobe Ventures II L.P. or assigns (the
"Holder"), is entitled to purchase, subject to the terms and conditions
hereinafter set forth, up to the number of fully paid and nonassessable shares
("Shares") of the Common Stock of the Company ("Common"), at a price of $0.26
per share, set forth in the following schedule
(i) 94,107 shares commencing on the date of this Warrant,
(ii) an additional 94,107 shares commencing 120 days after the date of
the first issuance by the Company of its Series C Preferred Stock (the "Date of
Grant") if the Company has not completed between the Date of Grant and the date
120 days after the Date of Grant one or more equity financings resulting in
aggregate cash proceeds to the Company of at least $8,500,000,
<PAGE>
which proceeds shall include any proceeds received on the Date of Grant (a
"Qualified Financing"), and
(iii) an additional 94,106 shares commencing 180 days from the Date of
Grant if the Company has not completed a Qualified Financing between the Date of
Grant and the date 180 days after the Date of Grant. The number of Shares to be
received upon the exercise of this Warrant and the price to be paid for a Share
may be adjusted from time to time as hereinafter set forth. The exercise price
of a Share in effect at any time and as adjusted from time to time is
hereinafter referred to as the "Warrant Price."
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time from the effective date
of this Warrant through September 30, 2008. The Company shall furnish to each
Holder a notice of the expiration date of this Warrant not more than 60 days and
not less than 30 days before such expiration date.
2. Method of Exercise; Payment; Issuance of New Warrant.
----------------------------------------------------
(a) Subject to paragraph 1 hereof, the purchase right represented by
this Warrant may be exercised by the Holder hereof, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Exhibit A duly executed) at the principal office of the Company and (i) by the
- ---------
payment to the Company, by check, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased,
or (ii) on the date on which the Common becomes publicly traded or the Company
is merged, acquired or consolidated pursuant to a transaction in which the
Company is not the surviving party, by surrender of the right to receive upon
exercise hereof a number of Shares equal to the value (as determined below) of
the Shares with respect to which this Warrant is being exercised, in which case
the number of shares to be issued to the Holder upon such exercise shall be
computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common to be issued to the
Holder.
Y = the number of shares of Common with respect to which this Warrant
is being exercised.
A = the fair market value of one share of Common.
B = Warrant Price.
(b) If the Holder shall purchase such shares in conjunction with a
merger, acquisition or other consolidation pursuant to which the Company is not
the surviving party, then the "fair market value of one share of Common" for
purposes of paragraph 2(a) shall be the value received by the holders of the
Common pursuant to such transaction for each share of Common,
<PAGE>
and such purchase shall be effective upon the closing of such transaction,
subject to the due, proper and prior surrender of this Warrant.
(c) If the Holder shall purchase such shares in conjunction with the
initial underwritten public offering of the Common pursuant to a registration
statement filed under the Securities Act of 1933, the "fair market value of one
share of Common" shall be the price at which registered shares are sold to the
public in such offering, and such purchase shall be effective upon the date of
such offering, subject to the due, proper and prior surrender of this Warrant
and the closing of the offering. Should such offering not be consummated, the
Company shall refund to the holder the Warrant Price and the Holder may exercise
the purchase right represented by this Warrant, in whole or in part, at any time
and from time to time during the remainder of its term.
(d) In the event of any exercise of the purchase right represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the holder hereof within five business days of the effective date
of such purchase and, unless this Warrant has been fully exercised or expired, a
new Warrant representing the portion of the Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof within such five business day period. Upon the effective date
of such purchase, the Holder shall be deemed to be the holder of record of the
Shares, notwithstanding that Certificates representing the Shares shall not then
be actually delivered to such Holder or that such Shares are not then set forth
on the stock transfer books of the Company.
(e) If the Shares are traded regularly in a public market, the fair
market value of the Shares shall be the closing price of the Shares reported for
the business day immediately before Holder delivers its notice of exercise to
the Company. If the Shares are not regularly traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment.
3. Stock Fully Paid; Reservation of Shares. All Shares which may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of the issue upon exercise
of the purchase rights evidenced by this Warrant, a sufficient number of shares
of Common to provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification or Merger. In case of any reclassification or
--------------------------
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is a continuing
<PAGE>
corporation and which does not result in any reclassification or change of
outstanding securities issuable upon exercise of this Warrant), or in case of
any sale of all or substantially all of the assets of the Company, the Company
shall, as condition precedent to such transaction, execute a new Warrant or
cause such successor or purchasing corporation, as the case may be, to execute a
new Warrant, providing that the holder of this Warrant shall have the right to
exercise such new Warrant and upon such exercise to receive, in lieu of each
share of Common theretofore issuable upon exercise of this Warrant, the kind and
amount of shares of stock, other securities, money and property receivable upon
such reclassification, change or merger by the holder of one share of Common.
Such new Warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
paragraph 4. The provisions of this subparagraph (a) shall similarly apply to
successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
------------------------------------
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common, the Warrant Price shall be proportionately decreased in the case of
a subdivision or increased in the case of a combination.
(c) Stock Dividends. If the Company at any time while this Warrant
---------------
is outstanding and unexpired shall pay a dividend with respect to Common payable
in, or make any other distribution with respect to Common (except any
distribution specifically provided for in the foregoing subparagraph (a) and
(b)) of, Common then the Warrant Price shall be adjusted, from and after the
date of determination of shareholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Warrant Price in
effect immediately prior to such date of determination by a fraction (a) the
numerator of which shall be the total number of shares of Common outstanding
immediately prior to such dividend or distribution, and (b) the denominator of
which shall be the total number of shares of Common outstanding immediately
after such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares of Common purchasable hereunder shall be
adjusted, to nearest whole share, to the product obtained by multiplying the
number of Shares purchasable immediately prior to such adjustment in the Warrant
Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
(e) No Impairment. The Company shall not, by amendment of its
-------------
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Section 5 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Section 5 against impairment.
5. Notice of Adjustments. Whenever any Warrant Price shall be adjusted
---------------------
pursuant to paragraph 4 hereof, the Company shall make a certificate signed by
its chief financial officer
<PAGE>
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the Warrant Price or Prices after giving effect to such adjustment, and
shall cause copies of such certificate to be mailed (by first class mail,
postage prepaid) to the holder of this Warrant.
6. Notice of Certain Actions. In the event that the Company shall
-------------------------
propose at any time:
(i) to declare any dividend or distribution upon any class or
series of its stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of earnings or
earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of its
Common outstanding involving a change in the Common; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its assets or
property, or to liquidate, dissolve or wind up, whether voluntary or
involuntary;
then in connection with each such event, this Company shall send to the holders
of the Warrants:
(1) at least 10 days prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (i) and (ii) above;
(2) in the case of the matters referred to in (iii)
through (iv) above, at least 10 days prior written notice of the date for the
determination of shareholders entitled to vote thereon (and specifying the date
on which the holders of Common shares shall be entitled to exchange their Common
for securities or other property deliverable upon the occurrence of such event);
and
(3) prompt notice of any material change in the terms of
the transaction described in (i) through (iv) above.
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Warrants at the
address for each such holder as shown on the books of this corporation.
7. Fractional Shares. No fractional shares of Common will be issued in
-----------------
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefore in an amount determined in such
reasonable manner as may be prescribed by the board of directors of the Company.
<PAGE>
8. Compliance with Securities Act; Non-transferability of Warrant;
---------------------------------------------------------------
Disposition of Shares of Common.
- -------------------------------
(a) Compliance with Securities Act. The holder of this Warrant, by
------------------------------
acceptance hereof, agrees that this Warrant and the shares of Common to be
issued upon exercise hereof are being acquired for investment and that it will
not offer, sell or otherwise dispose of this Warrant or any shares of Common to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended (the "Act"). Upon
exercise of this Warrant, the holder hereof shall confirm in writing, in a form
of Exhibit B, that the shares of Common so purchased are being acquired for
---------
investment and not with a view toward distribution or resale. All shares of
Common issued upon exercise of this Warrant (unless registered under the Act)
shall be stamped or imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY
TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT
OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN
AN RIGHTS AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
(b) Transferability of Warrant. This Warrant and the Shares to be
--------------------------
issued upon exercise hereof may not be transferred or assigned in whole or in
part without compliance with the requirements of that certain Rights Agreement
dated of even date herewith by and among the Company and certain holders of
Company securities, as amended from time to time hereafter (the "Rights
Agreement").
9. Rights of Shareholders. No holder of the Warrant or Warrants shall be
----------------------
entitled to vote or receive dividends on the Shares or be deemed the holder of
Common or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a shareholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant or Warrants shall have been
<PAGE>
exercised and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
10. Registration Rights. The Shares obtained upon exercise of this
-------------------
Warrant shall have all of the registration rights, obligations and restrictions
set forth in the Rights Agreement.
11. Governing Law. The terms and conditions of this Warrant shall be
-------------
governed by and construed in accordance with the internal laws of the State of
California without application of conflict of laws principles.
12. Miscellaneous. The headings in this Warrant are for purposes of
-------------
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the Company and the Holder. All notices and other communications from the
Company to the Holder shall be mailed by first-class registered or certified
mail, postage prepaid, to the address furnished to the Company in writing by the
last holder of this Warrant who shall have furnished an address to the Company
in writing.
<PAGE>
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
-------------------------------
Michael O'Donnell, President
[Signature Page to Salon Internet, Inc. Warrant]
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: SALON INTERNET, INC.
The undersigned hereby elects to purchase shares of Common Stock of Salon
Internet, Inc. pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such shares in full, together with all
applicable transfer taxes, if any.
Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other names as is
specified below:
____________________________________________________________
(Name)
____________________________________________________________
_____________________________________________________________
(Address)
The undersigned represents that the aforesaid shares of Common Stock are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Exhibit B.
_________________________________
(Signature)
_________________________________
(Date)
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER: _____________________________________
COMPANY: SALON INTERNET, INC.
SECURITY: COMMON STOCK
AMOUNT: _____________________________________
DATE: _____________________________________
In connection with the purchase of the above-listed securities (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any distribution
thereof for purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities except as set
forth in that certain Rights Agreement dated December 23, 1994 (as amended)
between the Company and certain holders of Company securities. In addition, I
understand that the certificate evidencing the securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the reasonable opinion of
counsel for the Company.
(d) I an aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of restricted
securities acquired, directly or indirectly, from the issuer thereof (or from an
affiliate of such issuer), in a non-public offering subject to the satisfaction
of certain conditions.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale.
<PAGE>
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act, compliance
with Regulation A, or some other registration exemption will be required.
Signature of Purchaser:
_______________________________
Date: ________________________
<PAGE>
EXHIBIT 10.14
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. THESE
SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR AN EXEMPTION THEREFROM UNDER SAID ACT AND LAWS.
THE SALE OF THESE SECURITIES HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFORE PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL UNLESS SUCH SALE OR TRANSFER IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS WARRANT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE COMPANY
AND LEGAL COUNSEL FOR THE COMPANY.
Void after 5:00 P.M., San Francisco (a) September 30, 2008 or (b) such earlier
date as this Warrant may expire pursuant to Section 1 hereof.
Right to Purchase up to 62,738 Shares of the Common Stock of Salon Internet,
Inc.
SALON INTERNET, INC.
STOCK PURCHASE WARRANT
SEPTEMBER 18, 1998
SALON INTERNET, INC., a California corporation (the "Company"), hereby
certifies that for value received, ASCII Ventures or assigns (the "Holder"), is
entitled to purchase, subject to the terms and conditions hereinafter set forth,
up to the number of fully paid and nonassessable shares ("Shares") of the Common
Stock of the Company ("Common"), at a price of $0.26 per share, set forth in the
following schedule
(i) 20,913 shares commencing on the date of this Warrant,
(ii) an additional 20,913 shares commencing 120 days after the date of
the first issuance by the Company of its Series C Preferred Stock (the "Date of
Grant") if the Company has not completed between the Date of Grant and the date
120 days after the Date of Grant one or more equity financings resulting in
aggregate cash proceeds to the Company of at least $8,500,000,
<PAGE>
which proceeds shall include any proceeds received on the Date of Grant (a
"Qualified Financing"), and
(iii) an additional 20,912 shares commencing 180 days from the Date of
Grant if the Company has not completed a Qualified Financing between the Date of
Grant and the date 180 days after the Date of Grant. The number of Shares to be
received upon the exercise of this Warrant and the price to be paid for a Share
may be adjusted from time to time as hereinafter set forth. The exercise price
of a Share in effect at any time and as adjusted from time to time is
hereinafter referred to as the "Warrant Price."
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time from the effective date
of this Warrant through September 30, 2008. The Company shall furnish to each
Holder a notice of the expiration date of this Warrant not more than 60 days and
not less than 30 days before such expiration date.
2. Method of Exercise; Payment; Issuance of New Warrant.
----------------------------------------------------
(a) Subject to paragraph 1 hereof, the purchase right represented by
this Warrant may be exercised by the Holder hereof, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Exhibit A duly executed) at the principal office of the Company and (i) by the
- ---------
payment to the Company, by check, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased,
or (ii) on the date on which the Common becomes publicly traded or the Company
is merged, acquired or consolidated pursuant to a transaction in which the
Company is not the surviving party, by surrender of the right to receive upon
exercise hereof a number of Shares equal to the value (as determined below) of
the Shares with respect to which this Warrant is being exercised, in which case
the number of shares to be issued to the Holder upon such exercise shall be
computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common to be issued to the Holder.
Y = the number of shares of Common with respect to which this Warrant
is being exercised.
A = the fair market value of one share of Common.
B = Warrant Price.
(b) If the Holder shall purchase such shares in conjunction with a
merger, acquisition or other consolidation pursuant to which the Company is not
the surviving party, then the "fair market value of one share of Common" for
purposes of paragraph 2(a) shall be the value received by the holders of the
Common pursuant to such transaction for each share of Common,
<PAGE>
and such purchase shall be effective upon the closing of such transaction,
subject to the due, proper and prior surrender of this Warrant.
(c) If the Holder shall purchase such shares in conjunction with the
initial underwritten public offering of the Common pursuant to a registration
statement filed under the Securities Act of 1933, the "fair market value of one
share of Common" shall be the price at which registered shares are sold to the
public in such offering, and such purchase shall be effective upon the date of
such offering, subject to the due, proper and prior surrender of this Warrant
and the closing of the offering. Should such offering not be consummated, the
Company shall refund to the holder the Warrant Price and the Holder may exercise
the purchase right represented by this Warrant, in whole or in part, at any time
and from time to time during the remainder of its term.
(d) In the event of any exercise of the purchase right represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the holder hereof within five business days of the effective date
of such purchase and, unless this Warrant has been fully exercised or expired, a
new Warrant representing the portion of the Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof within such five business day period. Upon the effective date
of such purchase, the Holder shall be deemed to be the holder of record of the
Shares, notwithstanding that Certificates representing the Shares shall not then
be actually delivered to such Holder or that such Shares are not then set forth
on the stock transfer books of the Company.
(e) If the Shares are traded regularly in a public market, the fair
market value of the Shares shall be the closing price of the Shares reported for
the business day immediately before Holder delivers its notice of exercise to
the Company. If the Shares are not regularly traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment.
3. Stock Fully Paid; Reservation of Shares. All Shares which may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of the issue upon exercise
of the purchase rights evidenced by this Warrant, a sufficient number of shares
of Common to provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification or Merger. In case of any reclassification or
--------------------------
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is a continuing
<PAGE>
corporation and which does not result in any reclassification or change of
outstanding securities issuable upon exercise of this Warrant), or in case of
any sale of all or substantially all of the assets of the Company, the Company
shall, as condition precedent to such transaction, execute a new Warrant or
cause such successor or purchasing corporation, as the case may be, to execute a
new Warrant, providing that the holder of this Warrant shall have the right to
exercise such new Warrant and upon such exercise to receive, in lieu of each
share of Common theretofore issuable upon exercise of this Warrant, the kind and
amount of shares of stock, other securities, money and property receivable upon
such reclassification, change or merger by the holder of one share of Common.
Such new Warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
paragraph 4. The provisions of this subparagraph (a) shall similarly apply to
successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
------------------------------------
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common, the Warrant Price shall be proportionately decreased in the case of
a subdivision or increased in the case of a combination.
(c) Stock Dividends. If the Company at any time while this Warrant is
---------------
outstanding and unexpired shall pay a dividend with respect to Common payable
in, or make any other distribution with respect to Common (except any
distribution specifically provided for in the foregoing subparagraph (a) and
(b)) of, Common then the Warrant Price shall be adjusted, from and after the
date of determination of shareholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Warrant Price in
effect immediately prior to such date of determination by a fraction (a) the
numerator of which shall be the total number of shares of Common outstanding
immediately prior to such dividend or distribution, and (b) the denominator of
which shall be the total number of shares of Common outstanding immediately
after such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares of Common purchasable hereunder shall be
adjusted, to nearest whole share, to the product obtained by multiplying the
number of Shares purchasable immediately prior to such adjustment in the Warrant
Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
(e) No Impairment. The Company shall not, by amendment of its
-------------
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Section 5 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Section 5 against impairment.
5. Notice of Adjustments. Whenever any Warrant Price shall be adjusted
---------------------
pursuant to paragraph 4 hereof, the Company shall make a certificate signed by
its chief financial officer
<PAGE>
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the Warrant Price or Prices after giving effect to such adjustment, and
shall cause copies of such certificate to be mailed (by first class mail,
postage prepaid) to the holder of this Warrant.
6. Notice of Certain Actions. In the event that the Company shall
-------------------------
propose at any time:
(i) to declare any dividend or distribution upon any class
or series of its stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of earnings or
earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of its
Common outstanding involving a change in the Common; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its assets or
property, or to liquidate, dissolve or wind up, whether voluntary or
involuntary;
then in connection with each such event, this Company shall send to the holders
of the Warrants:
(1) at least 10 days prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (i) and (ii) above;
(2) in the case of the matters referred to in (iii) through
(iv) above, at least 10 days prior written notice of the date for the
determination of shareholders entitled to vote thereon (and specifying the date
on which the holders of Common shares shall be entitled to exchange their Common
for securities or other property deliverable upon the occurrence of such event);
and
(3) prompt notice of any material change in the terms of
the transaction described in (i) through (iv) above.
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Warrants at the
address for each such holder as shown on the books of this corporation.
7. Fractional Shares. No fractional shares of Common will be issued in
-----------------
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefore in an amount determined in such
reasonable manner as may be prescribed by the board of directors of the Company.
<PAGE>
8. Compliance with Securities Act; Non-transferability of Warrant;
---------------------------------------------------------------
Disposition of Shares of Common.
- -------------------------------
(a) Compliance with Securities Act. The holder of this Warrant, by
------------------------------
acceptance hereof, agrees that this Warrant and the shares of Common to be
issued upon exercise hereof are being acquired for investment and that it will
not offer, sell or otherwise dispose of this Warrant or any shares of Common to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended (the "Act"). Upon
exercise of this Warrant, the holder hereof shall confirm in writing, in a form
of Exhibit B, that the shares of Common so purchased are being acquired for
---------
investment and not with a view toward distribution or resale. All shares of
Common issued upon exercise of this Warrant (unless registered under the Act)
shall be stamped or imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN
RIGHTS AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
(b) Transferability of Warrant. This Warrant and the Shares to be
--------------------------
issued upon exercise hereof may not be transferred or assigned in whole or in
part without compliance with the requirements of that certain Rights Agreement
dated of even date herewith by and among the Company and certain holders of
Company securities, as amended from time to time hereafter (the "Rights
Agreement").
9. Rights of Shareholders. No holder of the Warrant or Warrants shall be
----------------------
entitled to vote or receive dividends on the Shares or be deemed the holder of
Common or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a shareholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant or Warrants shall have been
<PAGE>
exercised and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
10. Registration Rights. The Shares obtained upon exercise of this
-------------------
Warrant shall have all of the registration rights, obligations and restrictions
set forth in the Rights Agreement.
11. Governing Law. The terms and conditions of this Warrant shall be
-------------
governed by and construed in accordance with the internal laws of the State of
California without application of conflict of laws principles.
12. Miscellaneous. The headings in this Warrant are for purposes of
-------------
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the Company and the Holder. All notices and other communications from the
Company to the Holder shall be mailed by first-class registered or certified
mail, postage prepaid, to the address furnished to the Company in writing by the
last holder of this Warrant who shall have furnished an address to the Company
in writing.
<PAGE>
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
---------------------------------
Michael O'Donnell, President
[Signature Page to Salon Internet, Inc. Warrant]
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: SALON INTERNET, INC.
The undersigned hereby elects to purchase shares of Common Stock of Salon
Internet, Inc. pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such shares in full, together with all
applicable transfer taxes, if any.
Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other names as is
specified below:
____________________________________________________________
(Name)
____________________________________________________________
_____________________________________________________________
(Address)
The undersigned represents that the aforesaid shares of Common Stock are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Exhibit B.
____________________________________________
(Signature)
____________________________________________
(Date)
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER: __________________________________
COMPANY: SALON INTERNET, INC.
SECURITY: COMMON STOCK
AMOUNT: __________________________________
DATE: __________________________________
In connection with the purchase of the above-listed securities (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any distribution
thereof for purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities except as set
forth in that certain Rights Agreement dated December 23, 1994 (as amended)
between the Company and certain holders of Company securities. In addition, I
understand that the certificate evidencing the securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the reasonable opinion of
counsel for the Company.
(d) I an aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of restricted
securities acquired, directly or indirectly, from the issuer thereof (or from an
affiliate of such issuer), in a non-public offering subject to the satisfaction
of certain conditions.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale.
<PAGE>
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act, compliance
with Regulation A, or some other registration exemption will be required.
Signature of Purchaser:
________________________________
Date: _________________________
<PAGE>
EXHIBIT 10.15
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. THESE
SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR AN EXEMPTION THEREFROM UNDER SAID ACT AND LAWS.
THE SALE OF THESE SECURITIES HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFORE PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL UNLESS SUCH SALE OR TRANSFER IS EXEMPT FROM
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS WARRANT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE COMPANY
AND LEGAL COUNSEL FOR THE COMPANY.
Void after 5:00 P.M., San Francisco Right to Purchase up to 94,106 Shares of
(a) September 30, 2008 or (b) such the Common Stock of Salon Internet,
earlier date as this Warrant may Inc.
expire pursuant to Section 1 hereof.
SALON INTERNET, INC.
STOCK PURCHASE WARRANT
NOVEMBER 3, 1998
SALON INTERNET, INC., a California corporation (the "Company"), hereby
certifies that for value received, H&Q Salon Investors, L.P. or assigns (the
"Holder"), is entitled to purchase, subject to the terms and conditions
hereinafter set forth, up to the number of fully paid and nonassessable shares
("Shares") of the Common Stock of the Company ("Common"), at a price of $0.26
per share, set forth in the following schedule
(i) 31,369 shares commencing on the date of this Warrant,
(ii) an additional 31,369 shares commencing 120 days after September 18,
1998 (the "Date of Grant") if the Company has not completed between the Date of
Grant and the date 120 days after the Date of Grant one or more equity
financings resulting in aggregate cash proceeds to the Company of at least
$8,500,000, which proceeds shall include any proceeds received on the Date of
Grant (a "Qualified Financing"), and
<PAGE>
(iii) an additional 31,368 shares commencing 180 days from the Date of
Grant if the Company has not completed a Qualified Financing between the Date of
Grant and the date 180 days after the Date of Grant. The number of Shares to be
received upon the exercise of this Warrant and the price to be paid for a Share
may be adjusted from time to time as hereinafter set forth. The exercise price
of a Share in effect at any time and as adjusted from time to time is
hereinafter referred to as the "Warrant Price."
1. Term. The purchase right represented by this Warrant is exercisable,
----
in whole or in part, at any time and from time to time from the effective date
of this Warrant through September 30, 2008. The Company shall furnish to each
Holder a notice of the expiration date of this Warrant not more than 60 days and
not less than 30 days before such expiration date.
2. Method of Exercise; Payment; Issuance of New Warrant.
----------------------------------------------------
(a) Subject to paragraph 1 hereof, the purchase right represented by
this Warrant may be exercised by the Holder hereof, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Exhibit A duly executed) at the principal office of the Company and (i) by the
- ---------
payment to the Company, by check, of an amount equal to the then applicable
Warrant Price per share multiplied by the number of Shares then being purchased,
or (ii) on the date on which the Common becomes publicly traded or the Company
is merged, acquired or consolidated pursuant to a transaction in which the
Company is not the surviving party, by surrender of the right to receive upon
exercise hereof a number of Shares equal to the value (as determined below) of
the Shares with respect to which this Warrant is being exercised, in which case
the number of shares to be issued to the Holder upon such exercise shall be
computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common to be issued to the
Holder.
Y = the number of shares of Common with respect to which this Warrant
is being exercised.
A = the fair market value of one share of Common.
B = Warrant Price.
(b) If the Holder shall purchase such shares in conjunction with a
merger, acquisition or other consolidation pursuant to which the Company is not
the surviving party, then the "fair market value of one share of Common" for
purposes of paragraph 2(a) shall be the value received by the holders of the
Common pursuant to such transaction for each share of Common, and such purchase
shall be effective upon the closing of such transaction, subject to the due,
proper and prior surrender of this Warrant.
2
<PAGE>
(c) If the Holder shall purchase such shares in conjunction with the
initial underwritten public offering of the Common pursuant to a registration
statement filed under the Securities Act of 1933, the "fair market value of one
share of Common" shall be the price at which registered shares are sold to the
public in such offering, and such purchase shall be effective upon the date of
such offering, subject to the due, proper and prior surrender of this Warrant
and the closing of the offering. Should such offering not be consummated, the
Company shall refund to the holder the Warrant Price and the Holder may exercise
the purchase right represented by this Warrant, in whole or in part, at any time
and from time to time during the remainder of its term.
(d) In the event of any exercise of the purchase right represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the holder hereof within five business days of the effective date
of such purchase and, unless this Warrant has been fully exercised or expired, a
new Warrant representing the portion of the Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof within such five business day period. Upon the effective date
of such purchase, the Holder shall be deemed to be the holder of record of the
Shares, notwithstanding that Certificates representing the Shares shall not then
be actually delivered to such Holder or that such Shares are not then set forth
on the stock transfer books of the Company.
(e) If the Shares are traded regularly in a public market, the fair
market value of the Shares shall be the closing price of the Shares reported for
the business day immediately before Holder delivers its notice of exercise to
the Company. If the Shares are not regularly traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment.
3. Stock Fully Paid; Reservation of Shares. All Shares which may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of the issue upon exercise
of the purchase rights evidenced by this Warrant, a sufficient number of shares
of Common to provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Reclassification or Merger. In case of any reclassification or
--------------------------
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is a continuing
corporation and which does not result in any reclassification or change of
outstanding securities issuable upon exercise of this Warrant), or in case of
any sale of all or substantially all of the assets of the Company, the Company
shall, as condition precedent to such transaction, execute a
3
<PAGE>
new Warrant or cause such successor or purchasing corporation, as the case may
be, to execute a new Warrant, providing that the holder of this Warrant shall
have the right to exercise such new Warrant and upon such exercise to receive,
in lieu of each share of Common theretofore issuable upon exercise of this
Warrant, the kind and amount of shares of stock, other securities, money and
property receivable upon such reclassification, change or merger by the holder
of one share of Common. Such new Warrant shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this paragraph 4. The provisions of this subparagraph (a) shall similarly
apply to successive reclassifications, changes, mergers and transfers.
(b) Subdivision or Combination of Shares. If the Company at any time
------------------------------------
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common, the Warrant Price shall be proportionately decreased in the case of
a subdivision or increased in the case of a combination.
(c) Stock Dividends. If the Company at any time while this Warrant is
---------------
outstanding and unexpired shall pay a dividend with respect to Common payable
in, or make any other distribution with respect to Common (except any
distribution specifically provided for in the foregoing subparagraph (a) and
(b)) of, Common then the Warrant Price shall be adjusted, from and after the
date of determination of shareholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Warrant Price in
effect immediately prior to such date of determination by a fraction (a) the
numerator of which shall be the total number of shares of Common outstanding
immediately prior to such dividend or distribution, and (b) the denominator of
which shall be the total number of shares of Common outstanding immediately
after such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
Warrant Price, the number of Shares of Common purchasable hereunder shall be
adjusted, to nearest whole share, to the product obtained by multiplying the
number of Shares purchasable immediately prior to such adjustment in the Warrant
Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
(e) No Impairment. The Company shall not, by amendment of its
-------------
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Section 5 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Section 5 against impairment.
5. Notice of Adjustments. Whenever any Warrant Price shall be adjusted
---------------------
pursuant to paragraph 4 hereof, the Company shall make a certificate signed by
its chief financial officer setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, and the Warrant Price or
4
<PAGE>
Prices after giving effect to such adjustment, and shall cause copies of such
certificate to be mailed (by first class mail, postage prepaid) to the holder of
this Warrant.
6. Notice of Certain Actions. In the event that the Company shall
-------------------------
propose at any time:
(i) to declare any dividend or distribution upon any class or series
of its stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights;
(iii) to effect any reclassification or recapitalization of its Common
outstanding involving a change in the Common; or
(iv) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its assets or property, or to
liquidate, dissolve or wind up, whether voluntary or involuntary;
then in connection with each such event, this Company shall send to the holders
of the Warrants:
(1) at least 10 days prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in (i) and (ii) above;
(2) in the case of the matters referred to in (iii) through (iv)
above, at least 10 days prior written notice of the date for the determination
of shareholders entitled to vote thereon (and specifying the date on which the
holders of Common shares shall be entitled to exchange their Common for
securities or other property deliverable upon the occurrence of such event); and
(3) prompt notice of any material change in the terms of the
transaction described in (i) through (iv) above.
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Warrants at the
address for each such holder as shown on the books of this corporation.
7. Fractional Shares. No fractional shares of Common will be issued in
-----------------
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefore in an amount determined in such
reasonable manner as may be prescribed by the board of directors of the Company.
8. Compliance with Securities Act; Non-transferability of Warrant;
---------------------------------------------------------------
Disposition of Shares of Common.
- -------------------------------
5
<PAGE>
(a) Compliance with Securities Act. The holder of this Warrant, by
------------------------------
acceptance hereof, agrees that this Warrant and the shares of Common to be
issued upon exercise hereof are being acquired for investment and that it will
not offer, sell or otherwise dispose of this Warrant or any shares of Common to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended (the "Act"). Upon
exercise of this Warrant, the holder hereof shall confirm in writing, in a form
of Exhibit B, that the shares of Common so purchased are being acquired for
---------
investment and not with a view toward distribution or resale. All shares of
Common issued upon exercise of this Warrant (unless registered under the Act)
shall be stamped or imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN
RIGHTS AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
(b) Transferability of Warrant. This Warrant and the Shares to be
--------------------------
issued upon exercise hereof may not be transferred or assigned in whole or in
part without compliance with the requirements of that certain Rights Agreement
dated of even date herewith by and among the Company and certain holders of
Company securities, as amended from time to time hereafter (the "Rights
Agreement").
9. Rights of Shareholders. No holder of the Warrant or Warrants shall be
----------------------
entitled to vote or receive dividends on the Shares or be deemed the holder of
Common or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a shareholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant or Warrants shall have been
exercised and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
6
<PAGE>
10. Registration Rights. The Shares obtained upon exercise of this
-------------------
Warrant shall have all of the registration rights, obligations and restrictions
set forth in the Rights Agreement.
11. Governing Law. The terms and conditions of this Warrant shall be
-------------
governed by and construed in accordance with the internal laws of the State of
California without application of conflict of laws principles.
12. Miscellaneous. The headings in this Warrant are for purposes of
-------------
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the Company and the Holder. All notices and other communications from the
Company to the Holder shall be mailed by first-class registered or certified
mail, postage prepaid, to the address furnished to the Company in writing by the
last holder of this Warrant who shall have furnished an address to the Company
in writing.
7
<PAGE>
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
---------------------------------
Michael O'Donnell, President
[Signature Page to Salon Internet, Inc. Warrant]
8
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: SALON INTERNET, INC.
The undersigned hereby elects to purchase shares of Common Stock of Salon
Internet, Inc. pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such shares in full, together with all
applicable transfer taxes, if any.
Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other names as is
specified below:
____________________________________________________________
(Name)
____________________________________________________________
_____________________________________________________________
(Address)
The undersigned represents that the aforesaid shares of Common Stock are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Exhibit B.
____________________________________________
(Signature)
____________________________________________
(Date)
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER: ________________________________
COMPANY: SALON INTERNET, INC.
SECURITY: COMMON STOCK
AMOUNT: ________________________________
DATE: ________________________________
In connection with the purchase of the above-listed securities (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any distribution
thereof for purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities except as set forth in
that certain Rights Agreement dated December 23, 1994 (as amended) between the
Company and certain holders of Company securities. In addition, I understand
that the certificate evidencing the securities will be imprinted with a legend
which prohibits the transfer of the Securities unless they are registered or
such registration is not required in the reasonable opinion of counsel for the
Company.
(d) I an aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of restricted
securities acquired, directly or indirectly, from the issuer thereof (or from an
affiliate of such issuer), in a non-public offering subject to the satisfaction
of certain conditions.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale.
<PAGE>
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act, compliance
with Regulation A, or some other registration exemption will be required.
Signature of Purchaser:
________________________________
Date: _________________________
<PAGE>
EXHIBIT 10.18
LOAN AGREEMENT
This Loan Agreement is entered into as of April 13, 1998 (this "Loan
Agreement") between Salon Internet, Inc., a California corporation (herein
called "Borrower"), and Imperial Bank (herein called "Bank").
1. COMMITMENTS.
A. REVOLVING LOAN COMMITMENT. Subject to all the terms and
conditions of this Loan Agreement and prior to the termination of its commitment
as hereinafter provided, Bank hereby agrees to make loans (each a "Revolving
Loan") to Borrower, from time to time and in such amounts as Borrower shall
request pursuant to this Section 1.A., up to an aggregate principal amount
outstanding under the Revolving Loan Account (as hereinafter defined) not to
exceed the least of: (a) $250,000.00 plus eighty percent (80.0%) of Eligible
Accounts (as the same may be adjusted from time to time as provided for under
Section 9.B. hereof, the "Borrowing Base") or (b) $500,000.00 (the "Revolving
Loan Commitment"), as the same may be adjusted in accordance with Sections
1.A.(2) or 1.A.(3) hereof. If at any time or for any reason, the outstanding
principal amount of the Revolving Loan Account is greater than the least of, (x)
the Borrowing Base or (y) the Revolving Loan Commitment, Borrower shall
immediately pay to Bank upon demand, in cash, the amount of such excess. Any
commitment of Bank, pursuant to the terms of this Loan Agreement, to make
Revolving Loans shall expire on the Revolving Loan Maturity Date (as hereinafter
defined), subject to Bank's right to renew said commitment in its sole and
absolute discretion at Borrower's request. Any such renewal of said commitment
shall not be binding upon Bank unless it is in writing and signed by an officer
of Bank. Provided that no Event of Default (as hereinafter defined) has
occurred and is continuing, all or any portion of the Revolving Loans advanced
by Bank which are repaid by Borrower shall be available for reborrowing in
accordance with the terms hereof. Borrower promises to pay to Bank the entire
outstanding unpaid principal balance (and all accrued unpaid interest thereon)
of the Revolving Loan Account on or before April 12, 1999 ("Revolving Loan
Maturity Date").
(1) REVOLVING LOANS. The amount of each Revolving Loan made by
Bank to Borrower hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Revolving Loan Commitment (herein called the
"Revolving Loan Account") and Bank shall credit the Revolving Loan Account with
all loan repayments in respect thereof made by Borrower. When Borrower desires
to obtain a Revolving Loan, Borrower shall notify Bank (which notice shall be
signed by an officer of Borrower and shall be irrevocable) in accordance with
Section 2 hereof, to be received no later than 3:00 p.m. Pacific time one (1)
Banking Day (as hereinafter defined) before the day on which the Revolving Loan
is to be made. Revolving Loans may only be used for working capital purposes and
for the issuance of letters of credit and corporate credit cards as further
described below.
(A) LETTER OF CREDIT USAGE AND SUBLIMIT. Subject to the
availability of the Revolving Loan Commitment and in reliance on the
representations and warranties of Borrower set forth herein, at any time and
from time to time from the date hereof
<PAGE>
through the Banking Day immediately prior to the Revolving Loan Maturity Date,
Bank shall issue for the account of Borrower such standby and commercial letters
of credit ("Letters of Credit") as Borrower may request, which request shall be
made by delivering to Bank a duly executed letter of credit application on
Bank's standard form; provided, however, that the outstanding and undrawn
amounts under all such Letters of Credit (i) shall not at any time exceed
$100,000.00 and (ii) shall be deemed to constitute Revolving Loans for the
purpose of calculating availability under the Revolving Loan Commitment. Unless
Borrower shall have deposited with Bank cash collateral in an amount sufficient
to cover all undrawn amounts under each such Letter of Credit, no Letter of
Credit shall have an expiration date that is later than the Revolving Loan
Maturity Date. All Letters of Credit shall be in form and substance acceptable
to Bank in its sole discretion and shall be subject to the terms and conditions
of Bank's form application and letter of credit agreement. Borrower will pay any
standard issuance and other fees that Bank notifies Borrower will be charged for
issuing and processing Letters of Credit for Borrower.
(B) CORPORATE CREDIT CARD USAGE AND SUBLIMIT. Subject to
the availability of the Revolving Loan Commitment and in reliance on the
representations and warranties of Borrower set forth herein, at any time and
from time to time from the date hereof through the Banking Day immediately prior
to the Revolving Loan Maturity Date, Bank shall make advances ("Credit Card
Advances") under the Revolving Loan Commitment in accordance with the terms and
conditions of that certain Credit Card Line of Credit and Security Agreement
dated as of April 14, 1997 ("Credit Card Agreement") between Borrower and Bank;
provided, however, that (i) such Credit Card Advances shall not at any time
exceed $55,000.00 and (ii) the outstanding balance of the charges under the
Credit Card (as defined in the Credit Card Agreement), whether or not such
charges are due and payable or there has been a Credit Card Advance pursuant to
this Section in respect thereof, together with any Credit Card Advances pursuant
to this Section in respect thereof, shall be deemed to constitute Revolving
Loans for the purpose of calculating availability under the Revolving Loan
Commitment. Borrower agrees to pay all fees and expenses, if any, incurred by
Bank in connection with any Credit Card Advances made under the Revolving Loan
Commitment pursuant to this Section.
(2) INCREASES UNDER THE REVOLVING LOAN COMMITMENT.
Notwithstanding any of the provisions contained in Section 1.A. hereof, upon
delivery by Borrower to Bank on or before July 31, 1998 a term sheet accepted by
a lead investor (in form acceptable to Bank, the "Term Sheet") for at least
$2,500,000.00 of new equity to be contributed to Borrower ("New Equity Round"),
Bank hereby agrees to adjust the Borrowing Base and increase the Revolving Loan
Commitment as hereinafter set forth and to make Revolving Loans to Borrower up
to an aggregate principal amount outstanding under the Revolving Loan Account
not to exceed the least of: (a) $500,000.00 plus eighty percent (80.0%) of
Eligible Accounts (as the same may be adjusted from time to time as provided for
under Section 9.B. hereof) or (b) $750,000.00.
(3) FURTHER INCREASES UNDER THE REVOLVING LOAN COMMITMENT.
Notwithstanding any of the provisions contained in Section 1.A. hereof, upon the
date of close of the New Equity Round, and delivery of evidence of same to Bank,
Bank hereby agrees to further
-2-
<PAGE>
adjust the Borrowing Base and increase the Revolving Loan Commitment as
hereinafter set forth and to make Revolving Loans to Borrower up to an aggregate
principal amount outstanding under the Revolving Loan Account not to exceed the
least of: (a) $250,000.00 plus eighty percent (80.0%) of Eligible Accounts (as
the same may be adjusted from time to time as provided for under Section 9.B.
hereof) or (b) $1,000,000.00.
(4) INTEREST PAYMENTS ON REVOLVING LOANS. Borrower further
promises to pay to Bank from the date of the advance of the initial Revolving
Loan through the Revolving Loan Maturity Date, on or before the tenth (10th) day
of each month, interest on the average daily unpaid balance of the Revolving
Loan Account during the immediately preceding month at a rate of interest per
annum equal to the rate of interest which Bank has announced as its prime
lending rate (the "Prime Rate"), which shall vary concurrently with any change
in the Prime Rate. Interest shall be computed at the above rate on the basis of
the actual number of days during which the principal balance of the Revolving
Loan Account is outstanding divided by 360, which shall for interest computation
purposes be considered one (1) year.
B. EQUIPMENT LOAN COMMITMENT. Subject to all the terms and
conditions of this Loan Agreement and prior to the termination of its commitment
as hereinafter provided, Bank hereby agrees to make loans (each an "Equipment
Loan") to Borrower in such amounts as Borrower shall request pursuant to this
Section 1.B. at any time from the date hereof through December 31, 1998 (the
"Equipment Availability End Date"), in an aggregate principal amount not to
exceed $300,000.00 (the "Equipment Loan Commitment"). If at any time or for any
reason, the outstanding principal amount of the Equipment Loan Account (as
hereinafter defined) is greater than the Equipment Loan Commitment, Borrower
shall immediately pay to Bank upon demand, in cash, the amount of such excess.
Any commitment of Bank, pursuant to the terms of this Loan Agreement, to make
Equipment Loans shall expire on the Equipment Availability End Date, subject to
Bank's right to renew said commitment in its sole and absolute discretion at
Borrower's request. Any such renewal of said commitment shall not be binding
upon Bank unless it is in writing and signed by an officer of Bank. Equipment
Loans which are repaid by Borrower may not be reborrowed. Borrower promises to
pay to Bank the outstanding unpaid principal balance (and all accrued unpaid
interest thereon) of the Equipment Loan Account on or before December 31, 2000
("Equipment Loan Maturity Date").
(1) EQUIPMENT LOANS. The amount of each Equipment Loan made by
Bank to Borrower hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Equipment Loan Commitment (herein called the
"Equipment Loan Account") and Bank shall credit the Equipment Loan Account with
all loan repayments in respect thereof made by Borrower. When Borrower desires
to obtain an Equipment Loan, Borrower shall notify Bank (which notice shall be
signed by an officer of Borrower and shall be irrevocable) in accordance with
Section 2 hereof, to be received no later than 3:00 p.m. Pacific time one (1)
Banking Day before the day on which the Equipment Loan is to be made. The notice
shall be signed by an officer of Borrower and include a copy of the invoice for
the equipment, software or furniture to be financed. Equipment Loans may only be
used to purchase or reimburse the cost of acquiring equipment, software and
furniture purchased by Borrower after October 1, 1997. Equipment Loans for
equipment and furniture will be limited to one hundred percent (100.00%)
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of the invoice amount for such equipment or furniture, approved from time to
time by Bank, less any taxes, shipping and freight charges or discounts,
warranty charges, installation expenses and other similar soft costs. Equipment
Loans for software will be limited to (a) one hundred percent (100.00%) of the
invoice amount for such software, approved from time to time by Bank, less any
taxes, shipping and freight charges or discounts, warranty charges, installation
expenses and other similar soft costs and (b) $100,000.00.
(2) INTEREST PAYMENTS PRIOR TO EQUIPMENT LOAN MATURITY DATE.
Borrower further promises to pay to Bank from the date of the advance of the
initial Equipment Loan through the Equipment Availability End Date, on or before
the tenth (10th) day of each month, interest on the average daily unpaid balance
of the Equipment Loan Account during the immediately preceding month at a rate
of interest per annum equal to the Prime Rate, which shall vary concurrently
with any change in the Prime Rate. Interest shall be computed at the above rate
on the basis of the actual number of days during which the principal balance of
the Equipment Loan Account is outstanding divided by 360, which shall for
interest computation purposes be considered one (1) year.
(3) PRINCIPAL AND INTEREST PAYMENTS FOLLOWING EQUIPMENT
AVAILABILITY END DATE. Borrower further promises to pay to Bank, on or before
January 10, 1999 and on or before the tenth (10th) day of each month thereafter
through the Equipment Loan Maturity Date, (a) the outstanding principal balance
of the Equipment Loan Account on the Equipment Availability End Date in twenty-
four (24) equal monthly installments plus (b) interest on the average daily
unpaid balance of the Equipment Loan Account accruing from and after January 1,
1999 and thereafter accruing during the immediately preceding month at the rate
of interest equal to one-half percent (0.50%) in excess of the Prime Rate and
computed in accordance with Section 1.B.(2) hereof.
2. LOAN REQUESTS. Requests for Loans hereunder shall be in writing duly
executed by Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in Section 1, which shall
disclose that Borrower is entitled to the amount and type of Loan being
requested. Bank is hereby authorized to charge Borrower's deposit account with
Bank for all sums due Bank under this Loan Agreement.
3. DELIVERY OF PAYMENTS. Payment to Bank of all amounts due hereunder
shall be made at its Santa Clara Valley Regional office, or at such other place
as may be designated in writing by Bank from time to time. If any payment date
falls on a day that is not a day that Bank is open for the transaction of
business ("Banking Day"), the payment due date shall be extended to the next
Banking Day.
4. LATE CHARGE. If any interest payment, principal payment or principal
balance payment required hereunder is not received by Bank on or before ten (10)
days from the date in which such payment becomes due, Borrower shall pay to
Bank, a late charge equal to the lesser of (a) five percent (5.0%) of the amount
of such unpaid payment, in addition to said unpaid payment or (b) the maximum
amount permitted to be charged by applicable law, until remitted to Bank;
provided, however, nothing contained in this Section 4, shall be construed
as any
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obligation on the part of Bank to accept payment of any past due payment or less
than the total unpaid principal balance of the applicable Loan Account following
the Revolving Loan Maturity Date or the Equipment Loan Maturity Date, as
applicable. All payments shall be applied first to any late charges due
hereunder, next to accrued interest then payable and the remainder, if any, to
reduce any unpaid principal due under the applicable Loan Account.
5. DEFAULT INTEREST. From and after the Revolving Loan Maturity Date or
the Equipment Loan Maturity Date, as applicable, or such earlier date as all
sums owing under any Loan Account becomes due and payable by acceleration or
otherwise, or upon the occurrence of an Event of Default, at the option of Bank
all sums owing under the applicable Loan Account shall bear interest until paid
in full at a rate equal to the lesser of (a) five percent (5.0%) per annum in
excess of the then applicable interest rate provided for in Sections 1.A.1,
1.B.(2) or 1.B.(3) hereof or (b) the maximum amount permitted to be charged by
applicable law, until all obligations hereunder are repaid in full or the Event
of Default is waived or cured to the satisfaction of Bank, as applicable.
6. DEFINITIONS. As used in this Loan Agreement and unless otherwise
defined herein, all initially capitalized terms shall have the meanings set
forth on Exhibit A attached hereto and incorporated herein by this reference.
7. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Bank: (a) That Borrower is a corporation, duly organized and existing in the
State of its incorporation and the execution, delivery and performance of each
of the Loan Documents are within Borrower's corporate powers, have been duly
authorized and are not in conflict with law or the terms of any charter, by-law
or other incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is bound or affected; (b)
Borrower is, and at the time the Collateral becomes subject to Bank's security
interest will be, the true and lawful owner of and has, and at the time the
Collateral becomes subject to Bank's security interest will have, good and clear
title to the Collateral, subject only to Bank's rights therein and to Permitted
Liens; (c) Each Account is, and at the time the Account comes into existence
will be, a true and correct statement of a bona fide indebtedness incurred by
the debtor named therein in the amount of the Account for either merchandise
sold or delivered (or being held subject to Borrower's delivery instructions)
to, or services rendered, performed (or to be rendered and performed) and
accepted by, the account debtor; (d) That to the best of Borrower's knowledge
there are and will be no material defenses, counterclaims, or setoffs which may
be asserted against the Accounts from time to time represented by Borrower to be
Eligible Accounts, except as permitted in the definition thereof; (e) Any and
all financial information, including information relating to the Collateral,
submitted by Borrower to Bank, whether previously or in the future, is and will
be true and correct in all material respects; (f) There is no litigation or
other proceeding pending or, to Borrower's knowledge, threatened against or
affecting Borrower, and Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or other governmental or
regulatory authority, except for proceedings and defaults which will not have a
Material Adverse Effect upon its financial condition, operations or business as
now conducted; (g)(i) The consolidated and consolidating profit and loss
statements for the 11-month period ended February 28, 1998, and the related
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balance sheet for the fiscal month ended March 31, 1998, copies of which have
heretofore been delivered to Bank by Borrower, and all other statements and data
submitted in writing by Borrower to Bank in connection with Borrower's request
for credit are true and correct, and said balance sheet and profit and loss
statement accurately present the financial condition of Borrower as of the date
thereof and the results of the operations of Borrower for the period covered
thereby, and have been prepared in accordance with GAAP, (ii) since such date,
there have been no material adverse changes in the financial condition of
Borrower, and (iii) Borrower has no knowledge of any liabilities, contingent or
otherwise, which are not reflected in said balance sheet, and Borrower has not
entered into any special commitments or substantial contracts which are not
reflected in said balance sheet, other than in the ordinary and normal course of
its business, which may have a Material Adverse Effect upon its financial
condition, operations or business as now conducted; (h) Borrower has no
liability for any delinquent local, state or federal taxes, and, if Borrower has
contracted with any government agency, it has no liability for renegotiation of
profits; and (i) Borrower, as of the date hereof, possesses all necessary
trademarks, trade names, copyrights, patents, patent rights, and licenses to
conduct its business as now operated, without any known conflict with valid
trademarks, trade names, copyrights, patents, patent rights and license rights
of others.
8. NEGATIVE COVENANTS. Borrower agrees that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank or the
commitment of Bank hereunder is in effect, neither Borrower, nor any of its
subsidiaries ("Subsidiaries") will, without the prior written consent of Bank,
which consent shall not be unreasonably withheld, delayed or conditioned in the
case of Section 8.F. below:
A. Make any substantial change in the character of its business as
now conducted;
B. Create, incur, assume or permit to exist any Indebtedness other
than loans from Bank except obligations now existing as shown in the financial
statements referenced in Section 7.(g)(i), excluding those being refinanced by
Bank, Subordinated Debt and Permitted Indebtedness; or sell or transfer, either
with or without recourse, any accounts or notes receivable or any monies due or
to become due;
C. Create, incur, assume or permit to exist any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
Permitted Liens and liens in favor of Bank;
D. Sell, dispose of or grant a security interest in any of the
Collateral other than to Bank (other than the disposing of such Collateral in
the ordinary and normal course of its business as now conducted or other assets
which are obsolete or otherwise considered surplus), or execute any financing
statements covering the Collateral in favor of any secured party or Person other
than Bank, except to the extent required to perfect Permitted Liens;
E. Make any loans or advances to any Person or other entity other
than in the ordinary and normal course of its business as now conducted or as
reasonably conducted under
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standard industry practices for businesses similar to Borrower's (provided that
such loans or advances are not made to any Person or entity which is controlled
by or under common control with Borrower) or make any investment in the
securities of any Person or other entity other than the United States
Government;
F. Purchase or otherwise acquire all or substantially all of the
assets or business of any Person or other entity; or liquidate, dissolve, merge
(other than a merger to change Borrower's state of incorporation) or
consolidate, or commence any proceedings therefore; or, except in the ordinary
and normal course of its business as now conducted or as reasonably conducted
under standard industry practices for businesses similar to Borrower's, sell
(including, without limitation, the selling of any property or other asset
accompanied by the leasing back of the same) any assets including any fixed
assets, any property, or other assets necessary for the continuance of its
business as now conducted;
G. Declare or pay any dividend or make any other distribution on any
of its capital stock now outstanding or hereafter issued or purchase, redeem or
retire any of such stock other than in dividends or distributions payable in
Borrower's or any such Subsidiary's capital stock. Notwithstanding the
foregoing, Borrower may redeem or repurchase its capital stock in connection
with any agreement entered into in the ordinary course of its business with any
of its officers, directors, employees or consultants wherein Borrower is
obligated or entitled to repurchase from such officer, director, employee or
consultant shares of Borrower's capital stock upon the termination of such
person's employment with or services provided to Borrower.
9. AFFIRMATIVE COVENANTS. Borrower affirmatively covenants that so long
as any loans, obligations or liabilities remain outstanding or unpaid to Bank or
the commitment of Bank hereunder is in effect, it will:
A. Furnish Bank from time to time such financial statements and
information as Bank may reasonably request and inform Bank immediately upon the
occurrence of a material adverse change therein;
B. Upon five (5) days prior notice to Borrower, permit
representatives of Bank to conduct an audit of Borrower's books and records
relating to the Collateral and make extracts therefrom, with results
satisfactory to Bank, provided that Bank shall use its best efforts to not
interfere with the conduct of Borrower's business, and to the extent possible to
arrange for verification of the Accounts directly with the account debtors
obligated thereon or otherwise, all under reasonable procedures acceptable to
Bank and at Borrower's sole expense; provided further that, prior to an Event of
Default, Borrower shall not be responsible for the expense of more than two (2)
such audits, in any fiscal year. Borrower hereby acknowledges and agrees that
upon completion of any such audit, Bank shall have the right to adjust the
Borrowing Base percentage, in its sole and reasonable discretion, based on its
review of the results of such Collateral audit;
C. Promptly notify Bank of any attachment or other legal process
levied against any of the Collateral and any information received by Borrower
relative to the Collateral, including the Accounts, the account debtors or other
Persons obligated in connection therewith,
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which may in any way affect the value of the Collateral or the rights and
remedies of Bank in respect thereto;
D. Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expenses incurred in collecting any sums
payable by Borrower under any Loan Account or any other obligation secured
hereby, enforcing any term or provision of this Loan Agreement or otherwise or
in the checking, handling and collection of the Collateral and the preparation
and enforcement of any agreement relating thereto;
E. Notify Bank of each location and of each office of Borrower at
which records of Borrower relating to the Accounts are kept;
F. Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms and
companies as Bank may require (to the extent customarily maintained by
businesses similar to Borrower) and with loss payable to Bank, and, in the event
Bank takes possession of the Collateral, the insurance policy or policies and
any unearned or returned premium thereon shall at the option of Bank become the
sole property of Bank, such policies and the proceeds of any other insurance
covering or in any way relating to the Collateral, whether now in existence or
hereafter obtained, being hereby assigned to Bank;
G. In the event the unpaid balance of any Loan Account shall exceed
the maximum amount of outstanding loans to which Borrower is entitled under
Section 1 hereof, as applicable, Borrower shall immediately pay to Bank, upon
demand, for credit to such Loan Account the amount of such excess;
H. Maintain and preserve all rights, franchises and other authority
adequate and necessary for the conduct of its business and maintain and preserve
its existence in the state of its incorporation and any other state(s) in which
Borrower conducts its business, except with respect to such other state(s),
where the failure to do so would not have a Material Adverse Effect;
I. Maintain public liability, property damage and workers
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to Bank, and certificates naming Bank
as a loss payee;
J. Pay and discharge, before the same becomes delinquent and
penalties accrue thereon, all taxes, assessments and governmental charges upon
or against it or any of its properties, and any of its other liabilities at any
time existing, except to the extent and so long as: (1) the same are being
contested in good faith and by appropriate proceedings in such manner as not to
cause any Material Adverse Effect or the loss of any right of redemption from
any sale thereunder; and (2) it shall have set aside on its books reserves
(segregated to the extent required by GAAP);
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K. Maintain a standard and modern system of accounting in accordance
with GAAP on a basis consistently maintained. Upon five (5) days prior notice
to Borrower, permit Bank's representatives to have access to, and to examine its
properties, books and records during normal business hours, provided that Bank
shall use its best efforts to not interfere with the conduct of Borrower's
business and so long as no Event of Default has occurred and is continuing, such
examinations shall not be conducted more than semi-annually by Bank;
L. Maintain its properties, equipment and facilities in good order
and repair (ordinary wear and tear excepted);
M. Maintain its primary banking accounts with Bank; and
N. Prior to allowing any of Borrower's raw materials, work in
process, finished goods inventory and property, plant and equipment to be
transported to or be held at any contract manufacturer, warehouse or other
location (other than with bona fide distributors and retail accounts), Borrower
shall provide notice to Bank and Borrower shall have complied with such filing
and notice requirements as shall, in Bank's opinion, assure Borrower's and
Bank's priority in such property over creditors of such contract manufacturer,
warehouseman or operator of such other location, including, without limitation,
making filings under California Commercial Code 2326, providing notice under
California Commercial Code 9114 and making filings and publications as required
under California Civil Code (S) 3440.1 and (S) 3440.5. All such filings,
notices and publications shall be in form and substance satisfactory to Bank.
10. FINANCIAL COVENANTS AND INFORMATION. All financial covenants and
financial information referenced herein shall be interpreted and prepared in
accordance with GAAP as used in the United States of America applied on a basis
consistent with previous years. Compliance with the financial covenants shall
be calculated and monitored on a monthly basis, except as shall be expressly
stated to the contrary. Borrower affirmatively covenants that so long as any
loans, obligations or liabilities remain outstanding or unpaid to Bank or any
commitment is outstanding hereunder, it will, on a consolidated basis:
A. At all times, maintain a Minimum Tangible Net Worth (meaning all
assets, excluding any value for goodwill, trademarks, patents, copyrights,
organization expense and other similar intangible items, less all liabilities,
plus Subordinated Debt) of not less than (1) $500,000.00 through July 31, 1998
and (2) $4,000,000.00 thereafter;
B. At all times maintain a Maximum Ratio of Total Liabilities
(meaning all liabilities, excluding Subordinated Debt) to Tangible Net Worth (as
defined in Section 10.A. hereof) not to exceed (1) 1.50:1.00 through July 31,
1998 and (2) 1.00:1.00 thereafter;
C. At all times maintain a Minimum Quick Ratio (meaning all cash
plus Accounts divided by current liabilities) of not less than (1) 1.25:1.00
through July 31, 1998 and (2) 2.00:1.00 thereafter;
D. As soon as it is available, but not later than thirty (30) days
after and as of the end of each month, deliver to Bank an internally-prepared
financial statement consisting of a
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balance sheet and profit and loss statement, in form satisfactory to Bank, and a
Compliance Certificate in the form of Exhibit B attached hereto and incorporated
herein by this reference, certified by an officer of Borrower;
E. As soon as it is available, but not later than one hundred twenty
(120) days after the end of Borrower's fiscal year, deliver to Bank unqualified
copies of Borrower's consolidated financial statements together with changes in
financial position audited by an independent certified public accountant
selected by Borrower but acceptable to Bank;
F. So long as the Revolving Loan Commitment shall be outstanding or
any amounts remain outstanding and unpaid under the Revolving Loan Account, as
soon as it is available, but not later than thirty (30) days after and as of the
end of each month, deliver to Bank, in such form and detail as Bank may require,
statements showing aging of the Accounts and Borrower's accounts payable,
together with a Borrowing Base Certificate in the form of Exhibit C attached
hereto and incorporated herein by this reference, certified by an officer of
Borrower ("Borrowing Base Certificate"). Notwithstanding the foregoing, as a
condition to any request for a Revolving Loan, Borrower shall have delivered to
Bank said aging statements as well as a Borrowing Base Certificate covering the
most recent month then ended prior to the date of Borrower's request for an
advance for a Revolving Loan;
G. Upon the reasonable request of Bank, deliver to Bank current
budgets, sales projections, operating plans and other financial exhibits and
information in form and substance satisfactory to Bank; and
H. Upon any officer becoming aware, deliver immediately to Bank
written notice of any pending or threatened litigation claiming, or reasonably
likely to result in, damages against Borrower in an amount in excess of
$50,000.00.
11. LOAN FEE. In addition to any other amounts due, or to become due,
concurrent with the execution of the Loan Documents, Borrower shall deliver to
Bank with respect to (a) the Revolving Loan Commitment a loan fee in the amount
of Three Thousand Five Hundred Dollars ($3,500.00) and (b) the Equipment Loan
Commitment a loan fee in the amount of One Thousand Five Hundred Dollars
($1,500.00).
12. DEFAULT AND REMEDIES. The occurrence of any one or more of the
following shall constitute an "Event of Default": (a) Default be made in the
payment of any obligation by Borrower under any Loan Document; (b) Except for
any failure to pay as described in clause (a) above, breach be made in any
warranty, statement, promise, term or condition, contained herein or in any
other Loan Document and the same shall not have been cured to the satisfaction
of Bank within fifteen (15) days after Borrower shall have become aware thereof,
whether by written notice from Bank, or otherwise, (except that no cure period
shall exist for breaches in respect of Borrower's obligations under Section 8,
Subsections 9.A., 9.B., 9.C., 9.F., 9.G., 9.H. and 9.I., Subsections 10.A.,
10.B., 10.C., 10.D., 10.E. and 10.F. of this Loan Agreement, and Sections 1 and
2 of the General Security Agreement); (c) Any statement, warranty or
representation made by Borrower at any time proves false in any material
respect; (d) Borrower defaults in the repayment of any principal of or the
payment of any interest on any indebtedness
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exceeding in the aggregate principal amount $10,000.00 or breaches or violates
any term or provision of any promissory note, loan agreement, mortgage,
indenture or other evidence of such indebtedness pursuant to which amounts
outstanding in the aggregate exceed $10,000.00 if the effect of such breach is
to permit the acceleration of such indebtedness, whether or not waived by the
note holder or obligee, and such failure shall not have been cured to Bank's
satisfaction within fifteen (15) calendar days after Borrower shall become aware
thereof, whether by written notice from Borrower of such indebtedness; (e)
Borrower becomes insolvent or makes an assignment for the benefit of creditors;
(f) Any proceeding be commenced by Borrower under any bankruptcy, or moratorium
law or statute or, any such a proceeding is commenced against Borrower and is
not dismissed or stayed within thirty (30) days (provided that no Loans will be
made prior to the dismissal of such proceeding); (g) Any material money
judgment, writ of attachment, garnishment, eecution or other legal process be
entered against Borrower or issued against any material property of Borrower
which is not fully covered by insurance (subject to reasonable deductibles) and
remains unvacated, unbonded, unstayed or unpaid or undischarged for more than
fifteen (15) days (whether or not consecutive) or in any event later than five
(5) days prior to the date of any proposed sale thereunder, or if any assessment
for taxes against Borrower other than against any of its real property, is made
by the Federal or State government or any department thereof; (h) Any change in
Borrower's financial condition, prospects or operations which has a Material
Adverse Effect; (i) Borrower has failed to deliver the Term Sheet to Bank by the
date specified in Section 1.A.(2) hereof; or (j) an "Event of Default" occurs
under that certain Security and Loan Agreement dated as of April 14, 1997, as
amended by that certain First Amendment to Loan Agreement dated of even date
herewith, executed by and between Bank and Borrower (as the same may be further
amended from time to time, collectively, the "Other Loan Agreement"). Upon the
occurrence and during the continuance of an Event of Default, Bank may, at its
option and without demand first made and without notice to Borrower, do any one
or more of the following: (i) Terminate its obligation to make loans to Borrower
as provided in Section 1 hereof; (ii) Declare all sums secured hereby
immediately due and payable; (iii) Immediately take possession of the Collateral
wherever it may be found, using all legally permissible means to do so, or
require Borrower to assemble the Collateral and make it available to Bank at a
place designated by Bank which is reasonably convenient to Borrower and Bank,
and Borrower waives all claims for damages due to or arising from or connected
with any such taking; (iv) Proceed in the foreclosure of Bank's security
interest and sale of the Collateral in any manner permitted by law, or provided
for herein; (v) Sell, lease or otherwise dispose of the Collateral at public or
private sale, with or without having the Collateral at the place of sale, and
upon terms and in such manner as Bank may determine, and Bank may purchase same
at any such sale; (vi) Retain the Collateral in full satisfaction of the
obligations secured thereby to the extent permitted under the Uniform Commercial
Code; or (vii) Exercise any remedies of a secured party under the Uniform
Commercial Code. Prior to any such disposition, Bank may, at its option, cause
any of the Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor by Bank shall
be repaid by Borrower and secured hereby. Bank shall have the right to enforce
one or more remedies hereunder successively or concurrently, and any such action
shall not estop or prevent Bank from pursuing any further remedy which it may
have hereunder or by law. If a sufficient sum is not realized from any such
disposition of the Collateral to pay all obligations
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secured by this Loan Agreement, Borrower hereby promises and agrees to pay Bank
any deficiency.
13. RECORDS RETENTION. If Borrower refuses to accept their return,
Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and
other types of documents and records submitted to Bank in connection with the
transactions contemplated herein at any time subsequent to four (4) months from
the time such items are delivered to Bank.
14. ATTORNEYS' FEES. Borrower agrees to reimburse Borrower for its
reasonable attorneys' fees and expenses incurred in connection with the
negotiation, preparation, execution and delivery of the Loan Documents.
15. GOVERNING LAW; JUDICIAL REFERENCE.
A. GOVERNING LAW. This Agreement shall be deemed to have been made
in the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
B. JUDICIAL REFERENCE.
(1) Other than (a) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (b) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Loan Agreement or the other Loan Documents, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"Claim Date" (defined as the date on which a party subject to this Loan
Agreement gives written notice to all other parties that a controversy, dispute
or claim exists), will be settled by a reference proceeding in California in
accordance with the provisions of Section 638 et seq. of the California Code of
Civil Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Loan Agreement, including whether such controversy, dispute or
claim is subject to the reference proceeding and except as set forth above, the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in the County where
the real property, if any, is located or Santa Clara County, if none (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his/her representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP (S) 170.6. The referee shall (x) be requested to set the matter
for hearing within sixty (60) days after the date of selection of the referee
and (y) try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date.
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Any decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP (S) 644 in any court in the State of
California having jurisdiction. Any party may apply for a reference proceeding
at any time after thirty (30) days following notice to any other party of the
nature of the controversy, dispute or claim by filing a petition for a hearing
and/or trial. All discovery permitted by this Loan Agreement shall be completed
no later than fifteen (15) days before the first hearing date established by the
referee. The referee may extend such period in the event of a party's refusal to
provide requested discovery for any reason whatsoever, including, without
limitation, legal objections raised to such discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to "priority" in
conducting discovery. Depositions may be taken by either party upon seven (7)
days written notice, and request for production or inspection of documents shall
be responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties. Pending
appointment of the referee as provided herein, the Superior Court is empowered
to issue temporary and/or provisional remedies, as appropriate.
(2) Except as expressly set forth in this Loan Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(3) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the judgment or any appealable order
or appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
(4) In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, (S) 1280 through (S) 1294.2
of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
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<PAGE>
16. CONFIDENTIALITY. Bank shall not disclose to any Person any
information with respect to Borrower or any of its Subsidiaries which is
furnished pursuant to this Loan Agreement and the other Loan Documents, except
that Bank may disclose any such information (a) to its own directors, officers,
employees, auditors, counsel and other professional advisors and to its
affiliates if Bank in its sole discretion determines that any such party should
have access to such information; (b) if such information is generally available
to the public; (c) if required or appropriate in any report, statement or
testimony submitted to any governmental authority having or claiming to have
jurisdiction over Bank, (d) if required or appropriate in response to any
summons or subpoena or in connection with any litigation, to the extent
permitted or deemed advisable by counsel; (e) to comply with any requirement or
law applicable to Bank; (f) to the extent necessary in connection with the
exercise of any right or remedy under any Loan Document; (g) to any participant
or assignee of Bank or any prospective participant or assignee, provided that
such participant or assignee or prospective participant or assignee agrees in
writing to be bound by this Section 16 prior to disclosure; or (h) otherwise
with the prior consent of Borrower; provided, however, that any disclosure made
in violation of this Loan Agreement shall not affect the obligations of Borrower
or any of its Subsidiaries under this Loan Agreement or the other Loan
Documents.
17. MISCELLANEOUS PROVISIONS.
A. Nothing herein shall in any way limit the effect of the conditions
set forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
B. No failure or delay on the part of Bank, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof.
C. All rights and remedies existing under this Loan Agreement or any
other Loan Document are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
D. All headings and captions in this Loan Agreement and any related
documents are for convenience only and shall not have any substantive effect.
E. This Loan Agreement may be executed in any number of counterparts,
each of which when so delivered shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument. Each such
agreement shall become effective upon
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<PAGE>
the execution of a counterpart hereof or thereof by each of the parties hereto
and telephonic notification that such executed counterparts has been received by
Borrower and Bank.
BANK: BORROWER:
IMPERIAL BANK SALON INTERNET, INC.,
a California corporation
By: /s/ Authorized Officer By: /s/ Authorized Officer
----------------------- ----------------------
Name: Authorized Officer Name: Authorized Officer
----------------------- ----------------------
Title: Title Title: Title
----------------------- ----------------------
LIST OF EXHIBITS AND SCHEDULES
Exhibit A: Definitions
Schedule 1 To Exhibit A: List of Specific Permitted Indebtedness
Schedule 2 To Exhibit A: List of Specific Permitted Liens
Exhibit B: Compliance Certificate
Exhibit C: Borrowing Base Certificate
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<PAGE>
EXHIBIT A
DEFINITIONS
"ACCOUNTS" means any right to payment for goods sold or leased, or to be
sold or to be leased, or for services rendered or to be rendered no matter how
evidenced, including accounts receivable, contract rights, chattel paper,
instruments, purchase orders, notes, drafts, acceptances, general intangibles
and other forms of obligations and receivables.
"APPROVED ACCOUNT" means one specific account debtor approved by Bank in
its sole and reasonable discretion.
"BORDERS ACCOUNT" means the Account of Borders, Inc., an account debtor of
Borrower.
"CAPITAL LEASE" means, as to any Person, any lease of any Property by such
Person as lessee that is, or should be in accordance with Financing Accounting
Standards Board Statement No. 13, classified and accounted for as a "capital
lease" on the balance sheet of such Person prepared in accordance with GAAP.
"CAPITAL LEASE OBLIGATION" means, with respect to any Capital Lease, the
amount of the obligation of the lessee thereunder that, in accordance with GAAP,
would appear on a balance sheet of such lessee in respect of such Capital Lease
or otherwise be disclosed in a note to such balance sheet.
"COLLATERAL" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest hereunder (including, without
limitation, the Accounts), or pursuant to the terms of the General Security
Agreement, the IP Security Agreement or otherwise.
"CONTINGENT OBLIGATION" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit in the ordinary
course of business), co-made or discounted or sold with recourse by that Person,
or in respect of which that Person is otherwise directly or indirectly liable,
including, without limitation, any such obligation for which that Person is in
effect liable through any agreement (contingent or otherwise) to purchase,
repurchase or otherwise acquire such obligation or any security therefor, or to
provide funds for the payment or discharge of such obligation (whether in the
form of loans, advances, capital stock purchases, capital contributions or
otherwise), or to maintain the solvency of the obligor of such obligation, or to
make payment for any products, materials or supplies or for any transportation,
services or lease regardless of the non-delivery or non-furnishing thereof, in
any such case if the purpose or intent of such agreement is to provide assurance
that such obligation will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such obligation will be
protected (in whole or in part) against loss in respect thereof. The amount of
any Contingent Obligation of any Person shall be deemed to be an amount equal to
the maximum amount of such Person's liability with
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<PAGE>
respect to the stated or determinable amount of the primary obligation for which
such Contingent Obligation is incurred or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof (assuming such
Person is required to perform thereunder).
"ELIGIBLE ACCOUNTS" means such of Borrower's Accounts and the Borders
Account, as Bank in its sole reasonable discretion shall determine are eligible
from time to time; provided, however, that in no event shall Eligible Accounts
include the following:
(1) all Accounts under which payment is not received within 90 days from
the applicable invoice date;
(2) all Accounts against which the account debtor or any other Person
obligated to make payment thereon asserts any defense, offset, counterclaim or
other right to avoid or reduce the liability represented by the Accounts to the
extent of such defense, offset or counterclaim;
(3) any Accounts if the account debtor or any other Person liable in
connection therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or whose
credit standing is unacceptable to Bank and Bank has so notified Borrower;
(4) Accounts with respect to which the account debtor is an officer,
director, shareholder, employee or Subsidiary;
(5) Accounts due from an account debtor if more than twenty-five percent
(25%) of the aggregate amount of Accounts of such account debtor have at that
time remained unpaid for more than ninety (90) days from the applicable invoice
date;
(6) Accounts with respect to international transactions unless either (a)
such Accounts are insured or covered by a letter of credit in a manner and form
acceptable to the Bank or (b) Bank shall have otherwise permitted in writing in
its sole and absolute direction;
(7) salesperson's accounts for promotional purposes;
(8) the amount by which the aggregate of all Accounts of an account debtor
exceeds twenty percent (20.0%) of the total accounts receivable balance
("Concentration Limit"); provided, however, the Concentration Limit for the
Approved Account shall be forty percent (40.0%);
(9) Accounts where the account debtor is a seller to borrower, to the
extent that a potential offset exists;
(10) Accounts where the account debtor is a federal governmental entity,
federal agency or instrumentality thereof.
(11) the amount by which the aggregate of the Border's Account exceeds
Fifty Thousand Dollars ($50,000.00) during any calendar month; and
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<PAGE>
(12) unless otherwise permitted by Bank, the entire Borders Account, if it
is determined upon Bank's review of the Borrowing Base Certificate that the
minimum number of monthly "book impressions" required to be provided by Borrower
to Borders pursuant to the terms of that certain Definitive Agreement for
Proposed Relationship entered into as of July 31, 1997, have not been met by
Borrower.
"EQUIPMENT LOAN MATURITY DATE" has the meaning set forth in Section 1.B.
"EVENT OF DEFAULT" has the meaning set forth in Section 12.
"GENERAL SECURITY AGREEMENT" means that certain General Security Agreement
(Tangible and Intangible Personal Property) dated as of April 14, 1997, made by
Borrower in favor of Bank.
"INDEBTEDNESS" means, as to any Person, without duplication, (a) all
indebtedness of such Person for borrowed money, including, without limitation,
all of such indebtedness outstanding under this Loan Agreement and any of the
other Loan Documents, (b) all Capital Lease Obligations of such Person, (c) to
the extent of the outstanding indebtedness thereunder, any obligation of such
Person representing an extension of credit to such Person, whether or not for
borrowed money, (d) any obligation of such Person for the deferred purchase
price of Property or services (other than (i) trade or other accounts payable in
the ordinary course of business in accordance with customary industry terms and
(ii) deferred franchise fees), (e) all Contingent Obligations, (f) any
obligation of such Person of the nature described in clauses (a), (b), (c), (d)
or (e) above, that is secured by a Lien on assets of such Person and which is
non-recourse to the credit of such Person, but only to the extent of the fair
market value of the assets so subject to the Lien, (g) obligations of such
Person arising under acceptance facilities or under facilities for the discount
of accounts receivable of such Person, (h) any obligation of such Person to
reimburse the issuer of any letter of credit issued for the account of such
Person upon which a draw has been made, and (i) any lease having the effect of
indebtedness, whether or not the same shall be treated as such on the balance
sheet of Borrower under GAAP.
"IP SECURITY AGREEMENT" means that certain Collateral Assignment, Patent
Mortgage and Security Agreement dated of even date herewith, made by Borrower in
favor of Bank.
"LIEN" means any mortgage, pledge, security interest, lien or other charge
or encumbrance, including the lien or retained security title of a conditional
vendor, upon or with respect to any property or assets.
"LOAN ACCOUNT OR LOAN ACCOUNTS" means individually and collectively, the
Revolving Loan Account, and the Equipment Loan Account.
"LOAN DOCUMENTS" means this Loan Agreement, the General Security Agreement,
the IP Security Agreement, the Warrants to Purchase Stock, the Subordination
Agreement and that certain Agreement to Provide Insurance (Real or Personal
Property) dated of even date herewith, each as executed by Borrower in favor of
Bank, together with all other documents entered into or
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<PAGE>
delivered pursuant to any of the foregoing, in each case as originally executed
or as the same may from time to time be modified, amended, supplemented or
restated.
LOANS" means individually and collectively, the Revolving Loans and the
Equipment Loans advanced pursuant to Section 1.
"MATERIAL ADVERSE EFFECT" means any set of circumstances or events which
(a) has or could reasonably be expected to have any material adverse effect upon
the validity or enforceability of any material provision of any Loan Document,
(b) is or could reasonably be expected to be material and adverse to the
condition (financial or otherwise) or business operations of Borrower, (c)
materially impairs or could reasonably be expected to materially impair the
ability of Borrower, to perform its material Obligations, (d) materially impairs
or could reasonably be expected to materially impair the value or priority of
Bank's security interest in any Collateral or (e) materially impairs or could
reasonably be expected to materially impair the ability of Bank to enforce any
of its legal remedies pursuant to the Loan Documents.
"PERMITTED INDEBTEDNESS" means the following:
(1) indebtedness of Borrower or Indebtedness and Contingent Obligations of
its Subsidiaries in favor of Bank arising under this Loan Agreement and the
other Loan Documents;
(2) the existing Indebtedness and Contingent Obligations disclosed on
Schedule 1 attached hereto and incorporated herein by this reference; provided
that the principal amount thereof is not increased and the terms thereof are not
modified to impose more burdensome terms upon Borrower or any of its
Subsidiaries;
(3) the Subordinated Debt;
(4) extensions, renewals or refinancings of Indebtedness permitted under
this Loan Agreement, other than clause (3) immediately above;
(5) accrued dividends on the preferred stock of Borrower;
(6) Indebtedness and Contingent Obligations as permitted under this Loan
Agreement;
(7) interest rate and currency hedging agreements;
(8) guaranties of any Subsidiary's suppliers in connection with the
purchase of supplies in the ordinary course of business;
(9) guaranties of lease obligations incurred in the ordinary course of
business and to the extent otherwise permitted hereunder;
(10) Contingent Obligations constituting Permitted Liens; and
(11) the indebtedness referred to in clause (3)(a) of the definition of
Permitted Liens.
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<PAGE>
"PERMITTED LIENS" means the following:
(1) liens and security interests existing as of this date and disclosed in
Schedule 2 attached hereto and incorporated herein by this reference;
(2) liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings;
(3) liens and security interests (a) upon or in any equipment acquired or
held by Borrower to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition of such equipment
and in an amount not greater than the purchase price thereof or (b) existing on
such equipment at the time of its acquisition, provided that the lien and
security interest is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment;
(4) liens consisting of leases or subleases and licenses and sublicenses
granted to others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and any interest or title
of a lessor or licensor under any lease or license, as applicable;
(5) liens securing claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like persons or entities imposed without
action of such parties, provided that the payment thereof is not yet required;
(6) liens incurred or deposits made in the ordinary course of Borrower's
business in connection with worker's compensation, unemployment insurance,
social security and other like laws;
(7) liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default;
(8) 1easements, reservations, rights-of-way, restrictions, minor defects
or irregulatories in title and other similar charges or encumbrances affecting
real property not interfering in any material respect with the ordinary conduct
of Borrower's business;
(9) liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the importation of
goods;
(10) liens that are not prior to Bank's security interest which constitute
rights of set-off of a customary nature;
(11) any interest or title of a lessor in equipment subject to any
Capitalized Lease otherwise permitted hereunder; and
(12) any liens arising from the filing of any financing statements relating
to true leases otherwise permitted hereunder.
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<PAGE>
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, public benefit corporation, firm, joint stock
company, estate, entity or governmental agency.
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed, whether tangible or intangible.
"REVOLVING LOAN MATURITY DATE" has the meaning set forth in Section 1.A.
"SUBORDINATED DEBT" means indebtedness of Borrower, the repayment of
principal of which is fully subordinated in time and right of payment to the
Loans, and has been approved in Bank's sole and absolute discretion and in
writing.
"WARRANTS TO PURCHASE STOCK" means collectively, that certain Warrant to
Purchase Stock issued on April 14, 1997 by Borrower to Bank in connection with
the Other Loan Agreement and that certain Warrant to Purchase Stock issued as of
the date hereof by Borrower to Bank in connection herewith.
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<PAGE>
SCHEDULE 1 To EXHIBIT A
SPECIFIC PERMITTED INDEBTEDNESS
<PAGE>
SCHEDULE 2 To EXHIBIT A
SPECIFIC PERMITTED LIENS
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
The consolidated financial statements dated as of
______________________________ of Salon Internet, Inc., a California corporation
("Borrower") attached hereto and submitted to Imperial Bank ("Bank") pursuant to
that certain Loan Agreement dated as of April 13, 1998, entered into between
Borrower and Bank (the "Loan Agreement"), are in compliance with all financial
covenants (unless otherwise noted below) as specified in Section 10 therein, as
follows:
COVENANT: ACTUAL:
A. MINIMUM TANGIBLE NET WORTH OF:
-----------------------------
$500,000.00 through July 31, 1998
$4,000,000 thereafter
B. MAXIMUM LIABILITIES TO TANGIBLE NET WORTH RATIO:
-----------------------------------------------
1.50:1.00 through July 31, 1998
2.00:1.00 thereafter
C. MINIMUM QUICK RATIO:
-------------------
1.25:1.00 through July 31, 1998
2.00:1.00 thereafter
Exceptions: (if none, so state):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
The undersigned authorized officer of Borrower hereby certifies that Borrower is
in complete compliance with the terms and conditions of the Loan Agreement for
the period ending _______________, _____, and as of the date of this Compliance
Certificate the representations and warranties stated therein are true, accurate
and complete as of the date hereof (except as to those representations and
warranties which specifically reference a particular date and except as noted
above).
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<PAGE>
The undersigned further certifies that s/he knows of no pending conditions which
may cause an Event of Default (as defined in the Loan Agreement) to exist in the
next thirty (30) days. The required support documents for this certification
are attached and prepared in accordance with GAAP consistently applied.
Date: ______________________ SALON INTERNET, INC.,
a California corporation
By:_________________________
Name:_______________________
Title:______________________
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<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
(To be provided and attached by Bank)
<PAGE>
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
Borrower: SALON INTERNET, INC. Date: April 13, 1998
$ paid to you directly by Cashiers Check No.
$ 1,000,000.00 (maximum aggregate amount) credited to deposit
Account No. 20-002-379 (when advances are
requested from the revolving loan commitment)
$ 30,000.00 credited to deposit Account No. 20-002-379 (from
undisbursed proceeds from the equipment loan
commitment)
$ paid on Loan(s) No.
$ amounts paid to Bank for:
Amounts paid to others on your behalf:
-------------------------------------
$ to ______________________________ Title Insurance
Company
$ to Public Officials
$ to
$ to
$ to
$ to
$ 1,300,000.00 SUBTOTAL (LOAN AMOUNT)
LES $ 0.00 Prepaid Finance Charge (Loan Fee)
$ 1,300,000.00 TOTAL (AMOUNT FINANCED)
Upon consummation of this transaction, this document will also serve as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
<PAGE>
SALON INTERNET, INC.,
a California corporation
By:_______________________________
Printed Name:_____________________
Title:____________________________
<PAGE>
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE)
THIS SECURITY AND LOAN AGREEMENT (Accounts Receivable) is entered into as
of April 14, 1997 (this "Loan Agreement") between SALON, INTERNET, INC., a
California corporation (herein called "Borrower") and IMPERIAL BANK (herein
called "Bank").
1. COMMITMENT. Bank hereby commits, subject to all the terms and
conditions of this Loan Agreement and prior to the termination of its commitment
as hereinafter provided, to make loans to Borrower from time to time in such
amounts as may be determined by Bank up to, but not exceeding, an aggregate
unpaid principal balance of $500,000.00 (the "Commitment Amount"). All loans
advanced pursuant to Sections 1A and 1B hereof, shall be referred to
collectively as "Loans". If, at any time or for any reason, the outstanding
principal amount of the Loan is greater than the Commitment Amount, Borrower
shall immediately pay to Bank, in cash, the amount of such excess. Any
commitment of Bank, pursuant to the terms of this Loan Agreement, to make (a)
Equipment Advances shall expire on the Equipment Availability End Date and (b)
Working Capital Advances shall expire on the Working Capital Maturing Date (as
said terms are hereinafter defined), subject to Bank's right to renew said
commitment in its sole and absolute discretion. Any such renewal of said
commitment shall not be binding upon Bank unless it is in writing and signed by
an officer of Bank. The outstanding principal balance of the Loans may be
prepaid in whole or in part at any time without penalty. Except for the
principal payments required hereunder, any partial prepayment of principal will
be applied to the Loans in inverse order of maturity. Provided that no Event
Default has occurred and is continuing, all or any portion of the Loans advanced
by Bank for Working Capital Advances which are repaid by Borrower shall be
available for reborrowing in accordance with the terms hereof. Equipment
Advances which are repaid by Borrower may not be reborrowed.
A. EQUIPMENT ADVANCES. At any time from the date hereof through
September 30, 1997 (the "Equipment Availability End Date"), Borrower may from
time to time request advances (each an "Equipment Advance" and collectively,
"Equipment Advances") from Bank in an aggregate amount not to exceed the
Commitment Amount less the outstanding balance under the Working Capital Loan
Account (as hereinafter defined). When Borrower desires to obtain an Equipment
Advance, Borrower shall notify Bank (which notice shall be irrevocable) in
accordance with Section 2 hereof, to be received no later than 3:00 p.m. pacific
time one (1) business day before the day on which the Equipment Advance is to be
made. The notice shall be signed by an officer of Borrower and include a copy of
the invoice for the equipment to be financed. Equipment Advances may only be
used to purchase equipment and will be limited to one hundred percent (100%) of
the invoice amount for such equipment, approved from time to time by Bank, less
any taxes, shipping and freight charges or discounts, warranty charges,
installation expenses and other soft costs, as may be reasonably identified by
Bank from time to time. The amount of each Equipment Advance shall be debited to
the loan ledger account of Borrower maintained by Bank with respect to Equipment
Advances (herein called the "Equipment Loan Account") and Bank shall credit Bank
the outstanding unpaid
1
<PAGE>
principal balance (and all accrued unpaid interest thereon) of the Equipment
Loan Account on March 31, 2000 (the "Equipment Maturity Date").
(i) INTEREST PAYMENTS PRIOR TO EQUIPMENT AVAILABILITY END DATE.
Borrower further promises to pay to Bank from the date of the initial Equipment
Advance through the Equipment Availability End Date, on or before the tenth
(10th) day of each month, and each month thereafter through and including a
payment on October 10, 1997, interest on the average daily unpaid balance of the
Equipment Loan Account during the immediately preceding month at the rate of
interest per annum which Bank has announced as its prime lending rate (the
"Prime Rate"), which shall vary concurrently with any change in the Prime Rate.
Interest shall be computed at the above rate on the basis of the actual number
of days during which the principal balance of the Equipment Loan Account is
outstanding divided by 360, which shall for interest computation purposes be
considered one (1) year.
(ii) PRINCIPAL REPAYMENT AND INTEREST PAYMENTS FOLLOWING
EQUIPMENT AVAILABILITY END DATE. Borrower further promises to pay to Bank, on or
before November 10, 1997 and on or before the tenth (10th) day of each month
thereafter through the Equipment Maturity Date, (a) the outstanding unpaid
principal balance of the Equipment Loan Account on the Equipment Availability
End Date in equal monthly Installments plus (b) interest on the average daily
unpaid balance of the Equipment Loan Account accruing from and after October 1,
1997, during the immediately preceding month at the rate of one-half one percent
(0.5%) per annum in excess of the Prime Rate, which shall vary concurrently with
any change in the Prime Rate. Interest shall be computed at the above rate on
the basis of the actual number of days during which the principal balance of the
Equipment Loan Account is outstanding divided by 360, which shall for interest
computation purposes be considered one (1) year.
B. WORKING CAPITAL ADVANCES. At any time from the date hereof and
prior to three hundred sixty-four (364) days from the date thereof ("Working
Capital Maturity Date"), Borrower may from time to time request advances (each a
"Working Capital Advance" and collectively, "Working Capital Advances") from
Bank in an aggregate amount not to exceed the Commitment Amount less the then
outstanding balance of the Equipment Loan Account. When Borrower desires to
obtain a Working Capital Advance, Borrower shall notify Bank (which notice shall
be signed by an officer of Borrower and shall be irrevocable) in accordance with
Section 2 hereof, to be received no later than 3:00 p.m. Pacific time one (1)
business day before the day on which the Working Capital Advance is to be made.
Working Capital Advances may only be used for general corporate and working
capital purposes. The amount of each Working Capital Advances (herein called the
"Working Capital Loan Account") and Bank shall credit the Working Capital Loan
Account with all loan repayments in respect thereof made by Borrower. Borrower
promises to pay to Bank the outstanding unpaid principal balance (and all
accrued unpaid interest thereon) of the Working Capital Loan Account on the
Working Capital Maturing Date.
(i) INTEREST. Borrower further promises to pay to Bank from the
date of the initial Working Capital Advance through the Working Capital Maturity
Date, on or before the tenth (10th) day of each month, and each month thereafter
interest on the average daily
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<PAGE>
unpaid balance of the Working Capital Loan Account during the immediately
preceding month at the rate of interest per annum equal to the Prime Rate, which
shall vary concurrently with any change in the Prime Rate. Interest shall be
computed at the above rate on the basis of the actual number of days during
which the principal balance of the Working Capital Loan Account is outstanding
divided by 360, which shall for interest computation purposes be considered one
(1) year.
2. LOAN REQUESTS. Requests for Loan hereunder shall be in writing duly
executed by Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in Section 1 hereof, which
shall disclose that Borrower is entitled to the amount of Loan being requested.
3. DELIVERY OF PAYMENTS. Payment to Bank of all amounts due hereunder
shall be made at its Santa Clara Valley Regional offices, or at such other place
as may be designated in writing by Bank from time to time.
4. LATE CHARGE. If any interest payment, principal payment or principal
balance payment required hereunder is not received by Bank on or before ten (10)
days from the date in which such payment becomes due, Borrower shall pay to
Bank, a late charge equal to the lesser of (a) a five percent (5.0%) of the
amount of such unpaid payment, in addition to such unpaid payment or (b) the
maximum amount permitted to be charged by applicable law, until remitted to
Bank; provided; however, nothing contained in this Section 4, shall be construed
as any obligation on the part of Bank to accept payment of any past due payment
or less than the total unpaid principal balance of the Working Capital Loan
Account or the Equipment Loan Account following the Working Capital Maturity
Date and Equipment Maturity Date, respectively. All payments shall be applied
first to any late charges due hereunder, next to accrued interest then payable
and the remainder, if any, to reduce any unpaid principal due under the Working
Capital Loan Account or the Equipment Loan Account, as applicable.
5. DEFAULT INTEREST. From and after the Working Capital Maturity Date
and/or the Equipment Maturity Date, as applicable, or such earlier date as all
sums owing under the Working Capital Loan Account and/or the Equipment Loan
Account become due and payable by acceleration or otherwise, or upon the
occurrence and continuance of an Event of Default, all sums owing under the
Working Capital Loan Account and/or the Equipment Loan Account, as applicable,
shall at the option of Bank, bear interest until paid in full at a rate equal to
the lesser of (a) five percent (5.0%) per annum in excess of the then applicable
interest rate provided for in Section 1(A)(i), 1A(ii) or 1B(i) hereof, as
applicable, or (b) the maximum amount permitted to be charged by applicable law,
until all obligations hereunder are repaid in full or the Event of Default is
waived or cured to the satisfaction of Bank, as applicable.
6. DEFINITIONS. As used in this Loan Agreement and unless otherwise
defined herein, all initially capitalized terms shall have the meanings set
forth on Exhibit A attached hereto and incorporated herein by reference.
7. ASSIGNMENT OF ACCOUNTS. Borrower hereby assigns to Bank all of
Borrower's present and future Accounts, including all proceeds due thereunder,
all guaranties and security
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therefor, and hereby grants to Bank a continuing security interest in all moneys
collected as contemplated under Section 8 hereof, as security for any and all
obligations of Borrower to Bank, whether now owing or hereunder incurred and
whether direct, indirect, absolute or contingent. So long as Borrower is
indebted to Bank or Bank is committed to extend credit to Borrower and there
shall exist and be continuing and Event of Default, Borrower will execute and
deliver to Bank such assignments, including Bank's standard forms of Specific or
General Assignment covering individual Accounts, notices, financing statements,
and other documents and papers as Bank may required in order to affirm,
effectuate or further assure the assignment to Bank of the Collateral or to give
any third party, including the account debtors obligated on the Accounts, notice
of Bank's interest in the Collateral. Notwithstanding the foregoing, so long as
no Event of Default has occurred and is continuing, Borrower shall be entitled
to use the proceeds of such Accounts in the ordinary course of its business.
8. COLLECTION OF ACCOUNTS. Until Bank exercises its rights to collect the
Accounts pursuant to Section 17 hereof, Borrower will collect with diligence all
Borrower's Accounts. Any collection of Accounts by Borrower, whether in the form
of cash, checks, notes, or other instruments for the payment of money (properly
endorsed or assigned where required to enable Bank to collect same), shall be in
the trust for Bank. If an Event of Default has occurred, Borrower shall keep all
such collections separate and apart from all other funds and property so as to
be capable of indemnification as the property of Bank and deliver said
collections daily to Bank in the identical from received. The proceeds of such
collections when received by Bank may be applied by Bank directly to the payment
of the Loan Account or to any other obligation secured hereby. Any credit given
by Bank upon receipt of said proceeds shall be conditional credit subject to
collection. Returned items at Bank's option may be charged to Borrower's deposit
account with Bank. All collections of the Accounts shall be set forth on an
itemized schedule, showing the name of the account debtor, the amount of each
payment and such other information as Bank may request.
9. RETURNS AND ADJUSTMENTS. Until Bank exercises its rights to collect
the Accounts pursuant to Section 17 hereof, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However, Borrower
shall immediately notify Bank of all cases involving repossessions, and material
loss or damage of or to merchandise represented by the Accounts.
10. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Bank: (a) that Borrower is a corporation, duly organized and existing in the
State of its incorporation and the execution, delivery and performance of each
of the Loan Documents are within Borrower's corporate powers, have been duly
authorized and are not in conflict with law or the terms of any charter, by-law
or other incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is bound or affected; (b)
Borrower is, and at the time the Collateral becomes subject to Bank's security
interest will be, the true and lawful owner of and has, and at the time the
Collateral becomes subject to Bank's security interest will have, good and clear
title to the Collateral, subject only to Bank's rights therein and to Permitted
Liens; (c) each Account is, all at the time the Account comes into existence
will be, a true and correct statement of a bona fide indebtedness incurred by
the debtor
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named therein in the amount of the Account for either merchandise sold or
delivered (or being held subject to Borrower's delivery instructions) to, or
services rendered, performed and accepted by, the account debtor, (d) that to
the best of Borrower's knowledge, there are and will be no material defenses,
counterclaims, or setoffs which may be asserted against the Accounts from time
to time, except as permitted in the definition thereof; (e) any and all
financial information, including information relating to the Collateral,
submitted by Borrower to Bank, whether previously or in the future, is and will
be true and correct; (f) there is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or deemed of any court or other
governmental or regulatory authority; (g) (i) the consolidated and consolidating
profit and loss statements for the 11-month period ended February 28, 1997, and
the related balance sheet for the fiscal month ended February 28, 1997, copies
of which have been delivered to Bank by Borrower, and all other statements and
data submitted in writing by Borrower to Bank in connection with Borrower's
request for credit are true and correct, and said balance sheet and profit and
loss statement accurately present and financial condition of Borrower as of the
date thereof and the results of the operations of Borrower for the period
covered thereby, and have been prepared in accordance with GAAP, (ii) since such
date, there have been no material adverse changes in the financial conditions of
Borrower, and (iii) Borrower has no knowledge of any liabilities, contingent or
otherwise, which are not reflected in said balance sheet, and Borrower has not
entered into any special commitments or substantial contracts which are not
reflected in said balance sheet, other than in the ordinary and normal course of
its business, which may have a Materially Adverse Effect upon its financial
condition, operations or business as now conducted; (h) Borrower has no
liability for any delinquent local, state or federal taxes, and, if Borrower has
contracted with any government agency, it has no liability for renegotiation of
profits; and (i) Borrower, as of the date hereof, possesses all necessary
trademarks, trade names, copyrights, patents, patent rights, and licenses to
conduct its business as now operated, without any known conflict with valid
trademarks, trade names, copyrights, patents, patent rights and license rights
of others.
11. NEGATIVE COVENANTS. Borrower agrees that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank or the
commitment of Bank hereunder is in effect, neither Borrower, nor any of its
Subsidiaries (as hereinafter defined), will without the prior written consent of
Bank;
A. Make any substantial change in the character of its business as
now conducted.
B. Create, incur, assume or permit to exist any Indebtedness other
than loans from Bank except obligations now existing as shown in the financial
statements described in Section 10(g)(i) hereof, excluding those being
refinanced by Bank, Subordinated Debt or Permitted Indebtedness; or sell or
transfer, either with or without recourse, any accounts or notes receivable or
any monies due or become due.
C. Create, incur, assume or permit to exist any mortgage, pledge,
encumbrance, lien or charge of any kind (including charge upon property at any
time purchased
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or acquired under conditional sale or other title retention agreement) upon any
asset now owned or hereafter acquired by it, other than Permitted Liens and
liens in favor of Bank.
D. Sell, dispose of or grant a security interest in any of the
Collateral other than to Bank (other than the disposing of such Collateral in
the ordinary and normal course of its business as now conducted or other assets
which are obsolete or otherwise considered surplus), or execute any financing
statements covering the Collateral in favor of any secured party of Person other
than Bank.
E. Make any loans or advances to any Person or other entity other
than in the ordinary and normal course of its business as now conducted or as
reasonably conducted under standard industry practices for businesses similar to
Borrower's (provided that such loans or advances are not made to any Person or
entity which is controlled by or under common control with Borrower) or make any
investment in the securities of any Person or other entity other than the United
States Government.
F. Purchase or otherwise acquire all or substantially all of the
assets or business of any Person or other entity; or liquidate, dissolve, merge
or consolidate, or commence any proceedings therefore, or, except in the
ordinary and normal course of its business as now conducted or as reasonably
conducted under standard industry practices for businesses similar to
Borrower's, sell (including, without limitation, the selling of any property or
other asset accompanied by the leasing back of the same) any assets including
any fixed assets, any property, or other assets necessary for the continuance of
its business as now conducted.
G. Declare or pay any dividend or make any other distribution on any
of its capital stock now outstanding or hereafter issued or purchase, redeem or
retire any of such stock other than in dividends or distributions payable in
Borrower's or any such Subsidiary's capital stock. Notwithstanding the
foregoing, Borrower may redeem or repurchase its capital stock in connection
with any agreement entered into in the ordinary course of its business with any
of its officers, directors, employees or consultants wherein Borrower is
obligated or entitled to repurchase from such officer, director, employee or
consultant shares of Borrower's capital stock upon the termination of such
person's employment with or services provided to Borrower.
12. AFFIRMATIVE COVENANTS. Borrower affirmatively covenants that so
long as any loans, obligations or liabilities remain outstanding or unpaid to
Bank or the commitment of Bank hereunder is in effect, it will:
A. Furnish Bank from time to time such financial statements and
information as Bank may reasonably request and inform Bank immediately upon the
occurrence of a material adverse change therein;
B. Upon five (5) days prior notice to Borrower, permit
representative of Bank to inspect Borrower's books and records relating to the
Collateral and make extracts therefrom at any reasonable time, provided that
Bank shall use its best efforts to not interfere with the conduct of Borrower's
business, and to arrange for verification of the Accounts, under reasonable
procedures, acceptable to Bank, directly with the account debtors or otherwise
at Borrower's
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<PAGE>
reasonable cost and expense provided, however, so long as no Event of Default
has occurred and its continuing, such inspections shall not be conducted more
than semi-annually by Bank.
C. Promptly notify Bank, upon any officer becoming aware, of any
attachment or other legal process levied against any of the Collateral and any
information received by Borrower relative to the Collateral, including the
Accounts, the account debtors or other Persons obligated in connection
therewith, which may in any way have a Material Adverse Effect On the value of
the Collateral or the rights and remedies of Bank in respect thereto as
determined by Bank in its reasonable discretion;
D. Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any sums
payable by Borrower under the Loan Account or any other obligation secured
hereby, enforcing any term or provision of this Loan Agreement or otherwise or
in the checking, handling and collection of the Collateral and the preparation
and enforcement of any agreement relating thereto;
E. Notify Bank of each location and of each office of Borrower at
which records of Borrower relating to the Accounts are kept;
F. Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms and
companies as Bank may required (to the extent customarily maintained by business
similar to Borrower) and with loss payable to Bank, and, in the event Bank takes
possession of the Collateral, the insurance policy or policies and any unearned
or returned premium thereon shall at the option of Bank becomes the sole
property of Bank, such policies and the proceeds of any other insurance covering
or in any way relating to the Collateral, whether now in existence or hereafter
obtained, being hereby assigned to Bank;
G. In the event the unpaid balance of the Equipment Loan Account
and/or the Working Capital Loan Account shall exceed the maximum amount of
outstanding loans to which Borrower is entitled under Section 1 hereof, as
applicable, Bank shall promptly notify Borrower of such excess and Borrower
shall immediately pay to Bank for credit to such Loan Account the amount of such
excess;
H. Maintain and preserve all rights, franchises and other authority
adequate and necessary for the conduct of its business and maintain and preserve
its existence in the State of its incorporation and any other state(s) in which
Borrower conducts its business, except with respect to such other state(s), as
the failure to do so would not have a Material Adverse Effect;
I. Maintain public liability, property damage and workers
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to Bank, and certificates naming Bank
as a loss payee;
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<PAGE>
J. Pay and discharge, before the same becomes delinquent and before
penalties accrue thereon, all taxes, assessments and governmental charges upon
or against it or any of its properties, and any of its other liabilities at any
time existing, except to the extent and so long as: (i) the same are being
contested in good faith and by appropriate proceedings in such manner as not to
cause any Materially Adverse Effect or the loss of any right of redemption from
any sale thereunder; and (ii) it shall have set aside on its books reserves
(segregated to the extent required by GAAP);
K. Maintain a standard and modern system of accounting in accordance
with GAAP on a basis consistently maintained. Upon five (5) days prior notice
to Borrower; permit Bank's representatives to have access to, and to examine its
properties, books and records at all reasonable times, provided that Bank shall
use its best efforts to not interfere with the conduct of Borrower's business;
provided, however, so long as no Event of Default has occurred and is
continuing, such examinations shall not be conducted more than semi-annually by
Bank; and
L. Maintain its properties, equipment and facilities in good order
and repair.
13. FINANCIAL COVENANTS AND INFORMATION. All financial covenants and
financial information referenced herein shall be interpreted and prepared in
accordance with GAAP as used in the United States of America applied on a basis
consistent with previous years. Compliance with financial covenants shall be
calculated and monitored on a monthly basis, except as shall be expressly stated
to the contrary. Borrower affirmatively covenants that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank, it will, on a
consolidated basis:
A. At all times, maintain a minimum tangible net worth (meaning all
assets, excluding any value for goodwill, trademarks, patents, copyrights,
organization expense and other similar intangible items, less all liabilities,
plus Subordinated Debt) or not less than $1,000,000.
B. As soon as it is available, but not later than thirty (30) days
after and as of the end of each month, deliver to Bank a financial statement
consisting of a balance sheet and profit and loss statement in the form
satisfactory to Bank, and a Compliance Certificate in the form of Exhibit B
attached hereto and incorporated herein by this reference, certified by an
officer of Borrower.
C. As soon as it is available, but not less than ninety (90) days
after the end of Borrower's fiscal year, deliver to Bank copies of Borrower's
consolidated financial statements together with changes in financial position
reviewed by an independent certified public accountant selected by Borrower, but
acceptable to Bank.
D. As soon as it is available, but not later than thirty (30) days
after and as of the end of each month, deliver to Bank, in such form and detail
as Bank may require, statements showing aging of the Accounts and Borrower's
accounts payable.
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<PAGE>
E. Upon the reasonable request of Bank, deliver to Bank current
budgets, sales projections, operating plans and other financial exhibits and
information in form and substance satisfactory to Bank.
F. Upon any officer becoming aware, deliver immediately to Bank
written notice of any pending or threatened litigation claiming, or reasonably
likely to result in, damages against Borrower in an amount in excess of
$50,000.00.
14. LOAN FEE. [INTENTIONALLY DELETED]
15. BANKING RELATIONSHIP. Borrower will maintain its primary
accounts with Bank.
16. DEFAULT AND REMEDIES. The occurrence of any one or more of the
following shall constitute an "Event of Default": (a) default be made in the
payment of any obligation by Borrower under any Loan Document; (b) subject to
clause (a) above, breach be made in any warranty, statement, promise, term or
condition, contained herein or in any other Loan Document and the same shall not
have been cured to the satisfaction of Bank within fifteen (15) days after
Borrower shall have become aware thereof, whether by written notice from Bank,
or otherwise, (except that no cure period shall exist for breaches in respect of
Borrower's obligations under Section 11, Subsections 12A, B, C, F, G, H and I,
Subsections 13A, B, C and D of this Loan Agreement, and Sections 1 and 2 of the
General Security Agreement); (c) any statement, warranty or representation made
by Borrower at any time proves false as of date such statement, warranty or
representation is made which has a Material Adverse Effect; (d) Borrower
defaults in the repayment of any principal of or the payment of any interest on
any indebtedness exceeding in the aggregate principal amount $10,000.00 or
breaches or violates any term or provision of any promissory note, loan
agreement, mortgage, indenture or other evidence of such indebtedness pursuant
to which amounts outstanding in the aggregate exceed $10,000.00 if the effect of
such breach is to permit the acceleration of such indebtedness, whether or not
waived by the note holder or obligee, and such failure shall not have been cured
to Bank's satisfaction within fifteen (15) calendar days after Borrower shall
become aware thereof, whether by written notice from Bank or otherwise, or there
has in fact been an acceleration of such indebtedness; (e) Borrower becomes
insolvent or makes an assignment for the benefit of creditors; (f) any
proceeding be commenced by Borrower under any bankruptcy, reorganization,
arrangement, readjustment of debt or moratorium law or statute or, any such a
proceeding is commenced against Borrower and is not dismissed or stayed within
thirty (30) days (provided that no Loans will be made prior to the dismissal of
such proceeding); (g) any material money judgment, writ of attachment,
garnishment, execution or other legal process be entered against Borrower or
issued against any material property of Borrower which is not fully covered by
insurance (subject to reasonable deductibles) and remains unvacated, unbonded,
unstayed or unpaid or undischarged for more than fifteen (15) days (whether or
not consecutive) or in any event later than five (5) days prior to the date of
any proposed sale thereunder, or if any assessment for taxes against Borrower
other than against any of its real property, is made by the Federal or State
government or any department thereof; or (h) any change in Borrower's financial
condition, prospects or operations which has a Material Adverse Effect. Upon
the occurrence and during the continuance of an event of Default, Bank may, at
its option and without demand first made and
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without notice to Borrower, do any one or more of the following: (i) terminate
its obligation to make loans to Borrower as provided in Section 1 hereof; (ii)
declare all sums secured hereby immediately due and payable; (iii) immediately
take possession of the Collateral wherever it may be found, using all necessary
force so to do, or require Borrower to assemble the Collateral and make it
available to Bank at a place designated by Bank which is reasonably convenient
to Borrower to assemble the Collateral and make it available to Bank at a place
designated by Bank which is reasonably convenient to Borrower and Bank, and
Borrower waives all claims for damages due to or arising from or connected with
any such taking; (iv) proceed in the foreclosure of Bank's security interest and
sale of the Collateral in any manner permitted by law, or provided for herein;
(v) sell, lease or otherwise dispose of the Collateral at public or private
sale, with or without having the Collateral at the place of sale, and upon terms
and in such manner as Bank may determine, and Bank may purchase same at any such
sale; (vi) retain the Collateral in full satisfaction of the obligations secured
thereby to the extent permitted under the Uniform Commercial Code; or (vii)
exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at its option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such extent as
Bank may deem advisable, and any sums expanded therefor by Bank shall be repaid
by Borrower and secured hereby. Bank shall have the right to enforce one or more
remedies hereunder successively or concurrently, and any such action shall not
estop or prevent Bank from pursuing any further remedy which it may have
hereunder or by law. If a sufficient sum is not realized from any such
disposition of the Collateral to pay all obligations secured by this Loan
Agreement, Borrower hereby promises and agrees to pay Bank any deficiency.
17. COLLECTION OF ACCOUNTS BY BANK. After and during the continuance
of an Event of Default Bank may, without prior notice to Borrower, collect the
Accounts and may give notice of assignment to any and all account debtors, and
after and during the continuance of an Event of Default, Borrower does hereby
make, constitute and appoint Bank its irrevocable, true and lawful attorney with
power (a) to receive, open and dispose of all mail addressed to Borrower, (b) to
endorse the name of Borrower upon any checks or other evidences of payment that
may come in the possession of Bank upon the Accounts, (c) to endorse the name of
Borrower upon any document or instrument relating to the Collateral, in its name
or otherwise, (d) to demand, sue for, collect and give acquaintances for any and
all moneys due or to become due upon the Accounts, (e) to compromise, prosecute
or defend any action, claim or proceeding with respect thereto and (f) to do any
and all things necessary and proper to carry out the purpose herein
contemplated.
18. RECORDS RETENTIONS. If Borrower refuses to accept their return,
Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and
other types of documents and records submitted to Bank in connection with the
transactions contemplated herein at any time subsequent to four (4) months from
the time such items are delivered to Bank.
19. NO ORIGINAL ISSUE DISCOUNT. Borrower and Bank hereby acknowledge
and agree that the warrant (the "Warrant") to purchase stock transferred to Bank
under the Warrant to Purchase Stock is part of an investment unit within the
meaning of Section 1273(c)(2) of the Internal Revenue Code which includes the
Loans. Borrower and Bank further agree as between
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Borrower and Bank, that the fair market value of the Warrant is equal to
US$1,000.00 and that, pursuant to Treas. Reg. (S) 1.1273-2(h). US$1,000.00 of
the issue price of the investment unit will be allocable to the Warrant and the
balance shall be allocable to the Loans. Borrower and Bank agree to prepare
their federal income tax returns in a manner consistent with the foregoing
agreement, pursuant to Treas. Reg. (S) 1.1273, the original issue discount on
the Loans shall be considered to be zero.
20. CONFIDENTIALITY. Bank shall not disclose to any Person any information
with respect to Borrower or any of its Subsidiaries which is furnished pursuant
to this Loan Agreement or any other Loan Document, except that Bank may disclose
any such information (a) to its own directors, officers, employees, auditors,
counsel and other professional advisors and to its affiliates if Bank in its
sole discretion determines that any such party should have access to such
information; (b) if such information is generally available to the public; (c)
if required or appropriate in any report, statement or testimony submitted to
any governmental authority having or claiming to have jurisdiction over Bank;
(d) if required or appropriate in respect to any summons or subpoena or in
connection with any litigation, to the extent permitted or deemed advisable by
counsel; (e) to comply with any requirement or law applicable to Bank; (f) to
the extent necessary in connection with the exercise of any right or remedy
under any Loan Document; (g) to any participant or assignee of Bank or any
prospective participant or assignee, provided that such participant or assignee
or prospective participant or assignee agrees in writing to be bound by this
Section 20 prior to disclosure; or (h) otherwise with the prior consent of
Borrower; provided, however, that any disclosure made in violation of this Loan
Agreement or any other Loan Document shall not affect the obligations of
Borrower or any of its Subsidiaries under this Loan Agreement or the other Loan
Documents.
21. ATTORNEYS FEES. Borrower agrees to reimburse Bank up to $5,000.00 for
its reasonable attorneys' fees and expenses incurred in connection with the
negotiation, preparation, execution and delivery of the Loan Documents.
22. MISCELLANEOUS PROVISIONS.
A. Nothing herein shall in any way limit the effect of the
conditions set forth in any other security or other agreement executed by
Borrower, but each and every condition hereof shall be in addition thereto.
B. No failure or delay on the part of Bank, in the exercise of any
right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof.
C. All rights and remedies existing under this Loan Agreement or any
other Loan Document are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
D. All headings and captions in this Loan Agreement and any related
documents are for convenience only and shall not have any substantive effect.
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E. This Loan Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard to
principles of conflicts of law.
F. This Loan Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such agreement shall become effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and telephonic notification that such
executed counterparts has been received by Borrower and Bank.
BANK: BORROWER:
Imperial Bank Salon Internet, Inc.,
a California corporation
By: /s/ Authorized Officer By: /s/ Authorized Officer
--------------------------- ---------------------------
Name: Authorized Officer Name: Authorized Officer
------------------------- --------------------------
Title: Title Title: Title
------------------------ -------------------------
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LIST OF EXHIBITS AND SCHEDULES
------------------------------
EXHIBIT A: Definitions
SCHEDULE 1 to EXHIBIT A: List of Specific Permitted Indebtedness
SCHEDULE 2 to EXHIBIT A: List of Specific Permitted Liens
EXHIBIT B: Compliance Certificate
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EXHIBIT A
DEFINITIONS
"ACCOUNTS" means any right to payment for goods sold or leased, or to be
sold or to be leased, or for services rendered or to be rendered no matter how
evidenced, including accounts receivable, contract rights, chattel paper,
instruments, purchase orders, notes, drafts, acceptances, general intangibles
and other forms of obligations and receivables.
"CAPITAL LEASE" means, as to any Person, any lease of any Property by such
Person as lessee that is, or should be in accordance with Financing Accounting
Standards Board Statement No. 13, classified and accounted for as a "capital
lease" on the balance sheet of such Person prepared in accordance with GAAP.
"CAPITAL LEASE OBLIGATION" means, with respect to any Capital Lease, the
amount of the obligation of the lessee thereunder that, in accordance with GAAP,
would appear on a balance sheet of such lessee in respect of such Capital Lease
or otherwise be disclosed in a note to such balance sheet.
"COLLATERAL" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest hereunder (including, without
limitation, the Accounts), or pursuant to the terms of the General Security
Agreement, the Intellectual Property Security Agreement or otherwise.
"CONTINGENT OBLIGATION" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit in the ordinary
course of business), co-made or discounted or sold with recourse by that Person,
or in respect of which that Person is otherwise directly or indirectly liable,
including, without limitation, any such obligation for which that Person is in
effect liable through any agreement (contingent or otherwise) to purchase,
repurchase or otherwise acquire such obligation or any security therefor, or to
provide funds for the payment or discharge of such obligation (whether in the
form of loans, advances, capital stock purchases, capital contributions or
otherwise), or to maintain the solvency of the obligor of such obligation, or to
make payment for any products, materials or supplies or for any transportation,
services or lease regardless of the non-delivery or non-furnishing thereof, in
any such case if the purpose or intent of such agreement is to provide assurance
that such obligation will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such obligation will be
protected (in whole or in part) against loss in respect thereof. The amount of
any Contingent Obligation of any Person shall be deemed to be an amount equal to
the maximum amount of such Person's liability with respect to the stated or
determinable amount of the primary obligation for which such Contingent
Obligation is incurred or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder).
-14-
<PAGE>
"EVENT OF DEFAULT" has the meaning set forth in Section 16.
"EQUIPMENT MATURITY DATE" has the meaning set forth in Section 1A.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other Person as may be approved by the significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"GENERAL SECURITY AGREEMENT" means that certain General Security Agreement
(Tangible and Intangible Personal Property) dated of even date herewith, made by
Borrower in favor of Bank.
"INDEBTEDNESS" means, as to any Person, without duplication, (a) all
indebtedness of such Person for borrowed money, including, without limitation,
all of such indebtedness outstanding under this Loan Agreement and any of the
other Loan Documents, (b) all Capital Lease Obligations of such Person, (c) to
the extent of the outstanding indebtedness thereunder, any obligation of such
Person representing an extension of credit to such Person, whether or not for
borrowed money, (d) any obligation of such Person for the deferred purchase
price of Property or services (other than (i) trade or other accounts payable in
the ordinary course of business in accordance with customary industry terms and
(ii) deferred franchise fees), (e) all Contingent Obligations, (f) any
obligation of such Person of the nature described in clauses (a), (b), (c), (d)
or (e) above, that is secured by a Lien on assets of such Person and which is
non-recourse to the credit of such Person, but only to the extent of the fair
market value of the assets so subject to the Lien, (g) obligations of such
Person arising under acceptance facilities or under facilities for the discount
of accounts receivable of such Person, (h) any obligation of such Person to
reimburse the issuer of any letter of credit issued for the account of such
Person upon which a draw has been made and (i) any lease having the effect of
indebtedness, whether or not the same shall be treated as such on the balance
sheet of Borrower under GAAP.
"IP SECURITY AGREEMENT" means that certain Collateral Assignment, Patent
Mortgage and Security Agreement dated of even date herewith, made by Borrower in
favor of Bank.
"LIEN" means any mortgage, pledge, security interest, lien or other charge
or encumbrance, including the lien or retained security title of a conditional
vendor, upon or with respect to any property or assets.
"LOAN ACCOUNT" means collectively, the Equipment Loan Account and the
Working Capital Loan Account.
"LOAN DOCUMENTS" means this Loan Agreement, the General Security Agreement,
the IP Security Agreement, the Warrant to Purchase Stock, that certain Agreement
to provide Insurance (Real or Personal Property) dated of even date herewith,
each as executed by Borrower in favor of Bank, together with all other documents
entered into or delivered pursuant to any of the
-15-
<PAGE>
foregoing.
"MATERIAL ADVERSE EFFECT" means any set of circumstances or events which
(a) has or could reasonably be expected to have such material adverse effect
upon the validity or enforceability of any material provision of any Loan
Document, (b) is or could reasonably be expected to be material and adverse to
the condition (financial or otherwise) or business operations of Borrower, (c)
materially impairs or could reasonably be expected to materially impair the
value or priority of Bank's security interest in any Collateral or (e)
materially impairs or could reasonably be expected to materially impair the
ability of Bank to enforce any of its legal remedies pursuant to the Loan
Documents.
"PERMITTED INDEBTEDNESS" means the following"
(1) Indebtedness of Borrower or Indebtedness and Contingent Obligations of
any affiliates or subsidiaries of Borrower ("Borrower's Subsidiaries") in favor
of Bank arising under this Loan Agreement and the other Loan Documents;
(2) The existing Indebtedness and Contingent Obligations disclosed on
Schedule 1 attached hereto and incorporated herein by this reference; provided
that the principal amount thereof is not increased and the terms thereof are not
modified to impose more burdensome terms upon Borrower or any of Borrower's
Subsidiaries;
(3) The Subordinated Debt;
(4) Extensions, renewals or refinancings of Indebtedness permitted under
this Loan Agreement, other than clause (3) immediately above;
(5) Accrued dividends on the preferred stock of Borrower;
(6) Indebtedness and Contingent Obligations as permitted under this Loan
Agreement;
(7) Interest rate and currency hedging agreements;
(8) Guaranties of suppliers to Borrower's Subsidiaries in connection with
the purchase of supplies in the ordinary course of business;
(9) Guaranties of lease obligations incurred in the ordinary course of
business and to the extent otherwise permitted hereunder;
(10) Contingent Obligations constituting Permitted Liens; and
(11) The Indebtedness referred to in clause (3)(a) of the definition of
Permitted Liens.
-16-
<PAGE>
"PERMITTED LIENS" MEANS THE FOLLOWING:
(1) liens and security interests existing as of this date and disclosed in
Schedule 2 attached hereto and incorporated herein by this reference;
(2) liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings;
(3) liens and security interests (a) upon or in any equipment acquired or
held by Borrower to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition of such equipment
and in an amount not greater than the purchase price thereof or (b) existing on
such equipment at the time of its acquisition, provided that the lien and
security interest is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment;
(4) liens consisting of leases or subleases and licenses and sublicenses
granted to others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and any interest or title
of a lessor or licensor under any lease or license, as applicable;
(5) liens securing claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like persons or entities imposed without
action of such parties, provided that the payment thereof is not yet required.
(6) liens incurred or deposits made in the ordinary course of Borrower's
business in connection with worker's compensation, unemployment insurance,
social security and other like laws;
(7) liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default;
(8) easements, reservations, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances affecting real
property not interfering in any material respect with the ordinary conduct of
Borrower's business.;
(9) liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the importation of
goods;
(10) liens that are not prior to Bank's security interest which constitute
rights of set-off of a customary nature;
(11) any interest or title of a lessor in equipment subject to any
Capitalized Lease otherwise permitted hereunder; and
(12) any liens arising from the filing of any financing statements relating
to true leases otherwise permitted hereunder.
-17-
<PAGE>
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, public benefit corporation, firm, joint stock
company, estate, entity or governmental agency.
"PROPERTY" means any interest in any kind of property or asset,
whether real, personal or mixed, whether tangible or intangible.
"SUBORDINATED DEBT" means indebtedness of Borrower, the payment of
which is fully subordinated in time and right of payment to the Loans, and has
been approved in Bank's sole and absolute discretion and in writing.
"WARRANT TO PURCHASE STOCK" means that certain Warrant to Purchase
Stock issued as of the date hereof by Borrower to Bank in connection herewith.
"WORKING CAPITAL MATURITY DATE" has the meaning set forth in Section
1B.
-18-
<PAGE>
SCHEDULE 1 TO EXHIBIT A
SPECIFIC PERMITTED INDEBTEDNESS
(List or indicate "None")
<PAGE>
SCHEDULE 2 TO EXHIBIT A
SPECIFIC PERMITTED LIENS
(List or indicate "None")
<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT ("First Amendment") is made and
entered into as of April 13, 1998, by and among SALON INTERNET, INC., a
California corporation ("Borrower"), and IMPERIAL BANK ("Bank").
RECITALS
A. Bank agreed to make loans to Borrower in the maximum principal amount
of $500,000.00 pursuant to the terms of that certain Security and Loan Agreement
dated as of April 14, 1997 (the "Existing Loan Agreement"), entered into between
Borrower and Bank.
B. Bank has agreed to make (1) revolving loans to Borrower in the maximum
principal amount of $1,000,000.00 and (2) an equipment term loan to Borrower in
the maximum principal amount of $300,000.00 pursuant to the terms of that
certain Loan Agreement dated of even date herewith (the "New Loan Agreement"),
entered into between Borrower and Bank.
C. Borrower and Bank desire to amend certain provisions of the Existing
Loan Agreement all in accordance with the terms set forth in this First
Amendment.
D. This First Amendment and the Loan Documents (as defined in the
Existing Loan Agreement), together with all other documents entered into or
delivered pursuant to any of the foregoing, in each case as originally executed
or as the same may from time to time be modified, amended, supplemented,
restated or superseded are hereinafter collectively referred to as the "Existing
Loan Documents."
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants herein set forth and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound, and to induce Bank to enter into the New Loan Agreement, Borrower
and Bank hereby agree to amend the Existing Loan Documents as follows:
1. DEFINITIONS. Unless otherwise defined herein, all terms defined
in the Existing Loan Agreement have the same meaning when used herein.
2. AMENDMENT TO EXISTING LOAN AGREEMENT. The Existing Loan Agreement is
hereby amended as follows:
2.1 SECTIONS 13.A. AND 13.B. of the Existing Loan Agreement are
hereby deleted in their entirety and the following paragraphs substituted
therefor:
"A. At all times, maintain a Minimum Tangible Net Worth (meaning all
assets, excluding any value for goodwill, trademarks, patents, copyrights,
organization
1
<PAGE>
expense and other similar intangible items, less all liabilities, plus
Subordinated Debt) of not less than (1) $500,000.00 through July 31, 1998
and (2) $4,000,000.00 thereafter;
A. At all times maintain a Maximum Ratio of Total Liabilities
(meaning all liabilities, excluding Subordinated Debt) to Tangible Net
Worth (as defined in Section 10.A. hereof) not to exceed (1) 1.50:1.00
through July 31, 1998 and (2) 1.00:1.00 thereafter;
B. At all times maintain a Minimum Quick Ratio (meaning all cash
plus Accounts divided by current liabilities) of not less than (1)
1.25:1.00 through July 31, 1998 and (2) 2.00:1.00 thereafter;"
2.2 SECTIONS 13.C. of the Existing Loan Agreement is hereby deleted
in its entirety and the following paragraph substituted therefor:
"D. As soon as it is available, but not later than one hundred twenty
(120) days after the end of Borrower's fiscal year, deliver to Bank
unqualified copies of Borrower's consolidated financial statements together
with changes in financial position audited by an independent certified
public accountant selected by Borrower but acceptable to Bank;"
2.3 SECTIONS 13.D., 13.E. and 13.F. of the Existing Loan Agreement
are hereby renumbered as Sections 13.E., 13.F. and 13.G., respectively.
2.4 SECTION 16 of the Existing Loan Agreement is hereby amended to
add the following subparagraph (i) as an additional Event of Default thereunder:
"or (i) an "Event of Default" occurs under the New Loan Agreement."
2.5 EXHIBIT B of the Existing Loan Agreement is hereby deleted in its
entirety and replaced with the Exhibit B attached hereto and incorporated herein
---------
by this reference.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants
that its representations and warranties in the Existing Loan Documents continue
to be true and complete in all material respects as of the date hereof after
giving effect to this First Amendment (except to the extent such specifically
relate to another date or as specifically described on Schedule 1 attached
hereto and incorporated herein by this reference) and that the execution,
delivery and performance of this First Amendment are duly authorized, do not
require the consent or approval of any governmental body or regulatory authority
and are not in contravention of or in conflict with any law or regulation or any
term or provision of any other agreement entered into by Borrower.
4. CONDITIONS PRECEDENT. The legal effectiveness of this First
Amendment is subject to the satisfaction of all of the following conditions
precedent:
(a) EXECUTED FIRST AMENDMENT. Bank shall have received this First
Amendment duly executed and delivered by Borrower.
2
<PAGE>
(b) INTELLECTUAL PROPERTY COLLATERAL UPDATE. Bank shall have received
schedules and other documents updating descriptions of Borrower's intellectual
property position as Bank shall have requested, all in form appropriate for
filing of the same with appropriate authorities.
(c) RESOLUTIONS AND OTHER CORPORATE DOCUMENTS OF BORROWER. Bank shall
have received resolutions of the Board of Directors of Borrower authorizing
Borrower to enter into this First Amendment and to deliver such other corporate
documents as Bank shall reasonably request.
(d) FINANCIAL CONDITION. There shall have occurred no material
adverse change in the financial condition or prospects of Borrower as shown on
the most recent financial statements submitted to Bank or disclosed to Bank,
respectively, and relied upon by Bank in entering into this First Amendment.
(e) NO DEFAULT. There shall have occurred no Event of Default that
remains uncured and is continuing under any of the Existing Loan Documents.
(f) PAYMENT OF FEES. Bank shall have received reimbursement from
Borrower of its costs and expenses incurred (including, without limitation, its
attorneys' fees and expenses) in connection with this First Amendment and the
transactions contemplated hereby.
(g) OTHER DOCUMENTS. Bank shall have received such other documents,
information and items from Borrower as it shall reasonably request to effectuate
the transactions contemplated hereby.
5. RELEASE AND WAIVER.
(a) Borrower hereby acknowledges and agrees that: (1) it has no claim
or cause of action against Bank or any parent, subsidiary or affiliate of Bank,
or any of Bank's officers, directors, employees, attorneys or other
representatives or agents (all of which parties other than Bank being,
collectively, "Bank's Agents") in connection with the Existing Loan Documents,
the loans thereunder or the transactions contemplated therein and herein; (2) it
has no offset or defense against any of its respective obligations, indebtedness
or contracts in favor of Bank; and (3) it recognizes that Bank has heretofore
properly performed and satisfied in a timely manner all of its obligations to
and contracts with Borrower.
(b) Although Bank regards its conduct as proper and does not believe
Borrower to have any claim, cause of action, offset or defense against Bank or
any of Bank's Agents in connection with the Existing Loan Documents, the loans
thereunder or the transactions contemplated therein, Bank wishes and Borrower
agrees to eliminate any possibility that any past conditions, acts, omissions,
events, circumstances or matters could impair or otherwise affect any rights,
interests, contracts or remedies of Bank. Therefore, Borrower unconditionally
releases and waives (1) any and all liabilities, indebtedness and obligations,
whether known or unknown, of any kind to Bank or of any of Bank's Agents to
Borrower, except the obligations remaining to be performed by Bank as expressly
stated in the Existing Loan Agreement, this First Amendment
3
<PAGE>
and the other Existing Loan Documents executed by Bank; (2) any legal, equitable
or other obligations or duties, whether known or unknown, of Bank or of any of
Bank's Agents to Borrower (and any rights of Borrower against Bank) besides
those expressly stated in the Existing Loan Agreement, this First Amendment and
the other Existing Loan Documents; (3) any and all claims under any oral or
implied agreement, obligation or understanding with Bank or any of Bank's
Agents, whether known or unknown, which is different from or in addition to the
express terms of the Existing Loan Agreement, this First Amendment or any of the
other Existing Loan Documents; and (4) all other claims, causes of action or
defenses of any kind whatsoever (if any), whether known or unknown, which
Borrower might otherwise have against Bank or any of Bank's Agents, on account
of any condition, act, omission, event, contract, liability, obligation,
indebtedness, claim, cause of action, defense, circumstance or matter of any
kind whatsoever which existed, arose or occurred at any time prior to the
execution and delivery of this First Amendment or which could arise concurrently
with the effectiveness of this First Amendment.
(c) Borrower agrees that it understands the meaning and effect of
Section 1542 of the California Civil Code, which provides:
Section 1542. Certain Claims Not Affected by General
Release. A general release does not extend to claims which
the creditor does not know or suspect to exist in his favor
at the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor.
BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR
MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES,
INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED BY THIS FIRST AMENDMENT IN FAVOR
OF BANK AND BANK'S AGENTS, AND BORROWER HEREBY WAIVES AND RELEASES ALL RIGHTS
AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER THE AFOREMENTIONED SECTION 1542
OF THE CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH UNKNOWN,
UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS,
LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY) WHICH ANY
SUCH LAWS MAY BE APPLICABLE, BORROWER WAIVES AND RELEASES (TO THE MAXIMUM EXTENT
PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE UNDER ANY
OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR RESTRICT THE
EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER THIS FIRST
AMENDMENT.
6. FULL FORCE AND EFFECT; ENTIRE AGREEMENT. Except to the extent
expressly provided in this First Amendment, the terms and conditions of the
Existing Loan Agreement and the other Existing Loan Documents shall remain in
full force and effect. This First Amendment and the other Existing Loan
Documents constitute and contain the entire agreement of the parties hereto and
supersede any and all prior agreements, negotiations, correspondence,
understandings and communications between the parties, whether written or oral,
respecting the subject matter
4
<PAGE>
hereof. The parties hereto further agree that the Existing Loan Documents
comprise the entire agreement of the parties thereto and supersede any and all
prior agreements, negotiations, correspondence, understandings and other
communications between the parties thereto, whether written or oral respecting
the extension of credit by Bank to Borrower and/or its affiliates.
7. COUNTERPARTS; EFFECTIVENESS. This First Amendment may be executed in
any number of counterparts, each of which when so delivered shall be deemed an
original, but all such counterparts taken together shall constitute but one and
the same instrument. Each such agreement shall become effective upon the
execution of a counterpart hereof or thereof by each of the parties hereto and
telephonic notification that such executed counterparts has been received by
Borrower and Bank.
IN WITNESS WHEREOF, each of the parties hereto has caused this First
Amendment to be executed and delivered by its duly authorized officer as of the
date first written above.
BORROWER
SALON INTERNET, INC.,
a California corporation
By: /s/ Authorized Officer
-----------------------------
Printed Name: AUTHORIZED OFFICER
-------------------
Title: Title
--------------------------
BANK
IMPERIAL BANK
By: /s/ Authorized Officer
-----------------------------
Printed Name: AUTHORIZED OFFICER
-------------------
Title: Title
--------------------------
5
<PAGE>
SCHEDULE 1
Schedule of Exceptions to Representations and Warranties
(List or indicate "NONE")
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
The consolidated financial statements dated as of ___________________ of
SALON INTERNET, INC., a California corporation ("Borrower") attached hereto and
submitted to IMPERIAL BANK ("Bank") pursuant to that certain Loan Agreement
dated as of April 14, 1997, entered into between Borrower and Bank, as amended
by that certain First Amendment to Loan Agreement dated as of April 13, 1998
(collectively, the "Loan Agreement"), are in compliance with all financial
covenants (unless otherwise noted below) as specified in Section 13 therein, as
follows:
- --------------------------------------------------------------------------------
COVENANT: ACTUAL:
- --------------------------------------------------------------------------------
A. Minimum Tangible Net Worth of:
-----------------------------
$500,000.00 through July 31, 1998
$4,000,000 thereafter
- --------------------------------------------------------------------------------
B. Maximum Liabilities to Tangible Net Worth Ratio:
-----------------------------------------------
1.50:1.00 through July 31, 1998
2.00:1.00 thereafter
- --------------------------------------------------------------------------------
C. Minimum Quick Ratio:
-------------------
1.25:1.00 through July 31, 1998
2.00:1.00 thereafter
- --------------------------------------------------------------------------------
Exceptions: (if none, so state):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
The undersigned authorized officer of Borrower hereby certifies that Borrower is
in complete compliance with the terms and conditions of the Loan Agreement for
the period ending _________________________, _____, and as of the date of this
Compliance Certificate the representations and warranties stated therein are
true, accurate and complete as of the date hereof (except as to those
representations and warranties which specifically reference a particular date
and except as noted above).
B-1
<PAGE>
The undersigned further certifies that s/he knows of no pending conditions which
may cause an Event of Default (as defined in the Loan Agreement) to exist in the
next thirty (30) days. The required support documents for this certification
are attached and prepared in accordance with GAAP consistently applied.
Date: _______________ SALON INTERNET, INC.,
a California corporation
By:__________________________
Name:________________________
Title:_______________________
B-2
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
(REAL OR PERSONAL PROPERTY)
TO: IMPERIAL BANK Date: April 13, 1998
226 Airport Parkway Borrower: SALON INTERNET, INC.
San Jose, California 95110
In consideration of loans in the aggregate principal amount not to exceed
$1,300,000.00 ("Loans"), secured by all tangible personal property of the
undersigned, including inventory and equipment, the undersigned agrees to obtain
adequate insurance coverage to remain in force during the term of the Loans.
The undersigned also agrees to advise the below named agent to add IMPERIAL
BANK ("Bank") as a loss payee on the new or existing insurance policy, and to
furnish Bank at the above address with a copy of said policy/endorsements and
any subsequent renewal policies.
The undersigned understands that the policy must contain:
1. Fire and extended coverage in an amount sufficient to cover:
(a) The amount of the Loans, OR
(b) All existing encumbrances, whichever is greater.
But not in excess of the replacement value of the Improvements on the real
property.
2. A Lender's "Loss Payable" Endorsement Form 438 BFU in favor of
IMPERIAL BANK, or any other form acceptable to Bank.
INSURANCE INFORMATION
Insurance Co./Agent: _______________________ Telephone No.:________________
Agent's Address:________________________________________________________________
BORROWER
SALON INTERNET, INC.,
a California corporation
By:_______________________________
Printed Name:_____________________
Title:____________________________
================================================================================
- ------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION: Date:____________
Person spoken to:______________________________
Policy Number:_________________________________
Effective Form:____________ To: _______________
Verified By:___________________________________
- ------------------------------------------------
<PAGE>
IMPERIAL BANK
MEMBER FDIC
AUTOMATIC DEBIT AUTHORIZATION
TO: IMPERIAL BANK
RE: LOAN # __________________________
You are hereby authorized and instructed to charge Account No. 20-002-379 in the
name of SALON INTERNET, INC. for principal and/or interest payments due on the
above referenced loan as set forth below and credit the loan referenced above.
[X] Debit each interest payment as it becomes due according to the terms
of that certain Loan Agreement dated of even date herewith, and any
renewals or amendments thereof.
[X] Debit each principal payment as it becomes due according to the terms
of that certain Loan Agreement dated of even date herewith, and any
renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.
- --------------------------------------------------------------------------------
Borrower Signature: Date: April 13, 1998
SALON INTERNET, INC.,
a California corporation
By:____________________________________
Printed Name:__________________________
Title:_________________________________
- --------------------------------------------------------------------------------
<PAGE>
IMPERIAL BANK
Member FDIC
CORPORATE RESOLUTION REGARDING CREDIT
OFFICE: Emerging Growth Industries ADDRESS: 226 Airport Parkway, San Jose,
CA 95110
RESOLVED, that SALON INTERNET, INC., a California corporation (the
"Corporation"), borrow from IMPERIAL BANK hereinafter referred to as "Bank",
from time to time, such sums of money as, in the judgment of the officer or
officers hereinafter authorized, this Corporation may require; provided that the
aggregate amount of such borrowing, pursuant to this resolution, shall not at
any one time exceed the principal sum of ONE MILLION THREE HUNDRED THOUSAND
DOLLARS ($1,300,000.00), in addition to such amount as may be otherwise
authorized;
RESOLVED FURTHER, that any one (1) of the following named officers
__________________________________ the__________________________________
__________________________________ the__________________________________
__________________________________ the__________________________________
of this Corporation (the officer or officers acting in combination, authorized
to act pursuant hereto being hereinafter designated as "authorized officers"),
be and he/she/they is/are hereby authorized, directed and empowered, for and on
behalf and in the name of this Corporation (1) to execute and deliver to Bank
such notes or other evidences of indebtedness of this Corporation for the monies
so borrowed, with interest thereon, as Bank may require, and to execute and
deliver, from time to time, renewals or extensions of such notes or other
evidences of indebtedness; (2) to grant a security interest in, transfer, or
otherwise hypothecate or deed in trust for Bank's benefit and deliver by such
instruments in writing or otherwise as may be demanded by Bank, any of the
property of this Corporation as may be required by Bank to secure the payment of
any notes or other indebtedness of this Corporation or third parties to Bank,
whether arising pursuant to this resolution or otherwise; and (3) to perform all
acts and execute and deliver all instruments which Bank may deem necessary to
carry out the purposes of this resolution;
RESOLVED FURTHER, that said authorized officers be and he/she/they is/are
hereby authorized and empowered, and that any ________ (____) of said authorized
officers be and he/she/they is/are hereby authorized and empowered (1) to
discount with or sell to Bank conditional sales contracts, notes, acceptances,
drafts, bailment agreements, leases, receivables and evidences of indebtedness
payable to this Corporation, upon such terms as may be agreed upon by them and
Bank, and to endorse in the name of this Corporation said notes, acceptances,
drafts, bailment agreements, leases, receivables and evidences of indebtedness
so discounted, and to guarantee the payment of the same to Bank, and (2) to
apply for and obtain from Bank letters of credit and in connection therewith to
execute such agreement, applications, guarantees, indemnities and other
financial undertakings as Bank may require;
RESOLVED FURTHER, that said authorized officers are also authorized to
direct the disposition of the proceeds of any such obligation, and to accept or
direct delivery from Bank of any property of this Corporation at any time held
by Bank;
RESOLVED FURTHER, that the authority given hereunder shall be deemed
retroactive and any and all acts authorized hereunder performed prior to the
passage of this resolution are hereby ratified and affirmed;
1
<PAGE>
RESOLVED FURTHER, that this resolution will continue in full force and
effect until Bank shall receive official notice in writing from this Corporation
of the revocation thereof by a resolution duly adopted by the Board of Directors
of this Corporation, and that the classification of the Secretary of this
Corporation as to the signatures of the above named persons shall be binding on
this Corporation.
I, _________________________, secretary of the Corporation, duly organized
and existing under the laws of the State of California, do hereby certify that
the foregoing is a full, true and correct copy of a resolution of the Board of
Directors of the Corporation, duly and regularly passed and adopted by the Board
of Directors of the Corporation.
I further certify that said resolution is still in full force and effect
and has not been amended or revoked, and that the specimen signatures appearing
below are the signatures of the officers authorized to sign for this Corporation
by virtue of said resolution.
Executed as of April 13, 1998.
____________________________________
______________________, Secretary
AUTHORIZED SIGNATURES:
__________________________________ Signature:_____________________________
__________________________________ Signature:_____________________________
__________________________________ Signature:_____________________________
2
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Salon Internet, Inc., a California Corporation
Number of Shares: 23,734 (subject to Section 1.8)
Class of Stock: Series B Preferred (subject to Section 1.8)
Initial Exercise Price: $1.58 per share (subject to Section 1.8)
Issue Date: ________________, 1998
Expiration Date: ________________, 2005 (Subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and for
other good and valuable consideration, IMPERIAL BANK or registered assignee
("Holder") is entitled to purchase the number of fully paid and nonassessable
shares of the class of securities (the "Shares") of the corporation (the
"Company") at the initial exercise price per Share (the "Warrant Price") all as
set forth above and as adjusted pursuant to Article 2 of this Warrant, subject
to the provisions and upon the terms and conditions set forth of this Warrant.
ARTICLE 1. EXERCISE.
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1.1 Method of Exercise. Holder may exercise this Warrant by delivering
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this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix I to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
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Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 No Fractional Shares. No fractional shares shall be issued upon
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exercise or conversion of this Warrant. The company shall, in lieu of issuing
any fractional share, pay the Holder entitled to such fraction a sum in cash
equal to the fair market value of a Share (as determined pursuant to Section
1.4) multiplied by such fraction.
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1.4 Fair Market Value. If the Shares are traded regularly in a public
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market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's stock into which the Shares are
convertible) reported for the business day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not regularly traded
in a public market, the Board of Directors of the Company shall determine fair
market value in its reasonable good faith judgment. The foregoing
notwithstanding, if Holder advises the Board of Directors in writing that Holder
disagrees with such determination, then the Company and Holder shall promptly
agree upon a reputable investment banking firm to undertake such valuation. If
the valuation of such investment banking firm is greater than that determined by
the Board of Directors by an amount equal to or greater than the lesser of (i)
10% of the valuation made by the Board of Directors or (ii) $0.50 per share,
then all fees and expenses of such investment banking firm shall be paid by the
Company. In all other circumstances, such fees and expenses shall be paid by
Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
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exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
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satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
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1.7.1 "Acquisition". For the purpose of this Warrant, "Acquisition"
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means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2 Assumption of Warrant. If after the date hereof the Company
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shall enter into any Acquisition, then, as a condition of such Acquisition,
lawful provisions shall be made, and duly executed documents evidencing the same
from the Company or its successor shall be delivered to Holder, so that Holder
shall thereafter have the right to purchase, at a total price not to exceed that
payable upon the exercise of this Warrant in full, the kind and amount of shares
of stock and other securities and property receivable upon such Acquisition by a
holder of the number of Shares which might have been purchased by the Holder
immediately prior to such Acquisition, and in any such case appropriate
provisions shall be made with respect to the rights and interest of Holder to
the end that the provisions hereof (including without limitation, provisions for
the adjustment of the Warrant Price and the number of shares issuable hereunder)
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shall thereafter be applicable in relation to any shares of stock or other
securities and property thereafter deliverable upon exercise hereof.
1.7.3 Purchase Right. Notwithstanding the foregoing, at the election
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of Holder, the Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant immediately before the record date for determining the shareholders
entitled to participate in the proceeds of the Acquisition, less (b) the
aggregate Warrant Price of the Shares, but in no event less than zero; provided,
however, that the purchase right under this Section 1.7.3 shall not be effective
if the accountants for the Company determine that it would result in the
disallowance of pooling of interest treatment.
1.8 Adjustment in Underlying Preferred Stock Price and Exercise Price.
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If on or before August 31, 1998, the Company sells and issues to any investors,
preferred stock with aggregate gross proceeds to the Company of at least
$2,500,000, this Warrant shall concurrent with the issuance of such shares of
preferred stock automatically be adjusted to instead be exercisable for shares
of the same series and class and bearing the same rights, preferences, and
privileges, of such shares of stock, with the Warrant Price hereunder adjusted
to equal the per share purchase price of such stock, and the number of such
shares subject to this Warrant adjusted to equal (i) thirty-seven thousand, five
hundred dollars ($37,500), divided by (ii) such modified per share Warrant
Price.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
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2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
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dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
shares are securities other than common stock. subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
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reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new
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securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
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combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
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of Shares issuable upon exercise of this Warrant or, if the shares are Preferred
Stock, the number of shares of common stock issuable upon conversion of the
Shares, shall be subject to adjustment, from time to time, in the manner set
forth on Exhibit A attached hereto in the event of Diluting Issuances (as
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defined on Exhibit A).
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2.5 No Impairment. The Company shall not, by amendment of its Articles of
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Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
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Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
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3.1 Representations and Warranties. The Company hereby represents and
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warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than the price per share at which the Shares were last
issued in an arms length transaction in which at least $500,000 of the shares
were sold.
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares,
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shall, upon issuance in accordance with the terms of this Warrant, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws. During the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized, and reserved for the purpose of the issue upon
exercise of the purchase rights evidenced by this Warrant, a sufficient number
of shares of its Series B Preferred Stock (subject to Article 1.8) to provide
for the exercise of the rights represented by this Warrant and a sufficient
number of shares of its Common Stock to provide for the conversion of such
Preferred Stock into Common Stock.
3.2 Notice of Certain Events. If the Company proposes at any time (a)
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to declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least ten days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least ten days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
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any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
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agrees that the Shares or, if the shares are convertible into common stock of
the Company, such common stock, shall be subject to the registration rights set
forth on Exhibit B hereto.
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ARTICLE 4. MISCELLANEOUS.
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4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole
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or in part, at any time and from time to time on or before the Expiration Date
set forth above. To the extent
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that this Warrant has not been exercised on or before the Expiration Date, this
Warrant shall automatically be deemed to be exercised in full pursuant to the
provisions of Section 1.2, without any further action on behalf of Holder, on
the Expiration Date.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
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directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
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Shares issuable upon exercise of this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
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may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to the
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Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
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discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
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4.7 Attorneys' Fees. In the event of any dispute between the parties
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concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
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accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
SALON INTERNET, INC.,
By:_______________________________
Name:_____________________________
Title:_____________________________
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APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase __________ shares of the
Series B Preferred stock of Salon Internet, Inc. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to ___________ of the Shares covered by the
Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
Chief Financial Officer
Controllers Department
Imperial Bank or registered assignee
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
IMPERIAL BANK or registered assignee
_________________________________________
(Signature)
_________________________________________
(Date)
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EXHIBIT A
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Anti-Dilution Provisions
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In the event of the issuance (a "Diluting Issuance") by the Company, after
the Issue Date of the Warrant, of securities at a price per share less than the
Conversion Price for the preferred stock then acquirable under the Warrant, then
the number of shares of common stock issuable upon conversion of the Shares
shall be adjusted in accordance with those provisions (the "Provisions") of the
Company's Articles (Certificate) of Incorporation which apply to Diluting
Issuances.
The Company agrees that the Provisions, as in effect on the Issue Date,
shall be deemed to remain in full force and effect during the term of the
Warrant notwithstanding any subsequent amendment, waiver or termination thereof
by the Company's shareholders, unless all holders of the class of preferred
stock then acquirable under Warrant are treated the same by such amendment,
waiver or termination.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
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EXHIBIT B
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Registration Rights
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The Warrant and the Shares issuable upon exercise of the Warrant shall be
deemed to be "Registrable Right Securities" and the common stock issuable upon
conversion of the Shares, shall be deemed "Registrable Securities" under the
following agreement (the "Agreement") between the Company and its investor(s):
The Rights Agreement dated December 22, 1995 by and among Salon Internet,
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Inc. and the holders of the Series A Preferred Stock and the holders of Common
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Stock of the Company
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By acceptance of the Warrant to which this Exhibit B is attached, Holder
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shall be deemed to be a party to the Agreement.
The Company represents and warrants that all consents necessary to make
Holder a party to the Agreement have been obtained.
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EXHIBIT 10.19
SALON INTERNET, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
made as of December 22, 1995, between SALON INTERNET, INC., a California
corporation (the "Company") and the purchasers listed on the Schedule of
Purchasers ("Schedule of Purchasers") attached hereto as Exhibit A (the
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"Purchasers"). The parties hereby agree as follows:
1. Authorization and Sale of the Preferred Shares.
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1.1 Authorization; Filing of Amended and Restated Certificate of
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Incorporation. The Company has authorized the issuance and sale pursuant to the
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terms and conditions hereof of up to 1,700,000 shares of its Series A Preferred
Stock, (the "Series A Shares"), having the rights, preferences and privileges as
set forth in the form of the Amended and Restated Articles of Incorporation of
the Company (the "Articles of Incorporation") attached hereto as Exhibit B. The
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Company shall adopt and file the Articles of Incorporation with the Secretary of
State of the State of California before the Closing (as defined below). If
there is a second closing, the Company will authorize the issuance and sale
pursuant to the terms and conditions hereof of an additional 300,000 shares of
Series A Preferred Stock (collectively, with the 1,700,000 shares of Series A
Preferred Stock above, the "Series A Shares"), having the rights, preferences
and privileges as set forth in the form of the Articles of Incorporation
attached hereto as Exhibit B. The Company shall adopt and file an amendment to
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the Articles of Incorporation with the Secretary of State of the State of
California before the Second Closing (as defined below).
1.2 Sale and Issuance of the Series A Shares. Subject to the
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terms and conditions hereof, at the Closing (as defined below) the Company will
issue and sell to each Purchaser and each Purchaser will purchase from the
Company that number of shares of Series A Shares Preferred Stock set forth
opposite each Purchaser's name on Exhibit A hereto at a purchase price of $1.00
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per share.
2. Closing Date; Delivery.
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2.1 Closing Date. The closing comprising the purchase by the
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Purchasers and sale by the Company of 1,700,000 shares of Series A Shares shall
be held at the offices of Gray Cary Ware & Freidenrich, 400 Hamilton Avenue,
Palo Alto, California 94301 on December 22, 1995, or at such other time and
place as the Company and the Purchasers may agree in writing (the "First
Closing"). If Apple Computer, Inc. ("Apple") does not enter into an agreement
on terms satisfactory to the Company by January 15, 1995, then by mutual
agreement of the Company and the Purchasers, there may be a second closing
compromising the purchase by the Purchasers and the sale by the Company of a
total of an additional 300,000 shares of its Series A Preferred Shares held at
the offices of Gray Cary Ware & Freidenrich, 400 Hamilton Avenue, Palo Alto,
California 94301 on January 20, 1996, or at such other time and place as the
Company
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and the Purchasers may agree in writing (the "Second Closing"). The First
Closing and Second Closing referred to in this Section 2.1 shall be hereinafter
referred to as the "Closing" and the date of the Closing is hereinafter referred
to as the "Closing Date."
2.2 Delivery. Subject to the terms of this Agreement, at the
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Closing, the Company will deliver to each Purchaser a certificate or
certificates representing the number of Series A Shares designated in Exhibit A
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to be issued to such Purchaser, against payment of the purchase price therefor
by delivery of a check or wire transfer, payable to the order of the Company.
3. Representations and Warranties of the Company. The Company
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hereby represents and warrants to the Purchasers that except as set forth on a
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall
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be deemed to be representations and warranties as if made hereunder:
3.1 Organization and Standing. The Company is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to carry on its
businesses as now conducted and as proposed to be conducted. The Company is
qualified or licensed to do business as a foreign corporation in all
jurisdictions where such qualification or licensing is required, except where
the failure to so qualify would not have a material adverse effect upon the
Company.
3.2 Corporate Power. The Company has now, or will have at the
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Closing Date, all requisite corporate power necessary for the authorization,
execution and delivery of this Agreement and the Rights Agreement in the form
attached hereto as Exhibit D (the "Rights Agreement"). This Agreement and the
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Rights Agreement are valid and binding obligations of the Company enforceable in
accordance with their terms, except as the same may be limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights.
3.3 Subsidiaries. The Company does not control, directly or
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indirectly, any other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of the Company is
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10,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, of
which 1,700,000 have been designated Series A Preferred Stock. There are issued
and outstanding 1,200,000 shares of the Company's Common Stock and no shares of
Preferred Stock. The holders of record of the presently issued and outstanding
Common Stock and options to purchase Common Stock immediately prior to the
Closing are as set forth on Exhibit E. All such issued and outstanding shares
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have been duly authorized and validly issued, are fully paid and nonassessable,
and were issued in compliance with all applicable state and federal laws
concerning the issuance of securities. The holders of any and all rights,
options, warrants or conversion rights to purchase or acquire from the Company
any of its capital stock, along with the number of shares of capital stock
issuable upon exercise of such rights, are set forth in Exhibit E hereto. The
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Company has reserved at least 1,700,000 shares of Common Stock for issuance upon
conversion of the Series A Preferred Stock and 800,000 shares of Common Stock
for future issuance to employees,
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consultants, officers or directors under stock or other option plans or
arrangements approved by the Board of Directors. Except for such rights, there
are no outstanding rights, options, warrants, conversion rights or agreements
for the purchase or acquisition from the Company of any shares of its capital
stock. The Company is not a party or subject to any agreement or understanding
between any persons or entities, which affects or relates to the voting or
giving of written consents with respect to any securities.
3.5 Authorization.
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(a) Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and stockholders necessary for the sale and
issuance of the Series A Shares, the issuance of the Common Stock issuable upon
conversion of the Series A Shares and the authorization, execution and
performance of the Company's obligations hereunder and under the Rights
Agreement has been taken or will be taken prior to the Closing. The Company has
duly reserved an aggregate of 1,700,000 shares of Common Stock for issuance upon
conversion of the Series A Shares.
(b) Valid Issuance. The Series A Shares when issued in compliance
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with the provisions of this Agreement, and the shares of Common Stock issued
upon conversion of the Series A Shares when issued in accordance with the
provisions of the Certificate of Incorporation, will be validly issued, fully
paid and nonassessable and will be free of any liens or encumbrances created by
the Company; provided, however, that all such shares may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein, and as may be required by future changes in such laws. The rights,
preferences, privileges and restrictions of the Series A Shares are as set forth
in the Certificate of Incorporation.
3.6 No Preemptive Rights. No person has any right of first refusal
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or any preemptive rights in connection with the issuance of the Series A Shares,
the issuance of the Common Stock upon conversion of the Series A Shares or,
except as set forth in the Rights Agreement, any future issuances of securities
by the Company.
3.7 Patents, Trademarks, etc. The Company owns and possesses or is
------------------------
licensed under all patents, patent applications, licenses, trademarks, trade
names, brand names, trade secrets, inventions and copyrights employed in the
operation of its business as now conducted and as proposed to be conducted, with
no infringement of or conflict with the rights of others respecting any of the
same. To the best knowledge of the Company, the operation of the Company's
business as now conducted or as proposed to be conducted does not infringe any
patent, copyright, trade secret or other proprietary rights of any third
parties. There are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to patents, patent
applications, licenses, trademarks, trade names, brand names, inventions,
proprietary rights and copyrights of any other person or entity. The Company is
not obligated to make any payments by way of royalties, fees or otherwise to any
owner, licensor of, or other claimant to any patent, trademark, trade name,
copyright or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business, or otherwise. The Company has not
received any communications alleging that it has violated or, by conducting its
business as
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<PAGE>
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity, nor is the Company aware of any basis for the foregoing. There
are no agreements, understandings, instruments, contracts, judgments, orders,
writs of decrees to which the Company is a party or by which it is bound which
involve indemnification by the Company with respect to infringements of
proprietary rights.
3.8 Compliance with Other Instruments. The Company is not in
---------------------------------
violation of any term of its Articles of Incorporation or Bylaws, nor is the
Company in violation of or in default in any material respect under the terms of
any mortgage, indenture, contract, agreement, instrument, judgment or decree,
the violation of which would have a material adverse effect on the Company as a
whole, and to the best knowledge of the Company, is not in violation of any
order, statute, rule or regulation applicable to the Company, the violation of
which would have a material adverse effect on the Company. The execution,
delivery and performance of and compliance with this Agreement or the Rights
Agreement, and the issuance and sale of the Series A Shares will not (a) result
in any such violation, or (b) be in conflict with or constitute a default under
any such term, or (c) result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company
pursuant to any such term. To the best knowledge of the Company, there is no
such term or any such order, statute, rule or regulation which adversely
affects, or in the future may materially adversely affect, the business,
prospects, condition, affairs or operations of the Company or any of its
properties or assets.
3.9 Proprietary Agreements; Employees. Each employee of the Company
---------------------------------
has executed an agreement regarding confidentiality and proprietary information,
the form of which has been provided to special counsel to the Purchasers. None
of its employees is in violation thereof and the Company will use best efforts
to prevent such violations. To the best knowledge of the Company, the employees
of the Company are not obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as conducted or
as proposed to be conducted or that would prevent any such employee from
assigning inventions to the Company. Neither the execution nor delivery of this
Agreement or the Rights Agreement, nor the carrying on of the Company's business
as proposed, will conflict with or result in a breach of the terms, conditions
or provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees is now obligated. The Company does
not believe that it is or will be necessary for the Company to utilize any
inventions of any of its employees made prior to their employment by the
Company.
3.10 Litigation, etc. There is no action, proceeding or
---------------
investigation pending, or threatened, against the Company or its officers,
directors or stockholders, or to the best of the Company's knowledge, against
employees of the Company (or, to the best of the Company's knowledge, any basis
therefor or threat thereof): (1) which might result, either individually or in
the aggregate, in (a) any material adverse change in the business, prospects,
conditions, affairs or operations of the Company or in any of its properties or
assets, or (b) any material impairment of the right or ability of the Company to
carry on its business as now conducted or as proposed to be
4
<PAGE>
conducted, or (c) any material liability on the part of the Company; or (2)
which questions the validity of this Agreement, the Rights Agreement, or any
action taken or to be taken in connection herewith, including in each case,
without limitation, actions pending or threatened involving the prior employment
of any of the Company's employees, the use in connection with the Company's
business of any information or techniques allegedly proprietary to any of the
former employers of such employees or their obligations under any agreements
with prior employers. The Company is not a party to or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by the Company currently pending or which the Company currently intends to
initiate.
3.11 Governmental Consent. No consent, approval or authorization of
--------------------
or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with: (a) the valid execution and
delivery of this Agreement or the Rights Agreement; or (b) the offer, sale or
issuance of the Series A Shares, the issuance of the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock or (c) the obtaining of
the consents, permits and waivers specified in subsection 5.1(b) hereof.
3.12 Offering. In reliance on the representations and warranties of
--------
the Purchasers in Section 4 hereof, the offer, sale and issuance of the Series A
Shares in conformity with the terms of this Agreement will not result in a
violation of the requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act") or the qualification or registration requirements
of applicable blue sky laws.
3.13 Taxes. The Company has filed all tax returns that are required
-----
to have been filed with appropriate federal, state, county and local
governmental agencies or instrumentalities, except where the failure to do so
would not have a material adverse effect upon the Company, taken as a whole.
The Company has not elected pursuant to the Internal Revenue Code of 1986, as
amended ("Code"), to be treated as a Subchapter S corporation or a collapsible
corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has
it made any other elections pursuant to the Code (other than elections which
relate solely to methods of accounting, depreciation or amortization) which
would have a material effect on the Company, its financial condition, its
business as presently conducted or proposed to be conducted or any of its
properties or material assets. The Company has paid or established reserves for
all income, franchise and other taxes, assessments, governmental charges,
penalties, interest and fines due and payable by them on or before the Closing.
3.14 Title. The Company owns its property and assets free and clear
-----
of all liens, mortgages, loans or encumbrances except liens for current taxes,
and such encumbrances and liens which arise in the ordinary course of business
and do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets leased by the Company, the
Company is in compliance with such leases and, to the best of the Company's
knowledge, holds valid leasehold interests free and clear of any liens, claims
or encumbrances.
5
<PAGE>
3.15 Material Contracts and Commitments. All of the contracts,
----------------------------------
mortgages, indentures, agreements, instruments and transactions to which the
Company is a party or by which it is bound (including purchase orders to the
Company or placed by the Company) which involve obligations of, or payments to,
the Company in excess of Ten Thousand Dollars ($10,000) and all agreements
between the Company and its officers, directors, consultants and employees are
set forth on the list attached hereto as Exhibit F (the "Contracts"), copies of
---------
which have been delivered to special counsel to the Purchasers. All of the
Contracts are valid, binding and in full force and effect in all material
respects and enforceable by the Company in accordance with their respective
terms in all material respects, subject to the effect of applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and rules or laws
concerning equitable remedies. The Company is not in material default under any
of such Contracts.
3.16 Financial Statements. The Company has delivered to the
--------------------
Purchasers the unaudited balance sheets and related statements of operations and
cash flow as of November 30, 1995 and for the eleven month period then ended
(the "Financial Statements"). The Financial Statements are in accordance with
the books and records of the Company, are complete and correct, and fairly and
accurately present the financial condition and operating results of the Company
for the periods indicated therein, all in conformity with generally accepted
accounting principles ("GAAP"), except that the unaudited Financial Statements
do not contain footnotes or reflect the interperiod adjustments required by
GAAP. As of October 31, 1995, the Company did not have any liabilities,
absolute, contingent, or otherwise, which in accordance with GAAP are required
to be disclosed or reserved for other than as set forth in the Financial
Statements. Since October 31, 1995, there has been no material adverse change
in the Company's financial condition or assets. The Company maintains and will
continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
3.17 Absence of Changes. Since November 30, 1995 (a) the Company has
------------------
not entered into any transaction which was not in the ordinary course of
business, (b) there has been no material adverse change in the condition
(financial or otherwise) of the business, property, assets or liabilities of the
Company other than changes in the ordinary course of its business, none of
which, individually or in the aggregate, has been materially adverse, (c) there
has been no damage to, destruction of or loss of physical property (whether or
not covered by insurance) materially adversely affecting the assets, prospects,
financial condition, operating results, business or operations of the Company,
(d) the Company has not declared or paid any dividend or made any distribution
on its stock, or redeemed, purchased or otherwise acquired any of its stock, (e)
the Company has not materially changed any compensation arrangement or agreement
with any of its key employees or executive officers, or materially changed the
rate of pay of its employees as a group, (f) the Company has not changed or
amended any material contract by which the Company or any of its assets are
bound or subject, except as contemplated by this Agreement, (g) there has been
no resignation or termination of employment of any key officer or employee of
the Company and the Company does not know of any impending resignation or
termination of employment of any such officer or employee that if consummated
would have a material adverse effect on the business of the Company, (h) there
has been no change, except in the ordinary course of business, in the material
contingent obligations of the Company (nor in
6
<PAGE>
any contingent obligation of the Company regarding any director, stockholder or
key employee or officer of the Company) by way of guaranty, endorsement,
indemnity, warranty or otherwise, (i) there have been no loans made by the
Company to any of its employees, officers or directors other than travel
advances and other advances made in the ordinary course of business, (j) there
has been no waiver by the Company of a valuable right or of a material debt
owing to it, and (k) there has not been any satisfaction or discharge of any
lien, claims or encumbrance or any payment of any obligation by the Company,
except in the ordinary course of business and which is not material to the
assets, properties, financial condition, operating results or business of the
Company.
3.18 Outstanding Indebtedness. The Company has no indebtedness for
------------------------
borrowed money which it has directly or indirectly created, incurred, assumed or
guaranteed, or with respect to which it has otherwise become liable, directly or
indirectly.
3.19 Registration Rights. Other than as granted pursuant to the
-------------------
Rights Agreement, the Company has not granted or agreed to grant any rights to
register (as that term is defined in the Rights Agreement) securities, including
piggyback registration rights, to any person or entity.
3.20 Certain Transactions. The Company is not indebted, directly or
--------------------
indirectly, to any of its employees, officers, directors or stockholders or to
their spouses or children, in any amount whatsoever; and none of said employees,
officers, directors, stockholders, or any member of their immediate families,
are indebted to the Company or have any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship. No such employee, officer, director,
stockholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company. The Company
is not guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
3.21 Corporate Documents; Minute Books. Except for amendments
---------------------------------
necessary to satisfy representations and warranties or conditions contained
herein (the form of which amendments has been approved by the Purchasers), the
Bylaws of the Company are in the form previously provided to special counsel to
the Purchasers. The minute books of the Company previously provided to special
counsel to the Purchasers contain a complete summary of all meetings of
directors and stockholders since the time of incorporation of the Company.
3.22 Employee Benefit Plans. The Company does not have any "employee
----------------------
benefit plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended.
3.23 Environmental and Safety Laws. To the best of its knowledge,
-----------------------------
the Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.
7
<PAGE>
3.24 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, and insurance against other hazards, risks and
liabilities to persons and property to the extent and in the manner customary
for companies in similar businesses similarly situated.
3.25 Labor Agreements and Actions. The Company is not aware that any
----------------------------
officer or key employee intends to terminate his or her employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of the Company is terminable at the will of the Company.
3.26 Section 83(b) Elections. To the best of the Company's
-----------------------
knowledge, no elections and notices pursuant to Section 83(b) of the Code and
any analogous provisions of applicable state tax laws have been filed by
individuals who have purchased shares of the Company's Common Stock.
3.27 Disclosure. No representation or warranty by the Company in
----------
this Agreement, or in any document or certificate furnished or to be furnished
to the Purchasers pursuant hereto or in connection with the transactions
contemplated hereby, when taken together, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements made herein and therein, in the light of the
circumstances under which they were made, not misleading. The Company has fully
provided the Purchasers with all the information which the Purchasers have
requested for deciding whether to purchase the Series A Shares.
4. Representations and Warranties of Purchasers and Restrictions on
----------------------------------------------------------------
Transfer Imposed by the Securities Act.
--------------------------------------
4.1 Representations and Warranties by the Purchasers. Each
------------------------------------------------
Purchaser, severally and not jointly, represents and warrants to the Company as
follows:
(a) Investment Intent. This Agreement is made with the
-----------------
Purchaser in reliance upon such Purchaser's representation to the Company,
evidenced by Purchaser's execution of this Agreement, that Purchaser is
acquiring the Series A Shares and the Common Stock issuable upon conversion of
Series A Preferred Shares (collectively the "Securities") for investment for
such Purchaser's own account, for investment and not with a view to, or for
resale in connection with, any distribution or public offering thereof within
the meaning of the Securities Act. Purchaser has the full right, power and
authority to enter into and perform this Agreement and the Rights Agreement, and
this Agreement and the Rights Agreement constitute valid and binding obligations
upon it.
(b) Series A Shares Not Registered. Purchaser understands and
------------------------------
acknowledges that the offering of the Series A Shares pursuant to this Agreement
will not be registered under the Securities Act or qualified under applicable
blue sky laws on the grounds that the offering and sale of securities
contemplated by this Agreement are exempt from registration under the Securities
Act and exempt from qualifications available under applicable
8
<PAGE>
blue sky laws, and that the Company's reliance upon such exemptions is
predicated upon such Purchaser's representations set forth in this Agreement.
Purchaser acknowledges and understands that the Securities must be held
indefinitely unless the Securities are subsequently registered under the
Securities Act and qualified under applicable blue sky laws or an exemption from
such registration and such qualification is available.
(c) No Transfer. Purchaser covenants that in no event will such
-----------
Purchaser dispose of any of the Securities (other than in conjunction with an
effective registration statement for the Securities under the Securities Act or
in compliance with Rule 144 promulgated under the Securities Act) unless and
until (i) such Purchaser shall have notified the Company of the proposed
disposition and shall have furnished the Company with a statement of the
circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, such Purchaser shall have furnished the Company with
an opinion of counsel to the effect that (x) such disposition will not require
registration under the Securities Act and (y) appropriate action necessary for
compliance with the Securities Act and other applicable state, local or foreign
law has been taken. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144.
(d) Permitted Transfers. Notwithstanding the provisions of
-------------------
subsection (c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser which is a partnership to a partner of
such partnership or a former partner of such partnership who leaves such
partnership after the date hereof, or to the estate of any such partner or
former partner or the transfer by gift, will or intestate succession of any
partner to his spouse or lineal descendants or ancestors, if the transferee
agrees in writing to be bound by the terms of this Agreement to the same extent
as if he were an original Purchaser hereunder.
(e) Knowledge and Experience. Purchaser (i) has such knowledge and
------------------------
experience in financial and business matters as to be capable of evaluating the
merits and risks of such Purchaser's prospective investment in the Securities;
(ii) has the ability to bear the economic risks of such Purchaser's prospective
investment; (iii) has been furnished with and has had access to such information
as such Purchaser has considered necessary to make a determination as to the
purchase of the Securities together with such additional information as is
necessary to verify the accuracy of the information supplied; (iv) has had all
questions which have been asked by such Purchaser satisfactorily answered by the
Company; and (v) has not been offered the Securities by any form of
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any such media.
(f) Accredited Investor. Purchaser is an "accredited
-------------------
investor" as that term is defined in Rule 501(a) under the Securities Act of
1933, as amended.
4.2 Legends. Each certificate representing the Securities may be
-------
endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
--------------
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
9
<PAGE>
AS AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR
(iii) PURSUANT TO AN OPINION OF COUNSEL, THAT SUCH REGISTRATION OR COMPLIANCE IS
NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.
(b) Other Legends. Any other legends required by applicable state
-------------
blue sky laws.
The Company need not register a transfer of legended Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in each of the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend endorsed
-------------------------------------------
on a certificate pursuant to subsection 4.2(a) and the stop transfer
instructions with respect to such legended Securities shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
Securities if such Securities are registered under the Securities Act and a
prospectus meeting the requirements of Section 10 of the Securities Act is
available or if such holder satisfies the requirements of Rule 144(k).
5. Conditions to Closing.
---------------------
5.1 Conditions to Purchasers' Obligations. The obligation of each
-------------------------------------
Purchaser to purchase the Series A Shares at the Closing is subject to the
fulfillment to the Purchaser's satisfaction, on or prior to the Closing Date, of
the following conditions, any of which may be waived by the Purchaser:
(a) Representations and Warranties Correct; Performance of
--------------------------------------- --------------
Obligations. The representations and warranties made by the Company in Section
3 hereof shall be true and correct when made, and shall be true and correct in
all material respects on the Closing Date with the same force and effect as if
they had been made on and as of said date. The Company's business and assets
shall not have been adversely affected in any material way prior to the Closing
Date. The Company shall have performed in all material respects all obligations
and conditions herein required to be performed or observed by it on or prior to
the Closing Date.
(b) Consents and Waivers. The Company shall have obtained in a
--------------------
timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement
and the Rights Agreement.
(c) Amendment of Bylaws; Election of Director. On or prior to
-----------------------------------------
the Closing Date the Company shall have amended its Bylaws to provide for a
Board of Directors with five (5) authorized members of the Board of Directors.
Effective upon the Closing, David Talbot, David Zweig, Standish O'Grady and Kate
Geldons shall have been elected to the Company's Board of Directors.
10
<PAGE>
(d) Additional Agreements. The Company shall have entered into an
---------------------
agreement with Borders, Inc. for the sponsorship of the Sneak Peek section of
the Company's worldwide web magazine (the "Borders Agreement").
(e) Rights Agreement. The Company and the Purchasers shall have
----------------
executed the Rights Agreement.
(f) Founders Shares. David Talbot and David Zweig shall have entered
---------------
into agreements providing for the Company's right to repurchase the unvested
portion of their shares in the event of termination of their employment for
other than death or disability.
(g) Compliance Certificate. The Company shall have delivered a
----------------------
Certificate, executed on behalf of the Company by the President, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
subsections (a), (b), (c), (d), (e) and (f).
(h) Secretary Certificate. The Company shall have delivered a
---------------------
Certificate, executed on behalf of the Company by the Secretary, dated the
Closing Date, certifying the Board of Directors and stockholders resolutions
approving this Agreement, the Rights Agreement and the issuance of the Series A
Shares and certifying the current versions of the Articles of Incorporation and
Bylaws of the Company.
(i) Opinion of Counsel. The Purchasers shall have received an opinion
------------------
from Gray Cary Ware & Freidenrich, the Company's counsel, satisfactory in form
to special counsel for the Purchasers.
5.2 Conditions to Obligations of the Company. The Company's obligation to
----------------------------------------
sell and issue the Series A Shares at the Closing is subject to the fulfillment
to the satisfaction of the Company on or prior to the Closing Date of the
following conditions, any of which may be waived by the Company:
(a) Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by each Purchaser in Section 4 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date with the same force
and effect as if they had been made on and as of said date.
(b) Conditions Fulfilled. The conditions set forth in subsections (b)
--------------------
and (e) of Section 5.1 shall have been fulfilled.
6. Affirmative Covenants of the Company. The Company hereby covenants and
------------------------------------
agrees as follows:
6.1 Financial Information. Until the first to occur of (i) the date
---------------------
on which the Company is required to file a report pursuant to Section 13(a) of
the Securities Exchange Act of 1934 (the "Exchange Act"), by reason of the
Company having registered any of its securities pursuant to Section 12(g) of the
Exchange Act or (ii) quotations for the Common Stock of the Company are reported
by the automated quotations system operated by the National Association of
Securities Dealers, Inc. or by an equivalent quotations system or (iii) shares
of the Common
11
<PAGE>
Stock of the Company are listed on a national securities exchange registered
under Section 6 of the Exchange Act, the Company will furnish to each Purchaser:
(a) so long as such Purchaser or its affiliates own any of the Series
A Shares or Common Stock issued upon conversion of the Series A Shares, as soon
as practicable after the end of each fiscal year, and in any event within 120
days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal year, and consolidated
statements of operations and consolidated statements of cash flow of the Company
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles, all in reasonable detail and certified
by independent public accountants of recognized national standing selected by
the Company; and
(b) so long as the Purchaser continues to hold any of the Series A
Shares or Common Stock issued upon conversion of the Series A Shares, as soon as
practicable after the end of each fiscal quarter, and in any event within 45
days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal quarter, and consolidated
statements of operations and consolidated statements of cash flow of the Company
and its subsidiaries, if any, for such quarter, prepared in accordance with
generally accepted accounting principles (except for required footnotes), all in
reasonable detail, subject to changes resulting from year-end audit adjustments
and inter-period allocations; and
(c) so long as the Purchaser continues to hold at least 100,000
shares of the Company's Series A Preferred Stock (as adjusted for stock splits,
combinations, dividends, distributions or recapitalizations), as soon as
practicable after the end of each month and in any event within 30 days
thereafter, consolidated balance sheets of the Company and its subsidiaries, if
any, as of the end of such month and consolidated statements of income and cash
flow statements, for such month and for the current fiscal year to date,
prepared in accordance with generally accepted accounting principles (except for
required footnotes), all in reasonable detail, subject to changes resulting from
year-end audit adjustments and inter-period allocations; and
(d) so long as the Purchaser continues to hold at least 100,000
shares of the Company's Series A Preferred Stock (as adjusted for stock splits,
combinations, dividends, distributions or recapitalizations), as soon as
practicable and in any event no later than thirty days before the end of the
fiscal year, an annual budget (consisting of projected income statements and
projected cash flow statements reported on a monthly basis) for the subsequent
fiscal year.
6.2 Conflicts of Interests. The Company shall use its best efforts to
----------------------
ensure that the Company's employees, during the term of their employment with
the Company, do not engage in activities which would result in a conflict of
interest with the Company. The Company's obligations hereunder include, but are
not limited to, requiring that the Company's employees devote their primary
productive time, ability and attention to the business of the Company (provided,
however, the Company's employees may engage in other professional activity if
such activity does not materially interfere with their obligations to the
Company), and requiring that the Company's employees enter into agreements
regarding proprietary information and confidentiality.
12
<PAGE>
6.3 Proprietary Rights Agreements. The Company will enter into a
-----------------------------
confidentiality and proprietary rights agreement with each new employee engaged
by the Company at the time of their employment by the Company.
6.4 Future Stock Issuances. The Company agrees, unless otherwise
----------------------
approved by at least 80% of the Directors then in office, that after the
Closing, stock options granted to employees, consultants or directors will be
granted with an exercise price of no less than fair market value at the time of
grant and with vesting schedule of four years (25% after the first year of
employment or service and remainder vesting in equal quarterly increments over
the following three years).
6.5 Inspection. The Company shall permit each Purchaser, at such
----------
Purchaser's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by such Purchaser; provided, however, that the Company shall not be obligated
pursuant to this Section 6.5 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
6.6 Special Board Approval Items. Unless otherwise indicated below,
----------------------------
the Company will not take any of the following actions unless they are approved
by the Board of Directors or taken pursuant to Board approved policies:
(a) Hiring of all officers of the Company;
(b) Entering into employment agreements (may be approved by a
majority of disinterested Directors, or a compensation committee of the Board of
Directors);
(c) Establish compensation programs for all officers and key
employees, including base salaries and bonus programs (may be approved by a
majority of disinterested Directors or by a compensation committee, when
established);
(d) Establish stock option programs and grants of stock options,
stock or rights to acquire stock (may be approved by a majority of disinterested
Directors or by a compensation committee, when established);
(e) Establishment of annual budgets, business and financial
plans;
(f) Entering into any real estate lease or purchase arrangement;
(g) Entering into any obligations or commitments, including
capital equipment leases or purchases, with total value greater than $25,000 and
which are outside the most recent business plan or budget approved by the Board
of Directors;
(h) Entering into agreements to license the Company's content or
technology for foreign markets or other publications (may be approved by a
majority of disinterested Directors); and
13
<PAGE>
(i) Amendment of Editorial Policy of the Company and the
establishment and membership of the Editorial Advisory Board; provided however
that the day-to-day editorial management of these publications will be the sole
responsibility of the editor and staff.
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
7.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by the Purchasers.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the date of such
certificate or instrument.
7.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7.4 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
they supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
7.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally,
mailed by first class mail, postage prepaid, or delivered by courier or
overnight delivery, addressed (a) if to a Purchaser, at such Purchaser's address
set forth in the Schedule of Purchasers, or at such other address as such
Purchaser shall have furnished to the Company in writing or (b) if to the
Company, at 221 Main Street, Suite 940, San Francisco, CA 94105, or at such
other address as the Company shall have furnished to the Purchasers in writing.
Notices that are mailed shall be deemed received five days after deposit in the
United States mail.
7.6 Severability. In case any provision of this Agreement shall be
------------
found by a court of law to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
7.7 Finder's Fees and Other Fees.
----------------------------
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement and, (ii) hereby agrees to indemnify and to hold Purchasers harmless
from and against any liability for commission or compensation in the nature of a
finder's fee to any broker or other person or firm
14
<PAGE>
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company, or any of its employees or representatives, is
responsible.
(b) Each Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Company
harmless from and against any liability for any commission or compensation in
the nature of a finder's fee to any broker or other person or firm (and the
costs and expenses of defending against such liability or asserted liability)
for which such Purchaser, or any of its employees or representatives, are
responsible.
7.8 Expenses. The Company and the Purchasers shall each bear their
--------
own expenses and legal fees in connection with the consummation of this
transaction; provided, however, that the Company will pay the reasonable fees
and disbursements up to an aggregate of $10,000, of special counsel for the
Purchasers in connection with the transaction contemplated by this Agreement.
7.9 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.11 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to any holder of any
securities issued or to be issued hereunder shall impair any such right, power
or remedy of the Company or such holder, nor shall it be construed to be a
waiver of any breach or default under this Agreement, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any delay or omission to exercise any right, power or remedy or any waiver
of any single breach or default be deemed a waiver of any other right, power or
remedy or breach or default theretofore or thereafter occurring. All remedies,
either under this Agreement, or by law otherwise afforded to the Company or any
holder, shall be cumulative and not alternative.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series A
Preferred Stock Purchase Agreement as of the date first written above.
SALON INTERNET, INC.
By: /s/ David Zweig
-------------------------
David Zweig, President
PURCHASERS:
ADOBE VENTURES L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
---------------------------------------
Title: President
------------------------------------
H&Q SALON INVESTORS, L.P.
By: /s/ Standish O'Grady
---------------------------------------
Title: President
------------------------------------
16
<PAGE>
List of Exhibits
Exhibit A - Schedule of Purchasers
Exhibit B - Articles of Incorporation
Exhibit C - Schedule of Exceptions
Exhibit D - Rights Agreement
Exhibit E - Stockholder and Optionholder List
Exhibit F - Material Contracts
17
<PAGE>
EXHIBIT A
---------
Schedule of Purchasers
Name No. of Shares Purchase Price
- ---- ------------- --------------
Adobe Ventures L.P. 1,200,000 $1,200,000
c/o Hambrecht & Quist
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
H&Q Salon Investors, L.P. 500,000 $ 500,000
c/o Hambrecht & Quist
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
--------- ----------
TOTAL 1,700,000 $1,700,000
18
<PAGE>
EXHIBIT B
---------
Articles of Incorporation
19
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
Pursuant to Section 3 of the Series A Preferred Stock Purchase Agreement
dated December ____, 1995 (the "Agreement") between Salon Internet, Inc. (the
"Company") and the purchasers listed on the Schedule of Purchasers attached to
the Agreement as Exhibit A, the Company hereby delivers this Schedule of
---------
Exceptions (the "Schedule"). The section numbers in the Schedule correspond to
the section numbers in the Agreement. Any information disclosed under any
section in the Schedule is deemed to be disclosed and incorporated in any other
section of the Schedule where such disclosure would be appropriate. Capitalized
terms used in the Schedule, unless otherwise specified, have the same meanings
given them in the Agreement.
3.7 Patents, Trademarks, etc. Pursuant to a Letter Agreement between the
-------------------------
Company and Borders, Inc. dated December 13, 1995 (the "Borders
Agreement"), the Company has granted Borders, Inc. an exclusive license to
reproduce, distribute and display certain written reviews created by the
Company during the term of the Borders Agreement.
3.22 Employee Benefit Plans. The Company's only "employee benefit plan" is the
----------------------
Salon Internet, Inc. 401(k) Plan (the "Plan"). The Company makes no
contributions the Plan. The Company's Board of Directors has also
approved the Salon Internet, Inc. 1995 Stock Option Plan.
3.24 Insurance. The Company currently does not have liability insurance. The
---------
Company is in the processing of obtaining fire and casualty insurance
policies, and insurance against other hazards, risks and liabilities to
persons and property.
20
<PAGE>
EXHIBIT D
---------
RIGHTS AGREEMENT
21
<PAGE>
EXHIBIT E
---------
LIST OF STOCKHOLDERS
AND OPTION HOLDERS
HOLDERS OF OUTSTANDING COMMON STOCK
-----------------------------------
Name Number of Shares
- ---- ----------------
David Talbot 600,000
David Zweig 600,000
-------
TOTAL 1,200,000
HOLDERS OF OPTIONS TO PURCHASE COMMON STOCK
-------------------------------------------
Name Number of Shares
- ---- ----------------
A.S. Ross 160,000
Mignon Khargie 140,000
Gary Kamiya 100,000
Niwana Nalley 100,000
Laura Miller 40,000
Scott Rosenberg 40,000
Joyce Miller 40,000
Dan Shafer 40,000
Susan Fassberg 20,000
------
TOTAL 680,000
22
<PAGE>
EXHIBIT F
---------
LIST OF MATERIAL CONTRACTS
--------------------------
1. Letter Agreement between Salon Internet, Inc. and Borders, Inc. dated
December 13, 1995
2. WebGenesis, Inc. Agreement between Salon Internet, Inc. and WebGenesis,
Inc. dated December 7, 1995.
3. Common Stock Purchase Agreement between Salon Internet, Inc. and David
Zweig dated July 5, 1995.
4. Common Stock Purchase Agreement between Salon Internet, Inc. and David
Talbot dated July 5, 1995.
5. Apple Computer, Inc. Agreement for Consulting Services between Apple
Computer, Inc. and Salon Internet, Inc. dated August 3, 1995.
6. Apple Computer, Inc. Agreement for Consulting Services between Apple
Computer, Inc. and Salon Internet, Inc. dated October 13, 1995.
23
<PAGE>
EXHIBIT 10.20
SALON INTERNET, INC.
AMENDMENT NUMBER ONE TO
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Amendment Number One (the "Amendment") to the Series A Preferred Stock
Purchase Agreement dated as of December 22, 1995 (the "Stock Purchase
Agreement") is entered into as of August 2, 1996, by and among Salon Internet,
Inc. (the "Company"), a California corporation, and each of the entities named
in the Schedule of Purchasers attached as Exhibit A-1 ("Schedule of Purchasers")
-----------
hereto. Unless specifically designated otherwise, the capitalized terms herein
shall have the same meanings given them in the Stock Purchase Agreement.
RECITALS
--------
A. The Board of Directors of the Company has determined that it is in the
best interests of the Company to amend the Stock Purchase Agreement to provide
for an additional closing and to provide for the sale and issuance of an
additional 300,000 shares of the Company's Series A Preferred Stock to the
Purchasers in the amounts set forth on Exhibit A-1 attached hereto.
-----------
B. The Company and the Purchasers wish to amend the Stock Purchase
Agreement dated as of December 22, 1995, to provide for a Second Closing as
described in the Stock Purchase Agreement.
AGREEMENT
---------
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto agree to amend certain
provisions of the Stock Purchase Agreement as set forth below:
1. A new Section 2.2 is added to the Stock Purchase Agreement to read in
full as follows:
2.2 Second Closing Date. The Second Closing comprising the purchase
-------------------
by the Purchasers and sale by the Company of 300,000 Series A Shares shall be
held at the offices of Gray Cary Ware and Freidenrich, 400 Hamilton Avenue, Palo
Alto, California 94501 on August 2, 1996, or at such other time and place as the
Company and the Purchasers may agree in writing.
2. Section 3.4 of the Stock Purchase Agreement shall be amended and
restated to read as follows:
3.4 Capitalization. The authorized capital stock of the Company is
--------------
10,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, of
which 2,000,000 have been
1
<PAGE>
designated Series A Preferred Stock. There are issued and outstanding 1,200,000
shares of the Company's Common Stock and 1,700,000 shares of Series A Preferred
Stock. The holders of record of the presently issued and outstanding Common
Stock, Preferred Stock and options to purchase Common Stock immediately prior to
the Closing are as set forth on Exhibit E-1. All such issued and outstanding
-----------
shares have been duly authorized and validly issued, are fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities. The holders of any and all
rights, options, warrants or conversion rights to purchase or acquire from the
Company any of its capital stock, along with the number of shares of capital
stock issuable upon exercise of such rights, are set forth in Exhibit E-1
-----------
hereto. The Company has reserved at least 2,000,000 shares of Common Stock for
issuance upon conversion of the Series A Preferred Stock and 800,000 shares of
Common Stock for future issuance to employees, consultants, officers or
directors under stock or other option plans or arrangements approved by the
Board of Directors. Except for such rights, there are no outstanding rights,
options, warrants, conversion rights or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. The Company is
not a party or subject to any agreement or understanding between any persons or
entities, which affects or relates to the voting or giving of written consents
with respect to any securities.
3. Section 3.5(a) of the Stock Purchase Agreement shall be amended and
restated to read in full as follows:
"(a) Corporate Action. All corporate action on the part of the Company,
----------------
its officers, directors and shareholders necessary for the sale and issuance of
the Series A Shares, the issuance of the Common Stock issuable upon conversion
of the Series A Shares and the performance of the Company's obligations
hereunder and under the Rights Agreement has been taken or will be taken prior
to the Closing. The Company has duly reserved an aggregate of 2,000,000 shares
of Common Stock for issuance upon conversion of the Series A Shares."
4. Exhibit B, the Amended and Restated Articles of Incorporation, is
---------
amended and restated to read as set forth on Exhibit B-1 attached hereto.
-----------
5. Exhibit C, the Schedule of Exceptions, is amended and restated to
---------
read as set forth on Exhibit C-1 attached hereto. [In order to update, if
-----------
necessary.]
6. Exhibit E, the List of Stockholders and Optionholders, is amended and
---------
restated to read as set forth on Exhibit E-1 attached hereto. [In order to
-----------
update, if necessary.]
7. Exhibit F, the List of Material Contracts, is amended and restated to
---------
read as set forth on Exhibit F-1 attached hereto. [In order to update, if
-----------
necessary.]
8. This Amendment shall inure to the benefit of the successors and
assigns of the Company and the Purchasers.
9. This Amendment shall be construed under the laws of the State of
California as it applies to agreements between California residents, entered
into and to be performed entirely within California.
2
<PAGE>
10. This Amendment may be executed in multiple counterparts, each of
which when so executed shall be deemed an original, and all counterparts shall
constitute but one and the same instrument.
11. Except as amended hereby, the Stock Purchase Agreement dated December
22, 1995, remains in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
SALON INTERNET, INC.
By: /s/ David Zweig
-----------------------------------------------
David Zweig, President
ADOBE VENTURES L.P.
By: Its General Partner,
H&Q Adobe Ventures Management L.P.,
By: Its General Partner,
H&Q Adobe Ventures Management Corp.,
By: Its President,
Standish O'Grady
By: /s/ Standish O'Grady
----------------------------------------------
Title: President
-------------------------------------------
H&Q SALON INVESTORS, L.P.
By: /s/ Standish O'Grady
-----------------------------------------------
Title: President
-------------------------------------------
3
<PAGE>
EXHIBIT A - 1
-------------
Schedule of Purchasers
SECOND CLOSING PURCHASERS
Name No. of Shares Purchase Price
---- ------------- --------------
Adobe Ventures L.P. 300,000 $300,000
c/o Hambrecht & Quist
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
------- --------
TOTAL 300,000 $300,000
4
<PAGE>
EXHIBIT B-1
-----------
Certificate of Amendment
to
Amended and Restated Certificate of Incorporation
of
Salon Internet, Inc.
5
<PAGE>
EXHIBIT C-1
-----------
Schedule of Exceptions
6
<PAGE>
EXHIBIT E-1
-----------
List of Stockholders and Optionholders
7
<PAGE>
EXHIBIT F-1
-----------
List of Material Contracts
8
<PAGE>
EXHIBIT 10.21
SALON INTERNET, INC.
AMENDMENT NUMBER TWO TO
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Amendment Number Two ("Amendment Two") to the Series A Preferred Stock
Purchase Agreement dated December 22, 1995, as amended by Amendment Number One
to Series A Preferred Stock Purchase Agreement dated August 2, 1996 ("Amendment
One"), is entered into as of February 6, 1997, by and among Salon Internet,
Inc. (the "Company"), a California corporation, and Adobe Ventures L.P. and H&Q
Salon Investors, L.P. (the "Purchasers") (the Stock Purchase Agreement and
Amendment One are collectively referred to as the "Stock Purchase Agreement"
hereinafter). Unless specifically designated otherwise, the capitalized terms
herein shall have the same meanings given them in the Stock Purchase Agreement.
RECITALS
--------
A. The Board of Directors of the Company has determined that it is in the
best interests of the Company to amend the Stock Purchase Agreement to provide
for a third closing and to provide for the sale and issuance of an additional
3,000,000 shares of the Company's Series A Preferred Stock to the Purchasers in
the amounts as set forth on the Schedule of Purchasers attached as Exhibit A-2
-----------
hereto.
B. The Company and the Purchasers wish to amend the Stock Purchase
Agreement to provide for a third closing.
AGREEMENT
---------
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto agree to amend certain
provisions of the Stock Purchase Agreement as set forth below:
1. Section 1.1 is amended and restated to read in full as follows:
1.1 Authorization; Filing of Articles of Incorporation. The Company
--------------------------------------------------
has authorized the issuance and sale pursuant to the terms and conditions hereof
of up to 5,000,000 shares of its Series A Preferred Stock, (the "Series A
Shares"), having the rights, preferences and privileges as set forth in the form
of the Amended and Restated Articles of Incorporation of the Company (the
"Articles of Incorporation") attached to the Stock Purchase Agreement as Exhibit
-------
B, as amended by the amendment to the Articles of Incorporation attached hereto
- -
as Exhibit B-2.
-----------
1
<PAGE>
2. Section 2.1 is amended and restated to read in full as follows:
2.1 Closing Date. The closing comprising the purchase by the
------------
Purchasers and sale by the Company of 1,700,000 shares of Series A Shares was
held at the offices of Gray Cary Ware & Freidenrich, 400 Hamilton Avenue, Palo
Alto, California 94301 on December 22, 1995 (the "First Closing"). A second
closing comprising the purchase by the Purchasers and the sale by the Company of
a total of an additional 300,000 shares of its Series A Shares was held at the
offices of Gray Cary Ware & Freidenrich on August 2, 1996 (the "Second
Closing"). In addition, subject to mutual agreement of the Company and the
Purchasers, there may be a third closing comprising the purchase by the
Purchasers and the sale by the Company of a total of an additional 3,000,000
shares of the Company's Series A Shares (the "Third Closing"). The First
Closing, Second Closing and Third Closing referred to in this Section 2.1 each
shall be hereinafter referred to as the "Closing" and the date of the Closing is
hereinafter referred to as the "Closing Date."
3. A new Section 2.3 is added to the Stock Purchase Agreement to read in
full as follows:
2.2 Third Closing Date. The Third Closing comprising the purchase
------------------
by the Purchasers and sale by the Company of 3,000,000 Series A Shares shall be
held at the offices of Gray Cary Ware and Freidenrich, 400 Hamilton Avenue, Palo
Alto, California 94301 on February 6, 1997, or at such other time and place as
the Company and the Purchasers may agree in writing.
4. Section 3.4 of the Stock Purchase Agreement shall be amended and
restated to read as follows:
3.4 Capitalization. The authorized capital stock of the Company is
--------------
10,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, of
which 5,000,000 have been designated Series A Preferred Stock and 5,000,000 have
been designated Series A-1 Preferred Stock. There are issued and outstanding
750,000 shares of the Company's Common Stock and 2,000,000 shares of Series A
Preferred Stock. The holders of record of the presently issued and outstanding
Common Stock, Preferred Stock and options to purchase Common Stock immediately
prior to the Closing are as set forth on Exhibit E-2. All such issued and
-----------
outstanding shares have been duly authorized and validly issued, are fully paid
and nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities. The holders of any and all
rights, options, warrants or conversion rights to purchase or acquire from the
Company any of its capital stock, along with the number of shares of capital
stock issuable upon exercise of such rights, are set forth in Exhibit E-2
-----------
hereto. The Company has reserved at least 5,000,000 shares of Common Stock for
issuance upon conversion of the Series A Preferred Stock and 3,750,000 shares of
Common Stock for future issuance to employees, consultants, officers or
directors under stock or other option plans or arrangements approved by the
Board of Directors. Except for such rights, there are no outstanding rights,
options, warrants, conversion rights or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. The Company is
not a party or subject to any agreement or understanding between any persons or
entities, which affects or relates to the voting or giving of written
2
<PAGE>
consents with respect to any securities.
5. Section 3.5(a) of the Stock Purchase Agreement shall be amended and
restated to read in full as follows:
"(a) Corporate Action. All corporate action on the part of the Company,
----------------
its officers, directors and shareholders necessary for the sale and issuance of
the Series A Shares, the issuance of the Common Stock issuable upon conversion
of the Series A Shares and the performance of the Company's obligations
hereunder and under the Rights Agreement has been taken or will be taken prior
to the Closing. The Company has duly reserved an aggregate of 5,000,000 shares
of Common Stock for issuance upon conversion of the Series A Shares."
5. Exhibit B, the Articles of Incorporation, are amended as set forth on
---------
Exhibit B-2 attached hereto.
- -----------
6. Exhibit C, the Schedule of Exceptions, is amended and restated to read
---------
as set forth on Exhibit C-2 attached hereto.
-----------
7. Exhibit E, the List of Stockholders and Optionholders, is amended and
---------
restated to read as set forth on Exhibit E-2 attached hereto.
-----------
8. Exhibit F, the List of Material Contracts, is amended and restated to
---------
read as set forth on Exhibit F-2 attached hereto.
-----------
9. This Amendment Two shall inure to the benefit of the successors and
assigns of the Company and the Purchasers.
10. This Amendment Two shall be construed under the laws of the State of
California as it applies to agreements between California residents, entered
into and to be performed entirely within California.
11. This Amendment Two may be executed in multiple counterparts, each of
which when so executed shall be deemed an original, and all counterparts shall
constitute but one and the same instrument.
12. Except as amended hereby, the Stock Purchase Agreement remains in full
force and effect.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment Two as of the
day and year first above written.
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
---------------------------------------
Michael O'Donnell, President
ADOBE VENTURES L.P.
By: Its General Partner,
H&Q Adobe Ventures Management L.P.,
By: Its General Partner,
H&Q Adobe Ventures Management Corp.,
By: Its President,
Standish O'Grady
By: /s/ Standish O'Grady
---------------------------------------
Title: President
------------------------------------
H&Q SALON INVESTORS, L.P.
By: /s/ Standish O'Grady
--------------------------------------
Title: President
-----------------------------------
4
<PAGE>
EXHIBIT A - 2
-------------
Schedule of Purchasers
Third Closing
THIRD CLOSING PURCHASER
<TABLE>
<CAPTION>
Name No. of Shares Purchase Price
--------------------------- ------------- --------------
<S> <C> <C>
Adobe Ventures L.P. 2,250,000 $2,250,000
c/o Hambrecht & Quist
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
H&Q Salon Investors, L.P. 750,000 750,000
c/o Hambrecht & Quist
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
------- -------
TOTAL 3,000,000 $3,000,000
</TABLE>
5
<PAGE>
EXHIBIT B-2
-----------
Certificate of Amendment
to
Amended and Restated Certificate of Incorporation
of
Salon Internet, Inc.
6
<PAGE>
EXHIBIT C-2
-----------
Schedule of Exceptions
Third Closing
Pursuant to Section 3 of the Series A Preferred Stock Purchase Agreement
dated December 22, 1995 (the "Agreement"), as amended in August 1996 and
February 1997, between Salon Internet, Inc. (the "Company") and the purchasers
listed on the Schedule of Purchasers attached to the Agreement as Exhibit A, the
---------
Company hereby delivers this Schedule of Exceptions (the "Schedule"). The
section numbers in the Schedule correspond to the section numbers in the
Agreement. Any information disclosed under any section in the Schedule is deemed
to be disclosed and incorporated in any other section of the Schedule where such
disclosure would be appropriate. Capitalized terms used in the Schedule, unless
otherwise specified, have the same meanings given them in the Agreement.
3.7 Patents, Trademarks, etc. Pursuant to Letter Agreements between the
-------------------------
Company and Borders, Inc. dated December 13, 1995 and November 11, 1996
(the "Borders Agreements"), the Company has granted Borders, Inc. an
exclusive license to reproduce, distribute and display certain written
reviews created by the Company during the term of the Borders Agreements.
3.10 Litigation, etc. The Company terminated an employee in late 1996. In
----------------
December 1996, the Company received a letter from this ex-employee
indicating the ex-employee intended to sue the Company for wrongful
termination unless the Company paid the ex-employee $5,000. After
consulting with counsel, the management of the Company concluded that the
ex-employee had no basis for a wrongful termination claim and in January
1997 communicated this to the ex-employee.
3.16 Financial Statements. The Company has delivered to Purchasers the
--------------------
unaudited balance sheets and related statements of operations and cash flow
as of November 30, 1996 and for the eleven month period then ended. Such
financial statements shall be the "Financial Statements" for purposes of
Section 3.16 of the Agreement and the Third Closing, and the
representations made as of October 31, 1995 in Section 3.16 of the
Agreement and November 30, 1995 in Section 3.17 of the Agreement shall be
made as of November 30, 1996 for purposes of the Third Closing.
3.18 Outstanding Indebtedness. The Company has indebtedness incurred in the
------------------------
ordinary course of business, which in the aggregate does not exceed $25,000
as of January 25, 1997.
3.22 Employee Benefit Plans. The Company's only "employee benefit plan" is the
----------------------
Salon Internet, Inc. 401(k) Plan (the "Plan"). The Company makes no
contributions the Plan. The Company's Board of Directors has also approved
the Salon Internet, Inc. 1995 Stock
7
<PAGE>
Option Plan.
8
<PAGE>
EXHIBIT E-2
-----------
List of Stockholders and Optionholders
Third Closing
HOLDERS OF OUTSTANDING COMMON STOCK
-----------------------------------
<TABLE>
<CAPTION>
Number
of
Name Shares
---- ------
<S> <C>
David Talbot 600,000
David Zweig 150,000
-------
TOTAL 750,000
</TABLE>
HOLDERS OF OUTSTANDING PREFERRED STOCK
--------------------------------------
<TABLE>
<CAPTION>
Number
of
Name Shares
---- ------
<S> <C>
Adobe Ventures L.P. 1,500,000
H&Q Salon Investors, L.P. 500,000
---------
TOTAL 2,000,000
</TABLE>
HOLDERS OF OPTIONS TO PURCHASE COMMON STOCK
-------------------------------------------
<TABLE>
<CAPTION>
Name Shares
---- ------
<S> <C>
Michael O'Donnell 520,000
A. S. Ross 280,000
Mignon Khargie 260,000
Gary Kamiya 240,000
Dan Schafer 100,000
Darlene Townsend 90,000
Scott Rosenberg 100,000
Elizabeth Kairys 60,000
Laura Miller 100,000
Joyce Millman 50,000
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Dwight Garner 50,000
Bonni Hamilton 55,000
Cynthia Joyce 30,000
Suzette Lalime 15,000
Tyson Vaughan 10,000
Marc Wernick 85,000
Karen Templar 20,000
Gary Kaufman 10,000
Steve Michel 15,000
Mary Beth Williams 20,000
---------
TOTAL 2,460,000
</TABLE>
10
<PAGE>
EXHIBIT F-2
-----------
List of Material Contracts
1. Letter Agreement between Salon Internet, Inc. and Borders, Inc. dated
December 13, 1995
2. WebGenesis, Inc. Agreement between Salon Internet, Inc. and
WebGenesis, Inc. dated December 7, 1995.
3. Common Stock Purchase Agreement between Salon Internet, Inc. and David
Zweig dated July 5, 1995.
4. Common Stock Purchase Agreement between Salon Internet, Inc. and David
Talbot dated July 5, 1995.
5. Apple Computer, Inc. Agreement for Consulting Services between Apple
Computer, Inc. and Salon Internet, Inc. dated August 3, 1995.
6. Apple Computer, Inc. Agreement for Consulting Services between Apple
Computer, Inc. and Salon Internet, Inc. dated October 13, 1995.
7. Letter Agreement between Salon Internet, Inc. and Borders, Inc. dated
November 11, 1996
8. Employment Letter Agreement with Michael O'Donnell dated November 1996
(provides for severance payments).
9. Employment Letter Agreement with Don George dated January 1997
(provides for severance payments)
10. The Company has the following standard agreements with its employees
and consultants: proprietary rights agreements and option agreements.
11
<PAGE>
EXHIBIT 10.22
SALON INTERNET, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made
as of November 28, 1997, between SALON INTERNET, INC., a California corporation
(the "Company"), and the purchasers listed on the Schedule of Purchasers
("Schedule of Purchasers") attached hereto as Exhibit A (the "Purchasers"). The
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parties hereby agree as follows:
1. Authorization and Sale of the Preferred Shares.
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1.1 Authorization; Filing of Amended and Restated Certificate of
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Incorporation. The Company has authorized the issuance and sale pursuant to the
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terms and conditions hereof of up to 1,900,000 shares of its Series B Preferred
Stock, (the "Series B Shares"), having the rights, preferences and privileges as
set forth in the form of the Amended and Restated Articles of Incorporation of
the Company (the "Articles of Incorporation") attached hereto as Exhibit B. The
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Company shall adopt and file the Articles of Incorporation with the Secretary of
State of the State of California before the Closing (as defined below).
1.2 Sale and Issuance of the Series B Shares. Subject to the terms
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and conditions hereof, at the Closing (as defined below) the Company will issue
and sell to each Purchaser and each Purchaser will purchase from the Company
that number of shares of Series B Shares set forth opposite each Purchaser's
name on Exhibit A hereto at a purchase price of $1.58 per share.
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2. Closing Date; Delivery.
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2.1 Closing Date. The closing comprising the purchase by the
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Purchasers and sale by the Company of up to 1,900,000 shares of Series B Shares
shall be held at the offices of Gray Cary Ware & Freidenrich, 400 Hamilton
Avenue, Palo Alto, California 94301 on November 28, 1997, or at such other time
and place as the Company and the Purchasers may agree in writing (the
"Closing").
2.2 Delivery. Subject to the terms of this Agreement, at the
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Closing, the Company will deliver to each Purchaser a certificate or
certificates representing the number of Series B Shares designated in Exhibit A
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to be issued to such Purchaser, against payment of the purchase price therefor
by delivery of a check or wire transfer, payable to the order of the Company.
3. Representations and Warranties of the Company. The Company hereby
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represents and warrants to the Purchasers that except as set forth on a Schedule
of Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to
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be representations and warranties as if made hereunder:
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3.1 Organization and Standing. The Company is a corporation duly
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organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to carry on its
businesses as now conducted and as proposed to be conducted. The Company is
qualified or licensed to do business as a foreign corporation in all
jurisdictions where such qualification or licensing is required, except where
the failure to so qualify would not have a material adverse effect upon the
Company.
3.2 Corporate Power. The Company has now, or will have at the
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Closing Date, all requisite corporate power necessary for the authorization,
execution and delivery of this Agreement, the First Amended and Restated Rights
Agreement in the form attached hereto as Exhibit D (the "Rights Agreement") and
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the Voting Agreement in the form attached hereto as Exhibit E (the "Voting
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Agreement"). This Agreement, the Rights Agreement and the Voting Agreement are
valid and binding obligations of the Company enforceable in accordance with
their terms, except as the same may be limited by bankruptcy, insolvency,
moratorium, and other laws of general application affecting the enforcement of
creditors' rights.
3.3 Subsidiaries. The Company does not control, directly or
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indirectly, any other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of the Company is
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25,000,000 shares of Common Stock and 13,835,000 shares of Preferred Stock, of
which 5,017,500 have been designated Series A Preferred Stock, 5,017,500 have
been designated Series A-1 Preferred Stock, 1,900,00 have been designated Series
B Preferred Stock and 1,900,000 have been designated Series B-1 Preferred Stock.
There are issued and outstanding 750,000 shares of the Company's Common Stock,
5,000,000 shares of Series A Preferred Stock and no shares of Series A-1, Series
B or Series B-1 Preferred Stock. The holders of record of the presently issued
and outstanding Common Stock, options to purchase Common Stock and Series A
Preferred Stock immediately prior to the Closing are as set forth on Exhibit F
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("Shareholder and Optionholder List"). All such issued and outstanding shares
have been duly authorized and validly issued, are fully paid and nonassessable,
and were issued in compliance with all applicable state and federal laws
concerning the issuance of securities. The holders of any and all rights,
options, warrants or conversion rights to purchase or acquire from the Company
any of its capital stock, along with the number of shares of capital stock
issuable upon exercise of such rights, are set forth in Exhibit F hereto. The
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Company has reserved at least 5,000,000 shares of Common Stock for issuance upon
conversion of the Series A and Series A-1 Preferred Stock and 3,750,000 shares
of Common Stock for future issuance to employees, consultants, officers or
directors upon exercise of options granted or to be granted under stock or other
option plans or arrangements approved by the Board of Directors. Except for such
rights, there are no outstanding rights, options, warrants, conversion rights or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. Except for the Voting Agreement executed concurrently herewith,
the Company is not a party or subject to any agreement or understanding between
any persons or entities, which affects or relates to the voting or giving of
written consents with respect to any securities.
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3.5 Authorization.
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(a) Corporate Action. All corporate action on the part of the
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Company, its officers, directors and stockholders necessary for the sale and
issuance of the Series B Shares, the issuance of the Common Stock issuable upon
conversion of the Series B Shares and the authorization, execution and
performance of the Company's obligations hereunder and under the Rights
Agreement has been taken or will be taken prior to the Closing. The Company has
duly reserved an aggregate of 1,900,000 shares of Common Stock for issuance upon
conversion of the Series B Shares.
(b) Valid Issuance. The Series B Shares when issued in
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compliance with the provisions of this Agreement, and the shares of Common Stock
issued upon conversion of the Series B Shares when issued in accordance with the
provisions of the Articles of Incorporation, will be validly issued, fully paid
and nonassessable and will be free of any liens or encumbrances created by the
Company; provided, however, that all such shares may be subject to restrictions
on transfer under state and/or federal securities laws as set forth herein, and
as may be required by future changes in such laws. The rights, preferences,
privileges and restrictions of the Series B Shares are as set forth in the
Articles of Incorporation.
3.6 No Preemptive Rights. No person has any right of first refusal
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or any preemptive rights in connection with the issuance of the Series B Shares,
the issuance of the Common Stock upon conversion of the Series B Shares or,
except as set forth in the Rights Agreement, any future issuances of securities
by the Company.
3.7 Patents, Trademarks, etc. The Company owns and possesses or is
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licensed under all patents, patent applications, licenses, trademarks, trade
names, brand names, trade secrets, inventions and copyrights employed in the
operation of its business as now conducted and as proposed to be conducted, with
no infringement of or conflict with the rights of others respecting any of the
same. To the best knowledge of the Company, the operation of the Company's
business as now conducted or as proposed to be conducted does not infringe any
patent, copyright, trade secret or other proprietary rights of any third
parties. There are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to patents, patent
applications, licenses, trademarks, trade names, brand names, inventions,
proprietary rights and copyrights of any other person or entity. The Company is
not obligated to make any payments by way of royalties, fees or otherwise to any
owner, licensor of, or other claimant to any patent, trademark, trade name,
copyright or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business, or otherwise. The Company has not
received any communications alleging that it has violated or, by conducting its
business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity, nor is the Company aware of any basis for the
foregoing. There are no agreements, understandings, instruments, contracts,
judgments, orders, writs of decrees to which the Company is a party or by which
it is bound which involve indemnification by the Company with respect to
infringements of proprietary rights.
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3.8 Compliance with Other Instruments. The Company is not in violation
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of any term of its Articles of Incorporation or Bylaws, nor is the Company in
violation of or in default in any material respect under the terms of any
mortgage, indenture, contract, agreement, instrument, judgment or decree, the
violation of which would have a material adverse effect on the Company as a
whole, and to the best knowledge of the Company, is not in violation of any
order, statute, rule or regulation applicable to the Company, the violation of
which would have a material adverse effect on the Company. The execution,
delivery and performance of and compliance with this Agreement or the Rights
Agreement, and the issuance and sale of the Series B Shares will not (a) result
in any such violation, or (b) be in conflict with or constitute a default under
any such term, or (c) result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company
pursuant to any such term. To the best knowledge of the Company, there is no
such term or any such order, statute, rule or regulation which adversely
affects, or in the future may materially adversely affect, the business,
prospects, condition, affairs or operations of the Company or any of its
properties or assets.
3.9 Proprietary Agreements; Employees. Each employee of the Company has
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executed an agreement regarding confidentiality and proprietary information, the
form of which has been provided to special counsel to the Purchasers. None of
its employees is in violation thereof, and the Company will use its best efforts
to prevent such violations. To the best knowledge of the Company, the employees
of the Company are not obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as conducted or
as proposed to be conducted or that would prevent any such employee from
assigning inventions to the Company. Neither the execution nor delivery of this
Agreement or the Rights Agreement, nor the carrying on of the Company's business
as proposed, will conflict with or result in a breach of the terms, conditions
or provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees is now obligated. The Company does
not believe that it is or will be necessary for the Company to utilize any
inventions of any of its employees made prior to their employment by the
Company.
3.10 Litigation, etc. There is no action, proceeding or investigation
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pending, or threatened, against the Company or its officers, directors or
shareholders, or to the best of the Company's knowledge, against employees of
the Company (or, to the best of the Company's knowledge, any basis therefor or
threat thereof): (1) which might result, either individually or in the
aggregate, in (a) any material adverse change in the business, prospects,
conditions, affairs or operations of the Company or in any of its properties or
assets, or (b) any material impairment of the right or ability of the Company to
carry on its business as now conducted or as proposed to be conducted, or (c)
any material liability on the part of the Company; or (2) which questions the
validity of this Agreement, the Rights Agreement, or any action taken or to be
taken in connection herewith, including in each case, without limitation,
actions pending or threatened involving the prior employment of any of the
Company's employees, the use in connection with the Company's business of any
information or techniques allegedly proprietary to any of the former employers
of such employees or their obligations under any agreements with prior
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employers. The Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company currently intends to initiate.
3.11 Governmental Consent. No consent, approval or authorization of or
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designation, declaration or filing with any governmental authority on the part
of the Company is required in connection with: (a) the valid execution and
delivery of this Agreement or the Rights Agreement; or (b) the offer, sale or
issuance of the Series B Shares, the issuance of the shares of Common Stock
issuable upon conversion of the Series B Shares or (c) the obtaining of the
consents, permits and waivers specified in subsection 5.1(b) hereof.
3.12 Offering. In reliance on the representations and warranties of the
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Purchasers in Section 4 hereof, the offer, sale and issuance of the Series B
Shares in conformity with the terms of this Agreement will not result in a
violation of the requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act") or the qualification or registration requirements
of applicable blue sky laws.
3.13 Taxes. The Company has filed all tax returns that are required to
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have been filed with appropriate federal, state, county and local governmental
agencies or instrumentalities, except where the failure to do so would not have
a material adverse effect upon the Company, taken as a whole. The Company has
not elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"),
to be treated as a Subchapter S corporation or a collapsible corporation
pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any
other elections pursuant to the Code (other than elections which relate solely
to methods of accounting, depreciation or amortization) which would have a
material effect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets. The Company has paid or established reserves for all income,
franchise and other taxes, assessments, governmental charges, penalties,
interest and fines due and payable by them on or before the Closing.
3.14 Title. The Company owns its property and assets free and clear of
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all liens, mortgages, loans or encumbrances except liens for current taxes, and
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets leased by the Company, the
Company is in compliance with such leases and, to the best of the Company's
knowledge, holds valid leasehold interests free and clear of any liens, claims
or encumbrances.
3.15 Material Contracts and Commitments. All of the contracts, mortgages,
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indentures, agreements, instruments and transactions to which the Company is a
party or by which it is bound (including purchase orders to the Company or
placed by the Company) which involve obligations of, or payments to, the Company
in excess of twenty-five thousand dollars ($25,000) and all agreements between
the Company and its officers, directors, consultants and employees are set forth
on the list attached hereto as Exhibit G (the "Contracts"), copies of which
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have been delivered to special counsel to the Purchasers. All of the Contracts
are valid, binding and in full force and effect in all material respects and
enforceable by the Company in accordance with their respective terms in all
material respects, subject to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and rules or laws concerning
equitable remedies. The Company is not in material default under any of such
Contracts.
3.16 Financial Statements. The Company has delivered to the Purchasers
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the unaudited balance sheets and related statements of operations and cash flow
as of September 30, 1997 and for the nine month period then ended (the
"Financial Statements"). The Financial Statements are in accordance with the
books and records of the Company, are complete and correct, and fairly and
accurately present the financial condition and operating results of the Company
for the periods indicated therein, all in conformity with generally accepted
accounting principles ("GAAP"), except that the unaudited Financial Statements
do not contain footnotes or reflect the interperiod adjustments required by
GAAP. As of September 30, 1997, the Company did not have any liabilities,
absolute, contingent, or otherwise, which in accordance with GAAP are required
to be disclosed or reserved for other than as set forth in the Financial
Statements. Since September 30, 1997, there has been no material adverse change
in the Company's financial condition or assets. The Company maintains and will
continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
3.17 Absence of Changes. Since September 30, 1997 (a) the Company has not
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entered into any transaction which was not in the ordinary course of business,
(b) there has been no material adverse change in the condition (financial or
otherwise) of the business, property, assets or liabilities of the Company other
than changes in the ordinary course of its business, none of which, individually
or in the aggregate, has been materially adverse, (c) there has been no damage
to, destruction of or loss of physical property (whether or not covered by
insurance) materially adversely affecting the assets, prospects, financial
condition, operating results, business or operations of the Company, (d) the
Company has not declared or paid any dividend or made any distribution on its
stock, or redeemed, purchased or otherwise acquired any of its stock, (e) the
Company has not materially changed any compensation arrangement or agreement
with any of its key employees or executive officers, or materially changed the
rate of pay of its employees as a group, (f) the Company has not changed or
amended any material contract by which the Company or any of its assets are
bound or subject, except as contemplated by this Agreement, (g) there has been
no resignation or termination of employment of any key officer or employee of
the Company and the Company does not know of any impending resignation or
termination of employment of any such officer or employee that if consummated
would have a material adverse effect on the business of the Company, (h) there
has been no change, except in the ordinary course of business, in the material
contingent obligations of the Company (nor in any contingent obligation of the
Company regarding any director, stockholder or key employee or officer of the
Company) by way of guaranty, endorsement, indemnity, warranty or otherwise, (i)
there have been no loans made by the Company to any of its employees, officers
or directors other than travel advances and other advances made in the ordinary
course of business, (j) there has been no waiver by the Company of a valuable
right or of a material debt owing to it, and
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(k) there has not been any satisfaction or discharge of any lien, claims or
encumbrance or any payment of any obligation by the Company, except in the
ordinary course of business and which is not material to the assets, properties,
financial condition, operating results or business of the Company.
3.18 Outstanding Indebtedness. The Company has no indebtedness for
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borrowed money which it has directly or indirectly created, incurred, assumed or
guaranteed, or with respect to which it has otherwise become liable, directly or
indirectly.
3.19 Registration Rights. Other than as granted pursuant to the Rights
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Agreement, the Company has not granted or agreed to grant any rights to register
(as that term is defined in the Rights Agreement) securities, including
piggyback registration rights, to any person or entity.
3.20 Certain Transactions. The Company is not indebted, directly or
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indirectly, to any of its employees, officers, directors or stockholders or to
their spouses or children, in any amount whatsoever; and none of said employees,
officers, directors, stockholders, or any member of their immediate families,
are indebted to the Company or have any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship. No such employee, officer, director,
stockholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company. The Company
is not guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
3.21 Corporate Documents; Minute Books. Except for amendments necessary
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to satisfy representations and warranties or conditions contained herein (the
form of which amendments has been approved by the Purchasers), the Bylaws of the
Company are in the form previously provided to special counsel to the
Purchasers. The minute books of the Company previously provided to special
counsel to the Purchasers contain a complete summary of all meetings of
directors and stockholders since the time of incorporation of the Company.
3.22 Employee Benefit Plans. The Company does not have any "employee
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benefit plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended.
3.23 Environmental and Safety Laws. To the best of its knowledge, the
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Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.
3.24 Insurance. The Company has in full force and effect fire and
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casualty insurance policies, and insurance against other hazards, risks and
liabilities to persons and property to the extent and in the manner customary
for companies in similar businesses similarly situated.
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3.25 Labor Agreements and Actions. The Company is not aware that any
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officer or key employee intends to terminate his or her employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of the Company is terminable at the will of the Company.
3.26 Section 83(b) Elections. To the best of the Company's
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knowledge, no elections and notices pursuant to Section 83(b) of the Code and
any analogous provisions of applicable state tax laws have been filed by
individuals who have purchased shares of the Company's Common Stock.
3.27 Disclosure. No representation or warranty by the Company in
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this Agreement, or in any document or certificate furnished or to be furnished
to the Purchasers pursuant hereto or in connection with the transactions
contemplated hereby, when taken together, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements made herein and therein, in the light of the
circumstances under which they were made, not misleading. The Company has fully
provided the Purchasers with all the information which the Purchasers have
requested for deciding whether to purchase the Series B Shares.
4. Representations and Warranties of Purchasers and Restrictions on
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Transfer Imposed by the Securities Act.
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4.1 Representations and Warranties by the Purchasers. Each
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Purchaser, severally and not jointly, represents and warrants to the Company as
follows:
(a) Investment Intent. This Agreement is made with the
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Purchaser in reliance upon such Purchaser's representation to the Company,
evidenced by Purchaser's execution of this Agreement, that Purchaser is
acquiring the Series B Shares and the Common Stock issuable upon conversion of
Series B Shares (collectively the "Securities") for investment for such
Purchaser's own account, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act. Purchaser has the full right, power and authority to
enter into and perform this Agreement and the Rights Agreement, and this
Agreement and the Rights Agreement constitute valid and binding obligations upon
it.
(b) Series B Shares Not Registered. Purchaser understands and
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acknowledges that the offering of the Series B Shares pursuant to this Agreement
will not be registered under the Securities Act or qualified under applicable
blue sky laws on the grounds that the offering and sale of securities
contemplated by this Agreement are exempt from registration under the Securities
Act and exempt from qualifications available under applicable blue sky laws, and
that the Company's reliance upon such exemptions is predicated upon such
Purchaser's representations set forth in this Agreement. Purchaser acknowledges
and understands that the Securities must be held indefinitely unless the
Securities are subsequently registered under the Securities Act and qualified
under applicable blue sky laws or an exemption from such registration and such
qualification is available.
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(c) No Transfer. Purchaser covenants that in no event will such
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Purchaser dispose of any of the Securities (other than in conjunction with an
effective registration statement for the Securities under the Securities Act or
in compliance with Rule 144 promulgated under the Securities Act) unless and
until (i) such Purchaser shall have notified the Company of the proposed
disposition and shall have furnished the Company with a statement of the
circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, such Purchaser shall have furnished the Company with
an opinion of counsel to the effect that (x) such disposition will not require
registration under the Securities Act and (y) appropriate action necessary for
compliance with the Securities Act and other applicable state, local or foreign
law has been taken. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144.
(d) Permitted Transfers. Notwithstanding the provisions of
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subsection (c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser which is a partnership to a partner of
such partnership or a former partner of such partnership who leaves such
partnership after the date hereof, or to the estate of any such partner or
former partner or the transfer by gift, will or intestate succession of any
partner to his spouse or lineal descendants or ancestors, if the transferee
agrees in writing to be bound by the terms of this Agreement to the same extent
as if he were an original Purchaser hereunder.
(e) Knowledge and Experience. Purchaser (i) has such knowledge
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and experience in financial and business matters as to be capable of evaluating
the merits and risks of such Purchaser's prospective investment in the
Securities; (ii) has the ability to bear the economic risks of such Purchaser's
prospective investment; (iii) has been furnished with and has had access to such
information as such Purchaser has considered necessary to make a determination
as to the purchase of the Securities together with such additional information
as is necessary to verify the accuracy of the information supplied; (iv) has had
all questions which have been asked by such Purchaser satisfactorily answered by
the Company; and (v) has not been offered the Securities by any form of
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any such media.
(f) Accredited Investor. Purchaser is an "accredited investor"
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as that term is defined in Rule 501(a) under the Securities Act of 1933, as
amended.
4.2 Legends. Each certificate representing the Securities may be
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endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
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CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR
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(III) PURSUANT TO AN OPINION OF COUNSEL, THAT SUCH REGISTRATION OR COMPLIANCE IS
NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.
(b) Other Legends. Any other legends required by applicable
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state blue sky laws.
The Company need not register a transfer of legended Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in each of the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend endorsed
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on a certificate pursuant to subsection 4.2(a) and the stop transfer
instructions with respect to such legended Securities shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
Securities if such Securities are registered under the Securities Act and a
prospectus meeting the requirements of Section 10 of the Securities Act is
available or if such holder satisfies the requirements of Rule 144(k).
5. Conditions to Closing.
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5.1 Conditions to Purchasers' Obligations. The obligation of each
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Purchaser to purchase the Series B Shares at the Closing is subject to the
fulfillment to the Purchaser's satisfaction, on or prior to the Closing Date, of
the following conditions, any of which may be waived by the Purchaser:
(a) Representations and Warranties Correct; Performance of
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Obligations. The representations and warranties made by the Company in Section 3
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hereof shall be true and correct when made, and shall be true and correct in all
material respects on the Closing Date with the same force and effect as if they
had been made on and as of said date. The Company's business and assets shall
not have been adversely affected in any material way prior to the Closing Date.
The Company shall have performed in all material respects all obligations and
conditions herein required to be performed or observed by it on or prior to the
Closing Date.
(b) Consents and Waivers. The Company shall have obtained in a
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timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement
and the Rights Agreement.
(c) Amendment of Bylaws; Election of Director. Effective upon
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the Closing, (i) the bylaws of the Company will have been amended to increase
the size of the Board of Directors to a range of four (4) to seven (7) and to
initially set the number of directors at six (6), and (ii) the Company's Board
of Directors shall consist of David Talbot, Standish O'Grady, Michael O'Donnell,
Kate Geldens, a designee of ASCII Ventures, and one vacancy. After the Closing
and pursuant to the terms of the Voting Agreement, certain members of the Board
of Directors may select additional members of the Board of Directors.
(d) Rights Agreement. The Company and the Purchasers shall have
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executed the Rights Agreement.
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(e) Voting Agreement. The Company and the Purchasers shall have
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executed the Voting Agreement.
(f) Compliance Certificate. The Company shall have delivered a
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Certificate, executed on behalf of the Company by the President, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
subsections (a), (b), (c), (d) and (e).
(g) Secretary Certificate. The Company shall have delivered a
---------------------
Certificate, executed on behalf of the Company by the Secretary, dated the
Closing Date, certifying the Board of Directors and shareholders resolutions
approving this Agreement, the Rights Agreement and the issuance of the Series B
Shares and certifying the current versions of the Articles of Incorporation and
Bylaws of the Company.
(h) Opinion of Counsel. The Purchasers shall have received an
------------------
opinion from Gray Cary Ware & Freidenrich, the Company's counsel, satisfactory
in form to special counsel for the Purchasers.
5.2 Conditions to Obligations of the Company. The Company's
----------------------------------------
obligation to sell and issue the Series B Shares at the Closing is subject to
the fulfillment to the satisfaction of the Company on or prior to the Closing
Date of the following conditions, any of which may be waived by the Company:
(a) Representations and Warranties Correct. The representations
--------------------------------------
and warranties made by each Purchaser in Section 4 hereof shall be true and
correct when made, and shall be true and correct on the Closing Date with the
same force and effect as if they had been made on and as of said date.
(b) Conditions Fulfilled. The conditions set forth in
--------------------
subsections (b), (d) and (e) of Section 5.1 shall have been fulfilled.
6. Affirmative Covenants of the Company. The Company hereby covenants
------------------------------------
and agrees as follows:
6.1 Financial Information. Until the first to occur of (i) the date
---------------------
on which the Company is required to file a report pursuant to Section 13(a) of
the Securities Exchange Act of 1934 (the "Exchange Act"), by reason of the
Company having registered any of its securities pursuant to Section 12(g) of the
Exchange Act or (ii) quotations for the Common Stock of the Company are reported
by the automated quotations system operated by the National Association of
Securities Dealers, Inc. or by an equivalent quotations system or (iii) shares
of the Common Stock of the Company are listed on a national securities exchange
registered under Section 6 of the Exchange Act, the Company will furnish to each
Purchaser:
(a) so long as such Purchaser or its affiliates own any of the
Series B Shares or Common Stock issued upon conversion of the Series B Shares,
as soon as practicable after the end of each fiscal year, and in any event
within 120 days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal year, and
11
<PAGE>
consolidated statements of operations and consolidated statements of cash flow
of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles, all in reasonable
detail and certified by independent public accountants of recognized national
standing selected by the Company; and
(b) so long as the Purchaser continues to hold any of the Series
B Shares or Common Stock issued upon conversion of the Series B Shares, as soon
as practicable after the end of each fiscal quarter, and in any event within 45
days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal quarter, and consolidated
statements of operations and consolidated statements of cash flow of the Company
and its subsidiaries, if any, for such quarter, prepared in accordance with
generally accepted accounting principles (except for required footnotes), all in
reasonable detail, subject to changes resulting from year-end audit adjustments
and inter-period allocations; and
(c) so long as the Purchaser continues to hold at least 100,000
shares of the Series B Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), as soon as practicable after the
end of each month and in any event within 30 days thereafter, consolidated
balance sheets of the Company and its subsidiaries, if any, as of the end of
such month and consolidated statements of income and cash flow statements, for
such month and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles (except for required footnotes), all in
reasonable detail, subject to changes resulting from year-end audit adjustments
and inter-period allocations; and
(d) so long as the Purchaser continues to hold at least 100,000
shares of the Series B Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), as soon as practicable and in
any event no later than thirty days before the end of the fiscal year, an annual
budget (consisting of projected income statements and projected cash flow
statements reported on a monthly basis) for the subsequent fiscal year.
(e) so long as ASCII Ventures ("ASCII") holds at least 250,000
shares of Series B Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), and ASCII is not represented on
the Company's Board of Directors, the Company shall give a representative of
ASCII access to board meetings, copies of all notices, minutes, consents and
other material that the Company provides to its directors, except that the
representative may be excluded from access to any material or meeting or portion
thereof if the Company believes that such exclusion is reasonably necessary to
preserve the attorney-client privilege, to protect confidential information, or
for other similar reasons. ASCII agrees, and any representative of ASCII will
agree, to hold in confidence and trust and not use or disclose any confidential
information provided to or learned by it in connection with its rights under
this letter.
(f) so long as Borders Group, Inc. ("Borders") holds at least
250,000 shares of Series B Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), and Borders is not represented
on the Company's Board of Directors, the Company shall give a representative of
Borders access to board meetings, copies of all notices,
12
<PAGE>
minutes, consents and other material that the Company provides to its directors,
except that the representative may be excluded from access to any material or
meeting or portion thereof if the Company believes that such exclusion is
reasonably necessary to preserve the attorney-client privilege, to avoid
conflicts of interest between the Company and Borders, or for other similar
reasons. Borders agrees, and any representative of Borders will agree, to hold
in confidence and trust and not use or disclose any confidential information
provided to or learned by it in connection with its rights under this letter.
(g) so long as H&Q Adobe Ventures ("H&Q") holds at least 250,000
shares of Series B Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), and H&Q has only one member on
the Company's Board of Directors, the Company shall give a representative of H&Q
access to board meetings, copies of all notices, minutes, consents and other
material that the Company provides to its directors, except that the
representative may be excluded from access to any material or meeting or portion
thereof if the Company believes that such exclusion is reasonably necessary to
preserve the attorney-client privilege, to protect confidential information, or
for other similar reasons. H&Q agrees, and any representative of H&Q will agree,
to hold in confidence and trust and not use or disclose any confidential
information provided to or learned by it in connection with its rights under
this letter.
6.2 Conflicts of Interests. The Company shall use its best efforts
----------------------
to ensure that the Company's employees, during the term of their employment with
the Company, do not engage in activities which would result in a conflict of
interest with the Company. The Company's obligations hereunder include, but are
not limited to, requiring that the Company's employees devote their primary
productive time, ability and attention to the business of the Company (provided,
however, the Company's employees may engage in other professional activity if
such activity does not materially interfere with their obligations to the
Company), and requiring that the Company's employees enter into agreements
regarding proprietary information and confidentiality.
6.3 Proprietary Rights Agreements. The Company will enter into a
-----------------------------
confidentiality and proprietary rights agreement with each new employee engaged
by the Company at the time of their employment by the Company.
6.4 Future Stock Issuances. The Company agrees, unless otherwise
----------------------
approved by at least 80% of the Directors then in office, that after the
Closing, stock, stock options, or other securities convertible into or
exchangeable for stock, granted to employees, consultants or directors will be
granted with an exercise or purchase price of no less than fair market value at
the time of grant and with vesting schedule of four years (25% after the first
year of employment or service and remainder vesting in equal quarterly
increments over the following three years).
6.5 Inspection. The Company shall permit each Purchaser, at such
----------
Purchaser's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by such Purchaser; provided, however, that the Company
13
<PAGE>
shall not be obligated pursuant to this Section 6.5 to provide access to any
information which it reasonably considers to be a trade secret or similar
confidential information.
6.6 Special Board Approval Items. Unless otherwise indicated below,
----------------------------
the Company will not take any of the following actions unless they are approved
by the Board of Directors or taken pursuant to Board approved policies:
(a) Hiring of all officers of the Company;
(b) Entering into employment agreements (may be approved by a
majority of disinterested Directors, or a compensation committee of the Board of
Directors);
(c) Establish compensation programs for all officers and key
employees, including base salaries and bonus programs (may be approved by a
majority of disinterested Directors or by a compensation committee, when
established);
(d) Establish stock option programs and grants of stock options,
stock or rights to acquire stock (may be approved by a majority of disinterested
Directors or by a compensation committee, when established);
(e) Establishment of annual budgets, business and financial
plans;
(f) Entering into any real estate lease or purchase arrangement;
(g) Entering into any obligations or commitments, including
capital equipment leases or purchases, with total value greater than $50,000 and
which are outside the most recent business plan or budget approved by the Board
of Directors;
(h) Entering into agreements to license the Company's content or
technology for foreign markets or other publications (may be approved by a
majority of disinterested Directors); and
(i) Amendment of Editorial Policy of the Company and the
establishment and membership of the Editorial Advisory Board; provided however
that the day-to-day editorial management of these publications will be the sole
responsibility of the editor and staff.
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
7.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by the Purchasers.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto or in
14
<PAGE>
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the date of such
certificate or instrument.
7.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7.4 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
they supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
7.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally,
mailed by first class mail, postage prepaid, or delivered by courier or
overnight delivery, addressed (a) if to a Purchaser, at such Purchaser's address
set forth in the Schedule of Purchasers, or at such other address as such
Purchaser shall have furnished to the Company in writing or (b) if to the
Company, at 706 Mission Street, 2nd Floor, San Francisco, CA 94103, or at such
other address as the Company shall have furnished to the Purchasers in writing.
Notices that are mailed shall be deemed received five days after deposit in the
United States mail.
7.6 Severability. In case any provision of this Agreement shall be
------------
found by a court of law to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
7.7 Finder's Fees and Other Fees.
----------------------------
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement and, (ii) hereby agrees to indemnify and to hold Purchasers harmless
from and against any liability for commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which the
Company, or any of its employees or representatives, is responsible.
(b) Each Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Company
harmless from and against any liability for any commission or compensation in
the nature of a finder's fee to any broker or other person or firm (and the
costs and expenses of defending against such liability or asserted liability)
for which such Purchaser, or any of its employees or representatives, are
responsible.
7.8 Expenses. The Company and the Purchasers shall each bear their
--------
own expenses and legal fees in connection with the consummation of this
transaction; provided, however, that the Company will pay the reasonable fees
and disbursements up to an aggregate of $10,000, of special counsel for the
Purchasers in connection with the transaction contemplated by this Agreement.
15
<PAGE>
7.9 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.11 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to the Company or to any holder of any securities
issued or to be issued hereunder shall impair any such right, power or remedy of
the Company or such holder, nor shall it be construed to be a waiver of any
breach or default under this Agreement, or an acquiescence therein, or of or in
any similar breach or default thereafter occurring; nor shall any delay or
omission to exercise any right, power or remedy or any waiver of any single
breach or default be deemed a waiver of any other right, power or remedy or
breach or default theretofore or thereafter occurring. All remedies, either
under this Agreement, or by law otherwise afforded to the Company or any holder,
shall be cumulative and not alternative.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series B Preferred
Stock Purchase Agreement as of the date first written above.
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
------------------------------
Michael O'Donnell, President
PURCHASERS:
ADOBE VENTURES L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
----------------------------
Title: President
-------------------------
H&Q SALON INVESTORS, L.P.
By: /s/ Standish O'Grady
----------------------------
Title: President
-------------------------
ASCII VENTURES
By: /s/ Authorized Officer
--------------------------------
Title: Authorized Officer
-----------------------------
17
<PAGE>
BORDERS GROUP, INC.
By: /s/ Authorized Officer
-------------------------------
Title: Title
----------------------------
18
<PAGE>
List of Exhibits
Exhibit A - Schedule of Purchasers
Exhibit B - Articles of Incorporation
Exhibit C - Schedule of Exceptions
Exhibit D - Rights Agreement
Exhibit E - Voting Agreement
Exhibit F - Shareholder and Optionholder List
Exhibit G - Material Contracts
19
<PAGE>
EXHIBIT A
---------
Schedule of Purchasers
Name No. of Shares Purchase Price
- ---- ------------- --------------
Adobe Ventures L.P. 474,683 $ 749,999.14
c/o Hambrecht & Quist
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
H&Q Salon Investors, L.P. 158,228 $ 250,000.24
c/o Hambrecht & Quist
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
ASCII Ventures 632,911 $ 999,999.38
Borders Group, Inc. 632,911 $ 999,999.38
--------- -------------
TOTAL 1,898,733 $2,999,998.14
20
<PAGE>
EXHIBIT B
---------
ARTICLES OF INCORPORATION
21
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS
22
<PAGE>
EXHIBIT D
---------
RIGHTS AGREEMENT
23
<PAGE>
EXHIBIT E
---------
VOTING AGREEMENT
24
<PAGE>
EXHIBIT F
---------
LIST OF STOCKHOLDERS
AND OPTION HOLDERS
25
<PAGE>
EXHIBIT G
---------
LIST OF MATERIAL CONTRACTS
Marketing and Sponsorship Agreement between the Company and Borders Inc. dated
July 31, 1997.
Syndication Agreement between the Company and United Features Syndicate dated
April, 4 1997.
Private Label Agreement between the Company and Worldview Systems Corporation,
Internet Travel Network, Inc. dated July 18, 1997.
The Company has arrangements with AOL, WebTV, C/Net, Match.com and Netscape
whereby these vendors publish the Company's proprietary content on their
respective websites and provide links to the Company's website.
Employment Agreement between the Company and Michael O'Donnell dated November 7,
1997.
Common Stock Purchase Agreement between the Company and David Talbot dated July
5, 1995.
Common Stock Purchase Agreement between the Company and David Zweig dated July
5, 1995.
Loan Agreement with Imperial Bank for capital equipment and working capital.
Insertion Order for Banner Advertising between the Company and Oglivy and Mather
dated November 18, 1997 in the amount of $150,000.
Insertion Orders for Banner Advertising between the Company and Hong Kong
Tourism dated October 30, 1997 in the amount of $27,200.
Insertion Orders for Banner Advertising between the Company and Winkler
Advertising dated July 7, 1997 in the amount of $34,200.
Balance remaining on invoice from Concept Offices in the amount of $37,430.56
for office furniture.
Amount owed to Net Gravity for ad server software as set forth in invoices in
the total amount of $34,661.
Balance remaining on Invoices from Paine and Associates to the Company in the
total amount of $33,619.43 for public relations services.
26
<PAGE>
Lease agreement between Salon Internet Inc. and TW Associates dated June 25,
1997 (lease for office space at 706 Mission Street, 2nd Floor, San Francisco, CA
94103).
27
<PAGE>
EXHIBIT 10.23
SALON INTERNET, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made
as of September 18, 1998, between SALON INTERNET, INC., a California corporation
(the "Company"), and the purchasers listed on the Schedule of Purchasers
("Schedule of Purchasers") attached hereto as Exhibit A (the "Purchasers"). The
---------
parties hereby agree as follows:
1. Authorization and Sale of the Preferred Shares.
----------------------------------------------
1.1 Authorization; Filing of Amended and Restated Certificate of
------------------------------------------------------------
Incorporation. The Company has authorized the issuance and sale pursuant to the
- -------------
terms and conditions hereof of (i) up to 1,330,798 shares of its Series C
Preferred Stock, (the "Series C Shares"), having the rights, preferences and
privileges as set forth in the form of the Amended and Restated Articles of
Incorporation of the Company (the "Articles of Incorporation") attached hereto
as Exhibit B; and (ii) warrants to purchase up to 439,164 shares of the
---------
Company's Common Stock (the "Warrants"), in substantially the form attached
hereto as Exhibit H; and (iii) up to 439,164 shares of its Common Stock
---------
issuable upon valid exercise of the Warrants (the "Warrant Shares"). The
Company shall adopt and file the Articles of Incorporation with the Secretary of
State of the State of California before the Closing (as defined below).
1.2 Sale and Issuance of the Series C Shares; Issuance of Warrants.
--------------------------------------------------------------
Subject to the terms and conditions hereof, at the Closing (as defined below)
the Company will (i) issue and sell to each Purchaser and each Purchaser will
purchase from the Company that number of shares of Series C Shares set forth
opposite each Purchaser's name on Exhibit A hereto at a purchase price of $2.63
---------
per share, and (ii) issue to each Purchaser Warrants to purchase up to that
number of shares of the Company's Common Stock set forth opposite each
Purchaser's name on Exhibit A hereto at an exercise price of $0.26 per share.
---------
2. Closing Dates; Delivery.
-----------------------
2.1 Closing Dates. There may be more than one closing of the sale
-------------
and purchase of the Series C Shares being purchased by the Purchasers hereunder
and the issuance of the Warrants hereunder (referred to as the "First Closing"
and the "Subsequent Closings"). The First Closing shall be held at the offices
of Gray Cary Ware & Freidenrich, LLP ("GCWF"), 400 Hamilton Avenue, Palo Alto,
California at 10:00 a.m. on September 18, 1998, or at such other time and place
as the Company and the majority in interest of the Purchasers mutually agree
upon (such date is hereinafter referred to as the "First Closing Date"). The
Subsequent Closings shall be held on or before October 9, 1998 at the offices of
GCWF on such dates as the Company and the Purchasers participating therein agree
(each such date is hereinafter referred to as a "Subsequent Closing Date"). The
First Closing and the Subsequent Closings may be referred to herein collectively
as the "Closings" and each individually as a "Closing," and the
1
<PAGE>
First Closing Date and the Subsequent Closing Dates may be referred to herein
collectively as the "Closing Dates" and each individually as a "Closing Date."
Any shares of Series C Preferred Stock sold in a Subsequent Closing shall be
deemed to be "Series C Shares" for all purposes under this Agreement and any
purchasers thereof shall be deemed to be "Purchasers" for all purposes under
this Agreement, and any Warrants issued in a Subsequent Closing shall be deemed
to be "Warrants" for all purposes under this Agreement.
2.2 Delivery. Subject to the terms of this Agreement, at a Closing,
--------
the Company will deliver to each Purchaser a certificate or certificates
representing the number of Series C Shares designated in Exhibit A to be issued
---------
to such Purchaser, against payment of the purchase price therefor by delivery of
a check or wire transfer, payable to the order of the Company.
3. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Purchasers that except as set forth on a Schedule
of Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to
---------
be representations and warranties as if made hereunder:
3.1 Organization and Standing. The Company is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to carry on its
businesses as now conducted and as proposed to be conducted. The Company is
qualified or licensed to do business as a foreign corporation in all
jurisdictions where such qualification or licensing is required, except where
the failure to so qualify would not have a material adverse effect upon the
Company.
3.2 Corporate Power. The Company has now, or will have at the
---------------
Closing Date, all requisite corporate power necessary for the authorization,
execution and delivery of this Agreement, the Second Amended and Restated Rights
Agreement in the form attached hereto as Exhibit D (the "Rights Agreement"),
---------
First Amended and Restated Voting Agreement in the form attached hereto as
Exhibit E (the "Voting Agreement") and the Warrants. This Agreement, the Rights
- ---------
Agreement, the Voting Agreement and the Warrants are valid and binding
obligations of the Company enforceable in accordance with their terms, except as
the same may be limited by bankruptcy, insolvency, moratorium, and other laws of
general application affecting the enforcement of creditors' rights.
3.3 Subsidiaries. The Company does not control, directly or
------------
indirectly, any other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of the Company is
--------------
25,000,000 shares of Common Stock and 17,435,000 shares of Preferred Stock, of
which 5,017,500 have been designated Series A Preferred Stock, 5,017,500 have
been designated Series A-1 Preferred Stock, 2,200,000 have been designated
Series B Preferred Stock, 2,200,000 have been designated Series B-1 Preferred
Stock, 1,500,000 have been designated Series C Preferred Stock and 1,500,000
have been designated Series C-1 Preferred Stock. There are issued and
outstanding 773,021 shares of the Company's Common Stock, 5,000,000 shares of
Series A Preferred Stock and no shares of Series A-1 Preferred Stock, 1,898,733
shares of Series B Preferred Stock, and
2
<PAGE>
no shares of Series B-1, Series C or Series C-1 Preferred Stock. The holders of
record of the presently issued and outstanding Common Stock, options to purchase
Common Stock, Series A Preferred Stock and Series B Preferred Stock immediately
prior to the Closing are as set forth on Exhibit F ("Shareholder and
---------
Optionholder List"). All such issued and outstanding shares have been duly
authorized and validly issued, are fully paid and nonassessable, and were issued
in compliance with all applicable state and federal laws concerning the issuance
of securities. The holders of any and all rights, options, warrants or
conversion rights to purchase or acquire from the Company any of its capital
stock, along with the number of shares of capital stock issuable upon exercise
of such rights, are set forth in Exhibit F hereto. The Company has reserved at
---------
least 5,017,500 shares of Common Stock for issuance upon conversion of the
Series A and Series A-1 Preferred Stock 2,200,000 shares of Common Stock for
issuance upon conversion of the Series B and Series B-1 Preferred Stock, and
3,750,000 shares of Common Stock for future issuance to employees, consultants,
officers or directors upon exercise of options granted or to be granted under
stock or other option plans or arrangements approved by the Board of Directors.
Except for such rights, there are no outstanding rights, options, warrants,
conversion rights or agreements for the purchase or acquisition from the Company
of any shares of its capital stock. Except for the Voting Agreement executed
concurrently herewith, the Company is not a party or subject to any agreement or
understanding between any persons or entities, which affects or relates to the
voting or giving of written consents with respect to any securities.
3.5 Authorization.
-------------
(a) Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and stockholders necessary for the sale and
issuance of the Series C Shares, the issuance of the Common Stock issuable upon
conversion of the Series C Shares, the issuance of the Warrants and the
authorization, execution and performance of the Company's obligations hereunder
and under the Rights Agreement has been taken or will be taken prior to the
Closing. The Company has duly reserved an aggregate of 1,330,798 shares of
Common Stock for issuance upon conversion of the Series C Shares and an
aggregate of 439,164 shares of Common Stock for issuance upon exercise of the
Warrants.
(b) Valid Issuance. The Series C Shares when issued in
--------------
compliance with the provisions of this Agreement, and the shares of Common Stock
issued upon conversion of the Series C Shares and the shares of Common Stock
issued upon exercise of the Warrants, when issued in accordance with the
provisions of the Articles of Incorporation, will be validly issued, fully paid
and nonassessable and will be free of any liens or encumbrances created by the
Company; provided, however, that all such shares may be subject to restrictions
on transfer under state and/or federal securities laws as set forth herein, and
as may be required by future changes in such laws. The rights, preferences,
privileges and restrictions of the Series C Shares are as set forth in the
Articles of Incorporation.
3.6 No Preemptive Rights. No person has any right of first refusal
--------------------
or any preemptive rights in connection with the issuance of the Series C Shares,
the issuance of the Common Stock upon
3
<PAGE>
conversion of the Series C Shares, the issuance of Common Stock upon exercise of
the Warrants, or, except as set forth in the Rights Agreement, any future
issuances of securities by the Company.
3.7 Patents, Trademarks, etc. The Company owns and possesses or is
------------------------
licensed under all patents, patent applications, licenses, trademarks, trade
names, brand names, trade secrets, inventions and copyrights employed in the
operation of its business as now conducted and as proposed to be conducted, with
no infringement of or conflict with the rights of others respecting any of the
same. To the best knowledge of the Company, the operation of the Company's
business as now conducted or as proposed to be conducted does not infringe any
patent, copyright, trade secret or other proprietary rights of any third
parties. There are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to patents, patent
applications, licenses, trademarks, trade names, brand names, inventions,
proprietary rights and copyrights of any other person or entity. The Company is
not obligated to make any payments by way of royalties, fees or otherwise to any
owner, licensor of, or other claimant to any patent, trademark, trade name,
copyright or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business, or otherwise. The Company has not
received any communications alleging that it has violated or, by conducting its
business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity, nor is the Company aware of any basis for the
foregoing. There are no agreements, understandings, instruments, contracts,
judgments, orders, writs of decrees to which the Company is a party or by which
it is bound which involve indemnification by the Company with respect to
infringements of proprietary rights.
3.8 Compliance with Other Instruments. The Company is not in
---------------------------------
violation of any term of its Articles of Incorporation or Bylaws, nor is the
Company in violation of or in default in any material respect under the terms of
any mortgage, indenture, contract, agreement, instrument, judgment or decree,
the violation of which would have a material adverse effect on the Company as a
whole, and to the best knowledge of the Company, is not in violation of any
order, statute, rule or regulation applicable to the Company, the violation of
which would have a material adverse effect on the Company. The execution,
delivery and performance of and compliance with this Agreement or the Rights
Agreement, and the issuance and sale of the Series C Shares and the Warrants
will not (a) result in any such violation, or (b) be in conflict with or
constitute a default under any such term, or (c) result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company pursuant to any such term. To the best knowledge of the
Company, there is no such term or any such order, statute, rule or regulation
which adversely affects, or in the future may materially adversely affect, the
business, prospects, condition, affairs or operations of the Company or any of
its properties or assets.
3.9 Proprietary Agreements; Employees. Each employee of the Company
---------------------------------
has executed an agreement regarding confidentiality and proprietary information,
the form of which has been provided to special counsel to the Purchasers. None
of its employees is in violation thereof, and the Company will use its best
efforts to prevent such violations. To the best
4
<PAGE>
knowledge of the Company, the employees of the Company are not obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of the Company or that would conflict with the
Company's business as conducted or as proposed to be conducted or that would
prevent any such employee from assigning inventions to the Company. Neither the
execution nor delivery of this Agreement or the Rights Agreement, nor the
carrying on of the Company's business as proposed, will conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such employees is
now obligated. The Company does not believe that it is or will be necessary for
the Company to utilize any inventions of any of its employees made prior to
their employment by the Company.
3.10 Litigation, etc. There is no action, proceeding or
---------------
investigation pending, or threatened, against the Company or its officers,
directors or shareholders, or to the best of the Company's knowledge, against
employees of the Company (or, to the best of the Company's knowledge, any basis
therefor or threat thereof): (1) which might result, either individually or in
the aggregate, in (a) any material adverse change in the business, prospects,
conditions, affairs or operations of the Company or in any of its properties or
assets, or (b) any material impairment of the right or ability of the Company to
carry on its business as now conducted or as proposed to be conducted, or (c)
any material liability on the part of the Company; or (2) which questions the
validity of this Agreement, the Rights Agreement, or any action taken or to be
taken in connection herewith, including in each case, without limitation,
actions pending or threatened involving the prior employment of any of the
Company's employees, the use in connection with the Company's business of any
information or techniques allegedly proprietary to any of the former employers
of such employees or their obligations under any agreements with prior
employers. The Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company currently intends to initiate.
3.11 Governmental Consent. No consent, approval or authorization of
--------------------
or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with: (a) the valid execution and
delivery of this Agreement or the Rights Agreement; or (b) the offer, sale or
issuance of the Series C Shares, the issuance of the shares of Common Stock
issuable upon conversion of the Series C Shares, (c) the issuance of the
Warrants, the issuance of the Common Stock issuable upon exercise of the
Warrants or (d) the obtaining of the consents, permits and waivers specified in
subsection 5.1(b) hereof.
3.12 Offering. In reliance on the representations and warranties of
--------
the Purchasers in Section 4 hereof, the offer, sale and issuance of the Series C
Shares and the issuance of the Warrants in conformity with the terms of this
Agreement will not result in a violation of the requirements of Section 5 of the
Securities Act of 1933, as amended (the "Securities Act") or the qualification
or registration requirements of applicable blue sky laws.
5
<PAGE>
3.13 Taxes. The Company has filed all tax returns that are required
-----
to have been filed with appropriate federal, state, county and local
governmental agencies or instrumentalities, except where the failure to do so
would not have a material adverse effect upon the Company, taken as a whole.
The Company has not elected pursuant to the Internal Revenue Code of 1986, as
amended ("Code"), to be treated as a Subchapter S corporation or a collapsible
corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has
it made any other elections pursuant to the Code (other than elections which
relate solely to methods of accounting, depreciation or amortization) which
would have a material effect on the Company, its financial condition, its
business as presently conducted or proposed to be conducted or any of its
properties or material assets. The Company has paid or established reserves for
all income, franchise and other taxes, assessments, governmental charges,
penalties, interest and fines due and payable by them on or before the Closing.
3.14 Title. The Company owns its property and assets free and clear
-----
of all liens, mortgages, loans or encumbrances except liens for current taxes,
and such encumbrances and liens which arise in the ordinary course of business
and do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets leased by the Company, the
Company is in compliance with such leases and, to the best of the Company's
knowledge, holds valid leasehold interests free and clear of any liens, claims
or encumbrances.
3.15 Material Contracts and Commitments. All of the contracts,
----------------------------------
mortgages, indentures, agreements, instruments and transactions to which the
Company is a party or by which it is bound (including purchase orders to the
Company or placed by the Company) which involve obligations of, or payments to,
the Company in excess of twenty-five thousand dollars ($25,000) and all
agreements between the Company and its officers, directors, consultants and
employees are set forth on the list attached hereto as Exhibit G (the
---------
"Contracts"), copies of which have been delivered to special counsel to the
Purchasers. All of the Contracts are valid, binding and in full force and
effect in all material respects and enforceable by the Company in accordance
with their respective terms in all material respects, subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and rules or laws concerning equitable remedies. The Company is not in material
default under any of such Contracts.
3.16 Financial Statements. The Company has delivered to the
--------------------
Purchasers the unaudited balance sheets and related statements of operation as
of July 31, 1998 and for the six month period then ended (the "Financial
Statements"). The Financial Statements are in accordance with the books and
records of the Company, are complete and correct, and fairly and accurately
present the financial condition and operating results of the Company for the
periods indicated therein, all in conformity with generally accepted accounting
principles ("GAAP"), except that the unaudited Financial Statements do not
contain footnotes or reflect the interperiod adjustments required by GAAP. As
of July 31, 1998, the Company did not have any liabilities, absolute,
contingent, or otherwise, which in accordance with GAAP are required to be
disclosed or reserved for other than as set forth in the Financial Statements.
Since July 31, 1998, there has been no material adverse change in the Company's
financial condition or assets. The Company
6
<PAGE>
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles.
3.17 Absence of Changes. Since July 31, 1998 (a) the Company has not
------------------
entered into any transaction which was not in the ordinary course of business,
(b) there has been no material adverse change in the condition (financial or
otherwise) of the business, property, assets or liabilities of the Company other
than changes in the ordinary course of its business, none of which, individually
or in the aggregate, has been materially adverse, (c) there has been no damage
to, destruction of or loss of physical property (whether or not covered by
insurance) materially adversely affecting the assets, prospects, financial
condition, operating results, business or operations of the Company, (d) the
Company has not declared or paid any dividend or made any distribution on its
stock, or redeemed, purchased or otherwise acquired any of its stock, (e) the
Company has not materially changed any compensation arrangement or agreement
with any of its key employees or executive officers, or materially changed the
rate of pay of its employees as a group, (f) the Company has not changed or
amended any material contract by which the Company or any of its assets are
bound or subject, except as contemplated by this Agreement, (g) there has been
no resignation or termination of employment of any key officer or employee of
the Company and the Company does not know of any impending resignation or
termination of employment of any such officer or employee that if consummated
would have a material adverse effect on the business of the Company, (h) there
has been no change, except in the ordinary course of business, in the material
contingent obligations of the Company (nor in any contingent obligation of the
Company regarding any director, stockholder or key employee or officer of the
Company) by way of guaranty, endorsement, indemnity, warranty or otherwise, (i)
there have been no loans made by the Company to any of its employees, officers
or directors other than travel advances and other advances made in the ordinary
course of business, (j) there has been no waiver by the Company of a valuable
right or of a material debt owing to it, and (k) there has not been any
satisfaction or discharge of any lien, claims or encumbrance or any payment of
any obligation by the Company, except in the ordinary course of business and
which is not material to the assets, properties, financial condition, operating
results or business of the Company.
3.18 Outstanding Indebtedness. The Company has no indebtedness for
------------------------
borrowed money which it has directly or indirectly created, incurred, assumed or
guaranteed, or with respect to which it has otherwise become liable, directly or
indirectly.
3.19 Registration Rights. Other than as granted pursuant to the
-------------------
Rights Agreement, the Company has not granted or agreed to grant any rights to
register (as that term is defined in the Rights Agreement) securities, including
piggyback registration rights, to any person or entity.
3.20 Certain Transactions. The Company is not indebted, directly or
--------------------
indirectly, to any of its employees, officers, directors or stockholders or to
their spouses or children, in any amount whatsoever; and none of said employees,
officers, directors, stockholders, or any member of their immediate families,
are indebted to the Company or have any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which
7
<PAGE>
the Company has a business relationship. No such employee, officer, director,
stockholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company. The Company is
not guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
3.21 Corporate Documents; Minute Books. Except for amendments
---------------------------------
necessary to satisfy representations and warranties or conditions contained
herein (the form of which amendments has been approved by the Purchasers), the
Bylaws of the Company are in the form previously provided to special counsel to
the Purchasers. The minute books of the Company previously provided to special
counsel to the Purchasers contain a complete summary of all meetings of
directors and stockholders since the time of incorporation of the Company.
3.22 Employee Benefit Plans. The Company does not have any "employee
----------------------
benefit plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended.
3.23 Environmental and Safety Laws. To the best of its knowledge,
-----------------------------
the Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.
3.24 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, and insurance against other hazards, risks and
liabilities to persons and property to the extent and in the manner customary
for companies in similar businesses similarly situated.
3.25 Labor Agreements and Actions. The Company is not aware that any
----------------------------
officer or key employee intends to terminate his or her employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of the Company is terminable at the will of the Company.
3.26 Section 83(b) Elections. To the best of the Company's
-----------------------
knowledge, no elections and notices pursuant to Section 83(b) of the Code and
any analogous provisions of applicable state tax laws have been filed by
individuals who have purchased shares of the Company's Common Stock.
3.27 Disclosure. No representation or warranty by the Company in
----------
this Agreement, or in any document or certificate furnished or to be furnished
to the Purchasers pursuant hereto or in connection with the transactions
contemplated hereby, when taken together, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements made herein and therein, in the light of the
circumstances under which they were made, not misleading. The Company has fully
provided the Purchasers with all the information which the Purchasers have
requested for deciding whether to purchase the Series C Shares and the Warrants.
8
<PAGE>
4. Representations and Warranties of Purchasers and Restrictions on
----------------------------------------------------------------
Transfer Imposed by the Securities Act.
--------------------------------------
4.1 Representations and Warranties by the Purchasers. Each
------------------------------------------------
Purchaser, severally and not jointly, represents and warrants to the Company as
follows:
(a) Investment Intent. This Agreement is made with the
Purchaser in reliance upon such Purchaser's representation to the Company,
evidenced by Purchaser's execution of this Agreement, that Purchaser is
acquiring the Series C Shares, the Warrants and the Common Stock issuable upon
conversion of Series C Shares and upon exercise of the Warrants (collectively
the "Securities") for investment for such Purchaser's own account, for
investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act. Purchaser has the full right, power and authority to enter into and perform
this Agreement and the Rights Agreement, and this Agreement and the Rights
Agreement constitute valid and binding obligations upon it.
(b) Series C Shares and Warrants Not Registered. Purchaser
-------------------------------------------
understands and acknowledges that the offering of the Series C Shares and
Warrants pursuant to this Agreement will not be registered under the Securities
Act or qualified under applicable blue sky laws on the grounds that the offering
and sale of securities contemplated by this Agreement are exempt from
registration under the Securities Act and exempt from qualifications available
under applicable blue sky laws, and that the Company's reliance upon such
exemptions is predicated upon such Purchaser's representations set forth in this
Agreement. Purchaser acknowledges and understands that the Securities must be
held indefinitely unless the Securities are subsequently registered under the
Securities Act and qualified under applicable blue sky laws or an exemption from
such registration and such qualification is available.
(c) No Transfer. Purchaser covenants that in no event will such
-----------
Purchaser dispose of any of the Securities (other than in conjunction with an
effective registration statement for the Securities under the Securities Act or
in compliance with Rule 144 promulgated under the Securities Act) unless and
until (i) such Purchaser shall have notified the Company of the proposed
disposition and shall have furnished the Company with a statement of the
circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, such Purchaser shall have furnished the Company with
an opinion of counsel to the effect that (x) such disposition will not require
registration under the Securities Act and (y) appropriate action necessary for
compliance with the Securities Act and other applicable state, local or foreign
law has been taken. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144.
(d) Permitted Transfers. Notwithstanding the provisions of
subsection (c) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser which is a partnership to a partner of
such partnership or a former partner of such partnership who leaves such
partnership after the date hereof, or to the estate of any such partner or
former partner or the transfer by gift, will or intestate succession of any
partner to his
9
<PAGE>
spouse or lineal descendants or ancestors, if the transferee agrees in writing
to be bound by the terms of this Agreement to the same extent as if he were an
original Purchaser hereunder.
(e) Knowledge and Experience. Purchaser (i) has such knowledge
------------------------
and experience in financial and business matters as to be capable of evaluating
the merits and risks of such Purchaser's prospective investment in the
Securities; (ii) has the ability to bear the economic risks of such Purchaser's
prospective investment; (iii) has been furnished with and has had access to such
information as such Purchaser has considered necessary to make a determination
as to the purchase of the Securities together with such additional information
as is necessary to verify the accuracy of the information supplied; (iv) has had
all questions which have been asked by such Purchaser satisfactorily answered by
the Company; and (v) has not been offered the Securities by any form of
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any such media.
(f) Accredited Investor. Purchaser is an "accredited investor"
-------------------
as that term is defined in Rule 501(a) under the Securities Act of 1933, as
amended.
4.2 Legends. Each certificate representing the Securities may be
-------
endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
--------------
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR
(iii) PURSUANT TO AN OPINION OF COUNSEL, THAT SUCH REGISTRATION OR COMPLIANCE IS
NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.
(b) Other Legends. Any other legends required by applicable
-------------
state blue sky laws.
The Company need not register a transfer of legended Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in each of the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend endorsed
-------------------------------------------
on a certificate pursuant to subsection 4.2(a) and the stop transfer
instructions with respect to such legended Securities shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
Securities if such Securities are registered under the Securities Act and a
prospectus meeting the requirements of Section 10 of the Securities Act is
available or if such holder satisfies the requirements of Rule 144(k).
10
<PAGE>
5. Conditions to Closing.
---------------------
5.1 Conditions to Purchasers' Obligations. The obligation of each
-------------------------------------
Purchaser to purchase the Series C Shares and the Warrants at the Closing is
subject to the fulfillment to the Purchaser's satisfaction, on or prior to the
Closing Date, of the following conditions, any of which may be waived by the
Purchaser:
(a) Representations and Warranties Correct; Performance of
--------------------------------------- --------------
Obligations. The representations and warranties made by the Company in Section
- -----------
3 hereof shall be true and correct when made, and shall be true and correct in
all material respects on the Closing Date with the same force and effect as if
they had been made on and as of said date. The Company's business and assets
shall not have been adversely affected in any material way prior to the Closing
Date. The Company shall have performed in all material respects all obligations
and conditions herein required to be performed or observed by it on or prior to
the Closing Date.
(b) Consents and Waivers. The Company shall have obtained in a
--------------------
timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement
and the Rights Agreement.
(c) Rights Agreement. The Company and the Purchasers shall have
----------------
executed the Rights Agreement.
(d) Voting Agreement. The Company and the Purchasers shall have
----------------
executed the Voting Agreement.
(e) Compliance Certificate. The Company shall have delivered a
----------------------
Certificate, executed on behalf of the Company by the President, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
subsections (a), (b), (c) and (d).
(f) Secretary Certificate. The Company shall have delivered a
---------------------
Certificate, executed on behalf of the Company by the Secretary, dated the
Closing Date, certifying the Board of Directors and shareholders resolutions
approving this Agreement, the Rights Agreement and the issuance of the Series C
Shares and certifying the current versions of the Articles of Incorporation and
Bylaws of the Company.
(g) Opinion of Counsel. The Purchasers shall have received an
------------------
opinion from Gray Cary Ware & Freidenrich, the Company's counsel, satisfactory
in form to special counsel for the Purchasers, substantially in the form
attached hereto as Schedule I.
----------
(h) Common Stock Warrants. The Company shall have issued to the
---------------------
Purchasers the Warrants.
5.2 Conditions to Obligations of the Company. The Company's
----------------------------------------
obligation to sell and issue the Series C Shares and issue the Warrants at the
Closing is subject to the fulfillment to the satisfaction of the Company on or
prior to the Closing Date of the following conditions, any of which may be
waived by the Company:
11
<PAGE>
(a) Representations and Warranties Correct. The representations
--------------------------------------
and warranties made by each Purchaser in Section 4 hereof shall be true and
correct when made, and shall be true and correct on the Closing Date with the
same force and effect as if they had been made on and as of said date.
(b) Conditions Fulfilled. The conditions set forth in
--------------------
subsections (b), (c) and (d) of Section 5.1 shall have been fulfilled.
6. Affirmative Covenants of the Company. The Company hereby covenants
------------------------------------
and agrees as follows:
6.1 Financial Information. Until the first to occur of (i) the date
---------------------
on which the Company is required to file a report pursuant to Section 13(a) of
the Securities Exchange Act of 1934 (the "Exchange Act"), by reason of the
Company having registered any of its securities pursuant to Section 12(g) of the
Exchange Act or (ii) quotations for the Common Stock of the Company are reported
by the automated quotations system operated by the National Association of
Securities Dealers, Inc. or by an equivalent quotations system or (iii) shares
of the Common Stock of the Company are listed on a national securities exchange
registered under Section 6 of the Exchange Act, the Company will furnish to each
Purchaser:
(a) so long as such Purchaser or its affiliates own any of the
Series C Shares or Common Stock issued upon conversion of the Series C Shares,
as soon as practicable after the end of each fiscal year, and in any event
within 120 days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal year, and consolidated
statements of operations and consolidated statements of cash flow of the Company
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles, all in reasonable detail and certified
by independent public accountants of recognized national standing selected by
the Company; and
(b) so long as the Purchaser continues to hold any of the Series
C Shares or Common Stock issued upon conversion of the Series C Shares, as soon
as practicable after the end of each fiscal quarter, and in any event within 45
days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal quarter, and consolidated
statements of operations and consolidated statements of cash flow of the Company
and its subsidiaries, if any, for such quarter, prepared in accordance with
generally accepted accounting principles (except for required footnotes), all in
reasonable detail, subject to changes resulting from year-end audit adjustments
and inter-period allocations; and
(c) so long as the Purchaser continues to hold at least 100,000
shares of the Series C Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), as soon as practicable after the
end of each month and in any event within 30 days thereafter, consolidated
balance sheets of the Company and its subsidiaries, if any, as of the end of
such month and consolidated statements of income and cash flow statements, for
such month and for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles (except for required footnotes), all in
reasonable detail, subject to changes resulting from year-end audit adjustments
and inter-period allocations; and
12
<PAGE>
(d) so long as the Purchaser continues to hold at least 100,000
shares of the Series C Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), as soon as practicable and in
any event no later than thirty days before the end of the fiscal year, an annual
budget (consisting of projected income statements and projected cash flow
statements reported on a monthly basis) for the subsequent fiscal year.
(e) so long as ASCII Ventures ("ASCII") holds at least 250,000
shares of Series C Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), and ASCII is not represented on
the Company's Board of Directors, the Company shall give a representative of
ASCII access to board meetings, copies of all notices, minutes, consents and
other material that the Company provides to its directors, except that the
representative may be excluded from access to any material or meeting or portion
thereof if the Company believes that such exclusion is reasonably necessary to
preserve the attorney-client privilege, to protect confidential information, or
for other similar reasons. ASCII agrees, and any representative of ASCII will
agree, to hold in confidence and trust and not use or disclose any confidential
information provided to or learned by it in connection with its rights under
this letter.
(f) so long as Adobe Ventures II L.P. ("Adobe") holds at least
250,000 shares of Series C Shares (as adjusted for stock splits, combinations,
dividends, distributions or recapitalizations), and Adobe has only one member on
the Company's Board of Directors, the Company shall give a representative of
Adobe access to board meetings, copies of all notices, minutes, consents and
other material that the Company provides to its directors, except that the
representative may be excluded from access to any material or meeting or portion
thereof if the Company believes that such exclusion is reasonably necessary to
preserve the attorney-client privilege, to protect confidential information, or
for other similar reasons. Adobe agrees, and any representative of Adobe will
agree, to hold in confidence and trust and not use or disclose any confidential
information provided to or learned by it in connection with its rights under
this letter.
6.2 Conflicts of Interests. The Company shall use its best efforts
----------------------
to ensure that the Company's employees, during the term of their employment with
the Company, do not engage in activities which would result in a conflict of
interest with the Company. The Company's obligations hereunder include, but are
not limited to, requiring that the Company's employees devote their primary
productive time, ability and attention to the business of the Company (provided,
however, the Company's employees may engage in other professional activity if
such activity does not materially interfere with their obligations to the
Company), and requiring that the Company's employees enter into agreements
regarding proprietary information and confidentiality.
6.3 Proprietary Rights Agreements. The Company will enter into a
-----------------------------
confidentiality and proprietary rights agreement with each new employee engaged
by the Company at the time of their employment by the Company.
13
<PAGE>
6.4 Future Stock Issuances. The Company agrees, unless otherwise
----------------------
approved by at least 80% of the Directors then in office, that after the
Closing, stock, stock options, or other securities convertible into or
exchangeable for stock, granted to employees, consultants or directors will be
granted with an exercise or purchase price of no less than fair market value at
the time of grant and with vesting schedule of four years (25% after the first
year of employment or service and remainder vesting in equal quarterly
increments over the following three years).
6.5 Inspection. The Company shall permit each Purchaser, at such
----------
Purchaser's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by such Purchaser; provided, however, that the Company shall not be obligated
pursuant to this Section 6.5 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
6.6 Special Board Approval Items. Unless otherwise indicated below,
----------------------------
the Company will not take any of the following actions unless they are approved
by the Board of Directors or taken pursuant to Board approved policies:
(a) Hiring of all officers of the Company;
(b) Entering into employment agreements (may be approved by a
majority of disinterested Directors, or a compensation committee of the Board of
Directors);
(c) Establish compensation programs for all officers and key
employees, including base salaries and bonus programs (may be approved by a
majority of disinterested Directors or by a compensation committee, when
established);
(d) Establish stock option programs and grants of stock options,
stock or rights to acquire stock (may be approved by a majority of disinterested
Directors or by a compensation committee, when established);
(e) Establishment of annual budgets, business and financial
plans;
(f) Entering into any real estate lease or purchase arrangement;
(g) Entering into any obligations or commitments, including
capital equipment leases or purchases, with total value greater than $50,000 and
which are outside the most recent business plan or budget approved by the Board
of Directors;
(h) Entering into agreements to license the Company's content or
technology for foreign markets or other publications (may be approved by a
majority of disinterested Directors); and
(i) Amendment of Editorial Policy of the Company and the
establishment and membership of the Editorial Advisory Board; provided however
that the day-
14
<PAGE>
to-day editorial management of these publications will be the sole
responsibility of the editor and staff.
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed in all
-------------
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
7.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by the Purchasers.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the date of such
certificate or instrument.
7.3 Successors and Assigns. Except as otherwise expressly
----------------------
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
7.4 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
they supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
7.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally,
mailed by first class mail, postage prepaid, or delivered by courier or
overnight delivery, addressed (a) if to a Purchaser, at such Purchaser's address
set forth in the Schedule of Purchasers, or at such other address as such
Purchaser shall have furnished to the Company in writing or (b) if to the
Company, at 706 Mission Street, 2nd Floor, San Francisco, CA 94103, or at such
other address as the Company shall have furnished to the Purchasers in writing.
Notices that are mailed shall be deemed received five days after deposit in the
United States mail.
7.6 Severability. In case any provision of this Agreement shall
------------
be found by a court of law to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions of this
Agreement shall not in any way be affected or impaired thereby.
7.7 Finder's Fees and Other Fees.
----------------------------
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by his
Agreement and, (ii) hereby agrees to indemnify and to hold Purchasers harmless
from and against any liability for commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which the
Company, or any of its employees or representatives, is responsible.
15
<PAGE>
(b) Each Purchaser (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the Company harmless
from and against any liability for any commission or compensation in the nature
of a finder's fee to any broker or other person or firm (and the costs and
expenses of defending against such liability or asserted liability) for which
such Purchaser, or any of its employees or representatives, are responsible.
7.8 Expenses. The Company and the Purchasers shall each bear
--------
their own expenses and legal fees in connection with the consummation of this
transaction; provided, however, that the Company will pay the reasonable,
documented fees and disbursements up to an aggregate of $15,000 of special legal
counsel for the Purchasers in connection with the transaction contemplated by
this Agreement.
7.9 Titles and Subtitles. The titles of the sections and
--------------------
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.11 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to any holder of any
securities issued or to be issued hereunder shall impair any such right, power
or remedy of the Company or such holder, nor shall it be construed to be a
waiver of any breach or default under this Agreement, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any delay or omission to exercise any right, power or remedy or any waiver
of any single breach or default be deemed a waiver of any other right, power or
remedy or breach or default theretofore or thereafter occurring. All remedies,
either under this Agreement, or by law otherwise afforded to the Company or any
holder, shall be cumulative and not alternative.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series C
Preferred Stock Purchase Agreement as of the date first written above.
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
--------------------------------
Michael O'Donnell, President
PURCHASERS:
ADOBE VENTURES II L.P.
By: Its general partner,
H&Q Adobe Ventures Management L.P.,
By: Its general partner,
H&Q Adobe Ventures Management Corp.,
By: Its president,
Standish O'Grady
By: /s/ Standish O'Grady
---------------------------------
Title: President
------------------------------
H&Q SALON INVESTORS, L.P.
By: /s/ Standish O'Grady
--------------------------------
Title: President
------------------------------
ASCII VENTURES
By: /s/ Authorized Signatory
---------------------------------
Title: Title
------------------------------
[SIGNATURE PAGE TO SALON INTERNET, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT]
17
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A - Schedule of Purchasers
Exhibit B - Articles of Incorporation
Exhibit C - Schedule of Exceptions
Exhibit D - Rights Agreement
Exhibit E - Voting Agreement
Exhibit F - Shareholder and Optionholder List
Exhibit G - Material Contracts
Exhibit H - Form of Warrant
Exhibit I - Form of Opinion of Gray Cary Ware & Freidenrich LLP
18
<PAGE>
EXHIBIT A
---------
Schedule of Purchasers
First Closing
<TABLE>
<CAPTION>
Name No. of Shares Purchase Price Warrants
- ---- ------------- -------------- --------
<S> <C> <C> <C>
Adobe Ventures II L.P.
c/o Hambrecht & Quist 855,513 $2,249,999.19 282,320
Attn: Standish O'Grady
One Bush Street
San Francisco, CA 94104
ASCII Ventures 190,114 499,999.82 62,738
--------- ------------ -------
TOTAL: 1,045,627 $2,749,999.01 345,058
</TABLE>
19
<PAGE>
EXHIBIT B
---------
ARTICLES OF INCORPORATION
20
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS
21
<PAGE>
EXHIBIT D
---------
RIGHTS AGREEMENT
22
<PAGE>
EXHIBIT E
---------
VOTING AGREEMENT
23
<PAGE>
EXHIBIT F
---------
LIST OF STOCKHOLDERS
AND OPTION HOLDERS
24
<PAGE>
EXHIBIT G
---------
LIST OF MATERIAL CONTRACTS
25
<PAGE>
EXHIBIT H
---------
FORM OF WARRANT
1
<PAGE>
EXHIBIT I
---------
FORM OF LEGAL OPINION
1
<PAGE>
EXHIBIT 10.24
SALON INTERNET, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made
as of April 14, 1999, between SALON INTERNET, INC., a California corporation
(the "Company"), and the purchasers listed on the Schedule of Purchasers
attached hereto as Exhibit A ("Purchasers"). The parties hereby agree as
---------
follows:
1. Authorization and Sale of the Preferred Shares.
----------------------------------------------
1.1 Authorization; Filing of Amended and Restated Certificate of
------------------------------------------------------------
Incorporation. The Company has authorized the issuance and sale pursuant to the
- -------------
terms and conditions hereof of up to 5,935,576 shares of its Series C Preferred
Stock, (the "Series C Shares"), having the rights, preferences and privileges as
set forth in the form of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation"), attached hereto as Exhibit B.
---------
The Company shall adopt and file the Articles of Incorporation with the
Secretary of State of the State of California. The Articles of Incorporation
shall be in effect before the Closing (as defined below).
1.2 Sale and Issuance of the Series C Shares. Subject to the terms
----------------------------------------
and conditions hereof, at the Closing the Company will issue and sell to
Purchasers and Purchasers will purchase from the Company an aggregate of
5,935,576 Series C Shares at a purchase price equal to $1.94 per Series C Share.
2. Closing Date; Delivery.
----------------------
2.1 Closing Date. The closing of the sale of the Series C Shares
------------
hereunder (the "Closing") shall be held at the offices of Gray Cary Ware &
Freidenrich LLP ("Gray Cary"), 400 Hamilton Avenue, Palo Alto, California at
10:00 a.m. on April 14, 1999, or at such other time and place as the Company and
a majority in interest of the Purchasers mutually agree upon (such date is
hereinafter referred to as the "Closing Date"); provided, however, the Company
shall provide to the Purchasers two business days prior to the Closing Date wire
transfer instructions for the Company.
2.2 Delivery. Subject to the terms of this Agreement, at the
--------
Closing, the Company will deliver to each Purchaser a certificate or
certificates representing the number of Series C Shares designated in the
Schedule of Purchasers to be issued to such Purchaser, against payment of the
purchase price therefor by delivery of a check or wire transfer, payable to the
Company.
3. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Purchasers that except as set forth on the
Schedule of Exceptions attached hereto as Exhibit C:
---------
1
<PAGE>
3.1 Organization and Standing. The Company and its subsidiary, The
-------------------------
Well, LLC (the "Subsidiary"), are each a corporation duly organized, validly
existing and in good standing under the laws of the State of California and has
all requisite corporate power and authority to carry on its businesses as now
conducted and as proposed to be conducted. The Company and its Subsidiary
qualified or licensed to do business as a foreign corporation in all
jurisdictions where such qualification or licensing is required, except where
the failure to so qualify individually or in the aggregate would not cause a
Material Adverse Effect. In this Agreement, the term "Material Adverse Effect"
shall mean a material adverse change in the business, prospects, conditions,
affairs or operations of the Company and its Subsidiary taken as a whole or in
any of their properties or assets. In Sections 3.7 through 3.10, 3.13 through
3.15, 3.17, 3.18 and 3.24 through 3.27, the term "Company" shall refer to both
the Company and the Subsidiary, except that any representations therein
qualified to the knowledge of the Company shall be qualified to the knowledge of
the Company alone.
3.2 Corporate Power. The Company has all requisite corporate power
---------------
necessary for the authorization, execution and delivery of this Agreement, the
Third Amended and Restated Rights Agreement in the form attached hereto as
Exhibit D (the "Rights Agreement") and the Second Amended and Restated Voting
- ---------
Agreement in the form attached hereto as Exhibit E (the "Voting Agreement").
---------
This Agreement, the Rights Agreement and the Voting Agreement are valid and
binding obligations of the Company enforceable in accordance with their terms,
except as the same may be limited by bankruptcy, insolvency, moratorium, and
other laws of general application affecting the enforcement of creditors'
rights.
3.3 Subsidiaries. Except for the Subsidiary, the Company does not
------------
control, directly or indirectly, any other corporation, partnership, joint
venture, limited liability company, association or business entity or other
similar entity. The Company owns all of the outstanding securities of the
Subsidiary.
3.4 Capitalization. The authorized capital stock of the Company is
--------------
25,000,000 shares of Common Stock and 16,217,500 shares of Preferred Stock, of
which 5,017,500 have been designated Series A Preferred Stock, 2,200,000 have
been designated Series B Preferred Stock, and 9,000,000 have been designated
Series C Preferred Stock. There are issued and outstanding 894,998 shares of
the Company's Common Stock, 5,000,000 shares of Series A Preferred Stock,
1,898,733 shares of Series B Preferred Stock, 2,731,960 shares of Series C
Preferred Stock. The holders of record of the presently issued and outstanding
Common Stock, options to purchase Common Stock, Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock immediately prior to the Closing
are as set forth on Exhibit F ("Shareholder and Optionholder List"). As of the
---------
date hereof each share of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock is convertible into one (1) share of Common Stock. All
such issued and outstanding shares have been duly authorized and validly issued,
are fully paid and nonassessable, and were issued in compliance with all
applicable state and federal laws concerning the issuance of securities. The
holders of any and all rights, options, warrants or conversion rights to
purchase or acquire from the Company or, to the knowledge of the Company, from
any other Person any of the Company's capital stock, along with the number of
shares of capital stock issuable upon exercise of such rights, are set forth in
Exhibit F hereto.
- ---------
2
<PAGE>
The Company has reserved at least 5,017,500 shares of Common Stock for issuance
upon conversion of the Series A Preferred Stock, 2,200,000 shares of Common
Stock for issuance upon conversion of the Series B Preferred Stock, 9,000,000
shares of Common Stock for issuance upon conversion of the Series C Preferred
Stock and 4,490,003 shares of Common Stock for future issuance to employees,
consultants, officers or directors upon exercise of options granted or to be
granted under stock or other option plans or arrangements approved by the Board
of Directors. Except as set forth in this Agreement, the Rights Agreement and
those agreements set forth on Exhibit F, there are no outstanding rights,
---------
options, warrants, conversion rights or agreements for the purchase or
acquisition from the Company or the Subsidiary of any shares of their capital
stock. Except for this Agreement, the Voting Agreement, the Rights Agreement and
those agreements set forth in Exhibit F, neither the Company nor the Subsidiary
---------
is a party or subject to any agreement or understanding between any persons or
entities, which affects or relates to the voting or, giving of written consents
with respect to any securities or the sale or issuance of any security.
3.5 Authorization.
-------------
(a) Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and stockholders necessary for the sale and
issuance of the Series C Shares, the issuance of the Common Stock issuable upon
conversion of the Series C Shares, and the authorization, execution and
performance of the Company's obligations hereunder and under the Rights
Agreement has been taken. The Company has duly reserved an aggregate of
9,000,000 shares of Common Stock for issuance upon conversion of the Series C
Shares.
(b) Valid Issuance. The Series C Shares, when issued in
--------------
compliance with the provisions of this Agreement, and the shares of Common Stock
issued upon conversion of the Series C Shares, when issued in accordance with
the provisions of the Articles of Incorporation, will be validly issued, fully
paid and nonassessable and will be free of any liens or other encumbrances;
provided, however, that all such shares may be subject to restrictions on
- -------- -------
transfer under state and/or federal securities laws as set forth herein, and as
may be required by future changes in such laws. The rights, preferences,
privileges and restrictions of the Series C Shares are as set forth in the
Articles of Incorporation.
3.6 No Preemptive Rights. No Person (as hereafter defined) has any
--------------------
right of first refusal or any preemptive rights in connection with the issuance
of the Series C Shares, the issuance of the Common Stock upon conversion of the
Series C Shares, or, except as set forth in the Rights Agreement, any future
issuances of any securities by the Company. In this Agreement, the term
"Person" shall mean an individual, partnership, venture, limited liability
company, unincorporated association, organization, syndicate, corporation, trust
and trustee, executor, administrator or other legal or personal representative
or any government or any agency or political subdivision thereof.
3.7 Intellectual Property; Year 2000.
--------------------------------
(a) Intellectual Property. The Company owns legally enforceable
---------------------
rights to use or is licensed to use by a Person which, to the Company's
knowledge, has legally
3
<PAGE>
enforceable rights to license, all worldwide intellectual property, including
but not limited to patents, trademarks, trade names, brand names, trade secrets,
inventions, know-how, copyrights, and proprietary rights of any kind, and any
registrations or applications therefor (herein "Intellectual Property Rights"),
employed in the operation of or otherwise material to its business as now
conducted and as currently proposed to be conducted, with no infringement or
violation of or conflict with the rights of any Person respecting any
Intellectual Property Rights owned by the Company or to the knowledge of the
Company, respecting any Intellectual Property Rights licensed to the Company.
The Company makes the foregoing representation to its knowledge with respect to
patents, trademarks, trade names and brand names owned or licensed. To the
knowledge of the Company, the operation of the Company's business as now
conducted or as currently proposed to be conducted does not infringe, violate or
conflict with any Intellectual Property Rights of any Person. There are no
options, licenses, or agreements of any kind relating to the foregoing
Intellectual Property Rights outside of the Company's ordinary course of
business, nor is the Company bound by or a party to any option, license or
agreement of any kind with respect to Intellectual Property Rights of any Person
outside of the Company's ordinary course of business. The Company is not
obligated to make any payments by way of royalties, fees or otherwise to any
owner, licensor of, or other claimant to any Intellectual Property Rights or
other intangible asset, with respect to the use thereof outside of the Company's
ordinary course of business. The Company has not received any communications
alleging that it has violated or, by conducting its business as currently
proposed, would violate any of the Intellectual Property Rights of any Person,
nor, upon due inquiry, is the Company aware of any basis for the foregoing.
There are no agreements, understandings, instruments, contracts, judgments,
orders, writs or decrees to which the Company is a party, or by which it or any
of the Company's asset would be bound, which involve indemnification by the
Company with respect to infringements or other violations of any Intellectual
Property Rights other than those contained in license and distribution
agreements entered into in the ordinary course of business by the Company. The
execution, delivery and performance of this Agreement and the consummation of
the transaction contemplated hereby will not constitute a breach of any license
or other agreement involving any Intellectual Property Rights, nor will it cause
or give a right of forfeiture or termination of any such Intellectual Property
Rights. The Company has made all necessary filings and recordations to protect
and maintain its interest in its Intellectual Property Rights. All Company
Intellectual Property Rights are valid, subsisting and enforceable. To the
knowledge of the Company, there is no unauthorized use, infringement or
misappropriation of any of the Company's Intellectual Property Rights by any
Person, including any employee, former employee, independent contractor or
consultant of the Company. The Company has taken reasonable and practicable
steps designed to safeguard and maintain the secrecy and confidentiality of, and
the proprietary rights in, the Company's Intellectual Property Rights. All
officers, employees and consultants of the Company having access to, or
developing any Intellectual Property Rights have executed and delivered (or
shall execute and deliver) an agreement regarding the protection of Company's
proprietary information, and a license or assignment to the Company of all
Intellectual Property Rights arising from the services performed by such persons
to the extent not already provided for under applicable law. The Company has not
received any notice that any current or prior officer, employee, or consultant
of the Company claims or has a right to claim an ownership interest in any
Company Intellectual
4
<PAGE>
Property Rights as a result of having been involved in the development or
licensing of any such Intellectual Property Rights while employed by or
consulting to the Company.
(b) Year 2000. Any software developed or owned by the Company,
---------
or used in the conduct of the Company's business as presently conducted and
currently as proposed to be conducted, will (i) accurately process date-related
information before, during and after January 1, 2000, including accepting the
date input, providing the date output, and performing calculations on dates or
portions of dates; (ii) function without interruption before, during and after
January 1, 2000 without any change in operation; (iii) respond to two-digit date
input in a way that resolves any ambiguity as to century in a defined manner;
and (iv) store and provide output date information in ways that are unambiguous
as to century.
3.8 No Conflicts. Neither the execution and delivery of this
------------
Agreement, the Voting Agreement, the Rights Agreement by the Company nor the
consummation of the transactions contemplated hereby or thereby, will (i)
conflict with or violate the constituting documents or by-laws or resolutions of
the directors or shareholders of the Company or (ii) (either with or without
notice or the passage of time) conflict with, violate, result in the breach of
any term of, constitute a default under, require the consent or approval of or
any notice to or filing with any third party or governmental authority under, or
create a lien or encumbrance on any of the shares of capital stock or the assets
of the Company under, (x) any note, mortgage, deed of trust or other agreement
or instrument to which the Company is a party or by which the Company or any of
its assets is bound, or (y) any law, order, rule, regulation, decree, writ,
injunction, license, approval, authorization, franchise or permit of any
governmental body having jurisdiction over the Company or any of its properties.
3.9 Proprietary Agreements; Employees. Each employee and/or
---------------------------------
independent contractor of the Company has executed an agreement regarding
confidentiality and proprietary information, the form of which has been provided
to special counsel to the Purchasers. None of its employees or independent
contractors is in violation thereof, and the Company will use its best efforts
to prevent such violations and to protect its rights under such agreements. To
the knowledge of the Company, no employee or independent contractor of the
Company is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that could interfere with
the individual's ability adequately to perform the services for the Company that
the Company intends the individual to perform or otherwise interfere with the
use of his or her best efforts to promote the interests of the Company or that
could conflict with the Company's business as conducted or as proposed to be
conducted or that could prevent such employee from assigning inventions to the
Company. Neither the execution nor delivery of this Agreement or the Rights
Agreement, nor the carrying on of the Company's business as proposed, will
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of the Company's employees or independent contractors is now obligated. The
Company does not believe that it is or will be necessary for the Company to
utilize any inventions of any of its employees made prior to their employment by
the Company.
5
<PAGE>
3.10 Litigation, etc. There is no action, proceeding or
---------------
investigation pending, or threatened, against the Company or its officers,
directors or shareholders, or to the best of the Company's knowledge, against
employees of the Company (or, to the best of the Company's knowledge, any basis
therefor or threat thereof): (1) which might result, either individually or in
the aggregate, in (a) any Material Adverse Effect, or (b) any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or (c) any material liability on
the part of the Company; or (2) which questions the validity of this Agreement,
the Rights Agreement, or any action taken or to be taken in connection herewith,
including in each case, without limitation, actions pending or threatened
involving the prior employment (whether as an employee, independent contractor
or otherwise) of any of the Company's employees or independent contractors, the
use in connection with the Company's business of any information or techniques
allegedly proprietary to any of the former employers of such employees or
independent contractors or their obligations under any agreements with prior
employers. The Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company currently intends to initiate.
3.11 Governmental Consent. Except for the filing of a Form D with
--------------------
the Securities and Exchange Commission and the filing of notices required under
applicable state securities laws, no consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of the Company is required in connection with: (a) the valid execution and
delivery of this Agreement or the Rights Agreement; or (b) the offer, sale or
issuance of the Series C Shares or the issuance of the shares of Common Stock
issuable upon conversion of the Series C Shares; or (c) the obtaining of the
consents, permits and waivers specified in subsection 5.1(b) hereof.
3.12 Offering. In reliance on the representations and warranties of
--------
the Purchasers in Section 4 hereof, the offer, sale and issuance of the Series C
Shares in conformity with the terms of this Agreement will not result in a
violation of the requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act") or the qualification or registration requirements
of applicable blue sky laws.
3.13 Taxes. The Company has filed all tax returns, reports and
-----
statements that are required to have been filed with appropriate federal, state,
county and local governmental agencies or instrumentalities, except where such
failure, individually or in the aggregate, to do so would not have a Material
Adverse Effect upon the Company. All such tax returns, reports and statements
are correct and complete in all material respects. The Company has not elected
pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be
treated as a Subchapter S corporation or a collapsible corporation pursuant to
Section 341(f) or Section 1362(a) of the Code, nor has it made any other
elections pursuant to the Code (other than elections which relate solely to
methods of accounting, depreciation or amortization) which individually or in
the aggregate would have a Material Adverse Effect. The Company has paid or
properly established reserves in accordance with GAAP (as defined below) for all
income, franchise, sales, use, license, payroll, transfer and other taxes,
assessments, governmental
6
<PAGE>
charges, penalties, interest and fines due and payable by them on or before the
Closing. There are no tax liens on any assets of Company other than liens for
taxes not yet due and payable. Proper and accurate amounts have been withheld by
Company from its employees for all periods in full and complete compliance with
the tax, social security and unemployment withholding provisions of applicable
federal, state, local and foreign law and such withholdings have been timely
paid to the respective governmental agencies. Company has not executed or filed
with the Internal Revenue Service or any other governmental authority any
agreement or other document extending, or having the effect of extending, the
period of assessment or collection of any taxes. No tax audits or other
administrative or judicial proceedings are pending or threatened with regard to
any taxes for which Company may be liable and no assessment is proposed against
Company. Company does not have any obligation under any written tax sharing
agreement. Company has not filed or been included in a combined, consolidated or
unitary return (or substantial equivalent thereof) of any Person.
3.14 Title. The Company owns its property and assets free and clear
-----
of all liens, mortgages, loans or other encumbrances except liens for current
taxes and mechanic's, materialmen's and similar liens that do not individually
or in the aggregate materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets leased by the
Company, the Company is in compliance with such leases and holds valid leasehold
interests free and clear of any liens, claims or other encumbrances.
3.15 Material Contracts and Commitments. All of the contracts,
----------------------------------
mortgages, indentures, agreements, instruments and transactions to which the
Company is a party or by which it is bound (including purchase orders to the
Company or placed by the Company) which (i) involve obligations of, or payments
to, the Company in excess of Twenty-Five Thousand Dollars ($25,000), (ii) are
between the Company and any officer, director, affiliate, consultant or
employee, (iii) are not in the ordinary course of business, (iv) confer agency
on any Person, (v) create or maintain joint venture, partnership or similar
arrangements, (vi) license intellectual property to or from any Person or (vii)
involve a sharing of profits, are set forth on the list attached hereto as
Exhibit G (the "Contracts"), copies of which have been delivered to special
- ---------
counsel to the Purchasers. All of the Contracts are valid, binding and in full
force and effect in all material respects and enforceable by the Company in
accordance with their respective terms subject to the effect of applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and rules
or laws concerning equitable remedies. The Company is not in default under any
of the Contracts.
3.16 Financial Statements. The Company has delivered to the
--------------------
Purchasers the unaudited balance sheets and related statements of operation as
of December 31, 1998 and for the eight month period then ended (the "Financial
Statements"). The Financial Statements are in accordance with the books and
records of the Company, are complete and correct, and fairly and accurately
present the financial condition and operating results of the Company for the
periods indicated therein, all in conformity with generally accepted accounting
principles consistently applied ("GAAP"), except that the unaudited Financial
Statements do not contain footnotes or reflect the interperiod adjustments
required by GAAP. As of December 31, 1998, the Company did not have any
liabilities, absolute, contingent, or otherwise, which in accordance with GAAP
7
<PAGE>
are required to be disclosed or reserved for other than as set forth in the
Financial Statements. Since December 31, 1998, there has been no material
adverse change in the Company's financial condition or assets. The Company
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with GAAP. As of the date of the
Financial Statements, the Company had no material liabilities, debts or
obligations (whether absolute, accrued, contingent or otherwise) except for
liabilities or obligations reflected or reserved against in the Financial
Statements. Since the date of the Financial Statements, the Company has not
incurred any liabilities, debts or obligations (whether absolute, accrued,
contingent or otherwise), except for current liabilities incurred in the
ordinary course of business consistent with past practice, which liabilities are
consistent with the representations and warranties contained in this Agreement.
Since the date of the Financial Statements, there has been no material adverse
change in the business, operations, assets, condition (financial or otherwise),
liabilities, results of operations or prospects of the Company, taken as a
whole, and no event has occurred which is reasonably likely to result in a
Material Adverse Effect.
3.17 Absence of Changes. Since December 31, 1998 (a) the Company has
------------------
not entered into any transaction which was not in the ordinary course of
business, (b) there has been no material adverse change in the condition
(financial or otherwise) of the business, property, prospects, assets or
liabilities of the Company other than changes in the ordinary course of its
business, which changes, individually or in the aggregate, could not result in a
Material Adverse Effect, (c) there has been no damage to, destruction of or loss
of physical property (whether or not covered by insurance), which, individually
or in the aggregate, has a Material Adverse Effect, (d) the Company has not
declared or paid any dividend or made any distribution on its stock, or
redeemed, purchased or otherwise acquired any of its stock, (e) the Company has
not materially changed any compensation arrangement or agreement with any of its
key employees or executive officers, or materially changed the rate of pay and
provision of employee benefits and prerequisites of its employees and
independent contractors as a group, or granted to any employee, independent
contractors or any other person, or modified in any respect, any stock options,
stock appreciation right or other compensation that is based in any respect on
the value of any class of equity of the Company, (f) the Company has not changed
or amended any material contract by which the Company or any of its assets are
bound or subject, except as contemplated by this Agreement, (g) there has been
no resignation or termination of employment of any key officer, employee or
independent contractor of the Company and the Company does not know of any
impending resignation or termination of employment of any such officer, employee
or independent contractor that if consummated could result in a Material Adverse
Effect, (h) there has been no change, except in the ordinary course of business,
in the contingent obligations of the Company (nor in any contingent obligation
of the Company regarding any director, stockholder or key employee, officer or
independent contractor of the Company) by way of guaranty, endorsement,
indemnity, warranty or otherwise, (i) there have been no loans made by the
Company to any of its employees, independent contractors, officers or directors
other than travel advances and other similar types of advances made in the
ordinary course of business and consistent with past practice and generally
applicable Company policy, (j) there has been no waiver by the Company of a
valuable right or of a debt owing to it, and (k) there has not been any
satisfaction or discharge of any lien, claim or other encumbrance or any payment
of any obligation by the Company, except in the ordinary course of business and
which is not material
8
<PAGE>
to the assets, properties, financial condition, operating results, prospects or
business of the Company.
3.18 Outstanding Indebtedness. The Company has no indebtedness for
------------------------
borrowed money which it has directly or indirectly created, incurred, assumed or
guaranteed, or with respect to which it has otherwise become liable, directly or
indirectly.
3.19 Registration Rights. Other than as granted pursuant to the
-------------------
Rights Agreement, the Company has not granted or agreed to grant any rights to
register (as that term is defined in the Rights Agreement) securities, including
piggyback registration rights, to any Person.
3.20 Transactions with Related Parties. In the past 12 months, (i)
---------------------------------
the Company has not at any time, directly or indirectly, purchased, leased or
otherwise acquired any property or obtained any services from, or sold, leased
or otherwise disposed of any property or furnished any services to (except in
each case with respect to remuneration for services rendered as a director,
officer or employee of Company), in the ordinary course of business or
otherwise, any shareholder, any family member of any shareholder or any other
Person (other than the Company) that, directly or indirectly, alone or together
with others, controls, is controlled by or is under common control with the
Company or any shareholder or any family member of any shareholder (the Persons
listed in this clause (i) being referred to herein collectively as "Affiliated
Persons" and individually as an "Affiliated Person"); (ii) the Company does not
owe any amount to any Affiliated Person; and (iii) no Affiliated Person owes any
amount to the Company and no part of the property or assets of any Affiliated
Person is used by the Company in the conduct or operation of its business.
3.21 Certain Transactions. The Company is not indebted, directly or
--------------------
indirectly, to any Affiliated Person, in any amount whatsoever; and no
Affiliated Person is indebted to the Company or has any direct or indirect
ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship. No such
Affiliated Person is, directly or indirectly, interested in any contract with
the Company (other than bona fide employment agreements, copies of which have
been previously delivered to special counsel to Purchasers). The Company is not
guarantor or indemnitor of any indebtedness of any Person.
3.22 Accounts Receivable. All accounts receivable of the Company as
-------------------
shown on the balance sheet as of December 31, 1998 and all such receivables
which have arisen thereafter are collectible in the ordinary course of business
by the Company, net of reserves for bad debts shown on such balance sheet, and,
as to the period after December 31, 1998, net of reserves established consistent
with prior practice in amount and nature.
3.23 Corporate Documents; Minute Books. The Bylaws of the Company
---------------------------------
are in the form previously provided to special counsel to the Purchasers. The
minute books of the Company previously provided to special counsel to the
Purchasers contain a complete summary of all meetings of directors and
stockholders since the time of incorporation of the Company.
9
<PAGE>
3.24 Employee Benefit Plans and Employment Matters.
---------------------------------------------
(a) Except as listed on the Schedule of Exceptions, there are no
Employee Benefit Plans. "Employee Benefit Plan" means any "employee benefit
plan" as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended from time to time ("ERISA") and any other plan, policy,
program, practice, agreement, understanding or arrangement (whether written or
oral) providing compensation or other benefits to any current or former officer,
employee or consultant (or to any dependent or beneficiary thereof), of the
Company or any ERISA Affiliate, which are now, or within the last three (3)
years were maintained, by the Company or any ERISA Affiliate, or under which the
Company or any ERISA Affiliate has or had any obligation to contribute or under
which the Company or any ERISA Affiliate has or could have any liability,
whether actual or contingent (including any liability arising out of an
indemnification guarantee, hold-harmless or similar agreement), including,
without limitation, all employee pension, profit-sharing, savings, retirement,
incentive, bonus, deferred compensation, vacation, holiday, cafeteria, medial,
disability, life, accident or other insurance, stock purchase, stock option,
stock appreciation right, phantom stock, restricted stock or other equity-based
compensation plans, and any other plans, policies, programs, practices or
arrangements. "ERISA Affiliate" means any entity (whether or not incorporated)
other than the Company that, together with the Company, is or was a member of a
controlled group of corporations within the meaning of Section 414(b) of the
Code, of a group of trades or businesses under common control within the meaning
of Section 414(c) of the Code, or in the case of any Employee Benefit Plan
subject to Part 3 of Subtitle B of Title I of ERISA of an affiliated service
group within the meaning of Section 414(m) of the Code.
All Employee Benefit plans comply in all material respects with and are and
have been operated in material accordance with each applicable provision of
ERISA, the Code, other federal statutes, state law and the regulations and rules
promulgated pursuant thereto or in connection therewith. Each Plan which is a
group health plan (within the meaning of Section 5000(b)(1) of the Code)
complies with and has been maintained and operated in accordance with each of
the requirements of Section 4980B of the Code and Part 6 of Subtitle B of Title
I of ERISA.
With respect to the Employee Benefit plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves on the financial statements or
books of the Company.
3.25 Environmental Protection.
------------------------
(a) The Company is in compliance with Environmental Laws and the
Company has obtained and is in compliance with all necessary permits, licenses,
approvals and authorizations required under applicable Environmental Laws,
except for such noncompliance which would not have, or could not reasonably be
expected to have, singly or in the aggregate, a Material Adverse Effect.
10
<PAGE>
(b) The Company has not, and to its knowledge, no third party
has released Hazardous Materials at, from, on, in, to or under any of the
properties or assets owned, leased or operated (or formerly owned or operated)
by the Company, and there are no underground storage tanks, polychlorinated
biphenyl-containing equipment or asbestos-containing material at any of the
properties or assets owned, leased or operated (or formerly owned or operated)
by the Company.
(c) There are no past, pending or, to the Company's knowledge,
threatened, claims, notices of violation, investigations, litigation,
administrative proceedings, orders, judgments against the Company relating to
Hazardous Materials, Environmental Laws or relating to any other location where
Hazardous Materials from the Company, or to the knowledge of the Company, any of
its predecessors have been transported, stored, handled, disposed, treated or
have otherwise come to be located ("Environmental Claims") and the Company is
not aware of any facts, events, conditions or circumstances which could
reasonably be expected to form the basis of any Environmental Claims against the
Company.
In this Agreement, the term "Environmental Laws" shall mean any and
all federal, state, local and foreign, civil and criminal laws, statutes, rules,
ordinances, codes, regulations, permits relating to the protection of health and
the environment, worker health and safety and or governing the use, handling,
storage, discharge or disposal of Hazardous Material, including but not limited
to the Comprehensive Environmental Response, Compensation and Liability Act, 42
USC (S) 9601 et. seq., the Resource Conservation and Recovery Act, 42 USC (S)
-- ---
6901 et. seq., the Occupational Health and Safety Act, 29 USC (S) 651 et. seq.,
-- --- -- ---
and the state analogues thereto, all as amended or superseded from time to time;
and the term "Hazardous Materials" shall mean petroleum and petroleum products,
radioactive materials, asbestos-containing materials, radon, lead-based paint,
polychlorinated biphenyls, pesticides and any other chemicals, substances,
wastes or materials defined, listed or regulated by any Environmental Law.
3.26 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, and insurance against other hazards, risks and
liabilities to persons and property to the extent and in the manner customary
for companies in similar businesses similarly situated.
3.27 Labor Agreements and Actions. To the knowledge of the Company,
----------------------------
no officer, key employee or independent contractor intends to terminate his or
her employment with the Company, nor does the Company have a present intention
to terminate the employment of any of the foregoing. Subject to general
principles related to wrongful termination of employees and to the terms of
employment agreements listed on the Schedule of Exceptions, the employment of
each officer and employee of the Company is terminable at the will of the
Company.
3.28 Section 83(b) Elections. To the knowledge of the Company, no
-----------------------
elections and notices pursuant to Section 83(b) of the Code and any analogous
provisions of applicable state tax laws have been filed by individuals who have
purchased or been granted shares of the Company's Common Stock.
11
<PAGE>
3.29 Disclosure. No representation or warranty by the Company in
----------
this Agreement, or in any document or certificate furnished or to be furnished
to the Purchasers pursuant hereto or in connection with the transactions
contemplated hereby, when taken together, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements made herein and therein, in the light of the
circumstances under which they were made, not misleading.
4. Representations and Warranties of Purchasers and Restrictions on
----------------------------------------------------------------
Transfer Imposed by the Securities Act.
--------------------------------------
4.1 Representations and Warranties of the Purchasers. Each
------------------------------------------------
Purchaser, severally and not jointly, represents and warrants to the Company as
follows:
(a) Legal Representation. Purchasers hereby acknowledges that
--------------------
Skadden, Arps, Slate, Meagher & Flom LLP is not counsel to and does not
represent the Purchasers in the transactions contemplated by this Agreement.
(b) Investment Intent. This Agreement is made with Purchaser in
-----------------
reliance upon Purchaser's representation to the Company, evidenced by such
Purchaser's execution of this Agreement, that Purchaser is acquiring the Series
C Shares and the Common Stock issuable upon conversion of Series C Shares
(collectively the "Securities") for investment for Purchaser's own account, and
not with a view to, or for resale in connection with, any distribution or public
offering thereof within the meaning of the Securities Act.
(c) Authority. Purchaser has the full right, power and
---------
authority to enter into and perform this Agreement and the Rights Agreement.
This Agreement and the Rights Agreement constitute or will constitute the valid
and binding obligations of Purchaser, enforceable against Purchaser in
accordance with their respective terms, except as such enforceability may be
limited by (i) bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to creditors' rights generally, and (ii) general
principles of equity.
(d) Series C Shares Not Registered. Purchaser understands and
------------------------------
acknowledges that the offering of the Series C Shares pursuant to this Agreement
will not be registered under the Securities Act or qualified under applicable
blue sky laws on the grounds that the offering and sale of securities
contemplated by this Agreement are exempt from registration under the Securities
Act and exempt from qualifications available under applicable blue sky laws, and
that the Company's reliance upon such exemptions is predicated upon Purchaser's
representations set forth in this Agreement. Purchaser acknowledges and
understands that the Securities must be held until the Securities are registered
under the Securities Act and/or qualified under applicable blue sky laws or an
exemption from such registration and/or such qualification is available.
(e) No Transfer. Purchaser covenants that in no event will
-----------
Purchaser dispose of any of the Securities (other than in conjunction with an
effective registration statement for the Securities under the Securities Act, in
compliance with Rule 144 promulgated under the Securities Act or in compliance
with another exemption from applicable securities laws) unless
12
<PAGE>
and until, if reasonably requested by the Company, Purchaser shall have
furnished the Company with an opinion of counsel to the effect that (x) such
disposition will not require registration under the Securities Act and (y)
appropriate action necessary for compliance with the Securities Act and other
applicable state, local or foreign law has been taken. It is agreed that the
Company will not require opinions of counsel for transactions made pursuant to
Rule 144.
(f) Permitted Transfers. Notwithstanding the provisions of
-------------------
subsection (d) above, no registration statement or opinion of counsel shall be
necessary for a transfer by a Purchaser which is a partnership to a partner of
such partnership or a former partner of such partnership who leaves such
partnership after the date hereof (including, but not limited to, transfers to
partners or limited partners of freely tradeable publicly traded stock in lieu
of cash and transfers pursuant to co-investment rights of limited partners), or
to the estate of any such partner or former partner or the transfer by gift,
will or intestate succession of any partner to his spouse or lineal descendants
or ancestors, if the transferee agrees in writing to be bound by the terms of
this Agreement to the same extent as if he were an original Purchaser hereunder.
(g) Knowledge and Experience. Purchaser (i) has such knowledge
------------------------
and experience in financial and business matters as to be capable of evaluating
the merits and risks of Purchaser's prospective investment in the Securities;
(ii) has the ability to bear the economic risks of Purchaser's prospective
investment; (iii) has been furnished with and has had access to such information
as Purchaser has considered necessary to make a determination as to the purchase
of the Securities together with such additional information as is necessary to
verify the accuracy of the information supplied; (iv) has had all questions
which have been asked by Purchaser satisfactorily answered by the Company; and
(v) has not been offered the Securities by any form of advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any such media.
(h) Accredited Investor. Purchaser is an "accredited investor"
-------------------
as that term is defined in Rule 501(a) under the Securities Act.
4.2 Legends. Each certificate representing the Securities may be
-------
endorsed with the following legends:
(a) Federal Legend. THE SECURITIES REPRESENTED BY THIS
--------------
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR
(iii) PURSUANT TO AN OPINION OF COUNSEL, THAT SUCH REGISTRATION OR COMPLIANCE IS
NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.
(b) Other Legends. Any other legends required by applicable
-------------
state blue sky laws.
13
<PAGE>
The Company need not register a transfer of legended Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in each of the foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions. Any legend endorsed
-------------------------------------------
on a certificate pursuant to subsection 4.2(a) and the stop transfer
instructions with respect to such legended Securities shall be removed, and the
Company shall issue a certificate without such legend to the holder of such
Securities if such Securities are registered under the Securities Act and a
prospectus meeting the requirements of Section 10 of the Securities Act is
available or if such holder satisfies the requirements of Rule 144(k), or to the
reasonable satisfaction of the Company, the proposed transfer is in accordance
with or exemption from federal and state accounting laws.
5. Conditions to Closing.
---------------------
5.1 Conditions to Purchasers' Obligations. The obligation of each
-------------------------------------
Purchaser to purchase the Series C Shares at the Closing is subject to the
fulfillment to Purchaser's satisfaction, on or prior to the Closing Date, of the
following conditions, any of which may be waived by Purchaser:
(a) Representations and Warranties Correct; Performance of
--------------------------------------- --------------
Obligations. The representations and warranties made by the Company in Section
- -----------
3 hereof shall be true and correct when made, and shall be true and correct on
the Closing Date with the same force and effect as if they had been made on and
as of said date. The Company shall have performed in all material respects all
obligations and conditions herein required to be performed or observed by it on
or prior to the Closing Date.
(b) Consents and Waivers. The Company shall have obtained any
--------------------
and all consents, permits and waivers necessary or appropriate for consummation
of the transactions contemplated by this Agreement, the Voting Agreement and the
Rights Agreement.
(c) Rights Agreement. The Company, Purchasers and the holders
----------------
of two-thirds of the Company's Preferred Stock outstanding immediately prior to
the Closing shall have executed the Rights Agreement.
(d) Voting Agreement. The Company, Purchasers and the holders
----------------
of two-thirds of the Company's Preferred Stock outstanding immediately prior to
the Closing shall have executed the Voting Agreement.
(e) Compliance Certificate. The Company shall have delivered a
----------------------
certificate, executed on behalf of the Company by its President, dated as of the
Closing Date, certifying to the fulfillment of the conditions specified in
subsections (a) and (b) of this Section 5.1.
(f) Secretary's Certificate. The Company shall have delivered a
-----------------------
certificate, executed on behalf of the Company by the Secretary, dated as of the
Closing Date,
14
<PAGE>
certifying the Board of Directors and shareholders resolutions approving this
Agreement, the Rights Agreement, the Voting Agreement and the issuance of the
Series C Shares, the reservation of the underlying Common Stock and certifying
the current versions of the Articles of Incorporation and Bylaws and the
composition of the Board of Directors of the Company upon Closing.
(g) Opinion of Counsel. Purchasers shall have received an
------------------
opinion from Gray Cary Ware & Freidenrich LLP, satisfactory in form to special
counsel for Purchasers, substantially in the form attached hereto as Exhibit H.
---------
(h) Small Business Administration. The Company shall have
-----------------------------
furnished to each Purchaser that is an SBIC all forms which such Purchaser shall
have informed the Company are required by the Small Business Administration in
connection with the transactions contemplated hereby, including without
limitation, a Size Status Declaration on SBA Form 480, an Assurance of
Compliance on SBA Form 652, a Portfolio Financing Report on Form 1031 and an SBA
Sideletter, which forms shall be in proper form for filing with the Small
Business Administration.
5.2 Conditions to Obligations of the Company. The Company's
----------------------------------------
obligation to sell and issue the Series C Shares at the Closing is subject to
the fulfillment to the satisfaction of the Company on or prior to the Closing
Date of the following conditions, any of which may be waived by the Company:
(a) Representations and Warranties Correct. The representations
--------------------------------------
and warranties made by Purchasers in Section 4 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date with the same force
and effect as if they had been made on and as of said date.
6. Affirmative Covenants of the Company. The Company hereby covenants
------------------------------------
and agrees as follows:
6.1 Director and Officer Liability Insurance. Prior to completion of
----------------------------------------
an underwritten public offering by the Company pursuant to the Securities Act,
the Company shall obtain liability insurance for the Company's directors and
officers in a form acceptable to the Company's Board of Directors.
6.2 Financial Information. Until the first to occur of (i) the date
---------------------
on which the Company is required to file a report pursuant to Section 13(a) of
the Securities Exchange Act of 1934 (the "Exchange Act"), by reason of the
Company having registered any of its securities pursuant to Section 12(g) of the
Exchange Act or (ii) quotations for the Common Stock of the Company are reported
by the automated quotations system operated by the National Association of
Securities Dealers, Inc. or by an equivalent quotations system or (iii) shares
of the Common Stock of the Company are listed on a national securities exchange
registered under Section 6 of the Exchange Act, the Company will furnish to each
Purchaser:
15
<PAGE>
(a) so long as Purchaser or its affiliates own any of the Series
C Shares or Common Stock issued upon conversion of the Series C Shares, as soon
as practicable after the end of each fiscal year, and in any event within 120
days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal year, and consolidated
statements of operations and consolidated statements of cash flow of the Company
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles, all in reasonable detail and certified
by independent public accountants of recognized national standing selected by
the Company; and
(b) so long as Purchaser continues to hold any of the Series C
Shares or Common Stock issued upon conversion of the Series C Shares, as soon as
practicable after the end of each fiscal quarter, and in any event within 45
days thereafter, consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal quarter, and consolidated
statements of operations and consolidated statements of cash flow of the Company
and its subsidiaries, if any, for such quarter, prepared in accordance with GAAP
(except for required footnotes), all in reasonable detail, subject to changes
resulting from year-end audit adjustments and inter-period allocations; and
(c) so long as the Purchaser continues to hold at least 100,000
of the Series C Shares (as adjusted for stock splits, combinations, dividends,
distributions or recapitalizations or the like), as soon as practicable after
the end of each month and in any event within 30 days thereafter, consolidated
balance sheets of the Company and its subsidiaries, if any, as of the end of
such month and consolidated statements of income and cash flow statements, for
such month and for the current fiscal year to date, prepared in accordance with
GAAP (except for required footnotes), all in reasonable detail, subject to
changes resulting from year-end audit adjustments and inter-period allocations;
and
(d) so long as Purchaser continues to hold at least 100,000 of
the Series C Shares (as adjusted for stock splits, combinations, dividends,
distributions or recapitalizations or the like), as soon as practicable and in
any event no later than 30 days before the end of the fiscal year, an annual
budget (consisting of projected income statements and projected cash flow
statements reported on a monthly basis) for the subsequent fiscal year.
6.3 Indemnity. The Company agrees to indemnify and hold harmless
---------
each Purchaser, its respective affiliates, officers, directors and employees
(collectively, the "Indemnified Parties") from and against any liabilities,
-------------------
obligations, losses, damages, amounts paid in settlement, penalties, actions,
judgments, fines, suits, claims, costs, reasonable attorneys' fees, reasonable
costs of investigation, expenses and disbursements of any kind ("Losses") which
------
may be imposed upon, incurred by or asserted against any Indemnified Party in
any manner relating to or arising out of any untrue representation, breach of
warranty or failure to perform any covenants or agreement by the Company
contained herein, in the Rights Agreement, the Voting Agreement, or in any
certificate or document delivered pursuant hereto. The Company shall also
advance expenses as incurred to the fullest extent permitted under applicable
law; provided, however, that the Indemnified Party provides an undertaking to
repay such advances to the Company if it is ultimately determined that such
Indemnified Party is not entitled to
16
<PAGE>
indemnification. The Purchasers and the Company will cooperate in the defense of
any such matter. Notwithstanding anything to the contrary contained in this
Agreement, the amount to which any Indemnified Party shall be entitled pursuant
to this Section 6.1 shall be limited to the Losses actually sustained by such
Indemnified Party, net of any tax benefits derived by such Indemnified Party in
respect of such Losses.
6.4 Indemnification Procedures. Any Indemnified Party seeking
--------------------------
indemnification pursuant to Section 6.3 with respect to a claim, action, suit or
proceeding by a Person who is not an Indemnified Party shall give prompt written
notice to the Company of the assertion of any claim, or the commencement of any
action, suit or proceeding, in respect of which indemnity may be sought
hereunder, provided that the failure to give such notice shall not affect the
Indemnified Party's rights to indemnification hereunder unless such failure
shall prejudice in any material respect the Company's ability to defend such
claim, action, suit or proceeding. The Company shall have the right to assume
the defense of any such action, suit or proceeding at its expense; provided,
however, that if the Company shall elect not to assume the defense of any such
action, suit or proceeding, or fails to make such an election within twenty (20)
days after it receives such notice pursuant to the first sentence of this
Section 6.4, the Indemnified Party may assume such defense with counsel of its
choice and at the expense of the Company and shall defend such claim, action,
suit or proceeding diligently and in good faith. The Indemnified Party shall
have the right to participate in (but not control) the defense of an action,
suit or proceeding defended by the Company hereunder and to retain its own
counsel in connection with such action, suit or proceeding, but the fees and
expenses of such counsel shall be at the Indemnified Party's expense; provided,
however, that the Company shall bear the expenses as incurred of counsel to the
Indemnified Party if (i) the Company and the Indemnified Party have mutually
agreed in writing to the retention of such counsel or (ii) the named parties in
any such action, suit or proceeding (including impleaded parties) include the
Company and the Indemnified Party, and representation of the Company and the
Indemnified Party by the same counsel would, in the reasonable opinion of
counsel to the Indemnified Party, create a conflict; provided further that,
unless otherwise agreed by the Company, if the Company is obligated to pay the
fees and expenses of such counsel, the Company shall be obligated to pay only
the fees and expenses associated with one attorney or law firm, as applicable,
for the Indemnified Party, as well as the fees and expenses associated with
local counsel. The Company shall not be liable under Section 6.3 for any
settlement effected without its written consent, which consent will not be
unreasonably withheld or delayed, of any claim, action, suit or proceeding in
respect of which indemnity may be sought hereunder.
6.5 Inspection. Until the first to occur of (i) the date on which
----------
the Company is required to file a report pursuant to Section 13(a) of the
Securities Exchange Act of 1934 (the "Exchange Act"), by reason of the Company
having registered any of its securities pursuant to Section 12(g) of the
Exchange Act or (ii) quotations for the Common Stock of the Company are reported
by the automated quotations system operated by the National Association of
Securities Dealers, Inc. or by an equivalent quotations system or (iii) shares
of the Common Stock of the Company are listed on a national securities exchange
registered under Section 6 of the Exchange Act, the Company shall permit
Purchaser, at Purchaser's expense, to visit and inspect the Company's
properties, to examine its books of account and records and to discuss the
17
<PAGE>
Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by Purchaser; provided, however, that the
Company shall not be obligated pursuant to this Section 6.5 to provide access to
any information which it reasonably considers to be a trade secret or similar
confidential information unless and until such Purchaser executes a
confidentiality/non-disclosure agreement reasonably acceptable to both parties.
6.6 Executive Search. The Company will use its best efforts to hire
----------------
(i) a chief financial officer within 60 days following the Closing Date and (ii)
a chief operating officer within 180 days of the Closing Date.
6.7 Certain Transactions. Until the first to occur of (i) the date
--------------------
on which the Company is required to file a report pursuant to Section 13(a) of
the Exchange Act by reason of the Company having registered any of its
securities pursuant to Section 12(g) of the Exchange Act or (ii) quotations for
the Common Stock of the Company are reported by the automated quotations system
operated by the National Association of Securities Dealers, Inc. or by an
equivalent quotations system or (iii) shares of the Common Stock of the Company
are listed on a national securities exchange registered under Section 6 of the
Exchange Act, the Company will not enter into a contract or other transaction
between the Company and one or more of its directors or officers or any
corporation or other entity in which such directors or officers have a material
financial interest unless such contract or transaction has been approved in
accordance with the procedures required for approval of a contract or
transaction between the Company and one or more of its directors pursuant to
Section 310 of the General Corporation Law of the State of California.
7. Miscellaneous.
-------------
7.1 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
7.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by Purchasers. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder as of the date of such
certificate or instrument.
7.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7.4 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
they supersede, merge and render void every other prior written and/or oral
understanding or agreement among or between the parties hereto.
18
<PAGE>
7.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally,
mailed by registered or certified mail, postage prepaid, return or receipt
requested, or delivered by courier, addressed (a) if to Purchaser, at
Purchaser's address set forth on Exhibit A, or at such other address as
Purchaser shall have furnished to the Company in writing or (b) if to the
Company, at 706 Mission Street, 2nd Floor, San Francisco, CA 94103, or at such
other address as the Company shall have furnished to Purchasers in writing.
Notices that are mailed shall be deemed to have been given five days after
deposit in the United States mail and notices delivered by courier or personally
shall be deemed to have been given upon delivery to the recipient's address.
7.6 Severability. In case any provision of this Agreement shall be
------------
found by a court of law to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
7.7 Finder's Fees and Other Fees.
----------------------------
(a) The Company (i) represents and warrants that it has retained
no finder or broker other than Daiwa Securities America Inc. in connection with
the transactions contemplated by this Agreement and, (ii) hereby agrees to
indemnify and to hold Purchasers harmless from and against any liability for
commission or compensation in the nature of a finder's fee to any broker or
other person or firm other than Daiwa Securities America Inc. (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company, or any of its employees or representatives, is responsible.
(b) Purchaser (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the Company harmless
from and against any liability for any commission or compensation in the nature
of a finder's fee to any broker or other person or firm (and the costs and
expenses of defending against such liability or asserted liability) for which
Purchaser, or any of its employees or representatives, are responsible.
7.8 Expenses. The Company and Purchasers shall each bear their own
--------
expenses and legal fees in connection with the consummation of this transaction;
provided, however, that the Company will pay the reasonable, documented fees and
- -------- -------
disbursements up to an aggregate of $20,000 of special legal counsel for
Constellation Ventures and up to an aggregate of $5,000 of special legal counsel
for Wasserstein Adelson Ventures, L.P. in connection with the transaction
contemplated by this Agreement.
7.9 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
19
<PAGE>
7.11 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to any holder of any
securities issued or to be issued hereunder shall impair any such right, power
or remedy of the Company or such holder, nor shall it be construed to be a
waiver of any breach or default under this Agreement, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any delay or omission to exercise any right, power or remedy or any waiver
of any single breach or default be deemed a waiver of any other right, power or
remedy or breach or default theretofore or thereafter occurring. All remedies,
either under this Agreement, or by law otherwise afforded to the Company or any
holder, shall be cumulative and not alternative.
7.12 Waivers and Amendments. With the written consent of the holders
----------------------
of more than two-thirds of the Series C Shares (including any shares of Common
Stock obtained upon conversion of the Series C Shares), the obligations of the
Company and the rights of the holders of the Series C Shares under this
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely), and with the same consent the Company, when authorized by
resolution of its Board of Directors, may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement. Upon the effectuation of
each such waiver, consent or agreement of amendment or modification the Company
shall promptly give written notice thereof to the record holders of the Series C
Shares who have not previously consented thereto in writing. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this subsection 7.12.
[REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Series C
Preferred Stock Purchase Agreement as of the date first written above.
COMPANY:
SALON INTERNET, INC.
By: /s/ Michael O'Donnell
------------------------------
Michael O'Donnell, President
21
<PAGE>
COUNTERPART SIGNATURE PAGE TO
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
PURCHASER:
If the Purchaser is an Entity:
Authorized Signatory
- --------------------------------
Print Name of Purchaser
By: /s/ Authorized Signatory
-----------------------------
Signature
Title: Title
--------------------------
If the Purchaser is an Individual:
/s/ Authorized Signatory
- --------------------------------
Signature
Name
- --------------------------------
Print Name
22
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A - Schedule of Purchasers
Exhibit B - Articles of Incorporation
Exhibit C - Schedule of Exceptions
Exhibit D - Rights Agreement
Exhibit E - Voting Agreement
Exhibit F - Shareholder and Optionholder List
Exhibit G - Material Contracts
Exhibit H - Form of Opinion of Gray Cary Ware & Freidenrich LLP
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
<PAGE>
EXHIBIT B
---------
ARTICLES OF INCORPORATION
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS
<PAGE>
EXHIBIT D
---------
RIGHTS AGREEMENT
<PAGE>
EXHIBIT E
---------
VOTING AGREEMENT
<PAGE>
EXHIBIT F
---------
STOCKHOLDER AND OPTIONHOLDER LIST
<PAGE>
EXHIBIT G
---------
LIST OF MATERIAL CONTRACTS
<PAGE>
EXHIBIT H
---------
FORM OF LEGAL OPINION
<PAGE>
EXHIBIT 21.1
Subsidiaries of Salon:
The Well, a California limited liability company.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. ) of our report dated April 14, 1999, on our audits of the financial
statements and financial statement schedule of Salon.com as of March 31, 1997
and 1998 and for the period from July 27, 1995 (inception) to March 31, 1996
and for each of the two years in the period ended March 31, 1998. We also
consent to the references to our firm under the captions "Experts" and
"Selected Financial Data." However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Consolidated Financial Data."
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 15, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. ) of our report dated March 3, 1999, on our audits of the financial
statements of The Well LLC as of December 31, 1998 and 1997 and for the year
ended December 31, 1998 and the period from July 1, 1997 to December 31, 1997.
We also consent to the reference to our firm under caption "Experts".
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 15, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this registration statement on Form S-1
(File No. ) of our report dated March 3, 1999, on our audit of the
financial statements of Online Conferencing Business (predecessor business) as
of June 30, 1997 and for the period from January 1, 1997 to June 30, 1997. We
also consent to the reference to our firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED NOTES FOR THE NINE MONTHS ENDED DECEMBER 31,
1998 AND THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> DEC-31-1998 MAR-31-1998
<CASH> 1,607,271 1,925,664
<SECURITIES> 0 0
<RECEIVABLES> 844,186 248,113
<ALLOWANCES> 19,167 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,759,222 2,312,009
<PP&E> 922,330 528,178
<DEPRECIATION> 168,440 114,894
<TOTAL-ASSETS> 3,385,925 2,707,208
<CURRENT-LIABILITIES> 1,237,232 417,826
<BONDS> 0 0
0 0
11,161,857 7,954,706
<COMMON> 392 375
<OTHER-SE> (9,151,031) (5,760,690)
<TOTAL-LIABILITY-AND-EQUITY> 3,385,925 2,707,208
<SALES> 2,058,024 1,155,931
<TOTAL-REVENUES> 2,058,024 1,155,931
<CGS> 3,134,810 2,832,006
<TOTAL-COSTS> 3,134,810 2,832,006
<OTHER-EXPENSES> 3,222,788 2,222,548
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 36,701 16,340
<INCOME-PRETAX> (4,297,917) (3,825,855)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,297,917) (3,825,855)
<EPS-PRIMARY> (11.20) (10.20)
<EPS-DILUTED> (11.20) (10.20)
</TABLE>
