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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to _________________
Commission File Number: 000-28871
SWITCHBOARD INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 04-3321134
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
115 Flanders Road 01581
Westboro, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 898-1122
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X] .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding at
Title of Class April 30, 2000
----------------- -----------------
Common Stock, par value $0.01 24,639,605
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical facts
included in this Quarterly Report on Form 10-Q, regarding our strategy, future
operations, financial position, estimated revenues, projected costs, prospects,
plans and objectives of management are forward-looking statements. When used in
this Quarterly Report on Form 10-Q, the words "will", "believe", "anticipate",
"intend", "estimate", "expect", "project" and similar expressions are intended
to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. We cannot guarantee future results,
levels of activity, performance or achievements and you should not place undue
reliance on our forward-looking statements. Our forward-looking statements do
not reflect the potential impact of any future acquisitions, mergers,
dispositions, joint ventures or strategic alliances. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including the risks described in "Risk Factors" and
elsewhere in this Quarterly Report on Form 10-Q. We do not assume any
obligation to update any of the forward-looking statements we make.
SWITCHBOARD INCORPORATED
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. -- Financial Statements
Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999....... 2
Statements of Operations for the Three Months Ended March 31, 2000
and 1999 (Unaudited)...................................................... 3
Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999
(Unaudited)................................................................ 4
Notes to Financial Statements............................................... 5
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 6
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk...... 22
PART II - Other Information
Item 2. -- Changes in Securities and Use of Proceeds........................ 22
Item 4. -- Submission of Matters to a Vote of Security Holders.............. 23
Item 6. -- Exhibits and Reports on Form 8-K................................. 24
Signatures.................................................................. 25
Our Web site address is www.switchboard.com. References in this Quarterly
Report on Form 10-Q to www.switchboard.com, switchboard.com, any variations of
the foregoing or any other uniform resource locator, or URL, are inactive
textual references only. The information on our Web site or at any other URL is
not incorporated by reference into this Quarterly Report on Form 10-Q and should
not be considered to be a part of this document.
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PART I -- FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
SWITCHBOARD INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,2000 December 31,1999
------------- ----------------
Assets: (Unaudited)
- -------
<S> <C> <C>
Cash and cash equivalents $ 78,747,776 $ 3,604,551
Accounts receivable, net of allowance of $250,513 and 3,512,130 3,060,249
$162,183, respectively
Other current assets 660,859 477,876
Investment 3,653,850 2,630,850
------------ ------------
Total current assets 86,574,615 9,773,526
Property and equipment, net 1,211,273 1,202,578
Other assets net 1,051,134 1,219,274
------------ ------------
Total assets $ 88,837,022 $ 12,195,378
============ ============
Liabilities and Stockholders' Equity (Deficit):
- -----------------------------------------------
Accounts payable $ 1,204,667 $ 775,202
Accrued expenses 2,697,350 2,739,665
Deferred revenue 1,937,970 1,349,145
Note payable, current portion 600,000 600,000
------------ ------------
Total current liabilities 6,439,987 5,464,012
Redeemable convertible preferred stock, $0.01 par value; - 16,319,570
3,552,421 shares issued and
outstanding as of December 31, 1999
Stockholders' equity (deficit):
- -------------------------------
Series E Special Voting Preferred Stock; one share -
authorized and designated; one
share issued and outstanding
Common stock, $.01 par value; authorized 85,000,000 and 238,146 146,640
30,000,000 shares,
respectively; issued and outstanding 23,814,605 and
14,663,934 shares, respectively
Additional paid-in capital 167,393,587 75,666,634
Accumulated other comprehensive income 2,878,950 1,855,950
Contribution receivable (60,212,236) (66,242,838)
Accumulated deficit (27,901,412) (21,014,590)
------------ ------------
Total stockholders' equity (deficit) 82,397,035 (9,588,204)
Total liabilities and stockholders' equity (deficit) $ 88,837,022 $ 12,195,378
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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SWITCHBOARD INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Total Revenue $ 3,818,020 $1,127,549
Cost of revenue 916,444 76,483
----------- ----------
Gross profit 2,901,576 1,051,066
Operating expenses:
- -------------------
Sales and marketing 8,736,690 690,451
Product development 612,937 435,108
General and administrative 732,885 393,812
----------- ----------
Total operating expenses 10,082,512 1,519,371
Operating loss (7,180,936) (468,305)
Interest income (expense), net 294,114 (118,157)
Income tax provision - -
----------- ----------
Net loss (6,886,822) (586,462)
----------- ----------
Accrued dividends for preferred stockholders 270,651 72,123
----------- ----------
Net loss attributable to common stockholders $(7,157,473) $ (658,585)
=========== ==========
Basic and diluted net loss per share ($0.41) ($0.09)
=========== ==========
Shares used in computing unaudited pro forma basic 17,494,418 7,023,107
and diluted net loss per share
Unaudited pro forma basic and diluted net loss per share ($0.34) ($0.08)
=========== ==========
Shares used in computing unaudited pro forma basic 20,070,899 7,773,107
and diluted net loss per share
</TABLE>
The accompanying notes are an integral part of the financial statements.
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SWITCHBOARD INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, March 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,886,822) $ (586,462)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 295,937 119,842
Non-cash advertising and promotion expense 6,030,602 -
Provision for doubtful accounts 88,330 55,400
Expense related to warrant grants 165,695 -
Changes in operating assets and liabilities:
Accounts receivable (540,211) (81,421)
Other current assets (182,983) (119,713)
Other assets 11,889 (198,669)
Accounts payable 429,465 21,447
Accrued expenses (42,315) 205,169
Deferred revenue 588,825 186,055
----------- ----------
Net cash used in operating activities (41,588) (398,352)
Cash flows from investing activities:
Purchase of property and equipment (148,381) (2,590)
----------- ----------
Net cash used in investing activities (148,381) (2,590)
Cash flows from financing activities:
Due to parent - 1,239,491
Proceeds from issuance of common stock, net 75,333,194 17,935
----------- ----------
Net cash provided by financing activities 75,333,194 1,257,426
Net increase in cash and cash equivalents 75,143,225 856,484
Cash and cash equivalents at beginning of period 3,604,551 386,590
----------- ----------
Cash and cash equivalents at end of period $78,747,776 $1,243,074
=========== ==========
Supplemental statement of non-cash financing activity:
Conversion of redeemable preferred stock into common stock $16,319,570
</TABLE>
The accompanying notes are an integral part of the financial statements.
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SWITCHBOARD INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Switchboard Incorporated (the "Company"), a Delaware corporation, commenced
operations in February 1996. The Company is an Internet-based local merchant
network interconnecting consumers, merchants and national advertisers.
Switchboard offers its users local information about people and businesses
across the United States. Switchboard provides a broad range of functions,
content and services designed to connect consumers and businesses on the
Internet.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that, in the opinion of
management, are necessary to present fairly the financial information set forth
therein. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for the
three-month period ended March 31, 2000 are not necessarily indicative of future
financial results.
Investors should read these interim financial statements in conjunction with
the audited financial statements and notes thereto included in the Company's
form S-1 filed with the SEC on March 2, 2000.
3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Net loss used in the calculation is
increased by the accrued dividends for the preferred stock outstanding in each
period. Diluted net loss per share does not differ from basic net loss per
share since potential common shares from conversion of preferred stock, stock
options and warrants are antidilutive for all periods presented and are
therefore excluded from the calculation. As of March 31, 2000 and 1999, options
to purchase 3,075,580 and 1,083,875 shares of common stock, respectively,
preferred stock convertible into 3,552,421 and 750,000 shares of common stock,
respectively, and warrants for 1,751,937 and 685,000 shares of common stock,
respectively, were not included in the computation of diluted net loss per share
since their inclusion would be antidilutive. An aggregate of 3,552,421 shares of
preferred stock converted into common stock automatically on March 7, 2000, upon
the closing of the Company's initial public offering. Pro forma basic and
diluted net loss per share have been calculated assuming the conversion of all
outstanding shares of preferred stock into common stock, as if the shares had
converted immediately upon their issuance.
4. INITIAL PUBLIC OFFERING
On March 7, 2000, the Company completed the sale of 5,500,000 shares of common
stock in its initial public offering at a per share price of $15.00. The
Company received an aggregate of $82.5 million in proceeds from that sale.
Expenses in connection with the initial offering were approximately $7.7
million, consisting of $5.8 million for underwriting discounts and commissions
and approximately $1.9 million for professional services and other expenses.
Net proceeds from the initial 5,500,000 shares sold were approximately $74.8
million.
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5. SUBSEQUENT EVENT
On April 6, 2000, the Company completed the sale of 825,000 shares of common
stock pursuant to the exercise of the over-allotment option by the underwriters
for the Company's initial public offering. The shares were sold at the initial
public offering price of $15.00 per share. The Company received an aggregate of
$12.4 million in proceeds from that sale. Expenses in connection with this
exercise were approximately $900,000 for underwriting discounts and commissions.
5. BARTER REVENUE
Revenues from barter transactions are recognized during the period in which
the advertisements are displayed in Switchboard properties. Barter transactions
are recorded at the fair value of the goods or services provided or received,
whichever is more readily determinable in the circumstances. In determining the
value of the goods or services provided, the Company uses historical pricing of
comparable cash transactions. The Company had one such transaction during the
three-month period ended March 31, 2000 in the amount of $200,000.
6. COMPREHENSIVE LOSS
Other comprehensive loss includes unrealized gains or losses on the Company's
investments.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------- -------------------
<S> <C> <C>
Net loss $(6,886,822) $(586,464)
Other comprehensive income:
Unrealized gains on investments 1,023,000 0
----------- ---------
Comprehensive loss $(5,863,822) $(586,464)
=========== =========
</TABLE>
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
You should read the following discussion together with the condensed financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q. This Item contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 that involve risks and uncertainties. Actual results may
differ materially from those included in such forward-looking statements.
Factors which could cause actual results to differ materially include those set
forth under "Risk Factors" commencing on page 10, as well as those otherwise
discussed in this section and elsewhere in this quarterly report on form 10-Q.
See "Forward-Looking Statements."
Overview
Since commencing operations in February 1996, we have derived our revenue
principally from the sale of national advertising. We have also derived revenue
from the licensing of our directory technology content and related services to
third party Web sites, which we refer to as syndication, and from our merchant
aggregation program.
Our advertising revenue is derived from banner advertisements, sponsorships,
promotions and other forms of national advertising that are sold on either a
fixed fee, cost per thousand impressions or cost per click basis. We recognize
revenue from national advertising upon delivery of services. During the three
months ended March 31, 2000, approximately 59% of our revenue was derived from
the sale of national advertising.
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We also derive revenue from various syndication and licensing agreements with
corporate customers which typically involve engineering work to integrate our
products and services with the customer's site and brand, as well as license
fees. We recognize these fees and related costs under these agreements ratably
over the term of the contract. During the three months ended March 31, 2000,
approximately 16% of our revenue was derived from syndication and licensing.
We also generate revenue from building Web sites for local merchants, running
display ads in our yellow pages directory and hosting Web sites on our servers.
Our merchant aggregation program is aimed at companies that have existing
relationships with small businesses in order to sell our Web site creation,
hosting and advertising services to local merchants. We recognize customer
acquisition fees from this program when the Web site construction is complete.
We recognize revenue on a monthly basis from the creation and hosting of display
ads and Web sites as services are provided. During the three months ended March
31, 2000, approximately 25% of our revenue was derived from merchant services.
Our cost of revenue consists primarily of expenses paid to third parties under
data licensing agreements, as well as other direct expenses incurred to maintain
the operations of our Web site. These direct expenses consist of data
communications expenses related to Internet connectivity charges, salaries and
benefits for operations personnel, equipment costs and related depreciation, and
the costs to run our data center, which include rent and utilities. We
anticipate that our cost of revenue will increase in absolute dollars in the
future as a result of hiring additional employees and purchasing additional
equipment and outside services. Cost of revenue as a percentage of revenue has
varied in the past, primarily as a result of fluctuations in our Web site
traffic and, to a lesser extent, the cost of third-party content and technology.
Our sales and marketing expense consists primarily of costs associated with
Web site promotion, third-party revenue share costs, advertising and creative
production expenses, employee salaries and benefits, public relations, market
research and a pro rata share of occupancy and information system expenses. We
expect sales and marketing expense to increase in absolute dollars as we
continue to expand our marketing programs and our sales force and incur
advertising expenditures associated with our CBS-related promotion and branding,
carriage fees, and other marketing expenses associated with building our
merchant aggregation program. We expect to record the net present value of our
$95.0 million of advertising and promotion services from CBS as sales and
marketing expense as incurred through June 2006.
Our product development expense consists primarily of employee salaries and
benefits, fees for outside consultants and related costs associated with the
development of new services and features on our Web site, the enhancement of
existing products, quality assurance, testing and documentation and a share of
occupancy and information system expenses based on employee headcount. We expect
product development expense to increase in absolute dollars in the future as we
maintain and upgrade our Web site.
Our general and administrative expense consists primarily of employee salaries
and benefits and other personnel-related costs for executive and financial
personnel, as well as legal, accounting and insurance costs and a share
of occupancy and information system expenses based on employee headcount. We
expect that our general and administrative expense will increase in absolute
dollars as we continue to expand our staffing to support growing operations and
facilities, and incur expenses relating to our new responsibilities as a public
company.
We have experienced substantial net losses since our inception. As of March
31, 2000, we had an accumulated deficit of $27.9 million. These net losses and
accumulated deficit resulted from our lack of substantial revenue and the
significant costs incurred in the development of our Web site and the
establishment of our corporate infrastructure and organization. We expect to
increase our expenditures in all areas in order to execute our business plan,
particularly in sales and marketing and in product development.
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RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
Revenue. Revenue increased to $3.8 million for the three-month period ended
March 31, 2000, from $1.1 million for the comparable period in 1999. This $2.7
million increase, or 239%, consisted primarily of a $1.6 million increase in
advertising revenue, a $941,000 increase in merchant services revenue and a
$130,000 increase in syndication and licensing revenue. The increase in
advertising revenue of $1.6 million was primarily due to an increase in revenue
per thousand page views (RPM) resulting from both traffic and utilization
increases to our Web site. RPM was $10.60 for the three-month period ended
March 31, 2000, compared to $3.99 for the three-month period ended March 31,
1999. The merchant services revenue increase of $941,000 was due to increased
membership in our local merchant network. The syndication and licensing revenue
increase of $130,000 was due to new customer agreements. Barter revenues were
5.2% of total revenues for the three-month period ended March 31, 2000.
Cost of revenue. Cost of revenue increased to $916,000, or 24.0% of revenue
for the three months ended March 31, 2000, from $76,000 or 6.8% of revenue for
the three months ended March 31, 1999. These dollar and percentage increases
were primarily the result of an increase in Web service fees of $248,000 in
connection with our merchant aggregation program, amortization of deferred
project costs of $225,000, data licensing fees of $128,000, and data
communications fees to support our Web site of $73,000.
Gross profit. Gross profit increased to $2.9 million for the three months
ended March 31, 2000 from $1.1 million for the three months ended March 31,
1999. Gross profit dollars increased primarily due to higher revenue. As a
percentage of revenue, gross profit percentage for the three months ended March
31, 2000 decreased to 76.0% from 93.2% for the three months ended March 31,
1999.
Sales and marketing. Sales and marketing expense increased to $8.7 million,
or 228.8% of revenue, for the three months ended March 31, 2000 from $690,000,
or 61.2% of revenue, for the three months ended March 31, 1999. This increase
of $8.0 million was primarily related to the non-cash advertising expense of
$6.0 million related to our agreements with CBS Corporation, third party revenue
share costs of $599,000, telemarketing fees of $354,000, carriage and royalty
expenses of $351,000, and employee salaries and benefits of $336,000.
Product development. Product development expense increased to $613,000, or
16.1% of revenue, for the three months ended March 31, 2000 from $435,000, or
38.6% of revenue, for the three months ended March 31, 1999. This increase of
$178,000 was primarily due to salaries and benefits associated with new
personnel.
General and administrative. General and administrative expense increased to
$726,000, or 19.0% of revenue, for the three months ended March 31, 2000 from
$394,000, or 34.9% of revenue, for the three months ended March 31, 1999. This
increase of $332,000 was primarily due to salaries and benefits associated with
new personnel of $175,000 and an increase in the allowance for doubtful accounts
of $121,000 related to the increase in revenue.
Interest income (expense) net. Interest income increased to $294,000, or 7.7%
of revenue, for the three months ended March 31, 2000 from interest expense of
$118,000, or 10.5% of revenue, for the three months ended March 31, 1999. This
increase of $412,000 was primarily due to the interest income earned on the net
proceeds from the Company's initial public offering completed on March 2, 2000.
Net loss. Our losses increased $6.3 million to $6.9 million for the three
months ended March 31, 2000, from $586,000 for the three months ended March 31,
1999. As of March 31, 2000, our accumulated deficit totaled $27.9 million.
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LIQUIDITY AND CAPITAL RESOURCES.
As of March 31, 2000, we had cash and cash equivalents totaling $78.7 million.
We also had an investment valued at $3.7 million.
Net cash used for operating activities for the three months ended March 31,
2000 was $42,000, primarily due to a net loss of $6.9 million offset in part by
the CBS non-cash advertising and increases in accounts payable and deferred
revenue.
Net cash used for investing activities for the three months ended March 31,
2000 was $148,000. Investing activities for the period were primarily for
purchases of computer equipment.
Net cash provided by financing activities for the three months ended March 31,
2000 was $75.3 million, primarily due to the net proceeds received as a result
of the initial public offering.
Since our inception, we have significantly increased our operating expenses.
We anticipate that we will continue to experience significant increases in our
operating expenses through at least 2001, and that our operating expenses and
capital expenditures will constitute a material use of our cash resources. We
expect to incur significant expense increases as we attempt to brand our name
and increase the traffic to our Web site. These increases are expected to
result from substantial advertising expenses and increased marketing expenses
associated with our merchant aggregation program. Additionally, we expect to
add personnel in all departments, which will increase salaries and benefits and
other personnel-related expenses. In addition, we may utilize cash resources to
fund acquisitions or investments in businesses, technologies, products or
services that are complementary to our business. Due to the fact that our
primary marketing expense will be the use of our non-cash CBS-related
advertising, we believe that the funds currently available will be sufficient to
meet our anticipated cash requirements for at least the next 24 months. If cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or debt securities, or obtain credit
facilities. However, there can be no assurance that we would be successful in
obtaining this additional funding. The issuance of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accountings Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
("SAB 101") as subsequently amended by SAB 101A, which is effective no later
than June 30, 2000 with retroactive application back to January 1, 2000. SAB
101 clarifies the Securities and Exchange Commission's views related to revenue
recognition and disclosure. Switchboard adopted SAB 101 in the fourth quarter
of 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard established accounting
and reporting standards for derivative instruments,
9
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including some derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all quarters for fiscal years beginning after June 15, 2000. We do not expect
SFAS No. 133 to have a material effect on our financial position or results of
operations.
FACTORS AFFECTING OPERATING RESULTS, BUSINESS PROSPECTS AND MARKET PRICE OF
STOCK
We caution you that the following important factors, among others, in the
future could cause our actual results to differ materially from those expressed
in forward-looking statements made by or on behalf of Switchboard in filings
with the Securities and Exchange Commission, press releases, communications with
investors, and oral statements. Any or all of our forward-looking statements in
this Quarterly Report on Form 10-Q, and in any other public statements we make
may turn out to be wrong. They can be affected by inaccurate assumptions we
might make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion below will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. You are advised, however, to consult any further
disclosures we make in our reports filed with the Securities and Exchange
Commission.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY AND OUR LACK OF ANY OPERATING HISTORY AS A STAND-
ALONE COMPANY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND OUR ABILITY TO
ADDRESS THE RISKS AND UNCERTAINTIES THAT WE FACE
We have only a limited operating history on which you can evaluate our
business and prospects. In addition, since commencing operations in 1996, we
have been a subsidiary of ePresence, formerly known as Banyan Worldwide.
Consequently, we have a limited operating history as a stand-alone company and
limited experience in addressing various business challenges without the support
of a corporate parent. We may not successfully address the risks and
uncertainties which confront stand-alone companies, particularly companies in
new and rapidly evolving markets like ours.
WE HAVE A HISTORY OF INCURRING NET LOSSES, WE EXPECT OUR NET LOSSES TO CONTINUE
AS A RESULT OF PLANNED INCREASES IN OPERATING EXPENSES AND WE MAY NEVER ACHIEVE
PROFITABILITY
We have incurred significant net losses in each fiscal quarter since our
inception. From inception to March 31, 2000, we have incurred net losses
totaling $27.9 million. We expect to continue to incur net losses and negative
cash flows throughout 2000 because we intend to increase operating expenses to
develop the Switchboard brand through marketing, promotion and enhancement and
to expand our services. As a result of this expected increase in operating
expenses, we will need to generate significant additional revenue to achieve
profitability. It is possible that we may never achieve profitability and, even
if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve sustained
profitability, we will be unable to continue our operations.
OUR QUARTERLY RESULTS OF OPERATIONS ARE LIKELY TO FLUCTUATE, AND AS A RESULT, WE
MAY FAIL TO MEET THE EXPECTATIONS OF OUR INVESTORS AND SECURITIES ANALYSTS,
WHICH MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE
Our quarterly revenue and results of operations are volatile and are
particularly difficult to predict. Our quarterly results of operations have
fluctuated significantly in the past and are likely to fluctuate significantly
from quarter to quarter in the future. We do not believe that period-to-period
comparisons of our results of operations are necessarily meaningful and you
should not rely upon these comparisons as indicators of our future performance.
10
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Factors that may cause our results of operations to fluctuate include:
. the addition or loss of relationships with third parties that are our source
of new merchants or that license our services for use on their own Web sites;
. our ability to attract and retain consumers, local merchants and national
advertisers to our Web site;
. the amount and timing of expenditures for expansion of our operations,
including the hiring of new employees, capital expenditures and related costs;
. technical difficulties or failures affecting our systems or the Internet in
general;
. the cost of acquiring, and the availability of, content, including directory
information and maps; and
. the fact that our expenses are partially based on our expectations regarding
future revenue and are largely fixed in nature, particularly in the short
term.
As a result of these factors, results in any future quarter may be below the
expectations of securities analysts or investors. If so, the market price of our
common stock may decline significantly.
OUR BUSINESS MODEL WILL FAIL IF OUR OPERATIONS ARE UNABLE TO GENERATE SUFFICIENT
REVENUE TO COVER THE COST OF THE CONTENT AND SERVICES WE PROVIDE TO CONSUMERS AT
NO CHARGE
Our model for conducting business is unproven and may not succeed. Because we
provide our services to consumers at no charge, our business model depends upon
our ability to generate revenue from:
. Internet advertising and sponsorships fees;
. Web site design, construction, hosting and enhancement services provided to
local merchants; and
. licensing of our services to third parties for use on their Web sites.
We may not be able to generate sufficient revenue to cover the cost of the
content and services that we provide to consumers at no charge.
WE NEED TO DEVELOP THE SWITCHBOARD BRAND TO ATTRACT USERS TO OUR WEB SITE, WHICH
WILL BE COSTLY AND MAY NOT GENERATE REVENUE
Building recognition of our brand is critical to attracting and expanding our
user base. We are pursuing an aggressive brand-building strategy and, if this
strategy is unsuccessful, we may never cover our costs. In addition to the
advertising and promotion available to us from CBS, we intend to incur
significant additional expenditures for future advertising and promotional
programs and activities. We may find it necessary to accelerate expenditures on
our sales and marketing efforts or otherwise increase our financial commitment
to creating and maintaining brand awareness among potential users. In addition,
even if awareness of our brand increases, the number of new users of our Web
site may not increase or result in increased revenue.
IF OUR RELATIONSHIP WITH CBS DOES NOT FOR ANY REASON RESULT IN POSITIVE
ASSOCIATION WITH THE SWITCHBOARD BRAND, OUR BRAND COULD BE DAMAGED
We use the "CBS" trademark and "eye" device under a license agreement with
CBS, which we entered into in June 1999. Therefore, we have limited experience
integrating CBS's trademarks into our effort to build our brand. While CBS's
trademarks are well-recognized, we cannot be certain that our use of these
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trademarks will increase awareness of or preference for the Switchboard brand
due to our limited experience in using them and the potential for confusion
between CBS's businesses and our business. In addition, CBS licenses the use of
its name and trademarks to other companies, some of whom have unproven business
plans in competitive markets. If CBS or any of these companies experiences
business difficulties or conducts activities which damage the CBS brand, the
Switchboard brand could be damaged.
IF WE DO NOT ENTER INTO AND MAINTAIN RELATIONSHIPS WITH MERCHANT AGGREGATORS,
OUR ABILITY TO ATTRACT NEW LOCAL MERCHANT CUSTOMERS AND TO DELIVER SERVICES TO
CURRENT LOCAL MERCHANT CUSTOMERS WOULD BE IMPEDED
For our business to be successful, we must expand our merchant aggregation
program and generate significant revenue from that program. The success of our
merchant aggregation program depends in substantial part upon our ability to
access a broad base of local merchants. The local merchant base is highly
fragmented. Local merchants are difficult to contact efficiently and cost-
effectively. Consequently, we depend on merchant aggregators to provide us with
local merchant contacts and to provide billing and other administrative services
relating to our local merchant services. The termination of any strategic
relationship with a merchant aggregator would significantly impair our ability
to attract potential local merchant customers and deliver our local merchant
services to our current customers. Furthermore, we cannot be certain that we
will be able to develop or maintain relationships with new merchant aggregators
on terms acceptable to us or at all.
IF WE CANNOT DEMONSTRATE THE VALUE OF OUR LOCAL MERCHANT SERVICES, LOCAL
MERCHANT CUSTOMERS MAY STOP USING OUR SERVICES, WHICH COULD REDUCE OUR REVENUE
We may be unable to demonstrate to our local merchant customers the value of
our local merchant services. If local merchants cancel our services, which are
generally provided on a month-to-month basis, our revenue could decline and we
may need to incur additional expenditures to obtain new local merchant
customers. We do not presently provide our local merchant customers with data
demonstrating the number of leads generated by our local merchant services.
Other forms of advertising available to local merchants provide local merchants
with tangible evidence, such as a coupon, of a lead resulting from their
advertising efforts. Regardless of whether our local merchant services
effectively produce leads, our local merchant customers may not know the source
of the leads and may cancel our local merchant services.
WE DEPEND ON STRATEGIC ALLIANCES WITH THIRD PARTIES TO GROW OUR BUSINESS AND OUR
BUSINESS MAY NOT GROW IF THE STRATEGIC ALLIANCES UPON WHICH WE DEPEND FAIL TO
PRODUCE THE EXPECTED BENEFITS OR ARE TERMINATED
Our business depends upon our ability to maintain and benefit from our
existing strategic alliances and to establish additional strategic alliances. In
addition to our relationship with CBS and our existing relationships with
merchant aggregators, we have entered into relationships with syndication
customers and third-party content providers. These parties may not perform their
contractual obligations to us and, if they do not, we may not be able to require
them to do so. Some of our strategic relationships may be terminated by either
party on short notice.
Our strategic relationships are in early stages of development. These
relationships may not provide us benefits that outweigh the costs of the
relationships. If any strategic ally demands a greater portion of revenue or
requires us to make payments for access to its Web site, we may need to
terminate or refuse to renew that relationship, even if it had been previously
profitable or otherwise beneficial. In addition, if we lose a significant
strategic ally, we may be unable to replace that relationship with other
strategic relationships with comparable revenue potential, content or user
demographics.
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<PAGE>
THE ATTRACTIVENESS OF OUR SERVICES WOULD DIMINISH IF WE ARE NOT ABLE TO LICENSE
ACCURATE DATABASE INFORMATION FROM THIRD-PARTY CONTENT PROVIDERS
We principally rely upon single third-party sources to provide us with our
business and residential listings data, e-mail data and mapping data. The loss
of any one of these sources or the inability of any of these sources to collect
their data could significantly and adversely affect our ability to provide
information to consumers. Although other sources of database information exist,
we may not be able to integrate data from these sources into our database
systems in a timely, cost-effective manner or without an inordinate expenditure
of internal engineering resources. Other sources of data may not be offered on
terms acceptable to us. Moreover, the rapid consolidation being experienced by
Internet-related businesses could reduce the number of content providers with
which we could form relationships.
We typically license information under arrangements that require us to pay
royalties or other fees for the use of the content. In the future, some of our
content providers may demand a greater portion of advertising revenue or
increase the fees that they charge us for their content. If we fail to enter
into and maintain satisfactory arrangements with existing or substitute content
providers, we may be unable to continue to provide our services.
The success of our business depends on the quality of our services and the
quality is substantially dependent on the accuracy of data we license from third
parties. Any failure to maintain accurate data could impair the reputation of
our brand and our services, reduce the volume of users attracted to our Web site
and diminish the attractiveness of our service offerings to our strategic
partners, advertisers and content providers.
IF WE DO NOT ATTRACT A LARGE NUMBER OF USERS TO OUR WEB SITE WHO HAVE
DEMOGRAPHIC CHARACTERISTICS THAT ARE ATTRACTIVE TO ADVERTISERS, THE ADVERTISING
REVENUE ON WHICH WE RELY WILL SUBSTANTIALLY DECLINE
We have derived a substantial portion of our revenue from the sale of
advertisements and sponsorships. If we are unable to remain an attractive medium
for advertising, our revenue will substantially decline. Our ability to remain
an attractive medium for advertising will depend upon a number of factors,
including, the acceptance of our services by a large number of users who have
demographic characteristics that are attractive to advertisers.
OUR AGREEMENTS TO SELL ADVERTISEMENTS EXPOSE US TO COMPETITIVE PRICING PRESSURES
AND MAY REQUIRE US TO PROVIDE ADVERTISING AT NO CHARGE IF WE DO NOT MEET MINIMUM
GUARANTEES
We typically sell advertisements under agreements with terms of less than six
months. These short-term agreements expose us to competitive pricing pressures
and potentially severe fluctuations in our results of operations. In addition,
these agreements often contain guarantees by us of a minimum number of
impressions or click throughs by Web users. If we fail to meet these guarantees,
we are required to provide our advertising customers with advertising at no
charge until the guarantees are met.
WE RELY ON A SMALL NUMBER OF ADVERTISING AND SYNDICATION CUSTOMERS, THE LOSS OF
WHOM MAY SUBSTANTIALLY REDUCE OUR REVENUE
We derive a substantial portion of our revenue from a small number of
advertising and syndication customers. For the three months ended March 31,
2000, revenue derived from our top ten customers accounted for approximately
58.3% of our total revenue. Consequently, our revenue may substantially decline
if we lose any of these customers. We anticipate that our future results of
operations will continue to depend to a significant extent upon revenue from a
small number of customers. In addition, we anticipate that the identity of those
customers will change over time.
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THE GROWTH OF OUR REVENUE WILL SUFFER IF WE DO NOT INCREASE THE NUMBER AND
PRODUCTIVITY OF OUR SALES PERSONNEL, MANY OF WHOM HAVE ONLY RECENTLY JOINED US
Our ability to generate revenue through the sale of advertising would be
adversely affected if we do not develop and maintain a productive sales force.
Our sales group consisted of only seven members as of March 31, 2000. We need to
increase the size of our sales force to accelerate our revenue growth. Our
Director of National Ad Sales joined us in April 1999, and four other members of
our sales group joined us since October 1999. Typically new sales personnel
require six to twelve months to become productive. If our sales force does not
increase its productivity, the growth of our revenue may be impeded.
IF WE DO NOT INTRODUCE NEW OR ENHANCED SERVICES FOR OUR WEB SITE, WE MAY BE
UNABLE TO ATTRACT AND RETAIN CONSUMERS AND LOCAL MERCHANTS, WHICH WOULD
SIGNIFICANTLY IMPEDE OUR ABILITY TO GENERATE REVENUE
We need to introduce new or enhanced services to attract and retain local
merchants to our services, attract more consumers to our Web site and respond to
competition. If we are not able to introduce new or enhanced services, we may
lose existing local merchants and consumers or fail to attract new ones,
which would significantly impede our revenue growth. Any new product or service
introduction not favorably received could damage our reputation and our brand.
We may also experience difficulties that could delay or prevent us from
introducing new services.
OUR SENIOR MANAGEMENT HAS LIMITED EXPERIENCE WORKING TOGETHER AS A TEAM AND ANY
DIFFICULTIES THEY ENCOUNTER IN INTEGRATING SUCCESSFULLY MAY INTERFERE WITH THE
OPERATION OF OUR BUSINESS
Our future success depends to a significant extent on the continued services
and effective working relationships of our senior management and other key
personnel, including Douglas Greenlaw, our Chief Executive Officer, and Dean
Polnerow, our founder and President. Mr. Greenlaw joined us in October
1999 and has not previously worked with other members of our senior management
team. Our business will suffer if we lose the services of Mr. Greenlaw, Mr.
Polnerow or other key personnel.
IF WE ARE NOT ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED MANAGERIAL AND TECHNICAL
PERSONNEL WITH INTERNET EXPERIENCE, WE MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY
OUR BUSINESS MODEL
We believe that our management must be able to act decisively to apply and
adapt our business model in the rapidly changing Internet markets in which we
compete. In addition, we rely upon our technical employees to develop and
maintain much of the technology used to provide our services. Consequently, we
believe that our success depends largely on our ability to attract and retain
highly skilled managerial and technical personnel. The industry in which we
compete has a high level of employee turnover. We may not be able to hire or
retain the necessary personnel to implement our business strategy. In addition,
we may need to pay higher compensation for employees than we currently expect.
Individuals with the skills we require, particularly with Internet experience,
are in very short supply. Competition to hire from this limited pool is intense.
IF WE DO NOT IMPROVE OUR MANAGEMENT, FINANCIAL AND INFORMATION SYSTEMS AND
CONTROLS, WE MAY FAIL TO PROPERLY MANAGE OUR GROWTH, WHICH WOULD STRAIN OUR
RESOURCES AND COULD IMPEDE FURTHER GROWTH
We have significantly expanded our operations and must expand further if we
are to be successful in building our business. Our growth has placed, and will
continue to place, a significant strain on our management, operating and
financial systems, and sales, marketing and administrative resources. If we
cannot manage our expanding operations, we may not be able to continue to grow
or may grow at a slower pace. Furthermore, our operating costs may escalate
faster than we expect. To manage our growth successfully we will need to improve
our management, financial and information systems and controls.
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THE MARKETS FOR INTERNET CONTENT, SERVICES AND ADVERTISING ARE HIGHLY
COMPETITIVE AND OUR FAILURE TO COMPETE SUCCESSFULLY WILL LIMIT OUR ABILITY TO
INCREASE OR RETAIN OUR MARKET SHARE
Our failure to maintain and enhance our competitive position will limit our
ability to increase or maintain our market share, which would seriously harm our
business. We compete in the markets for Internet content, services and
advertising. These markets are new, rapidly evolving and highly competitive. We
expect this competition to intensify in the future. We compete, or expect to
compete, with many providers of Internet content, information services and
products, as well as with traditional media, for audience attention and
advertising and sponsorship expenditures. We license much of our database
content under nonexclusive agreements with third-party providers which are in
the business of licensing their content to many businesses, including our
current and potential competitors. Many of our competitors are substantially
larger than we are and have substantially greater financial, infrastructure and
personnel resources than we have. In addition, many of our competitors have well
established, large and experienced sales and marketing capabilities and greater
name recognition than we have. As a result, our competitors may be in a stronger
position to respond quickly to new or emerging technologies and changes in
customer requirements. They may also develop and promote their services more
effectively than we do. Moreover, barriers to entry are not significant, and
current and new competitors may be able to launch new Web sites at a relatively
low cost. We therefore expect additional competitors to enter these markets.
Some of these new competitors may be traditional media companies, who are
increasingly expanding onto the Internet.
Many of our current customers have established relationships with our current
and potential competitors. If our competitors develop content that is superior
to ours or that achieves greater market acceptance than ours, we may not be able
to develop alternative content in a timely, cost-effective manner, or at all,
and we may lose market share.
WE MAY NOT BE ABLE TO DEDICATE THE SUBSTANTIAL RESOURCES REQUIRED TO EXPAND,
MONITOR AND MAINTAIN OUR INTERNALLY DEVELOPED SYSTEMS WITHOUT CONTRACTING WITH
AN OUTSIDE SUPPLIER AT SUBSTANTIAL EXPENSE
We will have to expand and upgrade our technology, transaction-processing
systems and network infrastructure if the volume of traffic on our Web site or
our syndication partners' Web sites increases substantially. We could experience
temporary capacity constraints that may cause unanticipated system disruptions,
slower response times and lower levels of customer service. We may not be able
to project accurately the rate or timing of increases, if any, in the use of our
services or expand and upgrade our systems and infrastructure to accommodate
these increases in a timely manner. Our inability to upgrade and expand as
required could impair the reputation of our brand and our services, reduce the
volume of users able to access our Web site and diminish the attractiveness of
our service offerings to our strategic partners, advertisers and content
providers. Because we developed these systems internally, we must either
dedicate substantial internal resources to monitor, maintain and upgrade these
systems or contract with an outside supplier for these services at substantial
expense.
OUR INTERNALLY DEVELOPED SOFTWARE MAY CONTAIN UNDETECTED ERRORS, WHICH COULD
LIMIT OUR ABILITY TO PROVIDE OUR SERVICES AND DIMINISH THE ATTRACTIVENESS OF OUR
SERVICE OFFERINGS
We use internally developed, custom software to provide our services. This
software may contain undetected errors, defects or bugs. Although we have not
suffered significant harm from any errors or defects to date, we may discover
significant errors or defects in the future that we may not be able to fix. Our
inability to fix any of those errors could limit our ability to provide our
services, impair the reputation of our brand and our services, reduce the volume
of users who visit our Web site and diminish the attractiveness of our service
offerings to our strategic partners, advertisers and content providers.
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WE DO NOT HAVE A FORMAL DISASTER RECOVERY PLAN, AND A DISASTER THAT RESULTS IN
THE INABILITY OF CONSUMERS TO VISIT OUR SITE WOULD SEVERELY DAMAGE OUR
OPERATIONS.
Our ability to generate revenue depends in large part on the number of users
that access our Web site. Our computer and communications hardware is located at
hosting facilities in Waltham, Massachusetts provided by Exodus Communications,
Inc. Our systems and operations could be damaged or interrupted by fire, flood,
power loss, telecommunications failure, Internet breakdown, break-in, earthquake
and similar events. We do not have a formal disaster recovery plan, and we do
not carry business interruption insurance that is adequate to compensate us for
losses that may occur. Any system interruptions resulting in the complete or
partial unavailability or slow or delayed delivery of our Web site could impair
the reputation of our brand and our services, diminish the attractiveness of our
service offerings to our strategic partners, advertisers and content providers
and reduce the volume of users able to access our Web site. Any volume
reductions could harm our ability to satisfy minimum advertising commitments. In
addition, a system interruption may give CBS the right to suspend or terminate
our advertising and promotion agreements and our license to use the "CBS"
trademark and "eye" device.
OUR INEXPERIENCE IN DOING BUSINESS IN INTERNATIONAL MARKETS EXPOSES US FURTHER
TO VARIOUS RISKS AND MAY LIMIT THE SUCCESS OF ANY EXPANSION OF OUR BUSINESS INTO
INTERNATIONAL MARKETS
In September 1999, we entered into an agreement to provide directory services
in Canada. As opportunities arise, we intend to pursue strategic initiatives
internationally. We will face additional risks related to doing business in
international markets, such as changes in regulatory requirements, difficulties
in protecting and enforcing our intellectual property, tariffs and other trade
barriers, fluctuations in currency exchange rates and adverse tax consequences.
Our inexperience in doing business in international markets exposes us further
to these risks and may make it more difficult for us to staff and manage any
foreign operations. In addition our services may not be perceived to be valuable
because of different consumer preferences and requirements in specific
international markets. The effects of one or more of these factors may limit the
success of any expansion of our business into international markets.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE TO US AND WHICH, IF
AVAILABLE, MAY DILUTE YOUR OWNERSHIP INTEREST IN US
We may need to raise additional funds through public or private equity or
debt financings to:
. expand our sales and marketing operations to increase their productivity;
. develop new technology and upgrade current technology and data network
infrastructure to comply with rapidly evolving industry standards;
. develop new and expand current content and services to attract and retain
consumers and local merchants;
. pursue acquisitions or expansion opportunities in our consolidating markets;
or
. address additional general corporate needs.
If we cannot obtain any needed financing on acceptable terms, we may be forced
to curtail some or all of these activities. As a result we could grow more
slowly or stop growing. Any additional capital raised through the sale of equity
may dilute your ownership interest in us and may be on terms that are
unfavorable to holders of our common stock.
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WE HAVE NO EXPERIENCE ACQUIRING COMPANIES, AND ANY ACQUISITIONS WE UNDERTAKE
COULD LIMIT OUR ABILITY TO MANAGE AND MAINTAIN OUR BUSINESS, RESULT IN ADVERSE
ACCOUNTING TREATMENT AND BE DIFFICULT TO INTEGRATE INTO OUR BUSINESS
We have no experience in acquiring businesses and have very limited experience
in acquiring complementary technologies. In the future we may undertake
acquisitions. Acquisitions, in general, involve numerous risks, including:
. diversion of our management's attention;
. amortization of substantial goodwill, adversely affecting our reported results
of operations;
. inability to retain the management, key personnel and other employees of the
acquired business;
. inability to assimilate the operations, product, technologies and information
systems of the acquired business with our business; and
. inability to retain the acquired company's customers, affiliates, content
providers and advertisers.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
TECHNOLOGY AND INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US
We depend upon our internally developed and other proprietary technology. If
we do not effectively protect our proprietary technology, others may become able
to use it to compete against us. To protect our proprietary rights, we rely on a
combination of copyright and trademark laws, patents, trade secrets,
confidentiality agreements with employees and third parties, and protective
contractual provisions. Despite our efforts to protect our proprietary rights,
unauthorized parties may misappropriate our proprietary technology or obtain and
use information that we regard as proprietary. We may not be able to detect
these or any other unauthorized uses of our intellectual property or take
appropriate steps to enforce our proprietary rights. In addition, others could
independently develop substantially equivalent intellectual property.
IF OUR SERVICES INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY BE
REQUIRED TO EXPEND SUBSTANTIAL RESOURCES TO REENGINEER OUR SERVICES AND TO INCUR
SUBSTANTIAL COSTS AND DAMAGES RELATED TO INFRINGEMENT CLAIMS
We are subject to the risk of claims alleging infringement of third-party
proprietary rights. If we are subject to claims of infringement of, or are
infringing on, the rights of third parties, we may not be able to obtain
licenses to use those rights on commercially reasonable terms. In that event, we
may need to undertake substantial reengineering to continue our service
offerings. Any effort to undertake such reengineering might not be successful.
In addition, any claim of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management. Furthermore, a party making such a claim could secure a
judgement that requires us to pay substantial damages. A judgment could also
include an injunction or other court order that could prevent us from providing
our services.
RISKS RELATED TO OUR RELATIONSHIPS WITH CBS AND EPRESENCE
TERMINATION OF OUR AGREEMENTS WITH CBS WOULD NEGATIVELY AFFECT OUR FINANCIAL
RESULTS
If our agreements with CBS terminate, our business, particularly our branding
and advertising initiatives, would suffer, which would impede our revenue
growth. If our license agreement terminates, we would lose the right to use the
"CBS" trademark and "eye" device which are very important to our
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marketing and brand building activities. Our license agreement with CBS will
expire on June 30, 2009 and CBS is not obligated to renew it. If our advertising
and promotion agreement terminates, we may lose the unused portion of the $95.0
million of advertising and promotion services which CBS has agreed to provide us
through June 2006. Under specified circumstances, CBS has the right to suspend
or terminate the license agreement and the advertising and promotion agreement
prior to their scheduled expirations.
CBS'S CONTRACTUAL RIGHT TO REQUIRE US TO REMOVE CONTENT FROM OUR WEB SITE AND TO
APPROVE ALL OF OUR USES OF ITS TRADEMARKS MAY RESTRICT OUR MARKETING ACTIVITIES
AND BUSINESS OPPORTUNITIES
Under our license agreement with CBS, CBS can require us to remove any content
on our Web site which it determines conflicts with, interferes with or is
detrimental to its reputation or business. We are also required to conform to
CBS's guidelines for the use of its trademark. CBS has the right to approve all
materials, such as marketing materials, that include CBS trademarks. Because of
these restrictions we may not be able to perform our desired marketing
activities or include some types of content on our Web site which we would
otherwise decide to include.
CBS DOES NOT GUARANTEE THE AVAILABILITY OF THE PARTICULAR ADVERTISING PLACEMENTS
THAT WE DESIRE OR ACCESS TO THE TYPE OF AUDIENCES AT WHICH WE TARGET OUR ADS,
AND THEREFORE OUR ADS MAY NOT BE EFFECTIVE
CBS does not guarantee us placement of our ads or the demographic composition
or size of the audience that views our ads. Moreover, CBS provides its
advertising and on-air promotions to us under the same terms as it provides to
its other advertising customers and does not extend us priority in the placement
of our ads. CBS has entered into agreements similar to ours with other
companies, some of whom may be targeting similar audiences for their ads as we
target for ours. We cannot be certain that we will receive the ad placements we
desire, particularly if other advertisers are seeking the same placements. Even
if we do receive our desired ad placements, we cannot be certain of the
demographic composition or size of the audience viewing our ads. Therefore, the
CBS advertising available to us may not be effective.
THE COMBINED OWNERSHIP OF EPRESENCE AND CBS WILL, IF EPRESENCE AND CBS ACT
TOGETHER, PERMIT EPRESENCE AND CBS TO CONTROL MATTERS SUBMITTED FOR APPROVAL OF
OUR STOCKHOLDERS WHICH COULD DELAY OR PREVENT A CHANGE OF CONTROL OR DEPRESS OUR
STOCK PRICE
As of March 31, 2000 ePresence beneficially owns approximately 41.3% of our
common stock and CBS beneficially owns approximately 34.4% of our common stock.
Acting together, ePresence and CBS will be able to control, and acting alone
each of ePresence and CBS will be able to substantially influence, all matters
submitted to our stockholders for approval and our management and affairs,
including the election and removal of directors and any merger, consolidation or
sale of all or substantially all of our assets. Other than with respect to the
election of directors, ePresence and CBS do not have an agreement to vote in
concert. This control could have the effect of delaying or preventing a change
of control of Switchboard that other stockholders may believe would result in a
premium or better management. In addition, this control could depress our stock
price because purchasers will not be able to acquire a controlling interest in
us. These risks would be exacerbated if a competitor of CBS acquires a 30%
voting interest in, or all or substantially all of the assets of, ePresence. In
that event, CBS has the right to purchase all of ePresence 's shares of our
stock.
ePresence has pledged all of our capital stock that it owns as security for
ePresence 's obligations under its bank credit facility. If ePresence defaults
under its bank credit facility, its lender could take ownership of ePresence 's
capital stock of Switchboard. Moreover, either or both of ePresence and CBS may
elect to sell all or a substantial portion of its capital stock to one or more
third parties. In either case, a third party with whom we have no prior
relationship could exercise the same degree of control over Switchboard as
ePresence or CBS presently possess.
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SO LONG AS EPRESENCE AND CBS MAINTAIN THEIR SIGNIFICANT OWNERSHIP INTEREST IN
SWITCHBOARD, YOU WILL NOT BE ABLE TO ELECT A MAJORITY OF OUR BOARD OF DIRECTORS
We are a party to a voting agreement with ePresence and CBS. Under that voting
agreement ePresence has the right to designate a majority of our board of
directors for election. CBS has agreed to vote its shares of our capital stock
for the directors designated by ePresence. ePresence and CBS will together
continue to control enough shares of our capital stock to elect all of our
directors. As a result, directors designated for election by ePresence will
continue to control our board of directors and therefore all of our business and
affairs. You may not agree with the management decisions made by our board of
directors.
OVERLAPPING MANAGEMENT AND BOARDS OF DIRECTORS COULD HINDER OR DELAY DECISIONS
REGARDING SIGNIFICANT BUSINESS MATTERS
Three of our directors hold positions as officers or directors of ePresence,
as described in the following table:
<TABLE>
<CAPTION>
Name Switchboard Position ePresence Position
- ---- -------------------- ------------------
<S> <C> <C>
William P. Ferry Chairman of the Board Chairman of the Board, President
and Chief Executive Officer
Richard M. Spaulding Director Senior Vice President and Chief
Financial Officer
Robert M. Wadsworth Director Director
</TABLE>
Serving as a director of Switchboard and either a director or an officer of
ePresence could create, or appear to create, potential conflicts of interest
when those directors and officers are faced with decisions that could have
different implications for us than for ePresence. These decisions may relate,
for example, to:
. potential acquisitions of businesses;
. intercompany agreements, such as our services agreement;
. the issuance or disposition of securities;
. the election of new or additional directors; and
. the payment of dividends by us.
These conflicts, or potential conflicts, of interest could hinder or delay our
management's ability to make timely decisions regarding significant matters
relating to our business.
IF EPRESENCE CEASES TO PROVIDE US WITH THE SERVICES AND FACILITIES THAT IT
CURRENTLY PROVIDES, WE MAY EXPERIENCE INCREASED COSTS AND DISRUPTION OF OUR
OPERATIONS TO REPLACE THOSE SERVICES AND FACILITIES
ePresence provides us with some of our financial, administrative and
operational services and related support functions. In addition, we occupy our
headquarters in Westboro, Massachusetts under an agreement with ePresence. If
ePresence ceases or fails to provide these services satisfactorily or terminates
our
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occupancy, we would be required to perform these services ourselves or obtain
these services from another provider or locate new facilities. Replacing these
services may cause us to incur additional costs and experience disruption of our
operations. We may not be able to replace these services on commercially
reasonable terms or, if we choose to perform these services ourselves, we may
not be able to perform them adequately.
RISKS RELATED TO THE INTERNET
IF THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING DOES NOT BECOME
FULLY ESTABLISHED, THE GROWTH OF OUR ADVERTISING REVENUE WILL SUFFER
Our future success depends, in part, on an increase in the use of the Internet
as an advertising medium. We generated 59.2% of our revenue from the sale of
advertisements and sponsorships during the three months ended March 31, 2000,
45.1% during the year ended December 31, 1999 and 61.5% in the year ended
December 31, 1998. The Internet advertising market is new and rapidly evolving,
and cannot yet be compared with traditional advertising media to gauge its
effectiveness. As a result, demand for and market acceptance of Internet
advertising is uncertain. Many of our current and potential local merchant
customers have little or no experience with Internet advertising and have
allocated only a limited portion of their advertising and marketing budgets to
Internet activities. The adoption of Internet advertising, particularly by
entities that have historically relied upon traditional methods of advertising
and marketing, requires the acceptance of a new way of advertising and
marketing.
These customers may find Internet advertising to be less effective for meeting
their business needs than traditional methods of advertising and marketing. In
addition, there are software programs that limit or prevent advertising from
being delivered to a user's computer. Widespread adoption of this software would
significantly undermine the commercial viability of Internet advertising. If the
market for Internet advertising fails to develop or develops more slowly than we
expect, our advertising revenue will suffer.
There are currently no generally accepted standards for the measurement of the
effectiveness of Internet advertising. Standard measurements may need to be
developed to support and promote Internet advertising as a significant
advertising medium. Our advertising customers may challenge or refuse to accept
our, or third-party, measurements of advertisement delivery.
IF WE ARE UNABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS EVOLVE,
OUR SERVICES MAY NOT BE ATTRACTIVE TO CONSUMERS, LOCAL MERCHANTS AND ADVERTISERS
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our Web site. Our industry has
been characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies. These changes could render our Web site, technology
and systems obsolete. If we do not periodically enhance our existing services,
develop new services and technologies that address sophisticated and varied
consumer needs, respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis, and address
evolving customer preferences, our services may not be attractive to consumers,
local merchants and advertisers.
IF WE ARE SUED FOR CONTENT DISTRIBUTED THROUGH, OR LINKED TO BY, OUR WEB SITE,
WE MAY BE REQUIRED TO SPEND SUBSTANTIAL RESOURCES TO DEFEND OURSELVES AND COULD
BE REQUIRED TO PAY MONETARY DAMAGES
We aggregate and distribute third party data over the Internet. In addition,
third-party Web sites are accessible through our Web site. As a result, we could
be subject to legal claims for defamation, negligence, intellectual property
infringement and product or service liability. Other claims may be based on
errors or false or misleading information provided on our Web site, such as
information deemed to constitute legal, medical, financial or investment advice.
Other claims may be based on links to sexually
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explicit Web sites and sexually explicit advertisements. We may need to expend
substantial resources to investigate and defend these claims, regardless of
whether we successfully defend against them. While we carry general business
insurance, the amount of coverage we maintain may not be adequate. In addition,
implementing measures to reduce our exposure to this liability may require us to
spend substantial resources and limit the attractiveness of our content to
users.
WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO PROTECT AGAINST ONLINE SECURITY
RISKS THAT COULD RESULT IN MISAPPROPRIATION OF OUR PROPRIETARY INFORMATION OR
CAUSE INTERRUPTION IN OUR OPERATIONS
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Someone who is able to circumvent security measures
could misappropriate our proprietary information or cause interruptions in our
operations. Internet and online service providers have experienced, and may in
the future experience, interruptions in service as a result of the accidental
or intentional actions of Internet users, current and former employees or
others. We may need to expend significant resources protecting against the
threat of security breaches or alleviating problems caused by breaches.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service.
WE MAY BE SUED FOR DISCLOSING TO THIRD PARTIES PERSONAL IDENTIFYING INFORMATION
WITHOUT CONSENT
Individuals whose names, addresses and telephone numbers appear in our yellow
pages and white pages directories have occasionally contacted us because their
phone numbers and addresses were unlisted with the telephone company. While we
have not received any formal legal claims from these individuals, we
may receive claims in the future for which we may be liable. In addition, if we
begin disclosing to third parties personal identifying information about our
users without consent or in violation of our privacy policy, we may face
potential liability for invasion of privacy.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES WHICH COULD LIMIT OUR GROWTH
Laws and regulations directly applicable to Internet communications, commerce
and advertising are becoming more prevalent. Laws and regulations may be adopted
covering issues such as user privacy, pricing, content, taxation and quality of
products and services. Any new legislation could hinder the growth
in use of the Internet and other online services generally and decrease the
acceptance of the Internet and other online services as media of communications,
commerce and advertising. Various U.S. and foreign governments might attempt to
regulate our transmissions or levy sales or other taxes relating to our
activities. The laws governing the Internet remain largely unsettled, even in
areas where legislation has been enacted. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel and taxation apply to the Internet and Internet advertising services. In
addition, the growth and development of the market for electronic commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business over the Internet.
IF WE CANNOT PROTECT OUR DOMAIN NAMES, OUR ABILITY TO SUCCESSFULLY BRAND
SWITCHBOARD WILL BE IMPAIRED
We currently hold various Web domain names, including Switchboard.com and
MapsOnUs.com. The acquisition and maintenance of domain names generally is
regulated by Internet regulatory bodies. The regulation of domain names in the
United States and in foreign countries is subject to change. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we
may be unable to acquire or maintain relevant domain names in all countries in
which we conduct business. This problem may be exacerbated by the length of time
required to expand into any other country and the corresponding opportunity for
others to acquire rights in relevant domain names. Furthermore, it is unclear
whether laws protecting trademarks and similar proprietary rights will be
extended to protect domain names. Therefore, we may be unable to
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<PAGE>
prevent third parties from acquiring domain names that are similar to, infringe
upon or otherwise decrease the value of our trademarks and other proprietary
rights. We may not be able to successfully carry out our business strategy of
establishing a strong brand for Switchboard if we cannot prevent others from
using similar domain names or trademarks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates.
We typically do not attempt to reduce or eliminate our market exposures on our
investment securities because the majority of our investments are short-term. We
do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.
All the potential changes noted above are based on sensitivity analysis
performed on our balances as of March 31, 2000.
PART II -- OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) From January 1, 2000 through March 2, 2000, the Registrant granted options
to purchase an aggregate of 230,658 shares of its common stock, net of
cancellations of 65,500 options and exercises of 98,250 options at a per share
weighted average exercise price of $4.68. No underwriters were involved in any
of the foregoing sales of securities. Such sales were made in reliance upon an
exemption from the registration provisions of the Securities Act set forth in
Rule 701 of the Securities Act. All of the foregoing securities are deemed
restricted securities for the purposes of the Securities Act.
(d) On March 2, 2000, we made an initial public offering of up to 6,325,000
shares of common stock registered under a Registration Statement on Form S-1
(Registration No. 333-90013), which was declared effective by the Securities and
Exchange Commission on March 1, 2000. On March 7, 2000, we sold, at an initial
public offering price of $15.00 per share, 5,500,000 shares of our common stock
registered under that Registration Statement. On April 6, 2000, we sold, at
$15.00 per share, the remaining 825,000 shares of our common stock registered
under that Registration Statement pursuant to the underwriters' March 31, 2000
exercise of their over-allotment option. All shares sold were for the account of
Switchboard. The managing underwriters for the offering were FleetBoston
Robertson Stephens Inc., J.P. Morgan Securities Inc., The Robinson-Humphrey
Company, LLC and SoundView Technology Group, Inc.
The aggregate gross proceeds raised in the offering were $94.9 million. Our
total expenses in connection with the offering were approximately $8.5 million,
of which $6.6 million was for underwriting discounts and commissions, $21,000
was for expenses paid to or for the underwriters, and $1.8 million was for
professional services and other expenses. Payments of expenses were to persons
other than directors, officers, general partners of Switchboard or their
associates, persons owning 10% or more of any class of equity securities of
Switchboard or affiliates of Switchboard.
Our total net proceeds from the offering were approximately $86.3 million, of
which $74.8 million was received in March and $11.5 million was received in
April. All payments of the offering proceeds were to persons other than
directors, officers, general partners of Switchboard or their associates,
persons owning 10% or more of any class of equity securities of Switchboard or
affiliates of Switchboard. From March 7, 2000 through March 31, 2000, we did
not use any of the proceeds for working capital or operations. As of March 31,
2000, we have invested the net proceeds in short-term, interest-bearing,
investment-grade securities.
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ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written consent of stockholders in lieu of a special meeting
dated January 31, 2000, the holders of shares of common stock and preferred
stock of Switchboard representing an aggregate of 17,419,481 votes, approved the
following matters:
1. An amendment to Switchboard's certificate of incorporation:
(a) increasing from 30,000,000 to 85,000,000 the number of shares of
common stock authorized for issuance by Switchboard;
(b) providing that, upon the closing of its initial public offering
of common stock, Switchboard will have a staggered board of
directors;
(c) providing that, upon the closing of its initial public offering
of common stock, the stockholders of Switchboard may not take
action by written consent and may not call a special meeting of
stockholders; and
(d) providing that, upon the closing of its initial public offering
of common stock, special meetings of stockholders may be called
only by the board of directors, the Chairman of the Board or the
Chief Executive Officer.
2. The amendment and restatement of Switchboard's certificate of
incorporation, subject to the closing of Switchboard's initial public
offering of common stock, providing for, among other things:
(a) the elimination of all references to Switchboard's designated
series of preferred stock (except for the Series E Special Voting
Preferred Stock);
(b) that the authorized capitalization of Switchboard shall consist
of 85,000,000 shares of common stock and 5,000,000 shares of
preferred stock, of which 4,999,999 shall be undesignated and one
share shall be designated as Series E Special Voting Preferred
Stock;
(c) the amendment to the provisions relating to the indemnification
of, and limitation on liability of, officers and directors of
Switchboard; and
(d) the amendment to the provisions relating to amending
Switchboard's bylaws.
3. The amendment and restatement of Switchboard's bylaws, subject to the
filing of Switchboard's Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware.
4. The amendment to Switchboard's 1996 Stock Incentive Plan increasing
from 1,500,000 to 3,000,000 the number of shares of common stock
authorized for issuance under such plan.
5. Switchboard's 1999 Stock Incentive Plan pursuant to which Switchboard
may grant incentive stock options, non-qualified stock options, stock
appreciation rights, performance share awards and restricted and
unrestricted stock awards for the purchase of an aggregate of
1,500,000 shares of common stock.
6. Switchboard's 1999 Employee Stock Purchase Plan pursuant to which
Switchboard may issue up to an aggregate of 300,000 shares of common
stock; provided, that, no offering
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under such plan shall commence prior to the closing of Switchboard's
initial public offering of common stock.
7. The amendment to Switchboard's 1999 Stock Incentive Plan increasing
from 1,500,000 to 1,875,000 the number of shares of common stock
authorized for issuance under such plan.
On February 11, 2000, Switchboard held its 2000 Annual Meeting of
Stockholders. The meeting involved the re-election of six then-current
directors of Switchboard: William P. Ferry, Douglas J. Greenlaw, Dean
Polnerow, Richard M. Spaulding, David N. Strohm and Robert M. Wadsworth;
provided, that, upon the closing of Switchboard's initial public offering of its
common stock, the six directors were to be classified as follows: two Class I
Directors (Messrs. Ferry and Wadsworth) elected for a term expiring at the 2001
Annual meeting of Stockholders, two Class II Directors (Messrs. Spaulding and
Strohm) elected for a term expiring at the 2002 Annual Meeting of Stockholders,
and two Class III Directors (Messrs. Greenlaw and Polnerow) elected for a term
expiring at the 2003 Annual Meeting of Stockholders, in all cases subject to the
election and qualification of their successors and to their earlier death,
resignation or removal. All six nominees were so elected. For each of the
nominees for director, the aggregate votes of the holders of shares of common
stock and preferred stock were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nominee Votes For Votes Withheld
------- --------- --------------
- --------------------------------------------------------------------------------
<S> <C> <C>
William P. Ferry 17,419,481 0
- --------------------------------------------------------------------------------
Douglas J. Greenlaw 17,419,481 0
- --------------------------------------------------------------------------------
Dean Polnerow 17,415,107 4,374
- --------------------------------------------------------------------------------
Richard M. Spaulding 17,419,481 0
- --------------------------------------------------------------------------------
David N. Strohm 17,415,107 4,374
- --------------------------------------------------------------------------------
Robert M. Wadsworth 17,419,481 0
- --------------------------------------------------------------------------------
</TABLE>
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on
the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference. Documents listed on such Exhibit Index, except
for documents identified by footnotes, are being filed as exhibits herewith.
Documents identified by footnotes are not being filed herewith and, pursuant to
Rule 12b-32 under the Securities Exchange Act of 1934, reference is made to such
documents as previously filed as exhibits filed with the Securities and Exchange
Commission. Switchboard's file number under the Securities Exchange Act of 1934
is 000-28871.
b. Reports on Form 8-K.
We did not file a current report on Form 8-K during the quarter ended
March 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SWITCHBOARD INCORPORATED
By: /s/ John P. Jewett
----------------------
John P. Jewett
Principal Financial Officer and
Chief Accounting Officer
Date: May 15, 2000
EXHIBIT INDEX
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Exhibit No. Description
----------- -----------
- -------------------------------------------------------------------------------------------------------------
<S> <C>
10.25 Registration Rights Agreement dated March 7, 2000 between the Registrant and Banyan
Systems Incorporated.
- -------------------------------------------------------------------------------------------------------------
10.26 Services Agreement dated March 7, 2000 between the Registrant and Banyan Systems
Incorporated.
- -------------------------------------------------------------------------------------------------------------
10.27 Sublease dated March 7, 2000 between the Registrant and Banyan Systems Incorporated.
- -------------------------------------------------------------------------------------------------------------
27.1 Financial data schedule.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
25
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EXHIBIT 10.25
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") dated as of March 7,
2000 is entered into by and between Switchboard Incorporated, a Delaware
corporation (the "Company"), and Banyan Systems Incorporated, a Massachusetts
corporation (together with any present or future, direct or indirect, wholly
owned subsidiary thereof, "Banyan").
Recitals
WHEREAS, Banyan holds 7,000,000 shares of the Company's Common Stock,
which were originally issued to Banyan during 1996; and
WHEREAS, the Company and Banyan desire to provide for certain arrangements
with respect to the possible future registration of such shares under the
Securities Act of 1933;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and for other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Certain Definitions.
As used in this Agreement, the following terms shall have the
following respective meanings:
"Commission" means the Securities and Exchange Commission, or any
other federal agency of the United States at the time administering the
Securities Act.
"Common Stock" means the common stock, $.01 par value per share, of
the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor federal statute, and the rules and regulations
of the Commission issued the Exchange Act, as they each may, from time to
time, be in effect.
"Initial Public Offering" means the initial underwritten public
offering of shares of Common Stock pursuant to an effective Registration
Statement.
"Other Holders" shall have the meaning set forth in Section 2.1(c).
<PAGE>
"Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by an amendment or prospectus
supplement, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registration Statement" means a registration statement filed by the
Company with the Commission for a public offering and sale of securities
of the Company (other than a registration statement on Form S-8 or Form
S-4, or their successors, or any other form for a similar limited purpose,
or any registration statement covering only securities proposed to be
issued in exchange for securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section 2.4.
"Registrable Shares" means (i) the Shares and (ii) any other shares
of Common Stock issued in respect of such Shares (because of stock splits,
stock dividends, reclassifications, recapitalizations, or similar events);
provided, however, that shares of Common Stock that are Registrable Shares
shall cease to be Registrable Shares upon (i) any sale pursuant to a
Registration Statement or Rule 144 under the Securities Act, (ii) any
eligibility for sale pursuant to Rule 144(k) under the Securities Act or
(iii) any sale in any manner to a person or entity which, by virtue of
Section 3 of this Agreement, is not entitled to the rights provided by
this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, or
any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be
in effect.
"Selling Stockholder" means any Stockholder owning Registrable
Shares included in a Registration Statement.
"Shares" means the 7,000,000 shares of Common Stock issued to Banyan
during 1996.
"Stockholders" means Banyan and any persons or entities to whom the
rights granted under this Agreement are transferred by Banyan, its
successors or assigns pursuant to Section 3 hereof.
2. Registration Rights
2.1 Required Registrations.
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<PAGE>
(a) At any time after the first anniversary of the closing of
the Initial Public Offering, Banyan may request, in writing, that
the Company effect the registration on Form S-3 (or any successor
form) of Registrable Shares owned by Banyan, having an aggregate
value of at least $10,000,000 (based on the then current market
price or fair value). For avoidance of doubt, the parties agree that
the Company shall not be required to file a registration statement
on Form S-1 or Form S-2 (or any successor form which does not allow
the incorporation by reference of subsequently filed Exchange Act
reports).
(b) Upon receipt of any request for registration pursuant to
this Section 2, the Company shall promptly give written notice of
such proposed registration to all other Stockholders. Such
Stockholders shall have the right, by giving written notice to the
Company within 10 days after the Company provides its notice, to
elect to have included in such registration such of their
Registrable Shares as such Stockholders may request in such notice
of election, subject in the case of an underwritten offering to the
approval of the managing underwriter as provided in Section 2.1(c)
below. Thereupon, the Company shall, as expeditiously as possible,
use its reasonable best efforts to effect the registration on an
appropriate registration form of all Registrable Shares which the
Company has been requested to so register.
(c) If Banyan intends to distribute the Registrable Shares
covered by its request by means of an underwriting, it shall so
advise the Company as a part of its request made pursuant to Section
2.1(a), and the Company shall include such information in its
written notice referred to in Section 2.1(b). The right of any other
Stockholder to include its Registrable Shares in such registration
pursuant to Section 2.1(a) shall be conditioned upon such other
Stockholder's participation in such underwriting on the terms set
forth herein. If other holders of securities of the Company who are
entitled, by contract with the Company, to have securities included
in such a registration (the "Other Holders") request such inclusion,
the Company may include the securities of such Other Holders in such
registration and underwriting on the terms set forth herein. The
Company shall (together with all Stockholders and Other Holders
proposing to distribute their securities through such underwriting)
enter into an underwriting agreement in customary form (including,
without limitation, customary indemnification and contribution
provisions on the part of the Company) with the managing
underwriter. Notwithstanding any other provision of this Section
2.1(c), if the managing underwriter advises the Company that the
inclusion of all shares requested to be registered would adversely
affect the offering, and if a limitation of the number of shares is
required, the number of shares that may be included in such
registration and underwriting shall, except as otherwise provided in
any contract to which the Company is a party, be allocated among all
holders of Registrable Shares and Other Holders requesting
registration in proportion, as nearly as practicable, to the
respective number of shares held by them at the time of the request
for registration
- 3 -
<PAGE>
made pursuant to Section 2.1(a). For the avoidance of doubt, the
parties agree that no Stockholder shall be entitled to include any
shares in a registration requested pursuant to its rights under this
Section 2.1 unless each Other Holder under the following listed
agreements (which term includes Banyan to the extent so provided in
one of the following listed agreements) is entitled to include in
such registration all of the shares of Common Stock which it desires
to include and which are registrable shares under one of the
following listed agreements: (1) Amended and Restated Registration
Rights Agreement, dated as of February 20, 1998, as amended, among
the Company, America Online, Inc., Digital City Inc. and Banyan; (2)
Registration Rights Agreement dated as of December 31, 1997, between
the Company and Continuum Software, Inc.; (3) Amended and Restated
Registration Rights Agreement dated as of May 3, 1999 between the
Company and Banyan; and (4) Registration Rights Agreement dated as
of June 30, 1999 between the Company and CBS Corporation. If any
holder of Registrable Shares or Other Holder who has requested
inclusion in such registration as provided above disapproves of the
terms of the underwriting, such person may elect to withdraw
therefrom by written notice to the Company, and the securities so
withdrawn shall also be withdrawn from registration. If the managing
underwriter has not limited the number of Registrable Shares or
other securities to be underwritten, the Company may include
securities for its own account in such registration if the managing
underwriter so agrees and if the number of Registrable Shares and
other securities which would otherwise have been included in such
registration and underwriting will not thereby be limited.
(d) The Company shall have the right to select the managing
underwriter(s) for any underwritten offering requested pursuant to
Section 2.1(a), subject to the approval of Banyan, which approval
will not be unreasonably withheld.
(e) The Company shall not be required to effect more than one
registration pursuant to Section 2.1(a) per year. In addition, the
Company shall not be required to effect any registration within six
months after the effective date of any other Registration Statement
of the Company. For purposes of this Section 2.1(e), a Registration
Statement shall not be counted until such time as such Registration
Statement has been declared effective by the Commission (unless
Banyan withdraws its request for such registration (other than as a
result of material information concerning the business or financial
condition of the Company which is first made known to Banyan after
the date on which such registration was requested) and elect not to
pay the Registration Expenses therefor pursuant to Section 2.4). In
the event Banyan is, as a result of the cut-back provisions in
Section 2.1(c), prohibited from selling at least 50% of the
Registrable Shares with respect to which it requested registration,
then such registration shall not count as a registration under this
Section 2.1(e).
- 4 -
<PAGE>
(f) If at the time of any request to register Registrable
Shares by Banyan pursuant to this Section 2.1, the Company is
engaged or has plans to engage in a registered public offering or is
engaged in any other activity which, in the good faith determination
of the Company's Board of Directors, would be adversely affected by
the requested registration, then the Company, upon furnishing a
certificate signed by an executive officer or the Chairman of the
Board of the Company stating that the Board has made the foregoing
determination, may at its option direct that such request be delayed
for a period not in excess of 75 days from the date of such request;
provided, however, that the Company may not utilize this right more
than twice in any twelve month period.
2.2 Incidental Registration.
(a) Whenever the Company proposes to file a Registration
Statement (other than a Registration Statement filed pursuant to
Section 2.1 and a Registration Statement covering shares to be sold
solely for the account of Other Holders in which the Company is
contractually prohibited from including Registrable Shares), at any
time and from time to time, it will, prior to such filing, give
written notice to all Stockholders of its intention to do so;
provided that no such notice need be given if no Registrable Shares
are to be included therein as a result of a determination of the
managing underwriter pursuant to Section 2.2(b). Upon the written
request of a Stockholder or Stockholders given within 10 days after
the Company provides such notice (which request shall state the
intended method of disposition of such Registrable Shares), the
Company shall use its best efforts to cause all Registrable Shares
which the Company has been requested by such Stockholder or
Stockholders to register to be registered under the Securities Act
to the extent necessary to permit their sale or other disposition in
accordance with the intended methods of distribution specified in
the request of such Stockholder or Stockholders; provided that the
Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 2.2 without
obligation to any Stockholder.
(b) If the registration for which the Company gives notice
pursuant to Section 2.2(a) is a registered public offering involving
an underwriting, the Company shall so advise the Stockholders as a
part of the written notice given pursuant to Section 2.2(a). In such
event, the right of any Stockholder to include its Registrable
Shares in such registration pursuant to this Section 2.2 shall be
conditioned upon such Stockholder's participation in such
underwriting on the terms set forth herein. All Stockholders
proposing to distribute their securities through such underwriting
shall (together with the Company and Other Holders distributing
their securities through such underwriting), enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting by the Company.
Notwithstanding any other provision of this Section 2.2, if the
managing underwriter
- 5 -
<PAGE>
determines that the inclusion of all shares requested to be
registered would adversely affect the offering, the Company may
limit the number of Registrable Shares to be included in the
registration and underwriting. The Company shall so advise all
holders of Registrable Shares requesting registration, and the
number of shares that are entitled to be included in the
registration and underwriting shall be allocated as follows:
(i) first, there shall be included any shares proposed
to be sold by the Company;
(ii) second, there shall be included any shares
permitted to be included in the registration pursuant to
Section 3(b) of the Amended and Restated Registration Rights
Agreement, dated as of February 20, 1998, as amended, among
the Company, America Online, Inc., Digital City Inc., and
Banyan;
(iii) third, there shall be included in the registration
any shares permitted to be included pursuant to Section 2(b)
of the Registration Rights Agreement dated as of December 31,
1997 between the Company and Continuum Software, Inc.;
(iv) fourth, there shall be included in the registration
any shares permitted to be included pursuant to Section 3(b)
of the Amended and Restated Registration Rights Agreement
dated as of May 3, 1999 between the Company and Banyan;
(v) fifth, there shall be included in the registration
any shares permitted to be included pursuant to Section 2(b)
of the Registration Rights Agreement dated as of June 30, 1999
between the Company and CBS Corporation; and
(vi) sixth, except as otherwise required in any contract
to which the Company is a party, there shall be included in
the registration any shares requested to be included by the
Stockholders and any Other Holders in proportion, as nearly as
practicable, to the respective number of shares of Common
Stock (on an as-converted basis) which they held at the time
the Company gives the notice specified in Section 2.2(a).
If any Stockholder or Other Holder would thus be entitled to include more
securities than such holder requested to be registered, the excess shall
be allocated among other requesting Stockholders and Other Holders pro
rata in the manner described in clause (vi) of the preceding sentence. If
any holder of Registrable Shares or Other Holder disapproves of the terms
of any such underwriting, such person may elect to withdraw therefrom by
written notice to the Company, and any Registrable Shares or other
- 6 -
<PAGE>
securities excluded or withdrawn from such underwriting shall be withdrawn
from such registration.
2.3 Registration Procedures.
(a) If and whenever the Company is required by the provisions
of this Agreement to use its reasonable best efforts to effect the
registration of any Registrable Shares under the Securities Act, the
Company shall:
(i) with respect to a registration under Section 2.1
above, (1) file with the Commission a Registration Statement
with respect to such Registrable Shares as soon as practicable
(but in any event within 60 days after receipt of the request
under Section 2, unless the filing of such registration
statement will require the preparation of financial statements
that have not been prepared as of the date of the receipt of
the request, in which case the filing will be made within 90
days after receipt of the request) and (2) use its reasonable
best efforts to cause that Registration Statement to become
effective as soon as possible;
(ii) with respect to a registration under Section 2.1
above, as expeditiously as reasonably possible prepare and
file with the Commission any amendments and supplements to the
Registration Statement and the prospectus included in the
Registration Statement as may be necessary to comply with the
provisions of the Securities Act (including the anti-fraud
provisions thereof) and to keep the Registration Statement
effective for 120 days from the effective date or such lesser
period until all such Registrable Shares are sold;
(iii) as expeditiously as reasonably possible furnish to
each Selling Stockholder such reasonable numbers of copies of
the Prospectus, including any preliminary Prospectus, in
conformity with the requirements of the Securities Act, and
such other documents as such Selling Stockholder may
reasonably request in order to facilitate the public sale or
other disposition of the Registrable Shares owned by such
Selling Stockholder;
(iv) as expeditiously as reasonably possible use its
reasonable best efforts to register or qualify the Registrable
Shares covered by the Registration Statement under the
securities or Blue Sky laws of such states as the Selling
Stockholders shall reasonably request; provided, however, that
the Company shall not be required in connection with this
paragraph (iv) to qualify as a foreign corporation or execute
a general consent to service of process in any jurisdiction;
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(v) as expeditiously as reasonably possible, cause all
such Registrable Shares to be listed on each securities
exchange or automated quotation system on which similar
securities issued by the Company are then listed;
(vi) promptly provide a transfer agent and registrar for
all such Registrable Shares not later than the effective date
of such registration statement;
(vii) notify each Selling Stockholder, reasonably
promptly after it shall receive notice thereof, of the time
when such Registration Statement has become effective or a
supplement to any Prospectus forming a part of such
Registration Statement has been filed; and
(viii) notify each seller of such Registrable Shares of
any request by the Commission for the amending or
supplementing of such Registration Statement or Prospectus.
(b) If the Company has delivered a Prospectus to the Selling
Stockholders and after having done so the Prospectus is amended to
comply with the requirements of the Securities Act, the Company
shall reasonably promptly notify the Selling Stockholders and, if
requested, the Selling Stockholders shall immediately cease making
offers of Registrable Shares and return all Prospectuses to the
Company. The Company shall reasonably promptly provide the Selling
Stockholders with revised Prospectuses and, following receipt of the
revised Prospectuses, the Selling Stockholders shall be free to
resume making offers of the Registrable Shares.
(c) In the event that, in the judgment of the Company, it is
advisable to suspend use of a Prospectus included in a Registration
Statement due to pending material developments or other events that
have not yet been publicly disclosed and as to which the Company
believes public disclosure would be detrimental to the Company, the
Company shall notify all Selling Stockholders in writing to such
effect, and, upon receipt of such notice, each such Selling
Stockholder shall immediately discontinue any sales of Registrable
Shares pursuant to such Registration Statement until such Selling
Stockholder has received copies of a supplemented or amended
Prospectus or until such Selling Stockholder is advised in writing
by the Company that the then current Prospectus may be used and has
received copies of any additional or supplemental filings that are
incorporated or deemed incorporated by reference in such Prospectus.
The Company, as expeditiously as reasonably possible, shall advise
the Selling Stockholders that use of the then current Prospectus may
be resumed or deliver copies of a supplemented or amended
Prospectus.
2.4 Allocation of Expenses. The Company will pay all Registration
Expenses for all registrations under this Agreement; provided, however,
that if a
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registration under Section 2.1 is withdrawn at the request of Banyan
(other than as a result of information concerning the business or
financial condition of the Company which is first made known to Banyan
after the date on which such registration was requested or pursuant to the
final sentence of Section 2.1(e)) and if Banyan elects not to have such
registration counted as a registration requested under Section 2.1, Banyan
shall pay the Registration Expenses of such registration. For purposes of
this Section 2.4, the term "Registration Expenses" shall mean all expenses
incurred by the Company in complying with this Agreement, including,
without limitation, all registration and filing fees, Nasdaq and exchange
listing fees, printing expenses, fees and expenses of counsel for the
Company, compensation of the employees of the Company and the reasonable
fees and expenses of one counsel selected by the Selling Stockholders to
represent the Selling Stockholders, state Blue Sky fees and expenses, and
the expense of any special audits incident to or required by any such
registration, but excluding underwriting discounts, selling commissions
and the fees and expenses of Selling Stockholders' own counsel (other than
the counsel selected to represent all Selling Stockholders).
2.5 Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless the seller of such
Registrable Shares and each of its officers, directors, employees
and partners, each underwriter of such Registrable Shares, and each
other person, if any, who controls such seller or underwriter within
the meaning of the Securities Act or the Exchange Act against any
losses, claims, damages or liabilities, joint or several, to which
such seller, underwriter or controlling person may become subject
under the Securities Act, the Exchange Act, state securities or Blue
Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement under which
such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such
Registration Statement, or arise out of or are based upon the
omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and the Company will reimburse such seller, underwriter
and each such controlling person, on at least a quarterly basis for
any legal or any other expenses reasonably incurred by such seller,
underwriter or controlling person in connection with investigating
or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made
in such Registration Statement, preliminary prospectus or
prospectus, or any such amendment
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or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of such
seller, underwriter or controlling person specifically for use in
the preparation thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each
seller of Registrable Shares, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors and
officers and each underwriter (if any) and each person, if any, who
controls the Company or any such underwriter within the meaning of
the Securities Act or the Exchange Act, against any losses, claims,
damages or liabilities, joint or several, to which the Company, such
directors and officers, underwriter or controlling person may become
subject under the Securities Act, Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement under which
such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to the
Registration Statement, or arise out of or are based upon any
omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, if the statement or omission was made in reliance upon
and in conformity with information relating to such seller furnished
in writing to the Company by or on behalf of such seller
specifically for use in connection with the preparation of such
Registration Statement, prospectus, amendment or supplement;
provided, however, that the indemnity contained in this section
shall not apply to amounts paid in settlement of any such claim,
loss, damage, liability or action if such action is effected without
the consent of the applicable Stockholder (which consent shall not
be unreasonably withheld); provided, further, that the obligations
of a Stockholder hereunder shall be limited to an amount equal to
the net proceeds to such Stockholder of Registrable Shares sold in
connection with such registration.
(c) Each party entitled to indemnification under this Section
2.5 (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 be unreasonably withheld); 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 2.5 except to the extent that the
Indemnifying Party is adversely affected by such failure. The
Indemnified Party
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may participate in such defense at such party's expense; provided,
however, that the Indemnifying Party shall pay such reasonable
expense if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified
Party and any other party represented by such counsel in such
proceeding; provided, further, that in no event shall the
Indemnifying Party be required to pay the expenses of more than one
law firm per jurisdiction as counsel for the Indemnified Party. The
Indemnifying Party also shall be responsible for the reasonable
expenses of such defense if the Indemnifying Party does not elect to
assume such defense. 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 of such claim or
litigation, and no Indemnified Party shall consent to entry of any
judgment or settle such claim or litigation without the prior
written consent of the Indemnifying Party, which consent shall not
be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this
Section 2.5 is due in accordance with its terms but for any reason
is held to be unavailable to an Indemnified Party in respect any
losses, claims, damages and liabilities referred to herein, then the
Indemnifying Party shall, in lieu of indemnifying such Indemnified
Party, contribute to the amount paid or payable by such Indemnified
Party as a result of such losses, claims, damages or liabilities to
which such party may be subject in such proportion as is appropriate
to reflect the relative fault of the Company on the one hand and the
Stockholders on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations.
The relative fault of the Company and the Stockholders shall be
determined by reference to, among other things, whether the untrue
or alleged untrue statement of material fact related to information
supplied by the Company or the Stockholders and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the
Stockholders agree that it would not be just and equitable if
contribution pursuant to this Section 2.5 were determined by pro
rata allocation or by any other method of allocation which does not
take account of the equitable considerations referred to above. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Any party entitled to contribution will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party in respect
of which a claim for contribution may be made against another party or parties
under this
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<PAGE>
Section, notify such party or parties from whom contribution may be sought, but
the omission so to notify such party or parties from whom contribution may be
sought shall not relieve such party from any other obligation it or they may
have thereunder or otherwise under this Section. No party shall be liable for
contribution with respect to any action, suit, proceeding or claim settled
without its prior written consent, which consent shall not be unreasonably
withheld.
2.6 Other Matters with Respect to Underwritten Offerings. In the
event that Registrable Shares are sold pursuant to a Registration
Statement in an underwritten offering pursuant to Section 2.1, the Company
agrees to (a) enter into an underwriting agreement containing customary
representations and warranties with respect to the business and operations
of the Company and customary covenants and agreements to be performed by
the Company, including without limitation customary provisions with
respect to indemnification by the Company of the underwriters of such
offering; (b) use its reasonable best efforts to cause its legal counsel
to render customary opinions to the underwriters with respect to the
Registration Statement; and (c) use its reasonable best efforts to cause
its independent public accounting firm to issue customary "cold comfort
letters" to the underwriters with respect to the Registration Statement.
2.7 Information by Holder. Each Stockholder including Registrable
Shares in any registration shall furnish to the Company such information
regarding such Stockholder and the distribution proposed by such
Stockholder 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 Agreement.
2.8 Rule 144 Requirements. After the earliest of (i) the closing of
the sale of securities of the Company pursuant to a Registration Statement
or (ii) the registration by the Company of a class of securities under
Section 12 of the Exchange Act, the Company agrees to:
(a) make and keep current public information about the Company
available, as those terms are understood and defined in Rule 144;
(b) 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); and
(c) so long as a Stockholder owns any Registrable Shares, to
furnish to such Stockholder forthwith upon request a written
statement by the Company as to its compliance with the reporting
requirements of said Rule 144(c) of the Securities Act and the
Exchange Act (at any time after it has become subject to such
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<PAGE>
reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and
documents so filed by the Company as the Stockholder may reasonably
request in complying with any rule or regulation of the SEC allowing
the Stockholder to sell any such securities without registration.
2.9 Termination. All of the Company's obligations to register
Registrable Shares under Sections 2.1 and 2.2 of this Agreement shall
terminate five years after the closing of the Initial Public Offering.
3. Transfers of Rights. This Agreement, and the rights and obligations of
Banyan hereunder, may not be assigned by Banyan except that (i) Banyan may
assign this Agreement, and its rights and obligations hereunder, to any person
to which at least 3,600,000 Shares are validly transferred by Banyan and (ii)
any other person to which Shares are validly transferred shall be deemed a
"Stockholder" hereunder; provided in each case that the transferee provides
written notice of such assignment to the Company and agrees in writing to be
bound hereby.
4. General.
(a) Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(b) Specific Performance. In addition to any and all other remedies that
may be available at law in the event of any breach of this Agreement, Banyan
shall be entitled to specific performance of the agreements and obligations of
the Company hereunder and to such other injunctive or other equitable relief as
may be granted by a court of competent jurisdiction.
(c) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware (without reference to
the conflicts of law provisions thereof).
(d) Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed delivered (i) two
business days after being sent by registered or certified mail, return receipt
requested, postage prepaid or (ii) one business day after being sent via a
reputable nationwide overnight courier service guaranteeing next business day
delivery, in each case to the intended recipient as set forth below:
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<PAGE>
If to the Company, at 115 Flanders Road, Westboro, MA 01581, Attention:
Chief Financial Officer, or at such other address or addresses as may have been
furnished in writing by the Company to Banyan.
If to Banyan, at 120 Flanders Road, Westboro, MA 01581, Attention: Chief
Financial Officer, or at such other address or addresses as may have been
furnished to the Company in writing by Banyan.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but not such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
(e) Entire Agreement. This Agreement constitutes the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings relating to such subject
matter.
(f) Amendments and Waivers. Any term of this Agreement may be amended or
terminated and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company, and the holders of a
majority of the Registrable Shares; provided, that this Agreement may be amended
with the consent of the holders of less than all Registrable Shares only in a
manner which applies to all such holders in the same fashion. Any such
amendment, termination or waiver effected in accordance with this Section 4(f)
shall be binding on all parties hereto, even if they do not execute such
consent. Upon the effectuation of any such amendment, the Company shall promptly
give written notice to the Stockholders, if any, who have not previously
consented thereto in writing. No waivers of or exceptions to any term, condition
or provision of this Agreement, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
(g) Pronouns. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural, and vice
versa.
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<PAGE>
(h) Counterparts; Facsimile Signatures. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original, and
all of which together shall constitute one and the same document. This Agreement
may be executed by facsimile signature.
(i) Section Headings. The section headings are for the convenience of the
parties and in no way alter, modify, amend, limit or restrict the contractual
obligations of the parties.
Executed as of the date first written above.
COMPANY:
SWITCHBOARD INCORPORATED
By: /s/ John Jewett
--------------------------------------
Name: John Jewett
Title: V.P. & Chief Financial Officer
PURCHASER:
BANYAN SYSTEMS INCORPORATED
By: /s/ Richard M. Spaulding
--------------------------------------
Name: Richard M. Spaulding
Title: S.V.P. & C.F.O.
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EXHIBIT 10.26
SERVICES AGREEMENT
This Services Agreement (this "AGREEMENT") dated as of March 7, 2000 is
entered into between Banyan Systems Incorporated, a Massachusetts corporation
("BANYAN"), and Switchboard Incorporated a Delaware corporation ("SWITCHBOARD"
and together with Banyan, the "PARTIES").
Recitals:
A. On the date hereof, Switchboard has consummated an initial public
offering of its common stock (the "OFFERING").
B. Prior to the Offering, Switchboard was a majority-owned subsidiary
of Banyan. As a result of Switchboard's issuance of shares of its common stock
in the Offering, Switchboard no longer is a majority-owned subsidiary of Banyan.
C. Each of the Parties is a party to that certain Services Agreement
dated November 1, 1996, as amended (the "PRIOR SERVICES AGREEMENT"), pursuant to
which Banyan provides specified services to Switchboard.
D. Each of the Parties desires to terminate the Prior Services
Agreement and to enter into this Agreement with respect to the services to be
provided to Switchboard by Banyan now that Switchboard no longer is a
majority-owned subsidiary of Banyan.
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained in this Agreement, the Parties hereby agree as follows:
1. SERVICES
1.1. Services to be Made Available. In accordance with the terms and
provisions of this Agreement, Banyan agrees to perform for Switchboard the
services described in the Schedule hereto (collectively, the "SERVICES") in the
amounts and to the extent specified with respect to each such Service in the
Schedule.
1.2. Fees for Services. Switchboard agrees to pay to Banyan a fee for
each of the Services as specified in the Schedule hereto.
Not more often than once per fiscal month, Banyan shall forward to
Switchboard invoices for the Services listing the Services provided hereunder
and listing the fees for such Services, setting forth in reasonable detail the
calculation of the amounts charged. Invoices for Services provided for partial
fiscal months and relating to Services for which the fees are to be calculated
on a monthly basis shall be based upon (a) the number of business days during
which services were provided, divided by (b) the number of business days in such
fiscal month. Within fifteen days of receiving an invoice, Switchboard shall pay
to Banyan the amount invoiced unless it
<PAGE>
shall in good faith dispute the types and/or amounts of Services set forth on
such invoice as having been provided during the period covered by such invoice.
In the event of such good faith dispute, Switchboard shall pay the fees set
forth on such invoice for all Services the amounts of which are not in dispute
and the Parties agree to use their respective best efforts to resolve such
dispute within ten days. If such dispute is not resolved within ten days, either
Party may seek binding arbitration of such dispute in accordance with the
provisions of Section 4.8 of this Agreement. With respect to any task that
Banyan agrees to perform hereunder, Banyan shall, at Switchboard's request,
inform Switchboard of the person(s) who are expected to perform such tasks, such
persons' hourly rates applicable thereto and an estimate of the time such tasks
will require to complete.
1.3. Term of Agreement. This Agreement is effective as of the date
hereof and shall terminate with respect to each Service on the date specified
for such Service in the Schedule hereto.
1.4. Timely Performance and Cooperation. Banyan shall use all
reasonable efforts in the timely performance of the Services and Switchboard
shall use all reasonable efforts to cooperate with Banyan in connection with the
provision of the Services.
2. REPRESENTATIONS AND WARRANTIES
As an inducement to enter into this Agreement, each Party represents to
and agrees with the other that:
(a) it is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power to own, lease and
operate its properties, to carry on its business as presently conducted
and to carry out the transactions contemplated by this Agreement;
(b) it has duly and validly taken all corporate action
necessary to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby;
and
(c) this Agreement has been duly executed and delivered by it
and constitutes its legal, valid and binding obligation enforceable
against it in accordance with its terms, except as such enforceability
may be affected by laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies.
3. OTHER AGREEMENTS
Contemporaneously with the execution of this Agreement, and
specifically in the case of the Registration Rights Agreement (as defined
below), as consideration, in part, for entering into this Agreement, the Parties
shall enter into the following agreements:
(a) a sublease in the form appended hereto as Annex A; and
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(b) a registration rights agreement in the form appended
hereto as Annex B (the "Registration Rights Agreement").
4. OTHER TERMS AND PROVISIONS
4.1. Independent Contractor Status. Banyan shall perform all services
under this Agreement as an "independent contractor" and not as an agent of
Switchboard. Banyan is not authorized to assume or create any obligation or
responsibility, express or implied, on behalf of, or in the name of Switchboard
or to bind Switchboard in any manner.
4.2. Limitation of Liability and Reimbursement. Neither Banyan, nor any
of its officers, employees, agents or affiliates (including its attorneys and
accountants), shall in any event be liable for any damages, including but not
limited to loss of profits or revenue, which arise out of Banyan's (or any such
officer's, employee's, agent's or affiliate's) performance or failure to perform
any of its obligations under this Agreement, other than those damages caused by
Banyan's (or such person's) willful misconduct or gross negligence. Switchboard
hereby agrees to indemnify Banyan and hold Banyan harmless for all costs
(including attorneys' fees) and damages incurred by Banyan to third parties as a
result of the provision of Banyan pursuant to this Agreement of the Services,
other than costs or damages incurred by Banyan as a result of its willful
misconduct or gross negligence.
4.3. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the Parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such which may be hereafter declared invalid, void or unenforceable, and the
Parties shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction.
4.4. Assignment. Except by operation of law or in connection with the
sale of all or substantially all the business or assets of a Party, this
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by either Party without the prior written consent of the other, and any attempt
to assign any rights or obligations arising under this Agreement without such
consent shall be void; provided, that, the provisions of this Agreement shall be
binding upon, inure to the benefit of and be enforceable by Banyan and
Switchboard and their respective successors and permitted assigns.
4.5. Further Assurance. Subject to the provisions hereof, each of
Banyan and Switchboard shall make, execute, acknowledge and deliver such other
agreements, documents or instruments and take or cause to be taken such other
actions as may be reasonably required in order to effectuate the purposes of
this Agreement and to consummate the transactions contemplated hereby. Subject
to the provisions hereof, each of Banyan and Switchboard shall, in connection
with entering into this Agreement, performing its obligations hereunder and
taking any and all actions relating hereto, comply with all applicable laws,
regulations, orders and decrees, obtain all required consents and approvals and
make all required filings with any
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governmental agency, or other regulatory or administrative agency, commission or
similar authority and promptly provide the other with all such information as
the other may reasonably request in order to be able to comply with the
provisions of this sentence.
4.6. Parties in Interest. Nothing in this Agreement expressed or
implied is intended or shall be construed to confer any right or benefit upon
any person or entity other than Banyan and Switchboard and their respective
successors and permitted assigns.
4.7. Waivers, Etc. No failure or delay on the part of Banyan or
Switchboard in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement nor
consent to any departure by Banyan or Switchboard therefrom shall in any event
be effective unless the same shall be in writing and signed by the Party against
whom such modification or waiver is asserted and then such modification or
waiver shall be effective only in the specific instance and for the purpose for
which given.
4.8. Arbitration. Each Party may refer any dispute arising under this
Agreement or the matters contemplated hereby (including without limitation the
fees for Services provided hereunder) to binding arbitration in the Commonwealth
of Massachusetts under the commercial arbitration rules of the American
Arbitration Association before a panel of three arbitrators, one selected by
each Party and the third selected by the other two arbitrators or, if they are
unable to agree, by the American Arbitration Association. Any award made in such
arbitration may be enforced in any court of competent jurisdiction.
4.9. Changes of Law. If, due to any change in applicable law or
regulations or the interpretation thereof by any court of law or other governing
body having jurisdiction subsequent to the date of this Agreement, performance
of any provision of this Agreement or any transaction contemplated thereby shall
become impracticable or impossible, the Parties shall use their best efforts to
find and employ an alternative means to achieve the same or substantially the
same result as that contemplated by such provision.
4.10. Confidentiality. Subject to any contrary requirement of law and
the right of each Party to enforce its rights hereunder in any legal action,
each Party shall keep strictly confidential and shall cause its employees and
agent to keep strictly confidential any information which it or any of its
agents or employees may acquire pursuant to, or the course of performing its
obligations under, any provision of this Agreement; provided, that, such
obligation to maintain confidentiality shall not apply to information which (a)
at the time of disclosure was in the public domain not as a result of acts by
the receiving Party, (b) was in the possession of the receiving Party at the
time of disclosure, or (c) was received by the receiving Party from a third
party that does not require the receiving Party to maintain the confidentiality
of such information, and that is not in violation of any contractual, legal or
fiduciary obligation to the disclosing party with respect to such information.
4.11. Entire Agreement. Notwithstanding the provisions of Section 4 of
the Prior Services Agreement, the Prior Services Agreement is hereby amended so
as to be terminated in
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its entirety. This Agreement contains the entire understanding of the Parties
with respect to the provision of Services from Banyan to Switchboard.
4.12. Titles and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
4.13. Counterparts. This Agreement may be executed in 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.
4.14. Notices. Any notice, request, demand, claim, or other
communication hereunder shall be in writing and shall be delivered by registered
or certified mail, return receipt requested, postage prepaid, and addressed to
the intended recipient as set forth below, and shall be deemed duly given on the
date which is three days after the date such notice, request, demand, claim, or
other communication is sent:
Switchboard at: 115 Flanders Road
Westboro, MA 01581
Attention: Chief Financial Officer
Banyan at: 120 Flanders Road
Westboro, MA 01581
Attention: Chief Financial Officer
Notwithstanding the foregoing, any Party may send any notice, request, demand,
claim, or other communication hereunder to the intended recipient at the address
set forth above using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic mail),
but no such notice, request, demand, claim, or other communication shall be
deemed to have been duly given unless and until it is actually received by the
intended recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Party notice in the manner herein set forth.
4.15. Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic substantive laws of the Commonwealth of
Massachusetts without regard to any choice or conflict of law rule or provision
that would result in the application of the domestic substantive laws of any
other jurisdiction.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed as of the day and year first above written.
BANYAN SYSTEMS INCORPORATED
By: /s/ Richard M. Spaulding
------------------------------------------
Richard M. Spaulding
Vice President and Chief Financial Officer
SWITCHBOARD INCORPORATED
By: /s/ John P. Jewett
------------------------------------------
John P. Jewett
Vice President and Chief Financial Officer
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<PAGE>
SCHEDULE TO SERVICES AGREEMENT
BETWEEN BANYAN SYSTEMS INCORPORATED
AND SWITCHBOARD INCORPORATED
SCOPE
This service agreement will cover the following areas:
-- Physical layer infrastructure (hubs, routers, switches,
firewalls, cabling plant and shared corporate internet
connectivity)
-- Communications (phone services for moves, adds, and changes)
-- Relationship Management (service reviews, change processes)
This agreement will not cover special projects such as implementation of Virtual
Private Networks, large-scale network changes or implementation of new internet
services. This agreement does not cover the Switchboard website. Any such
projects will be handled on an exception basis and resources provided
appropriately. The facilities and services described here are generally
consistent with those provided to Banyan in general. The service agreement is in
effect for a period of one year with an option for a one year renewal. Either
party may terminate this Agreement for convenience upon sixty (60) days advance
written notice to the other party.
FEES
The annual fee for service is $175,000 paid in monthly installments commencing
the date the Services Agreement is entered into, as set forth on page one of the
Services Agreement.
PHYSICAL INFRASTRUCTURE
Banyan Information Systems ("BIS") is responsible for corporate infrastructure
maintenance and management. Switchboard maintains responsibility for the
Switchboard website infrastructure.
Physical infrastructure includes hubs, routers, switches, firewalls, cabling
plant and shared corporate internet connectivity and the support required to
both keep these functional at high levels of service, and to make adjustments as
needed due to organizational changes.
Switchboard currently has all responsibility for its servers and related file
and print servers.
COMMUNICATIONS
Telecommunications services are provided to Switchboard and include PBX and
desktop phone service. Moves, adds and changes will be provided and in most
instances typical requests involving one to three users will be handled within
two business days.
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<PAGE>
Large moves, adds or changes will normally require five business days. This
period is the result of our agreement with a third-party provider and may be
negotiable for a premium fee.
Any problems impacting service will be handled as outlined under support and
service and problems should be reported through whatever means available during
the problem period.
BIS provides Switchboard long distance service and calling cards.
MANAGEMENT
-- The agreed upon BIS and Switchboard staff will meet monthly,
between the 15th and 30th, to review open issues and the
general working relationship.
-- Call tracking is essential, to provide for understanding and
verification of the types of issues, number of calls, and the
responses provided by BIS.
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<PAGE>
EXHIBIT 10.27
SUBLEASE
THIS SUBLEASE dated as of March 7, 2000 between Banyan Systems
Incorporated (the "Sublandlord") and Switchboard Incorporated (the "Subtenant").
ARTICLE I
REFERENCE DATA
1.1 Subjects Referred To.
Each reference in this Sublease to any of the following subjects shall
be construed to incorporate the data stated for that subject in this Section
1.1:
Date of Sublease: March 7, 2000
Sublandlord: Banyan Systems Incorporated,
a Massachusetts corporation
Sublandlord's Address: 120 Flanders Road, Westboro, Massachusetts 01581
Subtenant: Switchboard Incorporated, a Delaware corporation
Subtenant's Address: 115 Flanders Road, Westboro, Massachusetts 01581
Headlandlord: BerTech Flanders, LLC
Headlandlord's Address: c/o Steve Brooks, Asset Manager
Berkley Investment Inc.
121 High Street
Boston, MA 02110
Headlease: Lease Agreement dated as of November 14, 1986 by and
between Arthur DiMartino, Jr., Trustee of Flanders
Realty Trust, as landlord, and Sublandlord, as
tenant, as amended by a Lease Addendum dated
August 28, 1987, a Lease Addendum dated January 5,
1988, a Lease Extension and Modification Agreement
effective as of January 1, 1992, a Lease Extension
and Modification Agreement dated April 15, 1993, and
a Fifth Lease Extension and Modification Agreement
dated as of October 15, 1997.
<PAGE>
Headleased Premises: The premises situated at 115 Flanders Road,
Westboro, Massachusetts, as described in the
Headlease, containing approximately 64,654 rentable
square feet (constituting all of the rentable square
feet in the building) (the "Building").
Premises: The Premises are shown on Exhibit B attached hereto.
Beginning on March 1, 2000 the Premises shall also
include space shown on Exhibit C attached hereto.
Rentable Floor Area
of Premises: 9,572 Rentable Square Feet on the second floor of
the Building. Beginning on March 1, 2000 the
rentable floor area of the Premises shall increase
to 18,089 rentable square feet. Exact square footage
shall be verified by an architect in accordance with
BOMA standards.
Commencement Date: March 7, 2000
Term Expiration Date: December 31, 2002
Extension Option: Subtenant shall have option to extend term until
September 30, 2005.
Rent Commencement Date: March 1, 2000
Monthly Fixed Rent: Time Period Monthly Rent
----------- ------------
3/1/2000-12/31/2002 $25,551.00
Security Deposit: None
Permitted Uses: All permitted uses in the Headlease.
Parking Spaces: Subtenant shall be entitled to use 80 parking
spaces. Subject to prior written approval of
Headlandlord under the terms of the Headlease,
Subtenant, at Subtenant's expense, may install
several visitor parking spaces in front of the
entrance to the Premises.
Signs: Subject to prior written approval and signage
criteria of Headlandlord under the terms of the
Headlease, Subtenant, at Subtenant's expense, may
place signage at the entrance to
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<PAGE>
the Premises. Subtenant shall have its name and
suite number inserted into the building directory.
1.2 Exhibits.
The exhibits listed below in this section are incorporated in this
Sublease by reference and are to be construed as part of this Sublease:
EXHIBIT A Headlease
EXHIBIT B & C Floor Plan of Premises
ARTICLE II
PREMISES AND TERM
2.1 Premises. Subject to and with the benefit of the provisions of this
Sublease, Sublandlord hereby subleases the Premises to Subtenant, and Subtenant
subleases the Premises from Sublandlord.
The Premises are subleased in their condition "as is" on the
Commencement Date.
2.2 Term. To have and to hold beginning on the Commencement Date and
continuing until the Term Expiration Date (the "Term"), subject to earlier
termination as provided herein.
2.3 Early Access. Sublandlord shall allow Subtenant access to the
Premises prior to the Commencement Date to install cabling, telephone systems,
furniture partitions and to perform other necessary tenant improvement s. Prior
to Subtenant's entry into the Premises as permitted hereunder, Subtenant shall
submit a schedule to Sublandlord (and Sublandlord's contractor, if so requested
by Sublandlord), for their reasonable approval, which schedule shall detail the
timing and purpose of Subtenant's entry. Subtenant shall hold Sublandlord
harmless from and indemnify and protect and defend Sublandlord against any loss
or damage to the Premises or the Building and against injury to any person
caused by Subtenant's actions as a result of such entry, to the extent such loss
or damage is not covered by insurance carried or required to be carried under
this Sublease.
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<PAGE>
ARTICLE III
RENT
3.1 Monthly Fixed Rent. Subtenant shall pay Sublandlord the Monthly
Fixed Rent in advance on the first calendar day of each month included in the
Term, commencing on the Rent Commencement Date; and for any portion of a
calendar month at the beginning of or end of the Term, the corresponding
fraction of the Monthly Fixed Rent in advance. Monthly Fixed Rent shall include
HVAC, nightly janitorial service, electricity for lights and plugs and one
security guard from 4 p.m. to 8 a.m. Monday through Friday.
3.2 Additional Rent. Pursuant to the Headlease, Sublandlord is required
to pay 100% of all operating, tax, maintenance and repair costs for the Building
(as such terms are defined in the Headlease), and such other amounts payable as
in the Headlease (collectively, the "Operating Costs"). Subtenant shall pay
Sublandlord as additional rent hereunder 14.8% (increasing to 28% on March 1,
2000) of any increase over the base year of all Operating Costs allocable to the
periods of time included in the Term (the "Additional Rent"). The base year for
real estate taxes is July 1, 1999 through June 30, 2000 with real estate taxes
in the amount of $68,345. The base year for all other operating costs is the
2000 operating budget with an amount of $6.35 per rentable square foot.
Subtenant shall pay such amount within ten (10) days of billing by Sublandlord,
which bills shall include, where applicable, copies of the applicable statements
from Headlandlord. Any surplus shall be promptly refunded to Subtenant and any
deficit in such payment shall be promptly paid by Subtenant after the
Headlandlord finally determines the amounts payable by the Sublandlord under the
Headlease.
Capital repairs and replacements to the roof, structural elements and Building
systems shall be the sole responsibility of the Sublandlord and shall not be
included in the Operating Costs.
3.3 Payment. All payments of Monthly Fixed Rent and Additional Rent
shall be made to Sublandlord at Sublandlord's Address set forth in Section 1.1
or to such other address as Sublandlord may designate by notice to Subtenant
from time to time.
ARTICLE IV
SUBTENANT'S COVENANTS
Subtenant covenants during the Term and such further time as Subtenant
occupies any part of the Premises:
4.1 Subtenant's Payments. Subtenant shall pay all Monthly Fixed Rent,
Additional Rent and any other amounts payable when due.
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<PAGE>
4.2 Maintenance and Repair. Subtenant shall maintain the Premises in
the condition required by the Headlease.
4.3 Occupancy and Use. Subtenant shall not use the Premises for any
uses other than the Permitted Uses, and shall not make any use of the Premises
which is prohibited by any applicable law, ordinance, code, regulation, license,
permit, variances or governmental order.
4.4 Alterations and Additions. Subtenant shall not make any
improvements, repairs, alterations, replacements, decorations and/or additions
to the Premises without first obtaining the written approval of Sublandlord,
which approval shall not be unreasonably withheld or delayed, and the written
approval of the Headlandlord on the terms and conditions set forth in the
Headlease.
All construction work required or permitted by this Sublease shall be
done in a good and workmanlike manner and in compliance with all applicable laws
and all lawful ordinances, regulations and orders of governmental authority and
insurers of the building.
4.5 Assignment and Subletting. Except with Sublandlord's prior written
consent, which consent shall not be unreasonably withheld or delayed, Subtenant
shall not assign, transfer, mortgage or pledge this Sublease, or sublease (which
term shall be deemed to include the granting of concessions and licenses and the
like) all or any part of the Premises, or suffer or permit this Sublease or the
leasehold estate hereby created or any other rights arising under this Sublease
to be assigned, transferred or encumbered, in whole or in part, whether
voluntarily, involuntarily or by operation of law, or permit the occupancy of
the Premises by anyone other than Subtenant. Any attempted assignment, transfer,
mortgage, pledge, sublease or encumbrance without such consent shall be void.
In the event that any assignee or transferee of Subtenant pays to Subtenant any
amount in excess of the Monthly Fixed Rent, Additional Rent and any amounts
and/or charges then payable hereunder, Subtenant shall promptly pay one hundred
(100%) percent of said excess to Sublandlord as and when received by Subtenant.
If Subtenant shall receive from any assignee or transferee, either directly or
indirectly, any consideration for the assignment of this Sublease, either in the
form of cash, goods or services, Subtenant shall pay an amount equivalent to one
hundred (100%) percent of such consideration to Sublandlord as and when received
by Subtenant.
Notwithstanding the foregoing, any assignment, transfer, mortgage or pledge of
this Sublease is subject to and conditioned upon receipt of the prior written
consent of the Headlandlord as provided in the Headlease.
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<PAGE>
No assignment or subletting shall affect the continuing primary liability of
Subtenant (which, following assignment, shall be joint and several with the
assignee).
4.6 Indemnification. Subtenant shall indemnify Sublandlord and hold
Sublandlord harmless from and against any and all claims, demands, suits,
judgments, liabilities, costs and expenses, including reasonable attorneys'
fees, arising out of or in connection with Subtenant's use and possession of the
Premises and the exercise room, or arising out of the failure of Subtenant, its
agents, contractors or employees to perform any covenant, term or condition of
this Sublease or of the Headlease to be performed by Subtenant hereunder.
Sublandlord agrees to indemnify and hold Subtenant harmless from and against any
and all claims, demands, suits, judgments, liabilities, costs and expenses,
including reasonable attorneys' fees, arising out of the failure of Sublandlord,
its agents, contractors or employees to perform any covenant, term or condition
of this Sublease or of the Headlease to be performed by Sublandlord hereunder.
4.7 Insurance. Subtenant shall maintain in responsible companies with a
general policy rating of A or better and a financial class of VI or better by
A.M. Best, Inc. and qualified to do business and in good standing in
Massachusetts, comprehensive general liability insurance covering the premises
insuring Sublandlord and Headlandlord as well as Subtenant with limits which
shall, at the commencement of the Term, be at least $2,000,000 and from time to
time during the Term shall be for such higher limits, if any, as are customarily
carried in the Marlborough and Westboro areas with respect to similar properties
and worker's compensation insurance with statutory limits covering all of
Subtenant's employees working in the Premises. In addition, Subtenant shall be
responsible for insuring its personal property. Subtenant shall deposit promptly
with Sublandlord certificates for such insurance naming Sublandlord and
Headlandlord as additional insureds, and all renewals thereof bearing the
endorsement that the policies will not be canceled until after 30 days' written
notice to Sublandlord.
ARTICLE V
CASUALTY AND TAKING
5.1 Termination of Headlease. In the event that during the Term, all or
any part of the Premises or the Headleased Premises are destroyed or damaged by
fire or other casualty or taken by eminent domain, and either Sublandlord or
Headlandlord terminates the Headlease pursuant to its terms because of such
damage, destruction or taking, then this Sublease shall likewise terminate on
the same date that the Headlease terminates. Sublandlord shall give Subtenant
prompt notice of such termination and the date on which it shall occur.
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<PAGE>
5.2 Repair and Restoration. In the event any such damage, destruction
or taking of the Premises occurs and this Sublease is not terminated pursuant to
Section 5.1 above, then Sublandlord shall use reasonable efforts to cause
Headlandlord to repair and restore the Premises to the extent required by the
terms of the Headlease.
5.3 Reservation of Award. Any and all rights to receive awards made for
damages to the Premises and the leasehold hereby created accruing by reason of
exercise of eminent domain or by reason of anything lawfully done in pursuance
of public or other authority, are reserved to Sublandlord and Headlandlord.
Subtenant hereby releases and assigns to Sublandlord and Headlandlord all
Subtenant's rights to such award and covenants to deliver such further
assignments and assurances thereof as Sublandlord or Headlandlord may from time
to time request.
ARTICLE VI
HEADLEASE
6.1 Sublease Subject to Headlease. This Sublease is subject to the
Headlease. Subject to this Section 6.1, all terms and conditions of the
Headlease are incorporated into and made a part of this Sublease as if
Sublandlord were the landlord thereunder and Subtenant were the tenant. In case
of conflict between the incorporated provisions of the Headlease and the
remaining provisions of this Sublease, the latter shall control. Subtenant
assumes and agrees to perform the tenant's obligations under the Headlease
during the Term, except that the obligation to pay rent or other amounts to
Headlandlord under the Headlease shall not be an obligation of Subtenant, and
Subtenant shall instead pay the rent under this Sublease. Subtenant shall not
commit or suffer any act or omission that will violate any of the provisions of
the Headlease.
If the Headlease terminates as a result of a default or breach
of Subtenant under this Sublease and/or the Headlease, then the Subtenant shall
be liable to the Sublandlord for the direct damage suffered as a result of such
termination. Subtenant covenants not to commit or suffer any act or omission
that will violate the Headlease.
6.2 Excluded Obligations. Notwithstanding anything to the contrary
herein, the incorporated provisions of the Headlease are amended or qualified as
follows:
i. Sublandlord shall not be liable under any circumstances for a loss
of or injury to property, or interference with Subtenant's business, however
occurring, incidental to any failure to furnish any utilities or services.
ii. Sublandlord shall have no responsibility to perform or construct
(or to pay the cost of performing or constructing) any repair, maintenance or
improvement in or to the Premises, except as specifically set forth in Section
2.1 of this Sublease.
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<PAGE>
iii. Rent shall be abated under this Sublease only to the extent that
Sublandlord receives a corresponding rent abatement under the Headlease.
iv. Wherever the Headlease grants to Sublandlord a grace or cure
period, the corresponding grace or cure period under this Sublease shall be two
(2) business days shorter in duration.
The parties acknowledge that Sublandlord's ability to satisfy certain
of its obligations to Subtenant under this Sublease is contingent upon the full
and timely performance of Headlandlord's obligations under the Headlease. The
parties further acknowledge that, while Sublandlord will use reasonable efforts
to cause Headlandlord to perform its obligations under the Headlease,
Sublandlord will not be liable to Subtenant for any breach of Sublandlord's
obligations under this Sublease, nor shall such breach diminish Sublandlord's
rights hereunder, where the same is caused by or attributable to the failure of
Headlandlord to perform its obligations under the Headlease.
6.3 Headlandlord's Rights. Headlandlord shall have all rights with
respect to the Premises which it has reserved to itself as landlord under the
Headlease.
6.4 Termination of Headlease. In the event that Headlandlord terminates
the Headlease pursuant to its terms or the Headlease otherwise terminates or
expires, this Sublease shall likewise and simultaneously terminate.
ARTICLE VII
MISCELLANEOUS
7.1 Notices from One Party to the Other. All notices required or
permitted hereunder shall be in writing, duly signed by the party giving such
notice and transmitted by prepaid registered or certified mail, return receipt
requested, by telegram or telefax, or delivered by hand, and addressed as
follows:
to Sublandlord: Banyan Systems Incorporated
120 Flanders Road
Westboro, MA 01581
Fax No. (508) 366-6846
Attn: Legal Department
to Subtenant: Switchboard Incorporated
115 Flanders Road
Westboro, MA 01581
Fax No. (508) 870-2000
Attn: John P. Jewett
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<PAGE>
or to such other address as Sublandlord or Subtenant shall designate by written
notice to each other. Any notice shall be deemed duly given on the second
business day following the date of mailing, or when delivered to such address by
hand, or if transmitted by telefax or telegram, on the business day received.
7.2 Estoppel Certificate. Upon not less than twenty (20) days prior
notice by the requesting party, either party shall execute, acknowledge and
deliver to the other a statement in writing, addressed to such person as the
requesting party shall designate, certifying (a) that this Sublease is
unmodified and in full force and effect, (b) the dates to which Monthly Fixed
Rent, Additional Rent have been paid, and (c) that the requesting party is not
in default hereunder (or, if in default, specifying the nature of such default
in reasonable detail). Any such certificate may be relied upon by the person to
which it is addressed as to the facts stated therein.
7.3 Brokerage. Subtenant and Sublandlord mutually represent and warrant
that they have dealt with no broker in connection with this transaction. Each
agrees to defend, indemnify and save the other harmless from and against any and
all cost, expense or liability for any compensation, commissions or charges
claimed by any broker or agent, with respect to the indemnifying party's
dealings in connection with this Sublease.
7.4 Applicable Law. This Sublease shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
7.5 Security Deposit. Upon execution of this Sublease, Subtenant shall
deliver to Sublandlord the Security Deposit, such sum to be held by Sublandlord
as security for the performance of Subtenant's obligations under this Sublease.
The Security Deposit shall be held by Sublandlord without interest and
Sublandlord shall be entitled to commingle the Security Deposit with its other
funds.
7.6 Construction. If any term, covenant, condition or provision of this
Sublease or the application thereof to any person or circumstances shall be
declared invalid or unenforceable by the final ruling of a court of competent
jurisdiction having final review, the remaining terms, covenants, conditions and
provisions of this Sublease and their application to persons or circumstances
shall not be affected thereby and shall continue to be enforced and recognized
as valid agreements of the parties.
This Sublease constitutes the entire agreement between the parties
hereto with respect to the transactions contemplated herein, and it supersedes
all prior discussions, understandings or agreements, including without
limitation the Offer To Sublease, between the parties.
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<PAGE>
There are no oral or written agreements between Sublandlord and
Subtenant affecting this Sublease. This Sublease may be amended, and the
provisions hereof may be waived or modified, only by instruments in writing
executed by Sublandlord and Subtenant.
The titles of the several Articles and Sections contained herein are
for convenience only and shall not be considered in construing this Sublease.
Unless repugnant to the context, the words "Sublandlord" and
"Subtenant" appearing in this Sublease shall be construed to mean those named
above and their respective heirs, executors, administrators, successor and
assigns, and those claiming through or under them respectively. If there be more
than one tenant, the obligations imposed by this Sublease upon Subtenant shall
be joint and several.
7.7 Right of First Offer for Second Floor on 120 Flanders Road.
Provided that Subtenant is not in default in the performance or observance of
any of the terms and provisions of this Sublease or the Headlease, if
Sublandlord intends during the Term of this Sublease, to market the Second Floor
Space of 120 Flanders Road consisting of approximately 18,111 rentable square
feet when it becomes available for leasing (the "Second Floor Space"), then
Sublandlord will present a term sheet (the "Offer") for the leasing of the
Second Floor Space to Subtenant. Except as otherwise set forth in the Offer, the
lease of the Second Floor Space shall be on the terms and conditions set forth
in this Sublease.
Upon its receipt of the Offer, Subtenant shall have seven (7) business days to
accept or reject the Offer. If Subtenant accepts the Offer within said seven day
period, Sublandlord and Subtenant shall execute a lease for such Second Floor
Space on the terms set forth in the Offer within thirty (30) days of Subtenant's
acceptance of the Offer. In the event Subtenant does not accept the Offer within
said seven day period or Sublandlord and Subtenant do not execute a lease on the
terms set forth in the Offer within said thirty day period, then Sublandlord
shall have the right to lease the Second Floor Space on terms which Sublandlord
reasonably determines to be at least 90% as economically beneficial to
Sublandlord as those set forth in the Offer without reoffering the Second Floor
Space to Subtenant. If (i) Sublandlord wishes to lease the Second Floor Space on
terms less than 90% as economically beneficial to Sublandlord, or (ii)
Sublandlord does not enter into a lease for the Second Floor Space within 180
days of the submission of the Offer to Subtenant, then the Second Floor Space
shall first be subject to re-submission to Subtenant pursuant to the terms of
this Section prior to Sublandlord's leasing of the same.
In the event Subtenant accepts the Offer to lease the Second Floor Space,
Subtenant shall be solely responsible for any and all costs associated with
relocating or moving Subtenant from the Premises to the Second Floor Space.
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<PAGE>
7.8 Access and Security. Normal Building hours shall be from 7:00 a.m.
to 6:00 p.m. Monday through Friday. The Building has a twenty-four (24) hour
card access system. Subtenant shall be responsible for its own security card
access at the entrance to the Premises.
7.9 Cafeteria. Subtenant shall have the right to use the cafeteria at
120 Flanders Road during the Term of this Sublease.
7.10 Option to Extend. Subtenant shall have the right and option to
extend the Term for an additional two (2) years and nine (9) months until
September 30, 2005 (the "Extension Term") commencing upon the expiration of the
original Term referred to in Section 2.2 (the "Original Term"), provided that
Subtenant shall give Sublandlord notice of Subtenant's irrevocable exercise of
such option at least ninety (90) days prior to the expiration of the Original
Term and provided further that Subtenant shall not be in default at either the
time of giving such notice or at the time of the commencement of the Extension
Term in the performance or observance of any of the terms and provisions of this
Sublease on the part of Subtenant to be performed or observed. Prior to the
exercise by Subtenant of such option, the expression "Term" shall mean the
Original Term, and after the exercise by Subtenant of such option, the
expression "Term" shall mean the Original Term as it has been extended by the
Extension Term. Except as expressly otherwise provided in the following
paragraph, all the terms, covenants, conditions, provisions and agreements in
the Sublease contained shall be applicable to the Extension Term. If Subtenant
shall give notice of its exercise of such option to extend in the manner and
within the time period provided aforesaid, the Term shall be extended upon the
giving of such notice without the requirement of any further action on the part
of either Subtenant or Sublandlord. If Subtenant shall fail to give timely
notice of the exercise of such option as aforesaid, Subtenant shall have no
right to extend the Term of this Sublease, time being of the essence of the
foregoing provisions.
The Monthly Fixed Rent payable during the Extension Term shall be the greater of
(i) the Monthly Fixed Rent in effect for the year immediately preceding the
commencement of the Extension Term or (ii) the Fair Market Rent for the
Premises, as determined below, as of the commencement of the Extension Term. If
for any reason the Monthly Fixed Rent payable during the Extension Term has not
been determined as of the commencement of the Extension Term, Subtenant shall
pay the Monthly Fixed Rent payable during the immediately preceding year until
the Monthly Fixed Rent for the Extension Term is determined, at which time, an
appropriate adjustment, if any, shall be made.
For purposes hereof, the Fair Market Rent shall mean the fair rent for the
Premises as of the commencement of the Extension Term under market conditions
then existing. Fair Market Rent shall be determined by agreement between
Sublandlord and Subtenant, but if Sublandlord and Subtenant are unable to agree
upon the Fair Market Rent at least
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<PAGE>
two (2) months prior to the date upon which the Fair Market Rent is to take
effect, then the Fair Market Rent shall be determined by appraisal made as
hereinafter provided by a board of three (3) reputable independent commercial
real estate consultants, appraisers, or brokers, each of whom shall have at
least ten (10) years of experience in the Westboro office rental market and each
of whom is hereinafter referred to as "Appraiser". Subtenant and Sublandlord
shall each appoint one such Appraiser and the two (2) Appraisers so appointed
shall appoint the third Appraiser. The cost and expenses of each Appraiser
appointed separately by Subtenant and Sublandlord shall be borne by the party
who appointed the Appraiser. The cost and expense of the Third Appraiser shall
be shared equally by Subtenant and Sublandlord. Sublandlord and Subtenant shall
appoint their respective Appraisers at least fifty-five (55) days prior to
commencement of the Extension Term and shall designate the Appraisers so
appointed by notice to the other party. The two Appraisers so appointed and
designated shall appoint the third Appraiser at least forty-five (45) days prior
to the commencement of the Extension Term and shall designate such Appraiser by
notice to Sublandlord and Subtenant. The board of three (3) Appraisers shall
determine the Fair Market Rent of the Premises as of the commencement of the
Extension Term and shall notify Sublandlord and Subtenant of their
determinations at least thirty (30) days prior to the commencement of the
Extension Term. If the determination of the Fair Market Rent of any two (2) or
all three (3) Appraisers shall be identical in amount, said amount shall be
deemed to be the Fair Market Rent of the Premises. If the determination of all
three (3) Appraisers shall be different in amount, the average of the two (2)
values nearest in amount shall be deemed the Fair Market Rent of the Premises.
The Fair Market Rent of the Premises determined in accordance with the
provisions of this Section shall be binding and conclusive on Subtenant and
Sublandlord.
7.11 Consent of Headlandlord. Subtenant acknowledges that this Sublease
is subject to the consent of the Headlandlord. Within three (3) business days
after the execution of this Sublease, Sublandlord shall notify and forward an
originally executed copy of this Sublease to the Headlandlord and shall request
Headlandlord's consent thereto. Upon receiving Headlandlord's response,
Sublandlord shall notify Subtenant as to whether or not the Headlandlord
consented to the sublease. In the event the Headlandlord does not consent to the
sublease, this Sublease shall terminate and be of no further force or effect.
- 12 -
<PAGE>
THIS SUBLEASE is executed as a sealed instrument in two or more
counterparts on the day and year first above written.
SUBLANDLORD:
BANYAN SYSTEMS INCORPORATED
By: /s/ Richard M. Spaulding
-----------------------------------------------------
Name: Richard M. Spaulding
Title: Senior Vice President & CFO
SUBTENANT:
SWITCHBOARD INCORPORATED
By: /s/ John Jewett
-----------------------------------------------------
Name: John Jewett
Title: Vice President & CFO
- 13 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 78,747,776
<SECURITIES> 3,653,850
<RECEIVABLES> 3,512,130
<ALLOWANCES> 250,513
<INVENTORY> 0
<CURRENT-ASSETS> 86,574,615
<PP&E> 2,312,023
<DEPRECIATION> 1,100,750
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<CURRENT-LIABILITIES> 6,439,987
<BONDS> 0
0
0
<COMMON> 238,146
<OTHER-SE> 82,158,889
<TOTAL-LIABILITY-AND-EQUITY> 88,837,022
<SALES> 0
<TOTAL-REVENUES> 3,818,020
<CGS> 916,444
<TOTAL-COSTS> 10,082,512
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> (294,114)
<INCOME-PRETAX> (6,886,822)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,886,822)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,886,822)
<EPS-BASIC> (.41)
<EPS-DILUTED> (.34)
</TABLE>
