<PAGE>
As filed with the Securities and Exchange Commission on December 23, 1999
Registration No. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
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SNOWBALL.COM, INC.
(Exact name of Registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 7375 94-3316902
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) Identification no.)
250 Executive Park Boulevard, Suite 4000
San Francisco, CA 94134
(415) 508-2000
</TABLE>
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
James R. Tolonen
Chief Financial Officer
Snowball.com, Inc.
250 Executive Park Boulevard, Suite 4000
San Francisco, CA 94134
(415) 508-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Laird H. Simons III, Esq. John T. Sheridan, Esq.
Robert B. Dellenbach, Esq. Anthony Kikuta, Esq.
Darren L. Nunn, Esq. WILSON SONSINI GOODRICH & ROSATI
William L. Hughes, Esq. Professional Corporation
FENWICK & WEST LLP 650 Page Mill Road
Two Palo Alto Square Palo Alto, California 94304
Palo Alto, California 94306 (650) 493-9300
(650) 494-0600
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
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If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Amount of
Title of Each Class of Proposed Maximum Registration
Securities to be Registered Aggregate Offering Price(1) Fee
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<S> <C> <C>
Common Stock, $0.001 par value....... $86,250,000 $22,770
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated December 23, 1999.
Shares
[SNOWBALL LOGO]
[SNOWBALL LOGO APPEARS HERE]
Snowball.com, Inc.
Common Stock
----------
This is an initial public offering of shares of common stock of Snowball.com,
Inc. All of the shares of common stock are being sold by Snowball.
Prior to this offering, there has been no public market for our common stock.
We have applied for quotation of the common stock on the Nasdaq National Market
under the symbol "SNBL".
See "Risk Factors" beginning on page 7 to read about risks you should
consider before buying shares of the common stock.
----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to Snowball.......................... $ $
</TABLE>
Snowball has granted the underwriters the option to purchase up to an
additional shares from Snowball at the initial public offering price
less the underwriting discount.
----------
The underwriters expect to deliver the shares on , 2000.
Goldman, Sachs & Co.
Hambrecht & Quist
Robertson Stephens
----------
Prospectus dated , 2000.
<PAGE>
[The Snowball logo is displayed on the top left corner of the inside front
cover, with the phrase "We are i" under the logo. The logos of the four
Snowball networks, and a short description of each network, are staggered
vertically down the right side of the page. The ChickClick network logo is at
the top of the page, with the phrase "Girl Sites That Don't Fake It" to the
right of the logo. The IGN network logo is beneath the ChickClick logo, with
the phrase "Entertainment & Games Network" to the left of the logo. The
InsideGuide network logo is beneath the IGN logo, with the phrase "For Students
By Students" to the right of the logo. The PowerStudents network logo is
beneath the InsideGuide logo, with the phrase "Maximize Your Student
Experience" to the left of the logo.]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus. Unless otherwise indicated,
all information contained in this prospectus assumes no exercise by the
underwriters of their option to purchase additional shares of our common stock
in the offering, reflects a three-for-two stock split of our common stock
completed in September 1999, and reflects the conversion of all outstanding
shares of preferred stock into common stock upon completion of this offering.
Snowball.com, Inc.
Snowball is an Internet media company that operates a network of destination
web sites providing content, community and commerce to the Internet generation,
or Generation i. We view Generation i as individuals between the ages of 12 and
29 who consider the Internet to be an integral part of their daily lives.
According to the United States Census Bureau, Generation i consisted of 67.7
million individuals in 1998, and those individuals between the ages of 15 and
24 had $302.4 billion in disposable income in the same year. We serve the
members of this community by providing them with opinionated, cutting-edge
content, relevant services such as email and instant messaging, a forum for
interacting with one another and carefully selected merchandise within our
online store.
In addition to creating original content, we continuously work to expand the
breadth and depth of our content offerings by selectively adding affiliated web
sites to our network. Our network and affiliate business model enables us to
add content and traffic to our network rapidly and cost-effectively, while
keeping the content fresh and compatible with the evolving tastes of Generation
i. To attract and retain affiliates, we provide an integrated package of sales
and marketing services, technical support and audience development
opportunities. As of November 30, 1999, we were affiliated with more than 130
web sites and over 80 partner college destinations organized under four
vertical networks, each targeting a specific segment of Generation i:
. ChickClick, which provides content, community and commerce features to
Generation i women;
. IGN, which provides information and entertainment to Generation i men;
. InsideGuide, which offers student-generated information concerning
individual colleges; and
. PowerStudents, which provides students at all levels with information
concerning college admissions, jobs and careers.
Our vertical content destinations and their affiliated sites provide focused
and deep content that attracts a large and segmented audience. By offering
targeted access to a large audience with attractive demographic
characteristics, we are able to generate marketing and advertising revenue in a
variety of forms. These include promotions and sponsorships, slotting and lead-
generation fees, and sales of various forms of banner, button and textlink
advertising. We also generate merchandising revenue from the sale of carefully
selected items within our online store, ChickShops.
According to Media Metrix, our networks attracted over four million unique
visitors in October 1999, making us one of the top 50 highest-trafficked
networks on the Internet and, we believe, the leading online destination for
Generation i. Additionally, based on the same Media Metrix data, we are one of
the top 15 "stickiest" networks on the Internet in terms of average minutes
spent on our network per user day. As of November 30, 1999, we had over two
million registered users.
3
<PAGE>
The Snowball Strategy
Our goal is to be the preeminent network of content, community and commerce
sites on the Internet by, for and about Generation i, by:
. Building and developing our existing networks, while selectively adding
new networks;
. Continuing to leverage our network and affiliate business model to
achieve cost-effective and viral growth of content and traffic;
. Offering a range of value-added services to attract, retain and develop
affiliated web sites;
. Promoting affinity and community across all networks and affiliates to
increase "stickiness";
. Being the premier partner for marketing, advertising and commerce
directed at Generation i; and
. Pursuing strategic alliances and acquisitions that increase content,
traffic and revenue opportunities.
Recent Developments
In October 1999, we issued 841,233 shares of our Series B-1 preferred stock
to New Line New Media, Inc. for $3.6 million in cash. In connection with this
transaction, we received a two-year license to distribute and display on our
web sites New Line promotional materials, such as film trailers, interviews
with cast members and promotional tie-ins.
In December 1999, we acquired Extreme Interactive Media, Inc., an Oklahoma
corporation. Extreme Interactive Media owns the Scoops Wrestling Network, a
network of web sites focusing on professional wrestling. In connection with
this acquisition, we acquired all of the outstanding securities of Extreme
Interactive Media in exchange for $1.0 million in cash, $250,000 in unsecured
promissory notes and 75,000 shares of our common stock. In addition, we agreed
to pay up to $3.5 million in cash to former security holders of Extreme
Interactive Media in the event that stated performance milestones are achieved
within the next twelve months.
In December 1999, we agreed to sell 3,529,000 shares of our Series C
preferred stock to private investors for an aggregate purchase price of $32.3
million in cash and $3.0 million in debt conversion.
Corporate Information
From our inception in January 1997 through December 1998, we operated as a
division of Imagine Media, Inc., a California corporation. We were incorporated
as an independent company in Delaware in January 1999 as Affiliation, Inc. and
changed our name to Affiliation Networks, Inc. in February 1999. We then
changed our name to Snowball.com, Inc. in September 1999. References in this
prospectus to "Snowball," "we," "our" and "us" collectively refer to
Snowball.com, Inc., a Delaware corporation, and its predecessors and
subsidiaries, and not to the underwriters. Our principal executive offices are
located at 250 Executive Park Boulevard, Suite 4000, San Francisco, California
94134 and our telephone number is (415) 508-2000. Our World Wide Web address is
"www.snowball.com." The information on our web site is not part of this
prospectus.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by
Snowball........................ shares
Common stock to be outstanding
after the offering.............. shares
Use of proceeds.................. To promote our brand, expand sales and
marketing, repay any debt that may be
incurred under our credit facility and for
working capital and general corporate
purposes, including network expansion and
content development, relocation of our
offices and possible acquisitions of
affiliates. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.......................... "SNBL"
</TABLE>
The number of shares of common stock to be outstanding after the offering
includes:
. 5,106,786 shares outstanding as of September 30, 1999;
. 25,559,896 shares of common stock to be issued upon the automatic
conversion of all outstanding shares of preferred stock upon completion
of this offering, including 1,003,081 shares of Series B-1 preferred
stock issued in October 1999 and 3,529,000 shares of Series C preferred
stock that we agreed to sell in December 1999; and
. 75,000 shares of common stock issued in December 1999 in connection with
our acquisition of Extreme Interactive Media, Inc.
The shares of common stock to be outstanding exclude:
. 5,965,812 shares of common stock reserved for issuance under our stock
option plan, of which 1,554,878 shares at a weighted average exercise
price of $0.75 per share were subject to outstanding options as of
September 30, 1999; and
. 322,692 shares of common stock issuable upon exercise of outstanding
warrants as of September 30, 1999 at a weighted average exercise price
of $7.84 per share.
5
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
---------------- --------------------
1997 1998 1998 1999
------- ------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue............................... $ 927 $ 3,256 $ 1,342 $ 3,214
Cost of revenue....................... 171 1,322 520 2,286
------- ------- ------- --------
Gross margin.......................... 756 1,934 822 928
Total operating expenses.............. 2,035 5,594 3,980 19,692
------- ------- ------- --------
Loss from operations.................. (1,279) (3,660) (3,158) (18,764)
Interest income, net.................. -- -- -- 337
------- ------- ------- --------
Net loss.............................. $(1,279) $(3,660) $(3,158) $(18,427)
======= ======= ======= ========
Basic and diluted net loss per share.. $ (23.53)
========
Shares used in per share calculation.. 783
Pro forma basic and diluted net loss
per share (unaudited)................ $ (1.08)
========
Shares used in pro forma per share
calculation (unaudited).............. 17,126
</TABLE>
See Note 1 of Notes to our Financial Statements for a description of the
method that we used to compute our basic and diluted net loss per share.
The following table sets forth a summary of our balance sheet data as of
September 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the subsequent closings of the sale of
1,003,081 shares of Series B-1 preferred stock in October 1999 for $4.2
million in cash, the proceeds of $15.2 million under a term loan, the
sale of 3,529,000 shares of Series C preferred stock in December 1999
for $32.3 million in cash and $3.0 million in debt conversion, the
repayment of $12.0 million under the term loan, our acquisition of
Extreme Interactive Media in consideration of $1.0 million cash,
$250,000 in unsecured promissory notes and the issuance of 75,000 shares
of common stock and the automatic conversion of all outstanding shares
of preferred stock into common stock immediately prior to the closing of
this offering; and
. on a pro forma as adjusted basis to reflect the closing of the sale of
the Series B-1 and Series C preferred stock, the proceeds and repayment
under the term loan, our acquisition of Extreme Interactive Media, the
automatic conversion of all outstanding shares of preferred stock into
common stock and our receipt of the estimated net proceeds from the sale
of shares of common stock in this offering at an assumed
initial public offering price of $ per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. See "Capitalization."
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................... $10,790 $46,342 $
Working capital................................. 6,525 44,889
Total assets.................................... 20,094 60,474
Long-term debt, less current portion............ 1,253 1,253 1,253
Stockholders' equity............................ 12,027 52,150
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below and
the other information in this prospectus before deciding whether to invest in
shares of our common stock. The risks and uncertainties described below are not
the only risks we face. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may impair our business operations.
If any of the following risks actually occur, our business, results of
operations and financial condition could be seriously harmed, the trading price
of our common stock could decline and you may lose all or part of your
investment.
Risks Related to Our Business
It is difficult to evaluate our business and prospects because we have a
limited operating history.
Our IGN, ChickClick and PowerStudents networks began operating as divisions
of Imagine Media in March 1997, February 1998 and August 1998, respectively. We
were incorporated in January 1999, and Imagine Media contributed the IGN,
ChickClick and PowerStudents assets to us in February 1999. We launched our
InsideGuide network in September 1999. Accordingly, we have a limited operating
history upon which you can evaluate our business and prospects. Our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as Internet services. The
risks, expenses and difficulties that we expect to encounter include:
. implementing an evolving and unpredictable business model that relies on
viral growth and word-of-mouth publicity among members of Generation i;
. building our corporate brand to attract advertisers and affiliates, and
our network brands to expand our audience;
. increasing content and service offerings on existing networks through
internal development and affiliate partnerships;
. developing and integrating new networks addressing our target audience
and advertiser base;
. diversifying our revenue sources by offering sponsorship, merchandise
slotting and other marketing opportunities to content and e-commerce
partners and by launching e-commerce initiatives across our networks;
. expanding our sales and marketing efforts to increase our advertiser
base and our reach within the Generation i audience;
. attracting, retaining and motivating qualified personnel; and
. responding to competitive developments.
There can be no assurance that we will effectively address the risks we face,
and the failure to do so could harm our business, our financial condition and
the results of our operations.
Our quarterly revenue and operating results may fluctuate in future periods and
we may fail to meet expectations, which may cause the price of our common stock
to decline.
As a result of our limited operating history and the emerging nature of the
Internet markets in which we compete, we are unable to forecast our revenue
with precision. We plan our operating
7
<PAGE>
expenses based on our best estimates of revenue. If revenue in a particular
period does not meet expectations, it is likely that we will be unable to
adjust significantly our level of expenditures for the period, which could harm
our business, our financial condition and the results of our operations.
We anticipate that the results of our operations will fluctuate significantly
in the future as a result of a variety of factors, many of which are outside
our control. Factors that may affect our quarterly results of operations
include, but are not limited to:
. the addition or loss of affiliates, or our failure to add new
affiliates;
. our ability and the ability of our affiliates to attract and retain a
large Generation i audience by providing original and compelling content
and services;
. our ability to attract and retain advertisers and sponsors;
. the long sales cycle we face selling advertising and promotions;
. seasonal trends in Internet usage and advertising placements;
. the amount and timing of expenditures for expansion of our operations,
including the acquisition of new affiliates, the hiring of new
employees, capital expenditures and related costs;
. our ability to continue to enhance, maintain and support our networks
and technology and avoid system downtime;
. the introduction of new or enhanced offerings by our competitors; and
. price competition or pricing changes in Internet advertising.
Any one of these factors could cause our revenue and operating results to
vary significantly in the future. In addition, as a strategic response to
changes in the competitive environment, we may from time to time make certain
pricing, service or marketing decisions or acquisitions that could cause
significant declines in our quarterly results of operations.
Seasonality in Internet usage and advertising expenditures is likely to cause
quarterly fluctuations in our results of operations and could harm our
business, our financial condition and the results of our operations. We expect
to experience seasonality in our business, with reduced user traffic expected
during the summer and year-end vacation and holiday periods, when usage of the
Internet has typically declined. Advertising sales in traditional media, such
as broadcast and cable television, generally decline in the first and third
quarters of each year. Depending on the extent to which the Internet and
commercial online services are accepted as an advertising medium, seasonality
in the level of advertising expenditures could become more pronounced for
Internet-based advertising. Furthermore, we anticipate that sales from e-
commerce initiatives such as ChickShops will typically increase during the
fourth quarter as a result of the holiday buying season and may decline in
other periods.
Due to the foregoing factors, our revenue and operating results are difficult
to forecast. We believe that our quarterly revenue, expenses and operating
results will vary significantly in the future and that period-to-period
comparisons are not meaningful and are not indicative of future performance. As
a result of the foregoing factors, it is likely that in some future quarters or
years our results of operations will fall below the expectations of securities
analysts or investors, which would cause the trading price of our common stock
to decline.
8
<PAGE>
We have a history of losses and we expect to incur substantial net losses for
the foreseeable future.
We have incurred net losses since the formation of our business in January
1997. At September 30, 1999, we had an accumulated deficit of approximately
$23.4 million. We expect to incur significant operating losses on a quarterly
basis for the foreseeable future, and there can be no assurance that we will be
profitable in any future period. Even if we do achieve profitability, we cannot
assure you that we can sustain profitability on a quarterly or annual basis in
the future. We believe that our continued growth will depend in large part on
our ability to:
. increase awareness of our brands;
. provide our customers with superior content, community and e-commerce
services; and
. enhance our systems and technology to support increased traffic to our
web sites.
Accordingly, we plan to increase our operating expenses significantly to,
among other things:
. expand our affiliate base and develop additional networks;
. expand our sales and marketing operations and hire more salespersons;
. increase our marketing and promotional activities; and
. develop and upgrade our technology and purchase equipment for our
operations and network infrastructure.
Additionally, we may incur costs relating to the acquisition of content,
other businesses or technologies. We may not generate sufficient revenue to
offset these expenditures. If revenue grows more slowly than we anticipate or
if our operating expenditures exceed our expectations or cannot be adjusted
quickly, we will experience significant losses on a quarterly and annual basis.
If we fail to anticipate and respond to trends that develop among members of
Generation i, our business may suffer.
Our success depends upon our ability and the ability of our affiliates to
deliver original and compelling content and services that attract and retain
Generation i users. Because we derive our revenue from the sale of advertising,
sponsorships and merchandise targeted at Generation i, our success depends on
our ability to anticipate the frequently changing interests, styles, trends and
preferences of Generation i, and to offer content, services and products that
appeal to this group on a timely basis. Our failure to successfully anticipate,
identify and respond to changes in the interests, styles, trends or preferences
of Generation i on a timely basis may decrease traffic to our networks, lower
revenue from advertising, sponsorships and product sales and harm our image and
brand. We cannot assure you that our content, services and products will
continue to be attractive to a sufficient number of Generation i users to
generate revenue sufficient for us to achieve profitability.
If we fail to maintain our relationships with affiliates, or incorporate new
affiliates into our networks on a timely basis, we may be unable to provide
compelling content for our users.
We rely upon our affiliates to generate a significant portion of the content
for our networks and share with each affiliate a portion of the revenue
generated by advertising on its web pages. Our arrangements with our affiliates
typically are for limited durations of between six months and five years and
automatically renew for successive terms, subject to termination on short
notice by either party. We cannot assure you that such arrangements will not be
terminated or that such arrangements will be renewed with similar terms or
renewed at all. If affiliates, especially major affiliates, demand a greater
portion of advertising revenue or require us to make payments for access to
their sites or otherwise negotiate terms unfavorable to us, our business will
suffer.
9
<PAGE>
Moreover, if we lose a major affiliate to a competitor or if an affiliate
otherwise decides to operate independently from our network, we may be unable
to replace the affiliate with another affiliate having comparable traffic
patterns and user demographics on a timely basis or at all. Many affiliates
grow significantly after joining our network and some have left our network.
The loss of any major affiliate could harm our business.
In addition to maintaining our relationships with existing affiliates, we
must continue to identify potential new affiliates to ensure that we keep pace
with the changing interests, styles, trends and preferences of Generation i. We
cannot assure you that web sites targeting Generation i will continue to emerge
at their current pace or at all. Moreover, we may be unable to identify
potential new affiliates as they emerge or to negotiate affiliate agreements
with potential new affiliates on a timely basis. In addition, we will likely
face increasing competition for the content and services provided by possible
affiliates. If we fail to continue to identify and enter agreements with
potential new affiliates on a timely basis, our networks may lose their
relevance to Generation i, we may lose advertising and promotional
opportunities and our business may suffer.
We rely upon our IGN network for a significant portion of our traffic and
advertising revenue.
IGN is a network of web sites that provide information and entertainment to
Generation i men. IGN accounted for 73.7% of our consolidated page views in
November 1999 and 11.8% of our registered users as of November 30, 1999. If we
are unable to anticipate changes in the interests, styles, trends or
preferences of the audience targeted by IGN, if we are unable to maintain our
relationship with affiliates of IGN or incorporate new affiliates into the IGN
network on a timely basis or if IGN otherwise loses traffic, our ability to
generate advertising revenues would be harmed to an even greater extent than if
any of those events occurred with respect to any of our other networks.
If our advertising and marketing arrangements are terminated or are not
renewed, or if we fail to meet minimum performance levels required under these
arrangements, our revenue may decline.
To date, we have derived a substantial portion of our revenue from a small
number of advertising and marketing customers. We expect that this will
continue during the early stages of our development and may continue
indefinitely. Many of our advertising and marketing customers enter into short-
term agreements with us of less than six months. As a result, our customers
could cancel these agreements, change their advertising expenditures or buy
advertising from our competitors on relatively short notice and without
penalty. Because we expect to derive a large portion of our future revenue from
advertising and marketing arrangements, these short-term agreements expose us
to competitive pressures and potentially severe fluctuations in our financial
results.
In addition, our agreements typically provide for minimum performance levels,
such as click-throughs by web users or impressions. These arrangements expose
us to potentially significant risks. If we fail to deliver these minimum
levels, we typically have to provide free advertising to the customer until the
minimum level is met, which could harm our financial results. We occasionally
guarantee the availability of advertising space in connection with promotion
arrangements and content agreements. In addition, we provide customized
advertising campaigns for advertisers and agree with certain advertisers that
we will not accept advertising from any other customer within a particular
subject matter. All of these arrangements subject us to certain risks, such as
our potential inability to meet the guarantees we make to our customers and the
possible loss of potential customers whose advertisements, sponsorships and
promotions would conflict with those of other customers. Our advertising
revenue could also be adversely affected if we are unable to adapt to new forms
of Internet advertising or to meet the evolving demands of our advertising
customers. The occurrence of any of these events could harm our business, our
financial results and the results of our operations.
10
<PAGE>
We may lose advertising revenue if we are unable to adequately measure the
demographics of our user base and the delivery of advertisements on our web
sites.
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our web
sites. We depend upon third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider. This could
cause us to incur additional costs or cause interruptions in our business
during the time we are replacing these services. We are currently implementing
additional systems designed to record demographic data on our users. If we do
not implement these systems successfully, we may be unable to accurately
evaluate the demographic characteristic of our users. Advertisers may choose to
not advertise on our web sites or may pay less for advertising if they do not
perceive our measurements or measurements made by third parties to be reliable.
Our failure to compete successfully could adversely affect our prospects and
financial results.
The markets for targeted Internet content and e-commerce services are highly
competitive, with no substantial barriers to entry, and we expect that
competition will continue to intensify. These markets have only recently begun
to develop, are rapidly evolving and are likely to be characterized by an
increasing number of market entrants. It is possible that one or a few
providers may dominate one or more market sectors.
We currently derive substantially all of our revenue from advertising and
marketing, and our business model depends in part on increasing the amount of
such revenue. The market for advertising and marketing revenue is highly
competitive. We must maintain and enhance our traffic and audience to attract
advertisers and compete successfully for advertising revenue.
We believe that the primary competitive factors in attracting and retaining
users are:
. quality of content and services;
. brand recognition;
. user affinity and loyalty;
. demographic focus;
. variety of value-added services; and
. critical mass.
We believe that the principal competitive factors in attracting and retaining
online advertisers are:
. the amount of traffic on a web site;
. brand recognition;
. the demographics of a site's users;
. the ability to offer targeted audiences;
. the average duration of user visits; and
. cost-effectiveness.
There can be no assurance that our competitors will not develop content and
service offerings that are superior to ours or achieve greater market
acceptance than our services. If our content and service offerings fail to
achieve success in the short term, we could suffer an insurmountable loss in
market share and brand acceptance, which would harm our business, our financial
condition and the
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results of our operations. Moreover, there can be no assurance that we will be
able to compete successfully against other media for advertising dollars.
Many of our current competitors, as well as a number of potential new
competitors, have significantly greater editorial, financial, technical,
marketing, sales and other resources than we do. There can be no assurance that
we will be able to compete successfully against our current and future
competitors. Our failure to compete successfully with our competitors' content
and service offerings or for advertising revenue would harm our business, our
financial condition and the results of our operations. See "Business--
Competition" for more detailed information about our competitors.
If we are unable to expand our online capacity, computer systems and related
features to support increased volume on our web sites in a timely manner, our
business may suffer.
A key element of our strategy is to generate a high volume of traffic on our
web sites. However, growth in the number of users accessing our sites may
strain or exceed the capacity of our computer systems and lead to declines in
performance or systems failure. We believe that we will need to continually
improve and enhance the functionality and performance of our content and
advertisement serving, e-commerce and other technical systems to accommodate
rapid growth in user demand. As a result, we intend to upgrade our existing
systems and implement new systems to keep pace with rapidly changing
technologies and evolving industry standards. Our inability to add additional
hardware and software to upgrade our existing technology or network
infrastructure to accommodate increased traffic would cause decreased levels of
customer service and satisfaction and would harm our business, our financial
condition and the results of our operations.
We depend on third parties for software, systems and related services,
including many of the services we provide on our networks. For example, we rely
on Exodus Communications for our hosting infrastructure and on DoubleClick's
Adserver software for ad selection and management. Several of the third parties
that provide software, systems or services to us have limited operating
histories and are themselves dependent on reliable delivery of services from
others. If the software, systems or related services we currently obtain from
third parties do not function properly or are not updated, we would need to
purchase these items from other third party providers. This would require an
unplanned increase in operating expenses and could cause a disruption in our
business.
Technical problems with either our internal or our outsourced computer and
communications systems could interrupt our service.
Our operations depend on our ability to maintain our computer systems and
equipment in effective working order. Our web sites must accommodate a high
volume of traffic and deliver frequently updated information. Any sustained or
repeated system failure or interruption would reduce the attractiveness of our
web sites to customers and advertisers. In addition, interruptions in our
systems could result from the failure of our telecommunications providers to
provide the necessary data communications capacity in the timeframe we require.
Unanticipated problems affecting our systems have caused from time to time in
the past, and could cause in the future, slower response times and
interruptions in our services. Any damage or failure that interrupts or delays
our operations could harm our business.
Our web sites reside on computer systems located in the San Francisco Bay
area and in Columbia, South Carolina. Fire, earthquakes, hurricanes, power
loss, water damage, telecommunications failures, vandalism and other malicious
acts, and similar unexpected adverse events may damage our computer systems and
interrupt service. Our computer system's continuing and uninterrupted
performance is critical to our success. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems.
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If we lose key personnel or are unable to hire additional qualified personnel,
we will not be successful.
Our success depends upon the continued services of our senior management and
other key editorial, sales, marketing, engineering and support personnel, many
of whom would be difficult to replace. The loss of any of these individuals
would adversely affect our ability to implement our business strategy and would
significantly harm our business. In particular, the services of Mark Jung, our
chief executive officer, would be difficult to replace. None of our officers or
key employees is bound by an employment agreement for any specific term. Nor do
we have "key person" life insurance policies covering any of our officers or
key employees.
We believe that our success depends to a significant extent on the ability of
our management to operate effectively, both individually and as a group. Our
management team has only been working together since our incorporation in
January 1999. Moreover, James Tolonen, who was hired as our Chief Operating
Officer and Chief Financial Officer in October 1999, and certain other members
of our management team have only recently joined us. We therefore cannot assure
you that our management will be able to operate effectively in their respective
roles and as a team.
Our success also depends upon our ability to continue to attract, retain and
motivate skilled employees. Competition for employees in our industry is
intense, especially in the San Francisco Bay area. We believe that there are
only a limited number of persons with the requisite skills to serve in many key
positions and it is becoming increasingly difficult to hire, retain and
motivate these persons. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining skilled employees
with appropriate qualifications. Competitors and others have in the past, and
may in the future, attempt to recruit our employees. We believe that we will
incur increasing salaries, benefits and recruiting expenses because of the
difficulty in hiring and retaining employees.
The loss of services of any of our key employees, the inability to attract,
retain or motivate qualified personnel in the future or delays in hiring
required personnel would harm our business.
Our failure to manage growth effectively could result in our inability to
support and maintain our operations.
We have rapidly and significantly expanded our operations and anticipate that
further expansion of our operations will be required to address potential
market opportunities. Between January 1, 1999 and November 30, 1999, our
business grew from 38 employees to 232 employees. This rapid growth has placed,
and we expect it to continue to place, a significant strain on our management,
operational and financial resources. As part of this growth, we will have to
implement new operational and financial systems, procedures and controls. We
cannot assure you that:
. our current personnel, systems, procedures and controls will be adequate
to support our future operations;
. management will be able to identify, hire, train, motivate or manage
required personnel; or
. management will be able successfully to identify and exploit existing
and potential market opportunities.
Our prospects for obtaining additional financing, if required, are uncertain
and failure to obtain needed financing could affect our ability to pursue
future growth.
Although we believe that, following this offering, our cash reserves and cash
flows from operations will be adequate to fund our operations at least through
the next twelve months, we do not have a long enough operating history to know
with certainty whether our existing cash and the proceeds of this offering will
be sufficient to finance our anticipated growth. Accordingly, we cannot assure
you that these funds will be adequate or that additional funds will not be
required either
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during or after that period. We may need to raise additional funds if our
estimates of revenue, working capital and/or capital expenditure requirements
change or prove inaccurate, if we are required to respond to unforeseen
technological or marketing hurdles or if we choose to take advantage of
unanticipated opportunities. Moreover, we cannot assure you that additional
financing will be available when required. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our then
current stockholders will be reduced. In addition, any new securities issued
may have rights, preferences or privileges senior to those securities held by
our stockholders. If we raise additional funds through the issuance of debt, we
may become subject to restrictive covenants. If adequate funds are not
available to satisfy either short- or long-term capital requirements, we may be
required to limit our operations significantly. Our future capital requirements
are dependent upon many factors, including:
. the rate at which we expand our sales and marketing operations;
. the amount and timing of fees paid to affiliates;
. the extent to which we expand our content and service offerings;
. the extent to which we develop and upgrade our technology and data
network infrastructure; and
. the response of competitors to our content and service offerings.
If we are unable to identify or successfully integrate potential acquisitions
and investments, we may not grow as planned and our expenses may increase.
Since our incorporation, we have acquired two businesses and the selected
assets of another business and our growth strategy includes acquiring or making
investments in complementary businesses, products, services or technologies in
the future. We cannot assure you that we will be able to identify suitable
acquisition or investment candidates. Even if we do identify suitable
candidates, we cannot assure you that we will be able to make acquisitions or
investments on commercially acceptable terms and on a timely basis. If we buy a
business, we could have difficulty in assimilating that company's personnel,
operations, products, services or technologies into ours. These difficulties
could disrupt our ongoing business, distract our management and employees,
increase our expenses and adversely affect the results of our operations.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities would dilute the ownership of
our existing stockholders.
Infringement of our intellectual property rights, or claims that we have
infringed the rights of others, could result in litigation and the diversion of
our resources, which could harm our business.
Our success depends significantly upon our copyrights, trademarks, service
marks, trade secrets, technology and other intellectual property rights. To
protect our proprietary rights, we rely on a combination of copyright and
trademark laws, trade secret protection, confidentiality agreements with
employees and third parties and protective contractual provisions. Despite our
efforts to protect our proprietary rights, the steps taken by us to protect our
intellectual property may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks or other intellectual property. In
addition, others could possibly independently develop substantially equivalent
intellectual property. If we do not effectively protect our intellectual
property, our business could suffer.
We are dependent on the trademarks "Snowball," "IGN," "ChickClick,"
"PowerStudents," "InsideGuide" and the ".com" versions of these marks. We have
not applied for the registration of all of our trademarks and service marks,
and effective trademark, service mark, copyright and trade secret protection
may not be available in every country in which our content, services and
products
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are made available online. If we were prevented from using our trademarks, we
would need to reimplement our web sites and devise new collateral materials. We
would also need to rebuild our brand identity with our customers, users and
affiliates. Our operating expenses would substantially increase if we had to
rebuild our brand identity or reimplement our web sites.
We have licensed in the past and expect to license in the future certain of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. We attempt to ensure that our licensees maintain the quality of our
brands. Our licensees may take or omit to take actions that would materially
adversely affect the value of our proprietary rights or reputation, which
actions would harm our business, our financial condition and the results of our
operations.
Companies have frequently resorted to litigation regarding intellectual
property rights. We may have to litigate to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
other parties' proprietary rights. From time to time, we have received, and we
may receive in the future, notice of claims of infringement of other parties'
proprietary rights. Any such claims could be time-consuming, result in costly
litigation, divert management's attention, require the change of our trademarks
and the alternation of content, cause product or service release delays,
require us to redesign our web sites or services or require us to pay damages
or enter into royalty or licensing agreements. These royalty or licensing
agreements, if required, may not be available on acceptable terms or at all. If
a successful claim of infringement were made against us and we could not
develop non-infringing intellectual property or license the infringed or
similar intellectual property on a timely and cost-effective basis, our
business could suffer.
We intend to adopt anti-takeover defenses that could delay or prevent an
acquisition of our company.
After this offering, our board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Moreover, without any further vote
or action on the part of the stockholders, the board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if issued, might
have preference over and harm the rights of the holders of common stock.
Although the issuance of this preferred stock will provide us with flexibility
in connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.
Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Snowball.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving Snowball, even if doing so would be beneficial to our stockholders.
Furthermore, our board of directors will be divided into three classes, only
one of which will be elected each year. Directors will only be removable by the
affirmative vote of at least 66 2/3% of all classes of voting stock. These
factors may further delay or prevent a change of control of Snowball. See
"Description of Capital Stock--Anti-takeover Effects of Provisions of the
Certificate of Incorporation, Bylaws and Delaware Law."
Risks Related to Our Industry
If advertisers do not continue or increase their usage of the Internet as an
advertising medium, our revenue may decline or we may not grow.
We expect to derive substantially all of our revenue from sponsorships and
advertising for the foreseeable future. However, the prospects for continued
demand and market acceptance for Internet marketing solutions are uncertain.
Most advertising agencies and potential advertisers, particularly local
advertisers, have only limited experience advertising on the Internet and may
not devote a
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significant portion of their advertising expenditures to Internet advertising.
Moreover, advertisers that have traditionally relied on other advertising media
may not advertise on the Internet. In addition, advertising on the Internet is
at a much earlier stage of development in international markets as compared to
the United States and may not fully develop in these markets.
As the Internet evolves, advertisers may find Internet advertising to be a
less attractive or effective means of promoting their products and services
relative to traditional methods of advertising and may not continue to allocate
funds for Internet advertising. Many historical predictions by industry
analysts and others concerning the growth of the Internet as a commercial
medium have overstated the growth of the Internet and should not be relied
upon. This growth may not occur or may occur more slowly than estimated. In
addition, if a large number of Internet users use filter software programs that
limit or remove advertising from the user's monitor, advertisers may choose not
to advertise on the Internet. Moreover, there are no widely accepted standards
for the measurement of the effectiveness of Internet advertising, and standards
may not develop sufficiently to support Internet advertising as a significant
advertising medium. If the Internet does not develop as an effective and
measurable medium for advertising, or if it develops more slowly than expected,
our business will suffer.
Intense competition in the sale of advertising on the Internet has led
different vendors to quote a wide range of rates and offer a variety of pricing
models for various advertising services. As a result, we have difficulty
projecting future advertising revenue and predicting which pricing models
advertisers will adopt.
Our success depends on continued growth in the use of the Internet and the
ability of the Internet infrastructure to support such growth.
Our industry is new and rapidly evolving. A decrease in the growth of web
usage, particularly usage by Generation i, would harm our business. The
following factors may inhibit growth in web usage:
. inadequate Internet infrastructure;
. security and privacy concerns;
. inconsistent quality of content and service; and
. lack of cost-effective, high-speed service.
Our success depends in large part on the maintenance of the Internet
infrastructure, such as a reliable network backbone that provides adequate
speed, data capacity and security, and timely development of products, such as
high-speed modems, that enable reliable Internet access and services. To the
extent that the Internet continues to experience significant growth in the
number of users, frequency of use and amount of data transmitted, there can be
no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it or that the performance or reliability of the
Internet will not be adversely affected. Web sites have experienced
interruptions in their service as a result of outages and other delays
occurring throughout the Internet network infrastructure. If these outages or
delays occur frequently in the future, Internet usage, as well as the usage of
our web sites, could grow more slowly than expected or decline.
In addition, the Internet could lose its commercial viability as a form of
media due to delays in the development or adoption of new standards and
protocols to expedite increased levels of Internet activity. There can be no
assurance that the infrastructure or complementary products and services
necessary to establish and maintain the Internet as a viable commercial medium
will be developed on a timely basis or at all or, if they are developed, that
the Internet will become a viable commercial
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medium for us or our affiliates and advertisers. If the necessary
infrastructure or complementary services or facilities are not developed, or if
the Internet does not become a viable commercial medium or platform for
advertising, promotions and e-commerce, our business, our financial condition
and the results of our operations would suffer.
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems.
A party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. Internet and
online service providers have in the past 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.
Moreover, any well-publicized compromise of security could deter people from
using the Internet or using it to conduct transactions that involve
transmitting confidential information. We may be required to expend significant
capital or other resources to protect against the threat of security breaches
or to alleviate problems caused by such breaches. Although we intend to
continue to implement industry-standard security measures, there can be no
assurance that the measures we implement will not be circumvented in the
future. Eliminating computer viruses and alleviating other security problems
may require interruptions, delays or cessation of service to users accessing
web pages that deliver our content and services, any of which could harm our
business, our financial condition and the results of our operations.
We may be sued regarding privacy concerns.
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal information or credit card information, we
could be subject to liability. We may be liable for claims based on
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. Claims could also be based on other misuses of personal
information, such as unauthorized marketing purposes. These claims could result
in litigation.
In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. In 1998, the United States Congress enacted the Children's Online
Privacy Protection Act of 1998. We depend upon collecting personal information
from our customers and the regulations promulgated under this act have made it
more difficult for us to collect personal information from some of our
customers. We could incur additional expenses if new regulations regarding the
use of personal information are introduced or if our privacy practices are
investigated. Furthermore, the European Union recently adopted a directive
addressing data privacy that may limit the collection and use of information
regarding Internet users. This directive and regulations enacted by other
countries may limit our ability to target advertising or collect and use
information internationally.
We may be liable for information displayed on and communication through our
networks.
We face possible liability for defamation, negligence, copyright, patent or
trademark infringement and other claims, such as product or service liability,
based on the nature and content of the materials published on or downloaded
from our web sites. These types of claims have been brought, sometimes
successfully, against Internet companies and print publications in the past. We
could also be subjected to claims based upon the online content that is
accessible from our web sites through links to other web sites or through
content and materials that may be posted in chat rooms or bulletin boards.
Further, we do not verify the accuracy of the information supplied by third-
party content providers, including affiliates. We also offer email services
which may subject us to potential risks, such as liabilities or claims
resulting from unsolicited email, lost or misdirected messages, illegal or
fraudulent use of email or interruptions or delays in email service. The law in
these areas is unclear.
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Accordingly, we are unable to predict the possible existence or extent of our
liability in this area or related areas. Our insurance may not cover potential
claims of this type, or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could harm our business, our
financial condition and the results of our operations. In addition, any claims
like this, with or without merit, would result in the diversion of our
financial resources and management personnel.
Changes in regulation of domain names may result in the loss of or change in
our domain names and a reduction in brand awareness among our customers.
The regulation of domain names in the United States and in other countries is
expected to change in the near future. As a result, we cannot assure you that
we will be able to acquire or maintain relevant domain names in all countries
in which we conduct business. We hold various domain names relating to our
networks and brands. The acquisition and maintenance of domain names generally
is regulated by governmental agencies and their designees. In the United
States, the National Science Foundation has appointed a limited number of
entities as the current exclusive registrars for the ".com," ".net" and ".org"
generic top level domains. We expect future changes in the United States to
include a transition from the current system to a system controlled by a non-
profit corporation and the creation of additional top level domains.
Requirements for holding domain names also are expected to be affected.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. In addition, we may lose our domain
names to third parties with trademarks or other proprietary rights in those
names or similar names. Any inability to protect our domain names, trademarks
or other proprietary rights could harm our business, our financial condition
and the results of our operations.
Future regulation of the Internet may slow its growth, resulting in decreased
demand for our services and increased costs of doing business.
Although we remain subject to regulations applicable to businesses generally,
few laws or regulations exist that specifically regulate communications and
commerce over the Internet. We expect more stringent laws and regulations to be
enacted due to the increasing popularity and use of the Internet and other
online services.
New and existing laws and regulations are likely to address a variety of
issues, including:
. user privacy and expression;
. taxation and pricing;
. the rights and safety of children;
. intellectual property;
. information security;
. anticompetitive practices;
. the convergence of traditional channels with Internet commerce;
. property ownership;
. negligence;
. defamation;
. obscenity and indecency;
. distribution; and
. the characteristics and quality of products and services.
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Regulation could limit growth in the use of the Internet generally and
decrease the acceptance of the Internet as a communications and commercial
medium, which could harm our business, our financial condition and the results
of our operations.
Other federal, state, local or foreign laws, regulations and policies, either
now existing or that may be adopted in the future, may apply to our business
and may subject us to significant liability, significantly limit growth in
Internet usage, prevent us from offering certain Internet services or otherwise
harm our business, our financial condition and the results of our operations.
Although our online transmissions generally originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities.
We may be subject to Sections 5 and 12 of the Federal Trade Commission Act,
or the FTC Act, which regulate advertising in all media, including the
Internet, and require advertisers to have substantiation for advertising claims
before disseminating advertisements. The FTC Act prohibits the dissemination of
false, deceptive, misleading and unfair advertising, and grants the Federal
Trade Commission, or the FTC, enforcement powers to impose and seek civil and
criminal penalties, consumer redress, injunctive relief and other remedies upon
persons who disseminate prohibited advertisements. We could be subject to
liability under the FTC Act if we were found to have participated in creating
and/or disseminating a prohibited advertisement with knowledge, or had reason
to know that the advertising was false or deceptive. The FTC recently brought
several actions charging deceptive advertising via the Internet, and is
actively seeking new cases involving advertising via the Internet.
We may also be subject to the provisions of the recently enacted
Communications Decency Act, or the CDA, which, among other things, imposes
substantial monetary fines and/or criminal penalties on anyone who distributes
or displays certain prohibited material over the Internet or knowingly permits
a telecommunications device under its control to be used for such purpose.
Although the manner in which the CDA will be interpreted and enforced and its
effect on our operations cannot yet be fully determined, the CDA could subject
us to substantial liability. The CDA could also limit the growth of the
Internet generally and decrease the acceptance of the Internet as an
advertising medium.
Increased use of the Internet has burdened the existing telecommunications
infrastructure and has led to interruptions in phone service in areas with high
Internet use. Several telecommunications companies and local telephone carriers
have petitioned the Federal Communications Commission to regulate Internet
service providers and online service providers in a manner similar to long
distance telephone carriers and to impose access fees. If this were to occur,
the cost of communicating on the Internet could increase substantially,
potentially decreasing the use of the Internet.
The applicability to the Internet and other online services of existing laws
in various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could increase our costs of doing business,
discourage Internet communications and reduce demand for our services, any of
which could harm our business, our financial condition and the results of our
operations.
We may be unable to respond to rapid technological change in our industry.
The Internet and online advertising markets are characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions and changing customer preferences. The rapid growth of
the Internet and intense competition in our industry exacerbate these market
characteristics. To succeed we will need to integrate the various software
programs and tools required to enhance and improve our product offerings and
manage our business. Any
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enhancements or new services or features must meet the requirements of our
current and prospective Generation i users and must achieve significant market
acceptance. Our success also will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance features and
reliability of our services and to address our customers' changing preferences.
We may experience difficulties that delay or prevent our being able to do so.
Material delays in introducing new technologies and enhancements to our
services may cause customers and advertisers to make purchases from or visit
the web sites of our competitors. We could also incur substantial costs if we
need to modify our services or infrastructure to adapt to these changes.
We may be subject to liability for products sold through our web sites.
Consumers may sue us if any of the products sold through our web sites are
defective, fail to perform properly or injure the user. To date, we have had
very limited experience in the sale of products online and the development of
relationships with manufacturers or suppliers of such products. We introduced
ChickShops, our first e-commerce initiative, in December 1999 and plan to
develop a range of e-commerce activities. We also may foster relationships with
manufacturers or companies to offer their products directly through our network
of web sites. Although we intend to include provisions in our agreements with
manufacturers and companies to limit our exposure to liability claims, these
limitations may not prevent all potential claims. Liability claims resulting
from our sale of products could require us to spend significant time and money
in litigation or to pay significant damages.
Failure of computer systems and software products to be year 2000 compliant
could harm our business.
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00," which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations causing
disruptions to our operations. The failure of systems maintained by third
parties to be Year 2000 compliant could cause us to incur significant expense
to remedy any problems, reduce our revenues from such third parties or
otherwise seriously damage our business. A significant Year 2000-related
disruption of the network services or equipment that third-party vendors
provide to us could also cause our users to consider seeking alternate content
providers or cause an unmanageable burden on our technical support.
Our failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, some of our normal business activities or
operations. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
Risks Related to this Offering
Our stock price may be highly volatile and could drop, particularly because our
business depends on the Internet.
Prior to this offering, there has been no public market for our common stock,
and there can be no assurance that an active trading market will develop or, if
one does develop, that it will be maintained. The initial public offering
price, which was determined by negotiations between us and the representatives
of the underwriters, may not be indicative of prices that will prevail in the
trading market. If you purchase shares of our common stock, you may be unable
to resell the shares at or above the initial public offering price. The trading
price of our common stock is likely to be highly volatile and could be subject
to wide fluctuations in response to a number of factors, many of which are
outside our control, such as:
. actual or anticipated variations in quarterly results of operations;
. the addition or loss of affiliates;
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. the introduction of new or enhanced offerings by us or our competitors;
. changes in financial estimates or recommendations by securities
analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet service companies;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of common stock; and
. general political and economic conditions.
In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet and technology companies in particular, has experienced
extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies. These broad
market and industry factors may materially and adversely affect the market
price of our common stock, regardless of our operating performance. The trading
prices of the stocks of many Internet and technology companies are at or near
historical highs and reflect price-earnings ratios substantially above
historical levels. There can be no assurance that these trading prices and
price earnings ratios will be sustained or that our stock will trade at the
same levels as other Internet or Internet-related company stock.
Our business may be harmed by class action litigation due to stock price
volatility.
Volatility in the market price of our common stock could result in securities
class action litigation. Any litigation would likely result in substantial
costs and a diversion of management's attention and resources.
We may apply the proceeds of this offering to uses that do not increase our
operating results or market value.
We presently intend to use a portion of the net proceeds from this offering
to promote our brand, expand sales and marketing and repay any debt that may be
incurred under our current credit facility. The balance of the net proceeds of
this offering will be used for working capital and general corporate purposes,
including network expansion and content development, relocation of our offices
and possible acquisitions. General corporate purposes also include expenditures
made in the day-to-day operation of our business. Our use of proceeds is
subject to change at our management's discretion. The amounts actually expended
for each of the purposes listed above may vary significantly depending upon a
number of factors, including the progress of our marketing programs, capital
spending requirements and developments in Internet commerce. We may also use a
portion of the proceeds to acquire other businesses, products or technologies.
We will have broad discretion in how we use the proceeds from this offering.
You will not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions regarding how to use the proceeds
from this offering, and we may spend these proceeds in ways that do not
increase our operating results or market value. Pending any of these uses, we
plan to invest the proceeds of this offering in short-term, investment-grade,
interest-bearing securities. We cannot predict whether these investments will
yield a favorable return. See "Use of Proceeds."
21
<PAGE>
The price of our common stock after this offering may be lower than the price
you pay and may be affected by future sales by our existing stockholders.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price that we negotiated with the representatives of the underwriters based
upon a number of factors. The price of our common stock that will prevail in
the market after this offering may be higher or lower than the price you pay.
See "Underwriting."
If our existing stockholders sell their shares of our common stock in the
public market following the offering, the market price of our common stock
could decline. Moreover, the perception in the public market that our existing
stockholders might sell shares of common stock could depress the market price
of the common stock. These sales, and the possibility of these sales, could
make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem appropriate.
Immediately after this offering, we will have outstanding shares of our
common stock, assuming no exercise of the underwriters' over-allotment option.
of these shares are subject to a lock-up period that expires 180 days
after the date of this prospectus. Subject to this lock-up period and the
provisions of Rules 144, 144(k) and 701, additional shares will be available
for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
---------- ----
<C> <S>
20,838,866 After 180 days from the date of this prospectus, the 180 day lock-
up terminates and these shares are saleable under Rule 144 (subject
in some cases to volume limitations) or Rule 144(k)
705,087 After 180 days from the date of this prospectus, the 180 day lock-
up is released and these shares are saleable under Rule 701
(subject in some cases to our right of repurchase)
9,606,927 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
Holders of shares of our common stock, which will represent
approximately % of our outstanding stock after completion of this offering,
have the right to require us to register their shares of common stock with the
Securities and Exchange Commission. In addition, after this offering, we intend
to register all shares of our common stock that we may issue under our stock
option plans and employee stock purchase plan. Once we register these shares,
they can be freely sold in the public market upon issuance, in some instances
subject to the lock-up agreements described above. If these holders cause a
large number of securities to be sold in the public market, the sales could
materially and adversely affect the market price of our common stock. In
addition, any of these sales could impede our ability to raise needed capital.
Officers and directors and their affiliates will exercise significant control
over us.
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own, in the aggregate, approximately % of
our outstanding common stock. In particular, Christopher Anderson, the chairman
of our board of directors, will beneficially own, in the aggregate,
approximately % of our outstanding common stock. As a result, these
stockholders will be able to exercise significant control over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us. See "Principal Stockholders."
22
<PAGE>
Investors will experience immediate and substantial dilution in the book value
of their investment.
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of our common stock
immediately after this offering. Therefore, if you purchase our common stock in
this offering, you will incur an immediate dilution of $ in net tangible
book value per share from the price you paid, based on an assumed initial
public offering price of $ per share. The exercise of outstanding options
and warrants may result in further dilution. See "Dilution."
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that have been made under
the provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not historical facts but rather are based on
current expectations, estimates and projections about our industry, our beliefs
and our assumptions. All statements, other than statements of historical fact
included in this prospectus, regarding our strategy, future operations,
financial position, estimated revenue, projected costs, prospects, plans and
objectives of management are forward-looking statements. Words such as "may,"
"will," "should," "anticipates," "projects," "predicts," "expects," "intends,"
"plans," "believes," "seeks" and "estimates," and variations of these words and
similar expressions, are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words.
These statements are only predictions and are subject to risks, uncertainties
and other factors, many of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements. These risks and
uncertainties include those described in "Risk Factors" and elsewhere in this
prospectus.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. Except as required by law, we undertake no obligation to update any
forward-looking statement after the date of this prospectus, whether as a
result of new information, future events or otherwise, or to conform these
statements to actual results.
23
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock offered
hereby are estimated to be $ million, after deducting the underwriting
discount and estimated offering expenses payable by us. If the underwriters'
over-allotment option is exercised in full, we estimate that net proceeds will
be $ million. We presently intend to use a portion of the net proceeds
from this offering to promote our brand, expand sales and marketing and repay
any debt that may be incurred under our credit facility. The balance of the net
proceeds of this offering will be used for working capital and general
corporate purposes, including network expansion and content development,
relocation of our offices and possible acquisitions. Pending such uses, we will
invest the net proceeds of this offering in short-term, interest-bearing,
investment-grade securities.
We believe opportunities may exist to expand our business through
acquisitions of other businesses and technologies and may use a portion of the
proceeds for such purpose. In addition, we may consider acquisitions of
complementary businesses. We are not currently a party to any contracts or
letters of intent with respect to any acquisitions, and there can be no
assurance that any of our expansion plans will be realized or, if realized,
will prove profitable.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion.
24
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the subsequent closings of the sale of
1,003,081 shares of Series B-1 preferred stock in October 1999 for $4.2
million in cash, the proceeds of $15.2 million under a term loan, the
sale of 3,529,000 shares of Series C preferred stock in December 1999
for $32.3 million in cash and $3.0 million in debt conversion, the
repayment of $12.0 million under the term loan, our acquisition of
Extreme Interactive Media in consideration of $1.0 million cash,
$250,000 in unsecured promissory notes and the issuance of 75,000 shares
of common stock and the automatic conversion of all outstanding shares
of preferred stock into common stock immediately prior to the closing of
this offering; and
. on a pro forma as adjusted basis to reflect the closing of the sale of
the Series B-1 and Series C preferred stock, the proceeds and repayment
under the term loan, the acquisition of Extreme Interactive Media, the
automatic conversion of all outstanding shares of preferred stock, our
receipt of the estimated net proceeds from the sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share and the application of such proceeds.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited)
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Long-term debt, less current portion........... $ 1,253 $ 1,253 $ 1,253
-------- ------- -------
Stockholders' equity:
Convertible preferred stock, $0.001 par
value, actual: 20,000 shares authorized,
14,019 shares outstanding; pro forma: 20,000
shares authorized, no shares outstanding:
pro forma as adjusted: shares
authorized no shares outstanding............ 14 -- --
Common stock, $0.001 par value, actual:
37,500 shares authorized, 5,107 shares
outstanding; pro forma: 37,500 shares
authorized, 30,667 shares outstanding; pro
forma as adjusted: shares authorized,
shares outstanding................... 5 31 --
Additional paid-in capital................... 39,993 80,111
Notes receivable from stockholders........... (238) (238) (238)
Deferred stock compensation.................. (4,388) (4,388) (4,388)
Accumulated deficit.......................... (23,366) (23,366)
-------- ------- -------
Total stockholders' equity................. 12,027 52,150
-------- ------- -------
Total capitalization....................... $ 13,280 $60,474 $
======== ======= =======
</TABLE>
The common stock information in the table above excludes the following
shares:
. 1,554,878 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $0.75 per share as of September 30,
1999;
. 31,595 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.165 per share as of September 30,
1999; and
. 1,177,170 shares available for future issuance under our stock plans as
of September 30, 1999.
Please read this capitalization table together with the sections of this
prospectus entitled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and with the
financial statements and related notes beginning on page F-1.
25
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock immediately after completion of this offering.
Investors participating in this offering will incur immediate, substantial
dilution. Our pro forma net tangible book value as of September 30, 1999 was
$ or $ per share of common stock. Pro forma net tangible book value
per share represents total tangible assets less total liabilities, divided by
the total number of shares of common stock outstanding as of September 30, 1999
after giving effect to the subsequent sale of 1,003,081 shares of Series B-1
preferred stock and 3,529,000 shares of Series C preferred stock, our
acquisition of Extreme Interactive Media and the conversion of all outstanding
shares of preferred stock. After giving effect to the issuance and sale of
shares of common stock offered by us at an assumed initial public
offering price of $ per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by us, our pro forma as
adjusted net tangible book value as of September 30, 1999 would have been
$ , or $ per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Pro forma net tangible book value per share as of September 30,
1999........................................................... $
Increase per share attributable to this offering................
Pro forma as adjusted net tangible book value per share after this
offering.........................................................
Dilution per share to new investors............................... $
=====
</TABLE>
The following table summarizes on a pro forma as adjusted basis, as of
September 30, 1999, after giving effect to the offering at an assumed initial
public offering price of $ per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, the
difference between the existing stockholders and the purchasers of shares of
common stock in this offering with respect to the number of shares of common
stock purchased from us, the total consideration paid and the average price
paid per share:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
----------------- ------------------- Per
Number Percent Amount Percent Share
-------- -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............
New investors ...................
-------- -------- --------- --------- ------
Total..........................
======== ======== ========= ========= ======
</TABLE>
In the preceding tables, the shares of common stock outstanding exclude:
. 1,554,878 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $0.75 per share as of September 30,
1999;
. 31,595 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.165 per share as of September 30,
1999; and
. 1,177,170 shares available for future issuance under our stock plans as
of September 30, 1999.
To the extent that any of these options or warrants are exercised, there will
be further dilution to new investors. See "Capitalization," "Management--
Employee Benefit Plans," "Description of Capital Stock" and Note 7 of the Notes
to our Financial Statements.
26
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Financial Statements and the related notes included
elsewhere in this prospectus. The statement of operations data set forth below
for the two years in the period ended December 31, 1998 and the nine months
ended September 30, 1999 and the balance sheet data as of December 31, 1997 and
1998 and September 30, 1999 have been derived from our audited financial
statements and those of our predecessor division of Imagine Media, Inc.
included elsewhere in this prospectus, which have been audited by Ernst & Young
LLP, independent auditors. The statement of operations data for the nine months
ended September 30, 1998 are unaudited. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited interim results when read in
conjunction with the audited financial statements and the notes thereto
appearing elsewhere in this prospectus. The historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
---------------- --------------------
1997 1998 1998 1999
------- ------- ----------- --------
(unaudited)
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue............................... $ 927 $ 3,256 $ 1,342 $ 3,214
Cost of revenue....................... 171 1,322 520 2,286
------- ------- ------- --------
Gross margin......................... 756 1,934 822 928
Operating expenses:
Production and content............... 628 1,599 1,124 3,330
Engineering and development.......... 65 329 243 2,899
Sales and marketing.................. 836 2,592 1,824 9,173
General and administrative........... 506 1,074 789 3,485
Stock-based compensation............. -- -- -- 276
Amortization of goodwill and
intangible assets................... -- -- -- 529
------- ------- ------- --------
Total operating expenses.......... 2,035 5,594 3,980 19,692
------- ------- ------- --------
Loss from operations.................. (1,279) (3,660) (3,158) (18,764)
Interest income, net.................. -- -- -- 337
------- ------- ------- --------
Net loss.............................. $(1,279) $(3,660) $(3,158) $(18,427)
======= ======= ======= ========
Basic and diluted net loss per share.. $ (23.53)
========
Shares used in per share calculation.. 783
Pro forma basic and diluted net loss
per share (unaudited)................. $ (1.07)
========
Shares used in pro forma per share
calculation (unaudited).............. 17,126
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------ September 30,
1997 1998 1999
----- ------ -------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments... $ -- $ -- $10,790
Working capital..................................... 474 669 6,525
Total assets........................................ 763 1,161 20,094
Long-term debt, less current portion................ -- -- 1,253
Stockholders' / division equity..................... 502 762 12,027
</TABLE>
See Note 1 of Notes to our Financial Statements for a description of the
method that we used to compute our basic and diluted net loss per share.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our Financial Statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this prospectus.
Overview
Snowball is an Internet media company that operates a network of destination
web sites providing content, community and commerce to the Internet generation,
or Generation i. We serve the members of this community by providing them with
opinionated, cutting-edge content, relevant services such as email and instant
messaging, a forum for interacting with one another and carefully selected
merchandise within our online store. In addition to creating original content,
we continuously work to expand the breadth and depth of our content offerings
by selectively adding affiliated web sites to our network. This network and
affiliate business model allows us to rapidly and efficiently build our
content, traffic and brand. To attract and retain affiliates, we provide an
integrated package of sales and marketing services, technical support and
audience development opportunities. As of November 30, 1999, we had four
networks that target different segments of the Generation i audience and were
affiliated with more than 130 web sites and over 80 partner college
destinations.
By offering targeted access to a large and growing audience with attractive
demographic characteristics, we are able to generate marketing and advertising
revenue in a variety of forms. These include long-term promotions and
sponsorships with negotiated financial terms, slotting and lead-generation fees
from merchants who seek preferential placement on our sites and in our online
store, and sales of various forms of banner, button and textlink advertising,
both traditional and contextual. We also generate merchandising revenue from
the sale of carefully selected items through our online store, ChickShops.
From our inception in January 1997 through December 1998, we operated as an
independent division of Imagine Media, Inc. During this period, we focused our
operating activities primarily on the creation of our IGN, ChickClick and
PowerStudents networks, the development of relationships with affiliates to
expand our content and community offerings and the generation of revenue from
advertising sales. Separate financial statements were maintained and are
included elsewhere in this prospectus for the period prior to our incorporation
as a separate entity in January 1999.
In February 1999, we raised $3.2 million of initial capital, part of which
was paid by a promissory note for $2.0 million which has been paid in full.
Imagine Media contributed the IGN, ChickClick and PowerStudents assets and
related intellectual property to us and we hired approximately 40 Imagine Media
employees. During the summer and early fall of 1999, we raised $29.2 million of
additional capital (including equipment financing of $2.0 million) and began an
aggressive expansion program, adding new employees to develop additional
content and web sites, to recruit more third-party web sites into our networks
and to expand our sales and marketing staff. As of November 30, 1999, we had a
total of 232 employees, including 95 in sales and marketing, 31 in engineering,
87 in production and content and 19 in administration and finance.
Our relationships with our affiliates are an important part of our business
model. By adding new affiliates to our networks, we are able rapidly to gain
new content and to increase the consolidated
28
<PAGE>
page views of our networks. We typically enter into agreements with affiliates
for limited durations of between six months and five years under which we offer
affiliates revenue opportunities and a package of integrated marketing services
and support in exchange for the integration of their site into our network and
the use of their site for advertising, promotions and sponsorships. Typically,
we pay affiliates a portion of the revenue generated from advertising,
promotions and sponsorships run on their pages. During 1999, we acquired the
assets of several affiliates. We anticipate that we may acquire affiliates and
selected assets of affiliates in the future. See Note 6 of Notes to our
Financial Statements.
To date, our operating activities have been focused on developing the quality
of our content and services; expanding our audience and the usage of our
services; establishing operating relationships with our customers, users and
affiliates; building sales momentum and marketing our network and Snowball
brands; developing our computer software and hardware infrastructure;
recruiting personnel; and raising capital.
To date, we have derived revenue principally from short-term contracts for
banner advertisements, buttons and textlinks. Under these contracts, we
guarantee advertisers a minimum number of "impressions," or that a minimum
number of users will view their advertisements, for which we receive a fixed
fee. Advertising revenue is recognized at the lesser of the ratio of
impressions delivered over total guaranteed impressions or the straight-line
basis over the term of the contract, provided that we do not have any
significant remaining obligations and collection of the resulting receivable is
probable. To the extent that minimum guaranteed impression levels or other
obligations are not met, we defer recognition of the corresponding revenue
until guaranteed levels are achieved.
Revenue also includes sponsorships, slotting and other marketing programs
under contracts in which we commit to provide customers with promotional
opportunities in addition to traditional banner advertising. These agreements
typically provide for the delivery of advertising impressions on our web sites,
exclusive placement on our networks, special content and promotional offers,
the design and development of customized sites to enhance the promotional
objectives of the customer and a fixed fee plus incremental payments for
traffic driven to the customer's site. The portion of this revenue related to
the delivery of impressions is recognized in the period in which the
advertisement is displayed, provided that no significant obligations remain and
collection of the resulting receivable is probable, at the lesser of the ratio
of impressions delivered over total guaranteed impressions or the straight-line
basis over the term of the contract. The portion of any up-front nonrefundable
fee specified in the contract related to the up-front design work is also
recognized at the lesser of the ratio of impressions delivered over total
guaranteed impressions or the straight-line basis over the term of the
contract. We anticipate that revenue from sponsorships, slotting and other
marketing programs will provide an increasing percentage of our total revenue
in the future.
In December 1999, we introduced an online store through which we sell
carefully selected products that are pertinent to the content contained on web
sites within our network and have a high degree of relevance to our users. We
recognize revenue from the sale of these products when a product is delivered.
Revenue has increased each year since our inception, although we have never
been profitable. We cannot assure you that our revenue will continue to grow,
or that we will ever achieve or maintain profitability. As of September 30,
1999, we had an accumulated deficit of $23.4 million. We anticipate that we
will incur additional operating losses for the foreseeable future.
Cost of revenue consists primarily of expenses related to hosting web sites,
the costs and license fees of content and community tools and the portion of
revenue owed to affiliates for advertisements placed on their sites. These
costs can vary depending upon a variety of factors, primarily the mix of
advertisements and marketing programs placed on our web sites compared to
29
<PAGE>
those placed on affiliate web sites. These costs can also vary from period to
period as we either acquire an affiliate or selected sites from an affiliate,
or expand the portion of our total sites that are represented by affiliates
versus those that we own and operate directly. For example, after we acquire an
affilliate, our cost of revenue will typically decrease because we no longer
have to pay that affiliate the portion of revenue that would have otherwise
been owed to the affiliate for advertisements placed on its site.
We categorize operating expenses into production and content, sales and
marketing, engineering and development, general and administrative, stock-based
compensation and amortization of intangible assets.
Production and content expenses consist primarily of payroll and related
expenses for editorial, artistic and production staff; payments to freelance
writers and artists; and telecommunications and computer related expenses for
the creation of content for our web sites. These expenses can vary from period
to period as we either acquire an affiliate or selected sites from an
affiliate, or expand the portion of our total sites that are represented by
affiliates versus those that we own and operate directly. For example, after we
acquire an affiliate, our production and content expenses typically increase
because we incur costs for staff, services and equipment associated with
operating the new business.
Engineering and development expenses consist primarily of personnel and
related costs, consultant and outside contractor costs, and software and
hardware maintenance costs for our development and programming efforts,
including internal information services costs. To date, all engineering costs
have been expensed as incurred.
Sales and marketing expenses consist primarily of personnel and related costs
for our direct sales force, affiliate development and marketing staff. In
addition, these expenses consists of marketing programs which include
activities such as advertisements, trade shows, promotional activities and
media events.
General and administrative expenses consist primarily of personnel and
related costs for corporate functions including accounting and finance, human
resources, facilities and legal.
Stock-based compensation represents the aggregate difference, at the date of
grant, between the respective exercise price of stock options and the deemed
fair market value of the underlying stock. Stock-based compensation is
amortized using the graded amortization method over the vesting period of the
related options, which is generally four years. Through September 30, 1999, we
recorded stock-based compensation of $0.3 million. The total unamortized stock-
based compensation recorded through September 30, 1999 is $4.4 million. This
amount will be amortized as follows: $0.9 million for the remainder of the year
ending December 31, 1999; $2.0 million for the year ending December 31, 2000;
$1.0 million for the year ending December 31, 2001; $0.4 million for the year
ending December 31, 2002; and $0.1 million for the year ending December 31,
2003. Approximately $5.3 million will be recorded for options granted
subsequent to September 30, 1999. Subsequent terminations may reduce stock-
based compensation.
Amortization of goodwill and intangible assets represents the non-cash
charges for the expensing, over the anticipated useful life, of intangible
assets and goodwill acquired in acquisitions or created at the time of our
incorporation as a separate legal entity.
Results of Operations
Revenue
Our revenue of $3.2 million for the nine months ended September 30, 1999
increased over revenue of $1.3 million recorded for the comparable period in
1998. Revenue of $3.3 million for the
30
<PAGE>
year ended December 31, 1998 increased over revenue of $0.9 million recorded
for the year ended December 31, 1997. The increases in revenue reflect the
increases in our available inventory of page views, both from internal content
and affiliated third parties, as well as the expansion of our sales and
marketing operations. One customer accounted for 11% of revenue for the nine
months ended September 30, 1999. No customer accounted for over 10% of revenue
for 1997 or 1998. All revenue was generated in North America.
Cost of Revenue
Cost of revenue of $2.3 million for the nine months ended September 30, 1999
increased over the cost of revenue of $0.5 million recorded for the comparable
period in 1998. Cost of revenue of $1.3 million for the year ended December 31,
1998 increased over the cost of revenue of $0.2 million recorded for the year
ended December 31, 1997. These increases reflect the increased hosting costs of
our expanding web site operations, as well as increases in revenue recorded
from advertising on affiliate web sites.
Operating Expenses
Production and Content. Production and content expenses of $3.3 million for
the nine months ended September 30, 1999 increased over expenses of $1.1
million recorded for the comparable period in 1998. Production and content
expenses of $1.6 million for the year ended December 31, 1998 increased over
expenses of $0.6 million recorded for the year ended December 31, 1997. These
increases reflect salary and related costs associated with increases in
personnel and freelance writers and artists for the creation and production of
additional content for our web sites.
Engineering and Development. Engineering and development expenses of $2.9
million for the nine months ended September 30, 1999 increased over expenses of
$0.2 million recorded for the comparable period in 1998. Engineering and
development expenses of $0.3 million for the year ended December 31, 1998
increased over expenses of $65,000 recorded for the year ended December 31,
1997. These increases resulted primarily from increases in salary and related
costs, consultant fees and related costs and recruiting fees relating to our
development and programming efforts.
Sales and Marketing. Sales and marketing expenses of $9.2 million for the
nine months ended September 30, 1999 increased over expenses of $1.8 million
recorded for the comparable period in 1998. Sales and marketing expenses of
$2.6 million for the year ended December 31, 1998 increased over expenses of
$0.8 million recorded for the year ended December 31, 1997. These increases
reflect increases in salary and related costs for expansion of our sales,
affiliate development and marketing personnel, as well as increases in our
advertising, marketing and branding expenses.
General and Administrative. General and administrative expenses of $3.5
million for the nine months ended September 30, 1999 increased over expenses of
$0.8 million recorded for the comparable period in 1998. General and
administrative expenses of $1.1 million for the year ended December 31, 1998
increased over expenses of $0.5 million recorded for the year ended
December 31, 1997. These increases resulted primarily from increases in salary
and related costs associated with expansion of our accounting and finance,
human resources and other administrative efforts, as well as from increased use
of outside consulting services.
Stock-based Compensation. We amortized deferred compensation expenses of $0.3
million during the nine months ended September 30, 1999. We did not grant any
shares of our common stock prior to our incorporation in January 1999.
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<PAGE>
Amortization of Goodwill and Intangible Assets. Amortization of goodwill and
intangible assets was $0.5 million for the nine months ended September 30,
1999. $2.0 million of goodwill and intangible assets arose from the transfer of
various intangible assets from Imagine Media in January 1999. An additional
$1.6 million of goodwill and intangible assets arose from the acquisition of
Ameritrack, Inc. and various web site assets that we purchased during 1999. See
Notes 4 and 6 of Notes to our Financial Statements. As of September 30, 1999,
goodwill and intangible assets of $3.1 million remained to be amortized. These
assets are being amortized over a three-year life with amortization expense of
approximately $0.3 million per quarter through the second quarter of 2002.
Interest Income, Net
Interest income of $0.3 million for the nine months ended September 30, 1999
consisted primarily of interest received from the proceeds of equity financings
completed during the year.
Provision for Income Taxes
No provision for federal and state income taxes was recorded through
September 30, 1999 as we incurred net operating losses from inception through
that date. As of December 31, 1998 and September 30, 1999, we had approximately
$3.1 million and $21.3 million of federal and state net operating loss carry
forwards which expire on various dates beginning in 2019. Due to the
uncertainty regarding the ultimate use of the net operating loss carry
forwards, we have not recorded any benefit for losses and a valuation allowance
has been recorded for the entire amount of the net deferred tax asset. In
addition, certain future changes in our share ownership, as defined in the Tax
Reform Act of 1986, may further restrict our ability to use our net operating
loss carry forwards.
Liquidity and Capital Resources
During 1997 and 1998, we financed our operations through contributions from
Imagine Media. Since our incorporation in January 1999, we have financed our
operations primarily through private placements of preferred stock and
borrowings under equipment lease lines and a credit facility. Cash, cash
equivalents and short-term investments were $10.8 million at September 30,
1999.
We raised $27.3 million in equity financing during the nine months ended
September 30, 1999. During that period we used $12.6 million in operating
activities, and $4.2 million in acquiring property and equipment. During the
nine months ended September 1998, we drew $3.0 million from Imagine Media, and
used $2.9 million in operating activities and $66,000 in acquiring property and
equipment.
In April 1999, we entered into a lease line of credit for $2.0 million. This
credit facility has a term of three years and bears interest at the rate of
7.5% per annum. In connection with this credit facility, we issued warrants to
the lessor to purchase 31,595 shares of our common stock at $4.22 per share.
The credit facility does not include any financial covenants. Our obligations
under the credit facility comprised the entire amount of the debt obligations
on our balance sheet as of September 30, 1999. In October 1999, we entered into
additional lease lines of credit for up to $3.0 million. These credit
facilities also have terms of three years and bear interest at the rate of 7.5%
per annum. In connection with these credit facilities, we issued warrants to
the lessor to purchase 21,097 shares of our common stock at $7.11 per share.
These credit facilities do not include any financial covenants.
During 1999, we entered into several leases for our San Francisco
headquarters and our sales offices, with terms ranging from month-to-month to
three years. In connection with these short-term leases, we will make payments
of $448,000, $624,000 and $19,000 in the years ending 1999, 2000, and 2001,
respectively.
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<PAGE>
In November 1999, we entered into a lease for our new executive offices in
Brisbane, California, which expires in 2012. In connection with the lease, we
will make payments of $1.8, $4.4, $4.4, $4.4, and $4.4 million, in 2000, 2001,
2002, 2003, and 2004, respectively, and a total of $29.2 thereafter until the
expiration of the lease. In connection with this lease, we obtained a letter of
credit for $4.4 million as a deposit for the facilities. See Notes 9 and 10 of
the Notes to our Financial Statements for more information on our lease
commitments.
In November 1999, we entered into a term loan agreement for up to $15.2
million. In connection with this loan agreement, we issued a promissory note,
which bears interest at the rate of 11% per annum, and warrants to purchase
270,000 shares of our common stock at an exercise price of $8.44 per share. In
December 1999, the note holder cancelled $3.0 million of indebtedness under the
note in exchange for shares of our Series C preferred stock at $10 per share.
The entire outstanding balance under the note will become due upon consummation
of this offering. The note holder maintains a first position lien on all of our
assets, excluding fixed assets. The loan agreement does not include any
financial covenants.
Our capital requirements depend on numerous factors, including market
acceptance of our services and the resources we allocate to developing our
networks, our marketing and selling capabilities and our brand. We have
experienced substantial increases in our expenditures since our inception
consistent with the growth in our operations and personnel, and we anticipate
that our expenditures will continue to increase significantly for the
foreseeable future.
We will continue to evaluate possible acquisitions of, or investments in,
complementary businesses, technologies, services or products. We believe that
our available cash and cash equivalents and cash flows from operations,
combined with the net proceeds from this offering, will be sufficient to meet
our anticipated needs for working capital and capital expenditures for at least
the next 12 months. We may need to raise additional funds, however, to fund
expansion, including significant increases in personnel and office facilities,
to develop new or enhance existing services or products, to respond to
competitive pressures or to acquire or invest in complementary businesses,
technologies, services or products. In addition, to meet our long term
liquidity needs, we may need to raise additional funds, establish additional
credit facilities or seek other financing arrangements. Additional funding may
not be available on favorable terms, on a timely basis or at all.
Year 2000 Compliance
We may be exposed to a loss of revenue and our operating expenses could
increase if the systems on which we depend to conduct our operations are not
Year 2000 compliant. Our potential areas of exposure include products and
services purchased from third parties, information technology, including
computers and software, and non-information technology, including telephone
systems and other equipment used internally. The reasonable likely worst case
scenario for Year 2000 issues would be if a significant defect exists in key
hardware or software and if a solution for the problem were not immediately
available. If a problem is detected in these systems or subsystems, these
components will need to be revised or replaced.
We have substantially completed the testing and auditing of our technology
and systems. We have primarily relied upon internal testing and we have
retained a consultant to review and upgrade our desktop systems for Year 2000
compliance. Based upon our testing, we believe that our critical software is
Year 2000 compliant.
We do not expect to spend more than $100,000 to assess and remedy the Year
2000 problem based on the size of our operations, the percentage of our
software that is standard to our industry and because we do not have a
dependency on older legacy software in our production systems.
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<PAGE>
In the event that the production and operational facilities that support our
web sites are not Year 2000 compliant, portions of our web sites may become
inaccessible and we would not be able to deliver services to our users. A
prolonged disruption in our operations could cause our customers to stop doing
business with us. Our review of our systems has shown that there is no single
application that would make our web sites totally unavailable and we believe
that we can quickly address any difficulties that may arise.
We do not currently have a contingency plan to deal with the worst case
scenario that might occur if technologies we are dependent upon, such as the
Internet itself, are not Year 2000 compliant and fail to operate effectively
after the Year 2000.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or the
AICPA, issued Statement of Position 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," or SOP 98-1. SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance as to accounting for computer software developed or
obtained for internal use, including the requirement to capitalize and amortize
specified costs. Snowball adopted SOP 98-1 on January 1, 1999. Adoption of this
standard did not have a material effect on our capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities," or SOP 98-5. SOP 98-5 requires that all startup
costs related to new operations must be expensed as incurred. In addition, all
start-up costs that were capitalized in the past must be written off when SOP
98-5 is adopted. We adopted SOP 98-5 in January 1999 with no material impact on
our financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivatives and Hedging
Activities," or SFAS 133, which establishes accounting and reporting standards
for derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Because we do not
currently hold any derivative instruments and do not currently engage in
hedging activities, we expect that the adoption of SFAS 133 will not have a
material impact on our financial position or results of operations. We will be
required to implement SFAS 133 for fiscal year 2002.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101. This summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition principles comply with SAB 101.
Disclosures about Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of interest rates in the United
States, particularly since the majority of our investments are in short-term
debt securities issued by corporations or divisions of the United States
government. We place our investments with high quality issuers and limit the
amount of credit exposure to any one issuer. Due to the nature of our short-
term investments, we believe that we are not subject to any material market
risk exposure.
We do not have any foreign currency hedging or other derivative financial
instruments as of September 30, 1999.
34
<PAGE>
BUSINESS
Snowball is an Internet media company that operates a network of destination
web sites providing content, community and commerce to the Internet generation,
or Generation i. We view Generation i as individuals between the ages of 12 and
29 who consider the Internet to be an integral part of their daily lives. We
serve the members of this community by providing them with opinionated,
cutting-edge content, relevant services such as email and instant messaging, a
forum for interacting with one another and carefully selected merchandise. In
addition to creating original content, we continuously work to expand the
breadth and depth of our content offerings by selectively adding affiliated web
sites to our network. This network and affiliate business model allows us to
rapidly and efficiently build our traffic and brand. To attract and retain
affiliates, we provide an integrated package of sales and marketing services,
technical support and audience development opportunities.
We organize both our own and affiliated web sites around vertical networks
that target different segments of the Generation i audience. Currently, our
networks include:
. ChickClick, which provides content, community and commerce features to
Generation i women;
. IGN, which provides information and entertainment to Generation i men;
. InsideGuide, which offers student-generated information concerning
individual colleges; and
. PowerStudents, which provides students at all levels with information
concerning college admissions, jobs and careers.
By offering targeted access to a large and growing audience with attractive
demographic characteristics, we are able to generate marketing and advertising
revenue in a variety of forms. These include promotions and sponsorships with
negotiated financial terms, slotting and lead-generation fees from merchants
who seek preferential placement on our sites and in our online store, and sales
of various forms of banner, button and textlink advertising, both traditional
and contextual. We also generate merchandising revenue from the sale of
carefully selected items within our online store, ChickShops.
As of November 30, 1999, we were affiliated with more than 130 web sites and
over 80 partner college destinations organized under our four networks.
According to Media Metrix, our networks attracted over four million unique
visitors in October 1999, making us one of the top 50 highest-trafficked
networks on the Internet and, we believe, the leading online destination for
Generation i. Additionally, based on the same Media Metrix data, we were as of
that date one of the top 15 "stickiest" networks on the Internet in terms of
average minutes spent on our network per user day. As of November 30, 1999, we
had over two million registered users.
Industry Background
The Internet has emerged as an important new medium for communication and
commerce, providing companies with an effective channel for marketing and
selling their products and services. International Data Corporation, or IDC,
estimates that consumer e-commerce in the United States will grow from $12.4
billion in 1998 to $75.0 billion in 2003, representing a compound annual growth
rate of 43%. Because the Internet enables companies to attract specific
demographic groups to their web sites by offering focused content, services and
products, it is an effective medium for advertisers seeking targeted access to
these groups. Furthermore, as customers interact with a company's web site, the
company can gather valuable information on consumer preferences and buying
patterns, thereby allowing advertisers and marketers to further segment their
audience and increase the effectiveness of their spending. Jupiter
Communications LLC estimates that spending on Internet advertising in the
United States will grow from $2.1 billion in 1998 to $11.5 billion in 2003.
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Consistent with this growth in Internet commerce and advertising, Internet
content is growing at a rapid pace. A primary impetus behind the proliferation
of content and the number of web sites has been the increasing use of the
Internet for creating, sharing and searching for relevant information. IDC
estimates that the number of web sites will grow from 925 million in 1998 to
13.1 billion in 2003. Similarly, Forrester Research estimates that 1.5 million
web pages are added to the Internet each day. Online communities are also
growing rapidly as new user groups migrate from traditional media onto the
Internet. IDC estimates that the number of web users in the United States will
grow from approximately 63 million in 1998 to approximately 177 million by the
end of 2003.
While older online users are generally accustomed to traditional media and
adapt to the Internet gradually, younger Internet users have grown up using the
Internet and view it as a primary source for information and a medium for
communication. This younger generation of individuals between the ages of 12 to
29 represents a web-savvy audience that we refer to as "Generation i."
According to the United States Census Bureau, Generation i consisted of 67.7
million individuals in 1998, and represented approximately 25% of the U.S.
population. Based upon Census Bureau estimates, members of Generation i between
the ages of 15 and 24 had $302.4 billion in disposable income in 1998. We
believe that advertisers target this group because its members have a large
amount of disposable income and, since buying habits and brand decisions are
believed to be formed early, advertisers anticipate a high lifetime return on
their advertising dollars.
Generation i is a large Internet audience that desires community,
entertainment and content focused on their particular needs. Because this
generation is accustomed to numerous cable television channels and a wealth of
entertainment choices, its members expect a wide range of specialized content
that is available on demand. In the context of the Internet, this translates
into demand for deep, vertical content sites covering specialized subjects.
Major Internet sites offering standard content and services often fail to reach
Generation i because these sites generally:
. are designed to appeal to a broad audience and therefore do not provide
an environment focused on the specific programming and service needs and
buying habits of Generation i;
. do not comprehensively address issues important to Generation i, such as
peer, parental and school-related pressures, or issues revolving around
friendship, sexuality and relationships;
. do not provide a targeted forum for members of Generation i to express
and share their views with one another; and
. do not provide the kind of interactivity and services that this group
seeks, such as communication with their peers through instant messaging,
chat and email, as well as news, online games and personalized home
pages.
While the number of Internet sites that serve Generation i with targeted
content and community features continues to grow, these sites tend to be small,
independent sites in the early stages of commercial development, and the
individuals who operate these sites tend to have limited financial resources
and managerial experience. As a result, it is difficult for any one of these
sites to attract consistent traffic and premier advertisers. Furthermore,
because this group of web sites is large and fragmented, advertisers generally
have been unable to reach Generation i effectively through these individual
sites. To market more effectively to Generation i, we believe that products and
services must be advertised and promoted in the context of demographically
appropriate content rather than through traditional broad-based advertising.
Accordingly, we believe there is a need for a recognized online destination
consisting of an integrated network of content, community and commerce
targeting Generation i.
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The Snowball Solution
Snowball is a network of destination web sites providing fresh, cutting-edge
content created by, for and about Generation i. These web sites are currently
organized under four vertical networks: ChickClick, IGN, InsideGuide and
PowerStudents. Each of our networks provides creative and current content and
an interactive community for users who share similar interests and passions,
such as video games, college life or shopping. Through their integrated package
of content, community and commerce, our networks attracted over 4 million
unique visitors in October 1999, making us one of the top 50 highest-trafficked
sites on the Internet, according to Media Metrix, and, we believe, the leading
online destination for Generation i. As a result, we believe we provide a
compelling opportunity to our affiliates and potential affiliates as well as a
large, targeted audience for advertisers.
We focus on Generation i
We provide content, community and commerce features focused on Generation i.
To address the multiple audiences and tastes of Generation i, we have developed
a network of company owned and developed web sites complemented by linked,
third-party affiliate web sites which provide additional content. We have
organized these sites around individual vertical networks within the Snowball
network targeting specific groups within Generation i: ChickClick provides
content, community and commerce for Generation i women; IGN provides
information and entertainment for Generation i men; InsideGuide develops
individual web sites and guides for specific colleges; and PowerStudents
provides high school, college and graduate students with information on
careers, college admissions and jobs. The affiliate sites associated with these
networks deepen the level of content available to users and also extend the
reach of the networks to a broader audience. The content created by our
editorial staff, affiliates, and the network users is edited and organized into
networks to create a strong and consistent voice directed at Generation i.
Our networks also promote the community participation and personal growth of
Generation i users by encouraging communication among users, and between users
and network editors, through message boards, chat sessions, instant messaging
and email. The interactive features of our networks are designed to further
enhance the online experience, to encourage frequent visits and to lengthen the
time users spend on our networks. For example, users can create personalized
home pages which feature, among other things, targeted content, news feeds,
horoscopes, and information about television, movies and the weather. Users
also have access to special features such as calendars, diaries, classifieds
and trading services. Moreover, we have our own e-commerce boutique,
ChickShops, which is accessible from many pages on the ChickClick network and
offers hip fashion merchandise for young women. Collectively, the content,
community and commerce features of our networks seek to satisfy the many and
varied interests of our multiple Generation i audiences.
We provide significant benefits to advertisers
Our network model of vertical content destinations and their affiliated sites
provides focused and deep content that attracts a large and segmented audience.
This allows advertisers and marketers to gain wide access to the Generation i
audience as well as target narrow segments of this audience. Additionally, the
increased segmentation allows us to provide contextually linked advertising and
commerce opportunities to a variety of merchants that want to advertise and
gain preferential placement on our web sites and within our online stores. For
example, we provide EBWorld.com, a leading online game store, with an
integrated sponsorship package that includes preferential placement on our IGN
network, promotion to users within our game newsletters, email marketing and
targeted banner advertisements. In addition, we plan to open stores across all
of our networks that will offer commerce to our users while providing a store
front that will attract promotional opportunities for other merchants or
advertisers targeting the hard to reach demographic sub-groups of Generation i.
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Our model benefits us and our affiliates
Our network and affiliate business model allows us to benefit from the fresh
content and traffic of affiliated sites without the up-front costs and risks
associated with developing content for the rapidly changing tastes of
Generation i. Many members of this generation are prolific producers of content
and have a dynamic interest in sharing with the community. As a result, many of
our users create content web sites and contact us to become part of our
network. Our users also generate a stream of affiliation opportunities by
referring us to popular web sites. A selective screening process allows our
editorial staff to identify affiliate content partners that appeal to the
changing tastes of Generation i. This enables us to add content and traffic to
our network while keeping the content fresh and compatible with the evolving
tastes of Generation i. To attract and retain identified affiliates, we offer
them a package of integrated marketing services and support. Affiliates who
join our networks often experience immediate growth in traffic and advertising
revenue. Our network development strategy reinforces each network's brand
identity, drives traffic to our owned web sites, refers this traffic to
affiliate sites and leads to viral growth as users of the network share their
interests and opinions with others.
The Snowball Strategy
Our goal is to be the preeminent network of content, community and commerce
sites on the Internet by, for and about Generation i, by:
. Building and developing our existing networks, while selectively adding
new networks. We will continue to develop existing individual networks
by increasing the depth of content, services and product offerings
arranged around the appropriate vertical focus of the network. In
addition, we intend to add new networks to appeal specifically to
additional segments of Generation i. We intend to build each network's
brand through online, offline and affiliate marketing programs with the
goal of making each network the dominant destination within its vertical
content segment. By expanding our existing networks and increasing the
number of networks within the Snowball family, we intend to broaden our
appeal to the members of Generation i and to be the leading traffic
destination for this demographic on the Internet.
. Continuing to leverage our network and affiliate business model to
achieve cost-effective and viral growth of content and traffic. We will
continue proactively to identify sites that meet our criteria for target
demographics, quality of content and strategic fit with existing
networks. By expanding our networks, we intend to keep our existing
users engaged with deep, up-to-date, vertical content while quickly and
efficiently attracting new users. In cases where affiliate web sites do
not exist around relevant content areas, we will selectively offer our
services to help incubate web sites that provide the appropriate
content. We believe our affiliate-driven network growth model and our
reliance on word-of-mouth publicity within our target demographic will
allow us to rapidly and efficiently build our traffic and brand.
. Offering a range of value-added services to attract, retain and develop
affiliated web sites. We intend to continue to attract and retain select
affiliates by identifying small and developing web sites early and by
offering them a mutually beneficial agreement to increase their
marketing capabilities and to expand their reach. To maximize affiliate
retention, we have developed an integrated affiliate loyalty program
that includes education and community tools and other support services.
Additionally, we will continue to solicit and respond to affiliate and
user feedback to refine the services we provide to affiliates. These
services will assist us in incubating new web sites and networks to
supplement our content and service offerings.
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<PAGE>
. Promoting affinity and community across all networks and affiliates to
increase "stickiness." We intend to continue to develop the community
tools and services we provide to increase the time that users spend on
our sites, as well as increase the frequency of their visits. We will
continue to incorporate services into our networks that appeal to users,
such as free email, instant messaging, chat rooms, bulletin boards,
personalized home pages and polling, to keep them actively engaged in
both content and communication.
. Being the premier partner for marketing, advertising and commerce
directed at Generation i. By creating a set of branded networks around
deep vertical content, and by remaining a premier online destination for
Generation i, we intend to offer potential partners valuable
opportunities to reach targeted segments of Generation i. By providing
advertising banners, buttons, textlinks, promotions, sponsorships of
specific categories and direct merchandise slotting opportunities, we
can offer customized marketing programs for companies wanting to address
this market. Additionally, we will continue to develop opportunities for
merchants to sell selected merchandise on our own online stores.
. Pursuing strategic alliances and acquisitions that increase content,
traffic and revenue opportunities. We intend to selectively develop
strategic alliances to incorporate relevant content on our networks, to
derive additional traffic from the resulting co-branding effects and to
drive new methods of revenue generation. For example, we have entered
into a strategic relationship with New Line Media that will provide us
with offline marketing promotions in their products. In selecting our
partners, we will strive to ensure the integrity of our own brand
identities with Generation i. Additionally, where strategically
appropriate, we intend to acquire selected web sites and affiliates that
complement our existing networks. For example, we recently acquired
HighSchoolAlumni, a former affiliate that provides various services to
alumni of registered high schools.
Networks
Snowball is currently comprised of the following four networks of web sites:
[LOGO] ChickClick is a destination for forward-thinking young women
seeking community, commerce and "life tools." The ChickClick
network consists of three channels that offer progressive
features representing the interests of three groups within the
female Generation i demographic. MissClick targets teenage girls
between the ages of 12 and 17, EstroClick targets women between
the ages of 18 and 26, and MamaClick targets Generation i
mothers. ChickClick offers content on relevant subjects such as
relationships, entertainment, style, news, sports, work and
travel. ChickClick's community features include personalized
homepages, Chickmail, chat rooms, message boards and auctions.
In addition, ChickClick recently launched ChickShops, an e-
commerce area that offers online shoppers a specialty boutique
experience.
Together with its affiliated websites, ChickClick had approximately 29
million consolidated page views in November 1999 and over 600,000 registered
users as of November 30, 1999. According to the U.S. Census Bureau, women
between the ages of 12 and 29 numbered 33.3 million in 1999. Media Metrix
estimates that 13.4 million women between the ages of 12 and 34 used the
Internet in October 1999.
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The following table provides a brief description of ChickClick's affiliates
as of November 30, 1999:
<TABLE>
<CAPTION>
Web Site URL Description
- --------------------------------------------------------
<C> <C> <S>
Beatboxbetty beatboxbetty.com show business
news and reviews
BoHos flypaperpress.com BoHos comic site
Bust bust.com voice of the new
girl
Cherrysucker cherrysucker.com user-submitted
fiction
Crafty Lady getcrafty.com making art from
everyday life
Disgruntled disgruntledhousewife.com modern living
Housewife and intersex
relationships
Fametracker fametracker.com celebrity
almanac
Fashion Icon fashion-icon.com fashion news
Girlie Style girliestlye.com pertinent
female-driven
content
Greasergrrls greasergrrls.com women motor
enthusiasts
Grrlgamer grrlgamer.com news and reviews
from a girl's
point of view
Hellfire hellfire.com progressive
creative writing
Hipmama hipmama.com content and
advice for hip
moms
Hissyfit hissyfit.com political and
social essays
Lookenpeepers gmetropolis.com creative and
funny
information
</TABLE>
<TABLE>
<CAPTION>
Web Site URL Description
- --------------------------------------------------------
<C> <C> <S>
Maxi maximag.com empowerment and
information
Mighty Big TV mightybigtv.com popular TV shows
MissGirl missgirl.com teen advice and
issues
Out of order annie.newdream.net political and
social essays
Pencilbox pencilboxmag.com resource for
college women
Pop!sicle lickpopsicle.com political,
social and
comical essays
Razzberry razzberry.com teen community
Riotgrrl riotgrrl.com irreverant sassy
content
Rockrgrl rockrgrl.com women musicians
Smile and smileandactnice.com progressive
Act Nice women's content
Spacegirl spacegirl.org societal
commentary
Squiffy Ether ethernaut.com/zine irreverant
Jag fiction
Swanky swanky.com progressive
online community
Teengrrl teengrrl.com alternative teen
community
Wench wench.com feminism,
politics and
culture
Wired Woman wiredwoman.com women and
technology
Womengamers womengamers.com gaming for the
educated woman
</TABLE>
[LOGO] IGN is a leading network of web sites focusing on games and
entertainment for Generation i men. IGN provides the most
current editorial coverage of games, science fiction, movies and
television. IGN targets three distinct interest groups through
the following channels: IGN Games, IGN Sci-Fi and IGN for Men.
IGN Games provides reviews and previews of games for personal
computers and other video games; IGN Sci-Fi provides editorial
content on science fiction, movies, television, books and toys;
and IGN for Men offers content focusing on the lifestyles of
young men. IGN offers numerous features and services to keep its
users engaged, including free email, instant messaging, contests
and promotions, weather, horoscopes and search capabilities. IGN
also offers slots within branded commerce areas to partners
seeking to sell products and services online.
Together with its affiliated web sites, IGN had more than 150 million
consolidated page views in November 1999 and approximately 300,000 registered
users as of November 30, 1999. In July 1999, we acquired a popular former
affiliate, The Vault, which had approximately 6.5 million consolidated page
views in November 1999. According to Media Metrix, males between the ages of 12
and 34 accounted for 25.3% of all Internet users in the United States in
October 1999. Media Metrix estimates that IGN reached 7.4% of all 12 to 34 year
old males on the Internet and 14.2% of all 12 to 17 year old males on the
Internet in October 1999.
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The following table provides a brief description of IGN's affiliates as of
November 30, 1999:
<TABLE>
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
3Dportal 3dportal.com coverage of 3D
games
Allprowrestling.com allprowrestling.com independent
wrestling
Anime Links animelinks.com links to anime
sites
Anime News animenewsnetwork.com Anime news
Network
Arrgh arrgh.demon.co.uk early video
games
ComicFan comicfanmag.com comic portal
Coming Attractions corona.bc.ca coming
attractions and
reviews of
movies
Daily Dementia dailydementia.com interviews with
game industry
specialists
Daily Radar dailyradar.com entertainment
and games
DC Swirl dcswirl.com Sega Dreamcast
news and reviews
Desktop Starship desktopstarships.com sci-fi desktop
downloads
Diabloii.net diabloii.net Information on
the Diablo game
DMG Ice dmgice.com Gameboy
information
Doctor Dreamcast doctordreamcast.com Sega Dreamcast
news and reviews
Drew's script-o-rama.com movie and TV
Script-O-Rama scripts
Dukeworld dukeworld.com information on
Duke Nukem
EAGB gameboy.s-one.net.sg/ Gameboy user
information
Echostation echostation.com Star Wars
e-reality e-reality.com network of top
game specific
sites
Evergreen milpool.com The Simpsons
Terrace
EX ex.org Anime and Manga
FGN Online fgnonline.com news on the game
industry
Futurama nnyc.com Futurama
Archive (animated show)
GameFAQS gamefaqs.com answers to
questions about
video game
Gamers Depot gamersdepot.com game hardware
reviews
GameSages gamesages.com codes for games
Gaming Age gaming-age.com game industry
news
</TABLE>
<TABLE>
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
Halflife.net halflife.net information,
news and
previews on
Halflife
IndyJones.net indyjones.net coverage on new
Indiana Jones
game
JediKnight.Net jediknight.net Star Wars
related games
LucasGames lucasgames.com coverage of all
LucasArts games
MacGameNews macgamenews.com Macintosh games
Magic Box come.to/magicbox console and
Japanese games
MeccaWorld meccaworld.com PC games
Mighty Big TV mightybigtv.com popular TV shows
MovieBloopers moviebloopers.com movie bloopers
Moviefan Online moviefanonline.com movie news and
reviews
MovieSounds moviesounds.com movie sounds
Mr. Cranky mrcranky.com honest movie
reviews
Mr. Hats mrhatshellhole.com South Park
Hellhole
MTGnews.com mtgnews.com Magic: The
Gathering
NextGen Online next-generation.com new video games
Nintendo nintendoexpress.com Nintendo systems
Express
Nintendojo nintendojo.com Nintendo 64 news
and reviews
NintendojoFR nintendojofr.com French coverage
of Nintendo 64
Nintendorks nintendorks.com Nintendo 64 news
and reviews
Oh! The Humanity ohthehumanity.com coverage of bad
movies
Only Toons onlytoons.com cartoon news and
reviews
PC Accelerator pcxl.com action,
adventure and
sports games for
PCs
PC Gamer Online pcgamer.com gaming
information
PC Gameworld pcgameworld.com free demos
Playstation vidgames.com Playstation
Galleria news, previews
and strategies
Pokemon411 pokemon411.com Pokemon
information
PSM psmonline.com unbiased
Playstation
coverage
PSX Nation psxnation.com Playstation
news, early
previews and
reviews
PSX2.com psx2.com Playstaion 2
news
PSXNetwork psxnetwork.com Playstation
updates, news
and interviews
RareNet rarenet.com coverage of rare
games
RivaZone rivazone.com 3D games and
hardware
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Web Site URL Description
- -------------------------------------------------------------
<C> <C> <S>
Rogue Spear Database rsdatabase. comprehensive
gamenation.com Rogue Spear site
Scream-Trilogy scream-trilogy.com news and
information on
film trilogy
SF Site analogsf.com printed sci-fi
site
SMG Fan smgfan.com Sarah Michelle
Gellar fan site
Stay Tooned staytooned.com animated
entertainment
news
Stomp Tokyo Video Review stomptokyo.com video reviews
Stomped stomped.com gaming industry
information
The Astounding B Monster bmonster.com B movies
</TABLE>
<TABLE>
<CAPTION>
Web Site URL Description
- -------------------------------------------------------------
<S> <C> <C>
The Casual Otaku casualotaku.com Anime
The Digital Bits thedigitalbits.com DVD information
The Great RPG rpg-archive.com role playing
Archive game archive
The One Ring theonering.com J.R.R. Tolkien
TheForce.net jedicouncil.net Star Wars
Total RPG totalrpg.com role playing
game reviews
Total Video totalvideogames.com games
Games
Yakfaces Realm yakface.com Star Wars
memorabilia
Zelda HQ zhq.com comprehensive
Zelda site
</TABLE>
[LOGO]
PowerStudents provides students with targeted content, commerce and
community features through three channels: High School, College and
Jobs. PowerStudents provides editorial content on academics, college
admissions, entertainment and student life. Community features and
services include free email, instant messaging, contests, weather,
television listings, classifieds, polls, forums, student diaries and
expert Q&A.
Together with its affiliated web sites, PowerStudents had approximately 23
million consolidated page views in November 1999 and approximately 1.5 million
registered users as of November 30, 1999. HighSchoolAlumni, one of our owned
sites within the PowerStudents network, accounted for 15 million consolidated
page views in November 1999 and 1.4 million registered users as of the same
date. According to eMarketer, 11.1 million individuals in the United States
between the ages of 13 and 17 currently use the Internet. eMarketer also
estimates that online spending by this group will increase from $160 million in
1999 to $1.4 billion in 2002.
42
<PAGE>
The following table provides a brief description of PowerStudents' affiliates
as of November 30, 1999:
<TABLE>
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
4Tests.com 4tests.com practice exams
Back To College back2college.com resources for
reentry students
BrainLapse.com brainlapse.com games and movies
Bschool.com bschool.com business school
resources
CampusCareerCenter campuscareercenter.com information on
jobs
CampusTours campustours.com college campus
tours
CollegeGate.com collegegate.com editing for
admissions
essays
College Recruiter collegerecruiter.com jobs and
internships
CollegeTownUSA collegetownusa.com online college
community
CollegeView collegeview.com college
information and
virtual tours
CollegeXpress collegexpress.com information for
college bound
students
FastAid fastaid.com scholarships and
financial aid
Fishnet: jayi.com college guide
The College Guide
</TABLE>
<TABLE>
<CAPTION>
Web Site URL Description
- -----------------------------------------------------------
<C> <C> <S>
FreSch freschinfo.com scholarship
information
GoCollege gocollege.com information on
college,
scholarships and
tests
GradView gradview.com graduate school
resources
GreekCentral greekcentral.com Greek life
InternshipPrograms.com internshipprogram.com internships
Interview Feedback interviewfeedback.com interviews
The Job Resource thejobresource.com college career
center
MBAjob mbajob.com MBA job searches
MBA ZoNe mbazone.com MBA resources
Oilzine oilzine.com British humour
Quintessential quintcareers.com career and job
Careers hunting
RealCollegelife.com realcollegelife.com college life
RealWorld rwuniversity.com real world
University advice
SuperCollege supercollege.com information on
admissions and
financial aid
TestTutor testtutor.com standardized
test preparation
</TABLE>
[LOGO]
InsideGuide is a national network of online college sites created by
students for students. InsideGuide offers an insider's perspective on
college life. Each site provides students at a particular college
with an independent forum for expressing their opinions and sharing
information relevant to the community, such as classes, sports,
activity groups and entertainment. InsideGuide was launched in
September 1999 and as of November 30, 1999 offered guides centered
around more than 80 individual schools, including University of
California at Berkeley, Harvard University, Northwestern University
and University of Pennsylvania.
Together with its affiliated web sites, InsideGuide had approximately 300,000
consolidated page views in November 1999. According to Jupiter Communications,
as of January 1999, 10.6 million college students in the United States used the
Internet and online spending by this group will increase from $890 million in
1999 to $2.5 billion in 2002.
Networks Under Development
We are continually expanding the content, community and commerce services
offered by our networks and evaluating opportunities for the development of new
networks to keep pace with the expanding interests of Generation i. For
example, our acquisition of HighSchoolAlumni in September 1999 will allow each
of our networks to offer its users a new classmate finder tool. As of
November 30, 1999, HighSchoolAlumni included
43
<PAGE>
over 28,000 high schools throughout the United States. This site enables an
alumnus of a registered high school to register, update his or her information
and search for an old classmate. This database can then be used for personal
communication as well as for organizing and sponsoring group alumni activities
such as reunions and fund-raising. HighSchoolAlumni had approximately 15
million consolidated page views in November 1999 and over 1.4 million
registered users, as of November 30, 1999. Due to its strong following and
potential, we are currently evaluating options to establish this site as a
separate network during the year 2000.
Content
We believe that our original content provides us with a competitive
advantage. This content is derived from two sources: our in-house editorial
staff and our affiliates. As of November 30, 1999, our in-house editorial staff
consisted of 37 professional writers, and we had more than 130 affiliate
contributors. We view the development of new content as an interactive process
and encourage our users to offer suggestions for new subject areas. Once we
identify a new subject area, we typically hire an in-house editor to develop
content and to work with our affiliate development department to identify
potential affiliates.
Our affiliate model distinguishes us from many other Internet media
companies. This model allows us to recruit independent web sites to supplement
and broaden our in-house editorial content. Our affiliate agreements generally
require affiliates to display the logo of one or more of our networks and give
us the exclusive right to sell advertising on the affiliated site in exchange
for a percentage of the advertising revenue. In addition, our agreements
generally provide for joint development of e-commerce opportunities. We believe
that this model enhances our content, increases our audience reach, builds
advertising inventory and expands our distribution at a cost to us that is
lower than would be achievable through the development of in-house editorial
content alone.
We also believe that the affiliate model enables us to adapt quickly to
emerging Internet and media trends with reduced incremental costs. For example,
when Sega released its new Dreamcast game system in September 1999, we
recruited four Dreamcast-related web sites within one month. Because our
typical affiliate agreement requires us to pay affiliates only a portion of the
revenue that we earn from the affiliate's site, the new Dreamcast affiliates
expanded our editorial coverage of the Dreamcast subject area and added new
inventory for advertising sales without significantly increasing our expenses.
We invest in marketing and technical services to increase the value of
affiliate relationships. Our affiliate relations specialists work with each of
our affiliate content partners to promote their sites, build their traffic and
improve the technical performance of the sites.
Revenue Sources
Our business model is designed to provide for multiple revenue streams. Our
principal sources of revenue are sponsorships, advertisements, e-commerce and
merchandising. For the nine months ended September 30, 1999, advertising and
sponsorship revenue represented substantially all of our revenue.
Advertising and sponsorships
Our strategy is focused in part on generating a majority of our advertising
revenue from sponsors and merchants seeking an integrated and cost-effective
means to reach Generation i on the Internet. Our sponsorship arrangements are
designed to achieve broad marketing objectives such as brand promotion,
awareness, product introductions and online research. To help sponsors achieve
these goals, we develop individually tailored sponsorship programs that may
include any combination of advertising banners, buttons, textlinks, promotions,
sponsorships of specific categories and direct
44
<PAGE>
merchandise slotting opportunities. We also develop content to support the
marketing initiatives of advertisers. In addition, sponsors may talk one-on-one
with users on the networks' message boards, chats, polls and special events,
which allows them to gain insights into their customers. Sponsorships allow us
to cater to the specific goals of advertisers in the areas of impressions,
product research, market research, new product launches, list development,
product information, repositioning, new account openings, lead generation and
transactions. Our sponsorship agreements provide for revenue independent from
page views as the measure of value and generally are secured for periods of up
to one year.
We also generate revenue through slotting agreements with leading merchants
interested in targeting Generation i. These arrangements provide merchants with
exclusive placement on our networks, exposure through banner advertising,
special content and promotional offers in exchange for which we collect a fixed
fee plus incremental payments for traffic driven to the advertiser's site. In
addition to enhancing user retention, these retailing opportunities can be used
to identify valuable purchasing trends, which in turn can be used in future
advertising and commerce and to develop additional targeted content.
We derive a portion of our advertising revenue from banner advertisements,
buttons and textlinks that are prominently displayed on pages throughout our
networks. From each of these, viewers can hyperlink directly to the
advertiser's own web site, thus providing the advertiser the opportunity to
directly interact with an interested customer.
During the nine months ended September 30, 1999, our five largest customers
accounted for 28% of our total revenue. One of our customers, EBWorld.com,
accounted for 11% of our revenue during this nine-month period.
E-commerce and merchandising
We have recently begun to generate e-commerce revenue by selling products
that have a high degree of relevance to our users. We intend to develop e-
commerce stores across all of our networks. In December 1999, we began
merchandising directly to our users through the launch of ChickShops within our
ChickClick network. ChickShops offers more than 75 products, including clothes
and accessories, and was designed to offer online users the experience of
shopping in a specialty clothing boutique similar to those found in cities like
New York or San Francisco. Online orders are taken 24 hours a day, seven days
per week and products are shipped generally within 48 hours of placement of
most orders. All product orders and fulfillment are currently handled by
ShopNow.com.
Sales
As of November 30, 1999, we had a direct sales organization of 28 sales
professionals. Our sales team consults regularly with advertisers and agencies
on design and placement of advertisements, sponsorships and promotions across
the networks. We also have a group of sales professionals who concentrate
primarily on strategic sponsorships and promotions, seeking to establish
relationships with senior level executives to develop multi-million dollar
partnership packages linking our users with the partner's brand. As of November
30, 1999, this group consisted of seven individuals.
We also had 32 sales support, market research and advertising operations
staff who focus on market research and provide advertisers with information and
expertise that will help them market their products and services more
effectively to Generation i. We regularly conduct surveys concerning purchasing
patterns, attitudes and brand preferences of Generation i.
We have sales offices in New York City, San Francisco and Los Angeles.
45
<PAGE>
Corporate Marketing
As of November 30, 1999, we had 16 professionals in our corporate marketing
group who are complemented by marketing professionals within our four networks.
Through the efforts of these professionals, we pursue a variety of marketing
initiatives designed to build brand awareness of Snowball and its individual
networks among both the advertising community and members of Generation i. To
date these marketing activities have included advertising in online and offline
media, attending trade shows, sponsoring events and engaging in ongoing media
relations campaigns.
We target potential advertising customers in a variety of online and offline
media, including newspapers such as The New York Times, The Wall Street
Journal, USA Today and over 200 college newspapers; print magazines such as
Advertising Age, Adweek, Wired, Industry Standard and Business 2.0; outdoor
locations such as commuter rail lines and bus tails; and online sites such as
Adage.com, Adweek.com, ClickZ and Channel 7.
Network marketing activities focus on increasing traffic to our networks and
the number of our registered users. We have engaged in major event
sponsorships, such as ChickClick's title sponsorship of the 1999 Lilith Fair
and IGN's sponsorship of Sega Dreamcast's 1999 Assault Tour. We have also
entered into a strategic relationship with New Line Cinema that will provide us
with offline marketing promotions in their products. In addition, all networks
have aggressively launched promotions and contests to increase user
registration and maintain a relationship with Microsoft's MSN Hotmail offering
free category-specific newsletters.
We engage in an ongoing media relations campaign with business and financial
contacts and key industry analysts. Our public relations efforts are a key
component to our overall marketing and brand awareness strategy. We plan to
continue to develop a media outreach program based on market research that we
organize and conduct with third parties. Each individual network also manages
public relations activities targeted to the consumer press to encourage
publicity on new channels, affiliates, services and partners. The primary
purpose of our public relations activities is to increase audience development
among each network's target audience and increase overall visibility of the
network.
Technology
Our hosting infrastructure is co-located at our headquarters in San Francisco
and at Exodus Communications' Internet Data Center in Santa Clara, California.
Exodus is responsible for providing us with a high-speed, scalable, fault-
tolerant Internet connection, clean power and physical security. Packaged
software enables full text search, bulk email delivery, web serving and traffic
analysis. We developed our membership, personalization, advertising delivery
and community software using standard application servers and Oracle database
systems. Our advertising selection and management system is DoubleClick's
NetGravity. We have developed traffic analysis software to compute industry-
standard and advanced metrics. We also host a small number of our affiliates on
our servers. Our editorial infrastructure is located at our headquarters in San
Francisco. We developed our editorial and publishing software by using
Informix. We have started to migrate our editorial and publishing processes to
the same platform that we use for our dynamic services. Both our hosting and
editorial switched local area networks are fault-tolerant, scalable and
economical.
With respect to disaster recovery, all of our non-derivable data is presently
replicated between a storage array at our headquarters in San Francisco and a
storage array at Exodus Communications. We are currently studying the
advisability of locating a disaster recovery data center in New York City. Our
network operations center consists of monitoring software that is monitored by
our staff at all times.
46
<PAGE>
Competition
The competition for users and online advertisers is intense, and with no
substantial barriers to entry, we expect that it will continue to intensify. We
believe that the primary competitive factors in attracting and retaining users
are:
.quality of content and services;
. brand recognition;
. user affinity and loyalty;
. demographic focus;
. variety of value-added services; and
. critical mass.
We believe that the principal competitive factors in attracting and retaining
online advertisers are:
. the amount of traffic on a web site;
. brand recognition;
. the demographics of a site's users;
. the ability to offer targeted audiences;
. the average duration of user visits; and
. cost-effectiveness.
Other companies or sites which are primarily focused on targeting Generation
i online include MTV.com, Warner Bros. Online (Entertaindom), iTurf Inc. and
Alloy Online, Inc. We will likely also face competition in the future from:
. developers of web directories;
. search engine providers;
. content sites;
. commercial online services;
. sites maintained by Internet service providers; and
. other entities that establish communities on the Internet by developing
their own or purchasing one of our competitors.
In addition, we could face competition in the future from traditional media
companies, a number of which, including Disney, CBS and NBC, have recently made
significant acquisitions of or investments in Internet companies. We also
compete with traditional forms of media, such as newspapers, magazines, radio
and television, for advertisers and advertising revenue.
We believe that the number of Internet companies relying on web-based
advertising revenue will increase greatly in the future. Accordingly, we will
likely face increased competition, which could in turn have a material adverse
effect on our business, results of operations and financial condition.
Many of our current and potential competitors, including developers of web
directories and search engines and traditional media companies, have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and larger existing customer bases than we
do. These competitors are able to undertake more extensive marketing campaigns
for
47
<PAGE>
their brands and services, adopt more aggressive advertising pricing policies
and make more attractive offers to potential employees, distribution partners,
commerce companies, advertisers and third-party content providers. There can be
no assurance that Internet content providers and Internet service providers,
including developers of web directories, search engines, sites that offer
professional editorial content and commercial online services, will not be
perceived by advertisers as having more desirable web sites for placement of
advertisements. Further, there can be no assurance that our competitors and
potential competitors will not develop communities that are equal or superior
to ours or that achieve greater market acceptance than our community. In
addition, many of our current advertising customers and strategic partners also
have established collaborative relationships with certain of our competitors or
potential competitors, and other high-traffic web sites. Accordingly, there can
be no assurance that:
. we will be able to increase our traffic and advertising customer base at
historical levels;
. we will be able to sustain our traffic levels or retain our advertising
customers;
. competitors will not experience greater growth in traffic as a result of
strategic collaborative relationships which could make their web sites
more attractive to advertisers; or
. our affiliates and strategic partners will not sever or renew their
agreements with us.
There can be no assurance that we will be able to compete successfully
against our current or future competitors or that competitive pressures faced
by us will not have a material adverse effect on our business, our financial
condition and the results of our operations.
Proprietary Rights and Licensing
Our success depends significantly upon protecting our intellectual property.
To do this, we rely on a combination of copyright and trademark laws, trade
secrets, confidentiality agreements with employees and third parties and
protective contractual provisions. Prior to entering into discussions with
potential content providers and affiliates regarding our business and
technologies, we generally require that such parties enter into nondisclosure
agreements with us. If these discussions result in a license or other business
relationship, we also generally require that the agreement setting forth the
parties' respective rights and obligations include provisions for the
protection of our intellectual property rights.
We have registered approximately 300 domain names, including all names
currently in use across our networks. "Snowball," "ChickClick," "IGN,"
"PowerStudents" and "InsideGuide" are trademarks of ours. We have not applied
for the registration of all of our trademarks and service marks and may not be
successful in obtaining the trademarks and service marks that we have applied
for. We have not applied for any patents.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard as proprietary. The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
We do not currently have any patents or patent applications pending in any
foreign country. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively
protect our intellectual property, our business could suffer.
Companies have frequently resorted to litigation regarding intellectual
property rights. We may have to litigate to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
other parties' proprietary rights. From time to time, we have received, and
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<PAGE>
we may receive in the future, notice of claims of infringement of other
parties' proprietary rights. Any such claims could be time-consuming, result in
costly litigation, divert management's attention, require the change of our
trademarks and the alternation of content, cause product or service release
delays, require us to redesign our web sites or services or require us to pay
damages or enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, may not be available on acceptable terms or
at all. If a successful claim of infringement were made against us and we could
not develop non-infringing intellectual property or license the infringed or
similar intellectual property on a timely and cost-effective basis, our
business could suffer.
Employees
As of November 30, 1999, we had a total of 232 employees, including 95 in
sales and marketing, 31 in engineering, 87 in production and content and 19 in
administration and finance. None of our employees is represented by a
collective bargaining agreement, nor have we experienced any work stoppage. We
consider our relations with our employees to be good.
Our future operating results depend in significant part on the continued
service of our key technical, sales and senior management personnel. Other than
as described in "Management-- Employment Arrangements, Termination of
Employment Arrangements and Change of Control Arrangements," none of these
individuals is bound by an employment agreement. Our future success also
depends on our continuing ability to attract and retain highly qualified
editorial, technical, sales and senior management personnel. Competition for
these personnel is intense, and we may not be able to retain our key editorial,
technical, sales and senior management personnel or attract these personnel in
the future. If we are unable to hire and retain qualified personnel in the
future, this inability could seriously harm our business.
Facilities
Our principal editorial, sales, marketing, research, development and
administrative office occupies approximately 26,000 square feet in San
Francisco, California, under a month-to-month lease. In addition, we also lease
sales and service offices in Los Angeles and New York City. We recently entered
into a long-term lease for approximately 180,000 square feet to be divided
among three buildings in Brisbane, California. We intend to relocate and expand
our principal offices to this site next year. This lease will expire with
respect to approximately 55,000 square feet, 61,000 square feet and 66,000
square feet 10 years, 11 years and 12 years, respectively, after we take
occupancy. We believe that this proposed new facility will be adequate for our
needs for the foreseeable future.
Legal Proceedings
We are not a party to any material legal proceedings. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.
49
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table presents information regarding our executive officers and
directors as of December 20, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark A. Jung............ 38 President, Chief Executive Officer and Director
James R. Tolonen........ 50 Chief Financial Officer, Chief Operating Officer and Director
Sandra Cavanah.......... 39 Vice President, Affiliate Development
Janette S. Chock........ 33 Vice President, Controller and Chief Accounting Officer
Teresa M. Crummett...... 39 Vice President, Corporate Marketing and Product Management
Kenneth H. Keller....... 42 Vice President, Engineering
Kathleen Z.
Layendecker............ 38 Vice President, Affiliate Marketing
Elizabeth G. Murphy..... 41 Vice President, Sales and Marketing
Christopher Anderson.... 42 Chairman of the Board and Director
Richard A. LeFurgy...... 43 Director
Michael Orsak........... 39 Director
Robert H. Reid.......... 34 Director
</TABLE>
Mark A. Jung has served as our President and Chief Executive Officer and as a
director since our incorporation in January 1999. Prior to joining us, from
February 1992 to July 1997, he co-founded and served as Chief Executive
Officer, a director and, from February 1996 to July 1997, Chairman of Worldtalk
Communications Corporation, an Internet security company. Mr. Jung holds a
Bachelor of Science degree in electrical engineering from Princeton University
and a Master of Business Administration from Stanford University.
James R. Tolonen has served as our Chief Financial Officer and Chief
Operating Officer since October 1999, and as a director since November 1999.
Prior to joining us, from April 1998 to October 1998, he served as a director
of Cybermedia, Inc., a software product service and support company, and as its
President and Chief Operating Officer from May 1998 to October 1998. From June
1989 to April 1998, he served as Senior Vice President and Chief Financial
Officer of Novell, Inc., a computer network and software company. Mr. Tolonen
holds a Bachelor of Science degree in mechanical engineering and a Master of
Business Administration from the University of Michigan. Mr. Tolonen is also a
certified public accountant.
Sandra Cavanah has served as our Vice President, Affiliate Development since
June 1999. Ms. Cavanah shares responsibility for affiliate related matters with
Ms. Layendecker, focusing primarily on affiliate development. From February
1999 to June 1999, she served as our Co-Director of Affiliate Marketing and
Development, and from January 1999 to February 1999, she served as a consultant
to us. Prior to joining us, from December 1997 to February 1999, she served as
Chief Financial Officer of Genstar Capital, L.L.C., a private-equity investment
firm. From April 1995 to November 1997, she served as an analyst at Robertson
Stephens & Co., an investment banking firm, and from December 1993 to March
1995, she served as a consultant to Pacific Telesis Group, a holding company
whose subsidiaries are communication services companies. Ms. Cavanah holds a
Bachelor of Science degree in business administration from the University of
California at Berkeley and a Master of Business Administration from Harvard
University.
Janette S. Chock has served as our Vice President, Controller and Chief
Accounting Officer since October 1999. From February 1999 to October 1999, she
served as our Controller, and from January 1999 to February 1999, she served as
a consultant to us. Prior to joining us, from August 1998 to January 1999, she
served as Controller of Fujitsu Personal Systems, Inc., a mobile computer
50
<PAGE>
hardware company. From October 1996 to July 1998, she served as Controller of
Diffusion, Inc., a corporate information delivery software company, and from
November 1993 to July 1996, she served as Controller of Worldtalk
Communications Corporation, an Internet security company. Ms. Chock holds a
Bachelor of Science degree in business administration from the University of
California at Berkeley. Ms. Chock is also a certified public accountant.
Teresa M. Crummett has served as our Vice President, Corporate Marketing and
Product Management since March 1999. From January 1999 to March 1999, she
served as a consultant to us. Prior to joining us, from August 1997 to December
1998, she was a self-employed business consultant. She served as a Director of
Corporate Marketing at CyberCash, Inc., an electronic commerce company, from
January 1996 to August 1997. From April 1994 to June 1995, she served as Vice
President, Direct Marketing of Interactive Network, Inc., an interactive
television company, and from March 1992 to November 1993, she served as
Director of Marketing of Walt Disney Company, a diversified worldwide
entertainment company. Ms. Crummett holds a Bachelor of Arts degree in
government from Harvard University and a Master of Business Administration from
Stanford University.
Kenneth H. Keller has served as our Vice President, Engineering since March
1999. From January 1999 to March 1999, he served as a consultant to us. Prior
to joining us, from May 1996 to December 1998, he was a self-employed business
consultant, entrepreneur and investor. From April 1995 to April 1996, he served
as Director of Development of Excite, Inc., an Internet media company. Mr.
Keller holds a Bachelor of Science degree in mathematics from Carnegie Mellon
University and a Master of Science degree and Ph.D. in computer science from
the University of California at Berkeley.
Kathleen Z. Layendecker has served as our Vice President, Affiliate Marketing
since June 1999. Ms. Layendecker shares responsibility for affiliate related
matters with Ms. Cavanah, focusing primarily on affiliate marketing. From
February 1999 to June 1999, she served as our Co-Director of Affiliate
Marketing and Development, and from January 1999 to February 1999, she served
as a consultant to us. Prior to joining us, from January 1997 to June 1998, she
served as an analyst for Bodri Capital Management, Inc., an investment company.
From October 1993 to May 1995, she served as Director of Finance and
Administration of Valentis Corp., a biotechnology company. Ms. Layendecker
holds a Bachelor of Arts degree in English from Stanford University and a
Master of Business Administration from the Yale School of Management.
Elizabeth G. Murphy has served as our Vice President, Sales and Marketing
since March 1999. Prior to joining us, from April 1992 to March 1999, she
served most recently as Vice President, Associate Publisher with U.S. News and
World Report, a publishing company. Ms. Murphy holds a Bachelor of Science
degree in zoology from the University of Michigan.
Christopher Anderson has served as our Chairman and a director since our
incorporation in January 1999. He founded Imagine Media, Inc., an Internet
media company, and has served as its President and as one of its directors
since October 1993. He has also served as Chairman of the Board of Future
Network plc, an Internet media company, since May 1998. Mr. Anderson holds a
Bachelor of Arts degree in philosophy from Oxford University.
Richard A. LeFurgy has served as a director since May 1999. He has been a
member of Walden Media, L.L.C., the general partner of the Walden Media &
Information Technology Fund, L.P., a venture capital firm since August 1999. He
served as a consultant to the Walden Media & Information Technology Fund, L.P.
from October 1998 to August 1999. From June 1995 to October 1998, he served as
Senior Vice President, Advertising Sales of Starwave Corporation, an Internet
media company, and from June 1978 to May 1995, he served as Executive Vice
President, Senior Partner and a director at NW Ayer & Partners, an advertising
agency. Mr. LeFurgy holds a Bachelor of Science degree in advertising from
Syracuse University.
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Michael Orsak has served as a director since May 1999. He is a founder of
Worldview Technology Partners, a venture capital firm, and has been a general
partner since September 1996. From January 1990 to September 1996, he served as
a co-manager of a fund of JAFCO America Ventures, a venture capital firm. Mr.
Orsak holds a Bachelor of Arts degree in economics and a Master of Business
Administration from Stanford University.
Robert H. Reid has served as a director since March 1999. He is a founder of
Listen.com, Inc., an Internet music company, and has served as its President
and Chief Executive Officer since February 1998. From January 1997 to December
1998, he was an associate of 21st Century Internet Venture Partners, a venture
capital firm, and from December 1994 to April 1996 he served as a Business
Development Manager at Silicon Graphics, Inc., a high-performance computer
company. Mr. Reid holds a Bachelor of Arts degree in international relations
and a Master of Arts degree in international policy studies from Stanford
University and a Master of Business Administration from Harvard University.
Board of Directors and Committees
We currently have six directors. We intend to amend our certificate of
incorporation upon the closing of this offering. The amended certificate of
incorporation will divide our board of directors into three classes: Class I,
whose term will expire at the annual meeting of stockholders to be held in
2001, Class II, whose term will expire at the annual meeting of stockholders to
be held in 2002, and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2003. At each annual meeting of stockholders after
the initial classification, the successors to directors whose terms have
expired will be elected to serve from the time of election and qualification
until the third annual meeting following election.
In addition, we intend to amend our bylaws upon the consummation of this
offering to provide that the authorized number of directors may be changed only
by resolution of the board of directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the total number of directors.
This classification of the board of directors may have the effect of delaying
or preventing changes in our control or management. See "Description of Capital
Stock--Anti-Takeover Provisions of the Certificate of Incorporation, Bylaws and
Delaware Law." There are no family relationships among any of our directors,
officers or key employees.
Our board of directors has a compensation committee and an audit committee.
Compensation Committee. The current members of our compensation committee are
Messrs. Anderson, Orsak and Reid. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers and employees. The compensation committee also administers our
1999 Equity Incentive Plan and will administer our 2000 Equity Incentive Plan
and 2000 Employee Stock Purchase Plan.
Audit Committee. The current members of our audit committee are Messrs.
LeFurgy and Orsak. Our audit committee reviews and monitors our financial
statements and accounting practices, makes recommendations to our board
regarding the selection of independent auditors and reviews the results and
scope of the audit and other services provided by our independent auditors.
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Compensation Committee Interlocks and Insider Participation
Before June 1999, our board of directors did not have a compensation
committee and all compensation decisions were made by the full board of
directors. In June 1999, we formed a compensation committee consisting of
Richard LeFurgy, Michael Orsak and Mark Jung. Mr. Jung served as our President
and Chief Executive Officer while he was a member of the compensation
committee. In December 1999, we replaced the membership of our compensation
committee with our current compensation committee membership. No interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has an interlocking relationship existed in the past. Mr. Jung has not
participated in discussions by our board or directors or the compensation
committee with respect to his compensation. None of our executive officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors.
Preferred Stock Financings. Christopher Anderson, our Chairman and one of our
directors, and Mark Jung, our President and Chief Executive Officer and one of
our directors, purchased 12,857,143 and 989,011 shares, respectively, of Series
A preferred stock at $0.2333 per share in February 1999. In May 1999, Richard
LeFurgy, one of our directors, purchased 35,545 shares of Series B-1 preferred
stock at $4.22 per share, and in October 1999, James Tolonen, one of our
directors and our Chief Financial Officer and Chief Operating Officer,
purchased 150,000 shares of Series B-1 preferred stock at $4.22 per share. In
addition, entities associated with Worldview Technology Partners and the Walden
Media & Information Technology Fund, L.P., purchased 1,540,284 and 1,220,378
shares, respectively, of Series B-1 preferred stock at $4.22 per share in May
1999. In December 1999, these same individuals and entities purchased shares of
Series C preferred stock at $10.00 per share in the following amounts: 700,000
shares by Mr. Anderson; 50,000 shares by Mr. Jung and 10,000 by the Jung-
Murdock Children's Trust U/A 11/23/93, Susan Murdock TTEE, a trust for the
benefit of Mr. Jung's children; 3,400 shares by Mr LeFurgy; 117,800 shares by
entities associated with Walden Media & Information Technology Fund, L.P.; and
148,700 shares by entities associated with Worldview Technology Partners.
Michael Orsak, one of our directors, is a general partner of Worldview
Technology Partners and Richard LeFurgy is a member of Walden Media, L.L.C.,
the general partner of the Walden Media & Information Technology Fund, L.P.,
and each may be deemed to own beneficially the shares held by the entities with
whom they are associated.
Loan to Christopher Anderson. In February 1999, we loaned an aggregate of
$2,000,000 to Mr. Anderson, our Chairman and one of our directors, in
connection with his purchase of 12,857,143 shares of our Series A preferred
stock. The loan is secured by a full recourse promissory note and a stock
pledge agreement. The note accrued interest at a rate of 4.57% per year and was
due and payable with respect to $1,000,000 of principal, plus interest, on or
before March 1, 1999 and with respect to the remaining $1,000,000 of principal,
and any remaining interest, on or before April 1, 1999. The note has been
repaid in full.
Sale of Common Stock and Loan to Mark Jung. In February 1999, we loaned an
aggregate of $92,300 to Mark Jung, our President and Chief Executive Officer
and one of our directors, in connection with his purchase of 1,978,021 shares
of our common stock at $0.04667 per share. The loan is secured by a full
recourse promissory note and a stock pledge agreement. The note accrues
interest at a rate of 4.64% per year, payable annually, and is due and payable
on or before February 1, 2003. We will forgive the principal and accrued
interest ratably over a 48-month period from December 1998. In the event that
Mr. Jung's employment with us is terminated for any reason, then all remaining
unpaid principal and interest shall become due and payable within 90 days after
termination, unless we agree to a longer period.
Sale of Common Stock and Loan to Robert Reid. In March 1999, we loaned an
aggregate of $7,000 to Mr. Reid, one of our directors, in connection with his
purchase of 150,000 shares of our
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<PAGE>
common stock at $0.04667. The loan is secured by a full recourse promissory
note and a stock pledge agreement. The note accrues interest at a rate of 4.67%
per year, payable annually, and is due and payable in full on or before March
11, 2001.
Sale of Preferred Stock and Loan to Trusts Associated with James Tolonen. In
October 1999, we loaned an aggregate of $333,000 to Mr. Tolonen, our Chief
Financial Officer and Chief Operating Officer and one of our directors, in his
capacity as trustee for the James R. Tolonen and Ginger Tolonen Family Trust
dated 9/26/96 in connection with its purchase of 120,000 shares of our Series
B-1 preferred stock at $4.22 per share. The loan is secured by a full recourse
promissory note and a stock pledge agreement. The note accrues interest at a
rate of 5.86% per year, payable annually, and is due and payable in full on or
before October 20, 2003. We will forgive the principal and accrued interest
ratably over a 48-month period from October 1999. Mr. Tolonen also purchased
30,000 shares of our Series B-1 preferred stock in his capacity as a trustee
for the James R. Tolonen 1999 Grantor Retained Annuity Trust at this time.
Sale of Common Stock and Loan to James Tolonen. In November 1999, we loaned
an aggregate of $600,000 to Mr. Tolonen, our Chief Financial Officer and Chief
Operating Offer and one of our directors, in connection with his purchase of
400,000 shares of our common stock at $2.00 per share. The loan is secured by a
full recourse promissory note and a stock pledge agreement. The note accrues
interest at a rate of 6.08% per year, payable annually, and is due and payable
in full on or before November 30, 2003.
The promissory notes for Messrs. Jung and Reid and Mr. Tolonen's Trust
provide that all remaining unpaid principal and interest shall become due and
payable if the borrower's relationship with us ceases.
Director Compensation
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending board
and board committee meetings.
Each eligible director who is not our employee and who is or becomes a member
of our board on or after the effective date of the registration statement, of
which this prospectus forms a part, will be granted an option to purchase
20,000 shares of common stock under our 2000 Equity Incentive Plan, unless that
director has previously received an option grant in that amount before the
effective date. Immediately following each annual meeting of our stockholders,
each eligible director will automatically be granted an additional option to
purchase 5,000 shares under the plan if the director has served continuously as
a member of the board for at least one year. The options will have 10-year
terms and will terminate three months following the date the director ceases to
be one of our directors or consultants, 12 months if the termination is due to
death or disability, or one month if the termination is for cause. All options
granted under the plan will vest over four years from the date of grant, with
25% of the shares vesting on the first anniversary of the date of grant and the
remainder to vest ratably over a 36-month period thereafter.
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<PAGE>
Executive Compensation
The following table presents projected compensation information for 1999 with
regard to compensation paid to or accrued by our chief executive officer and
each of our four other most highly compensated executive officers whose salary
and bonus for 1999 will be more than $100,000. None of our officers were
compensated in 1998. The restricted stock value is calculated based upon a
$0.04667 per share purchase price and assumes that the estimated fair market
value on the date of grant is equal to the assumed initial public offering
price of $ per share. On December 31, 1999, Mr. Jung will hold 1,978,021
shares of our common stock pursuant to a restricted stock award of subject
to our right to repurchase these shares upon termination of his employment. Our
repurchase right expires ratably over a 48-month period from December 1998. If
declared by the board, dividends will be paid on Mr. Jung's restricted stock
award. If the value of our common stock on December 31, 1999 was the assumed
initial public offering price of $ per share, the value of Mr. Jung's
restricted stock award at that time would have been $ .
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation Awards
--------------- ---------------------
Restricted Securities
Stock Underlying All Other
Name and Principal Positions Salary Bonus Award Options Compensation
- ---------------------------- -------- ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Mark A. Jung................ $230,770 $ -- $ -- -- $20,000
President and Chief
Executive Officer
Elizabeth G. Murphy......... 160,000 40,500 -- 300,000 --
Vice President, Sales and
Marketing
Kenneth H. Keller........... 148,077 -- -- 450,000 38,000
Vice President, Engineering
Teresa M. Crummett.......... 119,616 15,000 -- 198,000 48,500
Vice President, Corporate
Marketing and Product
Management
Janette S. Chock............ 123,462 -- -- 147,500 5,000
Vice President, Controller
and Chief Accounting
Officer
</TABLE>
The amounts listed under the column captioned "All Other Compensation"
represents payments made on our behalf by Imagine Media in January and February
1999. The bonuses to be earned by Ms. Murphy and Ms. Crummett for the quarter
ending December 31, 1999 are estimates because each person's bonus is
determined at the discretion of Mark Jung, our President and Chief Executive
Officer, some time after the month of December. James Tolonen, our Chief
Financial Officer and Chief Operating Officer, was hired in October 1999 and,
had he been employed for the entire year, would have earned a salary of
$225,000. Mr. Tolonen was granted an option to purchase 600,000 shares of
common stock and purchased 150,000 shares of Series B-1 preferred stock, in his
capacity as a trustee for selected trusts.
Option Grants in 1999
The following table presents the grants of stock options under our 1999
Equity Incentive Plan during 1999 to our chief executive officer and each of
our four other most highly compensated executive officers in 1999. None of our
officers were compensated in 1998.
Options granted under the 1999 Equity Incentive Plan are either incentive
stock options or nonqualified stock options and generally become exercisable
with respect to 25% of the shares subject to the option on the first
anniversary of the date of grant and with respect to an additional 2.0833% of
these shares each month thereafter, subject to acceleration in some instances
upon certain changes in our control. Stock option grants in excess of 25,000
shares are generally
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immediately exercisable, subject to acceleration in some instances upon certain
changes in our control or termination by us in certain circumstances. We have a
right to repurchase these shares upon termination of the optionee's employment
with us. This right generally lapses as to 25% of the shares subject to the
option on the first anniversary of the date of grant and as to 2.083% each
month thereafter. Options expire ten years from the date of grant. Options were
granted at an exercise price equal to the fair market value of our common
stock, as determined by our board on the date of grant. We did not grant
options in 1998. As of December 20, 1999, we have granted to our employees
options to purchase a total of 6,103,962 shares of common stock under the 1999
Equity Incentive Plan and an additional 86,250 shares of common stock outside
the plan.
The 5% and 10% assumed annual rates of stock price appreciation are required
by the rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future common stock prices. The potential realizable
values at 0%, 5% and 10% appreciation are calculated by assuming that the
estimated fair market value on the date of grant, based upon an assumed initial
public offering price of $ per share, appreciates at the indicated rate for
the entire term of the option and that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
---------------------------------------- -----------------------
Percent
of
Total
Number of Options
Securities Granted Exercise
Underlying to Price
Options Employees Per Expiration
Name Granted in 1999 Share Date 0% 5% 10%
---- ---------- --------- -------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark A. Jung............ -- -- % $ -- -- -- % -- % -- %
Elizabeth G. Murphy..... 300,000 4.85 0.04667 3/15/09
Kenneth H. Keller....... 450,000 7.27 0.04667 3/15/09
Teresa M. Crummett...... 198,000 3.20 0.04667 3/15/09
Janette S. Chock........ 99,000 1.60 0.04667 2/24/09
13,500 0.22 0.04667 3/15/09
35,000 0.57 2.00 10/4/09
James R. Tolonen........ 600,000 9.70 2.00 10/20/09
</TABLE>
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Aggregated Option Exercises in 1999 and Values at December 31, 1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options for the year ended December 31, 1999
and the number of shares of common stock subject to "exercisable" and
"unexercisable" stock options held as of December 31, 1999 by our chief
executive officer and each of our four other most highly compensated executive
officers. All options were granted under our 1999 Equity Incentive Plan. Each
of these options was immediately exercisable upon grant, but is subject to our
right to repurchase the option shares at the exercise price upon termination of
the optionee's employment. Our right to repurchase the shares lapses either (1)
as to 25% of the shares subject to the option on the first anniversary of the
date of grant and the remainder expires ratably over a 36-month period
thereafter or (2) as to 12.5% of the shares subject to the option on the six
month anniversary of the date of grant and the remainder expires ratably over a
42-month period thereafter. In the table below, the heading "exercisable"
refers to shares as to which our right of repurchase has lapsed. The heading
"unexercisable" refers to shares that we still have the right to repurchase
upon termination of the optionee's employment. Also presented are values of
"in-the-money" options, which represent the positive difference between the
exercise price of each outstanding stock option and an assumed initial public
offering price of $ per share.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money Options at
Shares Options at December 31, 1999 December 31, 1999
Acquired on Value -------------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Jung............ -- $ -- -- -- -- --
Elizabeth G. Murphy..... -- -- -- 300,000 --
Kenneth H. Keller....... -- -- 112,500 337,500
Teresa M. Crummett...... -- -- 45,375 152,625
Janette S. Chock........ -- -- 23,156 124,344
James R. Tolonen........ -- -- 25,000 575,000
</TABLE>
Benefit Plans
1999 Equity Incentive Plan.
As of December 20, 1999, options to purchase 2,292,680 shares of common stock
were outstanding under the 1999 Equity Incentive Plan and 1,849,682 shares of
common stock remained available for issuance upon the exercise of options that
may be granted in the future. The options that were outstanding as of that date
had a weighted average exercise price of $0.82 per share. This plan will
terminate upon this offering and no options will be granted under this plan
after this offering. However, termination will not affect any outstanding
options, all of which will remain outstanding until exercise or until they
terminate or expire by their terms. Options granted under this plan are subject
to terms substantially similar to those described below with respect to options
granted under the 2000 Equity Incentive Plan.
2000 Equity Incentive Plan.
The Board is considering a proposal to adopt the 2000 Equity Incentive Plan
and to reserve shares of common stock to be issued under this
plan. On each January 1, beginning in 2001, the aggregate number of shares
reserved for issuance under this plan will increase automatically by a number
of shares equal to 5% of our outstanding shares of capital stock on December 31
of the preceding year.
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The following shares will be available for grant and issuance under the
equity incentive plan:
. shares under the 2000 Equity Incentive Plan not issued or subject to
outstanding grants on the date of this prospectus;
. shares that are subject to issuance upon exercise of an option granted
under the equity incentive plan that cease to be subject to the option
for any reason other than exercise of the option including by the
expiration of the option or the option otherwise becoming unexercisable
for any reason without having been exercised in full;
. shares that have been issued upon the exercise of an option granted
under the equity incentive plan that are subsequently forfeited or
repurchased by us at the original purchase price;
. shares that are subject to an award granted pursuant to a restricted
stock purchase agreement under the equity incentive plan that are
subsequently forfeited or repurchased by us at the original issue price;
or
. shares that are subject to stock bonuses granted under the equity
incentive plan that terminate without shares being issued.
This plan will become effective on the consummation of this offering and will
terminate on ten years following adoption, unless it is terminated earlier by
our board. The plan will authorize the award of options, restricted stock
awards and stock bonuses. No person will be eligible to receive more than
1,500,000 shares in any calendar year under the plan other than a new employee.
A new employee will be eligible to receive no more than 3,000,000 shares in the
calendar year in which the employee commences employment.
The plan will be administered by our compensation committee, all of the
members of which are "non-employee directors" under applicable federal
securities laws and "outside directors" as defined under applicable federal tax
laws. The compensation committee will have the authority to construe and
interpret the plan, grant awards and make all other determinations necessary or
advisable for the administration of the plan. Also, non-employee directors are
entitled to receive automatic annual grants of options to purchase shares of
our common stock, as described under "Management--Director Compensation."
The plan will provide for the grant of both incentive stock options that
qualify under Section 422 of the Internal Revenue Code and nonqualified stock
options. Incentive stock options may be granted only to our employees or
employees of our parent or subsidiary, if any. All awards other than incentive
stock options may be granted to employees, officers, directors, consultants,
independent contractors and advisors of ours or our parent or subsidiary, if
any, provided that, in the case of the consultants, independent contractors and
advisors they render bona fide services not in connection with the offer and
sale of securities in a capital-raising transaction. The exercise price of
incentive stock options must be at least equal to the fair market value of our
common stock on the date of grant. The exercise price of incentive stock
options granted to 10% stockholders must be at least equal to 110% of that
value. The exercise price of non-qualified stock options must be at least equal
to 85% of the fair market value of our common stock on the date of grant.
Options may be exercisable only as they vest or may be immediately
exercisable with the shares issued subject to our right of repurchase that
lapses as the shares vest. In general, options and the shares issued pursuant
to immediately exercisable options will vest over a four-year period. The
maximum term of options granted under the plan is ten years.
Awards granted under the plan may not be transferred in any manner other than
by will or by the laws of descent and distribution. They may be exercised
during the lifetime of the optionee only by
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<PAGE>
the optionee. The compensation committee could determine otherwise and provide
for these provisions in the award agreement, but only with respect to awards
that are not incentive stock options. Options granted under the plan generally
may be exercised for a period of time after the termination of the optionee's
service to us or to our parent or subsidiary, if any. Options will generally
terminate one month after termination of employment for cause.
The purchase price for restricted stock will be determined by our
compensation committee. Stock bonuses may be issued for past services or may be
awarded upon the completion of certain services or performance goals.
If we are dissolved or liquidated or have a "change in control" transaction,
outstanding awards may be assumed or substituted by the successor corporation,
if any. In the discretion of the compensation committee, the vesting of these
awards may accelerate upon one of these transactions.
2000 Employee Stock Purchase Plan.
The board is considering a proposal to adopt the 2000 Employee Stock Purchase
Plan and to reserve 500,000 shares of common stock under this plan. The plan
will become effective on the first business day on which price quotations for
our common stock are available on the Nasdaq National Market. On each January
1, beginning in 2001, the aggregate number of shares reserved for issuance
under this plan will increase automatically by a number of shares equal to
1% of our outstanding shares on December 31 of the preceding year. The
aggregate number of shares reserved for issuance under the plan may not exceed
5,000,000 shares. The plan will be administered by our compensation committee
which will have the authority to construe and interpret the plan.
Employees generally will be eligible to participate in the plan if:
. they are employed before the beginning of an offering period;
. they are customarily employed by us, or our parent or any subsidiaries
that we designate, for more than 20 hours per week and more than five
months in a calendar year; and
. are not, and would not become as a result of being granted an option
under the plan, 5% stockholders of us or our designated parent or
subsidiaries.
Under the plan, eligible employees will be permitted to acquire shares of our
common stock through payroll deductions. Eligible employees may select a rate
of payroll deduction between 1% and 10% of their compensation, subject to
maximum purchase limitations. Participation in the plan will end automatically
upon termination of employment for any reason.
Each offering period under the plan will be for two years and will consist of
four six-month purchase periods. The first offering period is expected to begin
on the first business day on which price quotations for our common stock are
available on the Nasdaq National Market. Additional offering periods and
purchase periods will begin on February 1 and August 1 of each year. Because
the first day on which price quotations for our common stock may be available
on the Nasdaq National Market may not be February 1 or August 1, the length of
the first offering period will be more than two years, and the length of the
first purchase period may be more than six months.
The plan will provide that, in the event of our proposed dissolution or
liquidation, each offering period that commenced prior to the closing of the
proposed event shall continue for the duration of the offering period, provided
that the compensation committee may fix a different date for termination of the
plan. The purchase price for our common stock purchased under the plan is 85%
of the lesser of the fair market value of our common stock on the first or last
day of the applicable offering period.
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The compensation committee will have the power to change the offering dates,
purchase dates and duration of offering periods or purchase periods without
stockholder approval, if the change is announced prior to the relevant offering
period, or prior to such other time period as specified by the compensation
committee.
The plan will be intended to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code. Rights granted under the plan
will not be transferable by a participant other than by will or the laws of
descent and distribution.
The plan will terminate ten years following adoption, unless it is terminated
earlier under the terms of the plan. The board will have the authority to
amend, terminate or extend the term of the plan, except that no action may
adversely affect any outstanding options previously granted under the plan.
Except for the automatic annual increase of shares described above, stockholder
approval is required to increase the number of shares that may be issued or to
change the terms of eligibility under the plan. The board may make amendments
to the plan as it determines to be advisable if the financial accounting
treatment for the plan is different from the financial accounting treatment in
effect on the date the plan was adopted by the board.
401(k) Plan. We sponsor a defined contribution plan intended to qualify under
Section 401 of the Internal Revenue Code, or a 401(k) plan. All employees are
generally eligible to participate and may enter the plan as of the first day of
the month coinciding with or next following the date on which the participant
met the requirements. Participants may make pre-tax contributions to the plan
of up to 20% of their eligible earnings, subject to a statutorily prescribed
annual limit. Each participant is fully vested in his or her contributions and
the investment earnings. Contributions to the plan by the participants or by
us, and the income earned on these contributions, are generally not taxable to
the participants until withdrawn. Participant and company contributions are
held in trust as required by law. Individual participants may direct the
trustee to invest their accounts in authorized investment alternatives.
Employment Arrangements, Termination of Employment Arrangements
and Change of Control Arrangements
Mark A. Jung's offer letter, dated February 1, 1999, provides for an initial
annual salary of $250,000 commencing on February 1, 1999. Pursuant to the offer
letter, Mr. Jung purchased 1,978,021 shares of our common stock at $0.04667 per
share. The shares purchased by him are subject to our right to repurchase these
shares upon termination of his employment. Our right to repurchase his shares
at the original price upon his termination lapses ratably over a 48-month
period from December 1998. The repurchase right will expire as to half of the
shares of common stock subject to repurchase at any given time if Mr. Jung is
terminated by us without cause or if he terminates his employment under some
circumstances. In connection with this stock purchase, we agreed to loan Mr.
Jung the entire purchase price. See "Management--Compensation Committee
Interlocks and Insider Participation."
James R. Tolonen's offer letter, dated October 18, 1999, provides for an
initial annual salary of $225,000 commencing on October 1, 1999. Pursuant to
the offer letter, Mr. Tolonen purchased 150,000 shares of our Series B-1
preferred stock at a purchase price of $4.22 per share. In connection with this
stock purchase, we loaned him $333,000 in his capacity as trustee for the James
R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96, pursuant to a full
recourse promissory note representing part of the purchase price for his
shares. The principal amount of the loan is due on October 20, 2003 or earlier
in the event of his termination for cause or if he terminates his employment
under some circumstances, and bears interest at the rate of 5.86% per year.
Mr. Tolonen's offer letter provides that the note and any accrued interest will
be forgiven in full if he
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<PAGE>
is terminated without cause or if he terminates his employment under some
circumstances. See "Management--Compensation Committee Interlocks and Insider
Participation." Pursuant to the offer letter, Mr. Tolonen was granted options
to purchase 600,000 shares of our common stock at an exercise price of $2.00
per share under the 1999 Equity Incentive Plan, which upon exercise will be
subject to our right to repurchase all of the shares of common stock upon
termination of his employment. In November 1999, he exercised options to
purchase 400,000 shares of our common stock at an exercise price of $2.00 per
share. Our right to repurchase these shares lapses ratably over a 48-month
period from October 1999. In addition, our repurchase right lapses as to 75,000
shares of common stock if Mr. Tolonen is terminated by us without cause or if
he terminates his employment under some circumstances, unless termination
happens 60 days before, or within one year after, we are acquired or merge with
another company, in which case our right to repurchase these shares lapses as
to 150,000 shares.
Janette S. Chock's offer letter, dated January 18, 1999, provides for an
initial annual salary of $120,000 commencing on February 1, 1999. Pursuant to
the offer letter, Ms. Chock purchased 99,000 shares of our common stock at an
exercise price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon
termination of her employment, we have the right to repurchase at the exercise
price all of the shares of common stock for which our repurchase right has not
lapsed. Our right to repurchase her shares at the original price upon
termination lapsed as to 12,375 shares on August 1, 1999 and lapses as to
approximately 2,062 shares each month thereafter.
Teresa M. Crummett's offer letter, dated March 15, 1999, provides for an
initial annual salary of $140,000 commencing on March 15, 1999, and an
incentive bonus of up to $7,500 per quarter commencing June 30, 1999. Pursuant
to the offer letter, Ms. Crummett purchased 198,000 shares of our common stock
at an exercise price of $0.04667 per share under the 1999 Equity Incentive
Plan. Upon termination of her employment, we have the right to repurchase at
the exercise price all of the shares of common stock for which our repurchase
right has not lapsed. Our right to repurchase her shares lapsed as to 24,750
shares on July 1, 1999 and lapses as to 4,125 shares each month thereafter.
Kenneth H. Keller's offer letter, dated March 15, 1999, provides for an
initial annual salary of $175,000 commencing on March 15, 1999. Pursuant to the
offer letter, Mr. Keller purchased 450,000 shares of our common stock at an
exercise price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon
termination of his employment, we have the right to repurchase at the exercise
price all of the shares of common stock for which our repurchase right has not
lapsed. Our right to repurchase his shares lapsed as to 28,125 shares on March
22, 1999 and lapses as to approximately 9,375 shares each month thereafter. The
repurchase right will expire as to 112,500 shares of the common stock subject
to repurchase at any given time if Mr. Keller is terminated by us without cause
or if he terminates his employment under some circumstances.
Elizabeth G. Murphy's offer letter, dated March 4, 1999, provides for an
initial annual salary of $200,000 commencing on March 17, 1999 and an incentive
bonus of up to $75,000, of which $36,500 is guaranteed in the first year of her
employment. In addition, her offer letter provides that we will pay her
$100,000 if she is terminated by us without cause, or if she terminates her
employment under some circumstances. Pursuant to the offer letter, Ms. Murphy
purchased 300,000 shares of our common stock, of which 75,000 shares shall vest
on March 15, 2000 and the remainder will vest ratably over a 36-month period
thereafter, at an exercise price of $0.04667 per share under the 1999 Equity
Incentive Plan. Upon termination of her employment, we have the right to
repurchase at the exercise price all of the shares of common stock for which
our repurchase right has not lapsed. Our right to repurchase her shares will
lapse as to 75,000 shares on March 17, 1999 and will lapse as to 6,250 shares
each month thereafter. The repurchase right will expire as to 75,000 shares of
the common stock subject to repurchase at any given time if Ms. Murphy is
terminated by us without cause or if she terminates her employment under some
circumstances.
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Unless stated otherwise, if we merge with or are acquired by another company
and the surviving company does not assume the employment contracts between our
executive officers and us, our executive officers may terminate their
employment at their own election and our repurchase right will expire as to 25%
of the number of shares purchased pursuant to the employment contract.
Limitation of Liability and Indemnification
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages resulting from breach
of fiduciary duty as a director, except liability for:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful dividends and stock repurchases or redemptions under section
174 of the Delaware General Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
. we must indemnify our directors and executive officers to the fullest
extent permitted by Delaware law or any other applicable law, subject to
very limited exceptions;
. we may indemnify our other employees and agents to the same extent that
we indemnified our directors and executive officers, unless otherwise
required by law, our certificate of incorporation, bylaws or agreements;
and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our current directors and executive
officers to give them additional contractual assurances regarding the scope of
the indemnification provided in our certificate of incorporation and bylaws and
to provide additional procedural protections. Presently, there is no pending
litigation or proceeding involving any of our directors, executive officers or
employees for which indemnification is sought, nor are we aware of any
threatened litigation that may result in claims for indemnification.
We have liability insurance for our directors and officers and intend to
obtain a rider to extend that coverage for public securities matters.
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RELATED PARTY TRANSACTIONS
Other than the employment agreements described in "Management," and the
transactions described below, since we were formed there has not been nor is
there currently proposed, any transaction or series of similar transactions to
which we were or will be a party:
. in which the amount involved exceeds or will exceed $60,000, and
. in which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
Sales of Securities
In February and March 1999, we sold an aggregate of 14,985,165 shares of
Series A preferred stock at a purchase price of $0.2333 per share. In February
1999, we issued and sold an aggregate of 7,500,000 shares of Series B preferred
stock to Imagine Media, Inc. in exchange for certain assets of Imagine Media
valued at $1,750,000. In connection with this issuance of Series B preferred
stock, we entered into a Services and Support Agreement with Imagine Media
dated as of January 1999. This agreement was intended to assist us in our
organizational and start-up phase by providing support services to us and by
permitting us to occupy space in Imagine Media's premises. The agreement
terminated on October 1, 1999, and we are currently discussing its renewal. In
May, June and October 1999, we sold an aggregate of 5,789,807 shares of
Series B-1 preferred stock at a purchase price of $4.22 per share. In
connection with this sale, all shares of Series B preferred stock converted
into 414,691 shares of Series B-1 preferred stock for no additional
consideration. In December 1999, we agreed to sell an aggregate of 3,529,000
shares of Series C preferred stock at a purchase price of $10.00 per share, of
which 3,379,000 shares were issued in December 1999 and 150,000 will be issued
in January 2000.
Purchasers of our preferred and common stock include, among others, the
following executive officers, directors and holders of more than 5% of our
outstanding stock:
<TABLE>
<CAPTION>
Series B-
Series A Series B 1 Series C
Common preferred preferred preferred preferred
stock stock stock stock stock
Purchaser purchased purchased purchased purchased purchased
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Christopher Anderson.......... -- 12,857,143 -- -- 700,000
Imagine Media, Inc............ -- 989,011 7,500,000 260,664 100,000
Mark A. Jung.................. 1,978,021 989,011 -- -- 60,000(1)
Michael Orsak
Entities associated with
Worldview
Technology Partners.......... -- -- -- 1,540,284 148,700
Richard A. LeFurgy
Entities associated with the
Walden
Media & Information Technology
Fund, L.P.................... 108,000 -- -- 1,255,923 121,200
Kenneth H. Keller............. -- 150,000 -- -- 14,500
James R. Tolonen.............. -- -- -- 150,000(2) --
</TABLE>
- --------
(1) Includes 10,000 shares held by the Jung-Murdock Children's Trust U/A
11/23/93, Susan Murdock TTEE. Mr. Jung disclaims beneficial ownership with
respect to the shares held by the Jung-Murdock Children's Trust.
(2) Represents 120,000 shares held by the James R. Tolonen and Ginger Tolonen
Family Trust dated 9/26/99 and 30,000 shares held by the James R. Tolonen
1999 Grantor Retained Annuity Trust.
All of the share numbers described above reflect the conversion of each
outstanding share of preferred stock into shares of our common stock. Mr.
Anderson, one of our directors, is the President and a director of Imagine
Media and may be deemed to beneficially own the shares held by Imagine Media.
Mr. Orsak, one of our directors, is a general partner of Worldview Technology
Partners and may be deemed to beneficially own the shares held by Worldview
Technology Partners. Mr. LeFurgy, one of our directors, is a member of the
Walden Media, L.L.C., the managing member of the Walden Media & Information
Technology Fund, L.P., and may be deemed to beneficially own the shares held by
the Walden Media & Information Technology Fund, L.P. and its affiliated
entities.
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Indemnification
We have entered into an indemnification agreement with Richard LeFurgy. Under
that agreement, we will indemnify Mr. LeFurgy for liabilities incurred by him
in connection with the possible recruitment of employees or consultants from a
particular company.
We intend to enter into indemnification agreements with each of our officers
and directors. Those indemnification agreements will require us to indemnify
our officers and directors to the fullest extent permitted by Delaware law. See
"Description of Capital Stock--Indemnification of Directors and Executive
Officers and Limitation of Liability."
Registration Rights
Holders of our preferred stock are entitled to registration rights with
respect to the shares of common stock that they will hold following this
offering. See "Description of Capital Stock --Registration Rights."
Loans to and other Arrangements with Officers and Directors
Please refer to "Management--Compensation Committee Interlocks and Insider
Participation" for a description of the loans to Messrs. Anderson, Jung, Reid
and Tolonen and "Management--Employment Agreements, Termination of Employment
Agreements and Change of Control Arrangements" for a description of stock
option grants to officers and directors.
We believe that all transactions between us and our officers, directors,
principal stockholders and other affiliates have been and will be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of
our common stock as of December 20, 1999 and as adjusted to reflect the sale of
the common stock in this offering by
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. each executive officer listed in the Summary Compensation Table, above;
and
. all executive officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
------------------------
Number of Shares Prior to After the
Name of Beneficial Owner Beneficially Owned Offering Offering
------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Christopher Anderson(1)......... 15,321,509 48.2% %
Mark A. Jung(2)................. 3,027,032 9.5
Imagine Media, Inc.(3)
150 North Hill Drive
Brisbane, California 94005..... 1,764,366 5.6
Michael Orsak(4)
Worldview Technology Partners
entities
435 Tasso Street, Suite 120
Palo Alto, California 94301.... 1,688,984 5.3
Weiss Peck & Greer, L.L.C.
entities(5)
555 California Street, Suite
3130
San Francisco, California 94104
Attn: Christopher J. Schaepe... 1,688,983 5.3
Richard A. LeFurgy(6)
The Walden Media & Information
Technology Fund, L.P. entities
750 Battery St., 7th Floor
San Francisco, California
94111.......................... 1,485,123 4.7
James R. Tolonen(7)............. 750,000 2.4
Kenneth H. Keller(8)............ 614,500 1.9
Elizabeth G. Murphy(9).......... 300,000 * *
Teresa M. Crummett(10).......... 198,000 * *
Robert H. Reid(11).............. 150,000 * *
Janette S. Chock(12)............ 147,500 * *
All 12 directors and executive
officers as a group(13)........ 23,915,148 75.2% %
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Based on information provided to us by Mr. Anderson and Imagine Media,
Inc. indicating that Mr. Anderson has sole voting and dispositive power
with respect to 13,557,143 shares and shares voting and dispositive power
with respect to 1,764,366 shares held by Imagine Media, Inc. described in
footnote 3. Mr. Anderson disclaims beneficial ownership with respect to
the shares held by Imagine Media, Inc.
(2) Includes 10,000 shares of common stock held of record by the Jung-Murdock
Children's Trust U/A 11/23/93, Susan Murdock TTEE. Mr. Jung disclaims
beneficial ownership with respect to the shares held by the Jung-Murdock
Children's Trust. Includes 1,401,098 shares of common stock subject to our
repurchase right.
(3) Mr. Anderson, one of our directors, is the President and a director of
Imagine Media, Inc. Based on information provided to us by Mr. Anderson
and Imagine Media, Inc., Mr. Anderson shares voting and dispositive power
with respect to the shares held of record by Imagine Media, Inc. Mr.
Anderson disclaims beneficial ownership with respect to the shares held by
Imagine Media, Inc.
(4) Represents 1,252,425 shares held by Worldview Technology Partners II,
L.P., 383,395 shares held by Worldview Technology International II, L.P.
and 53,164 shares held by Worldview Strategic Partners II, L.P. Mr. Orsak
is a general partner of the Worldview Technology Partner entities. Mr.
Orsak disclaims beneficial ownership of shares held by the Worldview
Technology Partner entities except to the extent of his pecuniary interest
in this venture capital firm.
(5) Includes 1,163,600 shares held by Weiss, Peck & Greer Venture Associates
V, L.L.C., 11,829 shares held by Weiss, Peck & Greer Venture Associates
V-A, L.L.C., 253,687 shares held by Weiss, Peck & Greer Venture
Associates V Cayman, L.P. and 259,867 shares held by Discovery Ventures
III, LLC. Christopher J. Schaepe is a managing member
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<PAGE>
of WPG VC Fund Adviser II, L.L.C., the Fund Investment Advisory Member of
Weiss, Peck & Greer Venture Associates V, L.L.C. and Weiss, Peck & Greer
Venture Associates V-A, L.L.C., and the Fund Investment Advisory Partner of
Weiss, Peck & Greer Venture Associates V Cayman, L.P. Mr. Schaepe shares
voting and dispositive power with respect to the shares held by Weiss, Peck
& Greer Venture Associates V, L.L.C., Weiss, Peck & Greer Venture Associates
V-A, L.L.C. and Weiss, Peck & Greer Venture Associates V Cayman, L.P. Based
on information provided to us by Weiss, Peck & Greer, L.L.C., Weiss, Peck &
Greer, L.L.C. is a member of Discovery III Management, LLC, the Fund
Investment Advisory member of Discovery Ventures III, LLC, and is a Class A
Non-Managing Member of WPG VC Fund Adviser II, L.L.C. Weiss, Peck & Greer,
L.L.C. and Mr. Schaepe disclaim beneficial ownership with respect to the
shares held by Weiss, Peck & Greer Venture Associates V, L.L.C., Weiss, Peck
& Greer Venture Associates V-A, L.L.C., Weiss, Peck & Greer Venture
Associates V Cayman, L.P. and Discovery Ventures III, LLC, except to the
extent of their pecuniary interest in these entities. Includes 87,750 shares
of common stock subject to our repurchase right within 60 days of December
20, 1999.
(6) Includes 26,007 shares held by Infotech Partners Ltd., 26,007 shares held
by Walden EDB Partners, L.P., 11,848 shares held by Walden Japan Partners,
L.P. and 1,274,316 shares held by Walden Media & Information Technology
Fund, L.P. Mr. LeFurgy, one of our directors, is a member of Walden Media,
L.L.C., the general partner of Walden Media & Information Technology Fund,
L.P., and an affiliate of Walden Japan Partners, L.P., Walden EDB
Partners, L.P. and Infotech Partners Ltd. Mr. LeFurgy disclaims beneficial
ownership of the shares held by Walden Media & Technology Fund, L.P.,
Walden Japan Partners, L.P., Walden EDB Partners, L.P. and Infotech
Partners Ltd., except to the extent of his proportionate ownership
therein.
(7) Includes 120,000 shares of common stock held by the James R. Tolonen and
Ginger Tolonen Family Trust dated 9/26/96, Ginger and James Tolonen
trustees, and 30,000 shares of common stock held by James R. Tolonen,
trustee of the James R. Tolonen 1999 Grantor Retained Annuity Trust.
Includes 562,500 shares of common stock subject to our repurchase right
within 60 days of December 20, 1999 and 200,000 shares of common stock
issuable upon exercise of options exercisable within 60 days of December
20, 1999.
(8) Includes 328,125 shares of common stock subject to our repurchase right
within 60 days of December 20, 1999.
(9) Includes 300,000 shares of common stock subject to our repurchase right
within 60 days of December 20, 1999.
(10) Includes 144,375 shares of common stock subject to our repurchase right
within 60 days of December 20, 1999.
(11) Includes 115,625 shares of common stock subject to our repurchase right
within 60 days of December 20, 1999.
(12) Includes 119,656 shares of common stock subject to our repurchase right
within 60 days of December 20, 1999.
(13) Includes 3,098,785 shares of common stock subject to our repurchase right
within 60 days of December 20, 1999 and 200,000 shares of common stock
issuable upon exercise of options exercisable within 60 days of
December 20, 1999.
The percentage of shares beneficially owned prior to the offering is based on
31,150,880 shares of common stock outstanding as of December 20, 1999, assuming
that all outstanding preferred stock has been converted into common stock and
including 322,692 shares of common stock issuable upon exercise and subsequent
conversion to common stock of warrants to purchase Series B-1 preferred stock,
150,000 shares of Series C preferred stock required to be issued in January
2000 and 341,817 shares of common stock exercisable within 60 days of December
20, 1999. The percentage of shares beneficially owned after this offering
includes shares of common stock being offered but does not include the shares
which are subject to the underwriters' over-allotment option. Percentage
ownership figures after the offering do not include shares that may be
purchased by each person in this offering.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated above, we have assumed that the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options and warrants that
are currently exercisable or exercisable within 60 days of December 20, 1999
are deemed to be outstanding and to be beneficially owned by the person holding
the options or warrants for the purpose of computing the percentage ownership
of that person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Unless indicated above, the
address for each listed stockholder is c/o Snowball.com, Inc., 250 Executive
Park Boulevard, Suite 4000, San Francisco, California 94134.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 100,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As
of December 20, 1999, and assuming the conversion of all outstanding preferred
stock into common stock upon the closing of this offering, there were
outstanding 31,150,880 shares of common stock held of record by approximately
101 stockholders, options to purchase 2,292,680 shares of common stock and
warrants to purchase 322,692 shares of common stock.
We are incorporated in the state of Delaware. Following the closing of this
offering, we intend to amend and restate our certificate of incorporation. Our
certificate of incorporation, bylaws and investors' rights agreement, described
below, are included as exhibits to the registration statement of which this
prospectus forms a part.
Common Stock
Dividend Rights. Subject to preferences that may apply to shares of preferred
stock outstanding at the time, the holders of outstanding shares of common
stock are entitled to receive dividends out of assets legally available at the
times and in the amounts as our board may from time to time determine.
Voting Rights. Each common stockholder is entitled to one vote for each share
of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
No preemptive or similar rights. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of Snowball, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the common stock
and any participating preferred stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, each outstanding share of preferred stock
will be converted into shares of common stock. See note 7 of notes to financial
statements for a description of this preferred stock.
Following the offering, we will be authorized, subject to the limits imposed
by Delaware law, to issue preferred stock in one or more series, to establish
from time to time the number of shares to be included in each series and to fix
the rights, preferences and privileges of the shares of each wholly unissued
series and any of its qualifications, limitations or restrictions. The board
can also increase or decrease the number of shares of any series, but not below
the number of shares of such series then outstanding, without any further vote
or action by the stockholders.
The board may authorize the issuance of preferred stock with voting,
dividend, liquidation or conversion rights that could adversely affect the
voting power or other rights of the holders of the
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<PAGE>
common stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in our control of Snowball and may adversely affect the market price of
the common stock and the voting and other rights of the holders of common
stock. We have no current plan to issue any shares of preferred stock.
Warrants
As of December 20, 1999, we had outstanding the following warrants to
purchase our stock:
<TABLE>
<S> <C> <C> <C>
Total number of
shares subject Exercise price
Type of stock to Warrants per share Expiration date
-------------------------- --------------- -------------- -------------------------
Series B-1 preferred stock 270,000 $8.44 180 days following this
offering
Series B-1 preferred stock 31,595 3.165 Upon consummation of this
offering
Series B-1 preferred stock 21,097 7.11 Upon consummation of this
offering
</TABLE>
After the closing of this offering, the warrants that survive the
consummation of the offering will become exercisable for a like number of
shares of common stock.
Registration Rights
Assuming all warrants to purchase shares of Series B-1 preferred stock are
exercised, the holders of approximately 25,882,588 shares of common stock have
the right to require us to register their shares with the Securities and
Exchange Commission so that those shares may be publicly resold or to include
their shares in any registration statement we file.
Right to demand registration
At any time six months after this offering, these stockholders can request
that we file a registration statement so they can publicly sell their shares.
The underwriters of any underwritten offering will have the right to limit the
number of shares to be so included in a registration statement.
Who may make a demand. At any time six months after the closing of this
offering, the holders of at least 30% of the shares with registration rights
have the right to demand that we file a registration statement on a form other
than Form S-3 covering at least a majority of the shares with registration
rights (or a lesser amount if the offering price exceeds $10,000,000 (net of
underwriting discounts and commissions)). If we are eligible to file a
registration statement on Form S-3, the same holders with the registration
rights above have the right to demand that we file a registration statement on
Form S-3, so long as the amount of securities to be sold in that registration
exceeds $10,000,000.
Number of times holders can make demands. We will not be required to file
more than two registration statements on a form other than Form S-3. If we are
eligible to file a registration statement on Form S-3, we are not required to
file more than two registration statements during any 12-month period.
Postponement. We may postpone the filing of a registration statement for up
to 90 days once in a 12-month period if we determine that the filing would be
seriously detrimental to us or our stockholders.
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Piggyback registration rights
If we register any securities for public sale, the same stockholders with
registration rights above will have the right to include their shares in the
registration statement. The underwriters of any underwritten offering will have
the right to limit the number of shares to be so included in a registration
statement.
Expenses of registration
We will pay all of the expenses (other than underwriting discounts and
commissions) relating to any demand or piggyback registration. However, we will
not pay for any expenses of any demand registration if the request is
subsequently withdrawn by the holders of a majority of the shares having
registration rights, subject to very limited exceptions.
Expiration of registration rights
The registration rights described above will expire five years after this
offering is completed. The registration rights will terminate earlier with
respect to a particular stockholder if that holder can resell all of its
securities in a 90-day period under Rule 144 of the Securities Act.
Anti-Takeover Provisions of the Certificate of Incorporation, Bylaws and
Delaware Law
The provisions of Delaware law, our certificate of incorporation and our
bylaws described below may have the effect of delaying, deferring or
discouraging another person from acquiring control of our company.
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations from engaging, under limited circumstances, in a
"business combination," with an "interested stockholder" for a period of three
years following the date the person became an interested stockholder unless:
. the board approves either the business combination or the transaction
that resulted in the stockholder becoming an interested director prior
to the date the "interested stockholder" attained that status;
. upon the closing of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
. on or subsequent to the date, the business combination is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
A "business combination" generally includes a merger, asset or stock sale or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to
determination of interested stockholder status did own, 15% or more of a
corporation's voting stock.
A Delaware corporation may "opt out" of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not "opted out" of this provision. Section 203 could prohibit
or delay mergers or other takeover or change-in-control attempts and,
accordingly, may discourage attempts to acquire us.
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Charter and Bylaw Provisions
The amendment and restatement of our certificate of incorporation to be filed
upon the closing of this offering will provide for a classified board divided
into three classes. The directors in each class will serve for a three-year
term, with our stockholders electing one class each year. The affirmative vote
of at least 66 2/3% of all classes of voting stock is required to remove any
director. For more information on the classification of our board, please see
"Management--Board Composition." This system of electing and removing directors
may tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of us, because it generally makes it more
difficult for stockholders to replace a majority of the directors.
Our bylaws provide that any action required or permitted to be taken by our
stockholders at an annual meeting or a special meeting of the stockholders may
only be taken if it is properly brought before the meeting. Our stockholders
may not take any action by written consent. Our certificate of incorporation
provides that our board of directors may issue preferred stock with voting or
other rights without stockholder action. Our bylaws and certificate of
incorporation provide that special meetings of the stockholders may only be
called by our board, the chairman of our board, our chief executive officer or
our president.
Our bylaws provide that we will indemnify officers and directors against
losses that they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in connection with
takeover defense measures. These provisions may have the effect of preventing
changes in our management.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We intend to enter
into separate indemnification agreements with our directors and executive
officers that provide them indemnification protection in the event the
certificate of incorporation is subsequently amended.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officer against losses that they may incur in
investigations and legal proceedings resulting from their services to us, which
may include services in connection with takeover defense measures. These
provisions may have the effect of preventing changes in our management.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The address of our Transfer Agent and Registrar is
Ridgefield Park, New Jersey.
Listing
We have applied for our common stock to be quoted on the Nasdaq National
Market under the trading symbol "SNBL."
70
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares issued
upon exercise of outstanding warrants or options, in the public market after
this offering could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through the sale of our equity
securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering due to limited contractual
restrictions on resale. Sales of substantial amounts of our common stock in the
public market after these restrictions lapse or are released could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.
Upon completion of this offering, based on shares outstanding as of December
20, 1999, we will have outstanding shares of common stock, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants. Of these shares, the shares sold in this
offering plus any shares issued upon exercise of the underwriters'
overallotment option will be freely tradable without restriction under the
Securities Act unless purchased by our "affiliates," as that term is defined in
Rule 144 under the Securities Act. In general, affiliates include officers,
directors and 10% stockholders. The remaining shares will become eligible for
public sale as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
20,838,866 After 180 days from the date of this prospectus, the 180 day lock-
up terminates and these shares are saleable under Rule 144 (subject
in some cases to volume limitations) or Rule 144(k)
705,087 After 180 days from the date of this prospectus, the 180 day lock-
up is released and these shares are saleable under Rule 701
(subject in some cases to a right of repurchase by the Company)
9,606,927 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
Lock-Up Agreements
All of our officers and directors and substantially all of our stockholders
have signed lock-up agreements under which they agreed not to sell, dispose of,
loan, pledge or grant any rights with respect to any shares of common stock or
any securities convertible into or exercisable or exchangeable for shares of
common stock without the prior written consent of Goldman, Sachs & Co. for a
period of 180 days after the date of this prospectus.
Goldman, Sachs & Co. may choose to release some of these shares from these
restrictions prior to the expiration of this 180 day period, though it has no
current intention to do so.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
71
<PAGE>
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, these shares may be sold immediately upon the completion of this
offering.
Rule 701
Any of our employees, officers, directors or consultants who purchased his or
her shares under a written compensatory plan or contract may be entitled to
sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling those shares. However, all
shares issued under Rule 701 are subject to lock-up agreements and will only
become eligible for sale when the 180-day lock-up agreements expire.
Registration Rights
Upon completion of this offering, the holders of 25,882,588 shares of common
stock, or their transferees, will be entitled to certain rights with respect to
the registration of those shares under the Securities Act. For a discussion of
these rights please see "Description of Capital Stock--Registration Rights."
After these shares are registered, they will be freely tradable without
restriction under the Securities Act.
Stock Options
As of December 20, 1999, options to purchase 2,292,080 shares of common stock
were issued and outstanding. Upon the expiration of the lock-up agreements
described above, at least 338,657 shares of common stock will be subject to
vested options, based on options outstanding as of December 20, 1999.
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering shares of common stock reserved for issuance
under our stock option and employee stock purchase plans. This registration
statement is expected to be filed and become effective as soon as practicable
after the effective date of this offering. Accordingly, shares registered under
this registration statement will, subject to vesting provisions and Rule 144
volume limitation manner of sale, notice and public information requirements
applicable to our affiliates, be available for sale in the open market
immediately after the 180 day lock up agreements expire.
Warrants
As of December 20, 1999, we had outstanding warrants to purchase 322,692
shares of common stock. When these warrants are exercised and the exercise
price is paid in cash, the shares must be held for one year before they can be
sold under Rule 144. Warrants to purchase up to 322,692 shares of common stock
contain "net exercise provisions." These provisions allow a holder to exercise
the warrant for a lesser number of shares of common stock in lieu of paying
cash. The number of shares which would be issued in this case would be based
upon the market price of the common stock at the time of the net exercise. If
the warrant had been held for at least one year, the shares of common stock
could be publicly sold under Rule 144. After the lock-up agreements described
above expire, these warrants will have expired or have been exercised.
72
<PAGE>
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the
issuance of the shares of common stock offered by this prospectus. Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California,
will pass upon certain legal matters in connection with this offering for the
underwriters. An investment fund associated with Fenwick & West LLP owns 12,948
shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1997 and at September 30, 1999, and for
each of the two years in the period ended December 31, 1998, and the nine
months ended September 30, 1999, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
J.W. Hunt and Company, LLP, independent auditors, have audited the financial
statements of Ameritrack, Inc. (a development stage company) at August 31, 1999
and for the period from the commencement of operations on or about August 14,
1998 through August 31, 1998, as set forth in their report. We have included in
the financial statements of Ameritrack, Inc. (a development stage company) in
the prospectus and elsewhere in the registration statement in reliance on J.W.
Hunt and Company, LLP's report, given on their authority as experts in
accounting and auditing.
Hamilton and Associates, Inc., independent auditors, have audited the
financial statements of Extreme Interactive Media, Inc. as of December 31, 1998
and September 30, 1999, and for the year ended December 31, 1998 and the nine
months ended September 30, 1999 as set forth in their report. We have included
the financial statements of Extreme Interactive Media, Inc. in the prospectus
and elsewhere in the registration statement in reliance on Hamilton and
Associates, Inc.'s report, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or
document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. The registration statement, including exhibits and schedules,
may be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C., and copies of all or any part of it
may be obtained from that office after payment of fees prescribed by the
Securities and Exchange Commission. The Securities and Exchange Commission
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Securities and Exchange Commission at http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports containing unaudited financial data for the first three
quarters of each year.
73
<PAGE>
Snowball.com, Inc.
INDEX TO FINANCIAL STATEMENTS
Snowball.com, Inc. Financial Statements:Page
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Balance Sheets.......................................................... F-3
Statements of Operations................................................ F-4
Statement of Stockholders'/Division Equity.............................. F-5
Statements of Cash Flows................................................ F-6
Notes to Financial Statements........................................... F-7
Ameritrack, Inc. (a development stage company) Financial Statements:
Independent Auditors' Report............................................ F-23
Balance Sheet........................................................... F-24
Statement of Income and Expense......................................... F-25
Statement of Changes in Stockholders' Equity............................ F-26
Statement of Cash Flows................................................. F-27
Notes to Financial Statements........................................... F-28
Extreme Interactive Media, Inc. Financial Statements:
Independent Auditors' Report............................................ F-30
Balance Sheets.......................................................... F-31
Statements of Operations and Accumulated Deficit........................ F-32
Statements of Cash Flows................................................ F-33
Notes to Financial Statements........................................... F-34
Unaudited Pro Forma Condensed Combined Financial Information:
Unaudited Pro Forma Condensed Combined Financial Information............ F-36
Pro Forma Condensed Combined Balance Sheets............................. F-37
Pro Forma Condensed Combined Statements of Operations for the year ended
December 31, 1998...................................................... F-38
Pro Forma Condensed Combined Statements of Operations for the nine
months ended
September 30, 1999..................................................... F-39
Notes to the Unaudited Pro Forma Condensed Combined Financial
Information............................................................ F-40
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Snowball.com, Inc.
We have audited the accompanying balance sheets of Snowball.com, Inc. and its
predecessor division of Imagine Media, Inc. as of December 31, 1997 and 1998
and September 30, 1999, and the related statements of operations,
stockholders'/division equity, and cash flows for each of the two years in the
period ended December 31, 1998 and for the nine months ended September 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Snowball.com, Inc. and its
predecessor division of Imagine Media, Inc. at December 31, 1997 and 1998 and
September 30, 1999, and the results of operations and cash flows of
Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. for each
of the two years in the period ended December 31, 1998 and for the nine months
ended September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Palo Alto, California
November 19, 1999,
except as to Note 10, as to which
the date is December 20, 1999
F-2
<PAGE>
Snowball.com, Inc.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro forma
Stockholders'
December 31, Equity at
---------------- September 30, September 30,
1997(1) 1998(1) 1999(2) 1999
------- ------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents....... $ -- $ -- $ 7,799
Short-term investments.......... -- -- 2,991
Accounts receivable, less
allowance of $54, $99 and
$344 at December 31, 1997 and
1998 and September 30, 1999,
respectively................... 667 920 999
Prepaid expenses and other
current assets................. 68 148 1,550
------- ------- --------
Total current assets.......... 735 1,068 13,339
Goodwill and intangible assets,
net............................. -- -- 3,062
Fixed assets, net................ 28 93 3,592
Other assets..................... -- -- 101
------- ------- --------
Total assets.................. $ 763 $ 1,161 $ 20,094
======= ======= ========
Liabilities and
stockholders'/division equity
Current liabilities:
Accounts payable................ $ 185 $ 301 $ 2,876
Accrued liabilities............. 65 50 2,984
Deferred revenue................ 11 48 330
Current equipment financing
obligations.................... -- -- 624
------- ------- --------
Total current liabilities..... 261 399 6,814
Long-term equipment financing
obligations..................... -- -- 1,253
Commitments
Stockholders'/division equity:
Convertible preferred stock,
$0.001 par value, issuable in
series: no shares authorized
at December 31, 1997 and 1998;
20,000,000 shares authorized
at September 30, 1999; no
shares issued and outstanding
at December 31, 1997 and 1998,
and 14,018,548 shares issued
and outstanding as of
September 30, 1999 (no shares
outstanding pro forma)......... -- -- 14 $ --
Common stock, $0.001 par value:
no shares authorized at
December 31, 1997 and 1998,
and 37,500,000 shares
authorized at September 30,
1999; no shares issued and
outstanding at December 31,
1997 and 1998 and
5,106,786 shares issued and
outstanding at September 30,
1999 (19,125,334 shares issued
and outstanding pro forma)..... -- -- 5 19
Net contribution from Imagine
Media/Additional paid-in
capital........................ 1,781 5,701 40,000 40,000
Notes receivable from
stockholders................... -- -- (238) (238)
Deferred stock compensation..... -- -- (4,388) (4,388)
Accumulated/division deficit.... (1,279) (4,939) (23,366) (23,366)
------- ------- -------- --------
Total stockholders'/division
equity....................... 502 762 12,027 $ 12,027
------- ------- -------- ========
Total liabilities and
stockholders equity............. $ 763 $ 1,161 $ 20,094
======= ======= ========
</TABLE>
- --------
(1) Through December 31, 1998, our activities were included in the operations
of Imagine Media, Inc. Our financial statements for these periods have been
prepared on a carve-out basis.
(2)From January 1999, we have operated as a separate legal entity.
See accompanying notes.
F-3
<PAGE>
Snowball.com, Inc.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
---------------- --------------------
1997(1) 1998(1) 1998(1) 1999(2)
------- ------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C>
Revenue............................... $ 927 $ 3,256 $ 1,342 $ 3,214
Cost of revenue....................... 171 1,322 520 2,286
------- ------- ------- --------
Gross margin.......................... 756 1,934 822 928
Operating expenses:
Production and content.............. 628 1,599 1,124 3,330
Engineering and development......... 65 329 243 2,899
Sales and marketing................. 836 2,592 1,824 9,173
General and administrative.......... 506 1,074 789 3,485
Stock-based compensation............ -- -- -- 276
Amortization of goodwill and
intangible assets.................. -- -- -- 529
------- ------- ------- --------
Total operating expenses.......... 2,035 5,594 3,980 19,692
------- ------- ------- --------
Loss from operations.................. (1,279) (3,660) (3,158) (18,764)
Interest income, net.................. -- -- -- 337
------- ------- ------- --------
Net loss.............................. $(1,279) $(3,660) $(3,158) $(18,427)
======= ======= ======= ========
Basic and diluted net loss per share.. $ (23.53)
========
Shares used in per share calculation.. 783
========
Pro forma basic and diluted net loss
per share (unaudited)................ $ (1.08)
========
Shares used in pro forma per share
calculation (unaudited).............. 17,126
========
</TABLE>
- --------
(1) Through December 31, 1998, our activities were included in the operations
of Imagine Media, Inc. Our financial statements for these periods have been
prepared on a carve-out basis.
(2)From January 1999, we have operated as a separate legal entity.
See accompanying notes.
F-4
<PAGE>
Snowball.com, Inc.
STATEMENT OF STOCKHOLDERS'/DIVISION EQUITY
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Net Contribution
Convertible From Imagine Notes Total
Preferred Stock Common Stock Media/ Receivable Deferred Accumulated/ Stockholders'/
----------------- ---------------- Additional Paid- From Stock Division Division
Shares Amount Shares Amount In Capital Stockholders Compensation Deficit Equity
---------- ------ --------- ------ ---------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1997............ -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss for the
period.......... -- -- -- -- -- -- -- (1,279) (1,279)
Contribution
from Imagine
Media........... -- -- -- -- 1,781 -- -- -- 1,781
----------------------------------------------------------------------------------------------------------
Balance at
December 31,
1997............ -- -- -- -- 1,781 -- -- (1,279) 502
Net loss for the
period.......... -- -- -- -- -- -- -- (3,660) (3,660)
Contribution
from Imagine
Media........... -- -- -- -- 3,920 -- -- -- 3,920
----------------------------------------------------------------------------------------------------------
Balance at
December 31,
1998............ -- -- -- -- 5,701 -- -- (4,939) 762
Issuance of
common stock to
founders and
employees for
cash and notes
receivable...... -- -- 3,822,047 4 297 (253) -- -- 48
Issuance of
Series A
preferred stock
at $0.35 per
share for cash,
notes receivable
and assets
transferred from
Imagine Media... 9,990,111 10 -- -- 3,487 (2,000) -- -- 1,497
Issuance of
Series B and B1
preferred stock
for cash and
assets
transferred from
Imagine Media at
$6.33 per
share........... 4,028,437 4 -- -- 25,496 -- -- -- 25,500
Issuance of
common stock to
employees upon
exercise of
stock options,
net of
repurchases..... -- -- 1,284,739 1 237 -- -- -- 238
Issuance of
warrants to
purchase Series
B1 preferred
stock in
connection with
lease
financing....... -- -- -- -- 118 -- -- -- 118
Payments
received on
promissory notes.. -- -- -- -- -- 2,000 -- -- 2,000
Debt forgiveness
on
promissory notes.. -- -- -- -- -- 15 -- -- 15
Deferred
compensation
arising from the
issuance of
stock options... -- -- -- -- 4,664 -- (4,664) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 276 -- 276
Net loss for the
period.......... -- -- -- -- -- -- -- (18,427) (18,427)
----------------------------------------------------------------------------------------------------------
Balance at
September 30,
1999............ 14,018,548 $ 14 5,106,786 $ 5 $40,000 $(238) $(4,388) $(23,366) $12,027
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
Snowball.com, Inc.
STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
---------------- --------------------
1997(1) 1998(1) 1998(1) 1999(2)
------- ------- ----------- --------
(unaudited)
-----------
<S> <C> <C> <C> <C>
Operating activities
Net loss.............................. $(1,279) $(3,660) $(3,158) $(18,427)
Adjustments to reconcile net loss to
net cash
used in operating activities:
Depreciation and amortization........ 20 40 25 1,206
Stock-based compensation............. -- -- -- 276
Other noncash expenses............... -- -- -- 32
Changes in assets and liabilities:
Accounts receivable................. (653) (272) 254 (79)
Prepaid expenses and other assets... (82) (61) (96) (1,402)
Accounts payable and accrued
liabilities........................ 250 102 20 5,509
Deferred revenue.................... 11 37 37 282
------- ------- ------- --------
Net cash used in operating
activities........................ (1,733) (3,814) (2,918) (12,603)
------- ------- ------- --------
Investing activities
Purchases of short-term investments... -- -- -- (2,991)
Purchases of intangible assets........ -- -- -- (1,610)
Purchases of fixed assets............. (48) (106) (66) (4,176)
------- ------- ------- --------
Net cash used in investing
activities........................... (48) (106) (66) (8,777)
------- ------- ------- --------
Financing activities
Proceeds from equipment financing
obligations.......................... -- -- -- 1,877
Proceeds from issuance of common and
preferred stock...................... -- -- -- 27,302
Contributions from Imagine Media...... 1,781 3,920 2,984 --
------- ------- ------- --------
Net cash provided by financing
activities........................... 1,781 3,920 2,984 29,179
------- ------- ------- --------
Net increase in cash and cash
equivalents.......................... -- -- -- 7,799
Cash at beginning of period........... -- -- -- --
Cash and cash equivalents at end of
period............................... $ -- $ -- $ -- $ 7,799
------- ------- ------- --------
Schedule of noncash investing and
financing activities
Stock issued for goodwill and
intangible assets.................... $ -- $ -- $ -- $ 1,981
------- ------- ------- --------
Stock issued for notes receivable..... $ -- $ -- $ -- $ 2,253
======= ======= ======= ========
</TABLE>
- --------
(1) Through December 31, 1998, our activities were included in the operations
of Imagine Media, Inc. Our financial statements for these periods have been
prepared on a carve-out basis.
(2) From January 1999, we have operated as a separate legal entity.
See accompanying notes.
F-6
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENTS
(Information for the nine months ended September 30, 1998 is unaudited)
1. Description of Company and Summary of Significant Accounting Policies
Description of Company
Snowball.com, Inc. ("Snowball") was incorporated as Affiliation, Inc. in the
state of Delaware on January 6, 1999, and commenced operations as a separate
legal entity at that time. Prior to its incorporation and since its inception
January 1997, Snowball operated as a division of Imagine Media, Inc. ("Imagine
Media"). Snowball is an Internet media company that operates a network of
destination web sites providing content, community and commerce to the Internet
generation, or Generation i. Snowball views Generation i as individuals between
the ages of 12 and 29 who consider the Internet to be an integral part of their
daily lives. Snowball serves the members of this community by providing them
with opinionated, cutting-edge content, relevant services such as email and
instant messaging, a forum for interacting with one another and carefully
selected merchandise within our online stores. Snowball provides its
advertisers with targeted access to Generation i and supplies content partners
with an integrated package of marketing services and audience-development
opportunities.
Snowball has sustained net losses and negative cash flows from operations
since inception. Snowball's ability to meet obligations in the ordinary course
of business is dependent upon its ability to establish profitable operations
and raise additional financing through public or private equity financings,
collaborative or other arrangements with corporate sources, or other sources of
financing. In the nine months ended September 30, 1999, Snowball has received
financing of approximately $27,302,000 through the issuance of common stock and
Series A and B convertible preferred stock (see Note 7). Management believes
that these funds will be sufficient to enable Snowball to meet planned
expenditures through at least December 31, 2000. If anticipated operating
results are not achieved, management intends to delay or reduce expenditures so
as not to require additional financial resources, if such resources were not
available on terms acceptable to Snowball.
The divisional statements of operations for each of the two years ended
December 31, 1998 include all revenue and expenses directly attributable to
Snowball, including a corporate allocation of the costs of facilities,
salaries, and employee benefits based on relative headcount. Additionally,
incremental corporate administration, finance, and management costs have been
allocated to Snowball (see Note 5).
All of the allocations reflected in 1997 and 1998 in the financial statements
are based on assumptions that management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs that would have resulted if Snowball had been operated
on a stand-alone basis in 1997 and 1998. From incorporation on January 6, 1999
through September 30, 1999, there has been a service and support agreement in
place between Snowball and Imagine Media which specifies the terms of certain
services to be provided by Imagine Media. Under that agreement, Imagine Media
provided certain management, personnel and technology and information services
support and rental space in return for cash payments based upon divisional
allocations and the actual costs of providing such services.
Basis of Presentation
The accompanying financial statements include the operations of Snowball as
part of Imagine Media (on a carved-out basis as discussed below) from its
inception as a division of Imagine Media in January 1997 through December 31,
1998 (the "divisional statements") and as a separate legal
F-7
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
entity from its incorporation on January 6, 1999. The balance sheets at
December 31, 1997 and 1998 represent the assets, liabilities, and divisional
equity of Snowball as a part of Imagine Media and at September 30, 1999,
represents the balance sheet of Snowball as a separate legal entity. The
divisional financial statements have been derived from the historical books and
records of Imagine Media. The balance sheets at December 31, 1997 and 1998
include all assets and liabilities specifically identifiable and directly
attributable to Snowball, which are derived from historical cost information of
Imagine Media and which are presented at the carryover basis of Imagine Media.
Imagine Media's corporate accounting systems were not designed to track cash
receipts and payments and liabilities on a business-specific basis.
Interim Financial Information
In the opinion of management, the unaudited financial statements for the nine
months ended September 30, 1998 have been prepared on the same basis as the
annual financial statements and contains all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
unaudited interim results when read in conjunction with the audited financial
statements and the accompanying notes. Operating results for any interim period
are not necessarily indicative of results to be expected for the entire year or
for any other period.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reported period. Actual results
could differ materially from those estimates.
Certain Risks and Concentrations
Snowball has a limited operating history and its prospects are subject to the
risks, expenses, and difficulties frequently encountered by companies in their
early stages of development, particularly companies in new and rapidly evolving
markets such as Internet services. These risks include the failure to develop
and extend online service brands, the rejection of services by Web consumers,
vendors, and/or advertisers, the inability of Snowball to maintain and increase
the level of traffic to the Snowball networks on online services, as well as
other risks and uncertainties. In the event that Snowball does not successfully
implement its business plan, certain assets may not be recoverable.
Snowball's revenue is principally derived from the sale of online
advertising, the market for which is highly competitive and rapidly changing.
Significant changes in the industry or changes in customer buying behavior
could adversely affect operating results.
For the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1999, revenue from Snowball's five largest advertisers accounted
for approximately 36%, 31%, and 28%, respectively, of total revenue. One
advertiser accounted for approximately 11% of total revenues for the nine
months ended September 30, 1999. No customer accounted for over 10% of revenue
for 1997 or 1998. At December 31, 1998 and September 30, 1999, one customer
accounted for approximately 8% and 10%, respectively, of the net accounts
receivable balances. Snowball generally does not require collateral and
maintains allowances for potential credit losses. Such losses have been
immaterial.
F-8
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
Revenue Recognition
Revenue is derived principally from short-term advertising contracts in which
Snowball guarantees a minimum number of impressions (a view of an advertisement
by a consumer), for a fixed fee. Advertising revenue is recognized at the
lesser of the ratio of impressions delivered over total guaranteed impressions
or the straight-line basis over the term of the contract, provided that
Snowball does not have any significant remaining obligations and collection of
the resulting receivable is probable. To the extent that minimum guaranteed
impression levels or other obligations are not being met, Snowball defers
recognition of the corresponding revenue until guaranteed levels are being
achieved.
Revenue also includes sponsorship revenue under contracts in which Snowball
commits to provide sponsors with a variety of promotional opportunities in
addition to traditional banner advertising. Typically, sponsorship agreements
provide for the delivery of impressions on Snowball's web sites through banner
button or text link advertising, exclusive placement on Snowball's websites,
and the design and development of customized sites designed to enhance the
promotional objective of the sponsor. The portion of sponsorship revenue
related to the delivery of impressions is recognized in the period in which the
advertisement is displayed, provided that no significant obligations remain and
the collection of the resulting receivable is probable, at the lesser of the
ratio of impressions delivered over total guaranteed impressions or the
straight-line basis over the term of the contract. The portion of any up-front
nonrefundable fee specified in the contract related to the up-front customized
design work is also recognized at the lesser of the ratio of impressions
delivered over total guaranteed impressions or the straight-line basis over the
term of the contract.
Snowball has not recognized any revenue related to the nonmonetary exchange
of advertising for other services as such exchanges were not objectively
determinable based on the criteria set forth in Accounting Principles Board
Opinion No. 29, "Accounting for Nonmonetary Transactions." To date, such
nonmonetary exchanges have consisted primarily of advertising exchanged for
advertising.
Advertising Expenses
Advertising is expensed as incurred. Other advertising expenses are expensed
as the advertisement is broadcast. Advertising expenses were not significant
for the years ended December 31, 1997 and 1998, and were approximately
$2,669,000 for the nine-months ended September 30, 1999.
Cash
Snowball considers all highly liquid investments with an original maturity
from the date of purchase of three months or less to be cash equivalents. As of
September 30, 1999, cash equivalents consist primarily of investments in money
market funds, corporate commercial paper and municipal bonds. To date, Snowball
has not experienced losses on any of its investments. Through December 31,
1998, Snowball's net cash requirements were funded by Imagine Media.
Fixed Assets
Fixed assets are presented at historical carryover basis or cost less
accumulated depreciation. Depreciation and amortization of fixed assets is
computed using the straight-line method over the estimated useful lives of the
assets (two to five years).
F-9
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
Goodwill and Intangible Assets
Goodwill and intangible assets consist of trademarks and the excess of
purchase price paid over identified intangible and tangible net assets.
Goodwill and intangible assets are amortized using the straight-line method
over the period of expected benefit, generally three years. Management assesses
the recoverability of goodwill and intangible assets by determining whether the
amortization of the unamortized balance over its remaining life can be
recovered through forecasted cash flows. If undiscounted forecasted cash flows
indicate that the unamortized amounts will not be recovered, an adjustment will
be made to reduce the net amounts to an amount consistent with forecasted
future cash flows discounted at Snowball's incremental borrowing rate. Cash
flow forecasts are based on trends of historical performance and management's
estimate of future performance, giving consideration to existing and
anticipated competitive and economic conditions. Snowball has not identified
any such impairment losses. Amortization expense for goodwill and intangible
assets for the nine months ended September 30, 1999 was approximately $529,000.
Fair Value of Financial Instruments
The carrying amounts of Snowball's financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts
payable, and accrued liabilities approximate fair value because of their short
maturities. The carrying amount of Snowball's capital lease obligations
approximates the fair value of such instruments based upon management's best
estimate of interest rates that would be available for similar debt obligations
at September 30, 1999.
Net Loss Per Share
Basic net loss per share and diluted net loss per share is presented in
conformity with the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
Pursuant to the Securities and Exchange Commission ("SEC") Accounting Bulletin
No. 98, common stock and convertible preferred stock issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per share as if they had been outstanding for all periods presented. To
date, Snowball has not had any issuances or grants for nominal consideration.
F-10
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
In accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of common shares outstanding during
the period, less the weighted-average number of shares of common stock issued
to founders, investors, and employees that are subject to repurchase. Basic and
diluted pro forma net loss per share, as presented in the statements of
operations, has been computed as described above and also gives effect, under
SEC guidance, to the conversion of the convertible preferred stock (using the
if-converted method) from the original date of issuance. Snowball issued common
stock in February 1999, and commenced operations as a separate legal entity in
January 1999. Accordingly, historical earnings per share have been presented
only for the nine-month period ended September 30, 1999. The following table
presents the calculation of basic and diluted and pro forma basic and diluted
net loss per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
Nine months
ended
September 30,
1999
-------------
<S> <C>
Net loss...................................................... $ (18,427)
==========
Basic and diluted:
Weighted-average shares of common stock outstanding......... 3,759,401
Less: weighted-average shares subject to repurchase......... (2,976,312)
----------
Weighted-average shares used in computing basic and diluted
net loss per share......................................... 783,089
Basic and diluted net loss per share.......................... $ (23.53)
==========
Pro forma:
Shares used above........................................... 783,089
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock (unaudited)...... 16,343,063
----------
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)................................. 17,126,152
==========
Pro forma basic and diluted net loss per share (unaudited).... $ (1.08)
==========
</TABLE>
Snowball has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted loss per share because all such
securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share was
26,422,133 for the nine months ended September 30, 1999. If the offering
contemplated by this prospectus is consummated, all of the convertible
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity at September 30, 1999, as adjusted for
the assumed conversion of convertible preferred stock based on the shares of
convertible preferred stock outstanding at September 30, 1999, is disclosed on
the balance sheet.
Income Taxes
Through December 31, 1998, Snowball was not a separate taxable entity for
federal, state, or local income tax purposes, and its operations were included
in the tax returns of Imagine Media.
F-11
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
Since incorporation, Snowball has recognized income taxes under the liability
method. Deferred income taxes are recognized for differences between the
financial statement and tax basis of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock-Based Compensation
As permitted by the FASB Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), Snowball accounts for
employee stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations in accounting for its stock-based compensation
plans. Under APB 25, when the exercise price of Snowball's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized. Stock compensation related to
nonemployees is based on the fair value of the related stock or options in
accordance with SFAS 123 and its interpretations.
Comprehensive Loss
Snowball has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting
comprehensive loss and its components in the financial statements. To date,
Snowball's comprehensive loss has equaled its net loss.
Segment Information
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information",
which established standards for reporting information about operating segments
in annual financial statements. Snowball identifies its operating segments
based on business activities, management responsibility, and geographical
location. Currently, Snowball has organized its operations into a single
operating segment, the development of programming content material for
distribution on the Internet. Snowball derives the significant majority of its
revenues from operations in the United States.
Recent Accounting Pronouncements
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed of Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be capitalized.
The adoption of this pronouncement did not materially impact Snowball's results
of operations for the nine months ended September 30, 1999.
F-12
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
In April 1998, AcSEC issued Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that the costs of
start-up activities, including organizational costs, be expensed as incurred.
The adoption of this pronouncement did not materially impact Snowball's results
of operations for the nine months ended September 30, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires Snowball to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through net income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. SFAS 133 is
effective for years beginning after June 15, 2000. Snowball does not currently
hold any derivatives and does not expect this pronouncement to materially
impact the results of its operations.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). This summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Snowball believes that its current revenue
recognition principles comply with SAB 101.
2. Cash and Cash Equivalents
Cash, cash equivalents, and short-term investments consist of the following
(in thousands):
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Cash and cash equivalents:
Cash......................................................... $ 219
Money market funds........................................... 1,580
Corporate commercial paper................................... 1,000
Municipal bonds.............................................. 5,000
--------
7,799
Short-term investments:
Certificate of deposit....................................... 1,000
Corporate commercial paper................................... 1,991
--------
2,991
Cash, cash equivalents, and short-term
investments................................................... $ 10,790
========
</TABLE>
Through September 30, 1999, the difference between the fair value and the
amortized cost of available-for-sale securities was not significant; therefore,
no unrealized gains or losses have been recorded in stockholders' equity. At
September 30, 1999, the contractual maturity of Snowball's short-term
investments was one year or less.
F-13
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
3. Balance Sheet Detail (in thousands)
<TABLE>
<CAPTION>
December
31,
----------- September 30,
1997 1998 1999
---- ----- -------------
<S> <C> <C> <C>
Fixed assets:
Computers and equipment........................ $48 $ 153 $ 2,665
Furniture and fixtures......................... -- -- 590
Software....................................... -- -- 1,074
--- ----- -------
48 153 4,329
Less accumulated depreciation and amortization... (20) (60) (737)
--- ----- -------
$28 $ 93 $ 3,592
=== ===== =======
Accrued liabilities:
Accrued compensation........................... $65 $ 50 $ 506
Accrued legal and accounting................... -- -- 444
Accrued marketing.............................. -- -- 253
Other accrued expenses......................... -- -- 1,781
--- ----- -------
$65 $ 50 $ 2,984
=== ===== =======
</TABLE>
4. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Goodwill and intangible assets................... $ -- $ -- $3,591
Less accumulated amortization.................... -- -- (529)
------ ------ ------
$ -- $ -- $3,062
====== ====== ======
</TABLE>
5. Related Party Transactions
Funding Prior to Incorporation
Through December 31, 1998, Snowball utilized Imagine Media's centralized cash
management services and processes related to receivables, payables, payroll,
and other activities. Through December 31, 1998, Snowball's net cash
requirements were funded by Imagine Media. Net financing provided by Imagine
Media to Snowball in 1997 and 1998 was approximately $1,781,000 and $3,920,000,
respectively, including funding related to expenditures for operations and
investing activities and corporate services provided, as described below. There
were no intercompany transfers and no amounts were paid to Imagine Media by
Snowball in repayment of the financing during these periods and through the
incorporation of Snowball. These amounts were included in division equity.
Amounts financed by Imagine Media did not bear interest.
Corporate Services
In accordance with the Staff Accounting Bulletin No. 55, prior to the
incorporation of Snowball, allocations have been reflected in these financial
statements for 1997 and 1998. These expenses include corporate communications,
management compensation and benefits administration, payroll,
F-14
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
accounts payable, income tax compliance, and other administration and finance
overhead. Allocations and charges were based on either a direct cost pass-
through for incremental corporate administration, finance and management costs
and a percentage allocation of costs for other services provided based on
factors such as headcount and relative expenditure levels. Such allocations and
charges totaled approximately $718,000, $1,851,000, and $757,000 for the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1999,
respectively.
Management believes that the basis used for allocating corporate services is
reasonable. However, the terms of these transactions may differ from those that
would have resulted from transactions among unrelated parties.
Asset Contribution
Among the assets transferred to Snowball from Imagine Media, upon the
incorporation of Snowball on January 6, 1999, were a number of cohosting and
technology agreements to which Imagine Media was a party, revenue from
advertising agreements involving Snowball and ownership rights in patent
applications. The assets transferred from Imagine Media have been recorded at
the value of the stock exchanged for them (approximately $2.0 million) and are
included within goodwill and purchased intangibles. No liabilities were
transferred to Snowball, except for those directly resulting from the assets
transferred.
The Chairman of Snowball's board of directors is a principal stockholder and
the Chief Executive Officer of Imagine Media. Accordingly, Imagine Media is
considered a related party for the period subsequent to incorporation. As of
September 30, 1999, Imagine Media owns approximately 6.7% of the outstanding
voting shares of Snowball.
6. Business and Asset Acquisitions
Ameritrack, Inc.
On September 28, 1999, Snowball acquired all of the outstanding stock of
Ameritrack, Inc., an Internet content provider, doing business as High School
Alumni, in exchange for approximately $1,000,000 in cash and 30,000 shares of
common stock. The cost of the acquisition was allocated to the assets and
liabilities assumed based upon their estimated fair values as follows:
<TABLE>
<S> <C>
Working capital (deficit)....................................... $ (3,381)
Equipment....................................................... 21,060
Goodwill and purchased intangibles.............................. 982,321
----------
$1,000,000
==========
</TABLE>
The financial results of Ameritrack, Inc. were insignificant and therefore no
pro forma information reflecting the acquisition has been presented.
Asset Purchase
In July 1999, Snowball entered into an asset purchase agreement with Vault
Networks, an Internet content producer, under which Snowball acquired certain
intangible rights such as trademarks, intellectual property rights, certain
registered Internet locations, and a small amount of computer hardware. The
total purchase price for these assets was $550,000 in cash. This purchase price
has been included within goodwill and purchased intangibles.
F-15
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
7. Stockholders' Equity
Convertible Preferred Stock
<TABLE>
<CAPTION>
Shares issued and
Shares outstanding at
authorized September 30, 1999
---------- ------------------
<S> <C> <C>
Series A....................................... 9,990,111 9,990,111
Series B....................................... 5,000,000 --
Series B-1..................................... 5,000,000 4,028,437
Undesignated................................... 9,889 --
---------- ----------
Total convertible preferred stock............ 20,000,000 14,018,548
========== ==========
</TABLE>
Holders of Snowball's preferred stock are entitled to one vote for each share
of common stock into which the preferred stock is convertible. Holders of
Snowball's preferred stock are also entitled to vote separately as a class with
regard to customary protective provisions.
The holders of Series A and B1 preferred stock are entitled to annual
noncumulative dividends per share of $0.028 and $0.5064, respectively, when and
if declared by the board of directors. Under the terms of certain financing
arrangements, Snowball is prohibited from declaring or paying any dividends on
its capital stock. In the event of any voluntary or involuntary liquidation of
Snowball, Series A and B-1 stockholders are entitled to a liquidation
preference of $0.35 and $6.33 per share, respectively, plus any declared but
unpaid dividends, all in preference to the holders of the common stock. After
payment to the Series A and B-1 stockholders of all preferential amounts in the
event of a liquidation, the holders of the common stock will receive any and
all remaining assets of Snowball.
The holders of Series A and B-1 preferred stock have the right at any time to
convert their shares into common stock. Each share of preferred stock shall be
automatically converted into 1.5:1 shares of common stock upon the closing of
the issuance of shares following the effectiveness of a registration statement
under the Securities Act of 1933, pursuant to a firm commitment public offering
of Snowball's common stock with aggregate proceeds in excess of $20,000,000
(see description of Series C preferred stock in Note 10).
Warrants
Snowball issued warrants to purchase 31,595 shares of Series B-1 preferred
stock in connection with lease financing. In accordance with SFAS 123, Snowball
valued the warrants using the Black-Scholes option pricing model, at $2.48 per
share. The following assumptions were used in the option pricing model: stock
price of $4.22, exercise price of $3.165, option term of 5 years, risk-free
rate of interest of 6%, 50% volatility, and a dividend yield of 0%. The cost of
the warrants (approximately $118,000) is being expensed as additional interest
expense over the three-year life of the lease arrangement.
Notes Receivable from Stockholders
In February 1999, Snowball loaned an aggregate of $2,000,000 to its Chairman,
secured by a full recourse promissory note and a stock pledge agreement, in
connection with his purchase of 8,571,429 shares of Series A preferred stock at
$0.35 per share. The note accrued interest at a rate of 4.57% per year and was
due and payable with respect to $1,000,000 of principal, plus interest, on
F-16
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
or before March 1, 1999 and with respect to the remaining $1,000,000 of
principal, and any remaining interest, on or before April 1, 1999. The note has
been repaid in full.
In February 1999, Snowball loaned an aggregate of $92,300 to an officer,
secured by a full recourse promissory note and a stock pledge agreement, in
connection with his purchase of 1,978,021 shares of common stock at $0.04667
per share. The note accrues interest at a rate of 4.64% per year, payable
annually, and the principal amount of the note is due and payable on or before
February 1, 2003. Snowball will forgive the principal and accrued interest at a
rate of $1,667 per month. In the event that the Officer's employment is
terminated for any reason, then all remaining unpaid principal and interest
shall become due and payable within 90 days after termination, unless Snowball
agrees to a longer period.
In March 1999, Snowball loaned an aggregate of $7,000 to Mr. Reid, one of its
directors, secured by a full recourse promissory note and a stock pledge
agreement, in connection with his purchase of 150,000 shares of our common
stock at $0.04667 per share. The note accrues interest at a rate of 4.67% per
year, payable annually, and is due and payable in full on or before March 11,
2001.
In addition, the Company has issued full recourse promissory notes to
employees.
Common Stock
Snowball is authorized to issue up to 37,500,000 shares of common stock. At
September 30, 1999, 5,106,786 shares were issued and outstanding. Prior to the
adoption of its 1999 Equity Incentive Plan, Snowball issued shares of common
stock to founders and employees. Generally, these shares were sold pursuant to
restricted stock purchase agreements containing provisions established by the
board of directors. These provisions give Snowball the right to repurchase the
shares at the original sales price. The right expires at the rate of 25% of the
shares after one year and 2.0833% per month thereafter. At September 30, 1999,
2,064,271 of these shares of common stock issued outside of the 1999 Equity
Incentive Plan remained subject to repurchase.
Equity Incentive Plan
In February 1999, the board of directors approved the 1999 Equity Incentive
Plan (the "Plan"). Under the Plan, Snowball has reserved 5,965,812 shares for
issuance to eligible participants. The Plan provides for option grants at an
option price no less than 85% of the fair market value of the stock subject to
the option on the date the option is granted. The options vest at a rate of at
least 20% per year over five years from the date the option was granted.
However, in the case of options granted to officers, directors, or consultants,
the options may vest at any time established by Snowball. All options under the
Plan expire ten years after their grant. See Note 10.
The Plan also provides for restricted stock awards. The purchase price of
restricted stock under such awards shall not be less than 85% of the fair
market value of the stock on the date such award is made or at the time the
purchase is consummated.
F-17
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
Aggregate activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Options outstanding
---------------------------------------
Shares Weighted-
available Number of Price per average
for grant shares share exercise price
---------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Authorized February
1999................... 5,965,812 -- -- --
Restricted stock
granted................ (1,881,525) -- -- --
Options granted......... (3,035,137) 3,035,137 $0.05-$ 2.00 $0.47
Options canceled........ 128,020 (128,020) $0.05-$ 0.67 $0.19
Options exercised....... -- (1,352,239) $0.05-$ 0.67 $0.18
---------- ----------
Balance at September 30,
1999................... 1,177,170 1,554,878 $0.05--$2.00 $0.75
========== ==========
</TABLE>
The following table summarizes information regarding options outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
Weighted-
Weighted average Weighted-
average remaining average
Number exercise contractual Number exercise
Exercise Prices outstanding price age (years) exercisable price
--------------- ----------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.05................ 543,328 $0.05 9.47 53,852 $0.05
0.67................ 495,750 0.67 9.80 -- --
1.33................ 342,300 1.33 9.90 -- --
2.00................ 173,500 2.00 9.53 125 2.00
--------- ------
1,554,878 0.75 9.68 53,977 0.05
========= ======
</TABLE>
In 1999, Snowball recorded compensation expense of approximately $4,700,000
representing the difference between the exercise price and the deemed fair
value of Snowball's common stock on the date such stock options were granted.
Such amount is included as a reduction in stockholders' equity and is being
amortized by charges to operations on a graded vesting method. Snowball
recorded amortization of deferred compensation expense of approximately
$300,000 for the nine months ended September 30, 1999. At September 30, 1999,
Snowball had a total of $4.4 million remaining to be amortized over the
corresponding vesting period of each respective option, generally four years.
The amortization expense relates to options awarded to employees in all
operating expense categories. This amount has not been separately allocated to
these categories.
F-18
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
Stock-Based Compensation
Snowball has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based compensation plans. Because the
exercise price of Snowball's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is generally
recognized. Pro forma information regarding net loss has been determined as if
Snowball had accounted for its employee stock options under the fair value
method prescribed by SFAS 123. The resulting effect on pro forma net loss
disclosed is not likely to be representative of the effects on net loss on a
pro forma basis in future years, due to additional grants and years of vesting
in subsequent years. The fair value of each option granted through September
30, 1999 was estimated on the date of grant using the minimum value method with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999
-----------------
<S> <C>
Dividend yield............................................. 0
Volatility factor.......................................... 50%
Risk-free interest rate.................................... 6%
Expected life.............................................. 4 years
Weighted-average fair value of options granted............. $0.1466
</TABLE>
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma expense over the options' vesting period, and
results in a pro forma net loss of approximately $(18,471) for the nine months
ended September 30, 1999 and pro forma basic and diluted net loss per share of
$(23.59).
Stock Split
On October 12, 1999, Snowball effected a three-for-two stock split of common
shares. All share and per share information included in these financial
statements has been retroactively adjusted to reflect this stock split.
Snowball also changed the conversion rate of its preferred stock. Preferred
Series A and B-1 will convert at a rate of 1.5 for each share of preferred
stock upon an initial public offering.
8. Provisions for Income Taxes
For the nine months ended September 30, 1999 Snowball was subject to
immaterial state minimum taxes, and as a result, no provision for income taxes
was recorded.
As of December 31, 1998 and September 30, 1999, Snowball had federal net
operating loss carryforwards of approximately $3,076,000 and $21,300,000,
respectively. The net operating loss carryforwards will expire at various dates
beginning in 2019 if not utilized.
Utilization of the net operating loss and tax credit carryforward may be
subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating loss and tax credit carryforwards before utilization.
F-19
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
As of December 31, 1998, and September 30, 1999 deferred tax assets totaled
approximately $1,230,000 and $8,000,000, respectively. A valuation allowance
has been recorded to offset the deferred tax assets. The deferred tax assets
relate primarily to net operating loss carryforwards that differ from the
accumulated deficit due to temporary differences in the recognition of certain
expense items for financial statement and income tax purposes.
9. Commitments
At September 30, 1999, Snowball's aggregate commitments under noncancelable
lease arrangements for office space and computer equipment are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
(in thousands)
<S> <C> <C>
Three months ended December 31, 1999...................... $ 184 $ 48
Year ended December 31,
2000.................................................... 737 112
2001.................................................... 737 --
2002.................................................... 418 --
------ ----
Total minimum payments required........................... 2,076 $160
====
Less amount representing interest......................... (199)
------
Present value of future payments.......................... 1,877
Less current portion...................................... (624)
------
$1,253
======
</TABLE>
The cost of assets under capital lease arrangements was $1,877,000 at
September 30, 1999 (none at December 31, 1997 and 1998) and the related
accumulated depreciation was $218,000 at September 30, 1999 (none at December
31, 1997 and 1998).
Rent expense, principally for leased office space under operating lease
commitments, was approximately $241,000 for the nine months ended September 30,
1999 (approximately $73,000 and $176,000 at December 31, 1997 and 1998,
respectively).
10. Subsequent Events
Initial Public Offering
In December 1999, the board of directors authorized Snowball to file a
registration statement with the SEC for an initial public offering of
Snowball's common stock.
License and Stock Purchase Agreement
On October 15, 1999, Snowball entered into an agreement with New Line New
Media, Inc. ("New Line"), a producer and distributor of motion pictures,
whereby Snowball sold and issued 560,822 shares of Series B-1 preferred stock
to New Line for $3.6 million in cash. Further, Snowball received a two-year
license to distribute and display New Line promotional materials (such as film,
trailers, interviews with cast members, and promotional tie-ins) on-line for
use by Snowball's sites.
F-20
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
Term Loan Agreement
On November 8, 1999, Snowball entered into an agreement to borrow an amount
not to exceed $15.2 million from a bank. The loan is due in one year, with $7
million of the principal balance due on or before July 15, 2000 and the
remaining balance, if any, on November 8, 2000. The entire outstanding balance
under the note will become due upon consummation of an initial public offering.
Interest is payable monthly at the annual rate of 11%. The loan is secured by
all of the assets of Snowball, excluding fixed assets.
The terms of the loan allow the lender to convert up to $3 million of the
outstanding loan balance into common stock of Snowball at the initial public
offering price per share. Additionally, Snowball has issued to the lender
warrants to purchase 270,000 shares of Snowball's Series B-1 preferred stock at
an exercise price of $8.44 per share. Following Snowball's initial public
offering, the warrants automatically convert into the right to purchase 270,000
shares of common stock at an exercise price of $8.44 per share. These warrants
expire 180 days following a public offering. Snowball has valued the warrants
issued to the bank using the Black-Scholes option pricing model, at $4.22 per
share. The following assumptions were used in the option pricing model: warrant
terms of two and three years, risk free-rate of interest of 6%, 50% volatility,
and a dividend yield of 0%. The value of the warrants will be expensed as
additional interest expense over the one-year term of the loan arrangement. In
the event of Snowball's initial public offering, unamortized interest will be
taken as a one-time charge to interest expense at that date. Under this
facility, the Company drew down $15.2 million in November and December 1999. In
December 1999, the Company converted $3.0 million to Series C preferred stock
and repaid $12.0 million of the remaining outstanding balance.
Office Building Lease
In November 1999, Snowball entered into a lease agreement for three yet to be
constructed office buildings to be used for Snowball's administration,
engineering and development, manufacturing and warehousing purposes. The term
of the lease shall be approximately ten years for the first building, 11 years
for the second building, and 12 years for the third building. The lease term
begins upon occupancy, when the construction of the buildings is completed,
anticipated to be in March 2000 and April 2000. Future minimum lease payments
under this noncancelable operating lease are as follows (in thousands): 2000--
$1,815; 2001--$4,399; 2002--$4,399; 2003--$4,399; 2004--$4,399; and
thereafter--$29,219.
Preferred Stock Series C Issuance
On December 20, 1999, Snowball issued 3,529,000 shares of Series C preferred
stock at $10 per share resulting in cash proceeds of $32,290,000 and $3,000,000
of debt converted on the term loan.
The holders of the Series C preferred stock are entitled to annual
noncumulative dividends per share of $0.80 per share when and if declared by
the board of directors. In the event of any voluntary or involuntary
liquidation of Snowball, Series C stockholders are entitled to a liquidation
preference of $10 per share plus all declared and unpaid dividends.
Holders of Snowball's Series C preferred stock are entitled to one vote for
each share of common stock into which the preferred stock is convertible.
Series C preferred stock will convert into common stock at a rate of 1.0 for
each share of preferred stock.
F-21
<PAGE>
Snowball.com, Inc.
and its predecessor division of Imagine Media, Inc.
NOTES TO FINANCIAL STATEMENT--(Continued)
Business Acquisition
On December 17, 1999, Snowball completed the acquisition of Extreme
Interactive Media, Inc. ("Extreme"), an internet community site. Snowball
acquired all of the outstanding capital stock of Extreme in exchange for 75,000
shares of Snowball common stock, valued at $600,000, $1.0 million in cash and
$250,000 in unsecured promissory notes. The purchase price may be increased by
up to $3.5 million of additional cash consideration based upon the attainment
of certain economic milestones by Extreme.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Ameritrack, Inc.
Columbia, South Carolina
We have audited the accompanying balance sheet of Ameritrack, Inc. (a
development stage company) as of August 31, 1999 and the related statement of
income and expense, changes in stockholders' equity and cash flows from the
commencement of operations on or about August 14, 1998 through August 31, 1999.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ameritrack, Inc. (a
development stage company) as of August 31, 1999, and the results of its
operations and cash flows from the commencement of operations on or about
August 14, 1998 through August 31, 1999, in conformity with generally accepted
accounting principles.
/s/ J. W. Hunt and Company, L.L.P.
Columbia, South Carolina
October 8, 1999
F-23
<PAGE>
AMERITRACK, INC.
(a development stage company)
BALANCE SHEET
<TABLE>
<CAPTION>
August 31, 1999
---------------
<S> <C>
Assets
Current assets:
Cash......................................................... $ 5,075
Accounts receivable.......................................... 2,111
---------
Total current assets....................................... 7,186
Equipment--at cost, less accumulated depreciation of $2,162.... 21,060
---------
Total assets............................................... $ 28,246
=========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable............................................. $ 8,480
Loans from stockholders...................................... 2,087
---------
Total current liabilities.................................. 10,567
Stockholders' equity:
Common stock, no par value; 1,000,000 shares authorized,
580,100 shares issued and outstanding....................... 174,025
Additional paid in capital...................................
Deficit accumulated during the development stage............. (156,346)
---------
Total stockholders' equity................................. 17,679
---------
Total liabilities and stockholders' equity................. $ 28,246
=========
</TABLE>
See accompanying notes.
F-24
<PAGE>
AMERITRACK, INC.
(a development stage company)
STATEMENT OF INCOME AND EXPENSE
From the commencement of operations
on or about August 14, 1998 through August 31, 1999
<TABLE>
<S> <C>
Revenues:
Advertising income................................................ $ 8,349
Other income...................................................... 514
---------
Total income.................................................... 8,863
Expenses:
Operating expenses................................................ 17,761
Research and development costs.................................... 147,448
---------
Total expenses.................................................. 165,209
---------
Net loss............................................................ $(156,346)
=========
</TABLE>
See accompanying notes.
F-25
<PAGE>
AMERITRACK, INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From the commencement of operations
on or about August 14, 1998 through August 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Number of Development
Shares Common Stock Stage Total
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Common stock issued pursuant to:
Sales of stock:
August 14, 1998................ 5,000 $ 1,500 $ -- $ 1,500
February 23, 1999.............. 5,000 1,500 -- 1,500
April 19, 1999................. 5,000 1,500 -- 1,500
May 28, 1999................... 55,000 16,500 -- 16,500
June 16, 1999.................. 8,350 2,500 -- 2,500
July 6, 1999................... 16,750 5,025 -- 5,025
Stock-based compensation:
Initial issue.................. 325,000 97,500 -- 97,500
June 14, 1999.................. 160,000 48,000 -- 48,000
Net loss......................... -- -- (156,346) (156,346)
------- -------- --------- ---------
Ending balance................... 580,100 $174,025 $(156,346) $ 17,679
======= ======== ========= =========
</TABLE>
See accompanying notes.
F-26
<PAGE>
AMERITRACK, INC.
(a development stage company)
STATEMENT OF CASH FLOWS
From the commencement of operations
on or about August 14, 1998 through August 31, 1999
<TABLE>
<S> <C>
Operating activities
Net Loss .......................................................... $(156,346)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation expense............................................. 2,162
Increase in accounts receivable.................................. (2,111)
Increase in accounts payable..................................... 6,880
Stock-based compensation......................................... 145,500
---------
Net cash used by operating activities.............................. (3,915)
---------
Investing activities
Purchase of equipment.............................................. (21,621)
Financing activities
Proceeds from loans from stockholders.............................. 2,510
Repayment of loans from stockholders............................... (424)
Proceeds from issuance of stock.................................... 28,525
---------
Net cash provided by financing activities.......................... 30,611
---------
Net increase in cash............................................... 5,075
Cash at beginning of period........................................ --
---------
Cash at end of period.............................................. $ 5,075
=========
</TABLE>
See accompanying notes.
F-27
<PAGE>
AMERITRACK, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
Ameritrack, Inc. (the "Company") was formed to develop an Internet web site
that would provide information to assist individuals in locating high school
classmates and provide web site development assistance. The web site is
available internationally.
Advertising
The Company expenses advertising costs as they are incurred. Advertising
expenses totaled $517 for the period.
Equipment and Depreciation
Computer equipment is valued at cost. Maintenance and repairs are charged to
expenses as incurred. Depreciation is computed on the straight-line method,
based on an estimated useful life of five years.
Income Taxes
The financial statements do not include a provision for income taxes because
the Company made an S Corporation election for federal and state income tax
purposes. The Company's earnings will be included in the stockholders' personal
income tax returns.
Research and Development Costs
Research and development costs related to both future and present web site
development are charged to expenses as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that directly affect the results of reported assets, liabilities,
revenue and expenses. Actual results may differ from those estimates.
2. Development Stage Operations
The Company was incorporated and began operations in mid August 1998.
Initially, there was one stockholder. Operations through August 31, 1999 were
devoted primarily to development of the web site, raising capital,
investigating other means of obtaining financing and administrative functions.
As of August 31, 1999, the Company had ten stockholders who acquired stock
through purchase and by providing services to the Company. The basis for
valuing the shares issued for services was determined by reference to the cash
price for the shares acquired by purchase.
These notes are an integral part of the accompanying financial statements.
F-28
<PAGE>
3. Related Party Transactions
During the period, two stockholders advanced operating funds to the Company.
These loans were of a short-term nature and were noninterest bearing. The
highest amount outstanding during the period was $2,262.
4. Subsequent Events
Subsequent to August 31, 1999, the Company signed a letter of intent to sell
all of its outstanding stock for cash and shares of stock in Snowball.com,
Inc., unrelated privately held company. This sale closed on September 28, 1999
with 25% of the cash and 50% of stock being held in escrow pending the
completion of this audit and certain other matters.
The Company was assisted in negotiating this sale by an investment banking
firm. This firm agreed to take its fee for services by acquiring a stock
warrant entitling it to acquire 30,532 shares in the Company. This warrant was
exercised subsequent to August 31, 1999. Upon this exercise, the Company's S
Corporation status was automatically revoked and the Company became a
C Corporation.
These notes are an integral part of the accompanying financial statements.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
of Extreme Interactive Media, Inc.
We have audited the accompanying balance sheets of Extreme Interactive Media,
Inc. (an Oklahoma "S" corporation) as of December 31, 1998 and September 30,
1999, and the related statements of operations and accumulated deficit, and
cash flows for the periods then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Extreme Interactive Media,
Inc. as of December 31, 1998 and September 30, 1999, and the results of its
operations and its cash flows for the periods then ended, in conformity with
generally accepted accounting principles.
/s/ Hamilton & Associates, Inc.
Oklahoma City, Oklahoma
December 9, 1999
F-30
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents......................... $217,798 $ 20,032
Notes receivable.................................. 50,000 --
Accounts receivable............................... 31,675 75,856
Prepaid expenses.................................. 2,760 1,885
-------- --------
Total current assets............................ 302,233 97,773
Property and equipment:
Computer equipment................................ 56,682 70,441
Furniture......................................... 1,622 1,401
-------- --------
58,304 71,842
Less: accumulated depreciation.................... (3,288) (15,358)
-------- --------
Net property and equipment...................... 55,016 56,484
-------- --------
Other assets:
Intangible assets................................. 263,472 269,089
Organization cost................................. 458 383
Deposit........................................... 1,885 1,885
-------- --------
Total other assets.............................. 265,815 271,357
-------- --------
Total assets.................................. $623,064 $425,614
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.................................. $ 20,165 $ 7,284
Other accrued taxes............................... 2,820 --
-------- --------
Total current liabilities....................... 22,985 7,284
Stockholders' equity:
Common stock, $.10 par value, 500,000 shares
authorized, 100,000 shares issued................ 10,000 10,000
Paid in capital in excess of par.................. 759,000 759,000
Accumulated deficit............................... (168,921) (350,670)
-------- --------
Total stockholders' equity...................... 600,079 418,330
Total liabilities and stockholders' equity.... $623,064 $425,614
======== ========
</TABLE>
See accompanying notes and auditor's report.
F-31
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Revenue:
Advertising income................................. $ -- $ 143,565
Other income....................................... 34,147 14,566
--------- ---------
Total revenue.................................... 34,147 158,131
--------- ---------
Operating expenses:
Amortization....................................... 7,570 14,458
Depreciation....................................... 3,288 12,071
Salaries........................................... 82,077 153,917
Professional services.............................. 32,175 48,258
Payroll taxes...................................... 10,513 12,677
Media.............................................. 9,792 1,260
Legal and accounting............................... 25,269 13,351
Rent............................................... 7,323 14,645
Office............................................. 2,994 12,293
Telephone.......................................... 3,052 13,438
Travel............................................. 8,351 6,972
Other.............................................. 14,752 26,867
Promotional........................................ -- 14,120
--------- ---------
Total operating expenses......................... 207,156 344,327
--------- ---------
Loss from operations................................. (173,009) (186,196)
Interest Income...................................... 4,088 4,447
--------- ---------
Net loss............................................. $(168,921) $(181,749)
Accumulated deficit, beginning of the period......... -- (168,921)
--------- ---------
Accumulated deficit, end of the period............... $(168,921) $(350,670)
========= =========
</TABLE>
See accompanying notes and auditor's report.
F-32
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss............................................ $(168,921) $(181,749)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation...................................... 3,288 12,070
Amortization...................................... 7,570 14,458
(Increase) decrease in:
Accounts receivable............................... (31,675) (44,181)
Notes receivable.................................. (50,000) 50,000
Prepaid expenses.................................. (2,760) 875
Other assets...................................... (273,385) (20,000)
Increase (decrease) in:
Accounts payable.................................. 20,165 (12,881)
Accrued taxes..................................... 2,820 (2,820)
--------- ---------
Net cash provided (used) by operating activities.... (492,898) (184,228)
Cash flows from investing activities:
Purchases of property and equipment............... (58,304) (13,538)
Increase from sale of stock....................... 769,000 --
--------- ---------
Net cash provided (used) by investing
activities..................................... 710,696 (13,538)
Net change in cash and cash equivalents............. 217,798 (197,766)
Cash and cash equivalents at beginning of period.... -- 217,798
--------- ---------
Cash and cash equivalents at end of period.......... $ 217,798 $ 20,032
========= =========
</TABLE>
See accompanying notes and auditor's report.
F-33
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Property and Equipment
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed on the declining balance
or straight-line method for financial reporting purposes and on the modified
accelerated cost recovery system method for income tax purposes. Depreciation
expense for the period ended September 30, 1999 was $12,071 and $3,288 for the
year ended December 31, 1998.
Income Taxes
Extreme Interactive Media, Inc., (the "Company"), with the consent of its
shareholders, has elected to be taxed as an S Corporation under Section 1372 of
the Internal Revenue Code, which provides that, in lieu of corporate income
taxes, the stockholders are taxed on their proportionate share of the Company
taxable income.
Cash Equivalents
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management must make estimates based on future events
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial statements,
and revenue and expenses during the reporting period. Actual results could
differ from these estimates.
Intangible Assets
Intangible assets associated with the purchase of websites and organizational
costs are being amortized on the straight-line method over a period of five to
15 years. Amortization expense for the period ended September 30, 1999, was
$14,458 and $7,570 for the year ended December 31, 1998.
2. Accumulated Depreciation
Accumulated depreciation and net book value of property and equipment is as
follows:
<TABLE>
<CAPTION>
September 30,
1999 December 31, 1998
----------------- -----------------
Amount Net Basis Amount Net Basis
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Computer equipment......................... $70,441 $55,389 $56,682 $53,475
Furniture and fixtures..................... 1,401 1,095 1,622 1,541
------- ------- ------- -------
$71,842 $56,484 $58,304 $55,016
======= ======= ======= =======
</TABLE>
3. Compensated Absences
Employees of the Company are entitled to paid vacation, paid sick days and
personal days off, depending on job classification, length of service, and
other factors. The Company does not account for the amount of compensation for
future absences and the amount would be immaterial, and
F-34
<PAGE>
EXTREME INTERACTIVE MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
accordingly, no liability has been recorded in the accompanying financial
statements. The Company's policy is to recognize the costs of compensated
absences when actually paid to employees.
4. RELATED PARTY TRANSACTIONS
The Company paid legal fees of $6,653 (December 31, 1998 $23,895) to a law
firm in which two of its stockholders are partners.
The Company paid rent of $1,250 (December 31, 1998 $725) to a company owned
by one of its stockholders.
Extreme Interactive Media, Inc. paid accounting fees of $2,525 to a firm that
is owned by one of its stockholders.
F-35
<PAGE>
Snowball.com, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
gives effect to the acquisition of Extreme Interactive Media, Inc. using the
purchase accounting method, based on allocations of the purchase price. The
historical information has been derived from the respective historical
financial information of Snowball and Extreme Interactive Media and should be
read in conjunction with their financial statements and the related notes
included in this prospectus.
The unaudited pro forma condensed combined balance sheet has been prepared
assuming the mergers took place as of September 30, 1999 and allocates the
total estimated purchase price to the fair values of assets and liabilities of
the acquired company based on preliminary valuations.
The unaudited pro forma condensed combined statements of operations combine
Snowball's and Extreme Interactive Media's historical statements of operations
and give effect to the merger, including the amortization of goodwill and other
intangible assets resulting from the merger, as if the merger occurred on
January 1, 1998 for the twelve months ended December 31, 1998 and on January 1,
1999 for the nine months ended September 30, 1999.
The total estimated purchase price of Extreme Interactive Media has been
allocated on a preliminary basis to assets and liabilities based on
management's estimates of their fair values with the excess cost over the net
assets acquired allocated to goodwill and other intangible assets. Although the
purchase price allocation is not final, it is anticipated that a portion of the
purchase price will be allocated to workforce, trademarks and strategic
relationships. These allocations are subject to change pending a final
determination and analysis.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would actually occur if the merger had been
consummated as of the dates indicated, nor is it necessarily indicative of the
future operating results or financial position of the combined company. The pro
forma adjustments are based on the information available at the time of the
filing of this prospectus.
F-36
<PAGE>
Snowball.com, Inc.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Extreme
Snowball.com, Interactive
Inc. Media, Inc. Pro Forma
September 30, September 30, Pro Forma September 30,
1999 1999 Adjustments 1999
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash, cash
equivalents, and
short-term
investments........... $ 10,790 $ 20 $(1,000)(i) $ 9,810
Accounts receivable,
net................... 999 76 -- 1,075
Other current assets... 1,550 2 -- 1,552
-------- ----- ------- --------
Total current assets.... 13,339 98 (1,000) 12,437
Goodwill and intangible
assets, net 3,062 269 1,432 (ii) 4,763
Fixed assets, net....... 3,592 56 -- 3,648
Other assets............ 101 2 -- 103
-------- ----- ------- --------
Total assets............ $ 20,094 $ 425 $ 432 $ 20,951
======== ===== ======= ========
Liabilities and
stockholders' equity
Current liabilities:
Accounts payable....... $ 2,876 $ 7 $ -- $ 2,883
Accrued liabilities.... 2,984 -- -- 2,984
Deferred revenue....... 330 -- -- 330
Notes payable.......... -- -- 250 (i) 250
Current equipment
financing
obligations........... 624 -- -- 624
-------- ----- ------- --------
Total current
liabilities......... 6,814 7 250 7,071
Long-term equipment
financing obligations.. 1,253 -- -- 1,253
Stockholders' equity:
Common and preferred
stock................. 19 10 (10)(iii) 19
Additional paid-in
capital............... 40,000 759 (159)(i),(iii) 40,600
Notes receivable....... (238) -- -- (238)
Deferred
compensation.......... (4,388) -- -- (4,388)
Accumulated deficit.... (23,366) (351) 351 (iii) (23,366)
-------- ----- ------- --------
Total stockholders'
equity................. 12,027 418 182 12,627
-------- ----- ------- --------
Total liabilities and
stockholders' equity... $ 20,094 $ 425 $ 432 $ 20,951
======== ===== ======= ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
F-37
<PAGE>
Snowball.com, Inc.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Extreme
Snowball.com, Interactive Pro Forma Pro Forma
Inc. Media, Inc. Adjustments Combined
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue....................... $ 3,256 $ 34 $ -- $ 3,290
Cost of revenue............... 1,322 -- -- 1,322
------- ----- ----- -------
Gross margin.................. 1,934 34 -- 1,968
Operating Expenses
Production and content....... 1,599 -- -- 1,599
Engineering and development.. 329 -- -- 329
Sales and marketing.......... 2,592 18 -- 2,610
General and administration... 1,074 189 -- 1,263
Amortization of intangible
assets...................... -- -- 477 (A) 477
------- ----- ----- -------
Total operating expenses.... 5,594 207 477 6,278
------- ----- ----- -------
Loss from operations.......... (3,660) (173) (477) (4,310)
Interest income, net.......... -- 4 -- 4
------- ----- ----- -------
Net loss...................... $(3,660) $(169) $(477) $(4,306)
======= ===== ===== =======
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
F-38
<PAGE>
Snowball.com, Inc.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands except per share data)
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Extreme
Snowball.com, Interactive Pro Forma Pro Forma
Inc. Media, Inc. Adjustments Combined
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue....................... $ 3,214 $ 158 $ -- $ 3,372
Cost of revenue............... 2,286 -- -- 2,286
-------- ----- ----- --------
Gross margin.................. 928 158 -- 1,086
Operating expenses
Production and content....... 3,330 -- -- 3,330
Sales and marketing.......... 9,173 22 -- 9,195
Engineering and development.. 2,899 -- -- 2,899
General and administration... 3,485 322 -- 3,807
Stock-based compensation..... 276 -- -- 276
Amortization of intangible
assets...................... 529 -- 358 (A) 887
-------- ----- ----- --------
Total operating expenses.... 19,692 344 358 20,394
-------- ----- ----- --------
Loss from operations.......... (18,764) (186) (358) (19,308)
Interest income, net.......... 337 4 -- 341
-------- ----- ----- --------
Net loss...................... $(18,427) $(182) $(358) $(18,967)
======== ===== ===== ========
Basic and diluted net loss per
share (B).................... $ (23.53) $ -- $ (22.11)
======== ===== ========
Shares used in per share
calculation.................. 783 75 858
======== ===== ========
Pro forma basic and diluted
net loss
per share (B)(unaudited)..... $ (1.08) $ -- $ (1.10)
======== ===== ========
Shares used in pro forma per
share calculation
(unaudited).................. 17,126 75 17,201
======== ===== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
F-39
<PAGE>
Snowball.com, Inc.
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The total estimated purchase price of the transaction has been allocated on a
preliminary basis to assets and liabilities based on management's estimate of
their fair values with the excess cost over the net assets acquired allocated
to goodwill and other intangible assets. Although the purchase price allocation
is not final, it is anticipated that a portion of the purchase price will be
allocated to workforce, trademarks, and strategic relationships. These
allocations are subject to change pending a final determination and analysis.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of September 30, 1999, have been calculated as if the merger occurred on
September 30, 1999 and are as follows:
(i) To reflect the acquisition of all of the outstanding capital stock of
Extreme Interactive Media by exchanging 75,000 shares of Snowball common
stock, valued at $600,000 and $1.0 million in cash and $250,000 in
promissory notes for a total estimated purchase price of $1.85 million. No
material purchase costs are anticipated. The purchase price may be
increased by up to $3,500,000 of additional cash consideration, based upon
the attainment of certain economic milestones by Extreme Interactive,
subsequent to the acquisition. The payment of this additional consideration
has not been assumed in these pro forma financial statements.
(ii) The excess purchase of approximately $1.4 million over the fair value
of net tangible assets acquired, has been recorded as goodwill and other
intangible assets.
(iii) To reflect the elimination of the historical stockholders' equity
accounts of Extreme Interactive Media.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the nine months ended September 30, 1999 and the year ended
December 31, 1998, assume the merger occurred as of January 1, 1999 and January
1, 1998, respectively, and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the merger. The goodwill and other intangible assets are
being amortized over periods of approximately three years. Based upon the
nature of Extreme Interactive Media's operations, management does not
anticipate that any significant value will be attributed to purchased in-
process research and development.
(B) Basic and diluted and pro forma basic and diluted net loss per share
has been adjusted to reflect the issuance of 75,000 shares of Snowball
common stock, as if the shares had been outstanding for the entire periods
presented.
These notes are an integral part of the accompanying financial statements.
F-40
<PAGE>
UNDERWRITING
Snowball and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Hambrecht &
Quist LLC and FleetBoston Robertson Stephens Inc. are the representatives of
the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .................................................
Hambrecht & Quist LLC.................................................
FleetBoston Robertson Stephens Inc....................................
Total...............................................................
====
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional [
] shares from Snowball to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Snowball. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Snowball
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share................................................
Total....................................................
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all of the shares are not sold at
the initial public offering price, the representatives may change the offering
price and the other selling terms.
Snowball and its officers, directors and substantially all of its
securityholders have agreed with the underwriters not to dispose of or hedge
any of their common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of Goldman, Sachs & Co. See "Shares Available
for Future Sale" for a discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Snowball and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Snowball's historical performance, estimates of Snowball's
business potential and earnings prospects, an assessment of Snowball's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
We intend to apply to have our common stock listed on the Nasdaq National
Market under the symbol "SNBL".
U-1
<PAGE>
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short-sale covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
At our request, the underwriters have reserved up to shares of
common stock for sale at the initial public offering price to directors,
officers, friends and family members of employees, and other friends of
Snowball, through a directed share program. The number of shares of common
stock available for sale to the general public in the public offering will be
reduced to the extent these persons purchase these reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as other shares offered hereby.
Snowball estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
Snowball has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-2
<PAGE>
[The image of a hip, adolescent girl is displayed on the top half of the
inside back cover, with the phrase "Who am i?" positioned at the top of the
page. Beneath the image of the girl are the statements "i am the internet
generation," "i am a vast community" and " And, i am here." Displayed
horizontally beneath these statements are the logos of the four Snowball
networks. Beneath the network logos is the Snowball logo, with the phrase "We
are i" under the logo.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or any other person is authorized to give any
information or represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus
is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Financial Data................................................... 6
Risk Factors............................................................. 7
Cautionary Note on Forward-Looking Statements............................ 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 26
Selected Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 35
Management............................................................... 50
Related Party Transactions............................................... 63
Principal Stockholders................................................... 65
Description of Capital Stock............................................. 67
Shares Available for Future Sale......................................... 71
Legal Matters............................................................ 73
Experts.................................................................. 73
Where You Can Find Additional Information................................ 73
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
---------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
Snowball.com, Inc.
Common Stock
---------------
[LOGO]
---------------
Goldman, Sachs & Co.
Hambrecht & Quist
Robertson Stephens
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 22,770
NASD filing fee.................................................... 9,125
Nasdaq National Market filing fee.................................. 95,000
Accounting fees and expenses....................................... 300,000
Legal fees and expenses............................................ 400,000
Road show expenses................................................. *
Printing and engraving expenses.................................... 250,000
Blue sky fees and expenses......................................... *
Transfer agent and registrar fees and expenses..................... 10,000
Miscellaneous...................................................... *
--------
Total........................................................ $ *
========
</TABLE>
- --------
*To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability:
. for any breach of the director's duty of loyalty to the Registrant or
its stockholders,
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
. under section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases), or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's Bylaws
provide that:
. the Registrant is required to indemnify its directors and officers to
the fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions,
. the Registrant may indemnify its other employees and agents as set forth
in the Delaware General Corporation Law,
. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions, and
. the rights conferred in the Bylaws are not exclusive.
II-1
<PAGE>
The Registrant intends to enter into Indemnification Agreements with each of
its current directors and officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Registrant's Certificate of Incorporation and to provide
additional procedural protections. At present, there is no pending litigation
or proceeding involving a director, officer or employee of the Registrant
regarding which indemnification is sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification.
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, Bylaws and the Indemnity
Agreements entered into between the Registrant and each of its directors and
officers may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising under the
Securities Act.
The Registrant maintains directors' and officers' liability insurance and
expects to obtain a rider to such coverage for securities matters.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit Document Number
---------------- ------
<S> <C>
Form of Underwriting Agreement...................................... 1.01
Registrant's Amended and Restated Certificate of Incorporation...... 3.01
Registrant's Bylaws................................................. 3.03
Amended and Restated Investor Rights Agreement dated December 20,
1999............................................................... 4.02
Form of Indemnity Agreement......................................... 10.01
</TABLE>
Item 15. Recent Sales of Unregistered Securities.
1. We granted stock options to purchase 6,103,962 shares of our common
stock at exercise prices ranging from $0.04667 to $8.00 per share to our
employees, consultants, directors, and other service providers under our
1999 Equity Incentive Plan. Through December 20, 1999, we issued and sold
an aggregate of 3,676,514 shares of our common stock to employees,
consultants, directors, and other service providers at prices ranging from
$0.04667 to $2.00 per share under direct issuances or exercises of options
granted under our 1999 Equity Incentive Plan. All shares purchased under
our 1999 Equity Incentive Plan are subject to our right to repurchase such
shares at their original exercise price. The repurchase feature generally
expires for 25% of the shares after the first year of service and then
expires ratably over the next 36 months.
2. In February and March 1999, we issued and sold an aggregate of
9,990,111 shares of our Series A Preferred Stock to certain of our officers
and directors and Imagine Media, Inc. for an aggregate purchase price of
$3,462,000. These shares of Series A preferred stock are convertible into
14,985,165 shares of our common stock.
3. In February 1999, we issued and sold an aggregate of 5,000,000 shares
of Series B preferred stock to Imagine Media Inc. in exchange for certain
assets of Imagine Media Inc. valued at $1,750,000. The shares of Series B
preferred stock were converted into 276,461 shares of Series B-1 preferred
stock in May 1999 for no additional consideration. These shares are
convertible into 414,691 shares of our common stock.
II-2
<PAGE>
4. In April 1999, we issued warrants to purchase 21,063 shares of our
Series B-1 preferred stock to Comdisco, Inc. in connection with a Master
Lease Agreement between Comdisco, Inc. and us. These shares are convertible
into 31,595 shares of our common stock.
5. In May, June and October 1999, we issued and sold an aggregate of
3,859,875 shares of our Series B-1 preferred stock to private investors,
one of our directors and trusts associated with one of our directors for an
aggregate purchase price of approximately $24,433,008. These shares of
Series B-1 preferred stock are convertible into 5,789,807 shares of common
stock.
6. In July 1999, we issued 100,000 shares of our common stock to the
owners of Vault Networks in connection with our purchase of selected assets
of Vault Networks.
7. In September 1999, we issued 30,000 shares of our common stock to
certain stockholders of AmeriTrack, Inc. in exchange for their shares of
that company.
8. In October 1999, we issued warrants to purchase 14,064 shares of our
Series B-1 preferred stock to Comdisco, Inc. in connection with a Master
Lease Agreement between Comdisco, Inc. and us. These shares are convertible
into 21,097 shares of our common stock.
9. In October 1999, we issued and sold 560,822 shares of Series B-1
preferred stock to New Line New Media, Inc. in connection with a commercial
transaction, for an aggregate purchase price of $3,550,000. These shares
are convertible into 841,233 shares of our common stock.
10. In November 1999, we issued a warrants to purchase 180,000 shares of
Series B-1 preferred stock to a creditor in connection with a Loan and
Security Agreement between Sand Hill Capital II, L.P. and us. These shares
are convertible into 270,000 shares of our common stock.
11. In December 1999, we issued 75,000 shares of our common stock to
certain stockholders of Extreme Interactive Media, Inc. in exchange for
their shares of that company.
12. In December 1999, we issued and sold an aggregate of 3,529,000 shares
of our Series C Preferred Stock to private investors for an aggregate
purchase price of approximately $32.3 in cash and $3.0 million in debt
conversion. These shares of Series C preferred stock are convertible into
3,529,000 shares of common stock.
All sales of common stock made pursuant to the exercise of stock options were
made in reliance on Rule 701 under the Securities Act or on Section 4(2) of the
Securities Act.
All sales of preferred stock and warrants to purchase preferred stock were
made in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. These sales were made without general
solicitation or advertising. Each purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate the investment and
represented to the Registrant that the shares were being acquired for
investment.
All sales of common stock made pursuant to the exchange of shares were made
in reliance on Rule 504.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01 Form of Underwriting Agreement.
2.01 Stock Exchange Agreement among Registrant, Ameritrack, Inc. and the
security holders of Ameritrack, Inc., dated as of September 28, 1999.
2.02* Stock Purchase and Exchange Agreement among Registrant, Extreme
Interactive Media, Inc. and all of the security holders of Extreme
Interactive Media, Inc., dated as of December 17, 1999.
3.01 Registrant's Amended and Restated Certificate of Incorporation.
3.02* Registrant's Amended and Restated Certificate of Incorporation (to be
filed immediately after the closing of this offering).
3.03 Registrant's Bylaws.
3.04* Registrant's Amended and Restated Bylaws (to be filed immediately
after the closing of this offering).
4.01* Form of Specimen Certificate for Registrant's common stock.
4.02 Amended and Restated Investor Rights Agreement, dated as of December
20, 1999.
5.01* Opinion of Fenwick & West LLP regarding legality of the securities
being registered.
10.01 Form of Indemnity Agreement between Registrant and each of its
directors and executive officers.
10.02 1999 Equity Incentive Plan and related agreements.
10.03 Proposed form of 2000 Equity Incentive Plan and forms of stock option
agreements and stock option exercise agreements.
10.04 Proposed form of 2000 Employee Stock Purchase Plan and forms of
related agreements.
10.05 Adoption Agreement for Pan American Life Insurance Standardized 401(k)
Profit Sharing Plan and Trust dated April 1, 1999, and related
agreements.
10.06 Offer Letter dated February 1, 1999 from Registrant to Mark A. Jung.
10.07 Offer Letter dated January 18, 1999 from Registrant to Janette S.
Chock.
10.08 Offer Letter dated March 4, 1999 from Registrant to Elizabeth G.
Murphy.
10.09 Offer Letter dated March 15, 1999 from Registrant to Teresa M.
Crummett.
10.10 Offer Letter dated March 15, 1999 from Registrant to Kenneth H.
Keller.
10.11 Offer Letter dated October 18, 1999 from Registrant to James R.
Tolonen.
10.12 Secured Promissory Note between Registrant and Mark A. Jung, dated as
of February 1, 1999.
10.13 Secured Promissory Note between Registrant and Christopher Anderson,
dated as of February 1, 1999.
10.14 Secured Promissory Note between Registrant and James R. Tolonen and
Ginger Tolonen Family Trust dated 9/26/96, dated as of October 20,
1999.
10.15* Secured Promissory Note between Registrant and James R. Tolonen, dated
as of November 30, 1999.
10.16 Series A Preferred Stock and Series B Preferred Stock Purchase
Agreement, dated as of January 7, 1999.
10.17 Services and Support Agreement between Registrant and Imagine Media,
Inc., dated as of January 7, 1999.
10.18 Brisbane Technology Park Lease dated November 29, 1999, between
Registrant and GAL-Brisbane, L.P.
10.19 Sublease Agreement dated as of May 1, 1999, between Registrant and
Imagine Media, Inc.
10.20 Loan and Security Agreement dated November 8, 1999, between Registrant
and Sand Hill Capital II, L.P.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.21 Indemnity Agreement dated as of June 1, 1999, between Registrant and
Richard LeFurgy.
21.01 Subsidiaries of Registrant
23.01* Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of Ernst & Young LLP, independent auditors.
23.03 Consent of Hamilton & Associates, Inc., independent auditors.
23.04 Consent of J.W. Hunt and Company LLP, independent auditors.
24.01 Power of Attorney.
27.01 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) The following financial statement schedule is filed herewith:
Financial statement schedules are omitted because the information called for
is not required or is shown either in the financial statements or the notes
thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on this 22nd day of December, 1999.
SNOWBALL.COM, INC.
/s/ Mark A. Jung
By: _________________________________
Mark A. Jung
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Mark Jung and James Tolonen, and each of
them, his true and lawful attorneys-in-fact and agents with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by the Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act, and all post-effective amendments thereto, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mark A. Jung President, Chief Executive December 22, 1999
______________________________________ Officer and a director
Mark A. Jung (Principal Executive
Officer)
/s/ James R. Tolonen Chief Financial Officer and December 22, 1999
______________________________________ Chief Operating Officer
James R. Tolonen (Principal Financial
Officer)
/s/ Janette Chock Controller and Chief December 22, 1999
______________________________________ Accounting Officer
Janette Chock (Principal Accounting
Officer)
/s/ Christopher Anderson Director December 22, 1999
______________________________________
Christopher Anderson
/s/ Richard LeFurgy Director December 22, 1999
______________________________________
Richard LeFurgy
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael Orsak Director December 22, 1999
______________________________________
Michael Orsak
/s/ Robert Reid Director December 22, 1999
______________________________________
Robert Reid
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01 Form of Underwriting Agreement.
2.01 Stock Exchange Agreement among Registrant, Ameritrack, Inc. and the
security holders of Ameritrack, Inc., dated as of September 28, 1999.
3.01 Registrant's Amended and Restated Certificate of Incorporation.
3.03 Registrant's Bylaws.
4.02 Amended and Restated Investor Rights Agreement, dated as of December
20, 1999.
10.01 Form of Indemnity Agreement between Registrant and each of its
directors and executive officers.
10.02 1999 Equity Incentive Plan and related agreements.
10.03 Proposed form of 2000 Equity Incentive Plan and forms of stock option
agreements and stock option exercise agreements.
10.04 Proposed form of 2000 Employee Stock Purchase Plan and forms of
related agreements.
10.05 Adoption Agreement for Pan American Life Insurance Standardized 401(k)
Profit Sharing Plan and Trust dated April 1, 1999, and related
agreements.
10.06 Offer Letter dated February 1, 1999 from Registrant to Mark A. Jung.
10.07 Offer Letter dated January 18, 1999 from Registrant to Janette S.
Chock.
10.08 Offer Letter dated March 4, 1999 from Registrant to Elizabeth G.
Murphy.
10.09 Offer Letter dated March 15, 1999 from Registrant to Teresa M.
Crummett.
10.10 Offer Letter dated March 15, 1999 from Registrant to Kenneth H.
Keller.
10.11 Offer Letter dated October 18, 1999 from Registrant to James R.
Tolonen.
10.12 Secured Promissory Note between Registrant and Mark A. Jung, dated as
of February 1, 1999.
10.13 Secured Promissory Note between Registrant and Christopher Anderson,
dated as of February 1, 1999.
10.14 Secured Promissory Note between Registrant and James R. Tolonen and
Ginger Tolonen Family Trust dated 9/26/96, dated as of October 20,
1999.
10.16 Series A Preferred Stock and Series B Preferred Stock Purchase
Agreement, dated as of January 7, 1999.
10.17 Services and Support Agreement between Registrant and Imagine Media,
Inc., dated as of January 7, 1999.
10.18 Brisbane Technology Park Lease dated November 29, 1999, between
Registrant and GAL-Brisbane, L.P.
10.19 Sublease Agreement dated as of May 1, 1999, between Registrant and
Imagine Media, Inc.
10.20 Loan and Security Agreement dated November 8, 1999, between Registrant
and Sand Hill Capital II, L.P.
10.21 Indemnity Agreement dated as of June 1, 1999, between Registrant and
Richard LeFurgy.
21.01 Subsidiaries of Registrant
23.02 Consent of Ernst & Young LLP, independent auditors.
23.03 Consent of Hamilton & Associates, Inc., independent auditors.
23.04 Consent of J.W. Hunt and Company LLP, independent auditors.
24.01 Power of Attorney.
27.01 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.01
Snowball.com, Inc.
Common Stock, par value $0.001 per share
____________________
Underwriting Agreement
----------------------
[________], 2000
Goldman, Sachs & Co.,
BancBoston Robertson Stephens, Inc.,
Hambrecht & Quist LLC
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
2765 Sand Hill Road
Menlo Park, CA 94025
Ladies and Gentlemen:
Snowball.com, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
[______] shares (the "Firm Shares") and, at the election of the Underwriters, up
to [______] additional shares (the "Optional Shares") of Common Stock, par value
$0.001 per share ("Stock") of the Company (the Firm Shares and the Optional
Shares that the Underwriters elect to purchase pursuant to Section 2 hereof
being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. [______]) (the "Initial
Registration Statement") in respect of the Shares has been filed with the
Securities and Exchange Commission (the "Commission"); the Initial Registration
Statement and any post-effective amendment thereto, each in the form heretofore
delivered to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such form; other
than a registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a "Preliminary
Prospectus"; the various parts of the Initial Registration Statement and the
Rule 462(b) Registration Statement, if
<PAGE>
any, including all exhibits thereto and including the information contained in
the form of final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and deemed by virtue of
Rule 430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective, each as amended at the time such part of the
Initial Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information relating to an Underwriter furnished in writing to
the Company by such Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been any change in the capital stock, net current assets,
stockholders' equity or long-term debt of the Company or any of its subsidiaries
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the Company
and its subsidiaries, otherwise than as set forth or contemplated in the
Prospectus;
(e) The Company and each of its subsidiaries own or possess adequate
licenses or other rights to use all patents, patent rights, inventions, trade
secrets, copyright, trademarks, service marks, trade names, technology and know-
how currently employed or proposed to be employed by them in connection with
their business as described in the Prospectus; the Company is not obligated to
pay a royalty, grant a license, or provide other consideration to any third
party in connection with its patents, copyrights, trademarks, service marks,
trade names, technology or know-how other than as disclosed in the Prospectus,
and, except as disclosed in the Prospectus, neither the Company nor any of its
subsidiaries has received any notice of infringement or conflict
-2-
<PAGE>
with (and neither the Company nor any of its subsidiaries knows of any
infringement or conflict with) rights of others with respect to any patents,
patent rights, inventions, trade secrets, copyrights, trademarks, service marks,
tradenames, technology or know-how which could result in any material adverse
effect upon the Company and its subsidiaries, taken as a whole; and, except as
disclosed in the Prospectus, the discoveries, inventions, products or processes
of the Company and its subsidiaries referred to in the Prospectus do not, to the
best knowledge of the Company or any of its subsidiaries, infringe or conflict
with any right or patent of any third party, or any discovery, invention,
product or process which is the subject of a patent application filed by any
third party, known to the Company or any of its subsidiaries which could have a
material adverse effect on the Company and its subsidiaries, taken as a whole;
and no third party, including any academic or governmental organization,
possesses rights to the Company's patents, copyrights, trademarks, service
marks, trade names, technology or know-how which, if exercised, could enable
such third party to develop products competitive to those of the Company or
could have a material adverse effect on the ability of the Company to conduct
its business in the manner described in the Prospectus;
(f) The Company and its subsidiaries possess all consents, licenses,
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a materially
adverse effect on or constitute a material adverse change, or constitute a
development involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries, otherwise than as disclosed
in the Prospectus;
(g) The Company and its subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal
property owned by them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries;
(h) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(i) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in
-3-
<PAGE>
the Prospectus; and all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, are fully paid
and non-assessable and (except for directors' qualifying shares) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(j) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(k) The issue and sale of the Shares by the Company and the compliance by
the Company with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties; no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters; and no holders of securities of the Company have rights to the
registration of such securities under the Registration Statement;
(l) Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation or By-laws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound;
(m) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and under the captions "Related Party Transactions",
"Management -- Benefit Plans", "Management -- Employment Arrangements,
Termination of Employment Arrangements and Change of Control Arrangements",
"Management -- Limitation of Liability and Indemnification", "Shares Eligible
for Future Sale", "Business -- Legal Proceedings", "Risk Factors -- Risks
Related to Our Business -- We have adopted anti-takeover defenses that could
delay or prevent an acquisition of our company", "Risk Factors -- Risks Related
to Our Industry -- Future regulation of the Internet may slow its growth,
resulting in decreased demand for our services and increased costs of doing
business" and "Underwriting", insofar as they purport to describe the provisions
of the laws and documents referred to therein, are accurate, complete and fair;
(n) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
-4-
<PAGE>
adverse effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; and, to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or by others;
(o) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company", as such term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act");
(p) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes;
(q) Ernst & Young LLP, who have certified certain financial statements of
the Company and its subsidiaries, are independent public accountants as required
by the Act and the rules and regulations of the Commission thereunder;
(r) The Company has reviewed its operations and that of its subsidiaries
and any third parties with which the Company or any of its subsidiaries has a
material relationship to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries will be affected by the Year 2000
Problem. As a result of such review, the Company has no reason to believe, and
does not believe, that the Year 2000 Problem will have a material adverse effect
on the general affairs, management or the current or future consolidated
financial position, business prospects, stockholders' equity or results of
operations of the Company and its subsidiaries or result in any material loss or
interference with the Company's business or operations. The "Year 2000 Problem"
as used herein means any significant risk that computer hardware or software
used in the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000;
(s) There are no transfer taxes or other similar fees or charges under
federal law or the laws of any state, or any political subdivision thereof,
required to be paid in connection with the execution and delivery of this
Agreement or the issuance or sale by the Company of the Shares;
(t) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the general affairs, management or the current or future
consolidated financial position, business prospects, stockholders' equity or
results of operations of the Company and its subsidiaries or result in any
material loss or interference with the Company's business or operations) and has
paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently being
contested in good faith or as would not have a material adverse effect on the
general affairs, management or the current or future consolidated financial
position, business prospects, stockholders' equity or results of operations of
the Company and its subsidiaries or result in any material loss or interference
with the Company's business or operations;
(u) No labor disturbance by or dispute with the employees of the Company
or any of its subsidiaries exists or is threatened or imminent and the Company
is not aware of any existing or imminent labor disturbance by the employees of
any of its principal suppliers, contractors or
-5-
<PAGE>
customers that could result in a material adverse effect on the general affairs,
management or the current or future consolidated financial position, business
prospects, stockholders' equity or results of operations of the Company and its
subsidiaries or result in any material loss or interference with the Company's
business or operations;
(v) Each of the Company and its subsidiaries is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which it is engaged;
all policies of insurance insuring the Company or its subsidiaries or their
businesses, assets, employees, officers or directors are in full force and
effect; each of the Company and its subsidiaries is in compliance with the terms
of such policies and instruments in all material respects; and there are no
claims by the Company or any of its subsidiaries under any such policy or
instrument as to which any insurance company is denying liability or defending
under a reservation of rights clause; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied for; and
the Company has no reason to believe that any of the Company or its subsidiaries
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a material
adverse effect on the general affairs, management or the current or future
consolidated financial position, business prospects, stockholders' equity or
results of operations of the Company and its subsidiaries or result in any
material loss or interference with the Company's business or operations;
(w) Each of the Company and its subsidiaries (i) is in compliance with any
and all foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received and is in compliance with all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its business and
(iii) has not received notice of any actual or potential liability for the
investigation or remediation of any disposal or release of hazardous or toxic
substances or wastes, pollutants or contaminants, except where such non-
compliance with Environmental Laws, failure to receive required permits,
licenses or other approvals, or liability would not, individually or in the
aggregate, have a material adverse effect on the general affairs, management or
the current or future consolidated financial position, business prospects,
stockholders' equity or results of operations of the Company and its
subsidiaries or result in any material loss or interference with the Company's
business or operations. Except as set forth in the Prospectus, neither the
Company nor any of its subsidiaries has been named as a "potentially responsible
party" under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended;
(x) Neither the Company nor any of its subsidiaries has taken, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Securities Exchange Act of
1934, as amended, or otherwise, in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares;
(y) Each of the Company and its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets
-6-
<PAGE>
is compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences;
(z) Each of the Company and its subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of the
United States Employee Retirement Income Security Act of 1974 ("ERISA") and the
regulations and published interpretations thereunder with respect to each "plan"
(as defined in Section 3(3) of ERISA and such regulations and published
interpretations) in which employees of the Company and its subsidiaries, as
applicable, are eligible to participate and each such plan is in compliance in
all material respects with the presently applicable provisions of ERISA and such
regulations and the published interpretations. Neither the Company nor any of
its subsidiaries has incurred any unpaid liability to the Pension Benefit
Guaranty Corporation (other than for the payment of premiums in the ordinary
course of business) or to any such plan under Title IV of ERISA; and
(aa) Except as disclosed in the Registration Statement and the Prospectus,
the Company (i) does not have any material lending or other relationship with
any bank or lending affiliate of Goldman, Sachs & Co., BancBoston Robertson
Stephens, Inc. or Hambrecht & Quist LLC and (ii) does not intend to use any of
the proceeds from the sale of the Shares hereunder to repay any outstanding debt
owed to any affiliate of Goldman, Sachs & Co., BancBoston Robertson Stephens,
Inc. or Hambrecht & Quist LLC.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $[________], the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to [________] Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
-7-
<PAGE>
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman, Sachs & Co.
at least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on [______], 2000 or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on
the date specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is herein
called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(j) hereof, will be delivered at the offices of Wilson
Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at 6:00
p.m., New York City time, on the New York Business Day next preceding such Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus which shall be
disapproved by you promptly after reasonable notice thereof; to advise you,
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
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suspending any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such jurisdictions for
as long as may be necessary to complete the distribution of the Shares, provided
that in connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in any
jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to furnish the
Underwriters with copies of the Prospectus in New York City in such quantities
as you may reasonably request, and, if the delivery of a prospectus is required
at any time prior to the expiration of nine months after the time of issue of
the Prospectus in connection with the offering or sale of the Shares and if at
such time any event shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made
when such Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary during such period to amend or supplement the Prospectus
in order to comply with the Act, to notify you and upon your request to prepare
and furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such statement
or omission or effect such compliance, and in case any Underwriter is required
to deliver a prospectus in connection with sales of any of the Shares at any
time nine months or more after the time of issue of the Prospectus, upon your
request but at the expense of such Underwriter, to prepare and deliver to such
Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to and
including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flows of the Company and its consolidated
subsidiaries certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of each fiscal
year (beginning with the fiscal quarter ending after the effective date of the
Registration
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Statement), to make available to its stockholders consolidated summary financial
information of the Company and its subsidiaries for such quarter in reasonable
detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form 10-K
as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar; and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that, except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
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7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, shall
have furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery, with
respect to the matters covered in paragraphs (i), (ii), (viii), (xii) and (xiv)
of subsection (c) below as well as such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Fenwick & West LLP, counsel for the Company, shall have furnished to
you their written opinion (a draft of such opinion is attached as Annex II(b)
hereto), dated such Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of Delivery)
have been duly and validly authorized and issued and are fully paid and
non-assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) Except as set forth in the Prospectus, the Company does not
have outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations;
(iv) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification or is subject to no
material liability or disability by reason of failure to be so qualified in
any such jurisdiction;
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(v) Each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and all of the issued shares of capital
stock of each such subsidiary have been duly and validly authorized and
issued, are fully paid and non-assessable, and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(vi) The Company and its subsidiaries have good and marketable title
in fee simple to all real property owned by them, in each case free and
clear of all liens, encumbrances and defects except such as are described
in the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its subsidiaries;
(vii) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a material adverse effect on
the current or future consolidated financial position, stockholders' equity
or results of operations of the Company and its subsidiaries; and, to the
best of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or by others;
(viii) This Agreement has been duly authorized, executed and delivered
by the Company;
(ix) The issue and sale of the Shares being delivered at such Time
of Delivery by the Company and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties; and no holder of securities of the Company has rights to the
registration of such securities under the Registration Statement;
(x) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
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(xi) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or By-laws or any statute or any order,
rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound;
(xii) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(xiii) The Company is not an "investment company", as such term is
defined in the Investment Company Act; and
(xiv) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Act and the
rules and regulations thereunder; although they do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (xii) of this section 7(c), they
have no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the Prospectus
or any further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the Prospectus
or any further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and they do not
know of any amendment to the Registration Statement required to be filed or
of any contracts or other documents of a character required to be filed as
an exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or described
as required;
(d) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any post-
effective amendment to the Registration Statement filed subsequent to the date
of this Agreement and also at each Time of Delivery, Ernst & Young LLP shall
have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I
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hereto (the executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of letter to
be delivered on the effective date of any post-effective amendment to the
Registration Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock, net current assets, stockholders' equity or long-
term debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in the sole judgment of the Representatives so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on the terms
and in the manner contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have occurred in
the rating accorded the Company's debt securities by any "nationally recognized
statistical rating organization", as that term is defined by the Commission for
purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall
have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt securities;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York or California State authorities; or (iv) the outbreak or escalation
of hostilities involving the United States or the declaration by the United
States of a national emergency or war, if the effect of any such event specified
in this clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from each officer, director, stockholder and optionholder
of the Company, substantially to the effect set forth in Subsection 5(e) hereof
in form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to you at
such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the
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performance by the Company of all of its obligations hereunder to be performed
at or prior to such Time of Delivery, as to the matters set forth in subsections
(a) and (e) of this Section and as to such other matters as you may reasonably
request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall 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 an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
relating to such Underwriter furnished to the Company by such Underwriter
through Goldman, Sachs & Co. expressly for use therein, and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other
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expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability arising out of
such action or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act, by or on behalf of any indemnified
party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
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(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each director and officer of each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and to each person, if any, who controls the
Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company shall be entitled to a further period of thirty-six hours
within which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company that you have so arranged for the
purchase of such Shares, or the Company notifies you that it has so arranged for
the purchase of such Shares, you or the Company shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
-17-
<PAGE>
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any officer or director or controlling person of any
Underwriter, or the Company, or any officer or director or controlling person of
the Company, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 6
and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of and each person who controls the
Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
-18-
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us six counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
Snowball.com, Inc.
By: _______________________________
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
BancBoston Robertson Stephens, Inc.
Hambrecht & Quist LLC
By: ______________________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-19-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
- --------------------------------------------------------------------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co.................................................
BancBoston Robertson Stephens, Inc..................................
Hambrecht & Quist LLC...............................................
--------------- ------------------
Total....................................................
=============== ==================
</TABLE>
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected financial
data, pro forma financial information, financial forecasts and/or condensed
financial statements derived from audited financial statements of the
Company for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been furnished to the representatives
of the Underwriters (the "Representatives") and are attached hereto;
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus as
indicated in their reports thereon copies of which are attached hereto and
on the basis of specified procedures including inquiries of officials of
the Company who have responsibility for financial and accounting matters
regarding whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations, nothing came to their attention
that cause them to believe that the unaudited condensed consolidated
financial statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in the
audited consolidated financial statements for such five fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
<PAGE>
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries
of officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited condensed
financial statements referred to in clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated long-
term debt of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
-2-
<PAGE>
Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in clause (E) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which
appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have
found them to be in agreement.
-3-
<PAGE>
Exhibit 2.01
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (this "Agreement") is made and entered into
as of September 28, 1999 (the "Agreement Date") by and among SNOWBALL.COM, INC.,
a Delaware corporation ("Snowball"), AMERITRACK, INC., a South Carolina
corporation ("AmeriTrack") and all of the security holders of AmeriTrack (each a
"Shareholder," and collectively, the "Shareholders"). The names and addresses
of each Shareholder, and the shares of AmeriTrack Stock (as defined below) owned
by each Shareholder, are set forth on Exhibit A attached hereto.
---------
RECITALS
A. The Shareholders now own, and will own as of the Closing Date (as
defined below) all of the AmeriTrack Stock.
B. The parties intend that, subject to the terms and conditions of this
Agreement, Snowball will purchase all of the AmeriTrack Stock from the
Shareholders in exchange for the consideration described herein so that Snowball
shall acquire and own, as of the Closing Date, all of the issued and outstanding
securities of AmeriTrack.
C. The representations and warranties of AmeriTrack and the Shareholders
herein are a material inducement to Snowball to enter into this Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms will have the meanings
set forth below. Other defined terms are set forth in context in the text.
1.1 "Advance Payment" means that certain $25,000.00 advance made by
Snowball to AmeriTrack pursuant to that certain letter of intent dated as of
September 7, 1999, less any amount of such Advance Payment that has been repaid
by AmeriTrack prior to the Closing.
1.2 "AmeriTrack Ancillary Agreements" means, collectively, each
agreement, certificate or document (other than this Agreement) which AmeriTrack
is to enter into as a party thereto, or is to otherwise execute and deliver,
pursuant to or in connection with this Agreement.
1.3 "AmeriTrack Derivative Securities" means, collectively: (a) any
warrant, option, right or other security that entitles the holder thereof to
purchase or otherwise acquire any shares of the share capital of AmeriTrack
(collectively, "AmeriTrack Stock Rights"); (b) any note, debenture, evidence of
indebtedness, stock or other security of AmeriTrack that is convertible into or
exchangeable for any shares of the share capital of AmeriTrack of any class or
<PAGE>
series or any AmeriTrack Stock Rights (each, an "AmeriTrack Convertible
Security"); and (c) any warrant, option, right, note, evidence of indebtedness,
stock or other security that entitles the holder thereof to purchase or
otherwise acquire any AmeriTrack Stock Rights or any AmeriTrack Convertible
Security.
1.4 "AmeriTrack Stock" means all of the issued and outstanding shares
of the share capital of AmeriTrack.
1.5 "Cash Consideration" shall mean $1 million in cash.
1.6 "Cash Escrow Amount" shall mean 25% of the Cash Consideration,
together with any interest accrued thereon, to be held in escrow as provided in
Section 2.4.
1.7 "Contingent Amount" shall mean 25% of the Cash Consideration, to
be paid pursuant to Section 2.5.
1.8 A Shareholder's "Percentage Interest" means, with respect to each
Shareholder, the percentage of the total amount of AmeriTrack Stock owned by all
the Shareholders that is owned by such Shareholder. Each Shareholder's
Percentage Interest is set forth opposite such Shareholder's name on Exhibit A
---------
under the column titled "Percentage Interest".
1.9 "Purchase Price" means, collectively: (a) an aggregate of 30,000
shares of Snowball Common Stock, $0.001 par value; and (b) the Cash
Consideration.
1.10 "Purchaser Representative" shall mean Azalea Capital, L.L.C.
1.11 "Registered User Milestone" means the completion of a
registration process by 55,000 users of AmeriTrack's High School Alumni website
including at a minimum (i) agreement to the terms and conditions of an end user
license agreement acceptable to Snowball setting forth an acceptance of terms,
benefits of joining, service limitations, service changes and discontinuation,
privacy policy, rights granted, limitations on liability and other relevant
legal and marketing information, and (ii) an opportunity for the user to accept
or decline email notices of various services and programs being offered by the
registering party. Snowball acknowledges that the registration process employed
on the High School Alumni website on September 10, 1999 complies with the
foregoing requirements.
1.12 "Shareholder Ancillary Agreements" means, collectively, the
Escrow Agreement, the Stock Powers, IRS Form W-8 or Form W-9 and each other
agreement, certificate or document (other than this Agreement) which a
Shareholder is to enter into as a party thereto, or is to otherwise execute and
deliver, pursuant to or in connection with this Agreement.
1.13 "Snowball Derivative Securities" means, collectively: (a) any
warrant, option, right or other security that entitles the holder thereof to
purchase or otherwise acquire any shares of the share capital of Snowball
(collectively, "Snowball Stock Rights"); (b) any note, debenture, evidence of
indebtedness, stock or other security of Snowball that is convertible into or
exchangeable for any shares of the share capital of Snowball of any class or
series or any
2
<PAGE>
Snowball Stock Rights (each, a "Snowball Convertible Security"); and (c) any
warrant, option, right, note, evidence of indebtedness, stock or other security
that entitles the holder thereof to purchase or otherwise acquire any Snowball
Stock Rights or any Snowball Convertible Security.
1.14 "Snowball Ancillary Agreements" means, collectively, the Escrow
Agreement and each other agreement, certificate or document (other than this
Agreement) which Snowball is to enter into as a party thereto, or is to
otherwise execute and deliver, pursuant to or in connection with this Agreement.
1.15 "Split" means the 3 for 2 forward stock split of the Snowball
Common Stock approved by Snowball's Board of Directors on September 1, 1999.
2. SALE AND PURCHASE OF THE AMERITRACK STOCK
2.1 Sale and Delivery of the AmeriTrack Stock. Subject to the terms
-----------------------------------------
and conditions of this Agreement, at the Closing, each of the Shareholders
hereby agrees to sell, assign, transfer and convey to Snowball, and Snowball
agrees to purchase, all AmeriTrack Stock owned by such Shareholder as of the
Closing and all right, title and interest thereto, including without limitation
any cause of action arising out of the acquisition or ownership by such
Shareholder of such AmeriTrack Stock, in exchange for Snowball's payment to such
Shareholder of each such Shareholder's respective portion of the consideration
specified in Section 2.2 below. Each Shareholder agrees to deliver to Snowball
at the Closing all the share certificates and any other documents representing
the AmeriTrack Stock ("AmeriTrack Certificates") owned by such Shareholder at
the Closing, accompanied by a stock power for each such AmeriTrack Certificate,
duly executed in blank, in substantially the form of Exhibit B attached hereto
---------
(the "Stock Power"). The sale by the Shareholders and Snowball's purchase of
the AmeriTrack Stock pursuant to this Agreement is sometimes referred to as the
"Purchase Transaction".
2.2 Payment of the Purchase Price.
-----------------------------
(a) Total Amounts Payable at Closing. Subject to the terms and
--------------------------------
conditions of this Agreement, Snowball hereby agrees to: (i) pay to the
Shareholders in the aggregate at the Closing a total amount equal to the
Purchase Price minus the Escrow Amount and minus the Contingent Amount and minus
----- ----- -----
the Advance Payment (such total net amount being referred to herein as the
"Closing Payment"); and (ii) transfer to the Escrow Agent at the Closing an
amount equal to the Escrow Amount. The deduction of the Advance Payment from
the amounts paid to the Shareholders at the Closing will satisfy in full
AmeriTrack's obligation to repay the Advance Payment to Snowball.
(b) Payments to Each Shareholder at Closing. The Closing Payment
---------------------------------------
shall be allocated among and paid to each of the Shareholders as set forth on
Exhibit A according to each Shareholder's Percentage Interest. Snowball will
- ---------
deliver the Closing Payment by wire transfer to Nexsen Pruet Jacobs & Pollard,
LLP, counsel to AmeriTrack, for distribution to the Shareholders.
3
<PAGE>
(c) Reduction of Purchase Price. The Cash Consideration portion of
---------------------------
the Purchase Price shall be reduced dollar for dollar to the extent that the
balance sheet liabilities of AmeriTrack as of the Closing are greater than zero
other than AmeriTrack's obligations to PSIWeb, Inc. under that certain agreement
dated August 31, 1999.
2.3 The Closing. The consummation of the Purchase Transaction
-----------
pursuant to this Agreement (the "Closing") will take place at the offices of
Fenwick & West LLP, 275 Battery Street, Suite 1500, San Francisco, CA 94111 on
September 28, 1999, at 10:00 a.m. PST, or at such other place or on such other
date and/or time as Snowball and AmeriTrack shall agree in writing (such date,
the "Closing Date"). The parties agree that facsimile signatures will be deemed
the same as original signatures with respect to all documents delivered at the
Closing.
2.4 Withholding and Allocation of Escrow Amount. At the Closing,
-------------------------------------------
Snowball shall withhold from the Purchase Price, and deliver to Greater Bay
Trust Company or a similar institution, as escrow agent (the "Escrow Agent"),
pursuant to the provisions of an escrow agreement (the "Escrow Agreement") in
substantially the form attached hereto as Exhibit C: (i) 50% of the Snowball
---------
Common Stock to be issued to the Shareholders in accordance with Section 2.2
(rounded down to the nearest whole number of shares to be issued to each
Shareholder) (the "Escrow Shares"), and (ii) the Cash Escrow Amount (together
with the Escrow Shares, collectively as the "Escrow Amount"). The Escrow Amount
will be held by the Escrow Agent from the Closing until the earlier of (a) one
(1) year after the Closing Date (the "Escrow Period") or (b) release of the
Escrow Amount or a portion thereof in accordance with the Escrow Agreement. The
Cash Escrow Amount held in the escrow fund will be invested in an interest-
bearing account or money market instrument. Any interest payable on the Cash
Escrow held in the escrow fund will be added to the Escrow Amount in the escrow
fund and become a part thereof. The Shareholders shall be deemed to have
consented to and approved: (i) the use of the Escrow Amount as collateral for
AmeriTrack's indemnification obligations under Section 11.2 in the manner set
forth in the Escrow Agreement, (ii) the appointment of James N. Haltiwanger,
Jr., and in the absence of James N. Haltiwanger, Jr., R. Patrick Weston on
behalf of Azalea Capital, L.L.C., as the representative of the Shareholders (the
"Representative") and as the attorney-in-fact and agent for and on behalf of
each Shareholder, and the taking by the Representative of any and all actions
and the making of any decisions required or permitted to be taken by him in
connection with the Escrow Amount (including, without limitation, the exercise
of the power to: authorize delivery to Snowball of Escrow Shares and Cash Escrow
Amount in satisfaction of claims by Snowball; agree to, negotiate, enter into
settlements and compromises of and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims; resolve any claim
made pursuant to Section 11.2; and take all actions necessary in the judgment of
the Representative for the accomplishment of the foregoing) and (iii) to all of
the other terms, conditions and limitations in the Escrow Agreement. Any
distribution of all or a portion of the escrow fund to the Shareholders shall be
made in accordance with the Shareholders' Percentage Interest.
2.5 Contingent Amount. On and after the Closing, subject to the
-----------------
terms and conditions of this Section 2.5, Snowball agrees to pay to the
Shareholders the Contingent Amount in $25,000 increments as follows: At the
Closing, Snowball will pay $25,000 of the
4
<PAGE>
Contingent Amount for each Registered User Milestone achieved prior to the
Closing. Upon the achievement of each additional Registered User Milestone
following the Closing, Snowball will pay $25,000 of the Contingent Amount, with
interest, until the Contingent Amount has been paid in full. The Contingent
Amount paid under this Section 2.5 shall be allocated among and paid to each of
the Shareholders according to such Shareholder's Percentage Interest. Payment of
each increment of the Contingent Amount shall be made by Snowball to the
Shareholders in cash or other immediately available funds within ten (10) days
after the end of each calendar month in which the applicable Registered User
Milestone is reached, pursuant to instructions to be provided by the
Shareholders to Snowball. Interest shall accrue from the Closing Date on the
Contingent Amount outstanding from time to time until paid in full at the fixed
simple rate per annum equal to five percent (5.0%) calculated based upon a 360-
day year and the actual number of days elapsed. Within ten (10) days after the
end of each calendar month after the Closing Date, Snowball shall furnish the
Representative a certified written statement, setting forth the number of users
of the High School Alumni website who completed a registration process complying
with Section 1.11 of this Agreement (a "Registered User", and collectively the
------------
"Registered Users") on each day of such calendar month. Snowball agrees to cause
such registration process to be maintained in accordance with Section 1.11
------------
following the Closing until the Contingent Amount is paid in full. Following the
Closing, Snowball will cause AmeriTrack keep accurate records in sufficient
detail to enable the number of Registered Users completing a registration
process after the Closing Date to be determined. Upon any dispute between the
Shareholders and Snowball regarding the calculation of the number of Registered
Users, the Representative shall be permitted to examine said records, at the
expense of the Shareholders, subject to reasonable confidentiality obligations,
during usual business hours to the extent necessary to verify the number of
Registered Users.
2.6 Further Assurances. If, at any time after the Closing, Snowball
------------------
considers or is advised that any further instruments, deeds, assignments or
assurances are reasonably necessary to consummate or perfect the Purchase
Transaction as contemplated hereby or any of the other transactions contemplated
hereby or to carry out the purposes and intent of this Agreement, then Snowball,
AmeriTrack and their respective officers and directors may, and each Shareholder
requested to do so by Snowball shall, promptly execute and deliver all such
proper instruments, deeds, assignments and assurances and do all other things
reasonably necessary to consummate or perfect the sale and transfer of the
AmeriTrack Stock to Snowball as contemplated hereby and any of the other
transactions contemplated hereby and to carry out the purposes and intent of
this Agreement, in the name of AmeriTrack or otherwise.
2.7 Waiver and Release. Each of the Shareholders hereby disclaims,
------------------
waives and releases all right, title and interest in and to (of record or
beneficially), and any claims (legal or equitable) to, any and all AmeriTrack
Stock and any and all AmeriTrack Derivative Securities, other than to the shares
----- ----
of AmeriTrack Stock listed opposite such Shareholder's name on Exhibit A. Each
---------
of the Shareholders hereby releases Snowball and AmeriTrack from any and all
debts, liabilities, obligations, other than Purchase Price, claims and causes of
----- ----
action, other than claims or causes of action based on, related to or arising
----- ----
from a breach by Snowball of this Agreement or any Shareholder's Ancillary
Agreements or Snowball Ancillary Agreements, which such Shareholder now has,
ever has had, or ever claims to have had, that are based on,
5
<PAGE>
related to or arising from (a) ownership of any right, title and interest in and
to any AmeriTrack Stock or any AmeriTrack Derivative Securities, (b) rights to
equity ownership of AmeriTrack or equity interests in AmeriTrack; (c) rights to
equity based appreciation in the value of AmeriTrack; (d) any other legal,
economic or beneficial interest in AmeriTrack or its business; (e) any right
such Shareholder may have had to exercise any preemptive right, right of first
refusal or similar rights, voting rights or registration rights of any kind;
and/or (f) any promises, covenants, contracts or representations with respect to
the matters referred to in clauses (a), (b), (c), (d) or (e) above, other than
----- ----
the shares AmeriTrack Stock listed opposite such Shareholder's name on
Exhibit A.
- ---------
2.8 Affiliate Agreement. Snowball will pay AmeriTrack all payments
-------------------
owed to AmeriTrack under that certain Affiliate Agreement dated as of June 25,
1999 through September 26, 1999. No other payments will be due by Snowball
under such agreement after such date.
3. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each of the Shareholders hereby represents and warrants to Snowball
that all the statements set forth below in this Section 3 are true, correct and
complete as of the Agreement Date and will be true, correct and complete as of
the Closing Date:
3.1 Organization of Certain Shareholders. If such Shareholder is a
------------------------------------
corporation, partnership, limited liability company, trust or other entity, such
Shareholder is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its formation and the individual signing this
Agreement and/or any of the Shareholder Ancillary Agreements on behalf of such
Shareholder is a duly authorized representative of such Shareholder who has
valid authority to execute and deliver this Agreement and such Shareholder
Ancillary Agreements on behalf of such Shareholder.
3.2 Authorization of Transactions. Such Shareholder has full power,
-----------------------------
capacity and authority (including, if such Shareholder is a corporation, full
corporate power and authority) to execute and deliver this Agreement and the
Shareholder Ancillary Agreements, and to perform its obligations hereunder and
thereunder. This Agreement and the Shareholder Ancillary Agreements are, or
when executed by the Shareholder will be, valid and binding obligations of such
Shareholder, enforceable against such Shareholder in accordance with their
respective terms, subject to the effect, if any, of (a) applicable bankruptcy
and other similar laws affecting the rights of creditors generally, and (b)
rules of law governing specific performance, injunctive relief and other
equitable remedies.
3.3 AmeriTrack Stock. Such Shareholder owns of record and
----------------
beneficially, and has good, valid and marketable title to, all of the shares of
AmeriTrack Stock set forth opposite such Shareholder's name on Exhibit A, free
---------
and clear of any restrictions on transfer (other than restrictions imposed by
applicable securities laws, if any), taxes, security interests, liens, pledges,
mortgages, charges, encumbrances, options, warrants, purchase rights, contracts,
commitments, calls, equities, claims and demands. Such Shareholder does not
own, of record or beneficially, any AmeriTrack Stock except as specified in
Exhibit A or any AmeriTrack Derivative Securities. Such Shareholder is not a
- ---------
party to any voting trust, proxy or other
6
<PAGE>
agreement or understanding with respect to the voting of any share capital of
AmeriTrack or the registration of any shares of share capital of AmeriTrack.
3.4 Disclosure of Information. Such Shareholder has received or has
-------------------------
had full access to all the information it considers necessary or appropriate to
make an informed investment decision with respect to the Snowball Common Stock
to be acquired by such Shareholder under this Agreement (the "Snowball
Securities"). Such Shareholder further has had an opportunity to ask questions
and receive answers from Snowball, the Purchaser Representative, AmeriTrack, and
AmeriTrack's management regarding the terms and conditions of the Purchase
Transaction and to obtain additional information (to the extent Snowball
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify any information furnished to such Shareholder or to
which such Shareholder had access.
3.5 Investment Experience. Such Shareholder understands that the
---------------------
acquisition of the Snowball Securities involves substantial risk. Such
Shareholder individually or together with his or her Purchaser Representative
has experience as an investor in securities of companies in the development
stage and acknowledges that such Shareholder is able to fend for itself, can
bear the economic risk of such Shareholder's investment in the Snowball
Securities and individually or together with his or her Purchaser Representative
has such knowledge and experience in financial or business matters that such
Shareholder is capable of evaluating the merits and risks of this investment in
the Snowball Securities and protecting its own interests in connection with this
investment. The Purchaser Representative has received no remuneration from
Snowball in connection with such advice.
3.6 Investment Representations. Each Shareholder hereby agrees,
--------------------------
represents and warrants as follows:
(a) Acquisition for Own Account. The Snowball Securities to be
---------------------------
acquired by such Shareholder hereunder will be acquired for investment for such
Shareholder's own account, not as a nominee or agent, and not with a view to the
public resale or distribution thereof within the meaning of the Securities Act,
and such Shareholder has no present intention of selling, granting any
participation in, or otherwise distributing the same. If not an individual,
such Shareholder also represents that such Shareholder has not been formed for
the specific purpose of acquiring Snowball Securities.
(b) Restricted Securities. Such Shareholder understands that the
---------------------
Snowball Securities are characterized as "restricted securities" under the
Securities Act inasmuch as they are being acquired from Snowball in a
transaction not involving a public offering and that under the Securities Act
and applicable regulations thereunder such securities may be resold without
registration under the Securities Act only in certain limited circumstances. In
this connection, such Shareholder represents that such Shareholder is familiar
with Rule 144 of the U.S. Securities and Exchange Commission, as presently in
effect, and understands the resale limitations imposed thereby and by the
Securities Act. Such Shareholder understands that Snowball is under no
obligation to register any of the Snowball Securities acquired hereunder. Such
Shareholder understands that no public market now exists for any of the Snowball
7
<PAGE>
Securities and that it is uncertain whether a public market will ever exist for
the Snowball Securities.
(c) Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, such Shareholder further agrees not to make
any disposition of all or any portion of the Snowball Securities unless and
until: (i) there is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or (ii) such Shareholder shall have
notified Snowball of the proposed disposition and, except as set forth in clause
(d) below, shall have furnished Snowball with a statement of the circumstances
surrounding the proposed disposition, and, at the expense of such Shareholder or
its transferee, with an opinion of counsel, reasonably satisfactory to Snowball,
that such disposition will not require registration of such securities under the
Securities Act.
(d) Legends. It is understood that the certificates evidencing the
-------
Snowball Securities will bear the legend set forth below and any legend required
by state securities laws:
The securities represented hereby have not been registered
under the Securities Act of 1933, as amended (the "Act"), or under the
securities laws of certain states. These securities are subject to
restrictions on transferability and resale and may not be transferred
or resold except as permitted under the Act and the applicable state
securities laws, pursuant to registration or exemption therefrom.
investors should be aware that they may be required to bear the
financial risks of this investment for an indefinite period of time.
The issuer of these securities may require an opinion of counsel in
form and substance satisfactory to the issuer to the effect that any
proposed transfer or resale is in compliance with the Act and any
applicable state securities laws.
The legend set forth above shall be removed by Snowball from any certificate
evidencing Snowball Securities; and no opinion of counsel will be required in
connection with the transfer of Snowball Securities: (i) to the extent that such
Snowball Securities are held by nonaffiliates of Snowball and may, in Snowball's
reasonable opinion, all be sold within a three month period in accordance with
Rule 144 promulgated under the Act; or (ii) upon delivery to Snowball of an
opinion by counsel, reasonably satisfactory to Snowball, that a registration
statement under the Securities Act is at that time in effect with respect to the
legended security or that such security can be freely transferred in a public
sale without such a registration statement being in effect and that such
transfer will not jeopardize the exemption or exemptions from registration
pursuant to which Snowball issued the Snowball Securities. In addition,
Snowball will not require an opinion of counsel in connection with a transfer of
Snowball Securities by a Shareholder to Snowball, an Indemnified Person (as
defined in Section 11.2 below) or another Shareholder so long as (i) in the
opinion of Snowball's counsel such transfer may be made without such a
registration statement being in effect and without jeopardizing the exemption or
exemption from
8
<PAGE>
registration pursuant to which Snowball issued the Snowball Securities; and (ii)
such transferee makes the representations and warranties made in Sections 3.4,
3.5 and 3.6 hereof and agrees to be bound by the terms and conditions of such
sections.
4. REPRESENTATIONS AND WARRANTIES OF AMERITRACK
AmeriTrack hereby represents and warrants to Snowball that the
statements set forth below in this Section 4 are true, correct and complete as
of the Agreement Date and will be true, correct and complete as of the Closing
Date, except as is otherwise expressly set forth in the AmeriTrack Disclosure
Schedule attached as Exhibit D hereto (the "AmeriTrack Disclosure Schedule"),
---------
which statements in such AmeriTrack Disclosure Schedule shall be deemed to be
representations and warranties made by AmeriTrack under this Section 4:
4.1 Organization and Good Standing. AmeriTrack is a company duly
------------------------------
organized, validly existing and in good standing under the laws of South
Carolina. AmeriTrack has the power and authority to own, operate and lease its
respective properties and to carry on its respective business as now conducted
and as proposed to be conducted, and is duly qualified to transact business as a
foreign company in each jurisdiction in which such qualification is required.
4.2 Power, Authorization and Validity. AmeriTrack has the right,
---------------------------------
power, legal capacity and authority to enter into, execute, deliver and perform
its obligations under this Agreement and all AmeriTrack Ancillary Agreements and
AmeriTrack has all requisite power and authority to consummate all of the
transactions contemplated by this Agreement and by all AmeriTrack Ancillary
Agreements. The execution, delivery and performance of this Agreement and each
of the AmeriTrack Ancillary Agreements by AmeriTrack have been duly and validly
approved and authorized by all necessary action on the part of AmeriTrack's
board of directors and shareholders. This Agreement and the AmeriTrack
Ancillary Agreements are, or when executed by AmeriTrack will be, valid and
binding obligations of AmeriTrack enforceable in accordance with their
respective terms, subject to the effect, if any, of (a) applicable bankruptcy
and other similar laws affecting the rights of creditors generally, and (b)
rules of law governing specific performance, injunctive relief and other
equitable remedies.
4.3 Capitalization of AmeriTrack.
----------------------------
4.3.1 Outstanding Stock. The authorized share capital of
-----------------
AmeriTrack consists entirely of 1,000,000 shares of Common Stock, no par value,
of which 610,632 shares are issued and outstanding, all of which shares are now
owned and held (and all of which shares will at the Closing be owned and held)
only by the Shareholders listed on Exhibit A in the respective amounts of each
---------
such class (as applicable) shown for each such Shareholder on Exhibit A. No
other shares
or fractional shares of the share capital of AmeriTrack are (or will at Closing
be) authorized, issued or outstanding. All issued and outstanding shares of
AmeriTrack Stock have been duly authorized and validly issued, are fully paid
and nonassessable, are not subject to any claim, lien, preemptive right, or
right of rescission, and have been offered, issued, sold and delivered by
AmeriTrack (and, if applicable, transferred) in compliance with all requirements
of applicable law, AmeriTrack's Articles of Incorporation, Bylaws and other
9
<PAGE>
charter documents and all agreements to which AmeriTrack is a party. AmeriTrack
has no liability for any dividends declared or accrued but unpaid.
4.3.2 No Options, Warrants or Rights. As of the Agreement Date there
------------------------------
are no AmeriTrack Derivative Securities outstanding and as of the Closing date
there will be no AmeriTrack Derivative Securities outstanding. No shares of
AmeriTrack Stock are reserved for issuance under any stock purchase, stock
option or other benefit plan.
4.3.3 No Voting or Other Arrangements. There are no voting
-------------------------------
agreements, voting trusts, rights of repurchase, rights of first refusal or
other restrictions applicable to any of AmeriTrack's outstanding securities or
to the sale of any shares of AmeriTrack Stock to Snowball hereunder.
4.4 Subsidiaries. AmeriTrack has no subsidiaries and no interest,
------------
direct or indirect, in any corporation, partnership, limited liability company,
joint venture or other business entity.
4.5 No Violations. Neither the execution and delivery of this
-------------
Agreement or any AmeriTrack Ancillary Agreement, nor the consummation of the
Purchase Transaction or any of the other transactions contemplated hereby or
thereby, will conflict with, or (with or without notice or lapse of time, or
both) result in a termination, breach, impairment or violation of: (i) any
provision of the Articles of Incorporation, Bylaws or other charter documents of
AmeriTrack as currently in effect; (ii) to AmeriTrack's knowledge, any federal,
state, local or foreign judgment, writ, decree, order, statute, rule or
regulation applicable to AmeriTrack or the assets or properties of AmeriTrack;
or (iii) any AmeriTrack Agreement (as defined in Section 4.11).
4.6 Litigation. There is no action, suit, arbitration, mediation,
----------
proceeding, claim or investigation pending against AmeriTrack (or against any
officer or director of AmeriTrack) before any court, administrative agency or
arbitrator, nor, to the best of AmeriTrack's knowledge, has any such action,
suit, proceeding, arbitration, mediation, claim or investigation been
threatened, nor to the best of AmeriTrack's knowledge is there any basis for any
person, firm, corporation or other entity, to assert a claim against AmeriTrack.
There is no judgment, decree, injunction, rule or order of any governmental
entity or agency, court or arbitrator outstanding against AmeriTrack.
4.7 Taxes. AmeriTrack has: (a) timely filed all national, state,
-----
local and foreign tax returns required to be filed by it; (b) timely paid all
taxes required by such tax returns to be paid by it in respect of all periods
for which returns have been filed; (c) has timely withheld and paid to the
appropriate taxing authorities all taxes and other payments required to be
withheld by it from salaries and other compensatory payments paid or payable by
it to employees or other service providers paid or payable by it; (d) timely
made all necessary estimated tax payments; and (e) no material liability for
taxes. AmeriTrack has not received any notification that any issues have been
raised (and are currently pending) by any taxing authority (including but not
limited to any income, franchise, sales or use tax authority) regarding
AmeriTrack.
10
<PAGE>
4.8 Liabilities. AmeriTrack has no debt, liability or obligation of
-----------
any nature (whether intercompany or owed to third parties), whether accrued,
absolute, contingent or otherwise, and whether due or to become due, except for
those shown on Section 4.8 to the AmeriTrack Disclosure Schedule.
-----------
4.9 Assets.
------
4.9.1 Assets Generally. Section 4.9 to the AmeriTrack Disclosure
---------------- -----------
Schedule lists all of the tangible and intangible assets of AmeriTrack,
including without limitation all AmeriTrack IP Rights ("Assets"). AmeriTrack has
good and marketable title to the Assets, free and clear of all liens, mortgages,
security interests, claims, charges, restrictions or encumbrances. All Assets
are in good condition and repair, normal wear and tear excepted, and all leases
of real or personal property to which AmeriTrack is a party are fully effective
and afford AmeriTrack, as the case may be, peaceful and undisturbed possession
of the real or personal property that is the subject of the lease. AmeriTrack
does not own any real property.
4.9.2 Database. Without limiting the foregoing, the
--------
highschoolalumni.com database included within the Assets is in good working
order as currently configured and is operable, and will be operable, without
anything other than minor maintenance, for a period of ninety (90) days
following the Closing; provided, however, AmeriTrack makes no representation or
-------- -------
warranty regarding any modifications or other changes to the
highschoolalumni.com database implemented by Snowball or its agents or
independent contractors before or after the Closing Date, or the continued
operation of the highschoolalumni.com database following the Closing as a result
of such modifications or other changes during such ninety (90) day period.
4.10 Absence of Certain Changes. Since June 30, 1999, there has not
--------------------------
been with respect to AmeriTrack: (a) any material adverse change in the
condition (financial or otherwise), properties, assets, liabilities, businesses,
operations, results of operations or prospects of AmeriTrack; (b) material
damage, destruction or loss of any Asset, whether or not covered by insurance;
(c) action prohibited by Section 6.1.1; or (d) agreement or arrangement made by
-------------
AmeriTrack to take any action which, if taken prior to the Agreement Date, would
have made any representation or warranty of AmeriTrack or the Shareholders set
forth in this Agreement untrue or incorrect.
4.11 Contracts and Commitments. Section 4.11 to the AmeriTrack
------------------------- ------------
Disclosure Schedule sets forth a list of each of the written or oral contracts,
agreements, commitments or other instruments to which AmeriTrack is a party or
to which AmeriTrack or any of its assets or properties is bound (collectively,
the "AmeriTrack Agreements"). A copy of each such agreement or document has
been delivered to Snowball. Except as provided in Section 4.11 of the
------------
AmeriTrack Disclosure Schedule, no consent or approval of any third party is
required to ensure that following the Closing each AmeriTrack Agreement shall
continue to be in full force and effect without any breach or violation thereof
caused by virtue of the transactions contemplated hereby. AmeriTrack is not in
breach or default of, and has not breached or been in default of, any AmeriTrack
Agreement.
11
<PAGE>
4.12 Intellectual Property.
---------------------
4.12.1 AmeriTrack owns, or has the irrevocable right to use,
sell or license all Intellectual Property Rights (as defined below) necessary or
required for the conduct of its business as presently conducted and as presently
proposed to be conducted (such Intellectual Property Rights being hereinafter
collectively referred to as the "AmeriTrack IP Rights"). AmeriTrack is the legal
and beneficial owner of all rights, including all Intellectual Property Rights,
in and to the Assets.
4.12.2 AmeriTrack has not violated, and the conduct of its
business and use, marketing, sale or distribution of any Asset does not violate,
any license or agreement between AmeriTrack and any third party or infringe or
misappropriate any Intellectual Property Right of any third party. AmeriTrack
has not received any notice asserting any such violation, infringement or
misappropriation or any conflict with the rights of any other party, and, to the
best knowledge of AmeriTrack, there is no basis for any such assertion. To the
best knowledge of AmeriTrack, no employee or agent of or consultant to
AmeriTrack is in violation of any term of any third party employment,
nondisclosure, noncompetition or similar contract or agreement with respect to
the performance of services for AmeriTrack.
4.12.3 AmeriTrack has taken reasonable and practicable steps, in
accordance with prevailing industry standards, designed to protect, preserve and
maintain the secrecy and confidentiality of all material AmeriTrack IP Rights.
All officers, employees, agents and consultants of AmeriTrack having access to
proprietary information have executed and delivered to AmeriTrack an agreement
regarding the protection of such proprietary information and the assignment of
inventions to AmeriTrack, in the form provided to Snowball and copies of all
such agreements executed by all such persons have been delivered to Snowball.
4.12.4 Section 4.12 to the AmeriTrack Disclosure Schedule
------------
contains a list of all worldwide applications, registrations, filings and other
formal actions made or taken pursuant to federal, state and foreign laws by
AmeriTrack to secure, perfect or protect its interest in AmeriTrack IP Rights.
4.12.5 As used herein, the term "Intellectual Property Rights"
means, collectively, all worldwide industrial and intellectual property rights,
including, without limitation, patents, trademarks, trade dress rights, trade
names, service marks, Internet domain names, copyrights, and all applications,
registrations and rights pertaining thereto, "moral rights", inventions, trade
secrets, know-how, customer lists, software source code and object code,
algorithms, architecture, structure, display screens, layouts, development tools
and all documentation and media constituting, describing or relating to the
above.
4.13 Compliance with Laws. AmeriTrack has complied, and is now and at
--------------------
the Closing Date will be in compliance, in all material respects, with all
applicable national, state, local or foreign laws, ordinances, regulations, and
rules, and all orders, writs, injunctions, awards, judgments, and decrees
applicable to it or to its assets, properties and business, including without
limitation all environmental, zoning and labor laws and regulations. AmeriTrack
holds
12
<PAGE>
all permits, licenses and approvals from, and has made all filings with, third
parties, including government agencies and authorities, that are necessary in
connection with its present business.
4.14 Employment. To AmeriTrack's knowledge, AmeriTrack is in
----------
compliance in all material respects with all applicable laws, agreements and
contracts relating to employment, employment practices, wages, hours, and terms
and conditions of employment, including, but not limited to, employee
compensation matters in each of the jurisdictions in which it conducts business.
Section 4.14 to the AmeriTrack Disclosure Schedule lists each employee of
- ------------
AmeriTrack and each employment, severance or other similar contract, arrangement
or policy, each employee benefit plan (if any) and each plan or arrangement
providing for compensation or benefits for employees, consultants or directors
which is entered into, maintained or contributed to by AmeriTrack and covers any
employee or former employee or consultant or former consultant of AmeriTrack.
4.14 No Brokers. Neither AmeriTrack nor any of the Shareholders is
----------
under any obligation for the payment of any fees or expenses of any investment
banker, broker or finder in connection with the origin, negotiation or execution
of this Agreement or in connection with the transactions contemplated hereby.
4.15 Disclosure. To AmeriTrack's knowledge, neither this Agreement,
----------
the AmeriTrack Disclosure Schedule nor any of the certificates or documents to
be delivered by AmeriTrack and/or the Shareholders to Snowball under this
Agreement, taken together, contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
contained herein and therein, in light of the circumstances under which such
statements were made, not misleading.
5. REPRESENTATIONS AND WARRANTIES OF SNOWBALL
Snowball hereby represents and warrants to AmeriTrack that the
statements set forth below in this Section 5 are true, correct and complete as
of the Agreement Date and will be correct and complete as of the Closing Date:
5.1 Organization and Good Standing. Snowball is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the corporate power and authority to own, operate and lease
its properties and to carry on its business as now conducted and as proposed to
be conducted.
5.2 Power, Authorization and Validity.
---------------------------------
5.2.1 Snowball has the right, power and authority to enter into,
execute and perform its obligations under this Agreement and the Snowball
Ancillary Agreements. The execution, delivery and performance of this Agreement
and the Snowball Ancillary Agreements by Snowball have been duly and validly
approved and authorized by all necessary corporate action on the part of
Snowball.
13
<PAGE>
5.2.2 This Agreement and the Snowball Ancillary Agreements are,
or when executed by Snowball will be, valid and binding obligations of Snowball,
enforceable in accordance with their respective terms, subject to the effect, if
any, of (a) applicable bankruptcy and other similar laws affecting the rights of
creditors generally, and (b) rules of law governing specific performance,
injunctive relief and other equitable remedies.
5.3 Capitalization of Snowball. The following representations
--------------------------
reflect the fact that Snowball has authorized the Split but that the Split may
not have become effective prior to the execution of this Agreement. The
authorized share capital of Snowball consists entirely of 25,000,000 shares of
Common Stock, $0.001 par value, prior to the Split, which number is expected to
be 35,000,000 shares of Common Stock, $0.001 par value post-Split, and
20,000,000 shares of Preferred Stock, of which 9,990,110 are designated Series A
Preferred Stock, $0.001 par value and 5,000,000 are designated Series B
Preferred Stock, $0.001 par value. As of the Agreement Date, Snowball had
19,335,500 shares of Common Stock pre-Split and 29,003,250 shares of Common
Stock post-Split (i) issued and outstanding; (ii) subject to options or warrants
to purchase shares of Snowball Common Stock; (iii) issuable upon conversion of
shares of outstanding Series A Preferred Stock and Series B Preferred Stock; and
(iv) reserved for issuance under Snowball's 1999 Equity Incentive Plan. No
other shares of the share capital of Snowball are (or will at Closing be)
authorized, issued or outstanding. Except as set forth above and except for the
right of first refusal held by certain holders of Snowball's preferred stock,
there are no Snowball Derivative Securities outstanding. The last price per
share (on an as-converted to Common Stock basis) of the Series B Preferred Stock
sold and issued by Snowball prior to the Closing date was $6.33 pre-Split ($4.22
on an as-converted to Common Stock basis post-Split), and the last options to
purchase shares of Snowball Common Stock issued prior to the Closing had an
exercise price of $3.00 per share Pre-Split and $2.00 per share Post-Split.
5.4 No Violations. Neither the execution and delivery of this
-------------
Agreement or any Snowball Ancillary Agreement, nor the consummation of the
Purchase Transaction or any of the other transactions contemplated hereby or
thereby, nor Snowball's discussion or negotiation with AmeriTrack of the
Purchase Transaction or any of the other transactions contemplated hereby, will
conflict with, or (with or without notice or lapse of time, or both) result in a
termination, breach, impairment or violation of: (i) any provision of the
Certificate of Incorporation, Bylaws or other charter documents of Snowball as
currently in effect; (ii) to Snowball's knowledge, any federal, state, local or
foreign judgment, writ, decree, order, statute, rule or regulation applicable to
Snowball or the assets or properties of Snowball; or (iii) any agreement,
contract, commitment or instrument that is material to the business of Snowball.
5.5 Litigation. There is no action, suit, arbitration, mediation,
----------
proceeding, claim or investigation pending against Snowball (or against any
officer or director of Snowball) before any court, administrative agency or
arbitrator, nor, to the best of Snowball's knowledge, has any such action, suit,
proceeding, arbitration, mediation, claim or investigation been threatened. To
Snowball's knowledge, there is no basis for any person, firm, corporation or
other entity, to assert a claim against Snowball based upon Snowball's entering
into this Agreement or consummating the transactions contemplated hereby. There
is no judgment,
14
<PAGE>
decree, injunction, rule or order of any governmental entity or agency, court or
arbitrator outstanding against Snowball.
5.6 Financial Statements. Attached as Exhibit E are the following
-------------------- ---------
financial statements of Snowball: the unaudited balance sheet of Snowball at
July 31, 1999 (the "Snowball Balance Sheet") and the unaudited income statements
of Snowball for the period ended July 31, 1999 (collectively, the "Snowball
Financial Statements"). The Snowball Financial Statements are (a) in accordance
with and accurately reflect the books and records of Snowball, and (b) fairly
present the financial condition of Snowball at the dates therein indicated and
the results of operations for the periods therein specified.
5.7 Disclosure of Information. Snowball has received or has had full
-------------------------
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the AmeriTrack Stock to be acquired
by Snowball under this Agreement. Snowball further has had an opportunity to
ask questions and receive answers from AmeriTrack and its officer and director
regarding the terms and conditions of the Purchase Transaction and to obtain
additional information (to the extent AmeriTrack possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify any
information furnished to Snowball or to which Snowball had access.
5.8 Investment Experience. Snowball understands that the acquisition
---------------------
of the AmeriTrack Stock involves substantial risk. Snowball has experience as
an investor in securities of companies in the development stage and acknowledges
that it is able to fend for itself, can bear the economic risk of its investment
in the AmeriTrack Stock and has such knowledge and experience in financial or
business matters that Snowball is capable of evaluating the merits and risks of
this investment in the AmeriTrack Stock and protecting its own interests in
connection with this investment.
5.9 Investment Representations. Snowball hereby agrees, represents
--------------------------
and warrants as follows:
(a) Acquisition for Own Account. The AmeriTrack Stock to be
---------------------------
acquired by Snowball hereunder will be acquired for investment for Snowball's
own account, not as a nominee or agent, and not with a view to the public resale
or distribution thereof within the meaning of the Securities Act, and Snowball
has no present intention of selling, granting any participation in, or otherwise
distributing the same. Snowball also represents that it has not been formed for
the specific purpose of acquiring the AmeriTrack Stock.
(b) Restricted Securities. Snowball understands that the shares
---------------------
of the AmeriTrack Stock are characterized as "restricted securities" under the
Securities Act inasmuch as they are being acquired from the Shareholders in a
transaction not involving a public offering and that under the Securities Act
and applicable regulations thereunder such securities may be resold without
registration under the Securities Act only in certain limited circumstances.
(c) Legends. It is understood that the certificates evidencing
-------
the AmeriTrack Stock on the Closing Date will bear the legends set forth below:
15
<PAGE>
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH SUCH ACT AND THE RULES AND REGULATIONS
THEREUNDER AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAW
(ii) THE RIGHTS OF SHAREHOLDERS IN A STATUTORY CLOSE
CORPORATION MAY DIFFER MATERIALLY FROM THE RIGHTS OF SHAREHOLDERS IN OTHER
CORPORATIONS. COPIES OF THE ARTICLES OF INCORPORATION AND THE BYLAWS,
SHAREHOLDERS' AGREEMENTS, AND OTHER DOCUMENTS, ANY OF WHICH MAY RESTRICT
TRANSFERS AND AFFECT VOTING AND OTHER RIGHTS, MAY BE OBTAINED BY A SHAREHOLDER
ON WRITTEN REQUEST TO THE CORPORATION.
5.10 No Brokers. Snowball is not under any obligation for the
----------
payment of any fees or expenses of any investment banker, broker or finder in
connection with the origin, negotiation or execution of this Agreement or in
connection with the transactions contemplated hereby.
5.11 Disclosure. To Snowball's knowledge, neither this Agreement nor
----------
any of the certificates or documents to be delivered by Snowball under this
Agreement, taken together, contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
contained herein and therein, in light of the circumstances under which such
statements were made, not misleading.
6. COVENANTS OF AMERITRACK AND THE SHAREHOLDERS
6.1 By AmeriTrack. During the period from the Agreement Date until
-------------
the earlier to occur of (i) the Closing or (ii) the termination of this
Agreement in accordance with Section 10, AmeriTrack hereby covenants and agrees
with Snowball as follows:
6.1.1 Maintenance of Business. AmeriTrack will carry on and
-----------------------
preserve its business and its relationships with customers, suppliers,
employees, consultants and others in substantially the same manner as it has
prior to the date hereof. If AmeriTrack becomes aware of a material
deterioration in the relationship with any material customer, supplier, key
employee, consultant or business partner, AmeriTrack will promptly bring such
information to the attention of Snowball in writing and, if requested by
Snowball, will exert its diligent efforts to restore the relationship.
AmeriTrack will not, without the prior written consent of Snowball: (a) borrow
or lend any money; (b) encumber, or permit to be encumbered or, except as set
forth in Section 6.1.1 to the AmeriTrack Disclosure Schedule, sell, transfer or
-------------
dispose of any of its Assets; (c) make any payment or commitment or incur any
liability or obligation in excess of $1,000; (d) declare, set aside or pay any
cash or stock dividend or make any distribution in respect of any of its share
capital; (e) enter into, amend or terminate any contract, agreement or license;
(f) waive or release any material right or claim; (g) issue, sell, create or
authorize any shares of its share capital or issue, grant or create any
AmeriTrack Derivative Securities; (h) change its capital
16
<PAGE>
structure; (i) merge, consolidate or reorganize with, or acquire, any entity or
enter into any negotiations, discussions or agreement for such purpose; (j)
amend its charter documents; (k) license any of its technology or Intellectual
Property Rights; (l) change any material insurance coverage; or (m) agree to do
any of the things described in the preceding clauses (a) through (l).
6.1.2 Access to Information. Until the Closing, AmeriTrack will
---------------------
allow Snowball and its agents reasonable access to the files, books, records and
offices of AmeriTrack, including, without limitation, any and all information
relating to the Intellectual Property Rights, contracts, leases, licenses,
commitments, taxes, and real, personal and intangible property and financial
condition of AmeriTrack. AmeriTrack will cause its accountants to cooperate
with Snowball and its agents in making available all financial and tax
information reasonably requested, including without limitation the right to
examine all working papers pertaining to all financial statements and tax
returns, prepared or audited by such accountants.
6.2 By AmeriTrack and the Shareholders. During the period from
----------------------------------
the Agreement Date until the earlier to occur of (i) the Closing or (ii) the
termination of this Agreement in accordance with Section 10, AmeriTrack and each
of the Shareholders hereby covenants and agrees with Snowball as follows:
6.2.1 Advice of Changes. AmeriTrack and each Shareholder
-----------------
will promptly advise Snowball in writing of any event occurring subsequent to
the date of this Agreement that would render any representation or warranty of
AmeriTrack or the Shareholders contained in this Agreement or the AmeriTrack
Disclosure Schedule, if made on or as of the date of such event or the Closing
Date, untrue or inaccurate in any material respect.
6.2.2 Necessary Consents. In addition to their obligations
------------------
under Section 2.6, AmeriTrack, each of its officers, directors and employees,
and each of the Shareholders will use their respective commercially reasonable,
diligent efforts to promptly obtain such written consents and take such other
actions as may be necessary to allow the consummation of the transactions
contemplated hereby and to allow Snowball to carry on AmeriTrack's business
after the Closing.
6.2.3 No Other Negotiations. From the Agreement Date until
---------------------
the earlier of termination of this Agreement in accordance with Section 10 or
the consummation of the transactions contemplated hereby, none of AmeriTrack,
its officers, directors and employees, nor any of the Shareholders will, and
will not authorize, encourage or permit, any officer, director, employee,
shareholder or affiliate of AmeriTrack, or any other person, on its or their
behalf to, directly or indirectly, solicit, facilitate, discuss, negotiate or
accept or enter into or encourage any offer, inquiry or proposal received from,
or any agreement with, any other party, furnish to any person any information
with respect to, or otherwise cooperate with, facilitate or encourage any effort
or attempt by any person (other than Snowball), concerning any agreement or
transaction regarding the possible (a) acquisition of or merger or other
business combination with AmeriTrack; (b) disposition of all or any substantial
portion of the business, assets or securities of AmeriTrack by sale, license or
others, other than as disclosed on Section 6.2.3 of the Disclosure Schedule; (c)
-------------
purchase by AmeriTrack of all or substantially all the business, assets or
17
<PAGE>
securities of another company; (d) license of technology of AmeriTrack other
than in the ordinary course of business; or (e) provision or delivery of any
confidential information of AmeriTrack to any party other than Snowball
concerning any such possible transaction. AmeriTrack and the Shareholders, as
applicable, will promptly notify Snowball orally and in writing of any such
offers, inquiries or proposals, the principal terms of the same and the identity
of the party making the same.
6.2.4 Satisfaction of Conditions Precedent. AmeriTrack, its
------------------------------------
directors and officers and each of the Shareholders will use their respective
commercially reasonable, diligent efforts to promptly satisfy or cause to be
satisfied all the conditions precedent which are set forth in Section 9; to
promptly cause the transactions contemplated by this Agreement to be consummated
in accordance with the provisions of this Agreement; and, without limiting the
generality of the foregoing, to obtain all consents and authorizations of third
parties and to make all filings with, and give all notices to, third parties
that may be necessary or reasonably required in order to effect the transactions
contemplated hereby.
6.2.5 Provision of Audited Financial Statements. AmeriTrack and
-----------------------------------------
the Shareholders will cause a balance sheet and a statement of operations and
cash flows from inception through August 31, 1999, audited by a qualified
accounting firm reasonably acceptable to Snowball and prepared in accordance
with GAAP applied on a consistent basis with prior periods, to be delivered to
Snowball on or before the date 30 days following the Closing Date, at no expense
to Snowball.
6.2.6 Opinion of Counsel. AmeriTrack and the Shareholders will
------------------
take such actions as are necessary in oder for Nexsen Pruet Jacobs & Pollard,
LLP to be able to deliver and to deliver an opinion of counsel in substantially
the form of Exhibit G, including customary qualifications and assumptions
---------
reasonably acceptable to Snowball, on or before the date 20 days following the
Closing Date, at no expense to Snowball.
7. SNOWBALL COVENANTS
During the period from the Agreement Date until the earlier to occur
of (i) the Closing or (ii) the termination of this Agreement in accordance with
Section 10, Snowball covenants and agrees as follows:
7.1 Advice of Changes. Snowball will promptly advise AmeriTrack in
-----------------
writing of any event occurring subsequent to the date of this Agreement that
would render any representation or warranty of Snowball contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect, including without limitation any
material change in the capital structure of Snowball.
7.2 Satisfaction of Conditions Precedent. Snowball will use its
------------------------------------
diligent efforts to promptly satisfy or cause to be satisfied all the conditions
precedent which are set forth in Section 8, to cause the transactions
contemplated by this Agreement to be consummated in accordance with the terms of
this Agreement, and, without limiting the generality of the foregoing, to obtain
all consents and authorizations of third parties and to make all filings with,
18
<PAGE>
and give all notices to, third parties that may be necessary or reasonably
required on its part in order to effect the transactions contemplated hereby.
8. CONDITIONS TO OBLIGATIONS OF AMERITRACK AND THE SHAREHOLDERS
The obligations of AmeriTrack and the Shareholders to consummate the
sale of the AmeriTrack Stock to Snowball and any other transactions contemplated
by this Agreement are subject to the fulfillment or satisfaction, on and as of
the Closing, of each of the following conditions (any one or more of which may
be waived by AmeriTrack and the Shareholders in their sole discretion, but only
in a writing signed by AmeriTrack and Shareholders collectively holding at least
a majority of the then outstanding shares of AmeriTrack Stock):
8.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of Snowball set forth in Section 5 shall be true and accurate in
every material respect on and as of the Closing with the same force and effect
as if they had been made at the Closing, and AmeriTrack shall have received a
certificate to such effect executed by Snowball's President or any Vice
President.
8.2 Covenants. Snowball shall have performed and complied in all
---------
material respects with all of its covenants contained in Section 7 on or before
the Closing, and AmeriTrack shall have received a certificate to such effect
signed by Snowball's President or any Vice President.
8.3 Documents. Snowball shall have executed and delivered to
---------
AmeriTrack all the Snowball Ancillary Agreements.
8.4 Consulting Agreement. Snowball shall have executed and delivered
--------------------
the Consulting Agreement with James N. Haltiwanger, Jr. in the form attached
hereto as Exhibit F (the "Consulting Agreement").
---------
9. CONDITIONS TO OBLIGATIONS OF SNOWBALL
The obligations of Snowball hereunder to consummate the purchase of
the AmeriTrack Stock, the payment of the Purchase Price and any other
transactions contemplated by this Agreement are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Snowball in its sole discretion, but only
in a writing signed by Snowball):
9.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of the Shareholders set forth in Section 3 and the
representations and warranties of AmeriTrack set forth in Section 4 shall each
be true and accurate in every material respect on and as of the Closing with the
same force and effect as if they had been made at the Closing, and Snowball
shall have received certificates to such effect executed by AmeriTrack's
President.
19
<PAGE>
9.2 Covenants. AmeriTrack and each of the Shareholders shall have
---------
performed and complied in all material respects with all of their respective
covenants contained in Section 6 on or before the Closing, and Snowball shall
have received certificates to such effect signed by AmeriTrack's President.
9.3 Documents. AmeriTrack, the Shareholders and the Representative
---------
shall have executed and delivered to Snowball all the AmeriTrack Ancillary
Agreements and all the Shareholder Ancillary Agreements, as applicable.
9.4 Consulting Agreement. James N. Haltiwanger, Jr. shall have
--------------------
executed and delivered to Snowball the Consulting Agreement.
9.5 Resignation of Directors and Officers. The directors and
-------------------------------------
officers of AmeriTrack in office immediately prior to the Closing shall have
resigned effective as of the Closing, unless otherwise directed by Snowball.
9.6 Sale of URLs. James N. Haltiwanger, Jr. will have entered into a
------------
URL Transfer Agreement in form satisfactory to Snowball under which Mr.
Haltiwanger will have assigned to Snowball all URLs he owns which are in any way
related to the coverage and/or registration of domestic high school alumni on
the internet.
9.7 Elimination of Liabilities. AmeriTrack will have satisfied all
--------------------------
outstanding liabilities of AmeriTrack other than AmeriTrack's obligations to
PSIWeb, Inc. on or before the Closing.
10. TERMINATION OF AGREEMENT
10.1 Prior to or at the Closing.
--------------------------
10.1.1 Mutual Termination. This Agreement may be terminated
------------------
at any time prior to or at the Closing by the mutual written consent of Snowball
and AmeriTrack, approved by their respective Boards of Directors; and the
consent of the Shareholders shall not be required to terminate this Agreement
provided such termination has been approved by the AmeriTrack Board of
Directors.
10.1.2 By Snowball.
-----------
(a) This Agreement may be terminated by Snowball if
the conditions precedent set forth in Section 9 shall have not been complied
with, waived or performed and such noncompliance or nonperformance shall not
have been cured or eliminated (or by its nature cannot be cured or eliminated)
by AmeriTrack and/or the Shareholders on or before Midnight, Pacific Standard
Time on October 15, 1999 (the "Termination Date").
(b) In addition, Snowball may terminate this Agreement
at any time prior to or at the Closing if any of the representations and
warranties of AmeriTrack or Shareholders in Sections 3 and 4 of this Agreement
were incorrect, untrue or false in any material
20
<PAGE>
respect as of the Agreement Date or are incorrect, untrue or false in any
material respect as of the proposed Closing Date or AmeriTrack and/or the
Shareholders have breached any of their respective covenants under Section 6 of
this Agreement in any material respect, and AmeriTrack and/or the Shareholders
have not cured such breach prior to the earlier of: (i) the Closing; (ii) five
(5) days after Snowball has given AmeriTrack written notice of its intention to
terminate this Agreement pursuant to this subsection 10.1.2(b); or (iii) the
Termination Date.
10.1.3 By AmeriTrack and the Shareholders.
----------------------------------
(a) This Agreement may be terminated by AmeriTrack
with the written consent of shareholders owning at least a majority of the
outstanding AmeriTrack Stock if the conditions precedent set forth in Section 8
shall have not been complied with, waived or performed and such noncompliance or
nonperformance shall not have been cured or eliminated (or by its nature cannot
be cured or eliminated) by Snowball on or before the Termination Date.
(b) In addition, AmeriTrack, with the written consent
of shareholders owning at least a majority of the outstanding AmeriTrack Stock
may terminate this Agreement at any time prior to or at the Closing if any of
the representations and warranties of Snowball in Section 5 of this Agreement
were incorrect, untrue or false in any material respect as of the Agreement Date
or are incorrect, untrue or false in any material respect as of the proposed
Closing Date or Snowball has breached any of its covenants under Section 7 of
this Agreement in any material respect, and Snowball has not cured such breach
prior to the earlier of (i) the Closing, (ii) five (5) days after AmeriTrack and
the Shareholders owning at least a majority of the outstanding AmeriTrack Stock
have given Snowball written notice of their intention to terminate this
Agreement pursuant to this subsection 10.1.3(b) or (iii) the Termination Date.
Any termination of this Agreement under this Section 10 will be effective upon
delivery of notice of termination by the terminating party to the other party or
parties hereto.
10.2 No Liability for Proper Termination. Any termination of this
-----------------------------------
Agreement in accordance with the applicable provisions of this Section 10 will
be without further obligation or liability of any party in favor of the other
party or parties hereto or to its stockholders, directors or officers; provided,
--------
however, that nothing herein will limit the obligation of AmeriTrack, the
- -------
Shareholders and Snowball for any willful breach hereof or failure to use their
diligent efforts to cause the transactions contemplated hereby to be
consummated, as set forth in Sections 6.2.4 and 7.4 hereof, respectively. In
-------------- ---
the event of the termination of this Agreement pursuant to this Section 10, this
----------
Agreement shall thereafter become void and have no effect and each party shall
be responsible for its own expenses incurred in connection herewith. The terms
of that certain Mutual Non-Disclosure Agreement, dated July 29, 1999 by and
between Snowball and AmeriTack shall survive any termination of this Agreement.
21
<PAGE>
11. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION; LIMITATION
11.1 Survival of Representations. Subject to Section 11.2(b) below,
--------------------------- ---------------
all representations, warranties and covenants of AmeriTrack, Snowball and the
Shareholders contained in this Agreement shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
party, only until that date which is the earlier of (i) the termination of this
Agreement or (ii) except as to breaches or violations of Sections 3.1, 3.2, 3.3,
-----------------------
4.3 and 4.7, two (2) years following the Closing Date, provided that there shall
- --- ---
be no limit with respect to claims arising out of a representation or warranty
that a Shareholder knew at the Closing Date was false or a Shareholder's fraud.
11.2 Agreements to Indemnify. Each of the Shareholders hereby agrees
-----------------------
to indemnify and hold harmless Snowball and its officers, directors, agents and
employees, and each person, if any, who controls or may control Snowball within
the meaning of the Securities Act (hereinafter referred to collectively as
"Indemnified Persons") from and against any and all Indemnified Losses. For
purposes of this Agreement, "Indemnified Losses" means all claims, demands,
actions, causes of actions, losses, costs, damages, liabilities and expenses
including, without limitation, reasonable legal fees:
(a) Arising out of any misrepresentation or breach of or default
in connection with any of the representations or warranties given or made by
such Shareholder in Section 3 of this Agreement or any certificate, instrument,
or agreement delivered at Closing by or on behalf of such Shareholder pursuant
hereto; or
(b) Resulting from any failure of any such Shareholder to have
good, valid and marketable title to the issued and outstanding AmeriTrack Stock
held by such Shareholder, free and clear of all liens, claims, pledges, options,
adverse claims, assessments or charges of any nature whatsoever; or
(c) Arising out of any misrepresentation or breach of or default
in connection with any of the representations, warranties and covenants given or
made by AmeriTrack in this Agreement or any certificate, instrument, or
agreement delivered at Closing by or on behalf of AmeriTrack pursuant hereto
(other than with respect to changes in the truth or accuracy of the
representations and warranties under this Agreement after the date hereof if
AmeriTrack has advised Snowball of such changes in an update to the AmeriTrack
Disclosure Schedule delivered prior to the Closing and Snowball has nonetheless
proceeded with the Closing).
The liability of the Shareholders under clauses (a) and (b) above will be
several and not joint. The liability of the Shareholders under clause (c) above
will be joint and several.
11.3 Limitations on Indemnification. Anything contained in this
------------------------------
Agreement to the contrary notwithstanding: (a) Shareholders shall not be liable
for any claim for indemnification asserted by any Indemnified Person or by any
party pursuant to any provision of this Agreement after the second (2nd)
anniversary date of the Closing; (b) Shareholders'
22
<PAGE>
aggregate liability for such indemnification claims under this Agreement shall
not exceed One Million Dollars ($1,000,000.00) and shall be limited as to each
Shareholder to the amount of the Purchase Price received or receivable by such
Shareholder; and (c) Shareholders shall not become liable for any such
indemnification claims under this Agreement unless and until the aggregate of
all such claims exceeds Fifteen Thousand Dollars ($15,000.00), and then only to
the extent of such excess over $15,000.00 and up to the amount limitation in
Section 11.3(b) above in the aggregate. The limitations of this Section 11.3
- --------------- ------------
shall apply to all claims for indemnification under this Agreement except: (x)
claims arising out of a representation or warranty that a Shareholder knew at
the Closing Date was false or a Shareholder's fraud; and (y) claims arising
under Sections 3.1, 3.2, 3.3, 4.3, and 4.7.
---------------------- --- ---
11.4 Exclusive Remedies. Anything contained in this Agreement to the
------------------
contrary notwithstanding, the indemnification rights set forth in this Article
-------
11, all of which are subject to the terms, limitations, and restrictions of this
- --
Article 11, shall be the exclusive remedy after Closing for monetary damages
- ----------
sustained by the Indemnified Persons as a result of a breach of a
representation, warranty, covenant, or agreement under this Agreement. Such
limitations set forth in this Article 11 shall not impair the rights of
----------
Snowball: (a) to seek non-monetary equitable relief, including (without
limitation) specific performance or injunctive relief to redress any default or
breach of this Agreement; or (b) to seek enforcement, collection, damages, or
such non-monetary equitable relief to redress any default or breach of any
consulting agreement, bill of sale, assignment, assumption (or other transfer
document), consent, or other agreement to be delivered at Closing hereunder. In
connection with the seeking of any non-monetary equitable relief, each of the
Shareholders acknowledges and agrees that Snowball would be damaged irreparably
in the event any of the provisions of this Agreement are not performed in
accordance with their specific terms or otherwise are breached. Accordingly,
the Shareholders agree that Snowball shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof in any
competent court having jurisdiction over the parties (subject to the provisions
of Section 12.1 below).
------------
11.5 Limitation of Snowball Liability. Anything contained in this
--------------------------------
Agreement to the contrary notwithstanding: (a) Snowball shall not be liable
pursuant to any provision of this Agreement after the second (2nd) anniversary
date of the Closing; (b) Snowball's aggregate liability under this Agreement
shall not exceed One Million Dollars ($1,000,000.00); and (c) Snowball shall not
become liable under this Agreement unless and until the aggregate of all claims
exceeds Fifteen Thousand Dollars ($15,000.00), and then only to the extent of
such excess over $15,000.00 and up to the amount limitation in Section 11.5(b)
---------------
above in the aggregate. The limitations of this Section 11.5 shall apply to all
------------
claims under this Agreement except (i) a failure to pay the Purchase Price in
accordance with the terms of this Agreement; (ii) claims arising under Section
5.3; and (iii) claims arising out of a representation or warranty that Snowball
knew at the Closing Date was false or Snowball's fraud. The limitations of
liability under this Section 11.5 do not apply to any claims arising out of the
Consulting Agreement.
23
<PAGE>
11.6 Assignment. To the extent that the Shareholders shall have
----------
actually paid indemnity damages to or on behalf of the Indemnified Persons,
Indemnified Persons shall make a non-exclusive assignment to the Shareholders
(as their interests may appear) of the remedies, rights, and claims, if any, of
the Indemnified Persons against any and all third parties for the same
liability, including, but not limited to, remedies, rights and claims against
(i) liability insurers and other insurance companies whose obligation to ensure
against such liability arose with respect to AmeriTrack prior to the Closing and
(ii) any other person which has indemnified the Indemnified Persons for such
liability. The parties shall cooperate reasonably in the pursuit of any such
remedies, rights, and claims.
11.7 Payment Priority. Any Indemnified Loss to be paid to an
----------------
Indemnified Person pursuant to this Article 11 by any one or more of the
----------
Shareholders shall be satisfied first out of the Escrow Shares, and second out
of the Cash Escrow Amount to the extent available under the Escrow Agreement;
provided, however, any Shareholder shall be entitled, at his option, to pay or
reimburse the Indemnified Person in whole or in part for his portion of such
Indemnified Loss by transferring to the Indemnified Person shares of Snowball
Common Stock retained by such Shareholder at the time, if any. For purpose of
payment for a Indemnified Loss pursuant to this Article 11, the value per share
----------
of the Snowball Common Stock shall be the fair market value on the date of
payment of such Indemnified Loss, which fair market value shall not be less than
the book value per share on such date of payment.
11.8 Notice of Claim.
---------------
(a) As used herein, the term "Claim" means a claim for
indemnification under Section 11.2 hereof made by Snowball or any Indemnified
Person against any Shareholder based upon any alleged Indemnified Loss
including, without limitation, an Indemnified Loss related to a Third-Party
Claim. The term "Third-Party Claim" means a written claim, written demand or
other formal or informal written complaint, whether or not perfected, made by a
third party against Snowball or any Indemnified Person causing or threatening an
Indemnified Loss. Promptly upon becoming aware of any Claim, Snowball will give
the Representative written notice of such Claim hereof (the "Notice of Claim").
Snowball may give a Notice of Claim at any time on or prior to the close of the
period specified in Section 11.3(a), and no Notice of Claim may be given after
the close of such period. No delay on the part of Snowball or any Indemnified
Person in giving the Representative a Notice of Claim prior to the close of such
period shall relieve any Shareholder from any of such Shareholder's obligations
under this Section 11 unless (and then only to the extent) that such Shareholder
is materially prejudiced by such delay.
(b) Content of Notice of Claim. Each Notice of Claim given by
--------------------------
Snowball pursuant to Section 11.8(a) shall be set forth in writing and shall
contain the following information to the extent it is reasonably available to
Snowball:
(i) A brief description in reasonable detail of the facts,
circumstances or events giving rise to the Claim based on Snowball's good faith
belief thereof, including, if applicable, the identity and address of the third-
party who has asserted a Third-Party
24
<PAGE>
Claim against Snowball (to the extent reasonably available to Snowball) and
copies of any demand or complaint representing such Third-Party Claim.
(ii) Snowball's statement of the amount of damages claimed,
and if in connection with a Third-Party Claim, based on facts alleged in such
Third-Party Claim which, if true, would give rise to damages as an Indemnified
Loss or, in the event a Third-Party Claim fails to specify the maximum amount of
damages, Snowball's good faith estimate upon advice of legal counsel of the
reasonably foreseeable maximum amount of damages arising thereunder that will
ultimately be incurred by Snowball and/or other Indemnified Persons in
connection with such Third-Party Claim (whether in connection with a direct
claim or Third-Party Claim, "Alleged Damages").
(c) Defense of Third-Party Claims. Subject to rights of or
-----------------------------
duties to any insurer or other third person having liability therefor, Snowball
shall defend any Third-Party Claim and Snowball shall be entitled to recover the
reasonable costs and expenses incurred by Snowball in connection with such
defense (including but not limited to reasonable attorneys fees, other
professionals' and experts' fees and court or arbitration costs) as part of its
Claim, to the extent provided in this Section 11. The parties agree to cooperate
fully with each other in connection with the defense, negotiation or settlement
of any such Third-Party Claim. Without limiting the foregoing, the Shareholders:
(X) may, in their sole discretion and expense, employ counsel to represent them
(in addition to counsel employed by Snowball) in any such matter, and in such
event counsel selected by the Indemnified Persons shall be required to cooperate
with such counsel of the Shareholders in such defense, compromise or settlement
for the purpose of informing and sharing information with such Shareholders; and
(Y) shall, at their own expense, provide such assistance as may be reasonably
requested by the Indemnified Persons in connection with the defense and
settlement of any such Third-Party Claim.
12. MISCELLANEOUS
12.1 Governing Law. Except as otherwise expressly provided herein,
-------------
the internal laws of the State of California (irrespective of its choice of law
principles) will govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto. Any dispute arising under or in relation to this Agreement
shall be resolved in either the United States District Court, Northern District
of California, or the United States District Court, District of South Carolina;
provided however, that (a) in the event that litigation is instituted against
Snowball, such litigation shall only be instituted in the United States District
Court, Northern District of California; and (b) in the event that litigation is
instituted against the Shareholders, such litigation shall only be instituted in
the United States District Court, District of South Carolina; and provided
further however, that once litigation is commenced as set forth above, counter-
claims or cross-claims may be instituted, at the option of the counter-claimant
or cross-claimant, in the court in which such litigation is pending.
12.2 Assignment; Binding Upon Successors and Assigns. No party
-----------------------------------------------
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other
25
<PAGE>
parties hereto, except that Snowball may assign its respective rights and/or
obligations to any wholly-owned subsidiary of Snowball, provided that Snowball
--------
guarantees the performance of such subsidiary. This Agreement will be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
12.3 Severability. If any provision of this Agreement, or the
------------
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
12.4 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument.
12.5 Other Remedies. Except as otherwise provided herein, any and
--------------
all remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law on such
party, and the exercise of any one remedy will not preclude the exercise of any
other.
12.6 Amendment and Waivers. Any term or provision of this Agreement
---------------------
may be amended prior to the Closing by the written consent of Snowball,
AmeriTrack and those Shareholders collectively holding at least a majority of
the then outstanding AmeriTrack Stock, and, after the Closing by Snowball and
the Shareholders (or their successors in interest) who immediately prior to the
Closing held a majority of the AmeriTrack Stock. The observance of any term,
condition or provision of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by a writing
signed by the party to be bound thereby or for whose benefit such condition was
provided except that a waiver on behalf of the Shareholders need only be signed
by the Shareholders collectively holding at least a majority of the then
outstanding AmeriTrack Stock. In addition, at any time prior to the Closing,
the Shareholders (acting by written consent of the holders of a majority of the
AmeriTrack Stock) and each of AmeriTrack and Snowball (by action taken by its
respective Board of Directors) may, to the extent legally allowed: (i) extend
the time for the performance of any of the obligations or other acts of the
other; (ii) waive any inaccuracies in the representations and warranties made to
it contained herein or in any document delivered pursuant hereto; and (iii)
waive compliance with any of the agreements or conditions for its benefit
contained herein. The failure of any party to enforce any of the provisions
hereof will not be construed to be a waiver of the right of such party
thereafter to enforce such provisions or any other provisions.
12.7 Expenses. Each party hereto will pay its respective fees and
--------
expenses of its own attorneys, accountants, investment bankers, advisors and
other professionals incurred in connection with this Agreement and the
transactions contemplated hereby.
26
<PAGE>
12.8 Notices. All notices and other communications required or
-------
permitted under this Agreement will be in writing and will be either hand
delivered in person, sent by telecopier, sent by certified or registered first
class mail, postage pre-paid, or sent by internationally recognized express
courier service. Such notices and other communications will be effective upon
receipt if hand delivered or sent by telecopier, five (5) days after mailing if
sent by mail, and one (l) day after dispatch if sent by express courier, to the
following addresses, or to such other addresses or fax number as any party may
notify the other parties in accordance with this Section:
(i) If to Snowball:
--------------
Snowball.com, Inc.
Executive Park Boulevard, Suite 400
San Francisco, CA 94134
Attention: President
Fax Number:
with a copy to:
--------------
Fenwick & West LLP
875 Battery Street, Suite 1500
San Francisco, CA 94111
Attention: Robert B. Dellenbach, Esq.
Fax Number: (415) 281-1350
(ii) If to Shareholders:
------------------
James N. Haltiwanger, Jr., as Representative
4155 East Buchannan Drive
Columbia, SC 29206
Fax Number: N/A.
with a copy to:
--------------
Nexsen Pruet Jacobs & Pollard, LLP
1441 Main Street, Suite 1500
Columbia, SC 29201
Attention: C. Jones DuBose, Jr., Esq.
Fax Number: (803) 253-8277
12.9 Construction of Agreement. This Agreement has been negotiated
-------------------------
by the respective parties hereto and their attorneys and the language hereof
will not be construed for or against any party.
12.10 Further Assurances. Each party agrees to cooperate fully with
------------------
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and
27
<PAGE>
reflect the transactions described herein and contemplated hereby and to carry
into effect the intent and purposes of this Agreement.
12.11 Absence of Third Party Beneficiary Rights. No provisions of
-----------------------------------------
this Agreement are intended, nor will be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner, employee, agent, consultant or any
party hereto or any other person or entity unless otherwise specifically
provided otherwise herein, and, except as so provided, all provisions hereof
will be personal solely among the parties to this Agreement; provided that
Indemnified Persons may be third party beneficiaries solely with respect to the
provisions of Article 11 of this Agreement.
----------
12.13 Public Announcement. At a time consistent with Snowball's
-------------------
corporate policy, and in any event no later than 45 days after the Closing,
Snowball and AmeriTrack will issue a press release approved by Snowball and the
Representative announcing the purchase and sale of stock contemplated hereby.
Thereafter, Snowball may issue such press releases, and make such other
disclosures regarding the transactions contemplated hereby, as it determines are
required under applicable securities laws or regulatory rules. Prior to the
publication of the press release issued upon execution of this Agreement (unless
this Agreement has been terminated), no party hereto shall make any public
announcement relating to this Agreement or the transactions contemplated hereby.
12.14 Attribution to James Haltiwanger, Jr. As soon as is
-------------------------------------
practically possible after the Closing, and in any event no later than 45 days
after the Closing, Snowball shall cause AmeriTrack to place on the
highschoolalumni.com website a statement that has been reasonably approved by
James N. Haltiwanger, Jr. which attributes the site's creation to James N.
Haltiwanger, Jr.
12.15 Entire Agreement. This Agreement, the Exhibits and Schedules
----------------
hereto and the AmeriTrack Disclosure Schedule constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between the parties with respect hereto.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SNOWBALL.COM, INC. AMERITRACK, INC.
/s/ Mark Jung /s/ James N. Haltiwanger, Jr.
By: ____________________________ By: ______________________________
Mark Jung
Name: __________________________ James N. Haltiwanger, Jr.
President and CEO
Title: _________________________ President
[SIGNATURE PAGE TO STOCK EXCHANGE AGREEMENT]
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SHAREHOLDER
/s/ Lenora Price
------------------------------------
Lenora Price
/s/ William C. Stork
------------------------------------
William C. Stork
/s/ James N. Haltiwanger, Jr.
------------------------------------
James N. Haltiwanger, Jr.
/s/ Dan Haltiwanger
------------------------------------
Dan Haltiwanger
/s/ George M. Baker
------------------------------------
George M. Baker
/s/ Melissa Hubbard
------------------------------------
Melissa Hubbard
/s/ Elizabeth M. Wolff
------------------------------------
Elizabeth M. Wolff
Azalea Capital, L.L.C.
/s/ Patrick A. Duncan
------------------------------------
Principal
/s/ Robert B. Stith
------------------------------------
Robert B. Stith
/s/ Jim Pickens
------------------------------------
Jim Pickens
By: ________________________________
Name: ______________________________
Title: _____________________________
[SIGNATURE PAGE TO STOCK EXCHANGE AGREEMENT]
30
<PAGE>
EXHIBIT 3.01
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SNOWBALL.COM, INC.
JAMES TOLONEN and JANETTE CHOCK hereby certify that:
ONE: The present name of this corporation is Snowball.com, Inc. The
corporation was incorporated under the name Affiliation, Inc. and the date of
filing the original Certificate of Incorporation of this corporation with the
Secretary of State of Delaware was January 6, 1999.
TWO: They are the duly elected and acting Chief Operating Officer and
Assistant Secretary, respectively, of Snowball.com, Inc., a Delaware
corporation.
THREE: The Certificate of Incorporation of this corporation is hereby
amended and restated to read as follows:
I.
The name of this corporation is Snowball.com, Inc. (the "Corporation" or
the "Company").
II.
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of Newcastle, and the
name of the registered agent of the Corporation in the State of Delaware at such
address is Corporation Service Company.
III.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is 120,000,000 shares,
100,000,000 shares of which shall be Common Stock (the "Common Stock") and
20,000,000 shares of which shall be Preferred Stock (the "Preferred Stock"). The
Common Stock shall have a par value of one tenth of one cent ($0.001) per share
and the Preferred Stock shall have a par value of one tenth of one cent ($0.001)
per share.
B. The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares of Common Stock then outstanding)
by the affirmative vote of the holders of a majority of the stock of the
Corporation (voting together on an as-if-converted basis).
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C. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Amended and Restated Certificate of Incorporation
(the "Restated Certificate"), to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and the number of shares constituting any such series
and the designation thereof, or any of them; and to increase or decrease the
number of shares of any series prior or subsequent to the issue of shares of
that series, but any such decrease shall not be below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
D. 9,990,111 of the authorized shares of Preferred Stock are hereby
designated "Series A Preferred Stock" (the "Series A Preferred"). 4,912,285
shares of Preferred Stock are hereby designated "Series B-1 Preferred Stock"
(the "Series B-1 Preferred"). 4,500,000 shares of Preferred Stock are hereby
designated "Series C Preferred Stock" (the "Series C Preferred"). The Series A
Preferred, Series B-1 Preferred and Series C Preferred are referred to herein
collectively as the "Series Preferred."
E. The rights, preferences, privileges, restrictions and other matters
relating to the Series Preferred are as follows:
1. DIVIDEND RIGHTS
(a) Subject to the right of any series of Preferred Stock that may
from time to time come into existence, the holders of Series A Preferred, the
holders of Series B-1 Preferred and the holders of Series C Preferred, in
preference to the holders of any other stock of the Company ("Junior Stock"),
shall be entitled to receive, when and as declared by the Board of Directors,
but only out of funds that are legally available therefore, cash dividends at
the rate of eight percent (8%) of the applicable Original Issue Price (as
defined below) per annum on each outstanding share of Series A Preferred, each
outstanding share of Series B-1 Preferred and each outstanding share of Series C
Preferred (each as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares). The "Original Issue
Price" of the Series A Preferred shall be thirty-five cents ($0.35). The
Original Issue Price of the Series B-1 Preferred shall be six dollars and
thirty-three cents ($6.33). The Original Issue Price of the Series C Preferred
shall be ten dollars ($10.00). Such dividends shall be payable only when, as and
if declared by the Board of Directors and shall be non-cumulative.
(b) Subject to the prior rights of the Series C Preferred under this
Section 1 and any series of Preferred Stock that may from time to time come into
existence, so long as any shares of Series A Preferred or Series B-1 Preferred
shall be outstanding, no dividend, whether in cash or property, shall be paid or
declared, nor shall any other distribution be made, on any Junior Stock, nor
shall any shares of any Junior Stock of the Company be purchased, redeemed, or
otherwise acquired for value by the Company (except for acquisitions of Common
Stock by the Company pursuant to agreements which permit the Company to
repurchase such shares upon termination of services to the Company or in
exercise of the Company's right of first refusal
2
<PAGE>
upon a proposed transfer) until all dividends (set forth in Section 1(a) above)
on the Series A Preferred and Series B-1 Preferred shall have been paid or
declared and set apart.
(c) So long as any shares of Series C Preferred shall be outstanding,
no dividend, whether in cash or property, shall be paid or declared, nor shall
any other distribution be made, on any shares of Series A Preferred or Series B-
1 Preferred or any Junior Stock, nor shall any shares of Series A Preferred,
Series B-1 Preferred or Junior Stock of the Company be purchased, redeemed, or
otherwise acquired for value by the Company (except for acquisitions of Common
Stock by the Company pursuant to agreements which permit the Company to
repurchase such shares upon termination of services to the Company or in
exercise of the Company's right of first refusal upon a proposed transfer) until
all dividends (set forth in Section 1(a) above) on the Series C Preferred shall
have been paid or declared and set apart.
(d) In the event dividends are paid on any share of Common Stock, an
additional dividend shall be paid with respect to all outstanding shares of
Series A Preferred, Series B-1 Preferred and Series C Preferred in an amount
equal per share (on an as-if-converted to Common Stock basis) to the amount paid
or set aside for each share of Common Stock. The provisions of this Section 1(d)
shall not, however, apply to (i) a dividend payable in Common Stock, (ii) the
acquisition of shares of any Junior Stock in exchange for shares of any other
Junior Stock, or (iii) any repurchase of any outstanding securities of the
Company that is unanimously approved by the Company's Board of Directors.
2. VOTING RIGHTS
(a) General Rights. Except as otherwise provided herein or as
required by law, the Series A Preferred and Series B-1 Preferred and Series C
Preferred shall be voted equally with the shares of the Common Stock of the
Company and not as separate classes, at any annual or special meeting of
stockholders of the Company, and may act by written consent in the same manner
as the Common Stock, in either case upon the following basis: each holder of
shares of Series A Preferred, Series B-1 Preferred or Series C Preferred shall
be entitled to such number of votes as shall be equal to the whole number of
shares of Common Stock into which such holder's aggregate number of shares of
such series of Series Preferred are convertible (pursuant to Section 4 hereof)
immediately after the close of business on the record date filed for such
meeting date of such written consent.
(b) Separate Vote of Series Preferred. Subject to the rights of any
series of Preferred Stock which may from time to time come into existence, for
so long as at least a majority of the authorized number of shares of Series A
Preferred or Series B-1 Preferred or Series C Preferred (subject to adjustment
for any stock split, reverse stock split or other similar event affecting the
Series A Preferred or Series B-1 Preferred or Series C Preferred) remain
outstanding, in addition to any other vote or consent required herein or by law:
(i) the vote or written consent of the holders of at least
sixty-six and two thirds percent (66 2/3%) of the outstanding Series A
Preferred, or the vote or written consent of the holders of at least sixty-six
and two thirds percent (66 2/3%) of the outstanding Series B-1 Preferred, or the
vote or written consent of the holders of at least sixty-six and two thirds
percent
3
<PAGE>
(66 2/3%) of the outstanding Series C Preferred shall be necessary, as
applicable, for effecting or validating the following actions:
(A) Any amendment, alteration, waiver or repeal of any
provision of the Certificate of Incorporation or Bylaws of the Company
(including any filing of a Certificate of Designation), including without
limitation, any amendment, alteration, waiver or repeal that alters or changes
the voting powers, preferences, or other special rights or privileges, or
restrictions of the Series A Preferred or Series B-1 Preferred or Series C
Preferred, respectively; and
(B) Any authorization, or any designation, whether by
reclassification or otherwise, of any new class or series of stock or any other
securities convertible into equity securities of the Company ranking on a parity
with or senior to the Series A Preferred, Series B-1 Preferred or Series C
Preferred, respectively, in rights of redemption, liquidation preference, voting
or dividends or any increase in the authorized or designated number of any such
new class or series.
(ii) the vote or written consent of the holders of at least
sixty-six and two thirds percent (66 2/3%) of the outstanding Series A
Preferred, and the vote or written consent of the holders of at least sixty-six
and two thirds percent (66 2/3%) of the outstanding Series B-1 Preferred, and
the vote or written consent of the holders of at least sixty-six and two thirds
percent (66 2/3%) of the outstanding Series C Preferred shall be necessary, as
applicable, for effecting or validating the following actions:
(A) Any redemption, repurchase, payment of dividends or
other distributions with respect to Junior Stock (except for acquisitions of
Common Stock by the Company pursuant to agreements which permit the Company to
repurchase such shares upon termination of services to the Company or in
exercise of the Company's right of first refusal upon a proposed transfer);
(B) Any agreement by the Company or its stockholders
regarding an Asset Transfer or Acquisition (each as defined in Section 3(d));
(C) Any increase or decrease on the authorized number of
members of the Board of Directors;
(D) Any declaration of any dividend with respect to any
class or series of stock;
(E) Any voluntary dissolution, liquidation or winding up of
the Company; or
(F) Any sale of stock to third parties by any subsidiary.
(c) Election of Board of Directors.
(i) The Company's Board of Directors shall be elected as
follows: (i) for so long as at least five million (5,000,000) shares of Series A
Preferred remain outstanding
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(subject to adjustment for any stock split, reverse stock split or similar event
affecting the Series A Preferred) the holders of Series A Preferred, voting as a
separate class shall be entitled to elect two (2) members of the Company's Board
of Directors at each meeting or pursuant to each consent of the Company's
stockholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors; (ii) for so long as at least one million (1,000,000) shares of
Series B-1 Preferred remain outstanding (subject to adjustment for any stock
split, reverse stock split or similar event affecting the Series B-1 Preferred)
the holders of Series B-1 Preferred, voting as a separate class, shall be
entitled to elect two (2) members of the Company's Board of Directors at each
meeting or pursuant to each consent of the Company's stockholders for the
election of directors, and to remove from office such directors and fill any
vacancy caused by the resignation, death or removal of such directors; (iii) the
holders of Common Stock, voting as a separate class, shall be entitled to elect
two (2) members of the Company's Board of Directors at each meeting or pursuant
to each consent of the Company's stockholders for the election of directors, and
to remove from office such directors and fill any vacancy caused by the
resignation, death or removal of such directors; and (iv) the holders of Common
Stock and Series Preferred, voting together as a single class on an as-if-
converted basis, shall be entitled to elect all remaining members of the Board
of Directors at each meeting or pursuant to each consent of the Company's
stockholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors.
(ii) No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation is subject to Section 2115 of the California General
Corporation Law ("CGCL"). During such time or times that the corporation is
subject to Section 2115(b) of the CGCL, every stockholder entitled to vote at an
election for directors may cumulate such stockholder's votes and give one
candidate a number of votes to which such stockholder's shares are otherwise
entitled, or distribute the stockholder's votes on the same principle among as
many candidates as such stockholder desires. No stockholder, however, shall be
entitled to so cumulate such stockholder's votes unless (i) the names of such
candidate or candidates have been placed in nomination prior to the voting and
(ii) the stockholder has given notice at the meeting, prior to the voting, of
such stockholder's intention to cumulate such stockholder's votes. If any
stockholder has given proper notice to cumulate votes, all stockholders may
cumulate their votes for any candidates who have properly placed in nomination.
Under cumulative voting, the candidates receiving the highest number of votes,
up to the number of directors to be elected, are elected.
(d) Removal.
(i) During such time or times that the corporation is subject to
Section 2115(b) of the CGCL, the Board of Directors or any individual director
may be removed from office at any time without cause by affirmative vote of the
holders of at least a majority of the outstanding shares entitled to vote on
such removal; provided, however, that unless the entire Board is removed, no
individual director may be removed when the votes cast against such director's
removal or not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively at an election which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire
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<PAGE>
number of directors authorized to be elected by the shareholders entitled to
vote at the time of such director's most recent election were then being
elected.
(ii) At any time or times that the corporation is not subject to
Section 2115(b) of the CGCL and subject to any limitations imposed by law,
Section (d)(i) above shall not apply and the Board of Directors or any director
may be removed from office at any time by the affirmative vote of the holders of
a majority of the voting power of all then-outstanding shares of voting stock of
the corporation entitled to vote at an election of directors.
3. LIQUIDATION RIGHTS
(a) Subject to the right of the Series C Preferred and any other
series of Preferred Stock that may from time to time come into existence, upon
any liquidation, dissolution, or winding up of the Company, whether voluntary or
involuntary, before any distribution or payment shall be made to the holders of
any Junior Stock, the holders of Series A Preferred and the holders of Series B-
1 Preferred shall be entitled to be paid out of the assets of the Company an
amount per share of such series of Series Preferred equal to the Original Issue
Price for such series plus all declared and unpaid dividends on such series (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares) for each share of such series of Series
Preferred held by them. If, upon any such liquidation, distribution, or winding
up, the assets of the Company shall be insufficient to make payment in full to
all holders of Series A Preferred and Series B Preferred of the liquidation
preference set forth in this Section 3(a), subject to the rights of the Series C
Preferred as set forth in Section 3(b) below and any other series of Series
Preferred that may from time to time come into existence, then such assets shall
be distributed among the holders of Series A Preferred and Series B Preferred at
the time outstanding, ratably in proportion to the full amounts to which they
would otherwise be respectively entitled.
(b) Upon any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, before any distribution or payment shall be
made to the holders of Series A Preferred, Series B Preferred or any Junior
Stock, subject to the rights of any series of Preferred Stock that may from time
to time come into existence, the holders of Series C Preferred shall be entitled
to be paid out of the assets of the Company an amount per share of Series C
Preferred equal to the Original Issue Price of the Series C Preferred plus all
declared and unpaid dividends on the Series C Preferred (as adjusted for any
stock dividends, combinations, splits, recapitalizations and the like with
respect to such shares) for each share of Series C Preferred held by them. If,
upon any such liquidation, distribution, or winding up, the assets of the
Company shall be insufficient to make payment in full to all holders of Series C
Preferred of the liquidation preference set forth in this Section 3(b), subject
to the rights of any series of Preferred Stock that may from time to time come
into existence, then such assets shall be distributed among the holders of
Series C Preferred at the time outstanding, ratably in proportion to the full
amounts to which they would otherwise be respectively entitled.
(c) After the payment of the full liquidation preference of the
Series Preferred as set forth in Sections 3(a) and (b) above and any other
distribution that may be required with respect to any series of Preferred Stock
that may from time to time come into existence, the remaining assets of the
Company legally available for distribution, if any, shall be distributed
6
<PAGE>
ratably to the holders of Series B-1 Preferred, Series C Preferred and Common
Stock on an as-if converted to Common Stock basis); provided, however, that the
holders of Series B-1 Preferred shall not be entitled to share on any further
distributions under this subsection 3(c) after they have received under
subsection 3(a) and this subsection 3(c) an aggregate amount equal to $12.66 per
share of Series B-1 (as adjusted for any stock dividends, combinations, splits
or the like) and the holders of Series C Preferred shall not be entitled to
share on any further distributions under this subsection 3(c) after they have
received under subsection 3(b) and this subsection 3(c) an aggregate amount
equal to $20.00 per share of Series C (as adjusted for any stock dividends,
combinations, splits or the like).
(d) The following events shall be considered a liquidation under this
Section:
(i) any consolidation or merger of the Company with or into any
other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Company immediately prior to
such consolidation, merger or reorganization, own less than 50% of the Company's
voting power immediately after such consolidation, merger or reorganization, or
any transaction or series of related transactions to which the Company is a
party in which in excess of fifty percent (50%) of the Company's voting power is
transferred, excluding any consolidation or merger effected exclusively to
change the domicile of the Company (an "Acquisition"); or
(ii) a sale, lease or other disposition of all or substantially
all of the assets of the Company (an "Asset Transfer").
(iii) In any such events, if the consideration received by this
Corporation is other than cash, its value will be deemed its fair market value
as determined in good faith by the Board of Directors. Any securities shall be
valued as follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability:
(1) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such quotation system over the thirty (30)
day period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty (30) day period ending three (3) days prior to
the closing; and
(3) If there is no active public market, the value
shall be the fair market thereof, as determined by the Board of Directors.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A)(1), (2) or (3) to reflect the approximate fair
market value thereof, as determined by the Board of Directors.
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4. SERIES PREFERRED CONVERSION RIGHTS
The holders of the Series Preferred shall have the following rights
with respect to the conversion of the Series Preferred into shares of Common
Stock (the "Conversion Rights"):
(a) Optional Conversion. Subject to and in compliance with the
provisions of this Section 4, any shares of Series Preferred may, at the option
of the holder, be converted at any time into fully-paid and nonassessable shares
of Common Stock. The number of shares of Common Stock to which a holder of
Series A Preferred shall be entitled upon conversion shall be the product
obtained by multiplying the Series A Preferred Conversion Rate then in effect
(determined as provided in Section 4(b)) by the number of shares of Series A
Preferred being converted. The number of shares of Common Stock to which a
holder of Series B-1 Preferred shall be entitled upon conversion shall be the
product obtained by multiplying the Series B-1 Preferred Conversion Rate then in
effect (determined as provided in Section 4(b)) by the number of shares of
Series B-1 being converted. The number of shares of Common Stock to which a
holder of Series C Preferred shall be entitled upon conversion shall be the
product obtained by multiplying the Series C Preferred Conversion Rate then in
effect (determined as provided in Section 4(b)) by the number of shares of
Series C being converted.
(b) Series Preferred Conversion Rate. The conversion rate in effect
at any time for conversion of the Series A Preferred (the "Series A Preferred
Conversion Rate") shall be the quotient obtained by dividing the Original Issue
Price of the Series A Preferred by the Series A Preferred Conversion Price,
calculated as provided in Section 4(c). The conversion rate in effect at any
time for conversion of the Series B-1 Preferred (the "Series B-1 Conversion
Rate") shall be the quotient obtained by dividing the Original Issue Price of
the Series B-1 Preferred by the "Series B-1 Preferred Conversion Price,"
calculated as provided in Section 4(c). The conversion rate in effect at any
time for conversion of the Series C Preferred (the "Series C Conversion Rate")
shall be the quotient obtained by dividing the Original Issue Price of the
Series C Preferred by the "Series C Preferred Conversion Price," calculated as
provided in Section 4(c).
(c) Series Preferred Conversion Price. The conversion price for the
Series A Preferred as of the date of the filing of this Restated Certificate of
Incorporation is $0.233333 (the "Series A Preferred Conversion Price"). Such
Series A Preferred Conversion Price shall be adjusted from time to time in
accordance with this Section 4. All references to the Series A Preferred
Conversion Price herein shall mean the Series A Preferred Conversion Price as so
adjusted. The conversion price for the Series B-1 Preferred as of the date of
the filing of this Restated Certificate of Incorporation is $4.22 (the "Series
B-1 Preferred Conversion Price"). Such Series B-1 Preferred Conversion Price
shall be adjusted from time to time in accordance with this Section 4. All
references to the Series B-1 Preferred Conversion Price herein shall mean the
Series B-1 Preferred Conversion Price as so adjusted. The conversion price for
the Series C Preferred shall initially be the Original Issue Price of the Series
C Preferred (the "Series C Preferred Conversion Price"). Such initial Series C
Preferred Conversion Price shall be adjusted from time to time in accordance
with this Section 4. All references to the Series C Preferred Conversion Price
herein shall mean the Series C Preferred Conversion Price as so adjusted. As
used herein, the "Conversion Price" means the Series A Preferred Conversion
8
<PAGE>
Price, the Series B-1 Preferred Conversion Price or the Series C Preferred
Conversion Price, as applicable.
(d) Mechanics of Conversion. Each holder of Series Preferred who
desires to convert the same into shares of Common Stock pursuant to this Section
4 shall surrender the certificate or certificates thereof, duly endorsed, at the
office of the Company or any transfer agent for the Series Preferred, and shall
give written notice to the Company at such office that such holder elects to
convert the same. Such notice shall state the number of shares of Series
Preferred being converted. Thereupon, the Company shall promptly issue and
deliver at such office to such holder a certificate or certificates for the
number of shares of Common Stock to which such holder is entitled and shall
promptly pay (i) in cash or, to the extent sufficient funds are not then legally
available therefor, in Common Stock (at the Common Stock's fair market value
determined by the Board of Directors as of the date of such conversion), any
declared and unpaid dividends on the shares of Series Preferred being converted
and (ii) in cash (at the Common Stock's fair market value determined by the
Board of Directors as of the date of such conversion) the value of any
fractional share of Common Stock otherwise issuable to any holder of the
applicable series of Series Preferred. Such conversion shall be deemed to have
been made at the close of business on the date of such surrender of the
certificates representing the shares of Series Preferred to be converted, and
the person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.
(e) Adjustment for Subdivisions or Combinations. If the Company at
any time or from time to time after the date that the first share of Series
Preferred is issued (the "Original Issue Date") effects a subdivision of the
outstanding Common Stock without a corresponding subdivision of the Preferred
Stock, the Series A Preferred Conversion Price, the Series B-1 Preferred
Conversion Price and the Series C Preferred Conversion Price in effect
immediately before that subdivision shall be proportionately decreased.
Conversely, if the Company shall at any time or from time to time after the
Original Issue Date combine the outstanding shares of Common Stock into a
smaller number of shares without a corresponding combination of the Preferred
Stock, the Series A Preferred Conversion Price, the Series B-1 Preferred
Conversion Price and the Series C Preferred Conversion Price in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this Section 4(e) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(f) Adjustment for Common Stock Dividends and Distributions. If the
Company at any time or from time to time after the Original Issue Date makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, in each such event the Series A Preferred Conversion Price, the Series B-
1 Preferred Conversion Price and the Series C Preferred Conversion Price that is
then in effect shall be decreased as of the time of such issuance or, in the
event such record date is fixed, as of the close of business on such record
date, by multiplying the Series A Preferred Conversion Price, the Series B-1
Preferred Conversion Price and the Series C Preferred Conversion Price then in
effect by a fraction (i) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (ii) the denominator
of which is
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the total number of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance or the close of business on such record date,
and (ii) the denominator of which is the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution; provided, however, that if
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Series A
Preferred Conversion Price, the Series B-1 Preferred Conversion Price and the
Series C Preferred Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Series A Preferred
Conversion Price and the Series C Preferred Conversion Price shall be adjusted
pursuant to this Section 4(f) to reflect the actual payment of such dividend or
distribution.
(g) Adjustment for Reclassification, Exchange and Substitution. If at
any time or from time after the Original Issue Date, the Common Stock issuable
upon the conversion of the Series Preferred is changed into the same or a
different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than an Acquisition or
Asset Transfer as defined in Section 3(d) or a subdivision or combination of
shares or stock dividend or a reorganization, merger, consolidation or sale of
assets provided for elsewhere in this Section 4), in any such event each holder
of Series Preferred shall have the right thereafter to convert such stock into
the kind and amount of stock and other securities and property receivable upon
such recapitalization, reclassification or other change by holders of the
maximum number of shares of Common Stock into which such shares of Series
Preferred could have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustment as provided herein
or with respect to such other securities or property by the terms thereof.
(h) Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time after the Original Issue Date, there is a
capital reorganization of the Common Stock (other than an Acquisition or Asset
Transfer as defined in Section 3(d) or a recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided for
elsewhere in this Section 4), as a part of such capital reorganization,
provision shall be made so that the holders of the Series Preferred shall
thereafter be entitled to receive upon conversion of the Series Preferred the
number of shares of stock or other securities or property of the Company to
which a holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization, subject to
adjustment in respect of such stock or securities by the terms thereof. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of Series
Preferred after the capital reorganization to the end that the provisions of
this Section 4 (including adjustment of the Series A Preferred Conversion Price
and Series B-1 Conversion Price then in effect and the number of shares issuable
upon conversion of the Series Preferred) shall be applicable after that event
and be as nearly equivalent as practicable.
(i) Sale of Shares Below Conversion Price.
(i) If any time or from time to time after the Original Issue
Date, the Company issues or sells, or is deemed by the express provisions of
this subsection (i) to have issued or sold, Additional Shares of Common Stock
(as defined in subsection (i)(iv) below), other than as a dividend or other
distribution on any class of stock as provided in Section 4(f) above, and other
than a subdivision or combination of shares of Common Stock as provided in
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Section 4(e) above, for an Effective Price (as defined in subsection (i)(v)
below) less than the then effective Conversion Price for a series of Series
Preferred, then and in each such case the then existing Conversion Price for
such series shall be reduced as of the opening of business on the date of such
issue or sale, to a price determined by multiplying the Conversion Price for
such Series by a fraction (i) the numerator of which shall be (A) the number
of shares of Common Stock deemed outstanding (as defined below) immediately
prior to such issue or sale, plus (B) the number of shares of Common Stock
which the aggregate consideration received (as defined in subsection (i)(ii)) by
the Company for the total number Additional Shares of Common Stock so issued
would purchase at such Conversion Price, and (ii) the denominator of which
shall be the number of shares of Common Stock deemed outstanding (as defined
below) immediately prior to such issue or sale plus the total number of
Additional Shares of Common Stock so issued. For the purposes of the preceding
sentence, the number of shares of Common Stock deemed to be outstanding as of a
given date shall be the sum of (A) the number of shares of Common Stock
actually outstanding, (B) the number of shares of Common Stock into which the
then outstanding shares of such series of Series Preferred could be converted if
fully converted on the day immediately preceding the given date, and (C) the
number of shares of Common Stock which could be obtained through the exercise or
conversion of all other rights, options and convertible securities outstanding
or vested on the day immediately preceding the given date.
(ii) For the purpose of making any adjustment required under this
Section 4(i), the consideration received by the Company for any issue or sale of
securities shall (A) to the extent it consists of cash, be computed at the net
amount of cash received by the Company after deduction of any underwriting or
similar commissions, compensation or concessions paid or allowed by the Company
in connection with such issue or sale but without deduction of any expenses
payable by the Company, (B) to the extent it consists of property other than
cash, be computed at the fair value of that property as determined in good faith
by the Board of Directors and (C) if Additional Shares of Common Stock,
Convertible Securities (as defined in subsection (i)(iii)) or rights or options
to purchase either Additional Shares of Common Stock or Convertible Securities
are issued or sold together with other stock or securities or other assets of
the Company for a consideration which covers both, be computed as the portion of
the consideration so received that may be reasonably determined in good faith by
the Board of Directors to be allocable to such Additional Shares of Common
Stock, Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under this Section
4(i), if the Company issues or sells (i) stock or other securities convertible
into, Additional Shares of Common Stock (such convertible stock or securities
being herein referred to as "Convertible Securities") or (ii) rights or options
for the purchase of Additional Shares of Common Stock or Convertible Securities
and if the Effective Price of such Additional Shares of Common Stock is less
than the Conversion Price for a series of Series Preferred, in each case the
Company shall be deemed to have issued at the time of the issuance of such
rights or options or Convertible Securities the maximum number of Additional
Shares of Common Stock issuable upon exercise or conversion thereof and to have
received as consideration for the issuance of such shares an amount equal to the
total amount of the consideration, if any, received by the Company for the
issuance of such rights or options or Convertible Securities, plus, in the case
of such rights or options, the minimum amounts of consideration, if any, payable
to the Company upon the exercise of such rights or options, plus, in the case of
Convertible Securities, the minimum
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amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof, provided that if in the case of
Convertible Securities the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; provided
further that if the minimum amount of consideration payable to the Company upon
the exercise or conversion of such rights, options or Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated using
the increased minimum amount of consideration payable to the Company upon the
exercise or conversion of such rights, options or Convertible Securities. No
further adjustment of the Conversion Price for any series of Series Preferred,
as adjusted upon the issuance of such rights, options or Convertible Securities,
shall be made as a result of the actual issuance of Additional Shares of Common
Stock on the exercise of any such rights or options or the conversion of any
such Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire without
having been exercised, the Conversion Price for a series of Series Preferred, as
applicable, as adjusted upon the issuance of such rights, options or Convertible
Securities shall be readjusted to the Conversion Price for such series that
would have been in effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional Shares of Common
Stock, if any, actually issued or sold on the exercise of such rights or options
or rights of conversion of such Convertible Securities, and such Additional
Shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of all such rights or
options, whether or not exercised, plus the consideration received for issuing
or selling the Convertible Securities actually converted, plus the
consideration, if any, actually received by the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) on the conversion of such Convertible Securities, provided that such
readjustment shall not apply to prior conversions of Series Preferred.
(iv) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued by the Company or deemed to be issued pursuant to this
Section 4(i), whether or not subsequently reacquired or retired by the Company,
other than (A) shares of Common Stock issued upon conversion of the Series
Preferred; (B) shares of Common Stock and/or options, warrants or other Common
Stock purchase rights, and the Common Stock issued pursuant to such options,
warrants or other rights after the Original Issue Date to employees, officers or
directors of, or consultants or advisors to the Company or any subsidiary
pursuant to stock purchase or stock option plans or other arrangements that are
approved by the Board (including the representatives of the Series Preferred);
(C) shares of Common Stock issued pursuant to the exercise of options, warrants
or convertible securities outstanding as of the Original Issue Date, and (E)
shares of Common Stock issued pursuant to any equipment leasing or loan
arrangement, or debt financing from a bank or similar financial institution
which debt financing has been approved by the Board (including the
representatives of the Series Preferred). References to Common Stock in the
subsections of this clause (iv) above shall mean all shares of
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<PAGE>
Common Stock issued by the Company or deemed to be issued pursuant to this
Section 4(i). The "Effective Price" of Additional Shares of Common Stock shall
mean the quotient determined by dividing the total number of Additional Shares
of Common Stock issued or sold, or deemed to have been issued or sold by the
Company under this Section 4(i), into the aggregate consideration received, or
deemed to have been received by the Company for such issue under this Section
4(i), for such Additional Shares of Common Stock.
(j) Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price for a series of Series Preferred for the
number shares of Common Stock or other securities issuable upon conversion of
such series of Series Preferred, if such series of Series Preferred is then
convertible pursuant to this Section 4, the Company, at its expense, shall
compute such adjustment or readjustment in accordance with the provisions hereof
and prepare a certificate showing such adjustment or readjustment, and shall
mail such certificate, by first class mail, postage prepaid, to each registered
holder of such series of Series Preferred, as the case may be, at the holder's
address as shown in the Company's books. The certificate shall set forth such
adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (i) the
consideration received or deemed to be received by the Company for any
Additional Shares of Common Stock issued or sold or deemed to have been issued
or sold, (ii) the Conversion Price for such series of Series Preferred, as
applicable, at the time in effect, (iii) the number of Additional Shares of
Common Stock and (iv) the type and amount, if any, of other property which at
the time would be received upon conversion of such series of Series Preferred,
as applicable.
(k) Notice of Record Date. Upon (i) any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or (ii) any Acquisition (as defined in Section 3(d)) or other
capital reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company, any merger or consolidation of the Company
with or into any other corporation, or any Asset Transfer (as defined in
Section 3(d)), or any voluntary or involuntary dissolution, liquidation or
winding up of the Company, the Company shall mail to each holder of Series
Preferred at least ten (10) days prior to the record date specified therein (or
such shorter period approved by a majority of the outstanding Series Preferred)
a notice specifying (A) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend or
distribution, (B) the date on which any such Acquisition, reorganization,
reclassification, transfer, consolidation, merger, Asset Transfer, dissolution,
liquidation or winding up is expected to become effective and (C) the date, if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
Acquisition, reorganization, reclassification, transfer, consolidation, merger,
Asset Transfer, dissolution, liquidation or winding up.
(l) Automatic Conversion.
(i) Each share of Series A Preferred, Series B-1 Preferred and
Series C Preferred shall automatically be converted into shares of Common Stock,
based on the then effective Conversion Price for such series of Series
Preferred, as applicable, (A) at any time upon
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the affirmative election of the holders of at least a majority of the
outstanding shares of the Series A Preferred, Series B Preferred or Series C
Preferred, as applicable, or (B) immediately upon the closing of a firmly
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock for the account of the Company for a price per share of not less
than $10.00 (as adjusted for stock splits, combinations and the like) in which
the gross cash proceeds to the Company (before underwriting discounts,
commissions and fees) are at least twenty million dollars ($20,000,000) (a
"Qualified IPO"). Upon such automatic conversion, any declared and unpaid
dividends shall be paid in accordance with the provisions of Section 4(d).
(ii) Upon the occurrence of either of the events specified in Section
4(1)(i) above, the outstanding shares of Series Preferred shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Company or its transfer agent; provided, however, that the Company shall not be
-------- -------
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such conversion unless the certificates evidencing such shares of Series
Preferred are either delivered to the Company or its transfer agent as provided
below, or the holder notifies the Company or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates. Upon the occurrence of such automatic
conversion of the Series Preferred, the holders of Series Preferred shall
surrender the certificates representing such shares at the office of the Company
or any transfer agent for the Series Preferred. Thereupon, there shall be
issued and delivered to such holder promptly at such office and in its name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares of
Series Preferred surrendered were convertible on the date on which such
automatic conversion occurred, and any declared and unpaid dividends shall be
paid in accordance with the provisions of Section 4(d).
(m) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series Preferred. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series Preferred by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of any fractional share, the Company shall in lieu
of issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the Common Stock's fair market value (as determined by the Board
of Directors) on the date of conversion.
(n) Reservation of Stock Issuable. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series Preferred, such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all outstanding shares of the
Series Preferred. If at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of Series Preferred, the Company will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
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(o) Notices. Any notice required by the provisions of this Section 4
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day, (iii) five (5) days after having been sent by registered
or certified mail, return receipt requested, postage prepaid, or (iv) one (1)
day after deposit with a nationally recognized overnight courier, specifying
next day delivery, with written verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing on
the books of the Company.
(p) Payment of Taxes. The Company will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series Preferred, excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series Preferred
so converted were registered.
5. NO REISSUANCE OF SERIES PREFERRED.
No share or shares of Series Preferred acquired by the Corporation by
reason of redemption, purchase, conversion or otherwise shall be reissued.
V.
A. The liability of directors for monetary damages shall be eliminated to
the fullest extent under applicable law.
B. The Corporation shall indemnify to the fullest extent permitted by
law, any person made or threatened to be made a party, to any action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact the he or she, or his or her testator or intestate, is or was a
director or officer of the Corporation or any predecessor of the Corporation, or
serves or served at any other enterprise as a director or officer at the request
of the Corporation or any predecessor to the Corporation.
C. The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the CGCL) for breach of duty to the Corporation and
its shareholders through bylaw provisions or through agreements with the agents,
or through shareholder resolutions, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject, at any
time or times that the Corporation is subject to Section 2115(b) of the CGCL, to
the limits on such excess indemnification set forth in Section 204 of the CGCL.
D. The holders of the Series Preferred expressly waive their rights, if
any, as described in California Code Sections 502, 503 and 506 as they relate to
repurchase of shares upon termination of employment or service as a consultant
or director.
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E. Neither any amendment nor repeal of this Article, nor the adoption
of any provision of this Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article in respect of any
matter occurring, or any cause of action, suit or claim accruing or arising or
that, but for this Article, would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
VI.
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. Subject to the
limitations set forth herein, the number of directors which shall constitute the
whole Board of Directors shall be fixed by the Board of Directors in the manner
provided by the Bylaws.
B. Subject to the indemnification provisions in the Bylaws, the Board
of Directors may from time to time make, amend, supplement or repeal the Bylaws,
provided, however, that the stockholders may change or repeal any Bylaw adopted
by the Board of Directors by the affirmative vote of the percentage of holders
of capital stock as provided therein; and, provided further, that no amendment
or supplement to the Bylaws adopted by the Board of Directors shall vary or
conflict with any amendment or supplement thus adopted by the stockholders.
VII.
Subject to the provisions of this Certificate, the Corporation
reserves the right to amend, alter, change or repeal any provision contained in
this Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
VIII.
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The conduct of the affairs of the Corporation shall be managed
under the direction of the Board of Directors.
2. Each director shall hold office until such director's successor is
elected and qualified, or until such director's earlier death, resignation or
removal. No decrease in the authorized number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
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3. Subject to the rights of the holders of any series of Preferred
Stock and the Common Stock as provided in Section 2(c) of Article Four, any
vacancy occurring in the Board of Directors for any cause, and any newly created
directorship resulting from any increase in the authorized number of directors,
shall, unless (i) the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the stockholders, or
(ii) as otherwise provided by law, be filled only by the affirmative vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director, and not by the stockholders. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred.
4. Subject to the rights of the holders of any series of Preferred
Stock and Common Stock set forth in Section 2(c) of Article Four, any director
or the entire Board of Directors may be removed by the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the shares then entitled to vote
at an election of directors.
5. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of a Qualified IPO, the directors shall be divided, with respect to the
time for which they severally hold office, into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors, with the number of directors in each class to be divided as
equally as reasonably possible. The term of office of the Class I directors
shall expire at the Corporation's first annual meeting of stockholders following
the closing of the Qualified IPO, the term of office of the Class II directors
shall expire at the Corporation's second annual meeting of stockholders
following the closing of the Qualified IPO, and the term of office of the Class
III directors shall expire at the Corporation's third annual meeting of
stockholders following the closing of the Qualified IPO. At each annual meeting
of stockholders commencing with the first annual meeting of stockholders
following the closing of the Qualified IPO, directors elected to succeed those
directors of the class whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election. Prior to the closing of the Qualified IPO, or in the event the
Corporation is prohibited from dividing its board of directors through the
operation of Section 2115 of the CGCL following the record date of the
Corporation's first annual meeting of stockholders following the closing of the
Qualified IPO, each director shall hold office until the next annual meeting of
stockholders and until such director's successor is elected and qualified, or
until such director's earlier death, resignation or removal.
6. Election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
7. Following the closing of the Qualified IPO, no action shall be
taken by the stockholders of the Corporation except at an annual or special
meeting of stockholders called in accordance with the Bylaws of the Corporation,
and no action shall be taken by the stockholders by written consent.
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8. Advance notice of stockholder nominations for the election of
directors of the Corporation and of business to be brought by stockholders
before any meeting of stockholders of the Corporation shall be given in the
manner provided in the Bylaws of the Corporation. Business transacted at
special meetings of stockholders shall be confined to the purpose or purposes
stated in the notice of meeting.
9. Following the closing of the Qualified IPO, stockholders of the
Corporation holding at least sixty-six and two-thirds percent (66-2/3%) of the
Corporation's outstanding voting stock then entitled to vote at an election of
directors shall have the power to adopt, amend or repeal Bylaws of the
Corporation.
10. Following the closing of the Qualified IPO, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
Corporation's outstanding voting stock then entitled to vote at an election of
directors, voting together as a single class, shall be required to alter,
change, amend, repeal or adopt any provision inconsistent with this Article
Nine.
IX.
To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Corporation shall indemnify to the fullest extent permitted by law, any
person made or threatened to be made a party, to any action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
the he or she, or his or her testator or intestate, is or was a director or
officer of the Corporation or any predecessor of the Corporation, or serves or
served at any other enterprise as a director or officer at the request of the
Corporation or any predecessor to the Corporation. Neither any amendment nor
repeal of this Article, nor the adoption of any provision of this Restated
Certificate inconsistent with this Article, shall eliminate or reduce the effect
of this Article in respect of any matter occurring, or any cause of action, suit
or claim accruing or arising or that, but for this Article, would accrue or
arise, prior to such amendment, repeal or adoption of an inconsistent provision.
* * * *
FOUR: This Restated Certificate has been duly approved by the Board
of Directors of this Corporation.
FIVE: This Restated Certificate has been duly adopted in accordance
with the provisions of Sections 228, 242 and 245 of the General Corporation Law
of the State of Delaware by the Board of Directors and the stockholders of the
Corporation. A majority of the outstanding shares of Common Stock, Series A
Preferred and Series B-1 Preferred, voting as separate classes, approved this
Restated Certificate by written consent in accordance with Section 228 of the
General Corporation Law of the State of Delaware and written notice of such was
given by the Corporation in accordance with said Section 228.
18
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Executed at San Francisco, California this 17th day of December 1999.
/s/ James Tolonen
___________________________________
James Tolonen
Chief Operating Officer
/s/ Janette Chock
___________________________________
Janette Chock
Assistant Secretary
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EXHIBIT 3.03
BYLAWS
OF
AFFILIATION, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the corporation in
the State of Delaware shall be in the City of Wilmington, County of New Castle.
Section 2. Other Offices. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware, as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
Section 3. Corporate Seal. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
Section 4. Place of Meetings. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal office of the corporation required
to be maintained pursuant to Section 2 hereof.
Section 5. Annual Meeting.
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly
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brought before the meeting by or at the direction of the Board of Directors, or
(C) otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
later than the close of business on the sixtieth (60th) day nor earlier than the
close of business on the ninetieth (90th) day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy statement, notice by the
stockholder to be timely must be so received not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to such
annual meeting or, in the event public announcement of the date of such annual
meeting is first made by the corporation fewer than seventy (70) days prior to
the date of such annual meeting, the close of business on the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made by the corporation. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the corporation which are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business and (v) any other
information that is required to be provided by the stockholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholders' meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the annual meeting
shall, if the facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(c) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.
Section 6. Special Meetings.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, [or] (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (iv) by the holders of shares entitled to cast not
less than ten percent (10%) of the
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votes at the meeting, and shall be held at such place, on such date, and at such
time as the Board of Directors shall fix. At any time or times that the
corporation is subject to Section 2115(b) of the California General Corporation
Law ("CGCL"), stockholders holding five percent (5%) or more of the outstanding
shares shall have the right to call a special meeting of stockholders as set
forth in Section 18(c) herein.
(b) If a special meeting is properly called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) no more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person or
persons properly requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this paragraph (b) shall be
construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
Section 7. Notice of Meetings. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
Section 8. Quorum. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast in all matters other
than the election of directors, the affirmative vote of a majority of shares
present in person or represented by
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proxy at the meeting and entitled to vote on the subject matter shall be the act
of the stockholders. Except as otherwise provided by statute, the Certificate of
Incorporation or these Bylaws, directors shall be elected by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. Where a separate vote by a class
or classes or series is required, except where otherwise provided by the statute
or by the Certificate of Incorporation or these Bylaws, a majority of the
outstanding shares of such class or classes or series, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and, except where otherwise provided by
statute or by the Certificate of Incorporation or these Bylaws, the affirmative
vote of the majority (plurality, in the case of the election of directors) of
the votes cast by the holders of shares of such class or classes or series shall
be the act of such class or classes or series.
Section 9. Adjournment and Notice of Adjourned Meetings. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 10. Voting Rights. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
Section 11. Joint Owners of Stock. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
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Section 12. List of Stockholders. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
Section 13. Action Without Meeting.
(a) Unless otherwise provided in the Certificate of Incorporation,
any action required by statute to be taken at any annual or special meeting of
the stockholders, or any action which may be taken at any annual or special
meeting of the stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written consent has been given in accordance with
Section 228 of the Delaware General Corporation Law.
Section 14. Organization.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, shall act as secretary of the meeting.
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(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
Section 15. Number and Term of Office.
The authorized number of directors of the corporation shall be fixed by the
Board of Directors from time to time.
Directors need not be stockholders unless so required by the Certificate of
Incorporation. If for any cause, the directors shall not have been elected at an
annual meeting, they may be elected as soon thereafter as convenient at a
special meeting of the stockholders called for that purpose in the manner
provided in these Bylaws.
Section 16. Powers. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
Section 17. Term of Directors.
(a) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
directors shall be elected at each annual meeting of stockholders for a term of
one year. Each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director.
(b) No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation is subject to Section 2115(b) of the CGCL. During such
time or times that the corporation is subject to Section 2115(b) of the CGCL,
every stockholder entitled to vote at an election for directors may cumulate
such stockholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
such stockholder's shares
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are otherwise entitled, or distribute the stockholder's votes on the same
principle among as many candidates as such stockholder thinks fit. No
stockholder, however, shall be entitled to so cumulate such stockholder's votes
unless (a) the names of such candidate or candidates have been placed in
nomination prior to the voting and (b) the stockholder has given notice at the
meeting, prior to the voting, of such stockholder's intention to cumulate such
stockholder's votes. If any stockholder has given proper notice to cumulate
votes, all stockholders may cumulate their votes for any candidates who have
been properly placed in nomination. Under cumulative voting, the candidates
receiving the highest number of votes, up to the number of directors to be
elected, are elected.
Section 18. Vacancies.
(a) Unless otherwise provided in the Certificate of Incorporation,
any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes and any newly created directorships
resulting from any increase in the number of directors shall, unless the Board
of Directors determines by resolution that any such vacancies or newly created
directorships shall be filled by stockholders, be filled only by the affirmative
vote of a majority of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
director for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified. A vacancy in the Board of
Directors shall be deemed to exist under this Bylaw in the case of the death,
removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
Delaware General Corporation Law.
(c) At any time or times that the corporation is subject to
(S)2115(b) of the CGCL, if, after the filling of any vacancy, the directors then
in office who have been elected by stockholders shall constitute less than a
majority of the directors then in office, then
(i) any holder or holders of an aggregate of five percent
(5%) or more of the total number of shares at the time outstanding having the
right to vote for those directors may call a special meeting of stockholders; or
(ii) the Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of the stockholders, to be held to elect the entire board, all in
accordance with Section 305(c) of the CGCL, the term of office of any director
shall terminate upon that election of a successor.
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Section 19. Resignation. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
Section 20. Removal.
(a) Subject to any limitations imposed by applicable law [(and
assuming the corporation is not subject to Section 2115 of the CGCL)], the Board
of Directors or any director may be removed from office at any time (i) with
cause by the affirmative vote of the holders of a majority of the voting power
of all then-outstanding shares of voting stock of the corporation entitled to
vote at an election of directors or (ii) without cause by the affirmative vote
of the holders of sixty-six and two-thirds percent (66-2/3%) of the voting power
of all then-outstanding shares of voting stock of the corporation, entitled to
vote at an election of directors.
(b) During such time or times that the corporation is subject to
Section 2115(b) of the CGCL, the Board of Directors or any individual director
may be removed from office at any time without cause by the affirmative vote of
the holders of at least a majority of the outstanding shares entitled to vote on
such removal; provided, however, that unless the entire Board is removed, no
individual director may be removed when the votes cast against such director's
removal, or not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively at an election which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire number of directors
authorized at the time of such director's most recent election were then being
elected.
Section 21. Meetings.
(a) Annual Meetings. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary, and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
(b) Regular Meetings. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of Directors may be
held at any time or date and at any place within or without the State of
Delaware which has been designated by the Board of Directors and publicized
among all directors. No formal notice shall be required for a regular meeting of
the Board of Directors.
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(c) Special Meetings. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.
(d) Telephone Meetings. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) Notice of Meetings. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, facsimile, telegraph or telex, or
by electronic mail or other electronic means, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, postage prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) Waiver of Notice. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.
Section 22. Quorum and Voting.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time, a quorum of the Board of Directors shall
consist of a majority of the exact number of directors fixed from time to time
by the Board of Directors in accordance with the Certificate of Incorporation;
provided, however, at any meeting, whether a quorum be present or otherwise, a
majority of the directors present may adjourn from time to time until the time
fixed for the next regular meeting of the Board of Directors, without notice
other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
Section 23. Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the
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Board of Directors or of any committee thereof may be taken without a meeting,
if all members of the Board of Directors or committee, as the case may be,
consent thereto in writing, and such writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee.
Section 24. Fees and Compensation. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
Section 25. Committees.
(a) Executive Committee. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law to be submitted to stockholders for approval,
or (ii) adopting, amending or repealing any bylaw of the corporation.
(b) Other Committees. The Board of Directors may, from time to
time, appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall any such committee have the powers denied to
the Executive Committee in these Bylaws.
(c) Term. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to any requirements of any
outstanding series of Preferred Stock, the provisions of subsections (a) or (b)
of this Bylaw may at any time increase or decrease the number of members of a
committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member
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of the Board of Directors to act at the meeting in the place of any such absent
or disqualified member.
(d) Meetings. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
Section 26. Organization. At every meeting of the directors, the Chairman
of the Board of Directors, or, if a Chairman has not been appointed or is
absent, the President, or if the President is absent, the most senior Vice
President, (if a director) or, in the absence of any such person, a chairman of
the meeting chosen by a majority of the directors present, shall preside over
the meeting. The Secretary, or in his absence, any Assistant Secretary directed
to do so by the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
Section 27. Officers Designated. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the officers
of the corporation shall be fixed by or in the manner designated by the Board of
Directors.
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Section 28. Tenure and Duties of Officers.
(a) General. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duty elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) Duties of Chairman of the Board of Directors. The Chairman
of the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) Duties of President. The President shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is present.
Unless some other officer has been elected Chief Executive Officer of the
corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.
(d) Duties of Vice Presidents. The Vice Presidents may assume
and perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) Duties of Secretary. The Secretary shall attend all meetings
of the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) Duties of Chief Financial Officer. The Chief Financial
Officer shall keep or cause to be kept the books of account of the corporation
in a thorough and proper manner and shall render statements of the financial
affairs of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the
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order of the Board of Directors, shall have the custody of all funds and
securities of the corporation. The Chief Financial Officer shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Treasurer or any
Assistant Treasurer, or the Controller or any Assistant Controller to assume and
perform the duties of the Chief Financial Officer in the absence or disability
of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and
each Controller and Assistant Controller shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.
Section 29. Delegation of Authority. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
Section 30. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
Section 31. Removal. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
Section 32. Execution of Corporate Instruments. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation
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by any contract or engagement or to pledge its credit or to render it liable for
any purpose or for any amount.
Section 33. Voting of Securities Owned by the Corporation. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
Section 34. Form and Execution of Certificates. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
Section 35. Lost Certificates. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such
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form and amount as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen, or destroyed.
Section 36. Transfers.
(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
Section 37. Fixing Record Dates.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall, subject to applicable law, not be more than sixty (60) nor less than ten
(10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten (10) days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. Any stockholder of record seeking to have the stockholders authorize
or take corporate action by written consent shall, by written notice to the
Secretary, request the Board of Directors to fix a record date. The Board of
Directors shall promptly, but in all events within ten (10) days after the date
on which such a request is received, adopt a resolution fixing the record date.
If no record date has been fixed by the Board of Directors within ten (10) days
of the date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by
applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation by delivery to its registered office in the State of Delaware, its
principal place of business or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of
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Directors and prior action by the Board of Directors is required by law, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
Section 38. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OFFICER SECURITIES OF THE CORPORATION
Section 39. Execution of Other Securities. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
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ARTICLE IX
DIVIDENDS
Section 40. Declaration of Dividends. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation
and applicable law, if any, may be declared by the Board of Directors pursuant
to law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation and applicable law.
Section 41. Dividend Reserve. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
Section 42. Fiscal Year. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
Section 43. Indemnification of Directors, Executive Officers, Other
Officers, Employees and Other Agents.
(a) Directors and Executive Officers. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law or any other applicable law; provided, however, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the Board of Directors of the
corporation, (iii) such indemnification is provided by the corporation, in its
sole discretion, pursuant to the powers vested in the corporation under the
Delaware General Corporation Law or any other applicable law or (iv) such
indemnification is required to be made under subsection (d).
(b) Other Officers, Employees and Other Agents. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware
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General Corporation Law or any other applicable law. The Board of Directors
shall have the power to delegate the determination of whether indemnification
shall be given to any such person except executive officers to such officers or
other persons as the Board of Directors shall determine.
(c) Expenses. The corporation shall advance to any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(e) of this Bylaw, no advance shall be made by the corporation to an executive
officer of the corporation (except by reason of the fact that such executive
officer is or was a director of the corporation, in which event this paragraph
shall not apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (ii) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
(d) Enforcement. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law or any other applicable law for the corporation
to indemnify the claimant for the amount claimed. In connection with any claim
by an executive officer of the corporation (except in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such executive officer is or was a director of the corporation)
for advances, the corporation shall be entitled to raise a defense as to any
such action clear and convincing evidence that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation, or with respect to any criminal action or
proceeding that
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such person acted without reasonable cause to believe that his conduct was
lawful. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law or any
other applicable law, nor an actual determination by the corporation (including
its Board of Directors, independent legal counsel or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that claimant has not met the applicable
standard of conduct.
(e) Non-Exclusivity of Rights. The rights conferred on any person by
this Bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any applicable statute, provision of the Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law or any
other applicable law.
(f) Survival of Rights. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(g) Insurance. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation or any other applicable law, upon
approval by the Board of Directors, may purchase insurance on behalf of any
person required or permitted to be indemnified pursuant to this Bylaw.
(h) Amendments. Any repeal or modification of this Bylaw shall only
be prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) Saving Clause. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law. If this Section
43 shall be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each director and
executive officer to the full extent under applicable law.
(j) Certain Definitions. For the purposes of this Bylaw, the
following definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement,
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arbitration and appeal of, and the giving of testimony in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Bylaw with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(4) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation as,
respectively, a director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
(5) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
Section 44. Notices.
(a) Notice to Stockholders. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.
(b) Notice to Directors. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by overnight
delivery service, facsimile, telex
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or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.
(c) Affidavit of Mailing. An affidavit of mailing, executed by a duly
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) Time Notices Deemed Given. All notices given by mail or by
overnight delivery service, as above provided, shall be deemed to have been
given as at the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending time recorded at
time of transmission.
(e) Methods of Notice. It shall not be necessary that the same method
of giving notice be employed in respect of all directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(f) Failure to Receive Notice. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) Notice to Person with Whom Communication Is Unlawful. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
(h) Notice to Person with Undeliverable Address. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person
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shall not be required. Any action or meeting which shall be taken or held
without notice to such person shall have the same force and effect as if such
notice had been duly given. If any such person shall deliver to the corporation
a written notice setting forth his then current address, the requirement that
notice be given to such person shall be reinstated. In the event that the action
taken by the corporation is such as to require the filing of a certificate under
any provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
Section 45. Amendments. Subject to paragraph (h) of Section 43 of the
Bylaws, these Bylaws may be amended or repealed and new Bylaws adopted by the
stockholders entitled to vote. The Board of Directors shall also have the power,
if such power is conferred upon the Board of Directors by the Certificate of
Incorporation, to adopt, amend, or repeal Bylaws (including, without limitation,
the amendment of any Bylaw setting forth the number of Directors who shall
constitute the whole Board of Directors).
Section 46. Right of First Refusal. No stockholder shall sell, assign,
pledge, or in any manner transfer any of the shares of stock of the corporation
or any right or interest therein, whether voluntarily or by operation of law, or
by gift or otherwise, except by a transfer which meets the requirements
hereinafter set forth in this bylaw:
(a) If the stockholder desires to sell or otherwise transfer any of
his shares of stock, then the stockholder shall first give written notice
thereof to the corporation. The notice shall name the proposed transferee and
state the number of shares to be transferred, the proposed consideration, and
all other terms and conditions of the proposed transfer.
(b) For thirty (30) days following receipt of such notice, the
corporation shall have the option to purchase all (but not less than all) of the
shares specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the stockholder, the
corporation shall have the option to purchase a lesser portion of the shares
specified in said notice at the price and upon the terms set forth therein. In
the event of a gift, property settlement or other transfer in which the proposed
transferee is not paying the full price for the shares, and that is not
otherwise exempted from the provisions of this Section 46, the price shall be
deemed to be the fair market value of the stock at such time as determined in
good faith by the Board of Directors. In the event the corporation elects to
purchase all of the shares or, with consent of the stockholder, a lesser portion
of the shares, it shall give written notice to the transferring stockholder of
its election and settlement for said shares shall be made as provided below in
paragraph (d).
(c) The corporation may assign its rights hereunder.
(d) In the event the corporation and/or its assignee(s) elect to
acquire any of the shares of the transferring stockholder as specified in said
transferring stockholder's notice, the Secretary of the corporation shall so
notify the transferring stockholder and settlement thereof shall be made in cash
within thirty (30) days after the Secretary of the corporation
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receives said transferring stockholder's notice; provided that if the terms of
payment set forth in said transferring stockholder's notice were other than cash
against delivery, the corporation and/or its assignee(s) shall pay for said
shares on the same terms and conditions set forth in said transferring
stockholder's notice.
(e) In the event the corporation and/or its assignees(s) do not elect
to acquire all of the shares specified in the transferring stockholder's notice,
said transferring stockholder may, within the sixty-day period following the
expiration of the option rights granted to the corporation and/or its
assignees(s) herein, transfer the shares specified in said transferring
stockholder's notice which were not acquired by the corporation and/or its
assignees(s) as specified in said transferring stockholder's notice. All shares
so sold by said transferring stockholder shall continue to be subject to the
provisions of this bylaw in the same manner as before said transfer.
(f) Anything to the contrary contained herein notwithstanding, the
following transactions shall be exempt from the provisions of this bylaw:
(1) A stockholder's transfer of any or all shares held either
during such stockholder's lifetime or on death by will or intestacy to such
stockholder's immediate family or to any custodian or trustee for the account of
such stockholder or such stockholder's immediate family or to any limited
partnership of which the shareholder, members of such shareholder's immediate
family or any trust for the account of such shareholder or such shareholder's
immediate family will be the general of limited partner(s) of such partnership.
"Immediate family" as used herein shall mean spouse, lineal descendant, father,
mother, brother, or sister of the stockholder making such transfer.
(2) A stockholder's bona fide pledge or mortgage of any shares
with a commercial lending institution, provided that any subsequent transfer of
said shares by said institution shall be conducted in the manner set forth in
this bylaw.
(3) A stockholder's transfer of any or all of such stockholder's
shares to the corporation or to any other stockholder of the corporation.
(4) A stockholder's transfer of any or all of such stockholder's
shares to a person who, at the time of such transfer, is an officer or director
of the corporation.
(5) A corporate stockholder's transfer of any or all of its
shares pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of shares or capital reorganization of the
corporate stockholder, or pursuant to a sale of all or substantially all of the
stock or assets of a corporate stockholder.
(6) A corporate stockholder's transfer of any or all of its
shares to any or all of its stockholders.
(7) A transfer by a stockholder which is a limited or general
partnership to any or all of its partners or former partners.
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In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this bylaw, and there
shall be no further transfer of such stock except in accord with this bylaw.
(g) The provisions of this bylaw may be waived with respect to any
transfer either by the corporation, upon duly authorized action of its Board of
Directors, or by the stockholders, upon the express written consent of the
owners of a majority of the voting power of the corporation (excluding the votes
represented by those shares to be transferred by the transferring stockholder).
This bylaw may be amended or repealed either by a duly authorized action of the
Board of Directors or by the stockholders, upon the express written consent of
the owners of a majority of the voting power of the corporation.
(h) Any sale or transfer, or purported sale or transfer, of
securities of the corporation shall be null and void unless the terms,
conditions, and provisions of this bylaw are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate on either of
the following dates, whichever shall first occur:
(1) On January 28, 2009;
(2) Upon the date securities of the corporation are first
offered to the public pursuant to a registration statement filed with, and
declared effective by, the United States Securities and Exchange Commission
under the Securities Act of 1933, as amended.
(j) The certificates representing shares of stock of the corporation
shall bear on their face the following legend so long as the foregoing right of
first refusal remains in effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION
AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE
CORPORATION."
ARTICLE XIV
LOANS TO OFFICERS
Section 47. Loans to Officers. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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ARTICLE XV
MISCELLANEOUS
Section 48. Annual Report.
Subject to the provisions of paragraph (b) of this Bylaw, the Board of
Directors shall cause an annual report to be sent to each stockholder of the
corporation not later than one hundred twenty (120) days after the close of the
corporation's fiscal year. Such report shall include a balance sheet as of the
end of such fiscal year and an income statement and statement of changes in
financial position for such fiscal year, accompanied by any report thereon of
independent accounts or, if there is no such report, the certificate of an
authorized officer of the corporation that such statements were prepared without
audit from the books and records of the corporation. When there are more than
100 stockholders of record of the corporation's shares, as determined by Section
605 of the CGCL, additional information as required by Section 1501(b) of the
CGCL shall also be contained in such report, provided that if the corporation
has a class of securities registered under Section 12 of the 1934 Act, that Act
shall take precedence. Such report shall be sent to stockholders at least
fifteen (15) days prior to the next annual meeting of stockholders after the end
of the fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of record of
the corporation's shares, the requirement of sending of an annual report to the
stockholders of the corporation is hereby expressly waived.
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EXHIBIT 4.02
SNOWBALL.COM, INC.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
This Amended and Restated Investor Rights Agreement (the "Agreement") is
entered into as of the 20th day of December, 1999, by and among Snowball.com,
Inc., a Delaware corporation (the "Company"), the holders of the Company's
Series A Preferred Stock (the "Series A Stock") and/or the holders of the
Company's Series B-1 Preferred Stock ("Series B-1 Stock") set forth on Exhibit A
hereto and the purchasers of the Company's Series C Preferred Stock ("Series C
Stock") pursuant to the terms of that certain Series C Preferred Stock Purchase
Agreement of even date herewith (the "Purchase Agreement") and listed on Exhibit
A hereto. The holders of Series A Stock and Series B Stock and the purchasers of
the Series C Stock shall be referred to hereinafter as the "Investors" and each
individually as an "Investor."
RECITALS
WHEREAS, certain of the Investors hold shares of Series A Stock and Series
B-1 Stock and possess registration rights, information rights and other rights
pursuant to that certain Investors Rights Agreement dated as of May 11, 1999
between the Company and such Investors, as amended on October 15, 1999 and
November 11, 1999 (the "Prior Agreement");
WHEREAS, the Company and the undersigned Investors who hold Series A Stock
and Series B-1 Stock purchased pursuant to that certain Series B-1 Preferred
Stock Purchase Agreement dated as of May 11, 1999 ("Prior Purchase Agreement")
desire to amend and restate the Prior Agreement in its entirety and to accept
the rights created pursuant hereto in lieu of the rights granted to them under
the Prior Agreement; and
WHEREAS, certain of the Investors are parties to the Purchase Agreement,
and certain of the Company's and such Investors' obligations under the Purchase
Agreement are conditioned upon the execution and delivery by such Investors,
constituting the holders of at least a majority of the Series A Stock, a
majority of the Series B-1 Stock and two thirds of the "Registrable Securities"
as defined in the Prior Agreement, and the Company of this Agreement.
Now, Therefore, in consideration of the mutual promises and covenants set
forth herein, the Investors who are parties to the Prior Agreement hereby agree
that the Prior Agreement shall be superseded and replaced in its entirety by
this Agreement, and the parties hereto further agree as follows:
SECTION 1. AMENDMENT AND RESTATEMENT
1.1 Amendment and Restatement. Effective upon the closing of the sale and
issuance of the Series C Stock pursuant to the Purchase Agreement (i) all
provisions of, rights granted and covenants made in the Prior Agreement and any
other agreement between the Company and the Investors, are hereby waived
released and terminated in their entirety and shall have no further force or
effect whatsoever and (ii) the rights and covenants contained in this
<PAGE>
Agreement shall set forth the sole and entire agreement between the Company and
the Investors on the subject matter hereof and supersede any and all rights
granted or covenants made under any prior agreement.
SECTION 2. GENERAL
2.1 Definitions. As used in this Agreement the following terms shall have
the following respective meanings:
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Form S-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"Holder" means any person owning of record Registrable Securities that
have not been sold to the public or any assignee of record of such Registrable
Securities in accordance with Section3. 10 hereof.
"Initial Offering" means the Company's first firm commitment
underwritten public offering of its Common Stock registered under the Securities
Act.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"Registrable Securities" means (a) Common Stock of the Company issued
or issuable upon conversion of the Shares; and (b) any Common Stock of the
Company issued as (or issuable upon the conversion or exercise of any warrant,
right or other security which is issued as) a dividend or other distribution
with respect to, or in exchange for or in replacement of, such above-described
securities. Notwithstanding the foregoing, Registrable Securities shall not
include any securities sold by a person to the public either pursuant to a
registration statement or Rule 144 or sold in a private transaction in which the
transferor's rights under Section 3 of this Agreement are not assigned.
"Registrable Securities then outstanding" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with Sections 3.2, 3.3 and 3.4 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, reasonable fees and disbursements not
to exceed twenty-five thousand dollars ($25,000) of a single special counsel for
the Holders, blue sky fees and expenses and the expense of any special
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audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company which shall be paid in any
event by the Company).
"SEC" or "Commission" means the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale.
"Shares" shall mean the Company's Series A Stock issued pursuant to
the Prior Purchase Agreement and held by the Investors listed on Exhibit A
hereto and their permitted assigns, the Company's Series B-1 Stock issued
pursuant to the Prior Purchase Agreement and held by the Investors listed on
Exhibit A hereto and their permitted assigns, and the Company's Series C Stock
issued pursuant to the Purchase Agreement and held by the Investors listed on
Exhibit A hereto and their permitted assigns.
SECTION 3. REGISTRATION; RESTRICTIONS ON TRANSFER
3.1 Restrictions on Transfer.
(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares or Registrable Securities unless and until:
(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(ii) (A) The transferee has agreed in writing to be bound by the
terms of this Agreement, (B) such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (C) if
reasonably requested by the Company, such Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the
Securities Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
(iii) Notwithstanding the provisions of paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by a Holder which is (A) a partnership to its partners or former
partners in accordance with partnership interests, (B) a corporation to its
shareholders in accordance with their interest in the corporation, (C) a limited
liability company to its members or former members in accordance with their
interest in the limited liability company, or (D) to the Holder's family member
or trust for the benefit of an individual Holder; provided that in each case the
transferee will be subject to the terms of this Agreement to the same extent as
if such transferee were an original Holder hereunder.
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(b) Each certificate representing Shares or Registrable Securities
shall (unless otherwise permitted by the provisions of the Agreement) be stamped
or otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.
(c) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any Holder thereof if the Holder shall have
obtained an opinion of counsel (which counsel may be counsel to the Company)
reasonably acceptable to the Company to the effect that the securities proposed
to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
3.2 Demand Registration.
(a) Subject to the conditions of this Section 3.2, if the Company
shall receive a written request from the Holders of at least 30% of the
Registrable Securities then outstanding (the "Initiating Holders") that the
Company file a registration statement under the Securities Act covering the
registration of at least a majority of the Registrable Securities then
outstanding (or a lesser percent if the anticipated aggregate offering price,
net of underwriting discounts and commissions, would exceed ten million dollars
($ 10,000,000) (a "Qualified Public Offering")), then the Company shall, within
thirty (30) days of the receipt thereof, give written notice of such request to
all Holders, and subject to the limitations of this Section 3.2, use its best
efforts to effect, as soon as practicable, the registration under the Securities
Act of all Registrable Securities that the Holders request to be registered.
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 3.2
or any request pursuant to Section 3.4 and the Company shall include such
information in the written notice referred to in Section 3.2(a) or Section
3.4(a), as applicable. In such event, the right of any Holder to include its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the
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extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders (which
underwriter or underwriters shall be reasonably acceptable to the Company).
Notwithstanding any other provision of this Section 3.2 or Section 3.4, if the
underwriter advises the Company that marketing factors require a limitation of
the number of securities to be underwritten (including Registrable Securities)
then the Company shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares that
may be included in the underwriting shall be allocated to the Holders of such
Registrable Securities on a pro rata basis based on the number of Registrable
Securities held by all such Holders (including the Initiating Holders). Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from the registration.
(c) The Company shall not be required to effect a registration
pursuant to this Section 3.2:
(i) prior to the earlier of (A) May 11, 2002 or (B) one hundred
eighty (180) days following the effective date of the registration statement
pertaining to the Initial Offering;
(ii) after the Company has effected two (2) registrations
pursuant to this Section 3.2, and such registrations have been declared or
ordered effective;
(iii) during the period starting with the date of filing of, and
ending on the date one hundred eighty (180) days following the effective date of
the registration statement pertaining to the Initial Offering; provided that the
Company makes reasonable good faith efforts to cause such registration statement
to become effective;
(iv) if within thirty (30) days of receipt of a written request
from Initiating Holders pursuant to Section 3.2(a), the Company gives notice to
the Holders of the Company's intention to make its Initial Offering within
ninety (90) days; provided that the Company is actively employing in good faith
all reasonable efforts to cause such registration to become effective;
(v) if the Company shall furnish to Holders requesting a
registration statement pursuant to this Section 3.2, a certificate signed by the
Chairman of the Board stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its shareholders for such registration statement to be effected at such time, in
which event the Company shall have the right to defer such filing for a period
of not more than ninety (90) days after receipt of the request of the Initiating
Holders; provided that such right to delay a request shall be exercised by the
Company not more than once in any twelve (12) month period; or
(vi) if the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3 pursuant
to a request made pursuant to Section 3.4 below.
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3.3 Piggyback Registrations. The Company shall notify all Holders of
Registrable Securities in writing at least fifteen (15) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within fifteen (15) days after receipt of the above-described notice from
the Company, so notify the Company in writing. Such notice shall state the
intended method of disposition of the Registrable Securities by such Holder. If
a Holder decides not to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(a) Underwriting. If the registration statement under which the
Company gives notice under this Section 3.3 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 3.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to the Company; second, to the Holders on a pro rata
basis based on the total number of Registrable Securities held by the Holders;
and third, to any shareholder of the Company (other than a Holder) on a pro rata
basis. No such reduction shall (i) reduce the securities being offered by the
Company for its own account to be included in the registration and underwriting,
or (ii) reduce the amount of securities of the selling Holders included in the
registration below thirty percent (30%) of the total amount of securities
included in such registration, unless such offering is the Initial Offering and
such registration does not include shares of any other selling shareholders, in
which event any or all of the Registrable Securities of the Holders may be
excluded in accordance with the immediately preceding sentence. In no event will
shares of any other selling shareholder be included in such registration which
would reduce the number of shares which may be included by Holders without the
written consent of Holders of not less than sixty-six and two-thirds percent (66
2/3%) of the Registrable Securities proposed to be sold in the offering. If any
Holder disapproves of the terms of any such underwriting, such Holder may elect
to withdraw therefrom by written notice to the Company and the underwriter,
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any Registrable Securities excluded or withdrawn from
such underwriting shall be excluded and withdrawn from the registration. For any
Holder which is a partnership or corporation, the partners, retired partners and
shareholders of such Holder, or the
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estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing person shall be deemed to be a
single "Holder", and any pro rata reduction with respect to such "Holder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such "Holder," as defined in this
sentence.
(b) Right to Terminate Registration. The Company shall have the right
to terminate or withdraw any registration initiated by it under this Section 3.3
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration. The Registration Expenses of
such withdrawn registration shall be borne by the Company in accordance with
Section 3.5 hereof.
3.4 Form S-3 Registration. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 (or any successor to Form S-3) or
any similar short-form registration statement and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders of Registrable
Securities; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 3.4:
(i) if Form S-3 (or any successor or similar form) is not
available for such offering by the Holders, or
(ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public of less than ten million dollars ($10,000,000), or
(iii) if within thirty (30) days of receipt of a written request
from Initiating Holders pursuant to Section 3.2(a), the Company gives notice to
the Holders of the Company's intention to make a public offering within ninety
(90) days;
(iv) if the Company shall furnish to the Holders a certificate
signed by the Chairman of the Board of Directors of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such Form S-3
registration to be effected at such time, in which event the
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Company shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than ninety (90) days after receipt of the
request of the Holder or Holders under this Section 3.4; provided, that such
right to delay a request shall be exercised by the Company not more than once in
any twelve (12) month period, or
(v) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected two (2) registrations on
Form S-3 for the Holders pursuant to this Section 3.4, or
(vi) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 3.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 3.2 or 3.3, respectively. All such Registration
Expenses incurred in connection with registrations requested pursuant to this
Section 3.4 after the first two (2) registrations shall be paid by the selling
Holders pro rata in proportion to the number of shares sold by each.
3.5 Expenses of Registration. Except as specifically provided herein, all
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 3.2 or any registration under
Section 3.3 or Section 3.4 herein shall be borne by the Company. All Selling
Expenses incurred in connection with any registrations hereunder, shall be borne
by the Holders of the securities so registered pro rata on the basis of the
number of shares so registered. The Company shall not, however, be required to
pay for expenses of any registration proceeding begun pursuant to Section 3.2 or
3.4, the request of which has been subsequently withdrawn by the Initiating
Holders unless (a) the withdrawal is based upon material adverse information
concerning the Company of which the Initiating Holders were not aware at the
time of such request or (b) the Holders of a majority of Registrable Securities
agree to forfeit their right to one requested registration pursuant to Section
3.2 or Section 3.4, as applicable, in which event such right shall be forfeited
by all Holders). If the Holders are required to pay the Registration Expenses,
such expenses shall be borne by the holders of securities (including Registrable
Securities) requesting such registration in proportion to the number of shares
for which registration was requested. If the Company is required to pay the
Registration Expenses of a withdrawn offering pursuant to clause (a) above, then
the Holders shall not forfeit their rights pursuant to Section 3.2 or Section
3.4 to a demand registration.
3.6 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities
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registered thereunder, keep such registration statement effective for up to
ninety (90) days or, if less, until the Holder or Holders have completed the
distribution related thereto. The Company shall not be required to file, cause
to become effective or maintain the effectiveness of any registration statement
that contemplates a distribution of securities on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement for the period set forth in paragraph (a) above.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and register for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Use its best efforts to furnish, at the request of any Holder
requesting registration of Registrable Securities pursuant to this Section 3, on
the date that such Registrable
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Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters on the date that the registration statement with respect to
such securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated as of such date,
from the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
3.7 Termination of Registration Rights. All registration rights granted
under this Section 2 shall terminate and be of no further force and effect five
(5) years after the date of the Company's Initial Offering. In addition, a
Holder's registration rights shall expire if all Registrable Securities held by
and issuable to such Holder (and its affiliates, partners, former partners,
members and former members) may be sold under Rule 144 during any ninety (90)
day period.
3.8 Delay of Registration; Furnishing Information.
(a) No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 3.
(b) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 3.2, 3.3 or 3.4 that the selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them and the intended method of disposition of
such securities as shall be required to effect the registration of their
Registrable Securities.
3.9 Indemnification. In the event any Registrable Securities are included
in a registration statement under Sections 3.2, 3.3 or 3.4:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners, officers and directors of each Holder,
any underwriter (as defined in the Securities Act) for such Holder and each
person, if any, who controls such Holder 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 they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(collectively a "Violation") by the Company: (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the
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Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law in
connection with the offering covered by such registration statement; and the
Company will pay as incurred to each such Holder, partner, officer, director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided however, that the indemnity
agreement contained in this Section 3.9(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration qualifications or compliance is being effected, indemnify and hold
harmless the Company, each of its directors, its officers and each person, if
any, who controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such Holder, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or other such Holder, or partner,
director, officer or controlling person of such other Holder may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereto) arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by such Holder under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will pay as incurred any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 3.9(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 3.9 exceed the net proceeds from the offering
received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
3.9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 3.9, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and
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expenses to be paid by the indemnifying party, 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 such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
3.9, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 3.9.
(d) If the indemnification provided for in this Section 3.9 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that in no event shall any contribution by a
Holder hereunder exceed the net proceeds from the offering received by such
Holder.
(e) The obligations of the Company and Holders under this Section 3.9
shall survive completion of any offering of Registrable Securities in a
registration statement and the termination of this agreement. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation.
3.10 Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant to this Section 3 may be assigned by a
Holder to a transferee or assignee of Registrable Securities which (a) is a
subsidiary, parent company, general partner, limited partner, retired partner,
member or retired member of a Holder, (b) is a Holder's family member, estate or
trust for the benefit of an individual Holder, or (c) acquires at least one
hundred fifty thousand (150,000) shares of Registrable Securities (as adjusted
for stock splits and combinations); provided, however, (i) the transferor shall,
within ten (10) days after such transfer, furnish to the Company written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned and (ii) such
transferee shall agree to be subject to all restrictions set forth in this
Agreement.
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3.11 Amendment of Registration Rights. Any provision of this Section 3 may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least sixty-six and two
thirds percent (66 2/3%) of the Registrable Securities then outstanding. Any
amendment or waiver effected in accordance with this Section 3.11 shall be
binding upon each Holder and the Company. By acceptance of any benefits under
this Section 3, Holders of Registrable Securities hereby agree to be bound by
the provisions hereunder.
3.12 Limitation on Subsequent Registration Rights. After the date of this
Agreement, the Company shall not, without the prior written consent of the
Holders of a majority of the Series A Stock, the Holders of a majority of the
Series B-1 Stock and the Holders of a majority of the Series C Stock then
outstanding, enter into any agreement with any holder or prospective holder of
any securities of the Company that would grant such holder registration rights
pari passu or senior to those granted to the Holders hereunder.
3.13 "Market Stand-Off" Agreement; Agreement to Furnish Information. Each
Holder hereby agrees that such Holder shall not sell, transfer, make any short
sale of, grant any option for the purchase of, or enter into any hedging or
similar transaction with the same economic effect as a sale, any Common Stock
(or other securities) of the Company held by such Holder (other than any Common
Stock included in the registration) for a period specified by the representative
of the underwriters of Common Stock (or other securities) of the Company not to
exceed one hundred eighty (180) days following the effective date of a
registration statement of the Company filed under the Securities Act; provided
that:
(i) such agreement shall apply only to the Company's Initial
Offering;
(ii) all officers and directors of the Company enter into similar
agreements; and
(iii) such agreement shall not apply to any Common Stock acquired in
the Company's Initial Offering or on the open market.
Each Holder agrees to execute and deliver such other agreements as may be
reasonably requested by the Company or the underwriter which are consistent with
the foregoing or which are necessary to give further effect thereto. In
addition, if requested by the Company or the representative of the underwriters
of Common Stock (or other securities) of the Company, each Holder shall provide,
within ten (10) days of such request, such information as may be required by the
Company or such representative in connection with the completion of any public
offering of the Company's securities pursuant to a registration statement filed
under the Securities Act. The obligations described in this Section 3.13 shall
not apply to a registration relating solely to employee benefit plans on Form S-
1 or Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
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The obligations described in this Section 3.13 shall not be amended with
respect to any investment company whose investment advisor is registered under
the Investment Company Act of 1940, as amended, without the consent of such
investment company.
3.14 Rule 144 Reporting. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act; and
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request: a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 of the Securities
Act, and of the Exchange Act (at any time after it has become subject to such
reporting requirements); a copy of the most recent annual or quarterly report of
the Company; and such other reports and documents as a Holder may reasonably
request in availing itself of any rule or regulation of the SEC allowing it to
sell any such securities without registration.
SECTION 4. COVENANTS OF THE COMPANY
4.1 Basic Financial Information and Reporting.
(a) The Company will maintain true books and records of account in
which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.
(b) So long as an Investor (with its affiliates) shall own not less
than four hundred thousand (400,000) shares of Registrable Securities (as
adjusted for stock splits and combinations) (a "Major Investor"), as soon as
practicable after the end of each fiscal year of the Company, and in any event
within ninety (90) days thereafter, the Company will furnish each Major Investor
an audited balance sheet of the Company, as at the end of such fiscal year, and
an audited statement of income and an audited statement of cash flows of the
Company, for such year, all prepared in accordance with generally accepted
accounting principles consistently applied and setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail. Such financial statements shall be accompanied by a report and opinion
thereon by independent public accountants of national standing selected by the
Company's Board of Directors.
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(c) The Company will furnish each Major Investor (i) prior to the
beginning of each fiscal year an annual budget and operating plans for such
fiscal year (and as soon as available, any subsequent revisions thereto); and
(ii) as soon as practicable after the end of each month a balance sheet of the
Company as of the end of each such month, and a statement of income and a
statement of cash flows of the Company for such month and for the current fiscal
year to date, including a comparison to plan figures for such period, prepared
in accordance with generally accepted accounting principles consistently
applied, with the exception that no notes need be attached to such statements
and year-end audit adjustments may not have been made.
(d) For the purposes of this Section 4 and Section 5 hereof, the term
"Major Investor" shall be construed to include any investment company which,
together with other investment companies advised by the same investment adviser,
owns more than 400,000 shares.
4.2 Inspection Rights. Each Major Investor shall have the right to visit
and inspect any of the properties of the Company or any of its subsidiaries, and
to discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, and to review such information as is reasonably
requested all at such reasonable times and as often as may be reasonably
requested; provided, however, that the Company shall not be obligated under this
Section 4.2 with respect to a competitor of the Company or with respect to
information which the Board of Directors determines in good faith is
confidential and should not, therefore, be disclosed.
4.3 Confidentiality of Records. Each Investor agrees to use, and to use
its best efforts to insure that its authorized representatives use, the same
degree of care as such Investor uses to protect its own confidential information
to keep confidential any information furnished to it which the Company
identifies as being confidential or proprietary (so long as such information is
not in the public domain), except that such Investor may disclose such
proprietary or confidential information to any partner, subsidiary or parent of
such Investor for the purpose of evaluating its investment in the Company as
long as such partner, subsidiary or parent is advised of the confidentiality
provisions of this Section 4.3.
4.4 Reservation of Common Stock. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of the
preferred stock, such number of stocks or Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of the
preferred stock.
4.5 Stock Vesting. All Common Stock issuances, stock options and other
equivalents granted or issued after the date of this Agreement to employees,
directors, consultants and other service providers, shall be made from time to
time under contracts, plans or other arrangements as recommended by management
and approved by the Board of Directors and unless otherwise approved by the
Board of Directors, including each of the designees of the Investors (as defined
under that certain Voting Agreement by and among the Company and other parties
thereto dated May 11, 1999), shall be subject to vesting as follows: (i) twenty-
five percent (25%) of such stock shall vest at the end of the first year
following the earlier of the date of grant or the commencement date of such
person's service with the Company, and (ii) seventy-five percent (75%) of such
stock shall vest monthly over the following three (3) years.
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4.6 Assignment of Right of First Refusal. In the event the Company elects
not to execute any right of first refusal or right of first offer the Company
may have on a proposed transfer of any of the Company's outstanding capital
stock pursuant to the Company's charter documents, by contract or otherwise, the
Company shall, to the extent it may do so, assign such right of first refusal or
right of first offer to each Investor. In the event of such assignment, each
Investor shall have a right to purchase its pro rata portion (as defined in
Section 5.1) of the capital stock proposed to be transferred.
4.7 Termination of Covenants. All covenants of the Company contained in
Section 4 of this Agreement shall expire and terminate as to each Investor upon
the earlier of (i) the effective date of the registration statement pertaining
to the Initial Offering, which results in the Preferred Stock being converted
into Common Stock or (ii) upon (a) the sale, lease or other disposition of all
or substantially all of the assets of the Company or (b) an acquisition of the
Company by another corporation or entity by consolidation, merger or other
reorganization in which the holders of the Company's outstanding voting stock
immediately prior to such transaction own, immediately after such transaction,
securities representing less than fifty percent (50%) of the voting power of the
corporation or other entity surviving such transaction (a "Change in Control"),
provided that this Section 4.7(ii)(b) shall not apply to a merger effected
exclusively for the purpose of changing the domicile of the Company.
SECTION 5. RIGHTS OF FIRST REFUSAL
5.1 Subsequent Offerings. Each Major Investor shall have a right of first
refusal to purchase its pro rata share of all Equity Securities, as defined
below, that the Company may, from time to time, propose to sell and issue after
the date of this Agreement, other than the Equity Securities excluded by Section
5.6 hereof. Each Investor's pro rata share is equal to the ratio of (a) the
number of shares of the Company's Common Stock (including all shares of Common
Stock issued or issuable upon conversion of the Shares) which such Investor is
deemed to be a holder of immediately prior to the issuance of such Equity
Securities to (b) the total number of shares of the Company's Common Stock
(including all shares of Common Stock issued or issuable upon conversion of the
Shares or pursuant to options or stock purchase rights granted under the
Company's 1999 Equity Incentive Plan or upon the exercise of any other
outstanding warrants or options) immediately prior to the issuance of the Equity
Securities. The term "Equity Securities" shall mean (i) any Common Stock,
Preferred Stock or other security of the Company, (ii) any security convertible,
with or without consideration, into any Common Stock, Preferred Stock or other
security (including any option to purchase such a convertible security), (iii)
any security carrying any warrant or right to subscribe to or purchase any
Common Stock, Preferred Stock or other security or (iv) any such warrant or
right.
5.2 Exercise of Rights. If the Company proposes to issue any Equity
Securities, it shall give each Investor written notice of its intention,
describing the Equity Securities, the price and the terms and conditions upon
which the Company proposes to issue the same. Each Investor shall have fifteen
(15) days from the giving of such notice to agree to purchase its pro rata share
of the Equity Securities for the price and upon the terms and conditions
specified in the notice by giving written notice to the Company and stating
therein the quantity of Equity Securities to be purchased. Notwithstanding the
foregoing, the Company shall not be required to offer or sell
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such Equity Securities to any Investor who would cause the Company to be in
violation of applicable federal securities laws by virtue of such offer or sale.
5.3 Issuance of Equity Securities to Other Persons. If not all of the
Investors elect to purchase their pro rata share of the Equity Securities, then
the Company shall promptly notify in writing the Investors who do so elect and
shall offer such Investors the right to acquire such unsubscribed shares. The
Investors shall have five (5) days after receipt of such notice to notify the
Company of its election to purchase all or a portion thereof of the unsubscribed
shares. If the Investors fail to exercise in full the rights of first refusal,
the Company shall have ninety (90) days thereafter to sell the Equity Securities
in respect of which the Investor's rights were not exercised, at a price and
upon general terms and conditions materially no more favorable to the purchasers
thereof than specified in the Company's notice to the Investors pursuant to
Section 5.2 hereof. If the Company has not sold such Equity Securities within
ninety (90) days of the notice provided pursuant to Section 5.2, the Company
shall not thereafter issue or sell any Equity Securities, without first offering
such securities to the Investors in the manner provided above.
5.4 Termination and Waiver of Rights of First Refusal. The rights of first
refusal established by this Section 5 shall not apply to, and shall terminate
upon the earlier of (i) effective date of the registration statement pertaining
to the Company's Initial Offering, which results in the Preferred Stock being
converted to Common Stock, or (ii) a Change in Control. The rights of first
refusal established by this Section 5 may be amended, or any provision waived
with the written consent of the holders of a majority in interest of the
outstanding Series A Stock, the holders of a majority in interest of the
outstanding Series B-1 Stock, and the holders of a majority in interest of the
outstanding Series C Stock each acting as separate classes, or as permitted by
Section 6.6.
5.5 Transfer of Rights of First Refusal. The rights of first refusal of
each Major Investor under this Section 5 may be transferred to the same parties,
subject to the same restrictions as any transfer of registration rights pursuant
to Section 3.10.
5.6 Excluded Securities. The rights of first refusal established by this
Section 5 shall have no application to any of the following Equity Securities:
(a) shares of Common Stock (and/or options, warrants or other Common
Stock purchase rights issued pursuant to such options, warrants or other rights)
issued or to be issued to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors,
including the representatives designated by the holders of the Shares;
(b) stock issued pursuant to any rights or agreements outstanding as
of the date of this Agreement, options and warrants outstanding as of the date
of this Agreement; and stock issued pursuant to any such rights or agreements
granted after the date of this Agreement; provided that the rights of first
refusal established by this Section 5 applied with respect to the initial sale
or grant by the Company of such rights or agreements;
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(c) any Equity Securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination;
(d) shares of Common Stock issued in connection with any stock split,
stock dividend or recapitalization by the Company;
(e) shares of Common Stock issued upon conversion of the Shares;
(f) any Equity Securities issued pursuant to any equipment leasing or
loan arrangement, or debt financing from a bank or similar financial or lending
institution approved by the Board of Directors, including the representatives
designated by the holders of the Shares, including the representatives
designated by the holder of the Shares; and
(g) shares of the Company's Common Stock or Preferred Stock issued in
connection with strategic transactions involving the Company and other entities,
including (i) joint ventures, manufacturing, marketing or distribution
arrangements or (ii) technology transfer or development arrangements; provided
that such strategic transactions and the issuance of shares therein has been
approved by the Company's Board of Directors, including the representatives
designated by the holders of the Shares.
SECTION 6. MISCELLANEOUS
6.1 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
6.2 Survival. The representations, warranties, covenants, and agreements
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.
6.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
6.4 Entire Agreement. This Agreement, the Exhibits and Schedules hereto,
the Purchase Agreement and the other documents delivered pursuant thereto
constitute the full and entire understanding and agreement between the parties
with regard to the subject hereof and no
18
<PAGE>
party shall be liable or bound to any other in any manner by any
representations, warranties, covenants and agreements except as specifically set
forth herein and therein.
6.5 Severability. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
6.6 Amendment and Waiver.
(a) Except as otherwise expressly provided herein, this Agreement may
be amended or modified only upon the written consent of the Company and the
holders of at least (i) a majority of the outstanding Series A Stock; (ii) a
majority of the outstanding Series B-1 Stock; and (iii) a majority of the
outstanding Series C Stock.
(b) Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of the holders of (i) a majority of the outstanding
Series A Stock, (ii) a majority of the outstanding Series B-1 Stock; and (iii) a
majority of the outstanding Series C Stock.
6.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, consent, or approval of any kind or character on any
Holder's part of any breach, default or noncompliance under the Agreement or any
waiver on such Holder's part of any provisions or conditions of this Agreement
must be in writing and shall be effective only to the extent specifically set
forth in such writing. All remedies, either under this Agreement, by law, or
otherwise afforded to Holders, shall be cumulative and not alternative.
6.8 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day, (c) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one (1) day after deposit with
a nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the party
to be notified at the address as set forth on the signature pages hereof or
Exhibit A hereto or at such other address as such party may designate by ten
(10) days advance written notice to the other parties hereto.
6.9 Attorneys' Fees. In the event that any suit or action is instituted to
enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and
19
<PAGE>
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.
6.10 Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
6.11 Additional Investors. Notwithstanding anything to the contrary
contained herein, if the Company shall issue additional shares of its Preferred
Stock pursuant to the Purchase Agreement, any purchaser of such shares of
Preferred Stock may become a party to this Agreement by executing and delivering
an additional counterpart signature page to this Agreement and shall be deemed
an "Investor" hereunder.
6.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK]
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Investor Rights Agreement as of the date set forth in the first
paragraph hereof
SNOWBALL: PURCHASERS:
Snowball.com, Inc.
By: /s/ James Tolonen /s/ [Signatories designated by an asterisk (*) on
Exhibit A attached hereto]
--------------------- ------------------------------------
James Tolonen
COO/CFO
[Signature Page to Snowball.com, Inc. Amended and Restated Investors Rights
Agreement]
<PAGE>
EXHIBIT A
Schedule of Investors
---------------------
Investor Shares of Shares of Shares of
Series A Series B Series C
Chris Anderson * 8,571,429 - 700,000
150 North Hill Drive
Brisbane, CA
Anthony Brenner * - 23,697 3,400
c/o BancBoston Robertson Stephens & Co.
555 California Street, Suite 2350
San Francisco, CA 94104
C. Blair Partners, L.P. * - 4,000 15,300
Five Greenwich Office Park, 4/th/ Floor
Greenwich, CT 06831
C. Blair Partners II, L.P. * - 20,700 97,900
Five Greenwich Office Park, 4/th/ Floor
Greenwich, CT 06831
C. Blair Fund, Ltd. * - 6,896 36,800
Five Greenwich Office Park, 4/th/ Floor
Greenwich, CT 06831
Comdisco, Inc. * - 7,899 1,100
3000 Sand Hill Road
Building 1, Suite 155
Menlo Park, CA 94025
Discovery Ventures III, LLC * - 157,978 22,900
3000 Sand Hill Road
Building 1, Suite 210
Menlo Park, CA 94025
F&W Investment 2000, L.P. * - 7,899 1,100
Two Palo Alto Square
Palo Alto, CA 94306
<PAGE>
<TABLE>
<CAPTION>
Investor Shares of Shares of Shares of
Series A Series B Series C
<S> <C> <C> <C>
GC&H Investments* -- 7,899 1,100
Five Palo Alto Square
Palo Alto, CA 94306
Imagine Media, Inc.* 659,341 450,237 100,000
150 North Hill Drive
Brisbane, CA
Infotech Ventures Ltd.* -- 15,798 2,310
750 Battery Street, 7/th/ Floor
San Francisco, CA 94111
Mark Jung* 659,341 -- 50,000
250 Executive Park Boulevard, Suite 4000
San Francisco, CA 94134
Jung-Murdock Children's Trust* -- -- 10,000
c/o Mark Jung
250 Executive Park Boulevard, Suite 4000
San Francisco, CA 94134
Ken Keller* 100,000 -- 14,500
250 Executive Park Boulevard, Suite 4000
San Francisco, CA 94134
Richard LeFurgy* -- 23,697 3,400
750 Battery Street, 7/th/ Floor
San Francisco, CA 94111
New Line New Media, Inc.* -- 560,822 150,000
888 Seventh Avenue
New York, NY 10106
Gerardo Rosenkranz* -- 7,899 1,100
[address]
Jim Tolonen -- 100,000 --
250 Executive Park Blvd., Suite 4000
San Francisco, CA 94134
Walden EDB Partners, L.P. -- 15,798 --
750 Battery Street, 7/th/ Floor
San Francisco, CA 94111
Walden EDB Partners II, L.P.* -- -- 2,310
750 Battery Street, 7/th/ Floor
San Francisco, CA 94111
Walden Media & Information* -- 774,091 113,180
Technology Fund, L.P.
750 Battery Street, 7/th/ Floor
San Francisco, CA 94111
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investor Shares of Shares of Shares of
Series A Series B Series C
<S> <C> <C> <C>
Walden Japan Partners, L.P. -- 7,899 --
750 Battery Street, 7/th/ Floor
San Francisco, CA 94111
Weiss, Peck & Greer Venture Associates V, L.L.C.* -- 706,745 103,483
555 California Street, Suite 3130
San Francisco, CA 94104
Weiss, Peck & Greer Venture Associates V-A, -- 7,299 881
L.L.C.*
555 California Street, Suite 3130
San Francisco, CA 94104
Weiss, Peck & Greer Venture Associates V -- 154,834 21,436
Cayman, L.P.*
555 California Street, Suite 3130
San Francisco, CA 94104
Whitman Partners, L.P.* -- 608,215 88,100
525 University Avenue, Suite 701
Palo Alto, CA 94301
Worldview Strategic Partners II, L.P.* -- 32,322 4,681
435 Tasso Street, Suite 120
Palo Alto, CA 94301
Worldview Technology International II, L.P.* -- 233,094 33,754
435 Tasso Street, Suite 120
Palo Alto, CA 94301
Worldview Technology Partners II, L.P.* -- 761,440 110,265
435 Tasso Street, Suite 120
Palo Alto, CA 94301
Beta Bayview, LLC* -- -- 5,000
555 California Street, Suite 2350
San Francisco, CA 94104
Crosslink Crossover Fund III, L.P.* -- -- 145,000
c/o Crossover Fund III Management, L.L.C.
555 California Street, Suite 2350
San Francisco, CA 94104
Millard S. Drexler* -- -- 30,000
[Address]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investor Shares of Shares of Shares of
Series A Series B Series C
<S> <C> <C> <C>
Generation Capital Partners L.P.* -- -- 212,282
One Maritime Plaza, Suite 1425
San Francisco, CA 94111
Generation Parallel Management Partners L.P.* -- -- 78
One Maritime Plaza, Suite 1425
San Francisco, CA 94111
Christopher Lenzo* -- -- 100,000
c/o Capital Trust Management
One Sansome Street, Suite 2900
San Francisco, CA 94104
State Board of Administration of Florida -- -- 7,640
Eugene Lynch* -- -- 10,000
[Address]
Palantir Partners LP* -- -- 150,000
Citicorp Center
153 East 53/rd/ Street, 43/rd/ Floor
New York, NY 10022
Attention: Tom Sullivan
Palantir Partners LDC* -- -- 100,000
Citicorp Center
153 East 53/rd/ Street, 43/rd/ Floor
New York, NY 10022
Attention: Tom Sullivan
Ziff Asset Management L.P.* -- -- 125,000
Citicorp Center
153 East 53/rd/ Street, 43/rd/ Floor
New York, NY 10022
Attention: Tom Sullivan
The Doshay Family Trust of 1999* -- -- 25,000
Citicorp Center
153 East 53/rd/ Street, 43/rd/ Floor
New York, NY 10022
Attention: Tom Sullivan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investor Shares of Shares of Shares of
Series A Series B Series C
<S> <C> <C> <C>
Pivotal Partners LP* -- -- 187,000
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
Christopher H. Lord* -- -- 3,000
[address]
California Bank & Trust Agent for Ralph -- -- 10,000
Cechettini IRA #1*
[address]
Seligman Investment (Opportunities) Master -- -- 84,000
Fund - NTV Portfolio*
100 Park Avenue
New York, NY 10017
Seligman New Technologies, Fund, Inc.* -- -- 316,000
100 Park Avenue
New York, NY 10017
Guy Oseary* -- -- 30,000
[address]
Sand Hill Capital* -- -- 300,000
3000 Sand Hill Road
Building 2, Suite 110
Menlo Park, CA 94025
TOTAL: 3,529,000
</TABLE>
<PAGE>
EXHIBIT 10.01
SNOWBALL.COM, INC.
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of _____________, is made by and between
Snowball.com, Inc., a Delaware corporation (the "Company"), and
-------
________________, a director and/or officer of the Company (the "Indemnitee").
----------
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors or officers of corporations unless
they are protected by comprehensive liability insurance and/or indemnification,
due to increased exposure to litigation costs and risks resulting from their
service to such corporations, and due to the fact that the exposure frequently
bears no reasonable relationship to the compensation of such directors and
officers;
B. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
-----
talented and experienced individuals to serve as officers and directors of the
Company, and to encourage such individuals to take the business risks necessary
for the success of the Company, it is necessary for the Company to contractually
indemnify officers and directors, and to assume for itself maximum liability for
expenses and damages in connection with claims against such officers and
directors in connection with their service to the Company;
C. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify by
-----------
agreement its officers, directors, employees and agents, and persons who serve,
at the request of the Company, as directors, officers, employees or agents of
other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive; and
D. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director or officer of the Company free from undue
concern for claims for damages arising out of or related to such services to the
Company.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1
<PAGE>
1. Definitions.
-----------
1.1 Agent. For the purposes of this Agreement, "agent" of the
-----
Company means any person who is or was a director or officer of the Company or a
subsidiary of the Company; or is or was serving at the request of, for the
convenience of, or to represent the interest of the Company or a subsidiary of
the Company as a director or officer of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or an affiliate of the
Company; or was a director or officer of a foreign or domestic corporation which
was a predecessor corporation of the Company or a subsidiary of the Company, or
was a director or officer of another enterprise or affiliate of the Company at
the request of, for the convenience of, or to represent the interests of such
predecessor corporation. The term "enterprise" includes any employee benefit
plan of the Company, its subsidiaries, affiliates and predecessor corporations.
1.2 Expenses. For purposes of this Agreement, "expenses" includes
--------
all direct and indirect costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements and other out-
of-pocket costs) actually and reasonably incurred by the Indemnitee in
connection with the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification or advancement of expenses
under this Agreement, Section 145 or otherwise; provided, however, that expenses
shall not include any judgments, fines, ERISA excise taxes or penalties or
amounts paid in settlement of a proceeding.
1.3 Proceeding. For the purposes of this Agreement, "proceeding"
----------
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, investigative or any other type
whatsoever.
1.4 Subsidiary. For purposes of this Agreement, "subsidiary" means
----------
any corporation of which more than 50% of the outstanding voting securities is
owned directly or in- directly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
------------------
serve as an agent of the Company, at the will of the Company (or under separate
agreement, if such agreement exists), in the capacity the Indemnitee currently
serves as an agent of the Company, faithfully and to the best of his ability so
long as he is duly appointed or elected and qualified in accordance with the
applicable provisions of the charter documents of the Company or any subsidiary
of the Company; provided, however, that the Indemnitee may at any time and for
-------- -------
any reason resign from such position (subject to any contractual obligation that
the Indemnitee may have assumed apart from this Agreement) and that the Company
or any subsidiary shall have no obligation under this Agreement to continue the
Indemnitee in any such position.
3. Directors' and Officers' Insurance. The Company shall, to the extent
----------------------------------
that the Board determines it to be economically reasonable, maintain a policy of
directors' and officers' liability insurance ("D&O Insurance"), on such terms
-------------
and conditions as may be approved by the Board.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
-------------------------
shall indemnify the Indemnitee:
2
<PAGE>
4.1 Third Party Actions. If the Indemnitee is a person who was or is
-------------------
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties, and amounts paid in settlement) actually and reasonably incurred
by him in connection with the investigation, defense, settlement or appeal of
such proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful; and
4.2 Derivative Actions. If the Indemnitee is a person who was or is
------------------
a party or is threatened to be made a party to any proceeding by or in the right
of the Company to procure a judgment in its favor by reason of the fact that he
is or was an agent of the Company, or by reason of anything done or not done by
him in any such capacity, against any amounts paid in settlement of any such
proceeding and all expenses actually and reasonably incurred by him in
connection with the investigation, defense, settlement, or appeal of such
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company; except that no
indemnification under this subsection shall be made in respect of any claim,
issue or matter as to which such person shall have been finally adjudged to be
liable to the Company by a court of competent jurisdiction due to willful
misconduct of a culpable nature in the performance of his duty to the Company,
unless and only to the extent that the Court of Chancery or the court in which
such proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such amounts which the
Court of Chancery or such other court shall deem proper; and
4.3 Exception for Amounts Covered by Insurance. Notwithstanding the
------------------------------------------
foregoing, the Company shall not be obligated to indemnify the Indemnitee for
expenses or liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) to the extent such have been paid directly to Indemnitee by D&O
Insurance.
5. Partial Indemnification and Contribution.
----------------------------------------
5.1 Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding but not entitled, however, to indemnification for all of
the total amount thereof, the Company shall nevertheless indemnify the
Indemnitee for such total amount except as to the portion thereof to which the
Indemnitee is not entitled to the indemnification.
5.2 Contribution. If the Indemnitee is not entitled to the
------------
indemnification provided in Section 4 for any reason other than the statutory
limitations set forth in the Law, then
3
<PAGE>
in respect of any threatened, pending or completed proceeding in which the
Company is jointly liable with the Indemnitee (or would be if joined in such
proceeding), the Company shall contribute to the amount of expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by the Indemnitee in such proportion as
is appropriate to reflect (i) the relative benefits received by the Company on
the one hand and the Indemnitee on the other hand from the transaction from
which such proceeding arose and (ii) the relative fault of the Company on the
one hand and of the Indemnitee on the other hand in connection with the events
which resulted in such expenses, judgments, fines or settlement amounts, as well
as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the Indemnitee on the other hand shall be
determined by reference to, among other things, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent the
circumstances resulting in such expenses, judgments, fines or settlement
amounts. The Company agrees that it would not be just and equitable if
contribution pursuant to this Section 5 were determined by pro rata allocation
or any other method of allocation which does not take account of the foregoing
equitable considerations.
6. Mandatory Advancement of Expenses.
---------------------------------
6.1 Advancement. Subject to Section 9 below, the Company shall
-----------
advance all expenses incurred by the Indemnitee in connection with the
investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company or by reason of anything
done or not done by him in any such capacity. The Indemnitee hereby undertakes
to repay such amounts advanced only if, and to the extent that, it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
by the Company under the provisions of this Agreement, the Certificate of
Incorporation or Bylaws of the Company, the General Corporation Law of Delaware
or otherwise. The advances to be made hereunder shall be paid by the Company to
the Indemnitee within thirty (30) days following delivery of a written request
therefor by the Indemnitee to the Company.
6.2 Exception. Notwithstanding the foregoing provisions of this
---------
Section 6, the Company shall not be obligated to advance any expenses to the
Indemnitee to the extent such arise from a lawsuit filed directly by the Company
against the Indemnitee if an absolute majority of the members of the Board of
Directors reasonably determines in good faith, within thirty (30) days of the
Indemnitee's request to be advanced expenses, that the facts known to them at
the time such determination is made demonstrate clearly and convincingly that
the Indemnitee acted in bad faith. If such a determination is made, the
Indemnitee may have such decision reviewed by another forum, in the manner set
forth in Sections 8.3, 8.4 and 8.5 hereof, with all references therein to
"indemnification" being deemed to refer to "advancement of expenses", and the
burden of proof shall be on the Company to demonstrate clearly and convincingly
that, based on the facts known at the time, the Indemnitee acted in bad faith.
The Company may not avail itself of this Section 6.2 as to a given lawsuit if,
at any time after the occurrence of the activities or omissions that are the
primary focus of the lawsuit, the Company has undergone a change in control.
For this purpose a change in control shall mean a given shareholder or group of
affiliated shareholders increasing their beneficial ownership interest in the
Company by at least twenty (20) percentage points without advance Board
approval.
4
<PAGE>
7. Notice and Other Indemnification Procedures.
-------------------------------------------
7.1 Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
7.2 If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7.1 hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
7.3 In the event the Company shall be obligated to advance the
expenses for any proceeding against the Indemnitee, the Company, if appropriate,
shall be entitled to assume the defense of such proceeding, with counsel
approved by the Indemnitee, upon the delivery to the Indemnitee of written
notice of its election to do so. After delivery of such notice, approval of
such counsel by the Indemnitee and the retention of such counsel by the Company,
the Company will not be liable to the Indemnitee under this Agreement for any
fees of counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (a) the Indemnitee shall have the right to employ his
own counsel in any such proceeding at the Indemnitee's expense; (b) the
Indemnitee shall have the right to employ his own counsel in connection with any
such proceeding, at the expense of the Company, if such counsel serves in a
review, observer, advice and counseling capacity and does not otherwise
materially control or participate in the defense of such proceeding; and (c) if
(i) the employment of counsel by the Indemnitee has been previously authorized
by the Company, (ii) the Indemnitee shall have reasonably concluded that there
may be a conflict of interest between the Company and the Indemnitee in the
conduct of any such defense or (iii) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company.
8. Determination of Right to Indemnification.
-----------------------------------------
8.1 To the extent the Indemnitee has been successful on the merits or
otherwise in defense of any proceeding referred to in Section 4.1 or 4.2 of this
Agreement or in the defense of any claim, issue or matter described therein, the
Company shall indemnify the Indemnitee against expenses actually and reasonably
incurred by him in connection with the investigation, defense or appeal of such
proceeding, or such claim, issue or matter, as the case may be.
8.2 In the event that Section 8.1 is inapplicable, or does not apply
to the entire proceeding, the Company shall nonetheless indemnify the Indemnitee
unless the Company shall prove by clear and convincing evidence to a forum
listed in Section 8.3 below that the Indemnitee has not met the applicable
standard of conduct required to entitle the Indemnitee to such indemnification.
5
<PAGE>
8.3 The Indemnitee shall be entitled to select the forum in which the
validity of the Company's claim under Section 8.2 hereof that the Indemnitee is
not entitled to indemnification will be heard from among the following, except
that the Indemnitee can select a forum consisting of the stockholders of the
Company only with the approval of the Company:
(a) A quorum of the Board consisting of directors who are not
parties to the proceeding for which indemnification is being sought;
(b) The stockholders of the Company;
(c) Legal counsel selected by the Indemnitee, and reasonably
approved by the Board, which counsel shall make such determination in a written
opinion; or
(d) A panel of three arbitrators, one of whom is selected by the
Company, another of whom is selected by the Indemnitee, and the last of whom is
selected by the first two arbitrators so selected.
8.4 As soon as practicable, and in no event later than 30 days after
written notice of the Indemnitee's choice of forum pursuant to Section 8.3
above, the Company shall, at its own expense, submit to the selected forum in
such manner as the Indemnitee or the Indemnitee's counsel may reasonably
request, its claim that the Indemnitee is not entitled to indemnification; and
the Company shall act in the utmost good faith to assure the Indemnitee a
complete opportunity to defend against such claim.
8.5 If the forum listed in Section 8.3 hereof selected by the
Indemnitee determines that the Indemnitee is entitled to indemnification with
respect to a specific proceeding, such determination shall be final and binding
on the Company. If the forum listed in Section 8.3 hereof selected by the
Indemnitee determines that the Indemnitee is not entitled to indemnification
with respect to a specific proceeding, the Indemnitee shall have the right to
apply to the Court of Chancery of Delaware, the court in which that proceeding
is or was pending or any other court of competent jurisdiction, for the purpose
of determining whether the Indemnitee is entitled to indemnification and
enforcing the Indemnitee's right to indemnification pursuant to the Agreement.
8.6 Notwithstanding any other provision in this Agreement to the
contrary, the Company shall indemnify the Indemnitee against all expenses
incurred by the Indemnitee in connection with any hearing or proceeding under
this Section 8 involving the Indemnitee and against all expenses incurred by the
Indemnitee in connection with any other proceeding between the Company and the
Indemnitee involving the interpretation or enforcement of the rights of the
Indemnitee under this Agreement unless a court of competent jurisdiction finds
that each of the material claims and/or defenses of the Indemnitee in any such
proceeding was frivolous or not made in good faith.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
6
<PAGE>
9.1 Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, except with respect to
proceedings specifically authorized by the Board of Directors or brought to
establish or enforce a right to indemnification and/or advancement of expenses
under this Agreement, the charter documents of the Company or any subsidiary, or
any statute or law or otherwise, but such indemnification or advancement of
expenses may be provided by the Company in specific cases if the Board of
Directors finds it to be appropriate; or
9.2 Unauthorized Settlements. To indemnify the Indemnitee hereunder
------------------------
for any amounts paid in settlement of a proceeding unless the Company consents
in advance in writing to such settlement, which consent shall not be
unreasonably withheld; or
9.3 Securities Law Actions. To indemnify the Indemnitee on account
----------------------
of any suit in which judgment is rendered against the Indemnitee for an
accounting of profits made from the purchase or sale by the Indemnitee of
securities of the Company pursuant to the provisions of 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any
federal, state or local statutory law; or
9.4 Unlawful Indemnification. To indemnify the Indemnitee if a final
------------------------
decision by a court having jurisdiction in the matter shall determine that such
indemnification is not lawful. In this respect, the Company and the Indemnitee
have been advised that the Securities and Exchange Commission takes the position
that indemnification for liabilities arising under the federal securities law is
against public policy and is, therefore, unenforceable and that claims for
indemnification should be submitted to appropriate courts for adjudication.
10. Non-exclusivity. The provisions for indemnification and advancement
---------------
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in the Indemnitee's official capacity and to action in another
capacity while occupying his position as an agent of the Company, and the
Indemnitee's rights hereunder shall continue after the Indemnitee has ceased
acting as an agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of the Indemnitee.
11. General Provisions
------------------
11.1 Interpretation of Agreement. It is understood that the parties
---------------------------
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification and advancement of expenses to the Indemnitee to the fullest
extent now or hereafter permitted by law, except as expressly limited herein.
11.2 Severability. If any provision or provisions of this Agreement
------------
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(a) the validity, legality and enforceability of the remaining provisions of the
Agreement (including, without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
7
<PAGE>
not in any way be affected or impaired thereby, and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraphs of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 11.1 hereof.
11.3 Modification and Waiver. No supplement, modification or
-----------------------
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
11.4 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary or desirable to secure such rights and
to enable the Company effectively to bring suit to enforce such rights.
11.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, which shall together constitute one agreement.
11.6 Successors and Assigns. The terms of this Agreement shall bind,
----------------------
and shall inure to the benefit of, the successors and assigns of the parties
hereto.
11.7 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (a) if
delivered by hand and receipted for by the party addressee or (b) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
11.8 Governing Law. This Agreement shall be governed exclusively by
-------------
and construed according to the laws of the State of California, as applied to
contracts between California residents entered into and to be performed entirely
with California.
11.9 Consent to Jurisdiction. The Company and the Indemnitee each
-----------------------
hereby irrevocably consent to the jurisdiction of the courts of the State of
California for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement.
11.10 Attorneys' Fees. In the event Indemnitee is required to bring
---------------
any action to enforce rights under this Agreement (including, without
limitation, the expenses of any Proceeding described in Section 3), the
Indemnitee shall be entitled to all reasonable fees and expenses in bringing and
pursuing such action, unless a court of competent jurisdiction finds each of the
material claims of the Indemnitee in any such action was frivolous and not made
in good faith.
[Remainder of Page Intentionally Left Blank]
8
<PAGE>
The parties hereto have entered into this Indemnity Agreement effective as of
the date first written above.
SNOWBALL.COM, INC.
Address: 250 Executive Park Blvd., Suite 4000
--------------------------------------
San Francisco, CA 94134
--------------------------------------
By:___________________________________
Its:__________________________________
INDEMNITEE:
______________________________________
Address: ______________________________________
______________________________________
[Signature Page to Interwoven, Inc. Indemnity Agreement]
9
<PAGE>
EXHIBIT 10.02
SNOWBALL.COM, INC.
1999 Equity Incentive Plan
Adopted February 12, 1999
Approved By Shareholders February 12, 1999
Amended November 19, 1999
Termination Date: February 11, 2009
1. Purposes.
(a) Eligible Stock Award Recipients. The persons eligible to receive Stock
Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) Available Stock Awards. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) General Purpose. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. Definitions.
(a) "Affiliate" means any parent corporation or subsidiary corporation of
the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee appointed by the Board in accordance with
subsection 3(c).
(e) "Common Stock" means the common stock of the Company.
(f) "Company" means Snowball.com, Inc., a Delaware corporation.
(g) "Consultant" means any person, including an advisor, (i) engaged by the
Company or an Affiliate to render consulting or advisory services and who is
compensated for
1.
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such services or (ii) who is a member of the Board of Directors of an Affiliate.
However, the term "Consultant" shall not include either Directors of the Company
who are not compensated by the Company for their services as Directors or
Directors of the Company who are merely paid a director's fee by the Company for
their services as Directors.
(h) "Continuous Service" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director of the
Company will not constitute an interruption of Continuous Service. The Board or
the chief executive officer of the Company, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case
of any leave of absence approved by that party, including sick leave, military
leave or any other personal leave.
(i) "Covered Employee" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to shareholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(j) "Director" means a member of the Board of Directors of the Company.
(k) "Disability" means (i) before the Listing Date, the inability of a
person, in the opinion of a qualified physician acceptable to the Company, to
perform the major duties of that person's position with the Company or an
Affiliate of the Company because of the sickness or injury of the person and
(ii) after the Listing Date, the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "Employee" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(n) "Fair Market Value" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or
traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the
2.
<PAGE>
greatest volume of trading in the Common Stock) on the last market trading day
prior to the day of determination, as reported in The Wall Street Journal or
such other source as the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(iii) Prior to the Listing Date, the value of the Common Stock shall
be determined in a manner consistent with Section 260.140.50 of Title 10 of the
California Code of Regulations.
(o) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "Listing Date" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25102(o) of the California Corporate
Securities Law of 1968.
(q) "Non-Employee Director" means a Director of the Company who either (i)
is not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly) from the
Company or its parent or a subsidiary for services rendered as a consultant or
in any capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K promulgated
pursuant to the Securities Act ("Regulation S-K")), does not possess an interest
in any other transaction as to which disclosure would be required under Item
404(a) of Regulation S-K and is not engaged in a business relationship as to
which disclosure would be required under Item 404(b) of Regulation S-K; or (ii)
is otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(r) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(s) "Officer" means (i) before the Listing Date, any person designated by
the Company as an officer and (ii) on and after the Listing Date, a person who
is an officer of the Company within the meaning of Section 16 of the Exchange
Act and the rules and regulations promulgated thereunder.
(t) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option
granted pursuant to the Plan.
3.
<PAGE>
(u) "Option Agreement" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(v) "Optionholder" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(w) "Outside Director" means a Director of the Company who either (i) is
not a current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(x) "Participant" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.
(y) "Plan" means this Snowball.com, Inc. 1999 Equity Incentive Plan.
(z) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(aa) "Securities Act" means the Securities Act of 1933, as amended.
(bb) "Stock Award" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(cc) "Stock Award Agreement" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
(dd) "Ten Percent Shareholder" means a person who owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates.
3. Administration.
(a) Administration by Board. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) Powers of Board. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
4.
<PAGE>
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive stock pursuant to a Stock Award; and the number of shares with respect
to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) Delegation to Committee.
(i) General. The Board may delegate administration of the Plan to a
Committee or Committees of one or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
(ii) Committee Composition when Common Stock is Publicly Traded. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more Non-
Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (i) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (1) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (2) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (ii)
delegate to a committee of one or more members of the Board who are not Non-
Employee Directors the authority to grant Stock Awards to eligible persons who
are not then subject to Section 16 of the Exchange Act.
5.
<PAGE>
4. Shares Subject to the Plan.
(a) Share Reserve. Subject to the provisions of Section 11 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Stock Awards shall not exceed in the aggregate seven million eight hundred
fifteen thousand eight hundred twelve (7,815,812) shares of Common Stock.
(b) Reversion of Shares to the Share Reserve. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full (or vested in the case of Restricted Stock), the stock
not acquired under such Stock Award shall revert to and again become available
for issuance under the Plan. If any Common Stock acquired pursuant to the
exercise of an Option shall for any reason be repurchased by the Company under
an unvested share repurchase option provided under the Plan, the stock
repurchased by the Company under such repurchase option shall not revert to and
again become available for issuance under the Plan.
(c) Source of Shares. The stock subject to the Plan may be unissued shares
or reacquired shares, bought on the market or otherwise.
(d) Share Reserve Limitation. Prior to the Listing Date, at no time shall
the total number of shares issuable upon exercise of all outstanding Options and
the total number of shares provided for under any stock bonus or similar plan of
the Company exceed the applicable percentage as calculated in accordance with
the conditions and exclusions of Section 260.140.45 of Title 10 of the
California Code of Regulations, based on the shares of the Company which are
outstanding at the time the calculation is made.
5. Eligibility.
(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.
(b) Ten Percent Shareholders. No Ten Percent Shareholder shall be eligible
for the grant of an Incentive Stock Option unless the exercise price of such
Option is at least one hundred ten percent (110%) of the Fair Market Value of
the Common Stock at the date of grant and the Option is not exercisable after
the expiration of five (5) years from the date of grant.
Prior to the Listing Date, no Ten Percent Shareholder shall be
eligible for the grant of a Nonstatutory Stock Option unless the exercise price
of such Option is at least one hundred ten percent (110%) of the Fair Market
Value of the Common Stock at the date of grant.
Prior to the Listing Date, no Ten Percent Shareholder shall be
eligible for a restricted stock award unless the purchase price of the
restricted stock is at least one hundred percent (100%) of the Fair Market Value
of the Common Stock at the date of grant.
6.
<PAGE>
(c) Section 162(m) Limitation. Subject to the provisions of Section 11
relating to adjustments upon changes in stock, no employee shall be eligible to
be granted Options covering more than one million (1,000,000) shares of the
Common Stock during any calendar year. This subsection 5(c) shall not apply
prior to the Listing Date and, following the Listing Date, this subsection 5(c)
shall not apply until (i) the earliest of: (1) the first material modification
of the Plan (including any increase in the number of shares reserved for
issuance under the Plan in accordance with Section 4); (2) the issuance of all
of the shares of Common Stock reserved for issuance under the Plan; (3) the
expiration of the Plan; or (4) the first meeting of shareholders at which
Directors of the Company are to be elected that occurs after the close of the
third calendar year following the calendar year in which occurred the first
registration of an equity security under Section 12 of the Exchange Act; or (ii)
such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.
6. Option Provisions.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and a separate certificate or certificates will be issued for shares
purchased on exercise of each type of Option. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. Subject to the provisions of subsection 5(b) regarding Ten
Percent Shareholders, no Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) Exercise Price of an Incentive Stock Option. Subject to the provisions
of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of
each Incentive Stock Option shall be not less than one hundred percent (100%) of
the Fair Market Value of the stock subject to the Option on the date the Option
is granted. Notwithstanding the foregoing, an Incentive Stock Option may be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(c) Exercise Price of a Nonstatutory Stock Option. Subject to the
provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise
price of each Nonstatutory Stock Option granted prior to the Listing Date shall
be not less than eighty-five percent (85%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. The exercise price of
each Nonstatutory Stock Option granted on or after the Listing Date shall be not
less than eighty-five percent (85%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, a Nonstatutory Stock Option may be granted with an exercise price
lower than that set forth in the preceding sentence if such
7.
<PAGE>
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(d) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) by (1) delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock) with the Participant or (3) in any
other form of legal consideration that may be acceptable to the Board; provided,
however, that at any time that the Company is incorporated in Delaware, payment
of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) Transferability of an Incentive Stock Option. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing provisions of this
subsection 6(e), the Optionholder may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.
(f) Transferability of a Nonstatutory Stock Option. A Nonstatutory Stock
Option granted prior to the Listing Date shall not be transferable except by
will or by the laws of descent and distribution and shall be exercisable during
the lifetime of the Optionholder only by the Optionholder. A Nonstatutory Stock
Option granted on or after the Listing Date shall be transferable to the extent
provided in the Option Agreement. If the Nonstatutory Stock Option does not
provide for transferability, then the Nonstatutory Stock Option shall not be
transferable except by will or by the laws of descent and distribution and shall
be exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing provisions of this subsection 6(f), the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(g) Vesting Generally. The total number of shares of Common Stock subject
to an Option may, but need not, vest and therefore become exercisable in
periodic installments which may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may
8.
<PAGE>
vary. The provisions of this subsection 6(g) are subject to any Option
provisions governing the minimum number of shares as to which an Option may be
exercised.
(h) Minimum Vesting Prior to the Listing Date. Notwithstanding the
foregoing subsection 6(g), Options granted prior to the Listing Date shall
provide for vesting of the total number of shares at a rate of at least twenty
percent (20%) per year over five (5) years from the date the Option was granted,
subject to reasonable conditions such as continued employment. However, in the
case of such Options granted to Officers, Directors or Consultants, the Option
may become fully exercisable, subject to reasonable conditions such as continued
employment, at any time or during any period established by the Company; for
example, the vesting provision of the Option may provide for vesting of less
than twenty percent (20%) per year of the total number of shares subject to the
Option.
(i) Termination of Continuous Service. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date two (2)
months following the termination of the Optionholder's Continuous Service (or
such longer or shorter period specified in the Option Agreement, which, for
Options granted prior to the Listing Date, shall not be less than thirty (30)
days, unless such termination is for cause), or (ii) the expiration of the term
of the Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified in
the Option Agreement, the Option shall terminate.
(j) Extension of Termination Date. An Optionholder's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionholder's Continuous Service (other than upon the Optionholder's death or
Disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in subsection 6(a) or (ii) the expiration of a period of
two (2) months after the termination of the Optionholder's Continuous Service
during which the exercise of the Option would not be in violation of such
registration requirements.
(k) Disability of Optionholder. In the event an Optionholder's Continuous
Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement, which, for Options granted prior to the Listing Date, shall
not be less than six (6) months) or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.
9.
<PAGE>
(l) Death of Optionholder. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise the Option as of the date of death) by the
Optionholder's estate, by a person who acquired the right to exercise the Option
by bequest or inheritance or by a person designated to exercise the option upon
the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within
the period ending on the earlier of (1) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement, which, for Options granted prior to the Listing Date, shall not be
less than six (6) months) or (2) the expiration of the term of such Option as
set forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.
(m) Early Exercise. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares subject to the Option prior to the full vesting of the Option.
Subject to the "Repurchase Limitation" in subsection 10(h), any unvested shares
so purchased may be subject to an unvested share repurchase option in favor of
the Company or to any other restriction the Board determines to be appropriate.
(n) Right of Repurchase. Subject to the "Repurchase Limitation" in
subsection 10(h), the Option may, but need not, include a provision whereby the
Company may elect, prior to the Listing Date, to repurchase all or any part of
the vested shares acquired by the Optionholder pursuant to the exercise of the
Option.
(o) Right of First Refusal. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionholder of
the intent to transfer all or any part of the shares exercised pursuant to the
Option. Except as expressly provided in this subsection 6(o), such right of
first refusal shall otherwise comply with any applicable provisions of the
Bylaws of the Company.
(p) Re-Load Options. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares equal to the
number of shares surrendered as part or all of the exercise price of such
Option; (ii) have an expiration date which is the same as the expiration date of
the Option the exercise of which gave rise to such Re-Load Option; and (iii)
have an exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on
10.
<PAGE>
the date of exercise of the original Option. Notwithstanding the foregoing, a
Re-Load Option shall be subject to the same exercise price and term provisions
heretofore described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares under subsection 4(a) and
the "Section 162(m) Limitation" on the grants of Options under subsection 5(c)
and shall be subject to such other terms and conditions as the Board may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. Provisions of Stock Awards other than Options.
(a) Stock Bonus Awards. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:
(i) Consideration. A stock bonus shall be awarded in consideration
for past services actually rendered to the Company for its benefit.
(ii) Vesting. Subject to the "Repurchase Limitation" in subsection
10(h), shares of Common Stock awarded under the stock bonus agreement may, but
need not, be subject to a share repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board.
(iii) Termination of Participant's Continuous Service. Subject to
the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may reacquire any or all of the
shares of Common Stock held by the Participant which have not vested as of the
date of termination under the terms of the stock bonus agreement.
(iv) Transferability. For a stock bonus award made before the Listing
Date, rights to acquire shares under the stock bonus agreement shall not be
transferable except by will or by the laws of descent and distribution and shall
be exercisable during the lifetime of the Participant only by the Participant.
For a stock bonus award made on or after the Listing Date, rights to acquire
shares under the stock bonus agreement shall be transferable by the Participant
only upon such terms and conditions as are set forth in the stock bonus
agreement, as the Board
11.
<PAGE>
shall determine in its discretion, so long as stock awarded under the stock
bonus agreement remains subject to the terms of the stock bonus agreement.
(b) Restricted Stock Awards. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) Purchase Price. Subject to the provisions of subsection 5(b)
regarding Ten Percent Shareholders, the purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. For restricted stock
awards made prior to the Listing Date, the purchase price shall not be less than
eighty-five percent (85%) of the stock's Fair Market Value on the date such
award is made or at the time the purchase is consummated. For restricted stock
awards made on or after the Listing Date, the purchase price shall not be less
than eighty-five percent (85%) of the stock's Fair Market Value on the date such
award is made or at the time the purchase is consummated.
(ii) Consideration. The purchase price of stock acquired pursuant to
the restricted stock purchase agreement shall be paid either: (i) in cash at
the time of purchase; (ii) at the discretion of the Board, according to a
deferred payment or other arrangement with the Participant; or (iii) in any
other form of legal consideration that may be acceptable to the Board in its
discretion; provided, however, that at any time that the Company is incorporated
in Delaware, then payment of the Common Stock's "par value," as defined in the
Delaware General Corporation Law, shall not be made by deferred payment.
(iii) Vesting. Subject to the "Repurchase Limitation" in subsection
10(h), shares of Common Stock acquired under the restricted stock purchase
agreement may, but need not, be subject to a share repurchase option in favor of
the Company in accordance with a vesting schedule to be determined by the Board.
(iv) Termination of Participant's Continuous Service. Subject to the
"Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the restricted stock
purchase agreement.
(v) Transferability. For a restricted stock award made before the
Listing Date, rights to acquire shares under the restricted stock purchase
agreement shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. For a restricted stock award made
12.
<PAGE>
on or after the Listing Date, rights to acquire shares under the restricted
stock purchase agreement shall be transferable by the Participant only upon such
terms and conditions as are set forth in the restricted stock purchase
agreement, as the Board shall determine in its discretion, so long as stock
awarded under the restricted stock purchase agreement remains subject to the
terms of the restricted stock purchase agreement.
8. Covenants of the Company.
(a) Availability of Shares. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) Securities Law Compliance. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Stock Awards and to issue and sell shares of Common
Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any stock issued or issuable pursuant to any such
Stock Award. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for failure to issue and
sell stock upon exercise of such Stock Awards unless and until such authority is
obtained.
9. Use of Proceeds from Stock.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
10. Miscellaneous.
(a) Acceleration of Exercisability and Vesting. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) Shareholder Rights. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares subject
to such Stock Award unless and until such Participant has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.
(c) No Employment or other Service Rights. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant or other holder of Stock Awards any right to continue to serve
the Company or an Affiliate in the capacity in effect at the time the Stock
Award was granted or shall affect the right of the
13.
<PAGE>
Company or an Affiliate to terminate (i) the employment of an Employee with or
without notice and with or without cause, (ii) the service of a Consultant
pursuant to the terms of such Consultant's agreement with the Company or an
Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of
the state in which the Company or the Affiliate is incorporated, as the case may
be.
(d) Incentive Stock Option $100,000 Limitation. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) Investment Assurances. The Company may require a Participant, as a
condition of exercising or acquiring stock under any Stock Award, (i) to give
written assurances satisfactory to the Company as to the Participant's knowledge
and experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (ii) to give written assurances
satisfactory to the Company stating that the Participant is acquiring the stock
subject to the Stock Award for the Participant's own account and not with any
present intention of selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (iii) the issuance of the shares upon the exercise or acquisition
of stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act or (iv) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(f) Withholding Obligations. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means (in addition to the Company's
right to withhold from any compensation paid to the Participant by the Company)
or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares from the shares of the Common Stock
otherwise issuable to the participant as a result of the exercise or acquisition
of stock under the Stock Award; or (iii) delivering to the Company owned and
unencumbered shares of the Common Stock.
14.
<PAGE>
(g) Information Obligation. Prior to the Listing Date, to the extent
required by Section 260.140.46 of Title 10 of the California Code of
Regulations, the Company shall deliver financial statements to Participants at
least annually. This subsection 10(g) shall not apply to key Employees whose
duties in connection with the Company assure them access to equivalent
information.
(h) Repurchase Limitation. The terms of any repurchase option shall be
specified in the Stock Award and may be either at Fair Market Value at the time
of repurchase or at not less than the original purchase price. To the extent
required by Section 260.140.41 and Section 260.140.42 of Title 10 of the
California Code of Regulations, any repurchase option contained in a Stock Award
granted prior to the Listing Date to a person who is not an Officer, Director or
Consultant shall be upon the terms described below:
(i) Fair Market Value. If the repurchase option gives the Company the
right to repurchase the shares upon termination of employment at not less than
the Fair Market Value of the shares to be purchased on the date of termination
of Continuous Service, then (i) the right to repurchase shall be exercised for
cash or cancellation of purchase money indebtedness for the shares within ninety
(90) days of termination of Continuous Service (or in the case of shares issued
upon exercise of Stock Awards after such date of termination, within ninety (90)
days after the date of the exercise) or such longer period as may be agreed to
by the Company and the Participant (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code regarding "qualified small
business stock") and (ii) the right terminates when the shares become publicly
traded.
(ii) Original Purchase Price. If the repurchase option gives the
Company the right to repurchase the shares upon termination of Continuous
Service at the original purchase price, then (i) the right to repurchase at the
original purchase price shall lapse at the rate of at least twenty percent (20%)
of the shares per year over five (5) years from the date the Stock Award is
granted (without respect to the date the Stock Award was exercised or became
exercisable) and (ii) the right to repurchase shall be exercised for cash or
cancellation of purchase money indebtedness for the shares within ninety (90)
days of termination of Continuous Service (or in the case of shares issued upon
exercise of Options after such date of termination, within ninety (90) days
after the date of the exercise) or such longer period as may be agreed to by the
Company and the Participant (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code regarding "qualified small
business stock").
11. Adjustments upon Changes in Stock.
(a) Capitalization Adjustments. If any change is made in the stock subject
to the Plan, or subject to any Stock Award, without the receipt of consideration
by the Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and
15.
<PAGE>
maximum number of securities subject to the Plan pursuant to subsection 4(a) and
the maximum number of securities subject to award to any person pursuant to
subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted
in the class(es) and number of securities and price per share of stock subject
to such outstanding Stock Awards. The Board, the determination of which shall be
final, binding and conclusive, shall make such adjustments. (The conversion of
any convertible securities of the Company shall not be treated as a transaction
"without receipt of consideration" by the Company.)
(b) Change in Control--Dissolution or Liquidation. In the event of a
dissolution or liquidation of the Company, then such Stock Awards shall be
terminated if not exercised (if applicable) prior to such event.
(c) Change in Control--Asset Sale, Merger, Consolidation or Reverse Merger.
In the event of (i) a sale of substantially all of the assets of the Company,
(ii) a merger or consolidation in which the Company is not the surviving
corporation or (iii) a reverse merger in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, then any surviving corporation or
acquiring corporation shall assume any Stock Awards outstanding under the Plan
or shall substitute similar stock awards (including an award to acquire the same
consideration paid to the shareholders in the transaction described in this
subsection 11(c) for those outstanding under the Plan. In the event any
surviving corporation or acquiring corporation refuses to assume such Stock
Awards or to substitute similar stock awards for those outstanding under the
Plan, then with respect to Stock Awards held by Participants whose Continuous
Service has not terminated, the vesting of such Stock Awards (and, if
applicable, the time during which such Stock Awards may be exercised) shall be
accelerated in full, and the Stock Awards shall terminate if not exercised (if
applicable) at or prior to such event. With respect to any other Stock Awards
outstanding under the Plan, such Stock Awards shall terminate if not exercised
(if applicable) prior to such event.
12. Amendment of the Plan and Stock Awards.
(a) Amendment of Plan. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the shareholders of the Company to the extent shareholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(b) Shareholder Approval. The Board may, in its sole discretion, submit
any other amendment to the Plan for shareholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
16.
<PAGE>
(c) Contemplated Amendments. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) No Impairment of Rights. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
(e) Amendment of Stock Awards. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. Termination or Suspension of the Plan.
(a) Plan Term. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the shareholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect except with the written consent of the Participant.
14. Effective Date of Plan.
The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the shareholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.
[THIS SPACE INTENTIONALLY LEFT BLANK]
17.
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Snowball.com, Inc.
Stock Option Grant Notice
(1999 Equity Incentive Plan)
Snowball.com, Inc., a Delaware corporation (the "Company"), pursuant to its
1999 Equity Incentive Plan (the "Plan"), hereby grants to Optionholder an option
to purchase the number of shares of the Company's Common Stock set forth below.
This option is subject to all of the terms and conditions as set forth herein
and in the Stock Option Agreement, the Plan and the Notice of Exercise, all of
which are attached hereto and incorporated herein in their entirety.
Optionholder:
Date of Grant:
Number of Shares Subject to Option:
Exercise Price (Per Share):
Expiration Date:
Type of Grant: [_] Incentive Stock Option/1/ [_] Nonstatutory Stock Option
Exercise Schedule: [_] Same as Vesting Schedule [_] Early Exercise Permitted
Vesting Schedule:
Payment: By cash or check
Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date
of Grant, this Grant Notice, the Stock Option Agreement, the Plan and the
employment offer letter between Optionholder and the Company dated October 19,
1999 set forth the entire understanding between Optionholder and the Company
regarding the acquisition of stock in the Company and supersede all prior oral
and written agreements on that subject with the exception of (i) options
previously granted and delivered to Optionholder under the Plan, and (ii) the
following agreements only:
Other Agreements: ______________________________________________
______________________________________________
Snowball.com, Inc. Optionholder:
By:_______________________________ _______________________________________
Signature Signature
Title:____________________________ Date:__________________________________
Date:_____________________________
Attachments: Stock Option Agreement, 1999 Equity Incentive Plan and Notice of
Exercise
__________________________
/1/ If this is an incentive stock option, it (plus your other outstanding
incentive stock options) cannot be first exercisable for more than $100,000 in
-----------
any calendar year. Any excess over $100,000 is a nonstatutory stock option.
<PAGE>
SNOWBALL.COM, INC.
1999 Equity Incentive Plan
Stock Option Agreement
(Incentive and Nonstatutory Stock Options)
Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock
Option Agreement, Snowball.com, Inc. (the "Company") has granted you an option
under its 1999 Equity Incentive Plan (the "Plan") to purchase the number of
shares of the Company's Common Stock indicated in your Grant Notice at the
exercise price indicated in your Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. Vesting. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service.
2. Number of Shares and Exercise Price. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for Capitalization
Adjustments, as provided in the Plan.
3. Exercise prior to Vesting ("Early Exercise"). If permitted in your
Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of
your option is permitted) and subject to the provisions of your option, you may
elect at any time that is both (i) during the period of your Continuous Service
and (ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:
(a) a partial exercise of your option shall be deemed to cover first
vested shares of Common Stock and then the earliest vesting installment of
unvested shares of Common Stock;
(b) any shares of Common Stock so purchased from installments that
have not vested as of the date of exercise shall be subject to the purchase
option in favor of the Company as described in the Company's form of Early
Exercise Stock Purchase Agreement;
(c) you shall enter into the Company's form of Early Exercise Stock
Purchase Agreement with a vesting schedule that will result in the same vesting
as if no early exercise had occurred; and
(d) if your option is an incentive stock option, then, as provided in
the Plan, to the extent that the aggregate Fair Market Value (determined at the
time of grant) of the shares of Common Stock with respect to which your option
plus all other incentive stock options you hold
1.
<PAGE>
are exercisable for the first time by you during any calendar year (under all
plans of the Company and its Affiliates) exceeds one hundred thousand dollars
($100,000), your option(s) or portions thereof that exceed such limit (according
to the order in which they were granted) shall be treated as nonstatutory stock
options.
4. Method of Payment. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of
the exercise price in cash or by check or in any other manner permitted by your
-----------------
Grant Notice, which may include one or more of the following:
- ------------
(a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.
(b) Provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, by delivery of already-
owned shares of Common Stock either that you have held for the period required
to avoid a charge to the Company's reported earnings (generally six months) or
that you did not acquire, directly or indirectly from the Company, that are
owned free and clear of any liens, claims, encumbrances or security interests,
and that are valued at Fair Market Value on the date of exercise. "Delivery"
for these purposes, in the sole discretion of the Company at the time you
exercise your option, shall include delivery to the Company of your attestation
of ownership of such shares of Common Stock in a form approved by the Company.
Notwithstanding the foregoing, you may not exercise your option by tender to the
Company of Common Stock to the extent such tender would violate the provisions
of any law, regulation or agreement restricting the redemption of the Company's
stock.
(c) Pursuant to the following deferred payment alternative:
(i) Not less than one hundred percent (100%) of the aggregate
exercise price, plus accrued interest, shall be due four (4) years from date of
exercise or, at the Company's election, upon termination of your Continuous
Service.
(ii) Interest shall be compounded at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any portion of any
amounts other than amounts stated to be interest under the deferred payment
arrangement.
(iii) At any time that the Company is incorporated in Delaware,
payment of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall be made in cash and not by deferred payment.
2.
<PAGE>
(iv) In order to elect the deferred payment alternative, you
must, as a part of your written notice of exercise, give notice of the election
of this payment alternative and, in order to secure the payment of the deferred
exercise price to the Company hereunder, if the Company so requests, you must
tender to the Company a promissory note and a security agreement covering the
purchased shares of Common Stock, both in form and substance satisfactory to the
Company, or such other or additional documentation as the Company may request.
5. Whole Shares. You may exercise your option only for whole shares of
Common Stock.
6. Securities Law Compliance. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also
comply with other applicable laws and regulations governing your option, and you
may not exercise your option if the Company determines that such exercise would
not be in material compliance with such laws and regulations.
7. Term. The term of your option commences on the Date of Grant and
expires upon the earliest of the following:
(a) two (2) months after the termination of your Continuous Service
for any reason other than your Disability or death, provided that if during any
part of such two (2) month period your option is not exercisable solely because
of the condition set forth in the preceding paragraph relating to "Securities
Law Compliance," your option shall not expire until the earlier of the
Expiration Date or until it shall have been exercisable for an aggregate period
of two (2) months after the termination of your Continuous Service;
(b) twelve (12) months after the termination of your Continuous
Service due to your Disability;
(c) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates;
(d) the Expiration Date indicated in your Grant Notice; or
(e) the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of your option
and ending on the day three (3) months before the date of your option's
exercise, you must be an employee of the Company or an Affiliate, except in the
event of your death or Disability. The Company has provided for extended
exercisability
3.
<PAGE>
of your option under certain circumstances for your benefit but cannot guarantee
that your option will necessarily be treated as an "incentive stock option" if
you continue to provide services to the Company or an Affiliate as a Consultant
or Director after your employment terminates or if you otherwise exercise your
option more than three (3) months after the date your employment terminates.
8. Exercise.
(a) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.
(c) If your option is an incentive stock option, by exercising your
option you agree that you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the
date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.
(d) By exercising your option you agree that the Company (or a
representative of the underwriter(s)) may, in connection with the first
underwritten registration of the offering of any securities of the Company under
the Securities Act, require that you not sell, dispose of, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale, any shares of
Common Stock or other securities of the Company held by you, for a period of
time specified by the underwriter(s) (not to exceed one hundred eighty (180)
days) following the effective date of the registration statement of the Company
filed under the Securities Act. You further agree to execute and deliver such
other agreements as may be reasonably requested by the Company and/or the
underwriter(s) that are consistent with the foregoing or that are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to your shares of
Common Stock until the end of such period.
9. Transferability. Your option is not transferable, except by will or by
the laws of descent and distribution, and is exercisable during your life only
by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
4.
<PAGE>
10. Right of First Refusal. Shares of Common Stock that you acquire upon
exercise of your option are subject to any right of first refusal that may be
described in the Company's bylaws in effect at such time the Company elects to
exercise its right. The Company's right of first refusal shall expire on the
Listing Date.
11. Right of Repurchase. To the extent provided in the Company's bylaws
as amended from time to time, the Company shall have the right to repurchase all
or any part of the shares of Common Stock you acquire pursuant to the exercise
of your option.
12. Option not a Service Contract. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or
an Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
13. Withholding Obligations.
(a) At the time you exercise your option, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option.
(b) Upon your request and subject to approval by the Company, in its
sole discretion, and compliance with any applicable conditions or restrictions
of law, the Company may withhold from fully vested shares of Common Stock
otherwise issuable to you upon the exercise of your option a number of whole
shares of Common Stock having a Fair Market Value, determined by the Company as
of the date of exercise, not in excess of the minimum amount of tax required to
be withheld by law. If the date of determination of any tax withholding
obligation is deferred to a date later than the date of exercise of your option,
share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code,
covering the aggregate number of shares of Common Stock acquired upon such
exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in
connection with such share withholding procedure shall be your sole
responsibility.
(c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise
5.
<PAGE>
your option when desired even though your option is vested, and the Company
shall have no obligation to issue a certificate for such shares of Common Stock
or release such shares of Common Stock from any escrow provided for herein.
14. Notices. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.
15. Governing Plan Document. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.
[THIS SPACE INTENTIONALLY LEFT BLANK]
6.
<PAGE>
NOTICE OF EXERCISE
Snowball.com, Inc.
250 Executive Park Blvd., Ste. 4000 Date of Exercise: _______________
San Francisco, CA 94134
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase the
number of shares for the price set forth below.
Type of option (check one): Incentive [_] Nonstatutory [_]
Stock option dated: _______________
Number of shares as
to which option is
exercised: _______________
Certificates to be
issued in name of: _______________
Total exercise price: $______________
Cash payment delivered
herewith: $______________
By this exercise, I agree (i) to provide such additional documents as you
may require pursuant to the terms of the 1999 Equity Incentive Plan, including
without limitation an executed Early Exercise Restricted Stock Purchase
Agreement, (ii) to provide for the payment by me to you (in the manner
designated by you) of your withholding obligation, if any, relating to the
exercise of this option, and (iii) if this exercise relates to an incentive
stock option, to notify you in writing within fifteen (15) days after the date
of any disposition of any of the shares of Common Stock issued upon exercise of
this option that occurs within two (2) years after the date of grant of this
option or within one (1) year after such shares of Common Stock are issued upon
exercise of this option.
I hereby make the following certifications and representations with respect
to the number of shares of Common Stock of the Company listed above (the
"Shares"), which are being acquired by me for my own account upon exercise of
the Option as set forth above:
I acknowledge that the Shares have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and are deemed to constitute
"restricted securities" under Rule 701 and "control securities" under Rule 144
promulgated under the Securities Act. I
1.
<PAGE>
warrant and represent to the Company that I have no present intention of
distributing or selling said Shares, except as permitted under the Securities
Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares for at
least ninety days (90) after the stock of the Company becomes publicly traded
(i.e., subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934) under Rule 701 and that more restrictive
conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the Shares
subject to the provisions of the Option shall have endorsed thereon appropriate
legends reflecting the foregoing limitations, as well as any legends reflecting
restrictions pursuant to the Company's Articles of Incorporation, Bylaws and/or
applicable securities laws.
I further agree that, if required by the Company (or a representative of
the underwriters) in connection with the first underwritten registration of the
offering of any securities of the Company under the Securities Act, I will not
sell or otherwise transfer or dispose of any shares of Common Stock or other
securities of the Company during such period (not to exceed one hundred eighty
(180) days) following the effective date of the registration statement of the
Company filed under the Securities Act as may be requested by the Company or the
representative of the underwriters. I further agree that the Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.
Very truly yours,
___________________________________________
2.
<PAGE>
EXHIBIT 10.03
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
As Adopted ______________, 1999
1. PURPOSE. The purpose of this Plan is to provide incentives to
-------
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the
--------------------------
total number of Shares reserved and available for grant and issuance pursuant to
this Plan will be ______________ Shares plus Shares that are subject to: (a)
issuance upon exercise of an Option but cease to be subject to such Option for
any reason other than exercise of such Option; (b) an Award granted hereunder
but are forfeited or are repurchased by the Company at the original issue price;
and (c) an Award that otherwise terminates without Shares being issued. In
addition, any authorized shares not issued or subject to outstanding grants
under the Company's 2000 Equity Incentive Plan (the "Prior Plan") on the
Effective Date (as defined below) and any shares issued under the Prior Plan
that are forfeited or repurchased by the Company or that are issuable upon
exercise of options granted pursuant to the Prior Plan that expire or become
unexercisable for any reason without having been exercised in full, will no
longer be available for grant and issuance under the Prior Plan, but will be
available for grant and issuance under this Plan. In addition, on each January
1, the aggregate number of Shares reserved and available for grant and issuance
pursuant to this Plan will be increased automatically by a number of Shares
equal to 5% of the total outstanding shares of the Company as of the immediately
preceding December 31, provided that no more than __________________ shares
shall be issued as ISOs (as defined in Section 5 below). At all times the
Company shall reserve and keep available a sufficient number of Shares as shall
be required to satisfy the requirements of all outstanding Options granted under
this Plan and all other outstanding but unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
number of shares that may be granted pursuant to Sections 3 and 9 below, (c) the
Exercise Prices of and number of Shares subject to outstanding Options, and (d)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the stockholders of the
Company and compliance with applicable securities laws; provided, however, that
-------- -------
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only
-----------
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of the Company or any Parent or Subsidiary of the Company; provided
--------
such consultants, contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. No person will be eligible to receive more than 1,500,000 Shares
in any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company), who are eligible to receive
up to a maximum of 3,000,000 Shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under this Plan.
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by the
-------------------
Committee or by the Board acting as the Committee. Except for automatic grants
to Outside Directors pursuant to Section 9 hereof, and subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Except
for automatic grants to Outside Directors pursuant to Section 9 hereof, the
Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Except for automatic grants to Outside
--------------------
Directors pursuant to Section 9 hereof, any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant an Award under this Plan to Participants who are not Insiders of the
Company.
5. OPTIONS. The Committee may grant Options to eligible persons and will
-------
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will
--------------------
be evidenced by an Award Agreement which will expressly identify the Option as
an ISO or an NQSO ("Stock Option Agreement"), and, except as otherwise required
by the terms of Section 9 hereof, will be in such form and contain such
provisions (which need not be the same for each Participant) as the Committee
may from time to time approve, and which will comply with and be subject to the
terms and conditions of this Plan.
2
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
5.2 Date of Grant. The date of grant of an Option will be the date
-------------
on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the times or
---------------
upon the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option; provided, however, that no Option will be
-------- -------
exercisable after the expiration of ten (10) years from the date the Option is
granted; and provided further that no ISO granted to a person who directly or by
----------------
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Parent or Subsidiary of the
Company ("Ten Percent Stockholder") will be exercisable after the expiration of
five (5) years from the date the ISO is granted. The Committee also may provide
for Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number of Shares or percentage of Shares as the Committee
determines.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by delivery to
------------------
the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set forth in
-----------
the Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) Except for automatic grants to Outside Directors pursuant to
Section 9 hereof, if the Participant is Terminated for any reason
except death or Disability, then the Participant may exercise
such Participant's Options only to the extent that such Options
would have been exercisable upon the Termination Date no later
than three (3) months after the Termination Date (or such shorter
or longer time period not exceeding five (5) years as may be
determined by the Committee, with any exercise beyond three (3)
months after the Termination Date deemed to be an NQSO), but in
any event, no later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than for Cause or because of
Participant's Disability), then Participant's Options may be
exercised only to the extent that such Options would have been
exercisable by Participant on the Termination Date and must be
exercised by Participant (or Participant's legal representative
or authorized assignee) no later than twelve (12) months after
the Termination Date (or such shorter or longer time period not
exceeding five (5) years as may be determined by the Committee,
with any such exercise beyond (a) three (3) months after the
Termination Date when the Termination is for any reason other
than the Participant's death or Disability, or (b) twelve (12)
months after the Termination Date when the Termination is for
Participant's
3
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
death or Disability, deemed to be an NQSO), but in any event no
later than the expiration date of the Options.
(c) If a Participant is terminated for Cause, then the Participant
may exercise such Participant's Options only to the extent that
such Options would have been exercisable upon the Termination
Date no later than one (1) month after the Termination Date (or
such shorter or longer time period as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no
later than the expiration date of the Options.
5.7 Limitations on Exercise. The Committee may specify a reasonable
-----------------------
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value (determined
------------------
as of the date of grant) of Shares with respect to which ISO are exercisable for
the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company, Parent or Subsidiary
of the Company) will not exceed $100,000. If the Fair Market Value of Shares on
the date of grant with respect to which ISO are exercisable for the first time
by a Participant during any calendar year exceeds $100,000, then the Options for
the first $100,000 worth of Shares to become exercisable in such calendar year
will be ISO and the Options for the amount in excess of $100,000 that become
exercisable in that calendar year will be NQSOs. In the event that the Code or
the regulations promulgated thereunder are amended after the Effective Date of
this Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISO, such different limit will be automatically
incorporated herein and will apply to any Options granted after the effective
date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify,
----------------------------------
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
- -------- -------
Exercise Price that would be permitted under Section 5.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in this
-------------------
Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
----------------
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the price to be paid (the "Purchase Price"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted
------------------------------
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
("Restricted Stock Purchase Agreement") that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of this
Plan. The offer of Restricted Stock will be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is delivered to the person. If such person
does not execute and deliver the Restricted Stock Purchase Agreement along
4
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
with full payment for the Shares to the Company within thirty (30) days, then
the offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
--------------
Restricted Stock Award will be determined by the Committee on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Stockholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8
of this Plan.
6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall
--------------------------------
be subject to such restrictions as the Committee may impose. These restrictions
may be based upon completion of a specified number of years of service with the
Company or upon completion of the performance goals as set out in advance in the
Participant's individual Restricted Stock Purchase Agreement. Restricted Stock
Awards may vary from Participant to Participant and between groups of
Participants. Prior to the grant of a Restricted Stock Award, the Committee
shall: (a) determine the nature, length and starting date of any Performance
Period for the Restricted Stock Award; (b) select from among the Performance
Factors to be used to measure performance goals, if any; and (c) determine the
number of Shares that may be awarded to the Participant. Prior to the payment
of any Restricted Stock Award, the Committee shall determine the extent to which
such Restricted Stock Award has been earned. Performance Periods may overlap
and Participants may participate simultaneously with respect to Restricted Stock
Awards that are subject to different Performance Periods and having different
performance goals and other criteria.
6.4 Termination During Performance Period. If a Participant is
-------------------------------------
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee will determine otherwise.
7. STOCK BONUSES.
-------------
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares
-----------------------
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the number
----------------------
of Shares to be awarded to the Participant. If the Stock Bonus is being earned
upon the satisfaction of performance goals pursuant to a Performance Stock Bonus
Agreement, then the Committee will: (a) determine the nature, length and
starting date of any Performance Period for each Stock Bonus; (b) select from
among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant.
Prior to the payment of any Stock Bonus, the Committee shall determine the
extent to which such Stock Bonuses have been earned. Performance Periods may
overlap and Participants may participate simultaneously with respect to Stock
Bonuses that are subject to different Performance Periods and different
performance goals and other criteria. The number of Shares may be fixed or may
vary in accordance with such performance goals and criteria as may be determined
by the Committee. The Committee may adjust the performance goals applicable to
the Stock Bonuses to take into account changes in law and accounting or tax
rules and to make such adjustments as the Committee deems necessary or
appropriate to reflect the impact of extraordinary or unusual items, events or
circumstances to avoid windfalls or hardships.
5
<PAGE>
Snowball.com, Inc.
2000 Equity Incentive Plan
7.3 Form of Payment. The earned portion of a Stock Bonus may be paid
---------------
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash or
whole Shares or a combination thereof, either in a lump sum payment or in
installments, all as the Committee will determine.
8. PAYMENT FOR SHARE PURCHASES.
---------------------------
8.1 Payment. Payment for Shares purchased pursuant to this Plan may
-------
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are
-------- -------
not employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for
the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay for
---------------
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.
--------------------------------------
9.1 Types of Options and Shares. Options granted under this Plan and
----------------------------
subject to this Section 9 shall be NQSOs.
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Snowball.com, Inc.
2000 Equity Incentive Plan
9.2 Eligibility. Options subject to this Section 9 shall be granted
-----------
only to Outside Directors.
9.3 Initial Grant. Each Outside Director who first becomes a member
-------------
of the Board on or after the Effective Date will automatically be granted an
Option for 20,000 Shares (an "Initial Grant") on the date such Outside Director
first becomes a member of the Board, unless such Outside Director received a
grant of Options before the Effective Date. Each Outside Director who became a
member of the Board prior to the Effective Date and who did not receive a prior
Option grant will receive an Initial Grant immediately following the Effective
Date.
9.4 Succeeding Grants. Immediately following each Annual Meeting of
-----------------
stockholders, each Outside Director will automatically be granted an Option for
5,000 Shares (a "Succeeding Grant"), provided the Outside Director is a member
of the Board on such date and has served continuously as a member of the Board
for a period of at least one year since the date of such Outside Director's
Initial Grant.
9.5 Vesting. The date an Outside Director receives an Initial Grant
-------
or a Succeeding Grant is referred to in this Plan as the "Start Date" for such
Option.
(a) Initial Grant. Each Initial Grant will vest as to 25% of the
-------------
Shares on the first anniversary of the Start Date for such
Initial Grant, and as to 2.08333% of the Shares on each
subsequent monthly anniversary of the Start Date, so long as the
Outside Director continuously remains a director or a consultant
of the Company.
(b) Succeeding Grant. Each Succeeding Grant will vest as to 25% of
----------------
the Shares on the first anniversary of the Start Date for such
Succeeding Grant, and as to 2.08333% of the Shares on each
subsequent monthly anniversary of the Start Date, so long as the
Outside Director continuously remains a director or a consultant
of the Company.
Notwithstanding any provision to the contrary, in the event of a corporate
transaction described in Section 18.1, the vesting of all options granted to
Outside Directors pursuant to this Section 9 will accelerate and such options
will become exercisable in full prior to the consummation of such event at such
times and on such conditions as the Committee determines, and must be exercised,
if at all, within three months of the consummation of said event. Any options
not exercised within such three-month period shall expire.
9.6 Exercise Price. The exercise price of an Option pursuant to an
--------------
Initial Grant or Succeeding Grant shall be the Fair Market Value of the Shares,
at the time that the Option is granted.
9.7 Termination. If the Outside Director ceases to be a member of
-----------
the Board or a consultant of the Company for any reason except death of the
Outside Director or disability of the Outside Director (whether temporary or
permanent, partial or total, as determined by the Committee), then each Option
then held by such Outside Director, to the extent (and only to the extent) that
it would have been exercisable by the Outside Director on the Termination Date,
may be exercised by the Outside Director on the later of seven (7) months after
the Termination Date, but in no event later than the Expiration Date.
10. WITHHOLDING TAXES.
-----------------
10.1 Withholding Generally. Whenever Shares are to be issued in
---------------------
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding tax
requirements.
10.2 Stock Withholding. When, under applicable tax laws, a
-----------------
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is
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Snowball.com, Inc.
2000 Equity Incentive Plan
obligated to pay the Company the amount required to be withheld, the Committee
may in its sole discretion allow the Participant to satisfy the minimum
withholding tax obligation by electing to have the Company withhold from the
Shares to be issued that number of Shares having a Fair Market Value equal to
the minimum amount required to be withheld, determined on the date that the
amount of tax to be withheld is to be determined. All elections by a Participant
to have Shares withheld for this purpose will be made in accordance with the
requirements established by the Committee and be in writing in a form acceptable
to the Committee.
11. TRANSFERABILITY.
---------------
11.1 Except as otherwise provided in this Section 11, Awards granted
under this Plan, and any interest therein, will not be transferable or
assignable by Participant, and may not be made subject to execution, attachment
or similar process, otherwise than by will or by the laws of descent and
distribution or as determined by the Committee and set forth in the Award
Agreement with respect to Awards that are not ISOs.
11.2 All Awards other than NQSO's. All Awards other than NQSO's shall
-----------------------------
be exercisable: (i) during the Participant's lifetime, only by (A) the
Participant, or (B) the Participant's guardian or legal representative; and (ii)
after Participant's death, by the legal representative of the Participant's
heirs or legatees.
11.3 NQSOs. Unless otherwise restricted by the Committee, an NQSO
-----
shall be exercisable: (i) during the Participant's lifetime only by (A) the
Participant, (B) the Participant's guardian or legal representative, (C) a
Family Member of the Participant who has acquired the NQSO by "permitted
transfer;" and (ii) after Participant's death, by the legal representative of
the Participant's heirs or legatees. "Permitted transfer" means, as authorized
by this Plan and the Committee in an NQSO, any transfer effected by the
Participant during the Participant's lifetime of an interest in such NQSO but
only such transfers which are by gift or domestic relations order. A permitted
transfer does not include any transfer for value and neither of the following
are transfers for value: (a) a transfer of under a domestic relations order in
settlement of marital property rights or (b) a transfer to an entity in which
more than fifty percent of the voting interests are owned by Family Members or
the Participant in exchange for an interest in that entity.
12. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES..
------------------------------------------------------
12.1 Voting and Dividends. No Participant will have any of the rights
--------------------
of a stockholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will
be a stockholder and have all the rights of a stockholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
--------
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
-------- -------
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 12.
12.2 Financial Statements. The Company will provide financial
--------------------
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
-------- -------
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
12.3 Restrictions on Shares. At the discretion of the Committee, the
-----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be.
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Snowball.com, Inc.
2000 Equity Incentive Plan
13. CERTIFICATES. All certificates for Shares or other securities
------------
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
------------------------
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
-------- -------
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
-----------------------------
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
----------------------------------------------
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
-----------------------
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
----------------------
18.1 Assumption or Replacement of Awards by Successor. Except for
------------------------------------------------
automatic grants to Outside Directors pursuant to Section 9 hereof, in the event
of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the stockholders of the Company or their relative stock
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Snowball.com, Inc.
2000 Equity Incentive Plan
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction, any or all outstanding Awards may be assumed, converted or
replaced by the successor corporation (if any), which assumption, conversion or
replacement will be binding on all Participants. In the alternative, the
successor corporation may substitute equivalent Awards or provide substantially
similar consideration to Participants as was provided to stockholders (after
taking into account the existing provisions of the Awards). The successor
corporation may also issue, in place of outstanding Shares of the Company held
by the Participants, substantially similar shares or other property subject to
repurchase restrictions no less favorable to the Participant. In the event such
successor corporation (if any) refuses to assume or substitute Awards, as
provided above, pursuant to a transaction described in this Subsection 18.1,
such Awards will expire on such transaction at such time and on such conditions
as the Committee will determine. Notwithstanding anything in this Plan to the
contrary, the Committee may, in its sole discretion, provide that the vesting of
any or all Awards granted pursuant to this Plan will accelerate upon a
transaction described in this Section 18. If the Committee exercises such
discretion with respect to Options, such Options will become exercisable in full
prior to the consummation of such event at such time and on such conditions as
the Committee determines, and if such Options are not exercised prior to the
consummation of the corporate transaction, they shall terminate at such time as
determined by the Committee.
18.2 Other Treatment of Awards. Subject to any greater rights granted
-------------------------
to Participants under the foregoing provisions of this Section 18, in the event
of the occurrence of any transaction described in Section 18.1, any outstanding
Awards will be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, or sale of assets.
18.3 Assumption of Awards by the Company. The Company, from time to
-----------------------------------
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
- -------
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on
---------------------------------
the date on which the registration statement filed by the Company with the SEC
under the Securities Act registering the initial public offering of the
Company's Common Stock is declared effective by the SEC (the "Effective Date").
This Plan shall be approved by the stockholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon
the Effective Date, the Committee may grant Awards pursuant to this Plan;
provided, however, that: (a) no Option may be exercised prior to initial
- -------- -------
stockholder approval of this Plan; (b) no Option granted pursuant to an increase
in the number of Shares subject to this Plan approved by the Board will be
exercised prior to the time such increase has been approved by the stockholders
of the Company; (c) in the event that initial stockholder approval is not
obtained within the time period provided herein, all Awards granted hereunder
shall be cancelled, any Shares issued pursuant to any Awards shall be cancelled
and any purchase of Shares issued hereunder shall be rescinded; and (d) in the
event that stockholder approval of such increase is not obtained within the time
period provided herein, all Awards granted pursuant to such increase will be
cancelled, any Shares issued pursuant to any Award granted pursuant to such
increase will be cancelled, and any purchase of Shares pursuant to such increase
will be rescinded.
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Snowball.com, Inc.
2000 Equity Incentive Plan
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of stockholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
--------------------------------
or amend this Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to this Plan;
provided, however, that the Board will not, without the approval of the
- -------- -------
stockholders of the Company, amend this Plan in any manner that requires such
stockholder approval.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
--------------------------
Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have the
-----------
following meanings:
"Award" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Cause" means the commission of an act of theft, embezzlement, fraud,
dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board.
"Company" means Snowball.com, Inc. or any successor corporation.
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national
11
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Snowball.com, Inc.
2000 Equity Incentive Plan
securities exchange on which the Common Stock is listed or
admitted to trading as reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported in The Wall
--------
Street Journal;
--------------
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the SEC under the
Securities Act; or
(e) if none of the foregoing is applicable, by the Committee in good
faith.
"Family Member" includes any of the following:
(a) child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law of the Participant, including any such person with
such relationship to the Participant by adoption;
(b) any person (other than a tenant or employee) sharing the
Participant's household;
(c) a trust in which the persons in (a) and (b) have more than fifty
percent of the beneficial interest;
(d) a foundation in which the persons in (a) and (b) or the
Participant control the management of assets; or
(e) any other entity in which the persons in (a) and (b) or the
Participant own more than fifty percent of the voting interest.
"Insider" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"Option" means an award of an option to purchase Shares pursuant to
Section 5.
"Outside Director" means a member of the Board who is not an employee
of the Company or any Parent, Subsidiary or Affiliate of the Company.
"Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"Participant" means a person who receives an Award under this Plan.
"Performance Factors" means the factors selected by the Committee from
among the following measures to determine whether the performance goals
established by the Committee and applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
12
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Snowball.com, Inc.
2000 Equity Incentive Plan
(b) Earnings before income taxes and amortization and/or earnings
before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total stockholder return and/or total stockholder return growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual confidential business objectives.
"Performance Period" means the period of service determined by the
Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
"Plan" means this Snowball.com, Inc. 2000 Equity Incentive Plan, as
amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to Section
6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of
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Snowball.com, Inc.
2000 Equity Incentive Plan
the term set forth in the Option agreement. The Committee will have sole
discretion to determine whether a Participant has ceased to provide services and
the effective date on which the Participant ceased to provide services (the
"Termination Date").
"Unvested Shares" means "Unvested Shares" as defined in the Award
Agreement.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
14
<PAGE>
No. ___
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
----------------------
This Stock Option Agreement (this "Agreement") is made and entered
into as of the Date of Grant set forth below (the "Date of Grant") by and
between Snowball.com, Inc., a Delaware corporation (the "Company"), and the
Optionee named below ("Optionee"). Capitalized terms not defined herein shall
have the meanings ascribed to them in the Company's 2000 Equity Incentive Plan
(the "Plan").
Optionee: __________________________________________
Social Security Number: __________________________________________
Optionee's Address: __________________________________________
__________________________________________
Total Option Shares: __________________________________________
Exercise Price Per Share: __________________________________________
Date of Grant: __________________________________________
Expiration Date: __________________________________________
(unless earlier terminated under Section 3 hereof)
Type of Stock Option
(Check one): [ ] Incentive Stock Option
[ ] Nonqualified Stock Option
1. Grant of Option. The Company hereby grants to Optionee an option
---------------
(this "Option") to purchase up to the total number of shares of Common Stock of
the Company set forth above as Total Option Shares (collectively, the "Shares")
at the Exercise Price Per Share set forth above (the "Exercise Price"), subject
to all of the terms and conditions of this Agreement and the Plan. If
designated as an Incentive Stock Option above, this Option is intended to
qualify as an "incentive stock option" ("ISO") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), to the extent
permitted under Code Section 422.
2. Vesting; Exercise Period.
------------------------
2.1 Vesting of Shares. This Option shall be exercisable as it
-----------------
vests. Subject to the terms and conditions of the Plan and this Agreement, this
Option shall vest and become exercisable as to portions of the Shares as
follows: (a) this Option shall not be exercisable with respect to any of the
Shares until _________________, 19___ (the "First Vesting Date"); (b) if
Optionee has continuously provided services to the Company, or any Parent or
Subsidiary of the Company, then on the First Vesting Date, this Option shall
become exercisable as to _______________% of the Shares; and (c) thereafter this
Option shall become
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
exercisable as to an additional _____________% of the Shares on each monthly
anniversary of the First Vesting Date, provided that Optionee has continuously
provided services to the Company, or any Parent or Subsidiary of the Company, at
all times during the relevant month. This Option shall cease to vest upon
Optionee's Termination and Optionee shall in no event be entitled under this
Option to purchase a number of shares of the Company's Common Stock greater than
the "Total Option Shares."
2.2 Vesting of Options. Shares that are vested pursuant to the
------------------
schedule set forth in Section 2.1 hereof are "Vested Shares." Shares that are
not vested pursuant to the schedule set forth in Section 2.1 hereof are
"Unvested Shares."
2.3 Expiration. This Option shall expire on the Expiration Date
----------
set forth above and must be exercised, if at all, on or before the earlier of
the Expiration Date or the date on which this Option is earlier terminated in
accordance with the provisions of Section 3 hereof.
3. Termination.
-----------
3.1 Termination for Any Reason Except Death, Disability or
------------------------------------------------------
Cause. If Optionee is Terminated for any reason except Optionee's death,
- -----
Disability or Cause, then this Option, to the extent (and only to the extent)
that it is vested in accordance with the schedule set forth in Section 2.1
hereof on the Termination Date, may be exercised by Optionee no later than three
(3) months after the Termination Date, but in any event no later than the
Expiration Date.
3.2 Termination Because of Death or Disability. If Optionee is
------------------------------------------
Terminated because of death or Disability of Optionee (or the Optionee dies
within three (3) months after Termination other than for Cause or because of
Disability), then this Option, to the extent that it is vested in accordance
with the schedule set forth in Section 2.1 hereof on the Termination Date, may
be exercised by Optionee (or Optionee's legal representative or authorized
assignee) no later than twelve (12) months after the Termination Date, but in
any event no later than the Expiration Date. Any exercise after three months
after the Termination Date when the Termination is for any reason other than
Optionee's death or disability, within the meaning of Code Section 22(e)(3),
shall be deemed to be the exercise of a nonqualified stock option.
3.3 Termination for Cause. If Optionee is Terminated for Cause,
---------------------
then this Option, to the extenct that it is vested in accordance with the
schedule set forth in Section 2.1 hereof on the Termination Date, may be
exercised by Optionee no later than one (1) month after the Termination Date,
but in any event no later than the Expiration Date.
3.4 No Obligation to Employ. Nothing in the Plan or this
-----------------------
Agreement shall confer on Optionee any right to continue in the employ of, or
other relationship with, the Company or any Parent or Subsidiary of the Company,
or limit in any way the right of the Company or any Parent or Subsidiary of the
Company to terminate Optionee's employment or other relationship at any time,
with or without Cause.
2
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
4. Manner of Exercise.
------------------
4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement in the form attached
hereto as Exhibit A, or in such other form as may be approved by the Company
---------
from time to time (the "Exercise Agreement"), which shall set forth, inter alia,
----- ----
Optionee's election to exercise this Option, the number of shares being
purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Optionee's investment intent and access to
information as may be required by the Company to comply with applicable
securities laws. If someone other than Optionee exercises this Option, then
such person must submit documentation reasonably acceptable to the Company that
such person has the right to exercise this Option.
4.2 Limitations on Exercise. This Option may not be exercised
-----------------------
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. This Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which this Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:
(a) by cancellation of indebtedness of the Company to the Optionee;
(b) by surrender of shares of the Company's Common Stock that either: (1)
have been owned by Optionee for more than six (6) months and have been
paid for within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note has
been fully paid with respect to such shares); or (2) were obtained by
Optionee in the open public market; and (3) are clear of all liens,
---
claims, encumbrances or security interests;
(c) by waiver of compensation due or accrued to Optionee for services
rendered;
(d) provided that a public market for the Company's stock exists: (1)
through a "same day sale" commitment from Optionee and a broker-dealer
that is a member of the National Association of Securities Dealers (an
"NASD Dealer") whereby Optionee irrevocably elects to exercise this
Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company; or (2) through a "margin" commitment from Optionee and an
--
NASD Dealer whereby Optionee irrevocably elects to exercise this
Option and to pledge the Shares so purchased to the NASD Dealer in a
margin account as security for a loan from the NASD Dealer in the
amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
3
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
---------------
exercise of this Option, Optionee must pay or provide for any applicable federal
or state withholding obligations of the Company. If the Committee permits,
Optionee may provide for payment of withholding taxes upon exercise of this
Option by requesting that the Company retain Shares with a Fair Market Value
equal to the minimum amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Optionee by deducting the
Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement and
------------------
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Optionee, Optionee's
authorized assignee, or Optionee's legal representative, and shall deliver
certificates representing the Shares with the appropriate legends affixed
thereto.
5. Notice of Disqualifying Disposition of ISO Shares. To the extent
-------------------------------------------------
this Option is an ISO, if Optionee sells or otherwise disposes of any of the
Shares acquired pursuant to the ISO on or before the later of (a) the date two
(2) years after the Date of Grant, and (b) the date one (1) year after transfer
of such Shares to Optionee upon exercise of this Option, then Optionee shall
immediately notify the Company in writing of such disposition.
6. Compliance with Laws and Regulations. The exercise of this Option
------------------------------------
and the issuance and transfer of Shares shall be subject to compliance by the
Company and Optionee with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the time of such issuance or
transfer. Optionee understands that the Company is under no obligation to
register or qualify the Shares with the SEC, any state securities commission or
any stock exchange to effect such compliance.
7. Nontransferability of Option. This Option may not be transferred
----------------------------
in any manner other than under the terms and conditions of the Plan or by will
or by the laws of descent and distribution and may be exercised during the
lifetime of Optionee only by Optionee. The terms of this Option shall be
binding upon the executors, administrators, successors and assigns of Optionee.
8. Tax Consequences. Set forth below is a brief summary as of the
----------------
date the Board adopted the Plan of some of the federal tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
8.1 Exercise of Incentive Stock Option. To the extent this
----------------------------------
Option qualifies as an ISO, there will be no regular federal income tax
liability upon the exercise of this
4
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
Option, although the excess, if any, of the fair market value of the Shares on
the date of exercise over the Exercise Price will be treated as a tax preference
item for federal income tax purposes and may subject the Optionee to the
alternative minimum tax in the year of exercise.
8.2 Exercise of Nonqualified Stock Option. To the extent this
-------------------------------------
Option does not qualify as an ISO, there may be a regular federal income tax
liability upon the exercise of this Option. Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the fair market value of the Shares on the date of exercise
over the Exercise Price. The Company may be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
8.3 Disposition of Shares. The following tax consequences may
---------------------
apply upon disposition of the Shares.
a. Incentive Stock Options. If the Shares are held for
-----------------------
twelve (12) months or more after the date of the transfer of the Shares pursuant
to the exercise of an ISO and are disposed of two (2) years or more after the
Date of Grant, any gain realized on disposition of the Shares will be treated as
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within the applicable one (1) year or two (2) year period, any
gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if any, of the
fair market value of the Shares on the date of exercise over the Exercise Price.
b. Nonqualified Stock Options. If the Shares are held for
--------------------------
more than twelve (12) months after the date of the transfer of the Shares
pursuant to the exercise of an NQSO, any gain realized on disposition of the
Shares will be treated as long-term capital gain.
c. Withholding. The Company may be required to withhold
-----------
from Optionee's compensation or collect from the Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income.
9. Privileges of Stock Ownership. Optionee shall not have any of the
-----------------------------
rights of a stockholder with respect to any Shares until the Shares are issued
to Optionee.
10. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Optionee.
11. Entire Agreement. The Plan is incorporated herein by reference.
----------------
This Agreement and the Plan and the Exercise Agreement constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersede all prior understandings and agreements with respect
to such subject matter.
12. Notices. Any notice required to be given or delivered to the
-------
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the
5
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
the Company at its principal corporate offices. Any notice required to be given
or delivered to Optionee shall be in writing and addressed to Optionee at the
address indicated above or to such other address as such party may designate in
writing from time to time to the Company. All notices shall be deemed to have
been given or delivered upon: personal delivery; three (3) days after deposit in
the United States mail by certified or registered mail (return receipt
requested); one (1) business day after deposit with any return receipt express
courier (prepaid); or one (1) business day after transmission by facsimile.
13. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Optionee and Optionee's heirs, executors, administrators, legal representatives,
successors and assigns.
14. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California, without regard
to that body of law pertaining to choice of law or conflict of law.
15. Acceptance. Optionee hereby acknowledges receipt of a copy of the
----------
Plan and this Agreement. Optionee has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms and
conditions of the Plan and this Agreement. Optionee acknowledges that there may
be adverse tax consequences upon exercise of this Option or disposition of the
Shares and that the Company has advised Optionee to consult a tax advisor prior
to such exercise or disposition.
6
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
2000 Equity Incentive Plan
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in duplicate by its duly authorized representative and Optionee has executed
this Agreement in duplicate as of the Date of Grant.
SNOWBALL.COM, INC. OPTIONEE
By: _________________________________ ____________________________________
(Signature)
______________________________________ ____________________________________
(Please print name) (Please print name)
______________________________________
(Please print title)
7
<PAGE>
EXHIBIT A
---------
STOCK OPTION EXERCISE AGREEMENT
<PAGE>
Exhibit A
---------
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN (the "Plan")
STOCK OPTION EXERCISE AGREEMENT
-------------------------------
I hereby elect to purchase the number of shares of Common Stock of
Snowball.com, Inc. (the "Company") as set forth below:
<TABLE>
<S> <C>
Optionee____________________________________________________ Number of Shares Purchased:_________________________________________
Social Security Number:_____________________________________ Purchase Price per Share:___________________________________________
Address:____________________________________________________ Aggregate Purchase Price:___________________________________________
_____________________________________________ Date of Option Agreement:____________________
_____________________________________________
Type of Option: [ ] Incentive Stock Option Exact Name of Title to Shares:______________________________________
[ ] Nonqualified Stock ____________________________________________________________________
</TABLE>
1. Delivery of Purchase Price. Optionee hereby delivers to the Company the
Aggregate Purchase Price, to the extent permitted in the Option Agreement (the
"Option Agreement") as follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $_____________________, receipt of
which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Optionee in the amount
of $___________________________________;
[ ] by delivery of ______________________________ fully-paid, nonassessable
and vested shares of the Common Stock of the Company owned by Optionee for
at least six (6) months prior to the date hereof (and which have been paid
for within the meaning of SEC Rule 144), or obtained by Optionee in the
open public market, and owned free and clear of all liens, claims,
encumbrances or security interests, valued at the current Fair Market
Value of $____________________ per share;
[ ] by the waiver hereby of compensation due or accrued to Optionee for
services rendered in the amount of $____________________________________;
[ ] through a "same-day-sale" commitment, delivered herewith, from Optionee
and the NASD Dealer named therein, in the amount of $_________________; or
[ ] through a "margin" commitment, delivered herewith from Optionee and the
NASD Dealer named therein, in the amount of $____________________________.
2. Market Standoff Agreement. Optionee, if requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by Optionee during the period requested by the managing
underwriter following the effective date of a registration statement of the
Company filed under the Securities Act, provided that all officers and directors
of the Company are required to enter into similar agreements. Such agreement
shall be in writing in a form satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to the shares (or
other securities) subject to the foregoing restriction until the end of such
period.
3. Tax Consequences. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER ADVERSE
TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF THE
SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX
CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR
ANY TAX ADVICE.
4. Entire Agreement. The Plan and Option Agreement are incorporated herein by
reference. This Exercise Agreement, the Plan and the Option Agreement
constitute the entire agreement and understanding of the parties and supersede
in their entirety all prior understandings and agreements of the Company and
Optionee with respect to the subject matter hereof, and are governed by
California law except for that body of law pertaining to choice of law or
conflict of law.
Date:_____________________________ ___________________________________
Signature of Optionee
<PAGE>
Spousal Consent
I acknowledge that I have read the foregoing Stock Option Exercise
Agreement (the "Agreement") and that I know its contents. I hereby consent to
and approve all of the provisions of the Agreement, and agree that the shares of
the Common Stock of Snowball.com, Inc. purchased thereunder (the "Shares") and
any interest I may have in such Shares are subject to all the provisions of the
Agreement. I will take no action at any time to hinder operation of the
Agreement on these Shares or any interest I may have in or to them.
__________________________________ Date:__________________
Signature of Optionee's Spouse
__________________________________
Spouse's Name - Typed or Printed
__________________________________
Optionee's Name - Typed or Printed
<PAGE>
No. ______
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
----------------------
(Initial Grants For Non-Employee Directors)
This Stock Option Agreement (this "Agreement") is made and entered
into as of the Date of Grant set forth below (the "Date of Grant") by and
between Snowball.com, Inc., a Delaware corporation (the "Company"), and the
Optionee named below ("Optionee"). Capitalized terms not defined herein shall
have the meanings ascribed to them in the Company's 2000 Equity Incentive Plan
(the "Plan").
Optionee: ____________________________
Social Security Number: ____________________________
Optionee's Address: ____________________________
____________________________
Total Option Shares: 20,000
----------------------------
Exercise Price Per Share: ____________________________
Date of Grant: ____________________________
Expiration Date: ____________________________
(unless earlier terminated
under Section 3 hereof)
Type of Stock Option: Nonqualified Stock Option
----------------------------
1. Grant of Option. The Company hereby grants to Optionee an option
---------------
(this "Option") to purchase up to the total number of shares of Common Stock of
the Company set forth above as Total Option Shares (collectively, the "Shares")
at the Exercise Price Per Share set forth above (the "Exercise Price"), subject
to all of the terms and conditions of this Agreement and the Plan.
2. Vesting; Exercise Period.
------------------------
2.1 Vesting of Shares. Subject to the terms and conditions of
-----------------
the Plan and this Agreement, this Option shall be exercisable as it vests.
Subject to the terms and conditions of the Plan and this Agreement, this Option
shall vest as to 25% of the Shares on the first anniversary of the Date of
Grant, and as to 2.08333% of the Shares monthly thereafter until all of the
Shares are fully vested, so long as the Optionee continuously remains a director
of the Company.
2.2 Expiration. This Option shall expire on the Expiration Date
----------
set forth above and must be exercised, if at all, on or before the earlier of
the Expiration Date or the date on which this Option is earlier terminated in
accordance with the provisions of Section 3 hereof.
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
3. Termination. Except as provided below in this Section, this
-----------
Option shall terminate and may not be exercised if Optionee ceases to be a
member of the Board of Directors of the Company ("Board Member"). The date on
which Optionee ceases to be a Board Member shall be referred to as the
"Termination Date."
3.1 Termination for Any Reason Except Death, Disability or Cause.
------------------------------------------------------------
If Optionee ceases to be a Board Member for any reason except death, Disability
or Cause, then this Option may be exercised by Optionee no later than seven (7)
months after the Termination Date, but in any event no later than the Expiration
Date.
3.2 Termination Because of Death or Disability. If Optionee
------------------------------------------
ceases to be a Board Member due to Optionee's death or Disability (or dies
within 3 months after Termination other than for Cause or because of
Disability), then this Option may be exercised by Optionee (or Optionee's legal
representative or authorized assignee) no later than twelve (12) months after
the Termination Date, but in any event no later than the Expiration Date.
3.3 Termination for Cause. If Optionee is Terminated for Cause,
---------------------
then this Option, to the extenct that it is vested in accordance with the
schedule set forth in Section 2.1 hereof on the Termination Date, may be
exercised by Optionee no later than one (1) month after the Termination Date,
but in any event no later than the Expiration Date.
4. Manner of Exercise.
------------------
4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement in the form attached
hereto as Exhibit A, or in such other form as may be approved by the Company
from time to time (the "Exercise Agreement"), which shall set forth, inter alia,
----- ----
Optionee's election to exercise this Option, the number of shares being
purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Optionee's investment intent and access to
information as may be required by the Company to comply with applicable
securities laws. If someone other than Optionee exercises this Option, then such
person must submit documentation reasonably acceptable to the Company that such
person has the right to exercise this Option.
4.2 Limitations on Exercise. This Option may not be exercised
-----------------------
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. This Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which this Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:
2
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
(a) by cancellation of indebtedness of the Company to the Optionee;
(b) by surrender of shares of the Company's Common Stock that either: (1)
have been owned by Optionee for more than six (6) months and have been
paid for within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note has
been fully paid with respect to such shares); or (2) were obtained by
Optionee in the open public market; and (3) are clear of all liens,
---
claims, encumbrances or security interests;
(c) by waiver of compensation due or accrued to Optionee for services
rendered;
(d) provided that a public market for the Company's stock exists: (1)
through a "same day sale" commitment from Optionee and a broker-dealer
that is a member of the National Association of Securities Dealers (an
"NASD Dealer") whereby Optionee irrevocably elects to exercise this
Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company; or (2) through a "margin" commitment from Optionee and an
--
NASD Dealer whereby Optionee irrevocably elects to exercise this
Option and to pledge the Shares so purchased to the NASD Dealer in a
margin account as security for a loan from the NASD Dealer in the
amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
---------------
exercise of this Option, Optionee must pay or provide for any applicable federal
or state withholding obligations of the Company. If the Committee permits,
Optionee may provide for payment of withholding taxes upon exercise of this
Option by requesting that the Company retain Shares with a Fair Market Value
equal to the minimum amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Optionee by deducting the
Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement and
------------------
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Optionee, Optionee's
authorized assignee, or Optionee's legal representative, and shall deliver
certificates representing the Shares with the appropriate legends affixed
thereto.
5. Compliance with Laws and Regulations. The exercise of this Option
------------------------------------
and the issuance and transfer of Shares shall be subject to compliance by the
Company and Optionee with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the
3
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
time of such issuance or transfer. Optionee understands that the Company is
under no obligation to register or qualify the Shares with the SEC, any state
securities commission or any stock exchange to effect such compliance.
6. Nontransferability of Option. This Option may not be transferred
----------------------------
in any manner other than under the terms and conditions of the Plan or by will
or by the laws of descent and distribution and may be exercised during the
lifetime of Optionee only by Optionee. The terms of this Option shall be binding
upon the executors, administrators, successors and assigns of Optionee.
7. Tax Consequences. Set forth below is a brief summary as of the
----------------
date the Board adopted the Plan of some of the federal tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
7.1 Exercise of Nonqualified Stock Option. There may be a
-------------------------------------
regular federal income tax liability upon the exercise of this Option. Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the fair market value of the
Shares on the date of exercise over the Exercise Price. The Company may be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
7.2 Disposition of Shares. If the Shares are held for more than
---------------------
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of an NQSO, any gain realized on disposition of the Shares will be
treated as long-term capital gain.
8. Privileges of Stock Ownership. Optionee shall not have any of the
-----------------------------
rights of a stockholder with respect to any Shares until the Shares are issued
to Optionee.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Optionee.
10. Entire Agreement. The Plan is incorporated herein by reference.
----------------
This Agreement and the Plan and the Exercise Agreement constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersede all prior understandings and agreements with respect
to such subject matter.
11. Notices. Any notice required to be given or delivered to the
-------
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to
4
<PAGE>
Snowball.com, Inc.
Stock Open Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Initial Grant
Optionee shall be in writing and addressed to Optionee at the address indicated
above or to such other address as such party may designate in writing from time
to time to the Company. All notices shall be deemed to have been given or
delivered upon: personal delivery; three (3) days after deposit in the United
States mail by certified or registered mail (return receipt requested); one (1)
business day after deposit with any return receipt express courier (prepaid); or
one (1) business day after transmission by facsimile.
12. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Optionee and Optionee's heirs, executors, administrators, legal representatives,
successors and assigns.
13. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California, without regard
to that body of law pertaining to choice of law or conflict of law.
14. Acceptance. Optionee hereby acknowledges receipt of a copy of the
----------
Plan and this Agreement. Optionee has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms and
conditions of the Plan and this Agreement. Optionee acknowledges that there may
be adverse tax consequences upon exercise of this Option or disposition of the
Shares and that the Company has advised Optionee to consult a tax advisor prior
to such exercise or disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in duplicate by its duly authorized representative and Optionee has
executed this Agreement in duplicate as of the Date of Grant.
SNOWBALL.COM, INC. OPTIONEE
By:________________________________ _______________________________
(Signature)
___________________________________ _______________________________
(Please print name) (Please print name)
___________________________________
(Please print title)
5
<PAGE>
EXHIBIT A
---------
STOCK OPTION EXERCISE AGREEMENT
<PAGE>
Exhibit A
---------
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN (the "Plan")
STOCK OPTION EXERCISE AGREEMENT
-------------------------------
(For Non-Employee Directors)
I hereby elect to purchase the number of shares of Common Stock of
Snowball.com, Inc. (the "Company") as set forth below:
<TABLE>
<CAPTION>
<S> <C>
Optionee______________________________________ Number of Shares Purchased:________________________________
Social Security Number:_______________________ Purchase Price per Share:__________________________________
Address:______________________________________ Aggregate Purchase Price:__________________________________
Date of Option Agreement: _________________________________
____________________________________
____________________________________
Type of Option: Nonqualified Stock Option Exact Name of Title to Shares:_____________________________
___________________________________________________________
</TABLE>
1. Delivery of Purchase Price. Optionee hereby delivers to the Company the
Aggregate Purchase Price, to the extent permitted in the Option Agreement (the
"Option Agreement") as follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $_____________________, receipt of
which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Optionee in the amount
of $___________________________________;
[ ] by delivery of ______________________________ fully-paid, nonassessable
and vested shares of the Common Stock of the Company owned by Optionee for
at least six (6) months prior to the date hereof (and which have been paid
for within the meaning of SEC Rule 144), or obtained by Optionee in the
open public market, and owned free and clear of all liens, claims,
encumbrances or security interests, valued at the current Fair Market Value
of $____________________ per share;
[ ] by the waiver hereby of compensation due or accrued to Optionee for
services rendered in the amount of $____________________________________;
[ ] through a "same-day-sale" commitment, delivered herewith, from Optionee
and the NASD Dealer named therein, in the amount of
$_______________________________; or
[ ] through a "margin" commitment, delivered herewith from Optionee and the
NASD Dealer named therein, in the amount of
$_________________________________________.
2. Market Standoff Agreement. Optionee, if requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by Optionee during the period requested by the managing
underwriter following the effective date of a registration statement of the
Company filed under the Securities Act, provided that all officers and directors
of the Company are required to enter into similar agreements. Such agreement
shall be in writing in a form satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to the shares (or
other securities) subject to the foregoing restriction until the end of such
period.
3. Tax Consequences. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER ADVERSE TAX
CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF THE SHARES.
OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX CONSULTANT(S)
OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE
SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE.
4. Entire Agreement. The Plan and Option Agreement are incorporated herein by
reference. This Exercise Agreement, the Plan and the Option Agreement constitute
the entire agreement and understanding of the parties and supersede in their
entirety all prior understandings and agreements of the Company and Optionee
with respect to the subject matter hereof, and are governed by California law
except for that body of law pertaining to choice of law or conflict of law.
Date: ________________ ___________________________
Signature of Optionee
<PAGE>
Spousal Consent
I acknowledge that I have read the foregoing Stock Option Exercise
Agreement (the "Agreement") and that I know its contents. I hereby consent to
and approve all of the provisions of the Agreement, and agree that the shares of
the Common Stock of Snowball.com, Inc. purchased thereunder (the "Shares") and
any interest I may have in such Shares are subject to all the provisions of the
Agreement. I will take no action at any time to hinder operation of the
Agreement on these Shares or any interest I may have in or to them.
__________________________________ Date:__________________
Signature of Optionee's Spouse
__________________________________
Spouse's Name - Typed or Printed
__________________________________
Optionee's Name - Typed or Printed
<PAGE>
No. ___
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
----------------------
(Succeeding Grant For Non-Employee Directors)
This Stock Option Agreement (this "Agreement") is made and entered
into as of the Date of Grant set forth below (the "Date of Grant") by and
between Snowball.com, Inc., a Delaware corporation (the "Company"), and the
Optionee named below ("Optionee"). Capitalized terms not defined herein shall
have the meanings ascribed to them in the Company's 2000 Equity Incentive Plan
(the "Plan").
Optionee: _______________________________________________
Social Security Number: _______________________________________________
Optionee's Address: _______________________________________________
Total Option Shares: 5,000
-----------------------------------------------
Exercise Price Per Share: _______________________________________________
Date of Grant: _______________________________________________
Expiration Date: _______________________________________________
(unless earlier terminated under Section 3 hereof)
Type of Stock Option: Nonqualified Stock Option
-----------------------------------------------
1. Grant of Option. The Company hereby grants to Optionee an option
---------------
(this "Option") to purchase up to the total number of shares of Common Stock of
the Company set forth above as Total Option Shares (collectively, the "Shares")
at the Exercise Price Per Share set forth above (the "Exercise Price"), subject
to all of the terms and conditions of this Agreement and the Plan.
2. Vesting; Exercise Period.
------------------------
2.1 Vesting of Shares. Subject to the terms and conditions of
-----------------
the Plan and this Agreement, this Option shall be exercisable as it vests.
Subject to the terms and conditions of the Plan and this Agreement, this Option
shall vest as to 25% of the Shares on the first anniversary of the Date of
Grant, and as to 2.08333% of the Shares monthly thereafter until all of the
Shares are fully vested, so long as the Optionee continuously remains a director
of the Company.
2.2 Expiration. This Option shall expire on the Expiration Date
----------
set forth above and must be exercised, if at all, on or before the earlier of
the Expiration Date or the date on which this Option is earlier terminated in
accordance with the provisions of Section 3 hereof.
<PAGE>
Snowball.com, Inc.
Stock Option Plan
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
3. Termination. Except as provided below in this Section, this
-----------
Option shall terminate and may not be exercised if Optionee ceases to be a
member of the Board of Directors of the Company ("Board Member"). The date on
which Optionee ceases to be a Board Member shall be referred to as the
"Termination Date."
3.1 Termination for Any Reason Except Death, Disability or
------------------------------------------------------
Cause. If Optionee ceases to be a Board Member for any reason except death,
- -----
Disability or Cause, then this Option may be exercised by Optionee no later than
seven (7) months after the Termination Date, but in any event no later than the
Expiration Date.
3.2 Termination Because of Death or Disability. If Optionee
------------------------------------------
ceases to be a Board Member due to Optionee's death or Disability (or dies
within 3 months after Termination other than for Cause or because of
Disability), then this Option may be exercised by Optionee (or Optionee's legal
representative or authorized assignee) no later than twelve (12) months after
the Termination Date, but in any event no later than the Expiration Date.
3.3 Termination for Cause. If Optionee is Terminated for Cause,
---------------------
then this Option, to the extenct that it is vested in accordance with the
schedule set forth in Section 2.1 hereof on the Termination Date, may be
exercised by Optionee no later than one (1) month after the Termination Date,
but in any event no later than the Expiration Date.
4. Manner of Exercise.
------------------
4.1 Stock Option Exercise Agreement. To exercise this Option,
-------------------------------
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement in the form attached
hereto as Exhibit A, or in such other form as may be approved by the Company
---------
from time to time (the "Exercise Agreement"), which shall set forth, inter alia,
----- ----
Optionee's election to exercise this Option, the number of shares being
purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Optionee's investment intent and access to
information as may be required by the Company to comply with applicable
securities laws. If someone other than Optionee exercises this Option, then
such person must submit documentation reasonably acceptable to the Company that
such person has the right to exercise this Option.
4.2 Limitations on Exercise. This Option may not be exercised
-----------------------
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. This Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which this Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
-------
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:
2
<PAGE>
Snowball.com, Inc.
Stock Option Plan
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
(a) by cancellation of indebtedness of the Company to the Optionee;
(b) by surrender of shares of the Company's Common Stock that either: (1)
have been owned by Optionee for more than six (6) months and have been
paid for within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note has
been fully paid with respect to such shares); or (2) were obtained by
Optionee in the open public market; and (3) are clear of all liens,
---
claims, encumbrances or security interests;
(c) by waiver of compensation due or accrued to Optionee for services
rendered;
(d) provided that a public market for the Company's stock exists: (1)
through a "same day sale" commitment from Optionee and a broker-dealer
that is a member of the National Association of Securities Dealers (an
"NASD Dealer") whereby Optionee irrevocably elects to exercise this
Option and to sell a portion of the Shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price directly to the
Company; or (2) through a "margin" commitment from Optionee and an
--
NASD Dealer whereby Optionee irrevocably elects to exercise this
Option and to pledge the Shares so purchased to the NASD Dealer in a
margin account as security for a loan from the NASD Dealer in the
amount of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
---------------
exercise of this Option, Optionee must pay or provide for any applicable federal
or state withholding obligations of the Company. If the Committee permits,
Optionee may provide for payment of withholding taxes upon exercise of this
Option by requesting that the Company retain Shares with a Fair Market Value
equal to the minimum amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Optionee by deducting the
Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement and
------------------
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Optionee, Optionee's
authorized assignee, or Optionee's legal representative, and shall deliver
certificates representing the Shares with the appropriate legends affixed
thereto.
5. Compliance with Laws and Regulations. The exercise of this Option
------------------------------------
and the issuance and transfer of Shares shall be subject to compliance by the
Company and Optionee with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the
3
<PAGE>
Snowball.com, Inc.
Stock Option Plan
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
time of such issuance or transfer. Optionee understands that the Company is
under no obligation to register or qualify the Shares with the SEC, any state
securities commission or any stock exchange to effect such compliance.
6. Nontransferability of Option. This Option may not be transferred
----------------------------
in any manner other than under the terms and conditions of the Plan or by will
or by the laws of descent and distribution and may be exercised during the
lifetime of Optionee only by Optionee. The terms of this Option shall be
binding upon the executors, administrators, successors and assigns of Optionee.
7. Tax Consequences. Set forth below is a brief summary as of the
----------------
date the Board adopted the Plan of some of the federal tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
7.1 Exercise of Nonqualified Stock Option. There may be a
-------------------------------------
regular federal income tax liability upon the exercise of this Option. Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the fair market value of the
Shares on the date of exercise over the Exercise Price. The Company may be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
7.2 Disposition of Shares. If the Shares are held for more than
---------------------
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of an NQSO, any gain realized on disposition of the Shares will be
treated as long-term capital gain.
8. Privileges of Stock Ownership. Optionee shall not have any of the
-----------------------------
rights of a stockholder with respect to any Shares until the Shares are issued
to Optionee.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Optionee.
10. Entire Agreement. The Plan is incorporated herein by reference.
----------------
This Agreement and the Plan and the Exercise Agreement constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersede all prior understandings and agreements with respect
to such subject matter.
11. Notices. Any notice required to be given or delivered to the
-------
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to
4
<PAGE>
Snowball.com, Inc.
Stock Option Agreement
For Non-Employee Directors
2000 Equity Incentive Plan
Succeeding Grant
Optionee shall be in writing and addressed to Optionee at the address indicated
above or to such other address as such party may designate in writing from time
to time to the Company. All notices shall be deemed to have been given or
delivered upon: personal delivery; three (3) days after deposit in the United
States mail by certified or registered mail (return receipt requested); one (1)
business day after deposit with any return receipt express courier (prepaid); or
one (1) business day after transmission by facsimile.
12. Successors And Assigns. The Company may assign any of its rights
----------------------
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Optionee and Optionee's heirs, executors, administrators, legal representatives,
successors and assigns.
13. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California, without regard
to that body of law pertaining to choice of law or conflict of law.
14. Acceptance. Optionee hereby acknowledges receipt of a copy of the
----------
Plan and this Agreement. Optionee has read and understands the terms and
provisions thereof, and accepts this Option subject to all the terms and
conditions of the Plan and this Agreement. Optionee acknowledges that there may
be adverse tax consequences upon exercise of this Option or disposition of the
Shares and that the Company has advised Optionee to consult a tax advisor prior
to such exercise or disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in duplicate by its duly authorized representative and Optionee has executed
this Agreement in duplicate as of the Date of Grant.
SNOWBALL.COM, INC. OPTIONEE
By:------------------------- -----------------------------------
(Signature)
- ---------------------------- -----------------------------------
(Please print name) (Please print name)
- ----------------------------
(Please print title)
5
<PAGE>
Exhibit A
---------
SNOWBALL.COM, INC.
2000 EQUITY INCENTIVE PLAN (the "Plan")
STOCK OPTION EXERCISE AGREEMENT
-------------------------------
I hereby elect to purchase the number of shares of Common Stock of
Snowball.com, Inc. (the "Company") as set forth below:
<TABLE>
<S> <C>
Optionee____________________________________________________ Number of Shares Purchased:_________________________________________
Social Security Number:_____________________________________ Purchase Price per Share:___________________________________________
Address:____________________________________________________ Aggregate Purchase Price:___________________________________________
_____________________________________________ Date of Option Agreement:____________________
_____________________________________________
Type of Option: [ ] Incentive Stock Option Exact Name of Title to Shares:______________________________________
[ ] Nonqualified Stock ____________________________________________________________________
</TABLE>
1. Delivery of Purchase Price. Optionee hereby delivers to the Company the
Aggregate Purchase Price, to the extent permitted in the Option Agreement (the
"Option Agreement") as follows (check as applicable and complete):
[ ] in cash (by check) in the amount of $_____________________, receipt of
which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Optionee in the amount
of $___________________________________;
[ ] by delivery of ______________________________ fully-paid, nonassessable
and vested shares of the Common Stock of the Company owned by Optionee for
at least six (6) months prior to the date hereof (and which have been paid
for within the meaning of SEC Rule 144), or obtained by Optionee in the
open public market, and owned free and clear of all liens, claims,
encumbrances or security interests, valued at the current Fair Market
Value of $____________________ per share;
[ ] by the waiver hereby of compensation due or accrued to Optionee for
services rendered in the amount of $____________________________________;
[ ] through a "same-day-sale" commitment, delivered herewith, from Optionee
and the NASD Dealer named therein, in the amount of $_________________; or
[ ] through a "margin" commitment, delivered herewith from Optionee and the
NASD Dealer named therein, in the amount of $____________________________.
2. Market Standoff Agreement. Optionee, if requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by Optionee during the period requested by the managing
underwriter following the effective date of a registration statement of the
Company filed under the Securities Act, provided that all officers and directors
of the Company are required to enter into similar agreements. Such agreement
shall be in writing in a form satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to the shares (or
other securities) subject to the foregoing restriction until the end of such
period.
3. Tax Consequences. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER ADVERSE
TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF THE
SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX
CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR
ANY TAX ADVICE.
4. Entire Agreement. The Plan and Option Agreement are incorporated herein by
reference. This Exercise Agreement, the Plan and the Option Agreement
constitute the entire agreement and understanding of the parties and supersede
in their entirety all prior understandings and agreements of the Company and
Optionee with respect to the subject matter hereof, and are governed by
California law except for that body of law pertaining to choice of law or
conflict of law.
Date:_____________________________ ___________________________________
Signature of Optionee
<PAGE>
Spousal Consent
I acknowledge that I have read the foregoing Stock Option Exercise
Agreement (the "Agreement") and that I know its contents. I hereby consent to
and approve all of the provisions of the Agreement, and agree that the shares of
the Common Stock of Snowball.com, Inc. purchased thereunder (the "Shares") and
any interest I may have in such Shares are subject to all the provisions of the
Agreement. I will take no action at any time to hinder operation of the
Agreement on these Shares or any interest I may have in or to them.
__________________________________ Date:__________________
Signature of Optionee's Spouse
__________________________________
Spouse's Name - Typed or Printed
__________________________________
Optionee's Name - Typed or Printed
<PAGE>
EXHIBIT 10.04
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
As Adopted __________________, 1999
1. Establishment of Plan. Snowball.com, Inc. (the "Company") proposes to
grant options for purchase of the Company's Common Stock to eligible employees
of the Company and its Participating Subsidiaries (as hereinafter defined)
pursuant to this Employee Stock Purchase Plan (this "Plan"). For purposes of
this Plan, "Parent Corporation" and "Subsidiary" shall have the same meanings as
"parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f),
respectively, of the Internal Revenue Code of 1986, as amended (the "Code").
"Participating Subsidiaries" are Parent Corporations or Subsidiaries that the
Board of Directors of the Company (the "Board") designates from time to time as
corporations that shall participate in this Plan. The Company intends this Plan
to qualify as an "employee stock purchase plan" under Section 423 of the Code
(including any amendments to or replacements of such Section), and this Plan
shall be so construed. Any term not expressly defined in this Plan but defined
for purposes of Section 423 of the Code shall have the same definition herein.
A total of 500,000 shares of the Company's Common Stock is reserved for
issuance under this Plan. In addition, on each January 1, the aggregate number
of shares of the Company's Common Stock reserved for issuance under the Plan
shall be increased automatically by a number of shares equal to 1% of the total
number of outstanding shares of the Company Common Stock on the immediately
preceding December 31; provided, that the Board or the Committee may in its sole
---------
discretion reduce the amount of the increase in any particular year; and,
provided further, that the aggregate number of shares issued over the term of
- ----------------
this Plan shall not exceed 5,000,000 shares. Such number shall be subject to
adjustments effected in accordance with Section 14 of this Plan.
2. Purpose. The purpose of this Plan is to provide eligible employees of
the Company and Participating Subsidiaries with a convenient means of acquiring
an equity interest in the Company through payroll deductions, to enhance such
employees' sense of participation in the affairs of the Company and
Participating Subsidiaries, and to provide an incentive for continued
employment.
3. Administration. This Plan shall be administered by the Compensation
Committee of the Board (the "Committee"). Subject to the provisions of this
Plan and the limitations of Section 423 of the Code or any successor provision
in the Code, all questions of interpretation or application of this Plan shall
be determined by the Committee and its decisions shall be final and binding upon
all participants. Members of the Committee shall receive no compensation for
their services in connection with the administration of this Plan, other than
standard fees as established from time to time by the Board for services
rendered by Board members serving on Board committees. All expenses incurred in
connection with the administration of this Plan shall be paid by the Company.
4. Eligibility. Any employee of the Company or the Participating
Subsidiaries is eligible to participate in an Offering Period (as hereinafter
defined) under this Plan except the following:
(a) employees who are not employed by the Company or a Participating
Subsidiary prior to the beginning of such Offering Period or prior to such other
time period as specified by the Committee, except that employees who are
employed on the Effective Date of the Registration Statement filed by the
Company with the Securities and Exchange Commission ("SEC") under the Securities
Act of 1933, as amended (the "Securities Act") registering the initial public
offering of the Company's Common Stock shall be eligible to participate in the
first Offering Period under the Plan;
(b) employees who are customarily employed for twenty (20) hours or
less per week;
(c) employees who are customarily employed for five (5) months or
less in a calendar year;
(d) employees who, together with any other person whose stock would
be attributed to such employee pursuant to Section 424(d) of the Code, own stock
or hold options to purchase stock possessing five
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or any of its Participating Subsidiaries or who, as a
result of being granted an option under this Plan with respect to such Offering
Period, would own stock or hold options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or any of its Participating Subsidiaries; and
(e) individuals who provide services to the Company or any of its
Participating Subsidiaries as independent contractors who are reclassified as
common law employees for any reason except for federal income and employment tax
------ ---
purposes.
5. Offering Dates. The offering periods of this Plan (each, an "Offering
Period") shall be of twenty-four (24) months duration commencing on February 1
and August 1 of each year and ending on January 31 and July 31 of each year;
provided, however, that notwithstanding the foregoing, the first such Offering
- -----------------
Period shall commence on the first business day on which price quotations for
the Company's Common Stock are available on the Nasdaq National Market (the
"First Offering Date") and shall end on January 31, 2002. Except for the first
Offering Period, each Offering Period shall consist of four (4) six month
purchase periods (individually, a "Purchase Period") during which payroll
deductions of the participants are accumulated under this Plan. The first
Offering Period shall consist of no more than five and no fewer than three
Purchase Periods, any of which may be greater or less than six months as
determined by the Committee. The first business day of each Offering Period is
referred to as the "Offering Date". The last business day of each Purchase
Period is referred to as the "Purchase Date". The Committee shall have the
power to change the Offering Dates, the Purchase Dates and the duration of
Offering Periods or Purchase Periods without stockholder approval if such change
is announced prior to the relevant Offering Period, or prior to such other time
period as specified by the Committee.
6. Participation in this Plan. Eligible employees may become
participants in an Offering Period under this Plan on the first Offering Date
after satisfying the eligibility requirements by delivering a subscription
agreement to the Company prior to such Offering Date, or such other time period
as specified by the Committee. Notwithstanding the foregoing, the Committee may
set a later time for filing the subscription agreement authorizing payroll
deductions for all eligible employees with respect to a given Offering Period.
An eligible employee who does not deliver a subscription agreement to the
Company by such date after becoming eligible to participate in such Offering
Period shall not participate in that Offering Period or any subsequent Offering
Period unless such employee enrolls in this Plan by filing a subscription
agreement with the Company prior to such Offering Date, or such other time
period as specified by the Committee. Once an employee becomes a participant in
an Offering Period, such employee will automatically participate in the Offering
Period commencing immediately following the last day of the prior Offering
Period unless the employee withdraws or is deemed to withdraw from this Plan or
terminates further participation in the Offering Period as set forth in Section
11 below. Such participant is not required to file any additional subscription
agreement in order to continue participation in this Plan.
7. Grant of Option on Enrollment. Enrollment by an eligible employee in
this Plan with respect to an Offering Period will constitute the grant (as of
the Offering Date) by the Company to such employee of an option to purchase on
the Purchase Date up to that number of shares of Common Stock of the Company
determined by dividing (a) the amount accumulated in such employee's payroll
deduction account during such Purchase Period by (b) the lower of (i) eighty-
five percent (85%) of the fair market value of a share of the Company's Common
Stock on the Offering Date (but in no event less than the par value of a share
of the Company's Common Stock), or (ii) eighty-five percent (85%) of the fair
market value of a share of the Company's Common Stock on the Purchase Date (but
in no event less than the par value of a share of the Company's Common Stock),
provided, however, that the number of shares of the Company's Common Stock
- -----------------
subject to any option granted pursuant to this Plan shall not exceed the lesser
of (x) the maximum number of shares set by the Committee pursuant to Section
10(c) below with respect to the applicable Purchase Date, or (y) the maximum
number of shares which may be purchased pursuant to Section 10(b) below with
respect to the applicable Purchase Date. The fair market value of a share of
the Company's Common Stock shall be determined as provided in Section 8 below.
8. Purchase Price. The purchase price per share at which a share of
Common Stock will be sold in any Offering Period shall be eighty-five percent
(85%) of the lesser of:
2
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
(a) The fair market value on the Offering Date; or
(b) The fair market value on the Purchase Date.
For purposes of this Plan, the term "Fair Market Value" means, as of
any date, the value of a share of the Company's Common Stock determined as
follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of determination on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading as reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices on the date
of determination as reported in The Wall Street Journal; or
-----------------------
(d) if none of the foregoing is applicable, by the Board in good
faith, which in the case of the First Offering Date will be the price per share
at which shares of the Company's Common Stock are initially offered for sale to
the public by the Company's underwriters in the initial public offering of the
Company's Common Stock pursuant to a registration statement filed with the SEC
under the Securities Act.
9. Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of
Shares.
(a) The purchase price of the shares is accumulated by regular
payroll deductions made during each Offering Period. The deductions are made as
a percentage of the participant's compensation in one percent (1%) increments
not less than one percent (1%), nor greater than ten percent (10%) or such lower
limit set by the Committee. Compensation shall mean all W-2 cash compensation,
including, but not limited to, base salary, wages, commissions, overtime, shift
premiums and bonuses, plus draws against commissions, provided, however, that
-------- -------
for purposes of determining a participant's compensation, any election by such
participant to reduce his or her regular cash remuneration under Sections 125 or
401(k) of the Code shall be treated as if the participant did not make such
election. Payroll deductions shall commence on the first payday of the Offering
Period and shall continue to the end of the Offering Period unless sooner
altered or terminated as provided in this Plan.
(b) A participant may increase or decrease the rate of payroll
deductions during an Offering Period by filing with the Company a new
authorization for payroll deductions, in which case the new rate shall become
effective for the next payroll period commencing after the Company's receipt of
the authorization and shall continue for the remainder of the Offering Period
unless changed as described below. Such change in the rate of payroll
deductions may be made at any time during an Offering Period, but not more than
one (1) change may be made effective during any Purchase Period. A participant
may increase or decrease the rate of payroll deductions for any subsequent
Offering Period by filing with the Company a new authorization for payroll
deductions prior to the beginning of such Offering Period, or prior to such
other time period as specified by the Committee.
(c) A participant may reduce his or her payroll deduction percentage
to zero during an Offering Period by filing with the Company a request for
cessation of payroll deductions. Such reduction shall be effective beginning
with the next payroll period after the Company's receipt of the request and no
further payroll deductions will be made for the duration of the Offering Period.
Payroll deductions credited to the participant's account prior to the effective
date of the request shall be used to purchase shares of Common Stock of the
Company in accordance with Section (e) below. A participant may not resume
making payroll deductions during the Offering Period in which he or she reduced
his or her payroll deductions to zero.
3
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
(d) All payroll deductions made for a participant are credited to his
or her account under this Plan and are deposited with the general funds of the
Company. No interest accrues on the payroll deductions. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose, and the Company shall not be obligated to segregate such payroll
deductions.
(e) On each Purchase Date, so long as this Plan remains in effect and
provided that the participant has not submitted a signed and completed
withdrawal form before that date which notifies the Company that the participant
wishes to withdraw from that Offering Period under this Plan and have all
payroll deductions accumulated in the account maintained on behalf of the
participant as of that date returned to the participant, the Company shall apply
the funds then in the participant's account to the purchase of whole shares of
Common Stock reserved under the option granted to such participant with respect
to the Offering Period to the extent that such option is exercisable on the
Purchase Date. The purchase price per share shall be as specified in Section 8
of this Plan. Any cash remaining in a participant's account after such purchase
of shares shall be refunded to such participant in cash, without interest;
provided, however that any amount remaining in such participant's account on a
Purchase Date which is less than the amount necessary to purchase a full share
of Common Stock of the Company shall be carried forward, without interest, into
the next Purchase Period or Offering Period, as the case may be. In the event
that this Plan has been oversubscribed, all funds not used to purchase shares on
the Purchase Date shall be returned to the participant, without interest. No
Common Stock shall be purchased on a Purchase Date on behalf of any employee
whose participation in this Plan has terminated prior to such Purchase Date.
(f) As promptly as practicable after the Purchase Date, the Company
shall issue shares for the participant's benefit representing the shares
purchased upon exercise of his or her option.
(g) During a participant's lifetime, his or her option to purchase
shares hereunder is exercisable only by him or her. The participant will have
no interest or voting right in shares covered by his or her option until such
option has been exercised.
10. Limitations on Shares to be Purchased.
(a) No participant shall be entitled to purchase stock under this
Plan at a rate which, when aggregated with his or her rights to purchase stock
under all other employee stock purchase plans of the Company or any Subsidiary,
exceeds $25,000 in fair market value, determined as of the Offering Date (or
such other limit as may be imposed by the Code) for each calendar year in which
the employee participates in this Plan. The Company shall automatically suspend
the payroll deductions of any participant as necessary to enforce such limit
provided that when the Company automatically resumes such payroll deductions,
the Company must apply the rate in effect immediately prior to such suspension.
(b) No more than two hundred percent (200%) of the number of shares
determined by using eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date as the denominator may
be purchased by a participant on any single Purchase Date.
(c) No participant shall be entitled to purchase more than the
Maximum Share Amount (as defined below) on any single Purchase Date. Prior to
the commencement of any Offering Period or prior to such time period as
specified by the Committee, the Committee may, in its sole discretion, set a
maximum number of shares which may be purchased by any employee at any single
Purchase Date (hereinafter the "Maximum Share Amount"). Until otherwise
determined by the Committee, there shall be no Maximum Share Amount. In no
event shall the Maximum Share Amount exceed the amounts permitted under Section
10(b) above. If a new Maximum Share Amount is set, then all participants must
be notified of such Maximum Share Amount prior to the commencement of the next
Offering Period. The Maximum Share Amount shall continue to apply with respect
to all succeeding Purchase Dates and Offering Periods unless revised by the
Committee as set forth above.
(d) If the number of shares to be purchased on a Purchase Date by all
employees participating in this Plan exceeds the number of shares then available
for issuance under this Plan, then the Company will make a pro rata allocation
of the remaining shares in as uniform a manner as shall be reasonably
practicable and as the
4
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
Committee shall determine to be equitable. In such event, the Company shall give
written notice of such reduction of the number of shares to be purchased under a
participant's option to each participant affected.
(e) Any payroll deductions accumulated in a participant's account
which are not used to purchase stock due to the limitations in this Section 10
shall be returned to the participant as soon as practicable after the end of the
applicable Purchase Period, without interest.
11. Withdrawal.
(a) Each participant may withdraw from an Offering Period under this
Plan by signing and delivering to the Company a written notice to that effect on
a form provided for such purpose. Such withdrawal may be elected at any time
prior to the end of an Offering Period, or such other time period as specified
by the Committee.
(b) Upon withdrawal from this Plan, the accumulated payroll
deductions shall be returned to the withdrawn participant, without interest, and
his or her interest in this Plan shall terminate. In the event a participant
voluntarily elects to withdraw from this Plan, he or she may not resume his or
her participation in this Plan during the same Offering Period, but he or she
may participate in any Offering Period under this Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for payroll
deductions in the same manner as set forth in Section 6 above for initial
participation in this Plan.
(c) If the Fair Market Value on the first day of the current Offering
Period in which a participant is enrolled is higher than the Fair Market Value
on the first day of any subsequent Offering Period, the Company will
automatically enroll such participant in the subsequent Offering Period. Any
funds accumulated in a participant's account prior to the first day of such
subsequent Offering Period will be applied to the purchase of shares on the
Purchase Date immediately prior to the first day of such subsequent Offering
Period, if any.
12. Termination of Employment. Termination of a participant's
employment for any reason, including retirement, death or the failure of a
participant to remain an eligible employee of the Company or of a Participating
Subsidiary, immediately terminates his or her participation in this Plan. In
such event, the payroll deductions credited to the participant's account will be
returned to him or her or, in the case of his or her death, to his or her legal
representative, without interest. For purposes of this Section 12, an employee
will not be deemed to have terminated employment or failed to remain in the
continuous employ of the Company or of a Participating Subsidiary in the case of
sick leave, military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than ninety (90) days or
- --------
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
13. Return of Payroll Deductions. In the event a participant's interest
in this Plan is terminated by withdrawal, termination of employment or
otherwise, or in the event this Plan is terminated by the Board, the Company
shall deliver to the participant all payroll deductions credited to such
participant's account. No interest shall accrue on the payroll deductions of a
participant in this Plan.
14. Capital Changes. Subject to any required action by the stockholders
of the Company, the number of shares of Common Stock covered by each option
under this Plan which has not yet been exercised and the number of shares of
Common Stock which have been authorized for issuance under this Plan but have
not yet been placed under option (collectively, the "Reserves"), as well as the
price per share of Common Stock covered by each option under this Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued and outstanding shares of Common Stock of the
Company resulting from a stock split or the payment of a stock dividend (but
only on the Common Stock) or any other increase or decrease in the number of
issued and outstanding shares of Common Stock effected without receipt of any
consideration by the Company; provided, however, that conversion of any
-----------------
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the
Committee, whose determination shall be final, binding and conclusive. Except
as expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no
5
<PAGE>
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the
Company, the Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. The Committee may, in the exercise of its sole discretion in such
instances, declare that this Plan shall terminate as of a date fixed by the
Committee and give each participant the right to purchase shares under this Plan
prior to such termination. In the event of (i) a merger or consolidation in
which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings and the options under this Plan are assumed, converted or replaced by
the successor corporation, which assumption will be binding on all
participants), (ii) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (iii) the sale of all or
substantially all of the assets of the Company or (iv) the acquisition, sale, or
transfer of more than 50% of the outstanding shares of the Company by tender
offer or similar transaction, the Plan will continue with regard to Offering
Periods that commenced prior to the closing of the proposed transaction and
shares will be purchased based on the Fair Market Value of the surviving
corporation's stock on each Purchase Date, unless otherwise provided by the
Committee consistent with pooling of interests accounting treatment.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, or in the event of the Company being consolidated with or merged into any
other corporation.
15. Nonassignability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under this Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 22 below) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be void and
without effect.
16. Reports. Individual accounts will be maintained for each participant
in this Plan. Each participant shall receive promptly after the end of each
Purchase Period a report of his or her account setting forth the total payroll
deductions accumulated, the number of shares purchased, the per share price
thereof and the remaining cash balance, if any, carried forward to the next
Purchase Period or Offering Period, as the case may be.
17. Notice of Disposition. Each participant shall notify the Company in
writing if the participant disposes of any of the shares purchased in any
Offering Period pursuant to this Plan if such disposition occurs within two (2)
years from the Offering Date or within one (1) year from the Purchase Date on
which such shares were purchased (the "Notice Period"). The Company may, at any
time during the Notice Period, place a legend or legends on any certificate
representing shares acquired pursuant to this Plan requesting the Company's
transfer agent to notify the Company of any transfer of the shares. The
obligation of the participant to provide such notice shall continue
notwithstanding the placement of any such legend on the certificates.
18. No Rights to Continued Employment. Neither this Plan nor the grant
of any option hereunder shall confer any right on any employee to remain in the
employ of the Company or any Participating Subsidiary, or restrict the right of
the Company or any Participating Subsidiary to terminate such employee's
employment.
19. Equal Rights And Privileges. All eligible employees shall have
equal rights and privileges with respect to this Plan so that this Plan
qualifies as an "employee stock purchase plan" within the meaning of Section 423
or any successor provision of the Code and the related regulations. Any
provision of this Plan which is inconsistent with Section 423 or any successor
provision of the Code shall, without further act or amendment by the
6
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
Company, the Committee or the Board, be reformed to comply with the requirements
of Section 423. This Section 19 shall take precedence over all other provisions
in this Plan.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with this Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Term; Stockholder Approval. After this Plan is adopted by the
Board, this Plan will become effective on the First Offering Date (as defined
above). This Plan shall be approved by the stockholders of the Company, in any
manner permitted by applicable corporate law, within twelve (12) months before
or after the date this Plan is adopted by the Board. No purchase of shares
pursuant to this Plan shall occur prior to such stockholder approval. This Plan
shall continue until the earlier to occur of (a) termination of this Plan by the
Board (which termination may be effected by the Board at any time), (b) issuance
of all of the shares of Common Stock reserved for issuance under this Plan, or
(c) ten (10) years from the adoption of this Plan by the Board.
22. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
this Plan in the event of such participant's death subsequent to the end of an
Purchase Period but prior to delivery to him of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under this Plan in the event
of such participant's death prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under this Plan who is living
at the time of such participant's death, the Company shall deliver such shares
or cash to the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such shares or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
23. Conditions Upon Issuance of Shares; Limitation on Sale of Shares.
Shares shall not be issued with respect to an option unless the exercise of such
option and the issuance and delivery of such shares pursuant thereto shall
comply with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange or automated quotation system upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
24. Applicable Law. The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of California.
25. Amendment or Termination of this Plan. The Board may at any time
amend, terminate or extend the term of this Plan, except that any such
termination cannot affect options previously granted under this Plan, nor may
any amendment make any change in an option previously granted which would
adversely affect the right of any participant, nor may any amendment be made
without approval of the stockholders of the Company obtained in accordance with
Section 21 above within twelve (12) months of the adoption of such amendment (or
earlier if required by Section 21) if such amendment would:
(a) increase the number of shares that may be issued under this Plan;
or
(b) change the designation of the employees (or class of employees)
eligible for participation in this Plan.
7
<PAGE>
Snowball.com, Inc.
2000 Employee Stock Purchase Plan
Notwithstanding the foregoing, the Board may make such amendments to
the Plan as the Board determines to be advisable, if the continuation of the
Plan or any Offering Period would result in financial accounting treatment for
the Plan that is different from the financial accounting treatment in effect on
the date this Plan is adopted by the Board.
8
<PAGE>
SNOWBALL.COM, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT FORM
<TABLE>
<S> <C>
Check One: Complete:
[ ] New Enrollment or Re-enrollment Social Security No._________________________________________________
[ ] Change Employee No.________________________________________________________
[ ] Change in How Shares Are to Be Held in Account
[ ] Increase in Payroll Deduction Level [ ] this Purchase Period [ ] next Offering Period
[ ] Decrease in Payroll Deduction Level [ ] this Purchase Period [ ] next Offering Period
[ ] Suspension of Payroll Deductions for Open Offering Period (Attach Completed Suspension Form)
[ ] Withdrawal (Attach Completed Withdrawal Form)
[ ] Beneficiary Change
</TABLE>
1. Name of Participant________________________________________________________
2. Shares purchased under the Plan should be held in account with the Plan
Broker in my name or in my name together with the name(s) indicated below:
Name__________________________ Social Security No.______________________
Name__________________________ Social Security No.______________________
There may be tax consequences for naming individuals other than your spouse
on the account in which Shares purchased under the Plan are held. If spouse
(circle one): Joint Tenants/Community Property.
Please notify the Plan Broker directly to transfer or sell your stock.
3. Payroll Deduction Level (from 1% to 10% in whole percentages):____________
(the percentage deduction will be made from your W-2 compensation including
base salary, commissions, overtime, shift premiums, bonuses and draws
against commissions)
4. I confirm my spouse's interest (if married) in the community property
herein, and I hereby designate the following person(s) as my
beneficiary(ies) to receive all payments and/or stock attributable to my
interest under the Plan:
<TABLE>
NAME *To be divided ADDRESS
as follows:
<S> <C> <C>
__________________________________________ ______________ _______________________________________
Last First M.I. Number Street
__________________________________________ _______________________________________
Social Security No. Relationship City State Zip
__________________________________________ ______________ _______________________________________
Last First M.I. Number Street
__________________________________________ _______________________________________
Social Security No. Relationship City State Zip
</TABLE>
* If more than one beneficiary: (1) insert "in equal shares", or (2) insert
percentage to be paid to each beneficiary.
5. The information provided on this Enrollment Form will remain in effect
unless and until I complete and submit to Silicon Image, Inc. a new
enrollment form.
SNOWBALL.COM, INC. OFFICE USE:
Signature:_________________ Date received by the__________________:______
Name:______________________ Date entered into system:____________________
Date:______________________ Please return this completed form to
Snowball.com, Inc.
<PAGE>
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
1. I elect to participate in the Snowball.com, Inc. (the "Company") 2000
Employee Stock Purchase Plan (the "Plan") and to subscribe to purchase
shares of the Company's Common Stock (the "Shares") in accordance with this
Subscription Agreement and the Plan.
2. I authorize payroll deductions from each of my paychecks in that percentage
of my base salary, commissions, overtime, shift premiums, bonuses and draws
against commissions as shown on my Enrollment Form, in accordance with the
Plan.
3. I understand that such payroll deductions shall be accumulated for the
purchase of Shares under the Plan at the applicable purchase price
determined in accordance with the Plan. I further understand that except as
otherwise set forth in the Plan, Shares will be purchased for me
automatically at the end of each Purchase Period unless I withdraw from the
Plan or otherwise become ineligible to participate in the Plan.
4. I understand that this Subscription Agreement will automatically re-enroll
me in all subsequent Offering Periods unless I withdraw from the Plan or I
become ineligible to participate in the Plan.
5. I acknowledge that I have a copy of and am familiar with the Company's most
recent Prospectus which describes the Plan. A copy of the complete Plan and
the Prospectus is on file with the Company. (In the case of the initial
Plan Purchase Period, the Prospectus will be on file on the first day of
the Offering Period.)
6. I understand that Shares purchased for me under the Plan will be held in a
personal account with the Plan Broker unless I request otherwise.
7. I hereby agree to be bound by the terms of the Plan. The effectiveness of
this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
8. I have read and understood this Subscription Agreement.
Signature:_________________________
Name:______________________________
Date:______________________________
Please return this completed form to the Company.
<PAGE>
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, _________________________, the undersigned participant in the Offering
Period of the Snowball.com, Inc. 2000 Employee Stock Purchase Plan (the "Plan")
which began on _______________, hereby notify Snowball.com, Inc. (the "Company")
that I wish to withdraw from the Offering Period. I direct the Company to pay
to me as promptly as practicable all payroll deductions credited to my account
with respect to such Offering Period. I understand and agree that my
participation in the Plan will terminate and no shares will be purchased for me
at the end of the Purchase Period so long as I submit this Notice of Withdrawal
to the Company prior to the end of the Purchase Period, or such other time
period as specified by the Company. I understand and agree that if I submit
this Notice of Withdrawal to the Company prior to the end of the Purchase
Period, shares will be purchased for me at the end of the Purchase Period, and
my participation in the Plan will end at the beginning of the next Purchase
Period or Offering Period, as the case may be. I further understand that no
additional payroll deductions will be made for the purchase of shares in the
current Offering Period, and I shall be eligible to participate in succeeding
Offering Periods only by timely delivering to the Company a new Subscription
Agreement and Enrollment Form.
Name and address of Participant (please print):
Name:______________________________________________________________________
Street Address or P.O. Box:________________________________________________
City, State ZIP:___________________________________________________________
__________________________________ __________________________________
Signature Date
Please return this form to the Company.
<PAGE>
SNOWBALL.COM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF SUSPENSION
I, _________________________, the undersigned participant in the Offering
Period of the Snowball.com, Inc. 2000 Employee Stock Purchase Plan (the "Plan")
which began on _______________, hereby notify Snowball.com, Inc. (the "Company")
that I wish to suspend my payroll deductions to the Plan for the remainder of
the Offering Period. I understand and agree that my request will be effective
beginning with the next payroll period after the Company receives this Notice of
Suspension. I understand and agree that payroll deductions credited to my
account prior to the date this Notice of Suspension is effective will be used to
purchase shares on the next Purchase Date. I further understand that no
additional payroll deductions will be made for the purchase of shares in the
current Offering Period, and I will be eligible to participate in succeeding
Offering Periods only by timely delivering to the Company a new Subscription
Agreement and Enrollment Form.
Name and address of Participant (please print):
Name:______________________________________________________________________
Street Address or P.O. Box:________________________________________________
City, State ZIP:___________________________________________________________
_____________________________________ ______________________________
Signature Date
Please return this form to the Company.
<PAGE>
EXHIBIT 10.05
ADOPTION AGREEMENT FOR
PAN AMERICAN LIFE INSURANCE
STANDARDIZED 401(K) PROFIT SHARING
PLAN AND TRUST
The undersigned Employer adopts the Pan American Life Insurance Company
Standardized 401(k) Profit Sharing Plan for those Employees who shall qualify as
Participants hereunder, to be known as the
Al Affiliation Networks, Inc. 401(k) Plan
------------------------------------------------------------------------
(Enter Plan Name)
It shall be effective as of the date specified below. The Employer hereby
selects the following Plan specifications:
CAUTION: The failure to properly fill out this Adoption Agreement may result
in disqualification of the Plan.
EMPLOYER INFORMATION
B1 Name of Employer Affiliation Networks, Inc.
------------------------------------------------
________________________________________________
________________________________________________
________________________________________________
B2 Address 150 North Hill Drive, #40
---------------------------------------------------------
Brisbane , California 94005
-------------- ---------------- ---------
City State Zip
Telephone (415) 468-4684
---------------------------------------------------------
B3 Employer Identification Number 94-3316902
---------------
B4 Date Business Commenced January 7, 1999
--------------------
B5 TYPE OF ENTITY
a. ( ) S Corporation
b. ( ) Professional Service Corporation
C. (X) Corporation
d. ( ) Sole Proprietorship
e. ( ) Partnership
f. ( ) Other
AND, is the Employer a member of...
g. a controlled group? ( ) Yes (X) No
1
<PAGE>
h. an affiliated service group? ( ) Yes (X) No
B6 NAME(S) OF TRUSTEE(S) a. /s/ Mark Jung
b.____________________________
c.____________________________
B7 TRUSTEES' ADDRESS a. (X) Use Employer Address
b. ( ) ________________________________________________________________
Street
City State Zip
---------------- --------------------- -----------
B8 LOCATION OF EMPLOYER'S PRINCIPAL OFFICE:
a. (x) state b. ( ) commonwealth of c. California and this Plan
----------
and Trust shall be governed under the same.
B9 EMPLOYER FISCAL YEAR means the 12 consecutive month period:
Commencing on a. January 1/st/ (e.g., January 1st) and
-------------
month day
ending on b. December 31/st/
---------------
month day
PLAN INFORMATION
C1 EFFECTIVE DATE
This Adoption Agreement of the Pan American Life Insurance Company
Standardized 401(k) Profit Sharing Plan and Trust shall:
a. (X) establish a new Plan and Trust effective as of April 1, 1999
---------------
(hereinafter called the "Effective Date").
b. ( ) constitute an amendment and restatement in its entirety of a
previously established qualified Plan and Trust of the Employer which
was effective _____________________ (hereinafter called the "Effective
Date"). Except as specifically provided in the Plan, the effective
date of this amendment and restatement is ____________ (For TRA '86
amendments, enter the first day of the first Plan Year beginning in
1989).
C2 PLAN YEAR
Commencing on a. January 1st (e.g., January 1st)
--------------
and ending on b. December 31/st/.
----------------
2
<PAGE>
IS THERE A SHORT PLAN YEAR?
c. ( ) No
d. (X) Yes, beginning April 1, 1999
-----------------------
and ending December 31, 1999 .
------------------------
C3 ANNIVERSARY DATE of Plan (Annual Valuation Date)
a. December 31/st/
--------------------
month day
C4 PLAN NUMBER assigned by the Employer
00 1 .
-----------------
3
<PAGE>
C5 NAME OF PLAN ADMINISTRATOR (Document provides for the Employer to appoint
an Administrator. If none is named, the Employer will become the
Administrator.)
a. (X) Employer (Use Employer Address)
b. ( ) Name ___________________________________________________________
Address ________________________________________________________
__________________, _____________________ ____________________
City State Zip
Telephone ____________________________________________
Administrator's I.D. Number _________________________
C6 PLAN'S AGENT FOR SERVICE OF LEGAL PROCESS
a. (X) Employer (Use Employer Address)
b. ( ) Name __________________________________________________________
Address _______________________________________________________
__________________, _____________________ ____________________
City State Zip
4
<PAGE>
D1 ELIGIBLE EMPLOYEES (Plan Section 1.15) shall mean all Employees who have
satisfied the eligibility requirements except those checked below:
a. (X) N/A. No exclusions.
b. ( ) Employees whose employment is governed by a collective bargaining
agreement between the Employer and "employee representatives" under
which retirement benefits were the subject of good faith
bargaining. For this purpose, the term "employee representatives"
does not include any organization more than half of whose members
are employees who are owners, officers, or executives of the
Employer.
c. ( ) Employees who are nonresident aliens who received no earned
income (within the meaning of Code Section 911(d)(2)) from the
Employer which constitutes income from sources within the United
States (within the meaning of Code Section 861(a)(3)).
NOTE: For purposes of this section, the term Employee shall include
all Employees of this Employer, any Affiliated Employer, and any
leased employees deemed to be Employees under Code Section 414(n)
or 414(o).
D2 YEARS OF SERVICE shall mean a period of twelve (12) consecutive months in
which an Employee completes the following number of Hours of Service:
a. (X) 1000 Hours of Service.
b. ( ) _________________ Hour(s) of Service (may not exceed 1,000 Hours
of Service).
D3 HOURS OF SERVICE (Plan Section 1.32) will be determined on the basis of the
method selected below. Only one method may be selected. The method
selected will be applied to all Employees covered under the Plan.
a. ( ) On the basis of actual hours for which an Employee is paid or
entitled to payment.
b. ( ) On the basis of days worked. An Employee will be credited with ten
(10) Hours of Service if under the Plan such Employee would be
credited with at least one (1) Hour of Service during the day.
c. ( ) On the basis of weeks worked. An Employee will be credited with
forty-five (45) Hours of Service if under the Plan such Employee
would be credited with at least one (1) Hour of Service during the
week.
d. ( ) On the basis of semi-monthly payroll periods. An Employee will be
credited with ninety-five (95) Hours of Service if under the Plan
such Employee would be credited with at least one (1) Hour of
Service during the semi-monthly payroll period.
e. (X) On the basis of months worked. An Employee will be credited with
one hundred ninety (190) Hours of Service if under the Plan such
Employee would be credited with at least one (1) Hour of Service
during the month.
5
<PAGE>
D4 BREAK IN SERVICE
A 1 Year Break in Service means the applicable computation period during
which an Employee has not completed more than 500 Hours of
------------
Service.
D5 CONDITIONS OF ELIGIBILITY (Plan Section 3.1)
(Check either a OR b and c, and if applicable, d)
Any Eligible Employee will be eligible to participate in the Plan if such
Eligible Employee has satisfied the service and age requirements, if any,
specified below:
a. ( ) NO AGE OR SERVICE REQUIRED.
b. ( ) SERVICE REQUIREMENT. (may not exceed 1 year.)
1. ( ) None
2. ( ) 1/2 Year of Service
3. ( ) 1 Year of Service
4. ( ) Other ______________________________
NOTE: If the Year(s) of Service selected is or includes a fractional
year, an Employee will not be required to complete any specified
number of Hours of Service to receive credit for such fractional
year. If expressed in Months of Service, an Employee will not be
required to complete any specified number of Hours of Service in
a particular month.
c. ( ) AGE REQUIREMENT (may not exceed 21)
1. ( ) N/A - No Age Requirement.
2. ( ) 20 1/2
3. ( ) 21
4. ( ) Other ____________________________
d. ( ) FOR NEW PLANS ONLY Regardless of any of the above age or service
requirements, any Eligible Employee who was employed on the
Effective Date of the Plan shall be eligible to participate
hereunder and shall enter the Plan as of such date.
6
<PAGE>
D6 YEAR OF SERVICE for purposes of eligibility shall be computed using the
following computation period:
a. ( ) Employment Year.
b. ( ) Employment Year for first year shifting to Plan Year, including
anniversary of date of hire.
c. ( ) Other ________________________________ (computation must commence
on date of hire).
d. (X) Not applicable.
D7 EFFECTIVE DATE OF PARTICIPATION (Plan Section 3.2) An Eligible Employee
shall become a Participant as of:
a. ( ) the earlier of the first day of the seventh month or the first day
of the Plan Year coinciding with or next following the date on
which he met the requirements.
b. ( ) the first day of the Plan Year next following the date on which he
met the requirements. (Eligibility must be 1/2 Year of Service or
less and age 20 1/2 or less.)
c. (X) the first day of the month coinciding with or next following the
date on which he met the requirements.
d. ( ) Other: _______________________________________________________,
provided that an Employee who has satisfied the maximum age and
service requirements that are permissible in Section DS above and
who is otherwise entitled to participate, shall commence
participation no later than the earlier of (a) 6 months after
such requirements are satisfied, or (b) the first day of the
first Plan Year after such requirements are satisfied, unless the
Employee separates from service before such participation date.
7
<PAGE>
D8 VESTING OF PARTICIPANT'S INTEREST (Plan Section 6.4(b))
The vesting schedule, based on number of Years of Service, shall be as
follows:
a. (X) 100% upon entering Plan. (Required if eligibility requirement is
greater than one (1) Year of Service.)
b. ( ) 0-2 years 0% c. ( ) 0-4 years 0%
3 years 100% 5 years 100%
d. ( ) 0-1 year 0% e. ( ) 1 year 25%
2 years 20% 2 years 50%
3 years 40% 3 years 75%
4 years 60% 4 years 100%
5 years 80%
6 years 100%
f. ( ) 1 year 20% g. ( ) 0-2 years 0%
2 years 40% 3 years 20%
3 years 60% 4 years 40%
4 years 80% 5 years 60%
5 years 100% 6 years 80%
7 years 100%
h. ( ) Other - Must be at least as liberal as either c or g above.
Years of Service Percentage of Vesting
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
8
<PAGE>
D9 FOR AMENDED PLANS (Plan Section 6.4(e)) If the vesting schedule has been
amended to a less favorable schedule, enter the pre-amended schedule below:
a. ( ) Vesting schedule has not been amended or amended schedule is more
favorable in all years.
b. ( ) Years of Service Percentage of Vesting
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
D10 TOP HEAVY VESTING (Plan Section 6.4(c)) If this Plan becomes a Top
Heavy Plan, the following vesting schedule, based on number of Years of
Service, for such Plan Year and each succeeding Plan Year, whether or
not the Plan is a Top Heavy Plan, shall apply and shall be treated as a
Plan amendment pursuant to this Plan. Once effective, this schedule
shall also apply to any contributions made prior to the effective date
of Code Section 416 and/or before the Plan became a Top Heavy Plan.
a. (X) N/A (D8a, b, d, e or f was selected)
b. ( ) 0-1 years 0% c. ( ) 0-2 years 0%
2 years 20% 3 years 100%
3 years 40%
4 years 60%
5 years 80%
6 years 100%
NOTE: This section does not apply to the Account balances of any
Participant who does not have an Hour of Service after the Plan has
initially become top heavy. Such Participant's Account balance
attributable to Employer contributions and Forfeitures will be
determined without regard to this section.
9
<PAGE>
D11 VESTING In determining Years of Service for purposes of vesting, Years of
Service attributable to the following shall be excluded:
a. ( ) Service prior to the Effective Date of the Plan or a predecessor
plan.
b. (X) N/A
c. ( ) Service prior to the time an Employee attained age 18.
d. (X) N/A
D12 VESTING In determining Years of Service for purposes of vesting, the
vesting computation period shall be:
a. (X) Plan Year.
b. ( ) Fiscal Year.
c. ( ) Other ________________________.
d. ( ) Not applicable, full and immediate vesting.
D13 PLAN SHALL RECOGNIZE SERVICE WITH PREDECESSOR EMPLOYER
a. ( ) No.
b. (X) Yes: Years of Service with Imagine Media, Inc.
-------------------
shall be recognized for the purpose of this Plan.
NOTE: If the predecessor Employer maintained this qualified Plan,
then Years of Service with such predecessor Employer shall be
recognized pursuant to Section 1.76 and b. must be marked.
D14 NORMAL RETIREMENT AGE ("NRA") (Plan Section 1.43) means:
a. (X) the date a Participant attains his 65th birthday.(not to exceed
65th)
b. ( ) the later of the date a Participant attains his birthday (not to
exceed 65th) or the c._____ (not to exceed 5th) anniversary of the first
day of the Plan Year in which participation in the Plan commenced.
d. ( ) the later of the date a Participant attains his birthday (not to
exceed 65th) or the
e._____ (not to exceed 5th) anniversary of the first day of the Plan Year
in which participation in the Plan commenced but not later than age
f.___________.
10
<PAGE>
D15 NORMAL RETIREMENT DATE (Plan Section 1.44) shall commence:
a. (X) as of the Participant's "NRA."
OR (must select b. or c. AND 1. or 2.)
b. ( ) as of the first day of the month...
c. ( ) as of the first day of the Plan Year ...
1. ( ) coinciding with or next following the Participant's "NRA."
2. ( ) nearest the Participant's "NRA."
D16 EARLY RETIREMENT DATE (Plan Section 1.12) means the:
a. (X) No Early Retirement provision provided.
b. ( ) date on which a Participant ...
c. ( ) first day of the month coinciding with or next following the date
on which a Participant ...
d. ( ) first day of the Plan Year coinciding with or next following the
date on which a Participant ...
AND, if b, c or d was selected...
1. (..) attains his birthday
2. (..) and has completed at least _______ Years of Service.
CONTRIBUTIONS, ALLOCATIONS AND DISTRIBUTIONS
E1 a. COMPENSATION (Plan Section 1.9) with respect to any Participant means:
1. ( ) "415 Compensation."
2. ( ) Wages as defined in Code Section 3401(a), for purposes of
income tax withholding at the source mended by but determined
without regard to any rules that limit the remuneration
included in wages based on the nature or on the nature or
location of the employment or the services performed (such as
Amended by the exception for agricultural labor in Code Section
Amendment #1 3401(a)(2)).
b. COMPENSATION shall be
1. (X) actually paid
2. ( ) accrued
E2 COMPENSATION FOR PURPOSES OF SALARY REDUCTIONS
a. COMPENSATION (Plan Section 1.9) with respect to any Participant means:
11
<PAGE>
1. ( ) "415 Compensation."
2. ( ) Wages as defined in Code Section 3401(a), for purposes of
income tax withholding at the source mended by but determined
without regard to any rules that limit the remuneration
included in wages based on the nature or on the nature or
location of the employment or the services performed (such as
Amended by the exception for agricultural labor in Code Section
Amendment #1 3401(a)(2)).
b. COMPENSATION shall be
1. (X) actually paid
2. ( ) accrued
E3 a. FOR PURPOSES OF SECTION El AND E2, Compensation shall be based on:
1. ( ) the Plan Year.
2. ( ) the Fiscal Year coinciding with or ending within the Plan
Year.
3. (X) the Calendar Year coinciding with or ending within the Plan
Year.
4. ( ) other ____________________________.
NOTE: The Limitation Year shall be the same as the year on which
Compensation is based.
b. HOWEVER, for an Employee's first year of participation, Compensation
shall be recognized as of:
1. (X) the first day of the year.
2. ( ) the date the Participant entered the Plan.
c. IN ADDITION, COMPENSATION and "414(s) Compensation"
1. (X) shall 2. ( ) shall not include compensation which is not
currently includible in the Participant's gross income by reason of the
application of Code Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b).
E4 SALARY REDUCTION ARRANGEMENT - ELECTIVE CONTRIBUTION (Plan Section 4.2)
Each Employee may elect to have his Compensation reduced by:
a. ( ) ________________%
b. ( ) up to ____________%
c. ( ) from 1 % to 20 %
------- --------
d. ( ) up to the maximum percentage allowable not to exceed the
limits of Code Sections 401(k), 404 and 415.
e. ( ) Participants may change their deferral percentage at any
time, by written notice to the Administrator. In the event
of such a change, the new amount shall become
12
<PAGE>
effective as soon as practicable after receipt of the notice. The
Participant shall not be permitted to change such percentage again
until months from the effective date of the change. The initial
election shall be considered a change for this purpose.
f. (X) Participants may change their deferral percentage
1. (X) monthly
2. ( ) quarterly on ______________, ____________, ______________
and _____________________
3. ( ) semi-annually on _______________, and _______________,
by written notice to the Administrator. In the event of such a
change, a new amount shall become effective as soon as practicable
after receipt of the notice.
g. (X) By written notice to the Administrator, a Participant may at any
time discontinue Elective Contributions. The discontinuance will
become effective as soon as practicable following receipt of such
notice by the Administrator. A Participant who discontinues his
Elective Contributions shall not be permitted to resume such
contributions for a period of 0 months from the effective date
------
of such discontinuance.
h. ( ) By written notice to the Administrator, a Participant may at any
time discontinue Elective Contributions. The discontinuance will
become effective as soon as practicable following receipt of such
notice by the Administrator. A Participant who discontinues his
Elective Contributions shall not be permitted to resume such
contributions until the
1. ( ) _______________ or _______________
2. ( ) _______________ or _______________
( ) _______________ or _______________
following
1. ( ) a period of _________ months from the effective date of
such discontinuance.
2. ( ) the effective date of such discontinuance.
i. (X) For purposes of the first short Plan Year, each Employee may elect
to have his Compensation reduced by:
a. ( ) _______________%
b. ( ) up to ________%
c. ( ) from ________% to ________%
13
<PAGE>
d. (X) up to the maximum percentage allowable not to exceed the
limits of Code Sections 401(k), 404 and 415.
e. ( ) $_____________
f. ( ) _____________ (fill in fraction) of amount set forth in E4
a-d above.
E5 In addition to amounts set forth in E4 a-d above, each Employee may elect
to make a separate election to have any bonus reduced by:
a. ( ) ___________%
b. ( ) up to __________%
c. ( ) from __________% to __________%
d. ( ) up to the maximum percentage allowable not to exceed the
limits of Code Section 401(k), 404 and 415 when added to
the amounts deferred under E4 a-d.
e. (X) not applicable.
E6 FORMULA FOR DETERMINING EMPLOYER'S MATCHING CONTRIBUTION (Plan
Section 4.1(b))
a. (X) N/A. There shall be no matching contributions.
b. ( ) The Employer shall make matching contributions equal to % (e.g.
50%) of the Participant's salary reductions.
c. ( ) The Employer may make matching contributions equal to a
discretionary percentage, to be determined by the Employer, of the
Participant's salary reductions.
d. ( ) The Employer shall make matching contributions equal to the sum of
__________% of the portion of the Participant's salary reduction
which does not exceed __________% of the Participant's Compensation
plus __________% (may not be more than the matching percentage
entered above) of the portion of the Participant's salary reduction
which exceeds __________% of the Participant's Compensation, but
does not exceed __________% of the Participant's Compensation.
FOR PLANS WITH MATCHING CONTRIBUTIONS
e. ( ) Matching contributions shall be made on behalf of a Participant, on
the date indicated below:
1. ( ) if the Participant has a salary deferral in effect as of
such date.
14
<PAGE>
2. ( ) regardless of whether or not the Participant has a salary
deferral in effect as of such date.
f. ( ) Matching contributions g. ( ) shall h. ( ) shall not be used in
satisfying the deferral percentage tests. (if used, full vesting
and restrictions on withdrawals will apply and the match will be
deemed to be an Elective Contribution).
i. ( ) Shall a Year of Service be required in order to share in the
matching contributions?
With respect to Plan Years beginning before 1990 ...
1. ( ) Yes
2. ( ) No
3. ( ) N/A
15
<PAGE>
j. ( ) In determining matching contributions, only salary reductions up to
__________% of a Participant's Compensation will be matched. k. ( )
N/A l.( ) The matching contribution made on behalf of a Participant
for any Plan Year shall not exceed $ __________ m. ( ) N/A n.( )
Matching contributions shall be made on behalf of
1. ( ) all Participants.
2. ( ) only Non-Highly Compensated Employees.
o. ( ) Matching contributions shall be made and allocated
1. ( ) monthly as of ____________________
2. ( ) quarterly as of __________, __________,
____________________ and _____
3. ( ) annually as of ____________________
4. ( ) per pay period
5. ( ) other ______________________________.
FOR PLANS WITH ADDITIONAL YEAR END MATCHING CONTRIBUTIONS
a. (X) N/A. There shall be no additional year end matching contributions.
b. ( ) The Employer shall make an additional year end matching
contribution equal to __________% (e.g. 50%) of the Participant's
salary reductions.
c. ( ) The Employer may make an additional year end matching contribution
equal to a discretionary percentage, to be determined by the
Employer, of the Participant's salary reductions.
d. ( ) The Employer shall make an additional year end matching
contribution equal to the sum of __________% of the portion of the
Participant's salary reduction which does not exceed __________% of
the Participant's Compensation plus __________% (may not be more
than the matching percentage entered above) of the portion of the
Participant's salary reduction which exceeds __________% of the
Participant's Compensation, but does not exceed __________% of the
Participant's Compensation.
16
<PAGE>
e. ( ) Additional matching contributions shall be made on behalf of a
Participant, on the date indicated below:
( ) if the Participant has a salary deferral in effect as of such date.
regardless of whether or not the Participant has a salary deferral
in effect as of such date.
f. ( ) Additional matching contributions
1. ( ) shall
2. ( ) shall not
be used in satisfying the deferral percentage tests. (If used, full
vesting and restrictions on withdrawals will apply and the match will
be deemed to be an Elective Contribution).
g. ( ) For Plan Years beginning prior to 1990, a Year of Service
1. ( ) shall
2. ( ) shall not
be required in order to share in the additional matching contributions.
h. ( ) In determining additional matching contributions, only salary
reductions up to% of a Participant's Compensation will be matched. ( )
N/A
i. ( ) The additional matching contribution made on behalf of a
Participant for any Plan Year shall not exceed $ ____________. ( ) N/A
j. ( ) Additional matching contributions shall be made on behalf of
1. ( ) all Participants.
2. ( ) only Non-Highly Compensated Employees.
k. ( ) Additional matching contributions shall be made and allocated
1. ( ) annually as of
2. ( ) other
17
<PAGE>
E7 WILL A DISCRETIONARY EMPLOYER CONTRIBUTION BE PROVIDED (OTHER THAN A
DISCRETIONARY MATCHING OR QUALIFIED NON-ELECTIVE CONTRIBUTION) (Plan
Section 4.1(c))?
a. (X) No.
b. ( ) Yes, the Employer may make a discretionary contribution out of its
current or accumulated Net Profit.
c. ( ) Yes, the Employer may make a discretionary contribution which is
not limited to its current or accumulated Net Profit.
d. ( ) __% of eligible payroll
e. ( ) __% of eligible payroll but not to exceed net
annual profits
f. ( ) __% of net annual profits
g. ( ) Other __________________________________________
CONTRIBUTIONS SHALL BE MADE AND ALLOCATED:
If (b) through (g) was selected, such contribution shall be made and
allocated
1. ( ) monthly as of ______________________________________.
2. ( ) quarterly as of _________________, and _____________,
_________________ and ______________________________.
3. ( ) annually as of _____________________________________.
4. ( ) other ______________________________________________.
E8 CONTRIBUTION ALLOCATIONS
a. ( ) FOR A NON-INTEGRATED PLAN IN WHICH THE EMPLOYER'S CONTRIBUTION IS
MADE ANNUALLY (selected in E7 above)
1. ( ) The Employer contribution for the Plan Year shall be
allocated to all Participants eligible to share in the
allocation in the same proportion that each Participant's
Compensation bears to the total Compensation of all
Participants for such year.
2. ( ) The ratio which the units allocated to such Participant
bears to the total of all units allocated to such
Participant, _________________ unit(s) being allocated
for each ____________________ of Compensation for the
latest Compensation Year ending on or prior to the
Allocation Date of such Participant and
__________________ unit(s) for each Year of Service with
the Employer including the current Plan Year. Years of
Service for
18
<PAGE>
this purpose shall be the same as determined for vesting
purposes and shall be determined as if the Plan had always
been in effect.
For purposes of determining units of Compensation, sums of
$50.00 or more shall be treated as equivalent to $100.00 and
sums of less than $50.00 shall be ignored.
b. ( ) FOR A NON-INTEGRATED PLAN IN WHICH THE EMPLOYER'S CONTRIBUTION IS
MADE MORE FREQUENTLY THAN ANNUALLY (selected in E7 above).
The Employer Contribution shall be allocated to all Participants
eligible to share in the allocation in the same proportion that each
Participant's Compensation bears to the total Compensation of all
Participants for such period.
c. ( ) FOR AN INTEGRATED PLAN IN WHICH THE EMPLOYER'S CONTRIBUTION IS MADE
ANNUALLY
The total Employer contribution for the Plan Year shall be allocated in
accordance with Plan Section 4.4(b)(3) based on a Participant's
Compensation in excess of:
1. ( ) The Taxable Wage Base.
2. ( ) The greater of $10,000 or 20% of the Taxable Wage Base.
3. ( )___________% of the Taxable Wage Base. (See Note below)
4. ( ) $______________ (See Note below)
NOTE: The integration percentage of 5.7% shall be reduced to:
a. 4.3% if 3. or 4. above is more than 20% and less than or equal to
80% of the Taxable Wage Base.
b. 5.4% if 3. or 4. above is less than 100% and more than 80% of the
Taxable Wage Base.
E9 QUALIFIED NON-ELECTIVE CONTRIBUTIONS (Plan Section 4.1(d))
a. (X) N/A. There shall be no Qualified Non-Elective Contributions except
as provided in Section 4.6 and 4.8.
b. (.) The Employer shall make a Qualified Non-Elective Contribution equal
to % of the total Compensation of all Participants eligible to
share in the allocations.
c. ( ) The Employer may make a Qualified Non-Elective Contribution in an
amount to be determined by the Employer.
19
<PAGE>
E10 FORFEITURES (Plan Section 4.4(e))
a. Forfeitures of contributions other than matching contributions shall be
...
1. ( ) added to the Employer's contribution under the Plan.
2. ( ) allocated to all Participants eligible to share in the
allocations in the same proportion that each Participant's
Compensation for the year bears to the Compensation of all
Participants for such year.
3. ( ) allocated in the same manner as set forth in Adoption
Agreement Section E8.
4. ( ) used to reduce Plan expenses.
5. ( ) used to reduce Plan expenses and then to the extent available
added to the Employer's contribution under the Plan.
6. (X) N/A. 100% vesting.
b. Forfeitures of matching contributions shall be ...
1. (X) N/A. No matching contributions or match is fully vested.
2. ( ) used to reduce the Employer's matching contribution.
3. ( ) allocated to all Participants eligible to share in the
allocations in proportion to each such Participant's
Compensation for the year.
4. ( ) allocated to all Non-Highly Compensated Employees eligible to
share in the allocations in proportion to each such
Participant's Compensation for the year.
5. ( ) used to reduce Plan expenses.
6. ( ) used to reduce Plan expenses and then to the extent available
added to the Employer's contribution under the Plan.
7. ( ) allocated in the same manner as set forth in Adoption
Agreement Section E8.
20
<PAGE>
E11 ALLOCATIONS TO TERMINATED PARTICIPANTS (Plan Section 4.4(l))
Any Participant who terminated employment prior to an allocation date for
reasons other than death, Total and Permanent Disability or retirement:
a. With respect to the allocation of Employer Non-Elective Contributions
(other than matching), Qualified Non Elective Contributions, and
Forfeitures for Plan Years beginning prior to 1990:
1. (X) N/A
2. ( ) shall share in such allocations provided such Participant
completed a Year of Service.
3. ( ) shall not share in such allocations regardless of Hours of
Service.
4. ( ) shall share in such allocations regardless of Hours of
Service.
NOTE: The Plan provides that for Plan Years beginning after 1989, a
terminated Participant shall share in such allocations provided:
1. ( ) such Participant completed more than 500 Hours of
Service.
2. ( ) regardless of Hours of Service.
3. (X) N/A.
b. With respect to the allocation of Employer matching Contributions, a
Participant:
1. For Plan Years beginning after 1989,
i. (X) N/A, Plan does not provide for matching contributions.
ii. ( ) shall share in the allocations, regardless of Hours of
Service.
iii. ( ) shall share in the allocations provided such Participant
completed more than 500 Hours of Service.
iv. ( ) shall not share in the allocations regardless of Hours of
Service.
v. ( ) shall share in the allocation provided such Participant
has completed a Year of Service.
2. For Plan Years beginning before 1990,
i. (X) N/A, new Plan.
ii. ( ) shall share in the allocations, regardless of Hours of
Service.
iii. ( ) shall share in the allocations provided such Participant
completed a Year of Service.
21
<PAGE>
iv. ( ) shall not share in the allocations regardless of Hours of
Service.
v. ( ) shall share in the allocation provided such Participant
has completed a Year of Service.
22
<PAGE>
E12 ALLOCATIONS UPON DEATH, TOTAL AND PERMANENT DISABILITY, OR RETIREMENT
Any Participant who dies, becomes disabled or retires:
a. With respect to the allocation of Employer Non-Elective Contributions
(other than matching), Qualified Non-Elective Contributions, and
Forfeitures for Plan Years beginning prior to 1990:
1. (X) N/A
2. ( ) shall share in such allocations provided such Participant
completed a Year of Service.
3. ( ) shall not share in such allocations regardless of Hours of
Service.
4. ( ) shall share in such allocations regardless of Hours of
Service.
NOTE: The Plan provides that for Plan Years beginning after 1989, a
terminated Participant shall share in such allocations provided:
1. ( ) such Participant completed more than 500 Hours of
Service.
2. ( ) regardless of Hours of Service.
3. (X) N/A.
b. With respect to the allocation of Employer matching Contributions, a
Participant:
1. For Plan Years beginning after 1989,
i. (X) N/A, Plan does not provide for matching contributions.
ii. ( ) shall share in the allocations, regardless of Hours of
Service.
iii. ( ) shall share in the allocations provided such Participant
completed more than 500 Hours of Service.
iv. ( ) shall not share in the allocations regardless of Hours of
Service.
v. ( ) shall share in the allocation provided such Participant
has completed a Year of Service.
2. For Plan Years beginning before 1990,
i. (X) N/A, new Plan.
ii. ( ) shall share in the allocations, regardless of Hours of
Service.
iii. ( ) shall share in the allocations provided such Participant
completed a Year of Service.
23
<PAGE>
iv. ( ) shall not share in the allocations regardless of Hours of
Service.
v. ( ) shall share in the allocation provided such Participant
has completed a Year of Service.
24
<PAGE>
E13 ALLOCATIONS OF EARNINGS (Plan Section 4.4(c))
Allocations of earnings with respect to amounts contributed to the Plan
after the previous Anniversary Date or other valuation date shall be
determined...
a. ( ) by using a weighted average.
b. ( ) by treating one-half of all such contributions as being a part of
the Participant's nonsegregated account balance as of the previous
Anniversary Date or valuation date.
c. (X) by using the method specified in Section 4.4(c).
d. ( ) other ________________________________
25
<PAGE>
E14 LIMITATIONS ON ALLOCATIONS (Plan Section 4.9)
a. If any Participant is or was covered under another qualified defined
contribution plan maintained by the Employer, other than a Master or
Prototype Plan, or if the Employer maintains a welfare benefit fund, as
defined in Code Section 419(e), or an individual medical account, as
defined in Code Section 415(l)(2), under which amounts are treated as
Annual Additions with respect to any Participant in this Plan:
1. (X) N/A.
2. ( ) The provisions of Section 4.9(b) of the Plan will apply as if
the other plan were a Master or Prototype Plan.
3. ( ) Provide the method under which the Plans will limit total
Annual Additions to the Maximum Permissible Amount, and will
properly reduce any Excess Amounts, in a manner that precludes
Employer discretion.
______________________________________________________________
______________________________________________________________
b. If any Participant is or ever has been a Participant in a defined
benefit plan maintained by the Employer:
1. (X) N/A.
2. ( ) In any Limitation Year, the Annual Additions credited to the
Participant under this Plan may not cause the sum of the
Defined Benefit Plan Fraction and the Defined Contribution
Fraction to exceed 1.0. If the Employer's contribution that
would otherwise be made on the Participant's behalf during the
limitation year would cause the 1.0 limitation to be exceeded,
the rate of contribution under this Plan will be reduced so
that the sum of the fractions equals 1.0. If the 1.0
limitation is exceeded because of an Excess Amount, such
Excess Amount will be reduced in accordance with Section
4.9(a)(4) of the Plan.
3. ( ) Provide the method under which the Plans involved will satisfy
the 1.0 limitation in a manner that precludes Employer
discretion.
______________________________________________________________
______________________________________________________________
26
<PAGE>
E15 DISTRIBUTIONS UPON DEATH (Plan Section 6.6(h)) Distributions upon the death
of a Participant prior to receiving any benefits shall ...
a. (X) be made pursuant to the election of the Participant or
beneficiary.
b. ( ) begin within 1 year of death for a designated beneficiary and be
payable over the life (or over a period not exceeding the life
expectancy) of such beneficiary, except that if the beneficiary is
the Participant's spouse, begin within the time the Participant
would have attained age 70 1/2.
c. ( ) be made within 5 years of death for all beneficiaries.
d. ( ) other ____________________________
E16 LIFE EXPECTANCIES (Plan Section 6.5(f)) for minimum distributions required
pursuant to Code Section 401(a)(9) shall ...
a. (X) be recalculated at the Participant's election.
b. ( ) be recalculated.
c. ( ) not be recalculated.
E17 CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION Distributions upon
termination of employment pursuant to Section 6.4(a) of the Plan shall not
be made unless the following conditions have been satisfied:
a. (X) N/A. Immediate distributions may be made at Participant's election.
b. ( ) The Participant has incurred 1-Year Break(s) in Service.
c. ( ) The Participant has reached his or her Early or Normal Retirement
Age.
d. ( ) The Participant's interest in the Plan is less than
$_______________. If the Participant's interest in the Plan exceeds
such amount, then no distribution shall be made until the
Participant reaches his or her Early or Normal Retirement Age.
e. ( ) Other _____________________________
AND: Regardless of the above, for amounts of $3,500 or less, the Plan
shall require immediate distributions.
(X) yes
( ) no
27
<PAGE>
E18 Shall a terminated Participant with a vested benefit of zero (0) be deemed
to have received a distribution of his entire vested benefit as of his date
of termination.
a. (X) Yes
b. ( ) No, the forfeiture will be deemed to have occurred upon the
completion of 5 consecutive 1-Year Breaks in Service.
E19 FORM OF DISTRIBUTIONS (Plan Sections 6.5 and 6.6) Distributions under the
Plan may be made ...
a. 1. (X) in lump sums.
2. ( ) in lump sums or installments.
b. AND, pursuant to Plan Section 6.13,
1. (X) no annuities are allowed (avoids Joint and Survivor rules).
2. ( ) annuities are allowed (Plan Section 6.13 shall not apply).
NOTE: b.1. above may not be elected if this is an amendment to a
plan which permitted annuities as a form of distribution or if
this Plan has accepted a plan to plan transfer of assets from
a plan which permitted annuities as a form of distribution.
c. AND may be made in...
1. (X) cash only (except for insurance or annuity contracts).
2. ( ) cash or property.
E20 HIGHLY COMPENSATED EMPLOYEE shall be determined based upon the "look back
year" defined as ...
1. (X) Prior Plan Year
2. ( ) Calendar Year ending with or within the current Plan Year
28
<PAGE>
TOP HEAVY REQUIREMENTS
F1 TOP HEAVY DUPLICATIONS (Plan Section 4.4(i)): When a Non-Key Employee is a
Participant in this Plan and a Defined Benefit Plan maintained by the
Employer, indicate which method shall be utilized to avoid duplication of
top heavy minimum benefits.
a. (X) The Employer does not maintain a Defined Benefit Plan.
b. ( ) A minimum, non-integrated contribution of 5% of each Non-Key
Employee's total Compensation shall be provided in this Plan, as
specified in Section 4.4(i). (The Defined Benefit and Defined
Contribution Fractions will be computed using 100% if this choice
is selected.)
c. ( ) A minimum, non-integrated contribution of 7 1/2% of each Non-Key
Employee's total Compensation shall be provided in this Plan, as
specified in Section 4.4(i). (If this choice is selected, the
Defined Benefit and Defined Contribution Fractions will be computed
using 125% for all Plan Years in which the Plan is Top Heavy, but
not Super Top Heavy.)
d. ( ) Specify the method under which the Plans will provide top heavy
minimum benefits for Non-Key Employees that will preclude Employer
discretion and avoid inadvertent omissions, including any
adjustments required under Code Section 415(e).
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
29
<PAGE>
F2 PRESENT VALUE OF ACCRUED BENEFIT (Plan Section 2.2) for Top Heavy purposes
where the Employer maintains a Defined Benefit Plan in addition to this
Plan, shall be based on ...
a. (X) N/A. The Employer does not maintain a defined benefit plan.
b. ( ) Interest Rate: ______________________________________
Mortality Table: _______________________________________
F3 TOP HEAVY DUPLICATIONS: Employer maintaining two (2) or more Defined
Contribution Plans (other than paired plans).
a. (X) N/A.
b. ( ) A minimum, non-integrated contribution of 3% of each Non-Key
Employee's total Compensation shall be provided in the Money
Purchase Plan (or other plan subject to Code Section 412), where
the Employer maintains two (2) or more non-paired Defined
Contributions Plans.
c. ( ) Specify the method under which the Plans will provide top heavy
minimum benefits for Non-Key Employees that will preclude Employer
discretion and avoid inadvertent omissions, including any
adjustments required under Code Section 415(e).
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
30
<PAGE>
MISCELLANEOUS
G1 LOANS TO PARTICIPANTS (Plan Section 7.4)
a. ( ) Yes, loans may be made.
b. ( ) No, loans may not be made.
AND FOR PLANS WITH LOANS...
c. (X) The minimum amount that the Participant shall be permitted to
borrow is:
1. ( ) $0. There is no minimum amount that the Participant is
required to borrow.
2. (X) $1000.
----
d. ( ) To be eligible for a loan, the Participant must have completed:
1. ( ) ____________ Year(s) of Service.
(Use fraction for less than one (1) year).
2. ( ) ____________ Year(s) of Participation.
(Use fraction for less than one (1) year).
e. ( ) Loans shall be permitted to be made under this Plan only in the
event of a hardship.
f. ( ) Only one loan may be outstanding at any time for each Participant.
G2 DIRECTED INVESTMENT ACCOUNTS
a. ( ) Employer Contributions (other than Elective Contributions) shall
be directed by:
1. ( ) the Participant.
2. ( ) the Trustee.
b. (X) Elective Contributions, Employee Contributions and rollover
contributions shall be directed by:
1. (X) the Participant.
2. ( ) the Trustee.
31
<PAGE>
c. If Participant directed, then such contributions may be directed to the
investment funds with the investment in each fund being an even
multiple of 1% of such contributions.
---
d. Changes in current investment elections may be made:
1. (X) on any date, except that only one change can be made each
i. ( ) three months
ii. ( ) six months
iii. (X) day
-----
2. ( ) on the following dates
i. ( )_______ and _______ of each year
ii. ( )_______, _______, _______
and _______ of each year.
e. Transfers of account balances may be made in even multiples of 1% of
---
the account balance from one investment fund to another investment
fund.
f. Transfers of account balances may be made:
1. (X) on any date except that only one change can be made each
i. ( ) three months
ii. ( ) six months
iii. (X) day
-----
2. ( ) on the following dates
i. ( )_______ and _______ of each year
ii. ( )_______, _______, _______
and _______ of each year.
G3 TRANSFERS FROM QUALIFIED PLANS (Plan Section 4.11)
a. (X) Yes, transfers from qualified plans (and rollovers) will be
allowed.
b. ( ) No, transfers from qualified plans (and rollovers) will not be
allowed.
AND, transfers shall be permitted...
c. (X) from any Employee, even if not a Participant.
d. ( ) from Participants only.
32
<PAGE>
G4 EMPLOYEES' VOLUNTARY CONTRIBUTIONS (Plan Section 4.12)
a. ( ) Yes, Voluntary Contributions are allowed subject to the limits
of Section 4.7.
b. (X) No, Voluntary Contributions will not be allowed.
NOTE: TRA `86 subjects voluntary contributions to strict discrimination
rules.
G5 HARDSHIP DISTRIBUTIONS (Plan Section 6.11)
a. ( ) No.
b. (X) Yes, from any accounts.
c. ( ) Yes, from the following (check all that apply)
1. ( ) Elective Contributions
2. ( ) Amounts attributable to matching contributions
3. ( ) Employer discretionary contributions
4. ( ) Employee voluntary contributions
5. ( ) Participant's Rollover Account
6. ( ) other ___________________________
NOTE: Distributions from a Participant's Elective Account are limited
to the portion of such account attributable to such Participant's
Deferred Compensation and earnings attributable thereto up to
December 31, 1988. Also hardship distributions are not permitted
from a Participant's Qualified Non-Elective Account.
NOTE: Determination of hardship in the case of contributions other than
Elective Contributions shall be made in the case of a heavy
financial need resulting from expenses related to health,
education, establishing or preserving the primary residence of
the Participant or other undue hardship.
33
<PAGE>
G6 PRE-RETIREMENT DISTRIBUTION (Plan Section 6.10)
a. (X) If a Participant has reached the age of 59 1/2 distributions may
be made, at the Participant's election, from any accounts without
requiring the Participant to terminate employment.
b. ( ) No pre-retirement distribution may be made.
NOTE: Distributions from a Participant's Elective Account and Qualified
Non-Elective Account are not permitted prior to age 59 1/2.
G7 LIFE INSURANCE (Plan Section 7.2(d)) may be purchased with Plan
contributions.
a. (X) No life insurance may be purchased.
b. ( ) Yes, at the option of the Administrator.
c. ( ) Yes, at the option of the Participant.
d. ( ) IF YES, a Participant may elect to have up to of contributions,
exclusive of qualified voluntary employee contributions, applied
to purchase life insurance coverage on his life. All premiums
shall be paid from the Participant's Elective Account.
AND, the purchase of initial or additional life insurance shall be subject
to the following limitations: (select all that apply)
e. ( ) N/A, no limitations.
f. ( ) each initial Contract shall have a minimum face amount of $
g. ( ) each additional Contract shall have a minimum face amount of $
h. ( ) the Participant has completed Years of Service.
i. ( ) the Participant has completed Years of Service while a
Participant in the Plan.
j. ( ) the Participant is under age on the Contract issue date.
k. ( ) the maximum amount of all Contracts on behalf of a Participant
shall not exceed $
1. ( ) the maximum face amount of life insurance shall be
34
<PAGE>
An Employer who has ever maintained or who later adopts any plan in addition to
this Plan (including a welfare benefit fund, as defined in Code Section 419(e),
which provides postretirement medical benefits allocated to separate accounts
for Key Employees, as defined in Code Section 419A(d)(3) or an individual
medical account, as defined in Code Section 415(l)(2)) may not rely on the
opinion letter issued by the National office of the Internal Revenue Service as
evidence that this Plan is qualified under Code Section 401. If the Employer who
adopts or maintains multiple plans wishes to obtain reliance that the Employer's
plan(s) qualified, application for a determination letter should be made to the
appropriate key district director of Internal Revenue.
This Adoption Agreement may be used only in conjunction with basic Plan document
#02. This Adoption Agreement and the basic Plan document shall together be known
as Pan American Life Insurance Company Standardized 401(k) Profit Sharing Plan
#02002.
The adoption of this Plan, its qualification by the IRS, and the related tax
consequences are the responsibility of the Employer and its independent tax and
legal advisors.
Pan American Life Insurance Company will notify the Employer of any amendments
made to the Plan or of the discontinuance or abandonment of the Plan provided
this Plan has been acknowledged by Pan American Life Insurance Company or its
authorized representative. Furthermore, in order to be eligible to receive such
notification, we agree to notify Pan American Life Insurance Company of any
change in address.
35
<PAGE>
IN WITNESS WHEREOF, the Employer and Trustee hereby cause this Plan to be
executed on this 1/st/ day of April, 1999. Furthermore, this Plan may not be
used unless acknowledged by Pan American Life Insurance Company or its
authorized representative.
EMPLOYER:
Affiliation Networks, Inc. /s/ Mark Jung
- -------------------------- -------------------------------
(enter name) TRUSTEE
By: /s/ Mark Jung _______________________________
---------------------- TRUSTEE
PARTICIPATING EMPLOYER: _______________________________
TRUSTEE
__________________________ _______________________________
(enter name) WITNESS
By:_______________________ _______________________________
WITNESS
This Plan may not be used, and shall not be deemed to be a Prototype Plan,
unless an authorized representative of Pan American Life Insurance Company has
acknowledged the use of the Plan. Such acknowledgment is for administerial
purposes only. It acknowledges that the Employer is using the Plan but does not
represent that this Plan, including the choices selected on the Adoption
Agreement, has been reviewed by a representative of the sponsor or constitutes a
qualified retirement plan.
Pan American Life Insurance Company
By: /s/ Wanda Macera
---------------------------------
With regard to any questions regarding the provisions of the Plan, adoption of
the Plan, or the effect of an opinion letter from the IRS, call or write (this
information must be completed by the sponsor of this Plan or its designated
representative):
Name Wanda Macera, Manager, Plan Services
------------------------------------
Address 601 Poydras Street, 15th Floor
------------------------------
New Orleans, Louisiana 70130
----------------------------
Telephone (504) 566 - 3356
----- ----------
36
<PAGE>
ADDENDUM TO THE PLAN
LOAN SPECIFICATIONS
This written document shall be attached to and form a part of the AFFILIATION
NETWORKS, INC. 401(K) PLAN. Loans shall be made available to all participants
who are parties in interest (as defined under Section 3(14) of ERISA) and who
meet the loan eligibility requirements as specified in the Plan.
(1) The person(s) or position(s) that are authorized to administer the
participant loan program shall be the Plan Trustee.
(2) The procedure for applying for a loan shall be through written request made
by the participant by the submission of a LOAN APPLICATION AND
AUTHORIZATION FORM to the Plan Trustee. The Trustee shall review the
written request and then shall notify the participant of the approval or
denial of the loan.
(3) The basis on which loans will be approved or denied shall be that in order
to be eligible for a loan, the participant must have a vested account
balance of $2,000.
(4) The limitations (if any) on the types and amounts of loans offered will be
that loans will be allowed from all contribution accounts. The minimum
amount that can be borrowed is $1,000. The maximum amount that can be
borrowed is the lesser of (a) $50,000 reduced by the highest outstanding
loan balance in the previous 12 months or (b) 50% of the participant's
vested account. Only one general purpose loan and one residential loan can
be outstanding at any time for a participant.
(5) The procedure under the program for determining a reasonable rate of
interest shall be 1% in excess of the prime rate published in the Wall
Street Journal.
(6) The type of collateral which may secure a participant loan shall be up to
50% of the participant's vested account balance.
(7) The events constituting default and the steps that will be taken to
preserve plan assets in the event of such default shall be a repayment that
has not been made for ninety days. The Plan Trustee will notify the
participant of the past due amount and advise the participant of loan
default if payment is not received within thirty days. A loan default will
be considered a distributable event under the Plan if the participant is at
least age 59 1/2 or if the participant is no longer actively employed.
(8) All loans shall mature and become payable in full regardless of the
repayment provisions of the loan on the earlier of (a) ninety (90) days
following the Participant's Termination of Employment, or (b) the date a
distribution from the Plan is payable.
<PAGE>
This written document is hereby executed this 1st day of April, 1999.
Witness: AFFILIATION NETWORKS, INC.
_____________________________ By:_________________________
_____________________________ Title:______________________
TRUSTEES:___________________
____________________________
Mark Jung
____________________________
<PAGE>
<TABLE>
<CAPTION>
Section 401(a)(31)
Internal Revenue Service Department of the Treasury
<S> <C>
Plan Description: Prototype Standardized Profit Sharing Plan with CODA Washington, DC 20224
FFN: 50245800702-002 Case: 9203058 EIN: 72-0281240
BPD: 02 Plan: 002 Letter Serial No.: D258113b Person to Contact: Mr. Welty
PAN AMERICAN LIFE INSURANCE CO Telephone Number: (202) 622-8380
601 POYDRAS STREET Refer Reply to: E:EP:Q:2
14TH FLOOR
NEW ORLEANS, LA 70103 Date: 12/15/92
</TABLE>
Dear Applicant:
In our opinion, the amendment to the form of the plan identified above does not
in and of itself adversely affect the plan's acceptability under section 401 of
the Internal Revenue Code. This opinion relates only to the amendment to the
form of the plan. It is not an opinion as to the acceptability of any other
amendment or of the form of the plan as a whole, or as to the effect of other
Federal or local statutes.
You must furnish a copy of this letter to each employer who adopts this plan.
You are also required to send a copy of the approved form of the plan, any
approved amendments and related documents to each Key District Director of
Internal Revenue Service in whose jurisdiction there are adopting employers.
Our opinion on the acceptability of the form of the plan is not a ruling or
determination as to whether an employer's plan qualifies under Code section
401(a). An employer who adopts this plan will be considered to have a plan
qualified under Code section 401(a) provided all the terms of the plan are
followed, and the eligibility requirements and contribution or benefit
provisions are not more favorable for highly compensated employees than for
other employees. Except as stated below, the Key District Director will not
issue a determination letter with regard to this plan.
Our opinion does not apply to the form of the plan for purposes of Code section
401(a)(16) if: (1) an employer ever maintained another qualified plan for one
or more employees who are covered by this plan, other than a specified paired
plan within the meaning of section 7 of Rev. Proc. 89-9, 1989-1 C.B. 780; or (2)
after December 31, 1985, the employer maintains a welfare benefit fund defined
in Code section 419(e), which provides postretirement medical benefits allocated
to separate accounts for key employees as defined in Code section 419A(d)(3).
An employer that has adopted a standardized plan may not rely on this opinion
letter with respect to: (1) whether any amendment or series of amendments to
the plan satisfies the nondiscrimination requirements of section 1.401(a)(4)-
5(a) of the regulations, except with respect to plan amendments granting past
service that meet the safe harbor described in section 1.401(a)(4)-5(a)(5) and
are not part of a pattern of amendments that significantly discriminates in
favor of highly compensated employees; or (2) whether the plan satisfies the
effective availability requirement of section 1.401(a)(4)-4(c) of the
regulations with respect to any benefit, right or feature.
An employer that has adopted a standardized plan as an amendment to a plan other
than a standardized plan may not rely on this opinion letter with respect to
whether a benefit, right or other feature that is prospectively eliminated
satisfies the current availability requirements of section 1.401(a)-4 of the
regulations.
The employer may request a determination (1) as to whether the plan, considered
with all related qualified plans and, if appropriate, welfare benefit funds,
satisfies the requirements of Code section 401(a)(16) as to limitations on
benefits and contributions in Code section 415; (2) regarding the
nondiscriminatory effect of grants of past service; and (3) with respect to
whether a prospectively eliminated benefit, right or feature satisfies the
current availability requirements.
<PAGE>
AMENDMENT NUMBER ONE TO
PAN AMERICAN LIFE INSURANCE COMPANY
401(K) PROFIT SHARING PLAN AND TRUST
Pan American Life Insurance Company 401(k) Profit Sharing Plan and Trust is
hereby amended as follows:
1. Section 1.9 is amended by replacing the first paragraph with the following
paragraphs:
"Compensation" with respect to any Participant means one of the following
as elected in the Adoption Agreement. However, compensation for any Self-
Employed Individual shall be equal to his Earned Income.
i. Information required to be reported under sections 6041, 6051 and 6052
(Wages, Tips and Other Compensation Box on Form W-2). Compensation is
defined as wages as defined in section 3401(a) and all other payments
of compensation to an employee by the employer (in the course of the
employer's trade or business) for which the employer is required to
furnish the employee a written statement under sections 6041(d) and
6051(a)(3) of the Code. Compensation must be determined without
regard to any rules under section 3401(a) that limit the remuneration
included in wages based on the nature or location of the employment or
the services performed (such as the exception for agricultural labor
in section 3401(a)(2)).
ii. Section 3401(a) wages. Compensation is defined as wages within the
meaning of section 3401(a) for the purposes of income tax withholding
at the source but determined without regard to any rules that limit
the remuneration included in wages based on the nature or location of
the employment or the services performed (such as the exception for
agricultural labor in section 3401(a)(2)).
iii. 415 safe-harbor compensation. Compensation is defined as wages,
salaries, and fees for professional services and other amounts
received (without regard to whether or not an amount is paid in cash)
for personal services actually rendered in the course of employment
with the employer maintaining the plan to the extent that the amounts
are includible in gross income (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits and reimbursements or other expense
allowances under a nonaccountable plan (as described in 1.62-2(c)),
and excluding the following:
a. Employer contributions to a plan of deferred compensation which
are not includible in the employee's gross income for the taxable
year in which contributed, or employer contributions under a
simplified employee pension plan to the extent such contributions
are deductible by the employee, or any distributions from a plan
of deferred compensation;
1
<PAGE>
b. Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
c. Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
d. Other amounts which received special tax benefits, or
contributions made by the employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract
described in section 403(b) of the Code (whether or not the
contributions are actually excludable from the gross income of
the employee).
If, in connection with the adoption of this or any other amendment, the
definition of Compensation has been modified, then, for Plan Years prior to
the Plan Year which includes the adoption date of such amendment,
Compensation means compensation determined pursuant to the Plan then in
effect.
2. Section 1.14 is amended in its entirety to read as follows:
"Elective Contribution" means the Employer's contributions to the Plan that
are made pursuant to the Participant's deferral election pursuant to Section
4.2, excluding any such amounts distributed as "excess annual additions"
pursuant to Section 4.4. In addition, if selected in E6 of the Adoption
Agreement, the Employer's matching contribution shall or shall not be considered
n Elective Contribution for purposes of the Plan, as provided in section 4.1(b).
Elective Contributions shall be subject to the requirements of Sections 4.2(b)
and 4.2(c) and shall further be required to satisfy the discrimination
requirements of Regulation 1.401(k)-1(b)(3), the provisions of which are
specifically incorporated herein by reference.
3. Section 1.20 is amended in its entirety to read as follows:
"Excess Deferred Compensation" means, with respect to any taxable year of a
Participant, the excess of the aggregate amount of such Participant's Deferred
Compensation and the elective deferrals pursuant to Section 4.2(f) actually made
on behalf of such Participant for such taxable year, over the dollar limitation
provided for in Code Section 402(g), which is incorporated herein by reference.
Excess Deferred Compensation shall be treated as an "annual addition" pursuant
to Section 4.9 when contributed to the Plan unless distributed to the affected
Participant not later than the first April 15th following the close of the
Participant's taxable year.
4. Section 1.27 is amended in its entirety to read as follows:
"414(s) Compensation" with respect to any Employee means his compensation
as defined in Section 1.9. However, for purposes of this Section, Compensation
shall be Compensation paid and, if selected in the Adoption Agreement, shall
only be recognized as of an Employee's effective date of participation. If, in
connection with the adoption of this or any other amendment, the definition of
"414(s) Compensation" has been modified, then, for Plan Years
2
<PAGE>
prior to the Plan Year which includes the adoption date of such amendment,
"414(s) Compensation" means compensation determined pursuant to the Plan then in
effect.
5. Section 1.28 ("415 Compensation") is amended by the addition of the
following paragraph:
If, in connection with the adoption of this or any other amendment, the
definition of "415 Compensation" has been modified, then, for Plan Years prior
the Plan Year which includes the adoption date of such amendment, "415
Compensation" means compensation determined pursuant to the Plan then in effect.
6. Section 4.9(a)(4) and 4.9(a)(4)(i) are amended to read as follows:
(4) If there is an excess amount pursuant to Section 4.9(a)(2) or Section
4.10, the excess will be disposed of in one of the following manners,
as uniformly determined by the Plan Administrator for all Participants
similarly situated:
(i) Any Deferred Compensation or nondeductible Voluntary Employee
Contributions, to the extent they would reduce the Excess Amount
will be distributed to the Participant;
7. Section 4.9(f)(2) is amended in its entirety to read as follows:
Compensation means a Participant's Compensation as elected in the Adoption
Agreement. However, regardless of any selection made in the Adoption Agreement,
"415 Compensation" shall exclude compensation which is not currently includible
in the Participant's gross income by reason of the application of Code Sections
125, 402(a)(8), 402(h)(1)(B), or 403(b).
For Limitation Years beginning after December 31, 1991, for purposes of
applying the limitations of this article, Compensation for a Limitation Year is
the Compensation actually paid or made available during such Limitation Year.
Notwithstanding the preceding sentence, Compensation for a Participant in a
defined contribution plan who is permanently and totally disabled (as defined in
section 22 (e) (3) of the Internal Revenue Code) is the compensation such
Participant would have received for the Limitation Year if the Participant had
been paid at the rate of Compensation paid immediately before becoming
permanently and totally disabled; such imputed Compensation for the disabled
Participant may be taken into account only if the Participant is not a Highly
Compensated Employee and contributions made on behalf of such Participant are
nonforfeitable when made.
8. Section 4.10 is amended in its entirety to read as follows:
(a) If as a result of the allocation of Forfeitures, a reasonable error in
estimating a Participant's annual Compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of Code Section
402(g)(3)) that may be made with respect to any
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<PAGE>
Participant under the limits of Section 4.9, or other facts and circumstances to
which Regulation 1.415-6(b)(6) shall be applicable, the "annual additions" under
this Plan would cause the maximum provided in Section 4.9 to be exceeded, the
Administrator shall treat the excess in accordance with Section 4.9(a)(4).
9. Sections 6.11(a)(1) and (a)(4) are amended in their entirety to read as
follows:
(1) Medical expenses described in Code Section 213(d) incurred by the
Participant, his spouse, or any of his dependents (as defined in Code Section
152) or expenses necessary for these persons to obtain medical care;
(4) Payment of tuition and related educational fees for the next 12 months
of post-secondary education for the Participant, his spouse, children, or
dependents;
10. Article VII is amended by the addition of the following section 7.13:
Direct Rollover
(a) This Section applies to distributions made on or after January 1, 1993.
Notwithstanding any provision of the Plan to the contrary that would otherwise
limit a distributee's election under this Section, a distributee may elect, at
the time and in the manner prescribed by the Plan Administrator, to have any
portion of an eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct rollover.
(b) An eligible rollover distribution is any distribution of all or any
portion of the balance to the credit of the distributee, except that an eligible
rollover distribution does not include: any distribution that is one of a
series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the distributee's
designated beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under section 401(a)(9)
of the Code; and the portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(c) An eligible retirement plan is an individual retirement account
described in section 408(a) of the Code, an individual retirement annuity
described in section 408(b) of the Code, an annuity plan described in section
403(a) of the Code, or the qualified trust described in section 401(a) of the
Code, that accepts the distributee's eligible rollover distribution. However,
in the case of an eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account or an individual
retirement annuity.
(d) A distributee includes an Employee or former Employee. In addition,
the Employee's or former Employee's surviving spouse and the Employee's or
former Employee's spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in section 414(p) of the Code,
are distributees with regard to the interest of the spouse or former spouse.
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(e) A direct rollover is a payment by the Plan to the eligible retirement
plan specified by the distributee.
11. Section 4.2(d) is amended in its entirety to read as follows:
(d) In any Calendar Year beginning after December 31, 1986, a Participant's
Deferred Compensation made under this Plan and all other plans, contracts or
arrangements of the Employer maintaining this Plan shall not exceed the
limitation imposed by Code Section 402(g). If such dollar limitation is
exceeded solely from elective deferrals made under this Plan or any other Plan
maintained by the Employer, a Participant will be deemed to have notified the
Administrator of such excess amount which shall be distributed in a manner
consistent with Section 4.2(f). This dollar limitation shall be adjusted
annually pursuant to the method provided in Code Section 415(d) in accordance
with Regulations.
12. Section 4.2(f) is amended by the addition of the following paragraph after
paragraph (f)(3) to read as follows:
Any distribution under this Section shall be made first from unmatched
Deferred Compensation and, thereafter, simultaneously from Deferred Compensation
which is matched and matching contributions which relate to such Deferred
Compensation. However, any such matching contributions which are not Vested
hall be forfeited in lieu of being distributed.
13. Section 4.2(f) is amended by the addition of the following paragraph as the
second to the last paragraph of such subsection:
Notwithstanding the above, for any distribution under this Section which is
made after August 15, 1991, such distribution shall not include any income for
the "gap period." Further provided, for any distribution under this Section
which is made after August 15, 1991, the amount of Income may be computed using
a reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for the
Plan Year.
14. Section 4.6(c) is amended by the addition of the following paragraph as the
second to the last paragraph of such subsection:
Notwithstanding the above, for any distribution under this Section which is
made after August 15, 1991, such distribution shall not include any income for
the "gap period." Further provided, for any distribution under this Section
which is made after August 15, 1991, the amount of Income may be computed using
a reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for the
Plan Year.
15. Section 4.7(c) is amended in its entirety to read as follows:
(c) For purposes of determining the "Actual Contribution Percentage" and
the amount of Excess Aggregate Contributions pursuant to Section 4.8(d), only
Employer matching
5
<PAGE>
contributions excluding matching contributions forfeited or distributed pursuant
to Section 4.2(f), 4.6(a), or 4.8(a)) contributed to the Plan prior to the end
of the succeeding Plan Year shall be considered. In addition, the Administrator
may elect to take into account, with respect to Employees eligible to have
Employer matching contributions made pursuant to Section 4.1(b) or voluntary
Employee contributions made pursuant to Section 4.12 allocated to their
accounts, elective deferrals (as defined in Regulation 1.402(g)-1(b)) and
qualified non-elective contributions (as defined in Code Section 401(m)(4)(C))
contributed to any plan maintained by the Employer. Such elective deferrals and
qualified non-elective contributions shall be treated as Employer matching
contributions subject to Regulation 1.401(m)-1(b)(2) which is incorporated
herein by reference. However, for Plan Years beginning after December 31, 1988,
the Plan Year must be the same as the plan year of the plan to which the
elective deferrals and the qualified non-elective contributions are made.
16. Section 4.8(i) is amended by the addition of the following paragraph as the
second to the last paragraph of such subsection:
Notwithstanding the above, for any distribution under this Section which is
made after August 15, 1991, such distribution shall not include any Income for
the "gap period." Further provided, for any distribution under this Section
which is made after August 15, 1991, the amount of Income may be computed using
a reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for the
Plan Year.
17. Section 6.11(b)(1) is amended in its entirety to read as follows:
(1) The distribution is not in excess of the amount of the immediate and
heavy financial need of the Participant. The amount of the immediate and heavy
financial need may include any amounts necessary to pay any federal, state or
local income taxes or penalties reasonably anticipated to result from the
distribution.
18. Article IV is amended by the addition of the following:
Notwithstanding anything in this Article to the contrary, effective as of
the Plan Year in which this amendment becomes effective, the Actual Deferral
Percentage Test and the Actual Contribution Percentage Test shall be applied
(and adjusted) by applying the Family Member aggregation rules of Code Section
414(q)(6).
19. Sections E1a. and E2a. of the Adoption Agreement are amended in their
entirety to read as follows:
Compensation with respect to any Participant means:
1. (X) Wages, Tips and other Compensation (Box 10 on Form W-2).
2. ( ) Section 3401(a) wages (wages for withholding purposes).
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3. ( ) 415 Safe-harbor compensation.
AND Compensation
( ) shall
(X) shall not
exclude (even if includible in gross income) reimbursements or other
expense allowances, fringe benefits (cash or noncash), moving expenses,
deferred compensation, and welfare benefits.
20. Section E6 of the 401(k) Adoption Agreement(s) is amended by the addition
of the following:
(X) Notwithstanding anything in the Plan to the contrary, all matching
contributions which relate to distributions of Excess Deferred
Compensation, Excess Contributions and Excess Aggregate Contributions
shall be Forfeited. (Select this option only if it is applicable.)
(NOTE: THIS AMENDMENT ONLY NEEDS TO BE EXECUTED BELOW BY THE EMPLOYER IF THE
PLAN IS BEING AMENDED TO UTILIZE THE MODIFICATIONS MADE TO SECTION E1 OR E6 OF
THE ADOPTION AGREEMENT.
IN WITNESS WHEREOF, the Employer hereby causes this amendment to be
executed on this ____________ day of __________________, 19___.
EMPLOYER: PARTICIPATING EMPLOYER:
AFFILIATION NETWORKS, INC. __________________________________
(enter name) (enter name)
By:_______________________________ By:_______________________________
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<PAGE>
AMENDMENT NUMBER TWO
AMENDMENT TO
PAN AMERICAN LIFE INSURANCE
401(K) PROTOTYPE
1. Section 1.9 is amended by the addition of the following:
In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision of the plan to the contrary, for plan years
beginning on or after January 1, 1994, the annual compensation of each employee
taken into account under the plan shall not exceed the OBRA `93 annual
compensation limit. The OBRA `93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with Section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living
adjustment in effect for a calendar year applies to any period, not exceeding 12
months, over which compensation is determined (determination period) beginning
in such calendar year. If a determination period consists of fewer than 12
months, the OBRA `93 annual compensation limit will be multiplied by a fraction,
the numerator of which is the number of months in the determination period, and
the denominator of which is 12.
For plan years beginning on or after January 1, 1994, any reference in this
plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA
`93 annual compensation limit set forth in this provision.
If compensation for any prior determination period is taken into account in
determining an employee's benefits accruing in the current plan year, the
compensation for that prior determination period is subject to the OBRA `93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of the
plan year beginning on or after January 1, 1994, the OBRA `93 annual
compensation limit is $150,000.
2. Section 6.13 is amended by the addition of the following:
If a distribution is one to which Sections 401(a)(11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less than 30
days after the notice required under Section 1.411(a)-11(c) of the Income Tax
Regulations is given, provided that:
(1) the plan administrator clearly informs the participant that the
participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and
(2) the participant, after receiving the notice, affirmatively elects a
distribution.
<PAGE>
3. Section 7.13 is amended to read as follows:
(a) Notwithstanding any provision of the plan to the contrary, with respect
to distributions made after December 31, 1992, a Participant shall be permitted
to elect to have any "eligible rollover distribution" transferred directly to an
"eligible retirement plan" specified by the Participant. The Plan provisions
otherwise applicable to distributions continue to apply to the direct transfer
option. The Participant shall, in the time and manner prescribed by the
Administrator, specify the amount to be directly transferred and the "eligible
retirement plan" to receive the transfer. Any portion of a distribution which
is not transferred shall be distributed to the Participant.
(b) For purposes of this Section, the term "eligible rollover distribution"
means any distribution other than a distribution of substantially equal periodic
payments over the life or life expectancy of the Participant (or joint life or
joint life expectancies of the Participant and the designated beneficiary) or a
distribution over a period certain of ten years or more. Amounts required to be
distributed under Code Section 401(a)(9) are not eligible rollover
distributions. The direct transfer option described in subsection (a) applies
only to eligible rollover distributions which would otherwise be includible in
gross income if not transferred.
(c) For purposes of this Section, the term "eligible retirement plan" means
an individual retirement account as described in Code Section 408(a), an
individual retirement annuity as described in Code Section 408(b), an annuity
plan as described in Code Section 403(a), or a defined contribution plan as
described in Code Section 401(a) which is exempt from tax under Code Section
501(a) and which accepts rollover distributions.
(d) The election described in subsection (a) also applies to the surviving
spouse after the Participant's death; however, distributions to the surviving
spouse may only be transferred to an individual retirement account or individual
retirement annuity. For purposes of subsection (a), a spouse or former spouse
who is the alternate payee under a qualified domestic relations order as defined
in Code Section 414(p) will be treated as the Participant.
<PAGE>
PAN AMERICAN LIFE INSURANCE
401(K) PROTOTYPE
Copyright 1990 Pan American Life Insurance Company
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLES I DEFINITIONS............................................ 1
ARTICLE II TOP HEAVY PROVISIONS AND ADMINISTRATION................ 13
2.1 TOP HEAVY PLAN REQUIREMENTS............................... 13
2.2 DETERMINATION OF TOP HEAVY STATUS......................... 13
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER............... 16
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY................... 17
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES............. 17
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR.................... 17
2.7 RECORDS AND REPORTS....................................... 19
2.8 APPOINTMENT OF ADVISERS................................... 19
2.9 INFORMATION FROM EMPLOYER................................. 19
2.10 PAYMENT OF EXPENSES....................................... 19
2.11 MAJORITY ACTIONS.......................................... 19
2.12 CLAIMS PROCEDURE.......................................... 19
2.13 CLAIMS REVIEW PROCEDURE................................... 20
ARTICLE III ELIGIBILITY........................................... 20
3.1 CONDITIONS OF ELIGIBILITY................................. 20
3.2 EFFECTIVE DATE OF PARTICIPATION........................... 20
3.3 DETERMINATION OF ELIGIBILITY.............................. 21
3.4 TERMINATION OF ELIGIBILITY................................ 21
3.5 OMISSION OF ELIGIBLE EMPLOYEE............................. 21
3.6 INCLUSION OF INELIGIBLE EMPLOYEE.......................... 21
3.7 ELECTION NOT TO PARTICIPATE............................... 22
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE..................... 22
</TABLE>
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<TABLE>
<S> <C>
ARTICLE IV CONTRIBUTION AND ALLOCATION............................ 22
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION........... 22
4.2 PARTICIPANT'S SALARY REDUCTION ELECTION................... 23
4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION................ 26
4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS...... 27
4.5 ACTUAL DEFERRAL PERCENTAGE TESTS.......................... 32
4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS............ 34
4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS...................... 37
4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS........ 40
4.9 MAXIMUM ANNUAL ADDITIONS.................................. 43
4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS................. 49
4.11 TRANSFERS FROM QUALIFIED PLANS............................ 49
4.12 VOLUNTARY CONTRIBUTIONS................................... 51
4.13 DIRECTED INVESTMENT ACCOUNT............................... 51
4.14 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS................ 52
4.15 INTEGRATION IN MORE THAN ONE PLAN......................... 53
ARTICLE V VALUATIONS.............................................. 53
5.1 VALUATION OF THE TRUST FUND............................... 53
5.2 METHOD OF VALUATION....................................... 53
ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS............. 54
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT................. 54
6.2 DETERMINATION OF BENEFITS UPON DEATH...................... 54
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY.......... 55
6.4 DETERMINATION OF BENEFITS UPON TERMINATION................ 55
6.5 DISTRIBUTION OF BENEFITS.................................. 58
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.6 DISTRIBUTION OF BENEFITS UPON DEATH....................... 62
6.7 TIME OF SEGREGATION OR DISTRIBUTION....................... 66
6.8 DISTRIBUTION FOR MINOR BENEFICIARY........................ 66
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN............ 67
6.10 PRE-RETIREMENT DISTRIBUTION............................... 67
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP......................... 67
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS................. 68
6.13 SPECIAL RULE FOR NON-ANNUITY PLANS........................ 69
ARTICLE VII TRUSTEE............................................... 69
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE..................... 69
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE............... 70
7.4 LOANS TO PARTICIPANTS..................................... 73
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS.................. 75
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES............. 75
7.7 ANNUAL REPORT OF THE TRUSTEE.............................. 76
7.8 AUDIT..................................................... 76
7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE............ 77
7.10 TRANSFER OF INTEREST...................................... 77
7.11 TRUSTEE INDEMNIFICATION................................... 78
7.12 EMPLOYER SECURITIES AND REAL PROPERTY..................... 78
ARTICLE VIII AMENDMENT, TERMINATION, AND MERGERS.................. 78
8.1 AMENDMENT................................................. 78
8.2 TERMINATION............................................... 79
8.3 MERGER OR CONSOLIDATION................................... 79
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX MISCELLANEOUS.......................................... 80
9.1 EMPLOYER ADOPTIONS........................................ 80
9.2 PARTICIPANT'S RIGHTS...................................... 80
9.3 ALIENATION................................................ 80
9.4 CONSTRUCTION OF PLAN...................................... 81
9.5 GENDER AND NUMBER......................................... 81
9.6 LEGAL ACTION.............................................. 81
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS.................... 81
9.8 BONDING................................................... 81
9.9 INSURER'S PROTECTIVE CLAUSE............................... 82
9.10 RECEIPT AND RELEASE FOR PAYMENTS.......................... 82
9.11 ACTION BY THE EMPLOYER.................................... 82
9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY........ 82
9.13 HEADINGS.................................................. 83
9.14 APPROVAL BY INTERNAL REVENUE SERVICE...................... 83
9.15 UNIFORMITY................................................ 83
9.16 PAYMENT OF BENEFITS....................................... 83
ARTICLE X PARTICIPATING EMPLOYERS................................. 84
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER............... 84
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS................... 84
10.3 DESIGNATION OF AGENT...................................... 84
10.4 EMPLOYEE TRANSFERS........................................ 84
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES..... 85
10.6 AMENDMENT................................................. 85
10.7 DISCONTINUANCE OF PARTICIPATION........................... 85
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.8 ADMINISTRATOR'S AUTHORITY................................. 85
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE......... 85
</TABLE>
<PAGE>
ARTICLES I
DEFINITIONS
As used in this Plan, the following words and phrases shall have the
meanings set forth herein unless a different meaning is clearly required by the
context:
1.1 "Act" means the Employee Retirement Income Security Act of 1974, as it
may be amended from time to time.
1.2 "Administrator" means the person(s) or entity designated by the
Employer pursuant to Section 2.4 to administer the Plan on behalf of the
Employer.
1.3 "Adoption Agreement" means the separate Agreement which is executed by
the Employer and accepted by the Trustee which sets forth the elective
provisions of this Plan and Trust as specified by the Employer.
1.4 "Affiliated Employer" means the Employer and any corporation which is a
member of a controlled group of corporations (as defined in Code Section 414(b))
which includes the Employer; any trade or business (whether or not incorporated)
which is under common control (as defined in Code Section 414(c)) with the
Employer; any organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Code Section 414(m)) which includes the
Employer; and any other entity required to be aggregated with the Employer
pursuant to Regulations under Code Section 414(o).
1.5 "Aggregate Account" means with respect to each Participant, the value
of all accounts maintained on behalf of a Participant, whether attributable to
Employer or Employee contributions, subject to the provisions of Section 2.2.
1.6 "Anniversary Date" means the anniversary date specified in C3 of the
Adoption Agreement.
1.7 "Beneficiary" means the person to whom a share of a deceased
Participant's interest in the Plan is payable, subject to the restrictions of
Sections 6.2 and 6.6.
1.8 "Code" means the Internal Revenue Code of 1986, as amended or replaced
from time to time.
1.9 "Compensation" with respect to any Participant means such Participant's
compensation as specified by the Employer in El and E2 of the Adoption Agreement
that is paid during the applicable period. Compensation for any Self-Employed
Individual shall be equal to his Earned Income.
In addition, if specified in the Adoption Agreement, Compensation for
all Plan purposes shall also include compensation which is not currently
includible in the Participant's gross income by reason of the application of
Code Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b).
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<PAGE>
Compensation in excess of $200,000 shall be disregarded. Such amount
shall be adjusted at the same time and in such manner as permitted under Code
Section 415(d). In applying this limitation, the family group of a Highly
Compensated Participant who is subject to the Family Member aggregation rules of
Code Section 414(q)(6) because such Participant is either a "five percent owner"
of the Employer or one of the ten (10) Highly Compensated Employees paid the
greatest "415 Compensation" during the year, shall be treated as a single
Participant, except that for this purpose Family Members shall include only the
affected Participant's spouse and any lineal descendants who have not attained
age nineteen (19) before the close of the year. If, as a result of the
application of such rules, the adjusted $200,000 limitation is exceeded, then
(except for purposes of determining the portion of Compensation up to the
integration level if this plan is integrated), the limitation shall be prorated
among the affected individuals in proportion to each such individual's
Compensation as determined under this Section prior to the application of this
limitation.
For Plan Years beginning prior to January 1, 1989, the $200,000 limit
(without regard to Family Member aggregation) shall apply only for Top Heavy
Plan Years and shall not be adjusted.
1.10 "Contract" or "Policy" means any life insurance policy, retirement
income policy, or annuity contract (group or individual) issued by the Insurer.
In the event of any conflict between the terms of this Plan and the terms of any
insurance contract purchased hereunder, the Plan provisions shall control.
1.11 "Deferred Compensation" means that portion of a Participant's total
Compensation that such Participant has elected to defer for a Plan Year pursuant
to Section 4.2.
1.12 "Early Retirement Date" means the date specified in the Adoption
Agreement on which a Participant or Former Participant has satisfied the age and
service requirements specified in the Adoption Agreement (Early Retirement Age).
A Participant shall become fully Vested upon satisfying this requirement if
still employed at his Early Retirement Age.
A Former Participant who terminates employment after satisfying the
service requirement for Early Retirement and who thereafter reaches the age
requirement contained herein shall be entitled to receive his benefits under
this Plan.
1.13 "Earned Income" means with respect to a Self-Employed Individual, the
net earnings from self-employment in the trade or business with respect to which
the Plan is established, for which the personal services of the individual are a
material income-producing factor. Net earnings will be determined without
regard to items not included in gross income and the deductions allocable to
such items. Net earnings are reduced by contributions by the Employer to a
qualified Plan to the extent deductible under Code Section 404. In addition,
for Plan Years beginning after December 31, 1989, net earnings shall be
determined with regard to the deduction allowed to the taxpayer by Code Section
164(f).
1.14 "Elective Contribution" means the Employer's contributions to the Plan
that are made pursuant to the Participant's deferral election pursuant to
Section 4.2. In addition, if selected in E6 of the Adoption Agreement, the
Employer's matching contribution made pursuant
2
<PAGE>
to Section 4.1(b) shall be considered an Elective Contribution for purposes of
the Plan. Elective Contributions shall be subject to the requirements of
Sections 4.2(b) and 4.2(c) and shall further be required to satisfy the
discrimination requirements of Regulation 1.401(k)-l(b)(3), the provisions of
which are specifically incorporated herein by reference.
1.15 "Eligible Employee" means any Employee specified in D1 of the Adoption
Agreement.
1.16 "Employee" means any person who is employed by the Employer, but
excludes any person who is employed as an independent contractor. The term
Employee shall also include Leased Employees as provided in Code Section 414(n)
or (o).
Except as provided in the Non-Standardized Adoption Agreement, all
Employees of all entities which are an Affiliated Employer will be treated as
employed by a single employer.
1.17 "Employer" means the entity specified in the Adoption Agreement, any
Participating Employer (as defined in Section 10.1) which shall adopt this Plan,
any successor which shall maintain this Plan and any predecessor which has
maintained this Plan.
1.18 "Excess Compensation" means, with respect to a Plan that is integrated
with Social Security, a Participant's Compensation which is in excess of the
amount set forth in the Adoption Agreement.
1.19 "Excess Contributions" means, with respect to a Plan Year, the excess
of Elective Contributions and Qualified Non-Elective Contributions made on
behalf of Highly Compensated Participants for the Plan Year over the maximum
amount of such contributions permitted under Section 4.5(a).
1.20 "Excess Deferred Compensation" means, with respect to any taxable year
of a Participant, the excess of the aggregate amount of such Participant's
Deferred Compensation and the elective deferrals pursuant to Section 4.2(f)
actually made on behalf of such Participant for such taxable year, over the
dollar limitation provided for in Code Section 402(g), which is incorporated
herein by reference.
1.21 "Family Member" means, with respect to an affected Participant, such
Participant's spouse, and such Participant's lineal descendants and ascendants
and their spouses, all as described in Code Section 414(q)(6)(B).
1.22 "Fiduciary" means any person who (a) exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of its
assets, (b) renders investment advice for a fee or other compensation, direct or
indirect, with respect to any monies or other property of the Plan or has any
authority or responsibility to do so, or (c) has any discretionary authority or
discretionary responsibility in the administration of the Plan, including, but
not limited to, the Trustee, the Employer and its representative body, and the
Administrator.
3
<PAGE>
1.23 "Fiscal Year" means the Employer's accounting year as specified in the
Adoption Agreement.
1.24 "Forfeiture" means that portion of a Participant's Account that is not
Vested, and occurs on the earlier of:
(a) the distribution of the entire Vested portion of a Participant's
Account, or
(b) the last day of the Plan Year in which the Participant incurs five
(5) consecutive 1-Year Breaks in Service.
Furthermore, pursuant to E18 of the Standardized and E19 of the Non-
Standardized Adoption Agreement for purposes of paragraph (a) above, in the case
of a Terminated Participant whose Vested benefit is zero, such Terminated
Participant may be deemed to have received a distribution of his Vested benefit
upon his termination of employment. In addition, the term Forfeiture shall also
include amounts deemed to be Forfeitures pursuant to any other provision of this
Plan.
1.25 "Forfeiture Account" means the total forfeitable portion of all Former
Participants' Accounts which has not yet become a Forfeiture during any Plan
Year.
1.26 "Former Participant" means a person who has been a Participant, but
who has ceased to be a Participant for any reason.
1.27 "414(s) Compensation" with respect to any Employee means his
Compensation as defined in Section 1.9. However, for purposes of this Section,
Compensation shall be Compensation paid and shall be determined by including, in
the case of a Non-Standardized Adoption Agreement, any items that are excluded
from Compensation pursuant to the Adoption Agreement. The amount of "414(s)
Compensation" with respect to any Employee shall include "414(s) Compensation"
during the entire twelve (12) month period ending on the last day of such Plan
Year, except that for Plan Years beginning prior to the later of January 1,
1992, or the date that is sixty (60) days after the date final Regulations are
issued, "414(s) Compensation" shall only be recognized as of an Employee's
effective date of participation.
In addition, if specified in the Adoption Agreement, "414(s)
Compensation" shall also include compensation which is not currently includible
in the Participant's gross income by reason of the application of Code Sections
125, 402(a)(8), 402(h)(1)(B), or 403(b), plus Elective Contributions
attributable to Deferred Compensation recharacterized as voluntary Employee
contributions pursuant to 4.6(a).
1.28 "415 Compensation" means compensation as defined in Section 4.9(f)(2).
1.29 "Highly Compensated Employee" means an Employee described in Code
Section 414(q) and the Regulations thereunder and generally means an Employee
who performed services for the Employer during the "determination year" and is
in one or more of the following groups:
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(a) Employees who at any time during the "determination year" or
"look-back year" were "five percent owners" as defined in Section 1.36(c).
(b) Employees who received "415 Compensation" during the "look-back
year" from the Employer in excess of $75,000.
(c) Employees who received "415 Compensation" during the "look-back
year" from the Employer in excess of $50,000 and were in the Top Paid Group of
Employees for the Plan Year.
(d) Employees who during the "look-back year" were officers of the
Employer (as that term is defined within the meaning of the Regulations under
Code Section 416) and received "415 Compensation" during the "look-back year"
from the Employer greater than 50 percent of the limit in effect under Code
Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be
limited to the lesser of M 50 employees; or (ii) the greater of 3 employees or
10 percent of all employees. If the Employer does not have at least one officer
whose annual 11415 Compensation" is in excess of 50 percent of the Code Section
415(b)(1)(A) limit, then the highest paid officer of the Employer will be
treated as a Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100 Employees
paid the greatest "415 Compensation" during the "determination year" and are
also described in (b), (c) or (d) above when these paragraphs are modified to
substitute "determination year" for "look-back year."
The "determination year" shall be the Plan Year for which testing is
being performed, and the "look-back year" shall be the twelve-month (12) period
as defined in the Adoption Agreement.
For purposes of this Section, the determination of "415 Compensation"
shall be made by including amounts that would otherwise be excluded from a
Participant's gross income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made pursuant
to a salary reduction agreement, Code Section 403(b). Additionally, the dollar
threshold amounts specified in (b) and (c) above shall be adjusted at such time
and in such manner as is provided in Regulations. In the case of such an
adjustment, the dollar limits which shall be applied are those for the calendar
year in which the "determination year" or "look back year" begins.
In determining who is a Highly Compensated Employee, Employees who are
non-resident aliens and who received no earned income (within the meaning of
Code Section 911(d)) from the Employer constituting United States source income
within the meaning of Code Section 861(a)(3) shall not be treated as Employees.
Additionally, all Affiliated Employers shall be taken into account as a single
employer and Leased Employees within the meaning of Code Sections 414(n)(2) and
414(o)(2) shall be considered Employees unless such Leased Employees are covered
by a plan described in Code Section 414(n)(5) and are not covered in any
qualified plan maintained by the Employer. The exclusion of Leased Employees
for this purpose shall be applied on a uniform and consistent basis for all of
the Employer's retirement plans. In addition,
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Highly Compensated Former Employees shall be treated as Highly Compensated
Employees without regard to whether they performed services during the
"determination year."
1.30 "Highly Compensated Former Employee" means a former Employee who had a
separation year prior to the "determination year" and was a Highly Compensated
Employee in the year of separation from service or in any "determination year"
after attaining age 55. Notwithstanding the foregoing, an Employee who
separated from service prior to 1987 will be treated as a Highly Compensated
Former Employee only if during the separation year (or year preceding the
separation year) or any year after the Employee attains age 55 (or the last year
ending before the Employee's 55th birthday), the Employee either received "415
Compensation" in excess of $50,000 or was a "five percent owner."
For purposes of this Section, "determination year," "415 Compensation"
and "five percent owner" shall be determined in accordance with Section 1.29.
Highly Compensated Former Employees shall be treated as Highly Compensated
Employees. The method set forth in this Section for determining who is a
"Highly Compensated Former Employee" shall be applied on a uniform and
consistent basis for all purposes for which the Code Section 414(q) definition
is applicable.
1.31 "Highly Compensated Participant" means any Highly Compensated Employee
who is eligible to participate in the Plan.
1.32 "Hour of Service" means (1) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the Employer
for the performance of duties during the applicable computation period; (2) each
hour for which an Employee is directly or indirectly compensated or entitled to
compensation by the Employer (irrespective of whether the employment
relationship has terminated) for reasons other than performance of duties (such
as vacation, holidays, sickness, jury duty, disability, lay-off, military duty
or leave of absence) during the applicable computation period; (3) each hour for
which back pay is awarded or agreed to by the Employer without regard to
mitigation of damages. The same Hours of Service shall not be credited both
under (1) or (2), as the case may be, and under (3).
Notwithstanding the above, M no more than 501 Hours of Service are
required to be credited to an Employee on account of any single continuous
period during which the Employee performs no duties (whether or not such period
occurs in a single computation period); (ii) an hour for which an Employee is
directly or indirectly paid, or entitled to payment, on account of a period
during which no duties are performed is not required to be credited to the
Employee if such payment is made or due under a plan maintained solely for the
purpose of complying with applicable worker's compensation, or unemployment
compensation or disability insurance laws; and (iii) Hours of Service are not
required to be credited for a payment which solely reimburses an Employee for
medical or medically related expenses incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made by
or due from the Employer regardless of whether such payment is made by or due
from the Employer directly, or indirectly through, among others, a trust fund,
or insurer, to which the Employer contributes or pays premiums and regardless of
whether contributions made or due to the trust
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fund, insurer, or other entity are for the benefit of particular Employees or
are on behalf of a group of Employees in the aggregate.
An Hour of Service must be counted for the purpose of determining a
Year of Service, a year of participation for purposes of accrued benefits, a 1-
Year Break in Service, and employment commencement date (or reemployment
commencement date). The provisions of Department of Labor regulations
2530.200b-2(b) and (c) are incorporated herein by reference.
Hours of Service will be credited for employment with all Affiliated
Employers and for any individual considered to be a Leased Employee pursuant to
Code Sections 414(n) or 414(o) and the Regulations thereunder.
Hours of Service will be determined on the basis of the method
selected in the Adoption Agreement.
1.33 "Insurer" means Pan American Life Insurance Company or any of its
affiliates or subsidiaries, or any legal reserve insurance company which has
issued one or more policies or group annuity contracts under the Plan prior to
the adoption of this Plan.
1.34 "Investment Manager" means an entity that (a) has the power to manage,
acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility
to the Plan in writing. Such entity must be a person, firm, or corporation
registered as an investment adviser under the Investment Advisers Act of 1940, a
bank, or an insurance company.
1.35 "Joint and Survivor Annuity" means an annuity for the life of a
Participant with a survivor annuity for the life of the Participant's spouse
which is not less than 1/2, nor greater than the amount of the annuity payable
during the joint lives of the Participant and the Participant's spouse. The
Joint and Survivor Annuity will be the amount of benefit which can be purchased
with the Participant's Vested interest in the Plan.
1.36 "Key Employee" means an Employee as defined in Code Section 416(i) and
the Regulations thereunder. Generally, any Employee or former Employee (as well
as each of his Beneficiaries) is considered a Key Employee if he, at any time
during the Plan Year that contains the "Determination Date" or any of the
preceding four (4) Plan Years, has been included in one of the following
categories:
(a) an officer of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) having annual "415
Compensation" greater than 50 percent of the amount in effect under Code Section
415(b)(1)(A) for any such Plan Year.
(b) one of the ten employees having annual "415 Compensation" from the
Employer for a Plan Year greater than the dollar limitation in effect under Code
Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and
owning (or considered as owning within the meaning of Code Section 318) both
more than one-half percent interest and the largest interests in the Employer.
(c) a "five percent owner" of the Employer. "Five percent owner"
means any person who owns (or is considered as owning within the meaning of Code
Section 318) more
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than five percent (5%) of the outstanding stock of the Employer or stock
possessing more than five percent (5%) of the total combined voting power of all
stock of the Employer or, in the case of an unincorporated business, any person
who owns more than five percent (5%) of the capital or profits interest in the
Employer. In determining percentage ownership hereunder, employers that would
otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be
treated as separate employers.
(d) a "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more than $150,000. "One percent owner"
means any person who owns (or is considered as owning within the meaning of Code
Section 318) more than one percent (1%) of the outstanding stock of the Employer
or stock possessing more than one percent (1%) of the total combined voting
power of all stock of the Employer or, in the case of an unincorporated
business, any person who owns more than one percent (1%) of the capital or
profits interest in the Employer. In determining percentage ownership
hereunder, employers that would otherwise be aggregated under Code Sections
414(b), (c), (m) and (o) shall be treated as separate employers. However, in
determining whether an individual has "415 Compensation" of more than $150,000,
"415 Compensation" from each employer required to be aggregated under Code
Sections 414(b), (c), (m) and (o) shall be taken into account.
For purposes of this Section, the determination of "415 Compensation"
shall be made by including amounts that would otherwise be excluded from a
Participant's gross income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made pursuant
to a salary reduction agreement, Code Section 403(b).
1.37 "Late Retirement Date" means the date of, or the first day of the
month or the Anniversary Date coinciding with or next following, whichever
corresponds to the election made for the Normal Retirement Date, a Participant's
actual retirement after having reached his Normal Retirement Date.
1.38 "Leased Employee" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with Code Section
414(n)(6)) on a substantially full time basis for a period of at least one year,
and such services are of a type historically performed by employees in the
business field of the recipient employer. Contributions or benefits provided a
leased employee by the leasing organization which are attributable to services
performed for the recipient employer shall be treated as provided by the
recipient employer.
A leased employee shall not be considered an Employee of the recipient
if: M such employee is covered by a money purchase pension plan providing: (1) a
nonintegrated employer contribution rate of at least 10 percent of compensation,
as defined in Code Section 415(c)(3), but including amounts contributed pursuant
to a salary reduction agreement which are excludable from the employee's gross
income under Code Sections 125, 402(a)(8), 402(h) or 403(b), (2) immediate
participation, and (3) full and immediate vesting; and (ii) leased employees do
not constitute more than 20 percent of the recipient's nonhighly compensated
workforce.
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1.39 "Net Profit" means with respect to any Fiscal Year the Employer's net
income or profit for such Fiscal Year determined upon the basis of the
Employer's books of account in accordance with generally accepted accounting
principles, without any reduction for taxes based upon income, or for
contributions made by the Employer to this Plan and any other qualified plan.
1.40 "Non-Elective Contribution" means the Employer's contributions to the
Plan other than those made pursuant to the Participant's deferral election made
pursuant to Section 4.2 and any Qualified Non-Elective Contribution. In
addition, if selected in E6 of the Adoption Agreement, the Employer's matching
contribution made pursuant to Section 4.1(b) shall be considered a Non-Elective
Contribution for purposes of the Plan.
1.41 "Non-Highly Compensated Participant" means any Participant who is
neither a Highly Compensated Employee nor a Family Member.
1.42 "Non-Key Employee" means any Employee or former Employee (and his
Beneficiaries) who is not a Key Employee.
1.43 "Normal Retirement Age" means the age specified in the Adoption
Agreement at which time a Participant shall become fully Vested in his
Participant's Account.
1.44 "Normal Retirement Date" means the date specified in the Adoption
Agreement on which a Participant shall become eligible to have his benefits
distributed to him.
1.45 "l-Year Break in Service" means the applicable computation period
during which an Employee has not completed more than the number of Hours of
Service with the Employer, set forth in the Adoption Agreement. Further, solely
for the purpose of determining whether a Participant has incurred a 1-Year Break
in Service, Hours of Service shall be recognized for "authorized leaves of
absence" and "maternity and paternity leaves of absence."
"Authorized leave of absence" means an unpaid, temporary cessation
from active employment with the Employer pursuant to an established
nondiscriminatory policy, whether occasioned by illness, military service, or
any other reason.
A "maternity or paternity leave of absence" means, for Plan Years
beginning after December 31, 1984, an absence from work for any period by reason
of the Employee's pregnancy, birth of the Employee's child, placement of a child
with the Employee in connection with the adoption of such child, or any absence
for the purpose of caring for such child for a period immediately following such
birth or placement. For this purpose, Hours of Service shall be credited for
the computation period in which the absence from work begins, only if credit
therefore is necessary to prevent the Employee from incurring a 1-Year Break in
Service, or, in any other case, in the immediately following computation period.
The Hours of Service credited for a "maternity or paternity leave of absence"
shall be those which would normally have been credited but for such absence, or,
in any case in which the Administrator is unable to determine such hours
normally credited, eight (8) Hours of Service per day. The total Hours of
Service required to be credited for a "maternity or paternity leave of absence"
shall not exceed the number of Hours of Service needed to prevent a 1-year Break
in Service.
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1.46 "Owner-Employee" means a sole proprietor who owns the entire interest
in the Employer or a partner who owns more than 10% of either the capital
interest or the profits interest in the Employer and who receives income for
personal services from the Employer.
1.47 "Participant" means any Eligible Employee who participates in the Plan
as provided in Section 3.2 and has not for any reason become ineligible to
participate further in the Plan.
1.48 "Participant's Account" means the account established and maintained
by the Administrator for each Participant with respect to his total interest
under the Plan resulting from the Employer's Non-Elective Contributions. A
separate accounting shall be maintained for matching contributions if they are
deemed to be Non-Elective Contributions.
1.49 "Participant's Combined Account" means the total aggregate amount of
each Participant's Elective Account, Qualified Non-Elective Account, and
Participant's Account.
1.50 "Participant's Elective Account" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan and Trust resulting from the Employer's Elective
Contributions. A separate accounting shall be maintained with respect to that
portion of the Participant's Elective Account attributable to Elective
Contributions made pursuant to Section 4.2, Employer matching contributions if
they are deemed to be Elective Contributions, and any Qualified Non-Elective
Contributions.
1.51 "Participant's Rollover Account" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from amounts transferred from another qualified
plan or "conduit" Individual Retirement Account in accordance with Section 4.11.
1.52 "Plan" means this instrument (hereinafter referred to as Pan American
Life Insurance 401(k) Prototype Basic Plan Document #02) including all
amendments thereto, and the Adoption Agreement as adopted by the Employer.
1.53 "Plan Year" means the Plan's accounting year as specified in C2 of the
Adoption Agreement.
1.54 "Pre-Retirement Survivor Annuity" means an immediate annuity for the
life of the Participant's spouse, the payments under which must be equal to the
amount of benefits which can be purchased with the accounts of a Participant
used to provide the death benefit under the Plan.
1.55 "Qualified Non-Elective Account" means the account established
hereunder to which Qualified Non-Elective Contributions are allocated.
1.56 "Qualified Non-Elective Contribution" means the Employer's
contributions to the Plan that are made pursuant to Section 4.1(d) and Section
4.6(b) which are used to satisfy the "Actual Deferral Percentage" tests.
Qualified Non-Elective Contributions are nonforfeitable when made and are
distributable only as specified in Sections 4.2(c) and 6.11. In addition, the
Employer's contributions to the Plan that are made pursuant to Section 4.8(h)
and which are used
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to satisfy the "Actual Contribution Percentage" tests shall be considered
Qualified Non-Elective Contributions.
1.57 "Qualified Voluntary Employee Contribution Account" means the account
established and maintained by the Administrator for each Participant with
respect to his total interest under the Plan resulting from the Participant's
tax deductible qualified voluntary employee contributions made pursuant to
Section 4.14.
1.58 "Regulation" means the Income Tax Regulations as promulgated by the
Secretary of the Treasury or his delegate, and as amended from time to time.
1.59 "Retired Participant" means a person who has been a Participant, but
who has become entitled to retirement benefits under the Plan.
1.60 "Retirement Date" means the date as of which a Participant retires for
reasons other than Total and Permanent Disability, whether such retirement
occurs on a Participant's Normal Retirement Date, Early or Late Retirement Date
(see Section 6.1).
1.61 "Self-Employed Individual" means an individual who has earned income
for the taxable year from the trade or business for which the Plan is
established, and, also, an individual who would have had earned income but for
the fact that the trade or business had no net profits for the taxable year. A
Self-Employed Individual shall be treated as an Employee.
1.62 "Shareholder-Employee" means a Participant who owns more than five
percent (5%) of the Employer's outstanding capital stock during any year in
which the Employer elected to be taxed as a Small Business Corporation under the
applicable Code Section.
1.63 "Short Plan Year" means, if specified in the Adoption Agreement, that
the Plan Year shall be less than a 12 month period. If chosen, the following
rules shall apply in the administration of this Plan. In determining whether an
Employee has completed a Year of Service for benefit accrual purposes in the
Short Plan Year, the number of the Hours of Service required shall be
proportionately reduced based on the number of days in the Short Plan Year. The
determination of whether an Employee has completed a Year of Service for vesting
purposes shall be made in accordance with Department of Labor Regulation
2530.203-2(c).
1.64 "Super Top Heavy Plan" means a plan described in Section 2.2(b).
1.65 "Taxable Wage Base" means, with respect to any year, the maximum
amount of earnings which may be considered wages for such year under Code
Section 3121(a)(1).
1.66 "Terminated Participant" means a person who has been a Participant,
but whose employment has been terminated other than by death, Total and
Permanent Disability or retirement.
1.67 "Top Heavy Plan" means a plan described in Section 2.2(a).
1.68 "Top Heavy Plan Year" means a Plan Year commencing after December 31,
1983 during which the Plan is a Top Heavy Plan.
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1.69 "Top Paid Group" shall be determined pursuant to Code Section 414(q)
and the Regulations thereunder and generally means the top 20 percent of
Employees who performed services for the Employer during the applicable year,
ranked according to the amount of "415 Compensation" (as determined pursuant to
Section 1.29) received from the Employer during such year. All Affiliated
Employers shall be taken into account as a single employer, and Leased Employees
shall be treated as Employees pursuant to Code Section 414(n) or (o). Employees
who are non-resident aliens who received no earned income (within the meaning of
Code Section 911(d)(2)) from the Employer constituting United States source
income within the meaning of Code Section 861(a)(3) shall not be treated as
Employees. Additionally, for the purpose of determining the number of active
Employees in any year, the following additional Employees shall also be
excluded, however, such Employees shall still be considered for the purpose of
identifying the particular Employees in the Top Paid Group:
(a) Employees with less than six (6) months of service;
(b) Employees who normally work less than 17 1/2 hours per week;
(c) Employees who normally work less than six (6) months during a
year; and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the Employer
are covered under agreements the Secretary of Labor finds to be collective
bargaining agreements between Employee representatives and the Employer, and the
Plan covers only Employees who are not covered under such agreements, then
Employees covered by such agreements shall be excluded from both the total
number of active Employees as well as from the identification of particular
Employees in the Top Paid Group.
The foregoing exclusions set forth in this Section shall be applied on
a uniform and consistent basis for all purposes for which the Code Section
414(q) definition is applicable.
1.70 "Trustee" means the person or entity named in B6 of the Adoption
Agreement or named in any separate trust forming a part of this Plan and any
successors.
1.71 "Trust Fund" means the assets of the Plan and Trust as the same shall
exist from time to time.
1.72 "Valuation Date" means the date or dates during the Plan Year on
which a valuation of the Trust Fund is performed.
1.73 "Vested" means the nonforfeitable portion of any account maintained on
behalf of a Participant.
1.74 "Voluntary Contribution Account" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from the Participant's nondeductible voluntary
contributions made pursuant to Section 4.12.
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Amounts recharacterized as voluntary Employee contributions pursuant
to Section 4.6(a) shall remain subject to the limitations of Sections 4.2(b) and
4.2(c). Therefore, a separate accounting shall be maintained with respect to
that portion of the Voluntary Contribution Account attributable to voluntary
Employee contributions made pursuant to Section 4.12.
1.75 "Year of Service" means the computation period of twelve (12)
consecutive months, herein set forth, and during which an Employee has at least
the number of Hours of Service set forth in the Adoption Agreement.
For purposes of eligibility for participation, the computation period
shall be at set forth in the Adoption Agreement.
For vesting purposes a Year of Service shall be the vesting
computation period set forth in the Adoption Agreement in which an Employee
completes the required Hours of Service set forth in the Adoption Agreement.
Years of Service with the predecessor Employer specified in the
Adoption Agreement shall be recognized.
Years of Service with any Affiliated Employer shall be recognized.
ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
2.l TOP HEAVY PLAN REQUIREMENTS
For any Top Heavy Plan Year, the Plan shall provide the special vesting
requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the
special minimum allocation requirements of Code Section 416(c) pursuant to
Section 4.4(i) of the Plan.
2.2 DETERMINATION OF TOP HEAVY STATUS
(a) This Plan shall be a Top Heavy Plan for any Plan Year beginning after
December 31, 1983, in which, as of the Determination Date, (1) the Present Value
of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts
of Key Employees under this Plan and all plans of an Aggregation Group, exceeds
sixty percent (60%) of the Present Value of Accrued Benefits and the Aggregate
Accounts of all Key and Non-Key Employees under this Plan and all plans of an
Aggregation Group.
If any Participant is a Non-Key Employee for any Plan Year, but such
Participant was a Key Employee for any prior Plan Year, such Participant's
Present Value of Accrued Benefit and/or Aggregate Account balance shall not be
taken into account for purposes of determining whether this Plan is a Top Heavy
or Super Top Heavy Plan (or whether any Aggregation Group which includes this
Plan is a Top Heavy Group). In addition, if a Participant or Former Participant
has not performed any services for any Employer maintaining the Plan at any time
during the five year period ending on the Determination Date, any accrued
benefit for such Participant or Former Participant shall not be taken into
account for the purposes of determining whether this Plan is a Top Heavy or
Super Top Heavy Plan.
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(b) This Plan shall be a Super Top Heavy Plan for any Plan Year beginning
after December 31, 1983, in which, as of the Determination Date, (1) the Present
Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate
Accounts of Key Employees under this Plan and all plans of an Aggregation Group,
exceeds ninety percent (90%) of the Present Value of Accrued Benefits and the
Aggregate Accounts of all Key and Non-Key Employees under this Plan and all
plans of an Aggregation Group.
(c) Aggregate Account: A Participant's Aggregate Account as of the
Determination Date is the sum of:
(1) his Participant's Combined Account balance as of the most recent
valuation occurring within a twelve (12) month period ending on the
Determination Date;
(2) an adjustment for any contributions due as of the Determination
Date. Such adjustment shall be the amount of any contributions actually made
after the valuation date but on or before the Determination Date, except for the
first Plan Year when such adjustment shall also reflect the amount of any
contributions made after the Determination Date that are allocated as of a date
in that first Plan Year;
(3) any Plan distributions made within the Plan Year that includes the
Determination Date or within the four (4) preceding Plan Years. However, in the
case of distributions made after the valuation date and prior to the
Determination Date, such distributions are not included as distributions for top
heavy purposes to the extent that such distributions are already included in the
Participant's Aggregate Account balance as of the valuation date.
Notwithstanding anything herein to the contrary, all distributions, including
distributions made prior to January 1, 1984, and distributions under a
terminated plan which if it had not been terminated would have been required to
be included in an Aggregation Group, will be counted. Further, distributions
from the Plan (including the cash value of life insurance policies) of a
Participant's account balance because of death shall be treated as a
distribution for the purposes of this paragraph.
(4) any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified voluntary employee
contributions shall not be considered to be a part of the Participant's
Aggregate Account balance.
(5) with respect to unrelated rollovers and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a plan maintained
by one employer to a plan maintained by another employer), if this Plan provides
the rollovers or plan-to-plan transfers, it shall always consider such rollovers
or plan-to-plan transfers as a distribution for the purposes of this Section.
If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it
shall not consider such rollovers or plan-to-plan transfers accepted after
December 31, 1983 as part of the Participant's Aggregate Account balance.
However, rollovers or plan-to-plan transfers accepted prior to January 1, 1984
shall be considered as part of the Participant's Aggregate Account balance.
(6) with respect to related rollovers and plan-to-plan transfers (ones
either not initiated by the Employee or made to a plan maintained by the same
employer), if this Plan
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provides the rollover or plan-to-plan transfer, it shall not be counted as a
distribution for purposes of this Section. If this Plan is the plan accepting
such rollover or plan-to-plan transfer, it shall consider such rollover or plan-
to-plan transfer as part of the Participant's Aggregate Account balance,
irrespective of the date on which such rollover or plan-to-plan transfer is
accepted.
(7) For the purposes of determining whether two employers are to be
treated as the same employer in 2.2(c)(5) and 2.2(c)(6) above, all employers
aggregated under Code Section 414(b), (c), (m) and (o) are treated as the same
employer.
(d) "Aggregation Group" means either a Required Aggregation Group or a
Permissive Aggregation Group as hereinafter determined.
(1) Required Aggregation Group: In determining a Required Aggregation
Group hereunder, each qualified plan of the Employer, including any Simplified
Employee Pension Plan, in which a Key Employee is a participant in the Plan Year
containing the Determination Date or any of the four preceding Plan Years, and
each other qualified plan of the Employer which enables any qualified plan in
which a Key Employee participates to meet the requirements of Code Sections
401(a)(4) or 410, will be required to be aggregated. Such group shall be known
as a Required Aggregation Group.
In the case of a Required Aggregation Group, each plan in the group
will be considered a Top Heavy Plan if the Required Aggregation Group is a Top
Heavy Group. No plan in the Required Aggregation Group will be considered a Top
Heavy Plan if the Required Aggregation Group is not a Top Heavy Group.
(2) Permissive Aggregation Group: The Employer may also include any
other plan of the Employer, including any Simplified Employee Pension Plan, not
required to be included in the Required Aggregation Group, provided the
resulting group, taken as a whole, would continue to satisfy the provisions of
Code Sections 401(a)(4) and 410. Such group shall be known as a Permissive
Aggregation Group.
In the case of a Permissive Aggregation Group, only a plan that is
part of the Required Aggregation Group will be considered a Top Heavy Plan if
the Permissive Aggregation Group is a Top Heavy Group. No plan in the
Permissive Aggregation Group will be considered a Top Heavy Plan if the
Permissive Aggregation Group is not a Top Heavy Group.
(3) Only those plans of the Employer in which the Determination Dates
fall within the same calendar year shall be aggregated in order to determine
whether such plans are Top Heavy Plans.
(4) When aggregating plans, the value of Aggregate Accounts and
Accrued Benefits will be calculated with reference to the Determination Dates
that fall within the same calendar year.
(5) An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years ending on the
Determination Date.
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(e) "Determination Date" means (a) the last day of the preceding Plan
Year, or (b) in the case of the first Plan Year, the last day of such Plan Year.
(f) Present value of Accrued Benefit: In the case of a defined benefit
plan, the Present Value of Accrued Benefit for a Participant other than a Key
Employee shall be as determined using the single accrual method used for all
plans of the Employer and Affiliated Employers, or if no such single method
exists, using a method which results in benefits accruing not more rapidly than
the slowest accrual rate permitted under Code Section 411(b)(1)(C). The
determination of the Present Value of Accrued Benefit shall be determined as of
the most recent valuation date that falls within or ends with the 12-month
period ending on the Determination Date, except as provided in Code Section 416
and the Regulations thereunder for the first and second plan years of a defined
benefit plan.
However, any such determination must include present value of accrued
benefit attributable to any Plan distributions referred to in Section 2.2(c)(3)
above, any Employee contributions referred to in section 2.2(c)(4) above or any
related or unrelated rollovers referred to in Sections 2.2(c)(5) and 2.2(c)(6)
above.
(g) "Top Heavy Group" means an Aggregation Group in which, as of the
Determination Date, the sum of:
(1) the Present Value of Accrued Benefits of Key Employees under all
defined benefit plans included in the group, and
(2) the Aggregate Accounts of Key Employees under all defined
contribution plans included in the group,
exceeds sixty percent (60%) of a similar sum determined for all
Participants.
(h) The Administrator shall determine whether this Plan is a Top Heavy
Plan on the Anniversary Date specified in the Adoption Agreement. Such
determination of the top heavy ratio shall be in accordance with Code Section
416 and the Regulations thereunder.
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) The Employer shall be empowered to appoint and remove the Trustee and
the Administrator from time to time as it deems necessary for the proper
administration of the Plan to assure that the Plan is being operated for the
exclusive benefit of the Participants and their Beneficiaries in accordance with
the terms of the Plan, the Code, and the Act.
(b) The Employer shall establish a "funding policy and method," i.e., it
shall determine whether the Plan has a short run need for liquidity (e.g., to
pay benefits) or whether liquidity is a long run goal and investment growth (and
stability of same) is a more current need, or shall appoint a qualified person
to do so. The Employer or its delegate shall communicate such needs and goals
to the Trustee, who shall coordinate such Plan needs with its investment policy.
The communication of such a "funding policy and method" shall not, however,
constitute a directive to the Trustee as to investment of the Trust Funds. Such
"funding policy
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and method" shall be consistent with the objectives of this Plan and with the
requirements of Title I of the Act.
(c) The Employer may, in its discretion, appoint an Investment Manager to
manage all or a designated portion of the assets of the Plan. In such event,
the Trustee shall follow the directive of the Investment Manager in investing
the assets of the Plan managed by the Investment Manager.
(d) The Employer shall periodically review the performance of any
Fiduciary or other person to whom duties have been delegated or allocated by it
under the provisions of this Plan or pursuant to procedures established
hereunder. This requirement may be satisfied by formal periodic review by the
Employer or by a qualified person specifically designated by the Employer,
through day-to-day conduct and evaluation, or through other appropriate ways.
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY
The Employer shall appoint one or more Administrators. Any person,
including, but not limited to, the Employees of the Employer, shall be eligible
to serve as an Administrator. Any person so appointed shall signify his
acceptance by filing written acceptance with the Employer. An Administrator may
resign by delivering his written resignation to the Employer or be removed by
the Employer by delivery of written notice of removal, to take effect at a date
specified therein, or upon delivery to the Administrator if no date is
specified.
The Employer, upon the resignation or removal of an Administrator, shall
promptly designate in writing a successor to this position. If the Employer
does not appoint an Administrator, the Employer will function as the
Administrator.
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the responsibilities
of each Administrator may be specified by the Employer and accepted in writing
by each Administrator. In the event that no such delegation is made by the
Employer, the Administrators may allocate the responsibilities among themselves,
in which event the Administrators shall notify the Employer and the Trustee in
writing of such action and specify the responsibilities of each Administrator.
The Trustee thereafter shall accept and rely upon any documents executed by the
appropriate Administrator until such time as the Employer or the Administrators
file with the Trustee a written revocation of such designation.
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to administer the Plan
for the exclusive benefit of the Participants and their Beneficiaries, subject
to the specific terms of the Plan. The Administrator shall administer the Plan
in accordance with its terms and shall have the power and discretion to construe
the terms of the Plan and determine all questions arising in connection with the
administration, interpretation, and application of the Plan. Any such
determination by the Administrator shall be conclusive and binding upon all
persons. The Administrator may establish procedures, correct any defect, supply
any information, or reconcile any inconsistency in such manner and to such
extent as shall be deemed necessary or advisable to carry out the
17
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purpose of the Plan; provided, however, that any procedure, discretionary act,
interpretation or construction shall be done in a nondiscriminatory manner based
upon uniform principles consistently applied and shall be consistent with the
intent that the Plan shall continue to be deemed a qualified plan under the
terms of Code Section 401(a), and shall comply with the terms of the Act and all
regulations issued pursuant thereto. The Administrator shall have all powers
necessary or appropriate to accomplish his duties under this Plan.
The Administrator shall be charged with the duties of the general
administration of the Plan, including, but not limited to, the following:
(a) the discretion to determine all questions relating to the eligibility
of Employees to participate or remain a Participant hereunder and to receive
benefits under the Plan;
(b) to compute, certify, and direct the Trustee with respect to the amount
and the kind of benefits to which any Participant shall be entitled hereunder;
(c) to authorize and direct the Trustee with respect to all
nondiscretionary or otherwise directed disbursements from the Trust Fund;
(d) to maintain all necessary records for the administration of the Plan;
(e) to interpret the provisions of the Plan and to make and publish such
rules for regulation of the Plan as are consistent with the terms hereof;
(f) to determine the size and type of any Contract to be purchased from any
insurer, and to designate the Insurer from which such Contract shall be
purchased;
(g) to determine the size and type of any Contract to be purchased from the
Insurer;
(h) to compute and certify to the Employer and to the Trustee from time to
time the sums of money necessary or desirable to be contributed to the Trust
Fund;
(i) to consult with the Employer and the Trustee regarding the short and
long-term liquidity needs of the Plan in order that the Trustee can exercise any
investment discretion in a manner designed to accomplish specific objectives;
(j) to prepare and distribute to Employees a procedure for notifying
Participants and Beneficiaries of their rights to elect Joint and Survivor
Annuities and Pre-Retirement Survivor Annuities if required by the Code and
Regulations thereunder;
(k) to prepare and implement a procedure to notify Eligible Employees that
they may elect to have a portion of their Compensation deferred or paid to them
in cash;
(1) to assist any Participant regarding his rights, benefits, or elections
available under the Plan.
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2.7 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and shall keep
all other books of account, records, and other data that may be necessary for
proper administration of the Plan and shall be responsible for supplying all
information and reports to the Internal Revenue Service, Department of Labor,
Participants, Beneficiaries and others as required by law.
2.8 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the Administrator,
may appoint counsel, specialists, advisers, and other persons as the
Administrator or the Trustee deems necessary or desirable in connection with the
administration of this Plan.
2.9 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer shall
supply full and timely information to the Administrator on all matters relating
to the Compensation of all Participants, their Hours of Service, their Years of
Service, their retirement, death, disability, or termination of employment, and
such other pertinent facts as the Administrator may require; and the
Administrator shall advise the Trustee of such of the foregoing facts as may be
pertinent to the Trustee's duties under the Plan. The Administrator may rely
upon such information as is supplied by the Employer and shall have no duty or
responsibility to verify such information.
2.10 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund unless
paid by the Employer. Such expenses shall include any expenses incident to the
functioning of the Administrator, including, but not limited to, fees of
accountants, counsel, and other specialists and their agents, and other costs of
administering the Plan. Until paid, the expenses shall constitute a liability
of the Trust Fund. However, the Employer may reimburse the Trust Fund for any
administration expense incurred. Any administration expense paid to the Trust
Fund as a reimbursement shall not be considered an Employer contribution.
2.11 MAJORITY ACTIONS
Except where there has been an allocation and delegation of administrative
authority pursuant to Section 2.5, if there shall be more than one
Administrator, they shall act by a majority of their number, but may authorize
one or more of them to sign all papers on their behalf.
2.12 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed in writing with the
Administrator. Written notice of the disposition of a claim shall be furnished
to the claimant within 90 days after the application is filed. In the event the
claim is denied, the reasons for the denial shall be specifically set forth in
the notice in language calculated to be understood by the claimant, pertinent
provisions of the Plan shall be cited, and, where appropriate, an explanation as
to how
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<PAGE>
the claimant can perfect the claim will be provided. In addition, the claimant
shall be furnished with an explanation of the Plan's claims review procedure.
2.13 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has been
denied a benefit by a decision of the Administrator pursuant to section 2.12
shall be entitled to request the Administrator to give further consideration to
his claim by filing with the Administrator a written request for a hearing.
Such request, together with a written statement of the reasons why the claimant
believes his claim should be allowed, shall be filed with the Administrator no
later than 60 days after receipt of the written notification provided for in
Section 2.12. The Administrator shall then conduct a hearing within the next 60
days, at which the claimant may be represented by an attorney or any other
representative of his choosing and expense and at which the claimant shall have
an opportunity to submit written and oral evidence and arguments in support of
his claim. At the hearing (or prior thereto upon 5 business days written notice
to the Administrator) the claimant or his representative shall have an
opportunity to review all documents in the possession of the Administrator which
are pertinent to the claim at issue and its disallowance. Either the claimant
or the Administrator may cause a court reporter to attend the hearing and record
the proceedings. In such event, a complete written transcript of the
proceedings shall be furnished to both parties by the court reporter. The full
expense of any such court reporter and such transcripts shall be borne by the
party causing the court reporter to attend the hearing. A final decision as to
the allowance of the claim shall be made by the Administrator within 60 days of
receipt of the appeal (unless there has been an extension of 60 days due to
special circumstances, provided the delay and the special circumstances
occasioning it are communicated to the claimant within the 60 day period). Such
communication shall be written in a manner calculated to be understood by the
claimant and shall include specific reasons for the decision and specific
references to the pertinent Plan provisions on which the decision is based.
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Any Eligible Employee shall be eligible to participate hereunder on the
date he has satisfied the requirements specified in the Adoption Agreement.
3.2 EFFECTIVE DATE OF PARTICIPATION
An Eligible Employee who has become eligible to be a Participant shall
become a Participant effective as of the later of the day specified in the
Adoption Agreement or the effective date of the Plan.
However, if this Plan is an amendment or restatement, any Participant in
the original Plan shall participate in restated plan as of the Effective Date of
the restatement.
In the event an Employee who has satisfied the Plan's eligibility
requirements and would otherwise have become a Participant shall go from a
classification of a noneligible Employee to
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<PAGE>
an Eligible Employee, such Employee shall become a Participant as of the date he
becomes an Eligible Employee.
In the event an Employee who has satisfied the Plan's eligibility
requirements and would otherwise become a Participant shall go from a
classification of an Eligible Employee to a noneligible Employee and becomes
ineligible to participate and has not incurred a 1-Year Break in Service, such
Employee shall participate in the Plan as of the date he returns to an eligible
class of Employees. If such Employee does incur a 1-Year Break in Service,
eligibility will be determined under the Break in Service rules of the Plan.
3.3 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee for
participation in the Plan based upon information furnished by the Employer. Such
determination shall be conclusive and binding upon all persons, as long as the
same is made pursuant to the Plan and the Act. Such determination shall be
subject to review per Section 2.13.
3.4 TERMINATION OF ELIGIBILITY
In the event a Participant shall go from a classification of an Eligible
Employee to an ineligible Employee, such Former Participant shall continue to
vest in his interest in the Plan for each Year of Service completed while a
noneligible Employee, until such time as his Participant's Account shall be
forfeited or distributed pursuant to the terms of the Plan. Additionally, his
interest in the Plan shall continue to share in the earnings of the Trust Fund.
3.5 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a Participant
in the Plan is erroneously omitted and discovery of such omission is not made
until after a contribution by his Employer for the year has been made, the
Employer shall make a subsequent contribution, if necessary after the
application of Section 4.4(e), so that the omitted Employee receives a total
amount which the said Employee would have received had he not been omitted. Such
contribution shall be made regardless of whether or not it is deductible in
whole or in part in any taxable year under applicable provisions of the Code.
3.6 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included as a
Participant in the Plan is erroneously included and discovery of such incorrect
inclusion is not made until after a contribution for the year has been made, the
Employer shall not be entitled to recover the contribution made with respect to
the ineligible person regardless of whether or not a deduction is allowable with
respect to such contribution. In such event, the amount contributed with respect
to the ineligible person shall constitute a Forfeiture for the Plan Year in
which the discovery is made.
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3.7 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect voluntarily
not to participate in the Plan. The election not to participate must be
communicated to the Employer, in writing, at least thirty (30) days before the
beginning of a Plan Year. For Standardized Plans, a Participant or an Eligible
Employee may not elect not to participate. Furthermore, the foregoing election
not to participate shall not be available with respect to partners in a
partnership.
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE
(a) If this Plan provides contributions or benefits for one or more Owner-
Employees who control both the business for which this Plan is established and
one or more other entities, this Plan and the plan established for other trades
or businesses must, when looked at as a single Plan, satisfy Code Sections
401(a) and (d) for the Employees of this and all other entities.
(b) If the Plan provides contributions or benefits for one or more Owner-
Employees who control one or more other trades or businesses, the employees of
the other trades or businesses must be included in a plan which satisfies Code
Sections 401(a) and (d) and which provides contributions and benefits not less
favorable than provided for Owner-Employees under this Plan.
(c) If an individual is covered as an Owner-Employee under the plans of
two or more trades or businesses which are not controlled and the individual
controls a trade or business, then the benefits or contributions of the
employees under the plan of the trades or businesses which are controlled must
be as favorable as those provided for him under the most favorable plan of the
trade or business which is not controlled.
(d) For purposes of the preceding paragraphs, an Owner-Employee, or two or
more owner-Employees, will be considered to control an entity if the Owner-
Employee, or two or more Owner-Employees together:
(1) own the entire interest in an unincorporated entity, or
(2) in the case of a partnership, own more than 50 percent of either
the capital interest or the profits interest in the partnership.
(e) For purposes of the preceding sentence, an Owner-Employee, or two or
more Owner-Employees shall be treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership which such Owner-
Employee, or such two or more Owner-Employees, are considered to control within
the meaning of the preceding sentence.
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
For each Plan Year, the Employer shall contribute to the Plan:
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(a) The amount of the total salary reduction elections of all Participants
made pursuant to Section 4.2(a), which amount shall be deemed an Employer's
Elective Contribution, plus
(b) If specified in E6 of the Adoption Agreement, a matching contribution
equal to the percentage specified in the Adoption Agreement of the Deferred
Compensation of each Participant eligible to share in the allocations of the
matching contribution, which amount shall be deemed an Employer's Non-Elective
or Elective Contribution as selected in the Adoption Agreement, plus
(c) If specified in E7 of the Adoption Agreement, a discretionary amount,
if any, which shall be deemed an Employer's Non-Elective Contribution, plus
(d) If specified in E9 of the Adoption Agreement, a Qualified Non-Elective
Contribution.
(e) Notwithstanding the foregoing, however, the Employer's contributions
for any Fiscal Year shall not exceed the maximum amount allowable as a deduction
to the Employer under the provisions of Code Section 404. All contributions by
the Employer shall be made in cash or in such property as is acceptable to the
Trustee.
(f) Except, however, to the extent necessary to provide the top heavy
minimum allocations, the Employer shall make a contribution even if it exceeds
current or accumulated Net Profit or the amount which is deductible under Code
Section 404.
4.2 PARTICIPANT'S SALARY REDUCTION ELECTION
(a) Each Participant may elect to defer his Compensation which would have
been received in the Plan Year, but for the deferral election, subject to the
limitations of this Section and the Adoption Agreement. A deferral election (or
modification of an earlier election) may not be made with respect to
Compensation which is currently available on or before the date the Participant
executed such election, or if later, the latest of the date the Employer adopts
this cash or deferred arrangement, or the date such arrangement first became
effective. Any elections made pursuant to this Section shall become effective as
soon as is administratively feasible.
Additionally, if elected in the Adoption Agreement, each Participant
may elect to defer and have allocated for a Plan Year all or a portion of any
cash bonus attributable to services performed by the Participant for the
Employer during such Plan Year and which would have been received by the
Participant on or before two and one-half months following the end of the Plan
Year but for the deferral. A deferral election may not be made with respect to
cash bonuses which are currently available on or before the date the Participant
executed such election. Notwithstanding the foregoing, cash bonuses attributable
to services performed by the Participant during a Plan Year but which are to be
paid to the Participant later than two and one-half months after the close of
such Plan Year will be subjected to whatever deferral election is in effect at
the time such cash bonus would have otherwise been received.
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The amount by which Compensation and/or cash bonuses are reduced shall
be that Participant's Deferred Compensation and be treated as an Employer
Elective Contribution and allocated to that Participant's Elective Account.
Once made, a Participant's election to reduce Compensation shall
remain in effect until modified or terminated. Modifications may be made as
specified in the Adoption Agreement, and terminations may be made at any time.
Any modification or termination of an election will become effective as soon as
is administratively feasible.
(b) The balance in each Participant's Elective Account shall be fully
Vested at all times and shall not be subject to Forfeiture for any reason.
(c) Amounts held in the Participant's Elective Account and Qualified Non-
Elective Account may be distributable as permitted under the Plan, but in no
event prior to the earlier of:
(1) a Participant's termination of employment, Total and Permanent
Disability, or death;
(2) a Participant's attainment of age 59 1/2;
(3) the proven financial hardship of a Participant, subject to the
limitations of Section 6.11;
(4) the termination of the Plan without the existence at the time of
Plan termination of another defined contribution plan (other than an employee
stock ownership plan as defined in Code Section 4975(e)(7)) or the establishment
of a successor defined contribution plan (other than an employee stock ownership
plan as defined in Code Section 4975(e)(7)) by the Employer or an `Affiliated
Employer within the period ending twelve months after distribution of all assets
from the Plan maintained by the Employer;
(5) the date of the sale by the Employer to an entity that is not an
Affiliated Employer of substantially all of the assets (within the meaning of
Code Section 409(d)(2)) with respect to a Participant who continues employment
with the corporation acquiring such assets; or
(6) the date of the sale by the Employer or an Affiliated Employer of
its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) to
an entity that is not an Affiliated Employer with respect to a Participant who
continues employment with such subsidiary.
(d) In any Plan Year beginning after December 31, 1987, a Participant's
Deferred Compensation made under this Plan and all other plans, contracts or
arrangements of the Employer maintaining this Plan shall not exceed the
limitation imposed by Code Section 402(g), as in effect for the calendar year in
which such Plan Year began. This dollar limitation shall be adjusted annually
pursuant to the method provided in Code Section 415(d) in accordance with
Regulations.
(e) In the event a Participant has received a hardship distribution
pursuant to Regulation 1.401(k)-l(d)(2)(iii)(B) from any other plan maintained
by the Employer or from his
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Participant's Elective Account pursuant to Section 6.11(b), and the Employer has
elected on the Adoption Agreement to rely on the safe harbor determination of
hardship, then such Participant shall not be permitted to elect to have Deferred
Compensation contributed to the Plan on his behalf for a period of twelve (12)
months following the receipt of the distribution. Furthermore, the dollar
limitation under Code Section 402(g) shall be reduced, with respect to the
Participant's taxable year following the taxable year in which the hardship
distribution was made, by the amount of such Participant's Deferred
Compensation, if any, made pursuant to this Plan (and any other plan maintained
by the Employer) for the taxable year of the hardship distribution.
(f) If a Participant's Deferred Compensation under this Plan together with
any elective deferrals (as defined in Regulation 1.402(g)-l(b)) under another
qualified cash or deferred arrangement (as defined in Code Section 401(k)), a
simplified employee pension (as defined in Code Section 408(k)), a salary
reduction arrangement (within the meaning of Code Section 3121(a)(5)(D)), a
deferred compensation plan under Code Section 457, or a trust described in Code
Section 501(c)(18) cumulatively exceed the limitation imposed by Code Section
402(g) (as adjusted annually in accordance with the method provided in Code
Section 415(d) pursuant to Regulations) for such Participant's taxable year, the
Participant may, not later than March 1st following the close of his taxable
year, notify the Administrator in writing of such excess and request that his
Deferred Compensation under this Plan be reduced by an amount specified by the
Participant. In such event, the Administrator shall direct the Trustee to
distribute such excess amount (and any Income allocable to such excess amount)
to the Participant not later than the first April 15th following the close of
the Participant's taxable year. Distributions in accordance with this paragraph
may be made for any taxable year of the Participant which begins after December
31, 1986. Any distribution of less than the entire amount of Excess Deferred
Compensation and Income shall be treated as a pro rata distribution of Excess
Deferred Compensation and Income. The amount distributed shall not exceed the
Participant's Deferred Compensation under the Plan for the taxable year. Any
distribution on or before the last day of the Participant's taxable year must
satisfy each of the following conditions:
(1) the Participant shall designate the distribution as Excess
Deferred Compensation;
(2) the distribution must be made after the date on which the Plan
received the Excess Deferred Compensation; and
(3) the Plan must designate the distribution as a distribution of
Excess Deferred Compensation.
For the purpose of this Section, "Income" means the amount of
income or loss allocable to a Participant's Excess Deferred Compensation and
shall be equal to the sum of the allocable gain or loss for the taxable year of
the Participant and the allocable gain or loss for the period between the end of
the taxable year of the Participant and the date of distribution ("gap period").
The income or loss allocable to each such period is calculated separately and is
determined by multiplying the income or loss allocable to the Participant's
Deferred Compensation for the respective period by a fraction. The numerator of
the fraction is the Participant's Excess Deferred Compensation for the taxable
year of the Participant. The denominator is the balance, as of the last day of
the respective period, of the Participant's
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<PAGE>
Elective Account that is attributable to the Participant's Deferred Compensation
reduced by the gain allocable to such total amount for the respective period and
increased by the loss allocable to such total amount for the respective period.
In lieu of the "fractional method" described above, a "safe
harbor method" may be used to calculate the allocable income or loss for the
"gap period." Under such "safe harbor method," allocable income or loss for the
"gap period" shall be deemed to equal ten percent (10%) of the income or loss
allocable to a Participant's Excess Deferred Compensation for the taxable year
of the Participant multiplied by the number of calendar months in the "gap
period." For purposes of determining the number of calendar months in the "gap
period," a distribution occurring on or before the fifteenth day of the month
shall be treated as having been made on the last day of the preceding month and
a distribution occurring after such fifteenth day shall be treated as having
been made on the first day of the next subsequent month.
Income or loss allocable to any distribution of Excess Deferred
Compensation on or before the last day of the taxable year of the Participant
shall be calculated from the first day of the taxable year of the Participant to
the date on which the distribution is made pursuant to either the "fractional
method" or the "safe harbor method."
Notwithstanding the above, for the 1987 calendar year, Income
during the "gap period" shall not be taken into account.
(g) Notwithstanding Section 4.2(f) above, a Participant's Excess
Deferred Compensation shall be reduced, but not below zero, by any distribution
and/or recharacterization of Excess Contributions pursuant to Section 4.6(a) for
the Plan Year beginning with or within the taxable year of the Participant.
(h) At Normal Retirement Date, or such other date when the
Participant shall be entitled to receive benefits, the fair market value of the
Participant's Elective Account shall be used to provide benefits to the
Participant or his Beneficiary.
(i) Employer Elective Contributions made pursuant to this Section may
be segregated into a separate account for each Participant in a federally
insured savings account, certificate of deposit in a bank or savings and loan
association, money market certificate, or other short-term debt security
acceptable to the Trustee until such time as the allocations pursuant to Section
4.4 have been made.
(j) The Employer and the Administrator shall adopt a procedure
necessary to implement the salary reduction elections provided for herein.
4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
The Employer shall generally pay to the Trustee its contribution to the
Plan for each Plan Year within the time prescribed by law, including extensions
of time, for the filing of the Employer's federal income tax return for the
Fiscal Year.
However, Employer Elective Contributions accumulated through payroll
deductions shall be paid to the Trustee as of the earliest date on which such
contributions can reasonably be
26
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segregated from the Employer's general assets, but in any event within ninety
(90) days from the date on which such amounts would otherwise have been payable
to the Participant in cash. The provisions of Department of Labor regulations
2510.3-102 are incorporated herein by reference. Furthermore, any additional
Employer contributions which are allocable to the Participant's Elective Account
for a Plan Year shall be paid to the Plan no later than the twelve-month period
immediately following the close of such Plan Year.
4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an account in the name
of each Participant to which the Administrator shall credit pursuant to the
terms and conditions of this Plan all amounts allocated to each such Participant
as set forth herein.
(b) The Employer shall provide the Administrator with all information
required by the Administrator to make a proper allocation of the Employer's
contributions. Within a reasonable period of time after the date of receipt by
the Administrator of such information, the Administrator shall allocate such
contribution as follows:
(1) With respect to the Employer's Elective Contribution made
pursuant to Section 4.1(a), to each Participant's Elective Account in an amount
equal to each such Participant's Deferred Compensation.
(2) With respect to the Employer's matching contribution made
pursuant to Section 4.1(b), to each Participant's Account, or Participant's
Elective Account as selected in E6 of the Adoption Agreement, in accordance with
Section 4.1(b).
Except, however, a Participant who is not credited with a Year of
Service during any Plan Year shall or shall not share in the Employer's matching
contribution for that year as provided in E6 of the Adoption Agreement. However,
for Plan Years beginning after 1989, if this is a standardized Plan, a
Participant shall share in the Employer's matching contribution regardless of
Hours of Service.
(3) With respect to the Employer's Non-Elective Contribution made
pursuant to Section 4.1(c), to each Participant's Account in accordance with the
provisions of E8 of the Adoption Agreement.
However, if an integrated allocation formula is selected at E8 of the
Adoption Agreement, then such contribution shall be allocated to each
Participant's Combined Account in a dollar amount equal to 5.7% of the sum of
each Participant's total Compensation plus Excess Compensation. If the Employer
does not contribute such amount for all Participants, each Participant will be
allocated a share of the contribution in the same proportion that his total
Compensation plus his total Excess Compensation for the Plan Years bears to the
total Compensation plus the total Excess Compensation of all Participants for
that year. The balance of the contribution, if any, will be allocated in the
same proportion that his total Compensation bears to the total Compensation of
all Participant's eligible to share in the allocation.
Regardless of the preceding, 4.3% shall be substituted for 5.7% above
if Excess Compensation is based on more than 20% and less than or equal to 80%
of the Taxable Wage Base.
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<PAGE>
If Excess Compensation is based on less than 100% and more than 80% of the
Taxable Wage Base, then 5.4% shall be substituted for 5.7% above.
(4) With respect to the Employer's Qualified Non-Elective
Contribution made pursuant to Section 4.1(d), to each Participant's Qualified
Non-Elective Contribution Account in the same proportion that each such
Participant's Compensation bears to the total Compensation of all Participants.
(5) Regardless of the preceding, a Participant who is not credited
with a Year of Service during a Plan Year shall or shall not (as specified in
the adoption agreement) share in the allocation of the Employer's Non-Elective
Contribution made pursuant to Section 4.1(c) and the Employer's Qualified Non-
Elective Contribution made pursuant to Section 4.1(d), unless reduced pursuant
to Section 4.4(h). However, for Plan Years beginning after 1989, for a
standardized plan, and if elected in the non-standardized Adoption Agreement, a
Participant shall share in the allocation of such contributions regardless of
whether a Year of Service was completed during the Plan Year.
(c) The nonsegregated accounts of a Participant or a Former Participant,
shall be credited with its share of the gains and losses of the Trust Fund. That
part of a Participant's or a Former Participant's nonsegregated accounts
invested in a funding arrangement which establishes an account or accounts for
such Participant or Former Participant thereunder shall be credited with the
gain or loss from such account or accounts. That part of a Participant's or
Former Participant's nonsegregated accounts which is invested in other funding
arrangements shall be credited with proportionate share of the gain or loss of
such investment. The share shall be determined by multiplying the gain or loss
of the investment by the ratio of the part of the Participant's or Former
Participant's nonsegregated accounts invested in such funding arrangement to the
total of the Trust Fund invested in such funding arrangement as of such date.
Notwithstanding the above, with respect to contributions made to a
401(k) Plan after the previous Anniversary Date or allocation date, the method
specified in the Adoption Agreement shall be used.
(d) Participants' Accounts shall be debited for any insurance or annuity
premiums paid, if any, and credited with any dividends or interest received on
insurance contracts.
(e) As of each Anniversary Date any amounts which became Forfeitures since
the last Anniversary Date shall first be made available to reinstate previously
forfeited account balances of Former Participants, if any, in accordance with
Section 6.4(g)(2) or be used to satisfy any contribution that may be required
pursuant to Section 3.5 and/or 6.9. The remaining Forfeitures, if any, shall be
treated in accordance with the Adoption Agreement. Provided, however, that in
the event the allocation of Forfeitures provided herein shall cause the "annual
addition" (as defined in Section 4.9) to any Participant's Account to exceed the
amount allowable by the Code, the excess shall be reallocated in accordance with
Section 4.10.
(f) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding
the foregoing, for any Top Heavy Plan Year, the sum of the Employer's
contributions and Forfeitures allocated to the Participant's Combined Account of
each Non-Key Employee shall be
28
<PAGE>
equal to at least three percent (3%) of such Non-Key Employee's "415
Compensation" (reduced by contributions and forfeitures, if any, allocated to
each Non-Key Employee in any defined contribution plan included with this plan
in a Required Aggregation Group). However, if M the sum of the Employer's
contributions and Forfeitures allocated to the Participant's Combined Account of
each Key Employee for such Top Heavy Plan Year is less than three percent (3%)
of each Key Employee's "415 Compensation" and (ii) this Plan is not required to
be included in an Aggregation Group to enable a defined benefit plan to meet the
requirements of Code Section 401(a)(4) or 410, the sum of the Employer's
contributions and Forfeitures allocated to the Participant's Combined Account of
each Non-Key Employee shall be equal to the largest percentage allocated to the
Participant's Combined Account of any Key Employee. However, for Plan Years
beginning after December 31, 1988, in determining whether a Non-Key Employee has
received the required minimum allocation, such Non-Key Employee's Deferred
Compensation and matching contributions used to satisfy the "Actual Deferral
Percentage" test pursuant to Section 4.5(a) or the "Actual Contribution
Percentage" test of Section 4.7(a) shall not be taken into account.
If this is an integrated Plan, then for any Top Heavy Plan Year the
Employer's contribution shall be allocated as follows:
(1) An amount equal to 3% multiplied by each Participant's
Compensation for the Plan Year shall be allocated to each Participant's Account.
If the Employer does not contribute such amount for all Participants, the amount
shall be allocated to each Participant's Account in the same proportion that his
total Compensation for the Plan Year bears to the total Compensation of all
Participants for such year.
(2) The balance of the Employer's contribution over the amount
allocated under subparagraph (1) hereof shall be allocated to each Participant's
Account in a dollar amount equal to 3% multiplied by a Participant's Excess
Compensation. If the Employer does not contribute such amount for all
Participants, each Participant will be allocated a share of the contribution in
the same proportion that his Excess Compensation bears to the total Excess
Compensation of all Participants for that year.
(3) The balance of the Employer's contribution over the amount
allocated under subparagraph (2) hereof shall be allocated to each Participant's
Account in a dollar amount equal to 2.7% multiplied by the sum of each
Participant's total Compensation plus Excess Compensation. If the Employer does
not contribute such amount for all Participants, each Participant will be
allocated a share of the contribution in the same proportion that his total
Compensation plus his total Excess Compensation for the Plan Year bears to the
total Compensation plus the total Excess Compensation of all Participants for
that year.
Regardless of the preceding, 1.3% shall be substituted for 2.7% above
if Excess Compensation is based on more than 20% and less than or equal to 80%
of the Taxable Wage Base. If Excess Compensation is based on less than 100% and
more than 80% of the Taxable Wage Base, then 2.4% shall be substituted for 2.7%
above.
(4) The balance of the Employer's contributions over the amount
allocated above, if any, shall be allocated to each Participant's Account in the
same proportion that his
29
<PAGE>
total Compensation for the Plan Year bears to the total Compensation of all
Participants for such year.
For each Non-Key Employee who is a Participant in this Plan and
another non-paired defined contribution plan maintained by the Employer, the
minimum 3% allocation specified above shall be provided as specified in F3 of
the Adoption Agreement.
(g) For purposes of the minimum allocations set forth above, the
percentage allocated to the Participant's Combined Account of any Key Employee
shall be equal to the ratio of the sum of the Employer's contributions and
Forfeitures allocated on behalf of such Key Employee divided by the "415
Compensation" for such Key Employee.
(h) For any Top Heavy Plan Year, the minimum allocations set forth above
shall be allocated to the Participant's Combined Account of all Non-Key
Employees who are Participants and who are employed by the Employer on the last
day of the Plan Year, including Non-Key Employees who have (1) failed to
complete a Year of Service; or (2) declined to make mandatory contributions (if
required) or salary reduction contributions to the Plan.
(i) Notwithstanding anything herein to the contrary, in any Plan Year in
which the Employer maintains both this Plan and a defined benefit pension plan
included in a Required Aggregation Group which is top heavy, the Employer shall
not be required to provide a Non-Key Employee with both the full separate
minimum defined benefit plan benefit and the full separate defined contribution
plan allocations. Therefore, if the Employer maintains both a Defined Benefit
and a Defined Contribution Plan that are a Top Heavy Group, the top heavy
minimum benefits shall be provided as follows:
Applies if F1b of the Adoption Agreement is selected -
(1) The requirements of Section 2.1 shall apply except that each Non-
Key Employee who is a Participant in this Plan or a Money Purchase Plan and who
is also a Participant in the Defined Benefit Plan shall receive a minimum
allocation of five percent (5%) of such Participant's "415 Compensation" from
the applicable Defined Contribution Plan(s).
(2) or each Non-Key Employee who is a Participant only in the Defined
Benefit Plan, the Employer will provide a minimum non-integrated benefit in the
Defined Benefit Plan equal to 2% of his highest five consecutive year average
"415 Compensation" for each Year of Service while a Participant in the Plan, in
which the Plan is top heavy, not to exceed ten.
(3) For each Non-Key Employee who is a Participant only in this
Defined Contribution Plan, the Employer will provide a contribution equal to 3%
of his "415 Compensation."
Applies if F1c of the Adoption Agreement is selected -
(4) The minimum allocation specified in Section 4.4(i)(1) shall be 7
1/2% for years in which the Plan is Top Heavy, but not Super Top Heavy.
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<PAGE>
(5) The minimum benefit specified in Section 4.4(i)(2) shall be 3%
for years in which the Plan is Top Heavy, but not Super Top Heavy.
(6) The minimum allocation specified in Section 4.4(i)(3) shall be 4%
for years in which the Plan is Top Heavy, but not Super Top Heavy.
(j) For the purposes of this Section, "415 Compensation" shall be limited
to $200,000 (unless adjusted in such manner as permitted under Code Section
415(d)). However, for Plan Years beginning prior to January 1, 1989, the
$200,000 limit shall apply only for Top Heavy Plan Years and shall not be
adjusted.
(k) Notwithstanding anything herein to the contrary, participants who
terminated employment during the Plan Year shall share in the salary reduction
contributions made by the Employer for the year of termination without regard to
the Hours of Service credited.
(l) Notwithstanding anything herein to the contrary (other than Sections
4.4(k) and 6.6(h)(1)), any Participant who terminated employment during the Plan
Year for reasons other than death, Total and Permanent Disability, or retirement
shall or shall not share in the allocations of the Employer's matching
contribution made pursuant to Section 4.1(b), the Employer's Non-Elective
Contributions made pursuant to Section 4.1(c), the Employer's Qualified Non-
Elective Contribution made pursuant to Section 4.1(d), and Forfeitures as
provided in the Adoption Agreement. Notwithstanding the foregoing, for Plan
Years beginning after 1989, if this is a standardized Plan, any such terminated
Participant shall share in such allocations as provided in the Adoption
Agreement.
(m) Notwithstanding anything herein to the contrary, Participants
terminating for reasons of death, Total and Permanent Disability, or retirement
shall or shall not share in the allocation of the Employer's matching
contribution made pursuant to Section 4.1(b), the Employer's Non-Elective
Contributions made pursuant to Section 4.1(c), the Employer's Qualified Non-
Elective Contribution made pursuant to Section 4.1(d), and Forfeitures as
provided in the Adoption Agreement. Notwithstanding the foregoing, for Plan
Years beginning after 1989, if this is a standardized Plan, any such terminated
Participant shall share in such allocations as provided in the Adoption
Agreement.
(n) If a Former Participant is reemployed after five (5) consecutive 1-
Year Breaks in Service, then separate accounts shall be maintained as follows:
(1) one account for nonforfeitable benefits attributable to pre-break
service; and
(2) one account representing his status in the Plan attributable to
post-break service.
(o) Notwithstanding any election in the Adoption Agreement to the
contrary, if this is a non-standardized Plan that would otherwise fail to meet
the requirements of Code Sections 401(a)(26), 410(b)(1), or 410(b)(2)(A)(i) and
the Regulations thereunder because Employer matching Contributions made pursuant
to Section 4.1(b), Employer Non-Elective Contributions made pursuant to Section
4.1(c) or Employer Qualified Non-Elective Contributions made
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<PAGE>
pursuant to Section 4.1(d) have not been allocated to a sufficient number or
percentage of Participants for a Plan Year, then the following rules shall
apply:
(1) Allocations of the respective contribution and Forfeitures shall
first be made to all active Participants who are employed on the last day of the
Plan Year, regardless of the number of Hours of Service completed; and
(2) If after application of paragraph (1) above, the applicable test
is still not satisfied, then the group of Participants eligible to share in the
Employer's contribution and Forfeitures for the Plan Year shall be further
expanded to include the minimum number of Participants who are not actively
employed on the last day of the Plan. Year as are necessary to satisfy the
applicable test. The specific Participants who shall become eligible to share
shall be those Participants, when compared to similarly situated Participants,
who have completed the greatest number of Hours of Service in the Plan Year
before terminating employment.
Nothing in this Section shall permit the reduction of a
Participant's accrued benefit. Therefore any amounts that have previously been
allocated to Participants may not be reallocated to satisfy these requirements.
In such event, the Employer shall make an additional contribution equal to the
amount such affected Participants would have received had they been included in
the allocations, even if it exceeds the amount which would be deductible under
Code Section 404. Any adjustment to the allocations pursuant to this paragraph
shall be considered a retroactive amendment adopted by the last day of the Plan
Year.
4.5 ACTUAL DEFERRAL PERCENTAGE TESTS
(a) Maximum Annual Allocation: For each Plan Year beginning after December
31, 1986, the annual allocation derived from Employer Elective Contributions and
Qualified Non-Elective Contributions to a Participant's Elective Account and
Qualified Non-Elective Account shall satisfy one of the following tests:
(1) The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral Percentage" of the
Non-Highly Compensated Participant group multiplied by 1.25, or
(2) The excess of the "Actual Deferral Percentage" for the Highly
Compensated Participant group over the "Actual Deferral Percentage" for the Non-
Highly Compensated Participant group shall not be more than two percentage
points. Additionally, the "Actual Deferral Percentage" for the Highly
Compensated Participant group shall not exceed the "Actual Deferral Percentage"
for the Non-Highly Compensated Participant group multiplied by 2. The provisions
of Code Section 401(k)(3) and Regulation 1.401(k)-l(b) are incorporated herein
by reference.
However, for Plan Years beginning after December 31, 1988, to prevent
the multiple use of the alternative method described in (2) above and Code
Section 401(m)(9)(A), any Highly Compensated Participant eligible to make
elective deferrals pursuant to Section 4.2 and to make Employee contributions or
to receive matching contributions under this Plan or under any other plan
maintained by the Employer or an Affiliated Employer shall have his actual
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contribution ratio reduced pursuant to Regulation 1.401(m)-2, the provisions of
which are incorporated herein by reference.
(b) For the purposes of this Section "Actual Deferral Percentage" means,
with respect to the Highly Compensated Participant group and Non-Highly
Compensated Participant group for a Plan Year, the average of the ratios,
calculated separately for each Participant in such group, of the amount of
Employer Elective Contributions and Qualified Non-Elective Contributions
allocated to each Participant's Elective Account and Qualified Non-Elective
Account for such Plan Year, to such Participant's 11414(s) Compensation" for
such Plan Year. The actual deferral ratio for each Participant and the "Actual
Deferral Percentage" for each group, for Plan Years beginning after December 31,
1988, shall be calculated to the nearest one-hundredth of one percent of the
Participant's 11414(s) Compensation." Employer Elective Contributions allocated
to each Non-Highly Compensated Participant's Elective Account shall be reduced
by Excess Deferred Compensation to the extent such excess amounts are made under
this Plan or any other plan maintained by the Employer.
(c) For the purpose of determining the actual deferral ratio of a Highly
Compensated Participant who is subject to the Family Member aggregation rules of
Code Section 414(q)(6) because such Participant is either a "five percent owner"
of the Employer or one of the ten (10) Highly Compensated Employees paid the
greatest 11415 Compensation" during the year, the following shall apply:
(1) The combined actual deferral ratio for the family group (which
shall be treated as one Highly Compensated Participant) shall be the ratio
determined by aggregating Employer Elective Contributions and 11414(s)
Compensation" of all eligible Family Members (including Highly Compensated
Participants). However, in applying the $200,000 limit to 11414(s) Compensation"
for Plan Years beginning after December 31, 1988, Family Members shall include
only the affected Employee's spouse and any lineal descendants who have not
attained age 19 before the close of the Plan Year.
(2) The Employer Elective Contributions and "414(s) Compensation" of
all Family Members shall be disregarded for purposes of determining the "Actual
Deferral Percentage" of the Non-Highly Compensated Participant group.
(3) If a Participant is required to be aggregated as a member of more
than one family group in a plan, all Participants who are members of those
family groups that include the Participant are aggregated as one family group in
accordance with paragraphs (1) and (2) above.
(d) For the purposes of Sections 4.5(a) and 4.6, a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any Employee
eligible to make a deferral election pursuant to Section 4.2, whether or not
such deferral election was made or suspended pursuant to Section 4.2.
(e) For the purposes of-this Section and Code Sections 401(a)(4), 410(b)
and 401(k), if two or more plans which include cash or deferred arrangements are
considered one plan for the purposes of Code Section 401(a)(4) or 410(b) (other
than Code Section 401(b)(2)(A)(ii) as in effect for Plan Years beginning after
December 31, 1988), the cash or deferred arrangements
33
<PAGE>
included in such plans shall be treated as one arrangement. In addition, two or
more cash or deferred arrangements may be considered as a single arrangement for
purposes of determining whether or not such arrangements satisfy Code Sections
401(a)(4), 410(b) and 401(k). In such a case, the cash or deferred arrangements
included in such plans and the plans including such arrangements shall be
treated as one arrangement and as one plan for purposes of this Section and Code
Sections 401(a)(4), 410(b) and 401(k). For plan years beginning after December
31, 1989, plans may be aggregated under this paragraph (e) only if they have the
same plan year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section 4975(e)(7) may
not be combined with this Plan for purposes of determining whether the employee
stock ownership plan or this Plan satisfies this Section and Code Sections
401(a)(4), 410(b) and 401(k).
(f) For the purposes of this Section, if a Highly Compensated Participant
is a Participant under two (2) or more cash or deferred arrangements (other than
a cash or deferred arrangement which is part of an employee stock ownership plan
as defined in Code Section 4975(e)(7) for Plan Years beginning after December
31, 1988) of the Employer or an Affiliated Employer, all such cash or deferred
arrangements shall be treated as one cash or deferred arrangement for the
purpose of determining the actual deferral ratio with respect to such Highly
Compensated Participant. However, for Plan Years beginning after December 31,
1988, if the cash or deferred arrangements have different Plan Years, this
paragraph shall be applied by treating all cash or deferred arrangements ending
with or within the same calendar year as a single arrangement.
4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS
In the event that the initial allocations of the Employer's Elective
Contributions and Qualified Non-Elective Contributions made pursuant to Section
4.4 do not satisfy one of the tests set forth in Section 4.5, for Plan Years
beginning after December 31, 1986, the Administrator shall adjust Excess
Contributions pursuant to the options set forth below:
(a) On or before the fifteenth day of the third month following the end of
each Plan Year, the Highly Compensated Participant having the highest actual
deferral ratio shall have his portion of Excess Contributions distributed to him
and/or at his election recharacterized as a voluntary Employee contribution
pursuant to Section 4.12 until one of the tests set forth in Section 4.5 is
satisfied, or until his actual deferral ratio equals the actual deferral ratio
of the Highly Compensated Participant having the second highest actual deferral
ratio. This process shall continue until one of the tests set forth in Section
4.5 is satisfied. For each Highly Compensated Participant, the amount of Excess
Contributions is equal to the Elective Contributions and Qualified Non-Elective
Contributions made on behalf of such Highly Compensated Participant (determined
prior to the application of this paragraph) minus the amount determined by
multiplying the Highly Compensated Participant's actual deferral ratio
(determined after application of this paragraph) by his "414(s) Compensation."
However, in determining the amount of Excess Contributions to be distributed
and/or recharacterized with respect to an affected Highly Compensated
Participant as determined herein, such amount shall be reduced by any Excess
Deferred Compensation previously distributed to such affected Highly Compensated
Participant for his taxable year ending with or within such Plan Year. Any
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<PAGE>
distribution and/or recharacterization of Excess Contributions shall be made in
accordance with the following:
(1) With respect to the distribution of Excess Contributions pursuant
to (a) above, such distribution:
(i) may be postponed but not later than the close of the Plan
Year following the Plan Year to which they are allocable;
(ii) shall be made first from unmatched Deferred Compensation
and, thereafter, simultaneously from Deferred Compensation which is matched and
matching contributions which relate to such Deferred Compensation. However, any
such matching contributions which are not Vested shall be forfeited in lieu of
being distributed;
(iii) shall be made from Qualified Non-Elective Contributions
only to the extent that Excess Contributions exceed the balance in the
Participant's Elective Account attributable to Deferred Compensation and
Employer matching contributions.
iv) shall be adjusted for Income; and
(v) shall be designated by the Employer as a distribution of
Excess Contributions (and Income).
(2) With respect to the recharacterization of Excess Contributions
pursuant to (a) above, such recharacterized amounts:
(i) shall be deemed to have occurred on the date on which the
last of those Highly Compensated Participants with Excess Contributions to be
recharacterized is notified of the recharacterization and the tax consequences
of such recharacterization;
(ii) for Plan Years ending on or before August 8, 1988, may be
postponed but not later than October 24, 1988;
(iii) shall not exceed the amount of Deferred Compensation on
behalf of any Highly Compensated Participant for any Plan Year;
(iv) shall be treated as voluntary Employee contributions for
purposes of Code Section 401(a)(4) and Regulation 1.401(k)-l(b). However, for
purposes of Sections 2.2 and 4.4(f), recharacterized Excess Contributions
continue to be treated as Employer contributions that are Deferred Compensation.
For Plan Years beginning after December 31, 1988, Excess Contributions
recharacterized as voluntary Employee contributions shall continue to be
nonforfeitable and subject to the same distribution rules provided for in
Section 4.9(f);
(v) which relate to Plan Years ending on or before October 24,
1988, may be treated as either Employer contributions or voluntary Employee
contributions and therefore shall not be subject to the restrictions of Section
4.2(c);
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<PAGE>
(vi) are not permitted if the amount recharacterized plus
voluntary Employee contributions actually made by such Highly Compensated
Participant, exceed the maximum amount of voluntary Employee contributions
(determined prior to application of Section 4.7(a)) that such Highly Compensated
Participant is permitted to make under the Plan in the absence of
recharacterization;
(vii) shall be adjusted for Income.
(3) Any distribution and/or recharacterization of less than the
entire amount of Excess Contributions shall be treated as a pro rata
distribution and/or recharacterization of Excess Contributions and income.
(4) The determination and correction of Excess Contributions of a
Highly Compensated Participant whose actual deferral ratio is determined under
the family aggregation rules shall be accomplished as follows:
(i) If the actual deferral ratio for the Highly Compensated
Participant is determined in accordance with Section 4.5(c)(1)(ii), then the
actual deferral ratio shall be reduced as required herein and the Excess
Contributions for the family unit shall be allocated among the Family Members in
proportion to the Elective Contributions of each Family Member that were
combined to determine the group actual deferral ratio.
(ii) If the actual deferral ratio for the Highly Compensated
Participant is determined under Section 4.5(c)(1)(i), then the actual deferral
ratio shall first be reduced as required herein, but not below the actual
deferral ratio of the group of Family Members who are not Highly Compensated
Participants without regard to family aggregation. The Excess Contributions
resulting from this initial reduction shall be allocated (in proportion to
Elective Contributions) among the Highly Compensated Participants whose Elective
Contributions were combined to determine the actual deferral ratio. If further
reduction is still required, then Excess Contributions resulting from this
further reduction shall be determined by taking into account the contributions
of all Family Members and shall be allocated among them in proportion to their
respective Elective Contributions.
(b) Within twelve (12) months after the end of the Plan Year, the Employer
shall make a special Qualified Non-Elective Contribution on behalf of Non-Highly
Compensated Participants in an amount sufficient to satisfy one of the tests set
forth in Section 4.5(a). Such contribution shall be allocated to the
Participant's Qualified Non-Elective Account of each Non-Highly Compensated
Participant in the same proportion that each Non-Highly Compensated
Participant's Compensation for the year bears to the total Compensation of all
Non-Highly Compensated Participants.
(c) For purposes of this Section, "Income" means the income or loss
allocable to Excess Contributions which shall equal the sum of the allocable
gain or loss for the Plan Year and the allocable gain or loss for the period
between the end of the Plan Year and the date of distribution ("gap period").
The income or loss allocable to Excess Contributions for the Plan Year and the
"gap period" is calculated separately and is determined by multiplying the
income or loss for the Plan Year or the "gap period" by a fraction. The,
numerator of the fraction is the
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Excess Contributions for the Plan Year. The denominator of the fraction is the
total of the Participant's Elective Account attributable to Elective
Contributions and the Participant's Qualified Non-Elective Account as of the end
of the Plan Year or the "gap period," reduced by the gain allocable to such
total amount for the Plan Year or the "gap period" and increased by the loss
allocable to such total amount for the Plan Year or the "gap period."
In lieu of the "fractional method" described above, a "safe harbor
method" may be used to calculate the allocable Income for the "gap period."
Under such "safe harbor method," allocable Income for the "gap period" shall be
deemed to equal ten percent (10%) of the Income allocable to Excess
Contributions for the Plan Year of the Participant multiplied by the number of
calendar months in the "gap period." For purposes of determining the number of
calendar months in the "gap period," a distribution occurring on or before the
fifteenth day of the month shall be treated as having been made on the last day
of the preceding month and a distribution occurring after such fifteenth day
shall be treated as having been made on the first day of the next subsequent
month.
Notwithstanding the above, for Plan Years which began in 1987, Income
during the "gap period" shall not be taken into account.
(d) Any amounts not distributed or recharacterized within 2 1/2 months
after the end of the Plan Year shall be subject to the 10% Employer excise tax
imposed by Code Section 4979.
4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) The "Actual Contribution Percentage," for Plan Years beginning after
the later of the Effective Date of this Plan or December 31, 1986, for the
Highly Compensated Participant group shall not exceed the greater of:
(1) 125 percent of such percentage for the Non-Highly Compensated
Participant group; or
(2) the lesser of 200 percent of such percentage for the Non-Highly
Compensated Participant group, or such percentage for the Non-Highly Compensated
Participant group plus 2 percentage points. However, for Plan Years beginning
after December 31, 1988, to prevent the multiple use of the alternative method
described in this paragraph and Code Section 401(m)(9)(A), any Highly
Compensated Participant eligible to make elective deferrals pursuant to Section
4.2 or any other cash or deferred arrangement maintained by the Employer or an
Affiliated Employer and to make Employee contributions or to receive matching
contributions under any plan maintained by the Employer or an Affiliated
Employer shall have his actual contribution ratio reduced pursuant to Regulation
1.401(m)-2. The provisions of Code Section 401(m) and Regulations 1.401(m)-l(b)
and 1.401(m)-2 are incorporated herein by reference.
(b) For the purposes of this Section and Section 4.8, "Actual Contribution
Percentage" for a Plan Year means, with respect to the Highly Compensated
Participant group and Non-Highly Compensated Participant group, the average of
the ratios (calculated separately for each Participant in each group) of:
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(1) the sum of Employer matching contributions pursuant to Section
4.1(b) (to the extent such matching contributions are not used to satisfy the
tests set forth in Section 4.5), voluntary Employee contributions made pursuant
to Section 4.12 and Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 4.6(a) contributed under the Plan on behalf of
each such Participant for such Plan Year; to
(2) the Participant's "414(s) Compensation" for such Plan Year.
(c) For purposes of determining the "Actual Contribution Percentage" and
the amount of Excess Aggregate Contributions pursuant to Section 4.8(e), only
Employer matching contributions contributed to the Plan prior to the end of the
succeeding Plan Year shall be considered. In addition, the Administrator may
elect to take into account, with respect to Employees eligible to have Employer
matching contributions made pursuant to Section 4.1(b) or voluntary Employee
contributions made pursuant to Section 4.12 allocated to their accounts,
elective deferrals (as defined in Regulation 1.402(g)-l(b)) and qualified non-
elective contributions (as defined in Code Section 401(m)(4)(C)) contributed to
any plan maintained by the Employer. Such elective deferrals and qualified non-
elective contributions shall be treated as Employer matching contributions
subject to Regulation 1.401(m)-l(b)(2) which is incorporated herein by
reference. However, for Plan Years beginning after December 31, 1988, the Plan
Year must be the same as the plan year of the plan to which the elective
deferrals and the qualified non-elective contributions are made.
(d) For the purpose of determining the actual contribution ratio of a
Highly Compensated Employee who is subject to the Family Member aggregation
rules of Code Section 414(q)(6) because such Employee is either a "five percent
owner" of the Employer or one of the ten (10) Highly Compensated Employees paid
the greatest "415 Compensation" during the year, the following shall apply:
(1) The combined actual contribution ratio for the family group
(which shall be treated as one Highly Compensated Participant) shall be the
greater of: M the ratio determined by aggregating Employer matching
contributions made pursuant to Section 4.1(b) (to the extent such matching
contributions are not used to satisfy the tests set forth in Section 4.5),
voluntary Employee contributions made pursuant to Section 4.12, Excess
Contributions recharacterized as voluntary Employee contributions pursuant to
section 4.6(a) and `1414(s) Compensation" of all eligible Family Members who are
Highly Compensated Participants without regard to family aggregation; and (ii)
the ratio determined by aggregating Employer matching contributions made
pursuant to Section 4.1(b) (to the extent such matching contributions are not
used to satisfy the tests set forth in Section 4.5), voluntary Employee
contributions made pursuant to Section 4.12, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to Section 4.6(a)
and 11414(s) Compensation" of all eligible Family Members (including Highly
Compensated Participants). However, in applying the $200,000 limit to "414(s)
Compensation" for Plan Years beginning after December 31, 1988, Family Members
shall include only the affected Employee's spouse and any lineal descendants who
have not attained age 19 before the close of the Plan Year.
(2) The Employer matching contributions made pursuant to Section
4.1(b) (to the extent such matching contributions are not used to satisfy the
tests set forth in Section 4.5),
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voluntary Employee contributions made pursuant to Section 4.12, Excess
Contributions recharacterized as voluntary Employee contributions pursuant to
Section 4.6(a) and "414(s) Compensation" of all Family Members shall be
disregarded for purposes of determining the "Actual Contribution Percentage" of
the Non-Highly Compensated Participant group except to the extent taken into
account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of more
than one family group in a plan, all Participants who are members of those
family groups that include the Participant are aggregated as one family group in
accordance with paragraphs (1) and (2) above.
(e) For purposes of this Section and Code Sections 401(a)(4), 410(b) and
401(m), if two or more plans of the Employer to which matching contributions,
Employee contributions, or both, are made are treated as one plan for purposes
of Code Sections 401(a)(4) or 410(b) (other than the average benefits test under
Code Section 410(b)(2)(A)(ii) as in effect for Plan Years beginning after
December 31, 1988), such plans shall be treated as one plan. In addition, two or
more plans of the Employer to which matching contributions, Employee
contributions, or both, are made may be considered as a single plan for purposes
of determining whether or not such plans satisfy Code Sections 401(a)(4), 410(b)
and 401(m). In such a case, the aggregated plans must satisfy this Section and
Code Sections 401(a)(4), 410(b) and 401(m) as though such aggregated plans were
a single plan. For plan years beginning after December 31, 1989, plans may be
aggregated under this paragraph only if they have the same plan year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section 4975(e)(7) may
not be aggregated with this Plan for purposes of determining whether the
employee stock ownership plan or this Plan satisfies this Section and Code
Sections 401(a)(4), 410(b) and 401(m).
(f) If a Highly Compensated Participant is a Participant under two or more
plans (other than an employee stock ownership plan as defined in Code Section
4975(e)(7) for Plan Years beginning after December 31, 1988) which are
maintained by the Employer or an Affiliated Employer to which matching
contributions, Employee contributions, or both, are made, all such contributions
on behalf of such Highly Compensated Participant shall be aggregated for
purposes of determining such Highly Compensated Participant's actual
contribution ratio. However, for Plan Years beginning after December 31, 1988,
if the plans have different plan years, this paragraph shall be applied by
treating all plans ending with or within the same calendar year as a single
plan.
(g) For purposes of Section 4.7(a) and 4.8, a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any Employee
eligible to have matching contributions made pursuant to Section 4.1(b) (whether
or not a deferred election was made or suspended pursuant to Section 4.2(e))
allocated to his account for the Plan Year or to make salary deferrals pursuant
to Section 4.2 (if the Employer uses salary deferrals to satisfy the provisions
of this Section) or voluntary Employee contributions pursuant to Section 4.12
(whether or not voluntary Employee contributions are made) allocated to his
account for the Plan Year.
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(h) For purposes of this Section, "matching contribution" shall mean an
Employer contribution made to the Plan, or to a contract described in Code
Section 403(b), on behalf of a Participant on account of an Employee
contribution made by such Participant, or on account of a participant's deferred
compensation, under a plan maintained by the Employer.
4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) In the event that for Plan Years beginning after December 31, 1986,
the "Actual Contribution Percentage" for the Highly Compensated Participant
group exceeds the "Actual Contribution Percentage" for the Non-Highly
Compensated Participant group pursuant to Section 4.7(a), the Administrator (on
or before the fifteenth day of the third month following the end of the Plan
Year, but in no event later than the close of the following Plan Year) shall
direct the Trustee to distribute to the Highly Compensated Participant having
the highest actual contribution ratio, his portion of Excess Aggregate
Contributions (and Income allocable to such contributions) or, forfeit such
Excess Aggregate Contributions attributable to Employer matching contributions
(and Income allocable to such Forfeitures) until either one of the tests set
forth in Section 4.7(a) is satisfied, or until his actual contribution ratio
equals the actual contribution ratio of the Highly Compensated Participant
having the second highest actual contribution ratio. This process shall continue
until one of the tests set forth in Section 4.7(a) is satisfied. The
distribution and/or Forfeiture of Excess Aggregate Contributions shall be made
in the following order:
(1) Employer matching contributions distributed and/or
forfeited pursuant to Section 4.6(a)(1);
(2) Voluntary Employee contributions including Excess
Contributions recharacterized as voluntary Employee contributions pursuant to
Section 4.6(a)(2);
(3) Remaining Employer matching contributions.
(b) Any distribution or Forfeiture of less than the entire amount of
Excess Aggregate Contributions (and Income) shall be treated as a pro rata
distribution of Excess Aggregate Contributions and Income. Distribution of
Excess Aggregate Contributions shall be designated by the Employer as a
distribution of Excess Aggregate Contributions (and Income). Forfeitures of
Excess Aggregate Contributions shall be treated in accordance with Section 4.4.
However, no such Forfeiture may be allocated to a Highly Compensated Participant
whose contributions are reduced pursuant to this Section.
(c) Excess Aggregate Contributions attributable to amounts other than
voluntary Employee contributions, including forfeited matching contributions,
shall be treated as Employer contributions for purposes of Code Sections 404 and
415 even if distributed from the Plan.
(d) For the purposes of this Section and Section 4.7, "Excess Aggregate
Contributions" means, with respect to any Plan Year, the excess of:
(1) the aggregate amount of Employer matching contributions made
pursuant to Section 4.1(b) (to the extent such contributions are taken into
account pursuant to Section 4.7(b)), voluntary Employee contributions made
pursuant to Section 4.12, Excess Contributions
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recharacterized as voluntary Employee contributions pursuant to Section 4.6(a)
and any Qualified Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 4.7(c) actually made on behalf of the Highly
Compensated Participant group for such Plan Year, over
(2) the maximum amount of such contributions permitted under the
limitations of Section 4.7(a).
(e) For each Highly Compensated Participant, the amount of Excess
Aggregate Contributions is equal to the total Employer matching contributions
made pursuant to Section 4.1(b) (to the extent taken into account pursuant to
Section 4.7(b)), voluntary Employee contributions made pursuant to Section 4.12,
Excess Contributions recharacterized as voluntary Employee contributions
pursuant to Section 4.6(a) and any Qualified Non-Elective Contributions or
elective deferrals taken into account pursuant to Section 4.7(c) on behalf of
the Highly Compensated Participant (determined prior to the application of this
paragraph) minus the amount determined by multiplying the Highly Compensated
Participant's actual contribution ratio (determined after application of this
paragraph) by his "414(s) Compensation." The actual contribution ratio must be
rounded to the nearest one-hundredth of one percent for Plan Years beginning
after December 31, 1988. In no case shall the amount of Excess Aggregate
Contribution with respect to any Highly Compensated Participant exceed the
amount of Employer matching contributions made pursuant to section 4.1(b) (to
the extent taken into account pursuant to Section 4.7(b)), voluntary Employee
contributions made pursuant to Section 4.12, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to Section 4.6(a)
and any Qualified Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 4.7(c) on behalf of such Highly Compensated
Participant for such Plan Year.
(f) The determination of the amount of Excess Aggregate Contributions with
respect to any Plan Year shall be made after first determining the Excess
Contributions, if any, to be treated as voluntary Employee contributions due to
recharacterization for the plan year of any other qualified cash or deferred
arrangement (as defined in Code Section 401(k)) maintained by the Employer that
ends with or within the Plan Year or which are treated as voluntary Employee
contributions due to recharacterization pursuant to Section 4.6(a).
(g) The determination and correction of Excess Aggregate Contributions of
a Highly Compensated Participant whose actual contribution ratio is determined
under the family aggregation rules shall be accomplished as follows:
(1) If the actual contribution ratio for the Highly Compensated
Participant is determined in accordance with Section 4.7(d)(l)(ii), then the
actual contribution ratio shall be reduced and the Excess Aggregate
Contributions for the family unit shall be allocated among the Family Members in
proportion to the sum of Employer matching contributions made pursuant to
Section 4.1(b) (to the extent taken into account pursuant to Section 4.7(b)),
voluntary Employee contributions made pursuant to Section 4.12, Excess
Contributions recharacterized as voluntary Employee contributions pursuant to
Section 4.6(a) and any Qualified Non-Elective Contributions or elective
deferrals taken into account pursuant to Section 4.7(c) of each Family Member
that were combined to determine the group actual contribution ratio.
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(2) If the actual contribution ratio for the Highly Compensated
Participant is determined under Section 4.7(d)(1)(i), then the actual
contribution ratio shall first be reduced, as required herein, but not below the
actual contribution ratio of the group of Family Members who are not Highly
Compensated Participants without regard to family aggregation. The Excess
Aggregate Contributions resulting from this initial reduction shall be allocated
among the Highly Compensated Participants whose Employer matching contributions
made pursuant to Section 4.1(b) (to the extent taken into account pursuant to
Section 4.7(b)), voluntary Employee contributions made pursuant to Section 4.12,
Excess Contributions recharacterized as voluntary Employee contributions
pursuant to Section 4.6(a) and any Qualified Non-Elective Contributions or
elective deferrals taken into account pursuant to Section 4.7(c) were combined
to determine the actual contribution ratio. If further reduction is still
required, then Excess Aggregate Contributions resulting from this further
reduction shall be determined by taking into account the contributions of all
Family Members and shall be allocated among them in proportion to their
respective Employer matching contributions made pursuant to Section 4.1(b) (to
the extent taken into account pursuant to Section 4.7(b)), voluntary Employee
contributions made pursuant to Section 4.12, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to Section 4.6(a)
and any Qualified Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 4.7(c).
(h) Notwithstanding the above, within twelve (12) months after the end of
the Plan Year, the Employer may make a special Qualified Non-Elective
Contribution on behalf of Non-Highly Compensated Participants in an amount
sufficient to satisfy one of the tests set forth in Section 4.7(a). Such
contribution shall be allocated to the Participant's Qualified Non-Elective
Account of each Non-Highly Compensated Participant in the same proportion that
each Non-Highly Compensated Participant's Compensation for the year bears to the
total Compensation of all Non-Highly Compensated Participants. A separate
accounting shall be maintained for the purpose of excluding such contributions
from the "Actual Deferral Percentage" tests pursuant to Code Section 4.5(a).
(i) For purposes of this Section, "Income" means the income or loss
allocable to Excess Aggregate Contributions which shall equal the sum of the
allocable gain or loss for the Plan Year and the allocable gain or loss for the
period between the end of the Plan Year and the date of distribution ("gap
period"). The income or loss allocable to Excess Aggregate Contributions for
the Plan Year and the "gap period" is calculated separately and is determined by
multiplying the income or loss for the Plan Year or the "gap period" by a
fraction. The numerator of the fraction is the Excess Aggregate Contributions
for the Plan Year. The denominator of the fraction is the total Participant's
Account and Voluntary Contribution Account attributable to Employer matching
contributions subject to Section 4.7, voluntary Employee contributions made
pursuant to Section 4.12, and any Qualified Non-Elective Contributions and
elective deferrals taken into account pursuant to Section 4.7(c) as of the end
of the Plan Year or the "gap period," reduced by the gain allocable to such
total amount for the Plan Year or the "gap period" and increased by the loss
allocable to such total amount for the Plan Year or the "gap period."
In lieu of the "fractional method" described above, a "safe harbor
method" may be used to calculate the allocable Income for the "gap period."
Under such "safe harbor method," allocable Income for the "gap period" shall be
deemed to equal ten percent (10%) of the Income
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allocable to Excess Aggregate Contributions for the Plan Year of the Participant
multiplied by the number of calendar months in the "gap period." For purposes of
determining the number of calendar months in the "gap period," a distribution
occurring on or before the fifteenth day of the month shall be treated as having
been made on the last day of the preceding month and a distribution occurring
after such fifteenth day shall be treated as having been made on the first day
of the next subsequent month.
The Income allocable to Excess Aggregate Contributions resulting from
recharacterization of Elective Contributions shall be determined and distributed
as if such recharacterized Elective Contributions had been distributed as Excess
Contributions.
Notwithstanding the above, for Plan Years which began in 1987, Income
during the "gap period" shall not be taken into account.
4.9 MAXIMUM ANNUAL ADDITIONS
(a) (1) If the Participant does not participate in, and has never
participated in another qualified plan maintained by the Employer, or a welfare
benefit fund (as defined in Code Section 419(e)), maintained by the Employer, or
an individual medical account (as defined in Code Section 415(l)(2)) maintained
by the Employer, which provides Annual Additions, the amount of Annual Additions
which may be credited to the Participant's accounts for any Limitation Year
shall not exceed the lesser of the Maximum Permissible Amount or any other
limitation contained in this Plan. If the Employer contribution that would
otherwise be contributed or allocated to the Participant's accounts would cause
the Annual Additions for the Limitation Year to exceed the Maximum Permissible
Amount, the amount contributed or allocated will be reduced so that the Annual
Additions for the Limitation Year will equal the Maximum Permissible Amount.
(2) Prior to determining the Participant's actual Compensation for
the Limitation Year, the Employer may determine the Maximum Permissible Amount
for a Participant on the basis of a reasonable estimation of the Participant's
Compensation for the Limitation Year, uniformly determined for all Participants
similarly situated.
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for such Limitation Year shall
be determined on the basis of the Participant's actual compensation for such
Limitation Year.
(4) If pursuant to section 4.9(a)(2) or as a result of the
allocation of Forfeitures, there is an Excess Amount, the excess will be
disposed of as follows:
(i) Any nondeductible voluntary Employee contributions, to the
extent they would reduce the Excess Amount, will be returned to the Participant;
(ii) If, after the application of subparagraph W, an Excess
Amount still exists, and the Participant is covered by the Plan at the end of
the Limitation Year, the Excess Amount in the Participant's account will be used
to reduce Employer contributions (including any allocation of Forfeitures) for
such Participant in the next Limitation Year, and each succeeding Limitation
Year if necessary;
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(iii) If, after the application of subparagraph M, an Excess Amount
still exists, and the Participant is not covered by the Plan at the end of a
Limitation Year, the Excess Amount will be held unallocated in a suspense
account. The suspense account will be applied to reduce future Employer
contributions (including allocation of any Forfeitures) for all remaining
Participants in the next Limitation Year, and each succeeding Limitation Year if
necessary;
(iv) If a suspense account is in existence at any time during a
Limitation Year pursuant to this Section, it will not participate in the
allocation of investment gains and losses. If a suspense account is in
existence at any time during a particular limitation year, all amounts in the
suspense account must be allocated and reallocated to participants' accounts
before any employer contributions or any employee contributions may be made to
the plan for that limitation year. Excess amounts may not be distributed to
participants or former participants.
(b)(1) This subsection applies if, in addition to this Plan, the
Participant is covered under another qualified Prototype defined contribution
plan maintained by the Employer, or a welfare benefit fund (as defined in Code
Section 419(e)) maintained by the Employer, or an individual medical account (as
defined in Code Section 415(l)(2)) maintained by the Employer, which provides
Annual Additions, during any Limitation Year. The Annual Additions which may be
credited to a Participant's accounts under this Plan for any such Limitation
Year shall not exceed the maximum Permissible Amount reduced by the Annual
Additions credited to a Participant's accounts under the other plans and welfare
benefit funds for the same Limitation Year. If the Annual Additions with
respect to the Participant under other defined contribution plans and welfare
benefit funds maintained by the Employer are less than the Maximum Permissible
Amount and the Employer contribution that would otherwise be contributed or
allocated to the Participant's accounts under this Plan would cause the Annual
Additions for the Limitation Year to exceed this limitation, the amount
contributed or allocated will be reduced so that the Annual Additions under all
such plans and welfare benefit funds for the Limitation Year will equal the
Maximum Permissible Amount. If the Annual Additions with respect to the
Participant under such other defined contribution plans and welfare benefit
funds in the aggregate are equal to or greater than the Maximum Permissible
Amount, no amount will be contributed or allocated to the Participant's account
under this Plan for the Limitation Year.
(2) Prior to determining the Participant's actual Compensation for the
Limitation Year, the Employer may determine the Maximum Permissible Amount for a
Participant in the manner described in Section 4.9(a)(2).
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for the Limitation Year will be
determined on the basis of the Participant's actual Compensation for the
Limitation Year.
(4) If, pursuant to Section 4.9(b)(2) or as a result of the allocation of
Forfeitures, a Participant's Annual Additions under this Plan and such other
plans would result in an Excess Amount for a Limitation Year, the Excess Amount
will be deemed to consist of the Annual Additions last allocated, except that
Annual Additions attributable to a welfare benefit fund or individual medical
account will be deemed to have been allocated first regardless of the actual
allocation date.
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(5) If an Excess Amount was allocated to a Participant on an
allocation date of this Plan which coincides with an allocation date of another
plan, the Excess Amount attributed to this Plan will be the product of,
(i) the total Excess Amount allocated as of such date, times
(ii) the ratio of (1) the Annual Additions allocated to the
Participant for the Limitation Year as of such date under this Plan to (2) the
total Annual Additions allocated to the Participant for the Limitation Year as
of such date under this and all the other qualified defined contribution plans.
(6) Any Excess Amount attributed to this Plan will be disposed in the
manner described in Section 4.9(a)(4).
(c) If the Participant is covered under another qualified defined
contribution plan maintained by the Employer which is not a Prototype Plan,
Annual Additions which may be credited to the Participant's account under this
Plan for any Limitation Year will be limited in accordance with Section 4.9(b),
unless the Employer provides other limitations in the Adoption Agreement.
(d) If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan the sum of the
Participant's Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which
may be credited to the Participant's account under this Plan for any Limitation
Year will be limited in accordance with the Limitation on Allocations Section of
the Adoption Agreement.
(e) For purposes of applying the limitations of Code Section 415, the
transfer of funds from one qualified plan to another is not an "annual
addition." In addition, the following are not Employee contributions for the
purposes of Section 4.9(f)(1)(2): (1) rollover contributions (as defined in Code
Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans
made to a Participant from the Plan; (3) repayments of distributions received by
an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of
distributions received by an Employee pursuant to Code Section 411(a)(3)(D)
(mandatory contributions); and (5) Employee contributions to a simplified
employee pension excludable from gross income under Code Section 408(k)(6).
(f) For purposes of this Section, the following terms shall be defined as
follows:
(1) Annual Additions means the sum credited to a Participant's
accounts for any Limitation Year of (1) Employer contributions, (2) effective
with respect to "limitation years" beginning after December 31, 1986, Employee
contributions, (3) forfeitures, (4) amounts allocated, after March 31, 1984, to
an individual medical account, as defined in Code Section 415(l)(2), which is
part of a pension or annuity plan maintained by the Employer and (5) amounts
derived from contributions paid or accrued after December 31, 1985, in taxable
years ending after such date, which are attributable to post-retirement medical
benefits allocated to the separate account of a key employee (as defined in Code
Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section
419(e)) maintained by the Employer. Except, however,
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the "415 Compensation" percentage limitation referred to in paragraph (a)(2)
above shall not apply to: (1) any contribution for medical benefits (within the
meaning of Code Section 419A(f)(2)) after separation from service which is
otherwise treated as an "annual addition," or (2) any amount otherwise treated
as an "annual addition" under Code Section 415(l)(1). Notwithstanding the
foregoing, for "limitation years" beginning prior to January 1, 1987, only that
portion of Employee contributions equal to the lesser of Employee contributions
in excess of six percent (6%) of "415 Compensation" or one-half of Employee
contributions shall be considered an "annual addition."
For this purpose, any Excess Amount applied under sections 4.9(a)(4)
and 4.9(b)(6) in the Limitation Year to reduce Employer contributions shall be
considered Annual Additions for such Limitation Year.
(2) Compensation means a Participant's earned income, wages,
salaries, fees for professional services and other amounts received for personal
services actually rendered in the course of employment with the Employer
maintaining the Plan (including, but not limited to, commissions paid salesmen,
compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, tips, and bonuses) and excluding the following:
(i) Employer contributions to a plan of deferred compensation
which are not includible in the Employee's gross income for the taxable year in
which contributed, or Employer contributions under a simplified employee pension
plan to the extent such contributions are excludable from the Employee's gross
income, or any distributions from a plan of deferred compensation;
(ii) contributions made by the Employer to a plan of deferred
compensation to the extent that all or a portion of such contributions are
recharacterized as a voluntary Employee contribution;
(iii) amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by an Employee becomes
freely transferable or is no longer subject to a substantial risk of forfeiture;
(iv) amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and
(v) other amounts which received special tax benefits, or
contributions made by an Employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in Code Section
403(b) (whether or not the contributions are excludable from the gross income of
the Employee).
For purposes of applying the limitations of this Section 4.9,
Compensation for any Limitation Year is the Compensation actually paid or
includible in gross income during such year. Notwithstanding the preceding
sentence, Compensation for a Participant in a profit-sharing plan who is
permanently and totally disabled (as defined in Code Section 22(e)(3)) is the
Compensation such Participant would have received for the Limitation Year if the
Participant had been paid at the rate of Compensation paid immediately before
becoming permanently and totally disabled; such imputed Compensation for the
disabled Participant may be taken into
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account only if the Participant is not a Highly Compensated Employee and
contributions made on behalf of such Participant are nonforfeitable when made.
(3) Defined Benefit Fraction means a fraction, the numerator of which
is the sum of the Participant's Projected Annual Benefits under all the defined
benefit plans (whether or not terminated) maintained by the Employer, and the
denominator of which is the lesser of 125 percent of the dollar limitation
determined for the Limitation Year under Code Sections 415(b) and (d) or 140
percent of his Highest Average Compensation including any adjustments under Code
Section 415(b).
Notwithstanding the above, if the Participant was a Participant as of
the first day of the first Limitation Year beginning after December 31, 1986, in
one or more defined benefit plans maintained by the Employer which were in
existence on May 6, 1986, the denominator of this fraction will not be less than
125 percent of the sum of the annual benefits under such plans which the
Participant had accrued as of the end of the close of the last Limitation Year
beginning before January 1, 1987, disregarding any changes in the terms and
conditions of the plan after May 5, 1986. The preceding sentence applies only
if the defined benefit plans individually and in the aggregate satisfied the
requirements of Code Section 415 for all Limitation Years beginning before
January 1, 1987.
Notwithstanding the foregoing, for any Top Heavy Plan Year, 100 shall
be substituted for 125 unless the extra minimum allocation is being made
pursuant to the Employer's election in F1 of the Adoption Agreement. However,
for any Plan Year in which this Plan is a Super Top Heavy Plan, 100 shall be
substituted for 125 in any event.
(4) Defined Contribution Dollar Limitation means $30,000, or, if
greater, one-fourth of the defined benefit dollar limitation set forth in Code
Section 415(b)(1) as in effect for the Limitation Year.
(5) Defined Contribution Fraction means a fraction, the numerator of
which is the sum of the Annual Additions to the Participant's account under all
the defined contribution plans (whether or not terminated) maintained by the
Employer for the current and all prior Limitation Years, (including the Annual
Additions attributable to the Participant's nondeductible voluntary employee
contributions to any defined benefit plans, whether or not terminated,
maintained by the Employer and the annual additions attributable to all welfare
benefit funds, as defined in Code Section 419(e), and individual medical
accounts, as defined in Code Section 415(l)(2), maintained by the Employer), and
the denominator of which is the sum of the maximum aggregate amounts for the
current and all prior Limitation Years of Service with the Employer (regardless
of whether a defined contribution plan was maintained by the Employer). The
maximum aggregate amount in any Limitation Year is the lesser of 125 percent of
the Defined Contribution Dollar Limitation or 35 percent of the Participant's
Compensation for such year. For Limitation Years beginning prior to January 1,
1987, the "annual addition" shall not be recomputed to treat all Employee
contributions as an Annual Addition.
If the Employee was a Participant as of the end of the first day of
the first Limitation Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the Employer which were in existence on
May 5, 1986, the numerator of this
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fraction will be adjusted if the sum of this fraction and the Defined Benefit
Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the
adjustment, an amount equal to the product of (1) the excess of the sum of the
fractions over 1.0 times (2) the denominator of this fraction, will be
permanently subtracted from the numerator of this fraction. The adjustment is
calculated using the fractions as they would be computed as of the end of the
last Limitation Year beginning before January 1, 1987, and disregarding any
changes in the terms and conditions of the plan made after May 5, 1986, but
using the Code Section 415 limitation applicable to the first Limitation Year
beginning on or after January 1, 1987.
(6) Employer means the Employer that adopts this Plan and all
Affiliated Employers, except that for purposes of this Section, Affiliated
Employers shall be determined pursuant to the modification made by Code Section
415(h).
(7) Excess Amount means the excess of the Participant's Annual
Additions for the Limitation Year over the Maximum Permissible Amount.
(8) Highest Average Compensation means the average Compensation for
the three consecutive Years of Service with the Employer that produces the
highest average. A Year of Service with the Employer is the 12 consecutive
month period defined in Section E3 of the Adoption Agreement which is used to
determine Compensation under the Plan.
(9) Limitation Year means the Compensation Year (a 12 consecutive
month period) as elected by the Employer in the Adoption Agreement. All
qualified plans maintained by the Employer must use the same Limitation Year.
If the Limitation Year is amended to a different 12 consecutive month period,
the new Limitation Year must begin on a date within the Limitation Year in which
the amendment is made.
(10) Master or Prototype Plan means a plan the form of which is the
subject of a favorable opinion letter from the Internal Revenue Service.
(11) Maximum Permissible Amount means the maximum Annual Addition that
may be contributed or allocated to a Participant's account under the plan for
any Limitation Year, which shall not exceed the lesser of:
(i) the Defined Contribution Dollar Limitation, or
(ii) 25 percent of the Participant's Compensation for the
Limitation Year.
The Compensation Limitation referred to in (ii) shall not apply
to any contribution for medical benefits (within the meaning of Code Sections
401(h) or 419A(f)(2)) which is otherwise treated as an annual addition under
Code Sections 415(l)(1) or 419A(d)(2).
If a short Limitation Year is created because of an amendment
changing the Limitation Year to a different 12 consecutive month period, the
Maximum Permissible Amount will not exceed the Defined Contribution Dollar
Contribution multiplied by the following fraction:
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number of months in the short Limitation Year
---------------------------------------------
12
(12) Projected Annual Benefit means the annual retirement benefit
(adjusted to an actuarially equivalent straight life annuity if such benefit is
expressed in a form other than a straight life annuity or qualified Joint and
Survivor Annuity) to which the Participant would be entitled under the terms of
the plan assuming:
(13) the Participant will continue employment until Normal Retirement
Age (or current age, if later), and
(14) the Participant's Compensation for the current Limitation Year
and all other relevant factors used to determine benefits under the Plan will
remain constant for all future Limitation Years.
(g) Notwithstanding anything contained in this Section to the contrary,
the limitations, adjustments and other requirements prescribed in this Section
shall at all times comply with the provisions of Code Section 415 and the
Regulations thereunder, the terms of which are specifically incorporated herein
by reference.
4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
If as a result of the allocation of Forfeitures, a reasonable error in
estimating a Participant's annual Compensation, or other facts and circumstances
to which Regulation 1.415-6(b)(6) shall be applicable, the "annual additions"
under this Plan would cause the maximum provided in Section 4.9 to be exceeded,
the Administrator shall treat the excess in accordance with Section 4.9(a)(4).
4.11 TRANSFERS FROM QUALIFIED PLANS
(a) If specified in the Adoption Agreement and with the consent of the
Administrator, amounts may be transferred from other qualified plans, provided
that the trust from which such funds are transferred permits the transfer to be
made and the transfer will not jeopardize the tax exempt status of the Plan or
create adverse tax consequences for the Employer. The amounts transferred shall
be set up in a separate account herein referred to as a "Participant's Rollover
Account." Such account shall be fully Vested at all times and shall not be
subject to forfeiture for any reason.
(b) Amounts in a Participant's Rollover Account shall be held by the
Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or
distributed to the Participant, in whole or in part, as provided in Section
6.10.
(c) Amounts attributable to elective contributions (as defined in
Regulation 1.401(k)-l(g)(4)), including amounts treated as elective
contributions, which are transferred from
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another qualified plan in a plan-to-plan transfer shall be subject to the
distribution limitations provided for in Regulation 1.401(k)-l(d).
(d) At Normal Retirement Date, or such other date when the Participant or
his Beneficiary shall be entitled to receive benefits, the fair market value of
the Participant's Rollover Account shall be used to provide additional benefits
to the Participant or his Beneficiary. Any distributions of amounts held in a
Participant's Rollover Account shall be made in a manner which is consistent
with and satisfies the provisions of Section 6.5, including, but not limited to,
all notice and consent requirements of Code Sections 411(a)(11) and 417 and the
Regulations thereunder. Furthermore, such amounts shall be considered as part
of a Participant's benefit in determining whether an involuntary cash-out of
benefits without Participant consent may be made.
(e) The Administrator may direct that employee transfers made after a
valuation date be segregated into a separate account for each Participant until
such time as the allocations pursuant to this Plan have been made, at which time
they may remain segregated or be invested as part of the general Trust Fund, to
be determined by the Administrator.
(f) For purposes of this Section, the term "qualified plan" shall mean any
tax qualified plan under Code Section 401(a). The term "amounts transferred
from other qualified plans" shall mean: W amounts transferred to this Plan
directly from another qualified plan; (ii) lump-sum distributions received by an
Employee from another qualified plan which are eligible for tax free rollover to
a qualified plan and which are transferred by the Employee to this Plan within
sixty (60) days following his receipt thereof; (iii) amounts transferred to this
Plan from a conduit individual retirement account provided that the conduit
individual retirement account has no assets other than assets which (A) were
previously distributed to the Employee by another qualified plan as a lump-sum
distribution (B) were eligible for tax-free rollover to a qualified plan and (C)
were deposited in such conduit individual retirement account within sixty (60)
days of receipt thereof and other than earnings on said assets; and (iv) amounts
distributed to the Employee from a conduit individual retirement account meeting
the requirements of clause (iii) above, and transferred by the Employee to this
Plan within sixty (60) days of his receipt thereof from such conduit individual
retirement account.
(g) Prior to accepting any transfers to which this Section applies, the
Administrator may require the Employee to establish that the amounts to be
transferred to this Plan meet the requirements of this Section and may also
require the Employee to provide an opinion of counsel satisfactory to the
Employer that the amounts to be transferred meet the requirements of this
Section.
(h) Notwithstanding anything herein to the contrary, a transfer directly
to this Plan from another qualified plan (or a transaction having the effect of
such a transfer) shall only be permitted if it will not result in the
elimination or reduction of any "Section 411(d)(6) protected benefit" as
described in Section 8.1.
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4.12 VOLUNTARY CONTRIBUTIONS
(a) If elected in the Adoption Agreement, each Participant may, at the
discretion of the Administrator in a nondiscriminatory manner, elect to
voluntarily contribute a portion of his compensation earned while a Participant
under this Plan. Such contributions shall be paid to the Trustee within a
reasonable period of time but in no event later than 90 days after the receipt
of the contribution.
(b) The balance in each Participant's Voluntary Contribution Account
shall be fully Vested at all times and shall not be subject to Forfeiture for
any reason.
(c) A Participant may elect to withdraw his voluntary contributions from
his Voluntary Contribution Account and the actual earnings thereon in a manner
which is consistent with and satisfies the provisions of Section 6.5, including,
but not limited to, all notice and consent requirements of Code Sections
411(a)(11) and 417 and the Regulations thereunder. If the Administrator
maintains sub-accounts with respect to voluntary contributions (and earnings
thereon) which were made on or before a specified date, a Participant shall be
permitted to designate which sub-account shall be the source for his withdrawal.
No Forfeitures shall occur solely as a result of an Employee's withdrawal of
Employee contributions. A Participant may not make more than two withdrawals
per year except in the event of proven hardship.
In the event such a withdrawal is made, a Participant shall be barred
from making any further contributions pursuant to this Section for a period of
six months. In addition, only one withdrawal can be made per year. In the
event a Participant has received a hardship distribution pursuant to Regulation
1.401(k)-l(d)(2)(iii)(B) from any other plan maintained by the Employer or from
his Participant's Elective Account pursuant to Section 6.11, then such
Participant shall be barred from making any voluntary contributions to the Trust
Fund for a period of twelve (12) months after receipt of the withdrawal or
distribution.
(d) At Normal Retirement Date, or such other date when the Participant or
his Beneficiary shall be entitled to receive benefits, the fair market value of
the Voluntary Contribution Account shall be used to provide additional benefits
to the Participant or his Beneficiary.
(e) The Administrator may direct that voluntary contributions made after
a valuation date be segregated into a separate account until such time as the
allocations pursuant to this Plan have been made, at which time they may remain
segregated or be invested as part of the general Trust Fund, to be determined by
the Administrator.
4.13 DIRECTED INVESTMENT ACCOUNT
(a) All contributions are forwarded to the Trustee to be deposited in the
Trust Fund. Contributions shall be forwarded within three months after they are
made. Investment of Contributions is governed by the provisions of the Trust,
the Annuity Contract and any other funding arrangement in which the Trust Fund
is or may be invested. To the extent permitted by the Trust, Contract or other
funding arrangement, the parties named in the Adoption Agreement shall direct
the Contributions to any of the accounts available under the Trust and may
request the transfer of assets resulting from those Contributions between such
accounts. A Participant
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may not direct the Trustee to invest in Participant's Account in collectibles.
Collectible means any work of art, rug or antique, metal or gem, stamp or coin,
alcoholic beverage or other tangible personal property specified by the
Secretary of Treasury. To the extent that a Participant does not direct the
investment of his account balances, such account balances shall be invested
rateable in the accounts available under the Trust in the same manner as the
undirected account balances of all other Participants. The Vested Accounts of
all Former Participants may be segregated and invested separately from the
Account of all other Participants.
(b) At least annually, the Named Fiduciary shall review all pertinent
Employee information and Plan data in order to establish the funding policy of
the Plan and to determine appropriate methods of carrying out the Plan's
objectives. The named Fiduciary shall inform the Trustee and any Investment
Manager of the Plan's short-term and long-term financial needs so the investment
policy can be coordinated with the Plan's financial requirements.
(c) However, the Named Fiduciary may delegate to the Investment Manager
investment discretion for Contributions and Plan assets which are not subject to
Participant direction.
(d) A separate Directed Investment Account shall be established for each
Participant who has directed an investment. Transfers between the Participant's
regular account and their Directed Investment Account shall be charged and
credited as the case may be to each account. The Directed Investment Account
shall not share in Trust Fund Earnings, but it shall be charged or credited as
appropriate with the net earnings, gains, losses and expenses as well as any
appreciation or depreciation in market value during each Plan Year attributable
to such account. Such amounts shall not be considered in determining Trust Fund
gains or losses.
(e) The specific procedures as to the administration of the self directed
account shall be as set forth in the Adoption Agreement.
4.14 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS
(a) If this is an amendment to a Plan that previously permitted
deductible voluntary contributions, then each Participant who made a "qualified
voluntary Employee contribution" within the meaning of Code Section 219(e)(2) as
it existed prior to the enactment of the Tax Reform Act of 1986, shall have his
contribution held in a separate Qualified Voluntary Employee Contribution
Account which shall be fully Vested at all times. Such contributions, however,
shall not be permitted if they are attributable to taxable years beginning after
December 31, 1986.
(b) A Participant may, upon written request delivered to the
Administrator, make withdrawals from his Qualified Voluntary Employee
Contribution Account. Any distribution shall be made in a manner which is
consistent with and satisfies the provisions of Section 6.5, including, but not
limited to, all notice and consent requirements of Code Sections 411(a)(11) and
417 and the Regulations thereunder.
(c) At Normal Retirement Date, or such other date when the Participant or
his Beneficiary shall be entitled to receive benefits, the fair market value of
the Qualified Voluntary
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Employee Contribution Account shall be used to provide additional benefits to
the Participant or his Beneficiary.
(d) Unless the Administrator directs qualified voluntary Employee
contributions made pursuant to this Section be segregated into a separate
account for each Participant, they shall be invested as part of the general
Trust Fund and share in earnings and losses.
4.15 INTEGRATION IN MORE THAN ONE PLAN
If the Employer and/or an Affiliated Employer maintain qualified
retirement plans integrated with Social Security such that any Participant in
this Plan is covered under more than one of such plans, then such plans will be
considered to be one plan and will be considered to be integrated if the extent
of the integration of all such plans does not exceed 100%. For purposes of the
preceding sentence, the extent of integration of a plan is the ratio, expressed
as a percentage, which the actual benefits, benefit rate, offset rate, or
employer contribution rate, whatever is applicable, under the Plan bears to the
limitation applicable to such Plan. If the Employer maintains two or more
standardized paired plans, only one plan may be integrated with Social Security.
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Anniversary Date,
and at such other date or dates deemed necessary by the Administrator, herein
called "valuation date" to determine the net worth of the assets comprising the
Trust Fund as it exists on the "valuation date". In determining such net worth,
the Trustee shall value the assets comprising the Trust Fund at their fair
market value as of the "valuation date" and shall deduct all expenses for which
the Trustee has not yet obtained reimbursement from the Employer or the Trust
Fund.
5.2 METHOD OF VALUATION
In determining the fair market value of securities held in the Trust Fund
which are listed on a registered stock exchange, the Administrator shall direct
the Trustee to value the same at the prices they were last traded on such
exchange preceding the close of business on the "valuation date". If such
securities were not traded on the "valuation date," or if the exchange on which
they are traded was not open for business on the "valuation date," then the
securities shall be valued at the prices at which they were last traded prior to
the "valuation date." Any unlisted security held in the Trust Fund shall be
valued at its bid price next preceding the close of business on the "valuation
date," which bid price shall be obtained from a registered broker or an
investment banker. In determining the fair market value of assets other than
securities for which trading or bid prices can be obtained, the Trustee may
appraise such assets itself, or in its discretion, employ one or more appraisers
for that purpose and rely on the values established by such appraiser or
appraisers.
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ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the Employer and
retire for the purposes hereof on or after his Normal Retirement Date or Early
Retirement Date. Upon such Normal Retirement Date or Early Retirement Date, all
amounts credited to such Participant's Combined Account shall become
distributable. However, a Participant may postpone the termination of his
employment with the Employer to a later date, in which event the participation
of such Participant in the Plan, including the right to receive allocations
pursuant to Section 4.4, shall continue until his Late Retirement Date. Upon a
Participant's Retirement Date, or as soon thereafter as is practicable, the
Administrator shall direct the distribution of all amounts credited to such
Participant's Combined Account in accordance with Section 6.5.
6.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Upon the death of a Participant before his Retirement Date or
other termination of his employment, all amounts credited to such Participant's
Combined Account shall become fully Vested. The Administrator shall direct, in
accordance with the provisions of Sections 6.6 and 6.7, the distribution of the
deceased Participant's accounts to the Participant's Beneficiary.
(b) Upon the death of a Former Participant, the Administrator shall
direct, in accordance with the provisions of Sections 6.6 and 6.7, the
distribution of any remaining amounts credited to the accounts of such deceased
Former Participant to such Former Participant's Beneficiary.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive payment of the value of the
account of a deceased Participant or Former Participant as the Administrator may
deem desirable. The Administrator's determination of death and of the right of
any person to receive payment shall be conclusive.
(d) Unless otherwise elected in the manner prescribed in Section 6.6,
the Beneficiary of the Pre-Retirement Survivor Annuity shall be the
Participant's spouse. Except, however, the Participant may designate a
Beneficiary other than his spouse for the Pre-Retirement Survivor Annuity if:
(1) the Participant and his spouse have validly waived the Pre-
Retirement Survivor Annuity in the manner prescribed in Section 6.6, and the
spouse has waived his or her right to be the Participant's Beneficiary, or
(2) the Participant is legally separated or has been abandoned
(within the meaning of local law) and the Participant has a court order to such
effect (and there is no "qualified domestic relations order" as defined in Code
Section 414(p) which provides otherwise), or
(3) the Participant has no spouse, or
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(4) the spouse cannot be located.
In such event, the designation of a Beneficiary shall be made on a
form satisfactory to the Administrator. A Participant may at any time revoke
his designation of a Beneficiary or change his Beneficiary by filing written
notice of such revocation or change with the Administrator. However, the
Participant's spouse must again consent in writing to any change in Beneficiary
unless the original consent acknowledged that the spouse had the right to limit
consent only to a specific Beneficiary and that the spouse voluntarily elected
to relinquish such right. The Participant may, at any time, designate a
Beneficiary for death benefits payable under the Plan that are in excess of the
Pre-Retirement Survivor Annuity. In the event no valid designation of
Beneficiary exists at the time of the Participant's death, the death benefit
shall be payable to his estate.
(e) If the Plan provides an insured death benefit and a Participant
dies before any insurance coverage to which he is entitled under the Plan is
effected, his death benefit from such insurance coverage shall be limited to the
standard rated premium which was or should have been used for such purpose.
(f) In the event of any conflict between the terms of this Plan and
the terms of any Contract issued hereunder, the Plan provisions shall control.
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability prior to his
Retirement Date or other termination of his employment, all amounts credited to
such Participant's Combined Account shall become fully Vested. In the event of
a Participant's Total and Permanent Disability, the Administrator, in accordance
with the provisions of Sections 6.5 and 6.7, shall direct the distribution to
such Participant of all amounts credited to such Participant's Combined Account
as though he had retired.
6.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) On or before the Anniversary Date coinciding with or subsequent to
the termination of a Participant's employment for any reason other than
retirement, death, or Total and Permanent Disability, the Administrator may
direct the Trustee to segregate the amount of the Vested portion of such
Terminated Participant's Combined Account and invest the aggregate amount
thereof in a separate, federally insured savings account, certificate of
deposit, common or collective trust fund of a bank or a deferred annuity. In the
event the Vested portion of a Participant's Combined Account is not segregated,
the amount shall remain in a separate account for the Terminated Participant and
share in allocations pursuant to Section 4.4 until such time as a distribution
is made to the Terminated Participant. The amount of the portion of the
Participant's Combined Account which is not Vested may be credited to a separate
account (which will always share in gains and losses of the Trust) and at such
time as the amount becomes a Forfeiture shall be treated in accordance with the
provisions of the Plan regarding Forfeitures.
Regardless of whether distributions in kind are permitted, in the
event that the amount of the Vested portion of the Terminated Participant's
Combined Account equals or
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exceeds the fair market value of any insurance Contracts, the Trustee, when so
directed by the Administrator and agreed to by the Terminated Participant, shall
assign, transfer, and set over to such Terminated Participant all Contracts on
his life in such form or with such endorsements, so that the settlement options
and forms of payment are consistent with the provisions of Section 6.5. In the
event that the Terminated Participant's Vested portion does not at least equal
the fair market value of the Contracts, if any, the Terminated Participant may
pay over to the Trustee the sum needed to make the distribution equal to the
value of the Contracts being assigned or transferred, or the Trustee, pursuant
to the Participant's election, may borrow the cash value of the Contracts from
the Insurer so that the value of the Contracts is equal to the Vested portion of
the Terminated Participant's Combined Account and then assign the Contracts to
the Terminated Participant.
Distribution of the funds due to a Terminated Participant shall be
made on the occurrence of an event which would result in the distribution had
the Terminated Participant remained in the employ of the Employer (upon the
Participant's death, Total and Permanent Disability, Early or Normal
Retirement). However, at the election of the Participant, the Administrator
shall direct that the entire Vested portion of the Terminated Participant's
Combined Account to be payable to such Terminated Participant provided the
conditions, if any, set forth in the Adoption Agreement have been satisfied.
Any distribution under this paragraph shall be made in a manner which is
consistent with and satisfies the provisions of Section 6.5, including but not
limited to, all notice and consent requirements of Code Sections 411(a)(11) and
417 and the Regulations thereunder.
Notwithstanding the above, if the value of a Terminated Participant's
Vested benefit derived from Employer and Employee contributions does not exceed,
and at the time of any prior distribution, has never exceeded $3,500, the
Administrator may pursuant to the Adoption Agreement direct that the entire
Vested benefit be paid to such Participant in a single lump-sum without regard
to the consent of the Participant or the Participant's spouse. A Participant's
Vested benefit shall not include qualified voluntary Employee contributions
within the meaning of Code Section 72(o)(5)(B) for Plan Years beginning prior to
January 1, 1989.
(b) The Vested portion of any Participant's Account shall be a
percentage of such Participant's Account determined on the basis of the
Participant's number of Years of Service according to the vesting schedule
specified in the Adoption Agreement.
(c) For any Top Heavy Plan Year, one of the minimum top heavy vesting
schedules as elected by the Employer in the Adoption Agreement will
automatically apply to the Plan. The minimum top heavy vesting schedule applies
to all benefits within the meaning of Code Section 411(a)(7) except those
attributable to Employee contributions, including benefits accrued before the
effective date of Code Section 416 and benefits accrued before the Plan became
top heavy. Further, no decrease in a Participant's Vested percentage may occur
in the event the Plan's status as top heavy changes for any Plan Year. However,
this Section does not apply to the account balances of any Employee who does not
have an Hour of Service after the Plan has initially become top heavy and the
Vested percentage of such Employee's Participant's Account shall be determined
without regard to this Section 6.4(c)
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If in any subsequent Plan Year, the Plan ceases to be a Top Heavy
Plan, the Administrator shall continue to use the vesting schedule in effect
while the Plan was a Top Heavy Plan for each Employee who had an Hour of Service
during a Plan Year when the Plan was Top Heavy.
(d) Notwithstanding the vesting schedule above, upon the complete
discontinuance of the Employer's contributions to the Plan or upon any full or
partial termination of the Plan, all amounts credited to the account of any
affected Participant shall become 100% Vested and shall not thereafter be
subject to Forfeiture.
(e) If this is an amended or restated Plan, then notwithstanding the
vesting schedule specified in the Adoption Agreement, the Vested percentage of a
Participant's Account shall not be less than the Vested percentage attained as
of the later of the effective date or adoption date of this amendment and
restatement. The computation of a Participant's nonforfeitable percentage of
his interest in the Plan shall not be reduced as the result of any direct or
indirect amendment to this Article, or due to changes in the Plan's status as a
Top Heavy Plan.
(f) If the Plan's vesting schedule is amended, or if the Plan is
amended in any way that directly or indirectly affects the computation of the
Participant's nonforfeitable percentage or if the Plan is deemed amended by an
automatic change to a top heavy vesting schedule, then each Participant with at
least 3 Years of Service as of the expiration date of the election period may
elect to have his nonforfeitable percentage computed under the Plan without
regard to such amendment or change. Notwithstanding the foregoing, for Plan
Years beginning before January 1, 1989, or with respect to Employees who fail to
complete at least one (1) Hour of service in a Plan Year beginning after
December 31, 1988, five (5) shall be substituted for three (3) in the preceding
sentence. If a Participant fails to make such election, then such Participant
shall be subject to the new vesting schedule. The Participant's election period
shall commence on the adoption date of the amendment and shall end 60 days after
the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice of the
amendment from the Employer or Administrator.
(g)(1) If any Former Participant shall be reemployed by the
Employer, he shall continue to participate in the Plan in the same manner as if
such termination had not occurred.
(2) A terminated Participant who has received a distribution
equal to his Vested Account from this Plan and who resumes employment with the
Employer before he has five consecutive 1-Year Breaks in Service must return the
full amount of his distribution to the Plan, other than his Voluntary
Contribution Account and Qualified Voluntary Employee Contribution account,
before the earlier of five years after the first date on which the Participant
is subsequently by the Employer or the close of the first period of five
consecutive 1-Year Breaks in Service commencing after the distribution, for his
forfeited account to be reinstated. In the event the former terminated
Participant does repay the amount of the distribution his non-vested Employer
Contribution Account at the time of his distribution is to be
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reinstated. In the event the former terminated Participant does repay the amount
of the distribution his non-vested Employer Contribution Account at the time of
his distribution is to be restored in full, unadjusted by any gains or losses
occurring subsequent to his distribution.
(3) If any Former Participant is reemployed after a 1-Year Break in
Service has occurred, Years of Service shall include Years of Service prior to
his 1-Year Break in Service subject to the following rules:
(i) If a Former Participant has a 1-Year Break in Service, his pre-
break and post-break service shall be used for computing Years of Service for
eligibility and for vesting purposes upon his reemployment with the Employer;
(ii) Each non-vested Former Participant shall lose credits otherwise
allowable under (1) above if his consecutive 1-Year Breaks in Service equal or
exceed the greater of (A) five (5) or (B) the aggregate number of his pre-break
Years of Service. Such aggregate number of Years of Service will not include
any Years of Service disregarded under the preceding sentence by reason of prior
breaks in service;
(iii) After five (5) consecutive 1-Year Breaks in Service, a Former
Participant's Vested Account balance attributable to pre-break service shall not
be increased as a result of post-break service;
(iv) If a Former Participant is reemployed by the Employer, he shall
participate in the Plan as of his date of reemployment;
(v) If a Former Participant completes a Year of Service (a 1-Year
Break in Service previously occurred, but employment had not terminated), he
shall participate in the Plan immediately upon his reemployment.
(h) For non-standardized plans, in determining Years of Service for
purposes of vesting under the Plan, Years of Service shall be excluded as
specified in the Adoption Agreement.
6.5 DISTRIBUTION OF BENEFITS
(a) (1) unless otherwise elected as provided below, a Participant
who is married on the "annuity starting date" and who does not die before the
"annuity starting date" shall receive the value of all of his benefits in the
form of a Joint and Survivor Annuity. The Joint and Survivor Annuity is an
annuity that commences immediately and shall be equal in value to a single life
annuity. Such joint and survivor benefits following the Participant's death
shall continue to the spouse during the spouse's lifetime at a rate equal to 50%
of the rate at which such benefits were payable to the Participant. This Joint
and Survivor Annuity shall be considered the designated qualified Joint and
Survivor Annuity and automatic form of payment for the purposes of this Plan.
However, the Participant may elect to receive a smaller annuity benefit with
continuation of payments to the spouse at a rate of seventy-five percent (75%)
or one hundred percent (100%) of the rate payable to a Participant during his
lifetime which alternative Joint and Survivor Annuity shall be equal in value to
the automatic Joint and 50% Survivor Annuity. An unmarried Participant shall
receive the value of his benefit in the form of
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a life annuity. Such unmarried Participant, however, may elect in writing to
waive the life annuity. The election must comply with the provisions of this
Section as if it were an election to waive the Joint and Survivor Annuity by a
married Participant, but without the spousal consent requirement. The
Participant may elect to have any annuity provided for in this Section
distributed upon the attainment of the "earliest retirement age" under the Plan.
The "earliest retirement age" is the earliest date on which, under the Plan, the
Participant could elect to receive retirement benefits.
(2) Any election to waive the Joint and Survivor Annuity must be made
by the Participant in writing during the election period and be consented to by
the Participant's spouse. If the spouse is legally incompetent to give consent,
the spouse's legal guardian, even if such guardian is the Participant, may give
consent. Such election shall designate a Beneficiary (or a form of benefits)
that may not be changed without spousal consent (unless the consent of the
spouse expressly permits designations by the Participant without the requirement
of further consent by the spouse). Such spouse's consent shall be irrevocable
and must acknowledge the effect of such election and be witnessed by a Plan
representative or a notary public. Such consent shall not be required if it is
established to the satisfaction of the Administrator that the required consent
cannot be obtained because there is no spouse, the spouse cannot be located, or
other circumstances that may be prescribed by Regulations. The election made by
the Participant and consented to by his spouse may be revoked by the Participant
in writing without the consent of the spouse at any time during the election
period. The number of revocations shall not be limited. Any new election must
comply with the requirements of this paragraph. A former spouse's waiver shall
not be binding on a new spouse.
(3) The election period to waive the Joint and Survivor Annuity shall
be the 90 day period ending on the "annuity starting date."
(4) For purposes of this Section and Section 6.6, the "annuity
starting date" means the first day of the first period for which an amount is
paid as an annuity, or, in the case of a benefit not payable in the form of an
annuity, the first day on which all events have occurred which entitles the
Participant to such benefit.
(5) With regard to the election, the Administrator shall provide to
the Participant no less than 30 days and no more than 90 days before the
"annuity starting date" a written explanation of:
(i) the terms and conditions of the Joint and Survivor
Annuity, and
(ii) the Participant's right to make and the effect of an
election to waive the Joint and Survivor Annuity, and
(iii) the right of the Participant's spouse to consent to
any election to waive the Joint and Survivor Annuity, and
(iv) the right of the Participant to revoke such election,
and the effect of such revocation.
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(b) In the event a married Participant duly elects pursuant to
paragraph (a)(2) above not to receive his benefit in the form of a Joint and
Survivor Annuity, or if such Participant is not married, in the form of a life
annuity, the Administrator, pursuant to the election of the Participant, shall
direct the distribution to a Participant or his Beneficiary any amount to which
he is entitled under the Plan in one or more of the following methods which are
permitted pursuant to the Adoption Agreement:
(1) one lump-sum payment in cash or in property;
(2) Payments over a period certain in monthly, quarterly,
semiannual, or annual cash installments. In order to provide such installment
payments, the Administrator may direct that the Participant's interest in the
Plan be segregated and invested separately, and that the funds in the segregated
account be used for the payment of the installments. The period over which such
payment is to be made shall not extend beyond the Participant's life expectancy
(or the life expectancy of the Participant and his designated Beneficiary);
(3) Purchase of or providing an annuity. However, such annuity
may not be in any form that will provide for payments over a period extending
beyond either the life of the Participant (or the lives of the Participant and
his designated Beneficiary) or the life expectancy of the Participant (or the
life expectancy of the Participant and his designated Beneficiary).
(4) An installment refund option.
(c) The present value of a Participant's Joint and Survivor Annuity
derived from Employer and Employee contributions may not be paid without his
written consent if the value exceeds, or has ever exceeded at the time of any
prior distribution, $3,500. Further, the spouse of a Participant must consent
in writing to any immediate distribution. If the value of the Participant's
benefit derived from Employer and Employee contributions does not exceed $3,500
and has never exceeded $3,500 at the time of any prior distribution, the
Administrator may, if permitted pursuant to the Adoption Agreement, immediately
distribute such benefit without such Participant's consent. No distribution may
be made under the preceding sentence after the "annuity starting date" unless
the Participant and his spouse consent in writing to such distribution. Any
written consent required under this paragraph must be obtained not more than 90
days before commencement of the distribution and shall be made in a manner
consistent with Section 6.5(a)(2).
(d) Any distribution to a Participant who has a benefit which exceeds,
or has ever exceeded at the time of any prior distribution, $3,500 shall require
such Participant's consent if such distribution commences prior to the later of
his Normal Retirement Age or age 62. With regard to this required consent:
(1) No consent shall be valid unless the Participant has received a
general description of the material features and an explanation of the relative
values of the optional forms of benefit available under the Plan that would
satisfy the notice requirements of Code Section 417.
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(2) The Participant must be informed of his right to defer
receipt of the distribution. If a Participant fails to consent, it shall be
deemed an election to defer the commencement of payment of any benefit. However,
any election to defer the receipt of benefits shall not apply with respect to
distributions which are required under Section 6.5(e).
(3) Notice of the rights specified under this paragraph shall be
provided no less than 30 days and no more than 90 days before the "annuity
starting date."
(4) Written consent of the Participant to the distribution must
not be made before the Participant receives the notice and must not be made more
than 90 days before the "annuity starting date."
(5) No consent shall be valid if a significant detriment is
imposed under the Plan on any Participant who does not consent to the
distribution.
(e) Notwithstanding any provision in the Plan to the contrary, the
distribution of a Participant's benefits, made on or after January 1, 1985,
whether under the Plan or through the purchase of an annuity Contract, shall be
made in accordance with the following requirements and shall otherwise comply
with Code Section 401(a)(9) and the Regulations thereunder (including Regulation
Section 1.401(a)(9)-2), the provisions of which are incorporated herein by
reference:
(1) A Participant's benefits shall be distributed to him not
later than April 1st of the calendar year following the later of (i) the
calendar year in which the Participant attains age 70 1/2 or (ii) the calendar
year in which the Participant retires, provided, however, that this clause (ii)
shall not apply in the case of a Participant who is a "five (5) percent owner"
at any time during the five (5) Plan Year period ending in the calendar year in
which he attains age 70 1/2 or, in the case of a Participant who becomes a "five
(5) percent owner" during any subsequent Plan Year, clause (ii) shall no longer
apply and the required beginning date shall be the April 1st of the calendar
year following the calendar year in which such subsequent Plan Year ends.
Alternatively, distributions to a Participant must begin no later than the
applicable April 1st as determined under the preceding sentence and must be made
over the life of the Participant (or the lives of the Participant and the
Participant's designated Beneficiary) or, if benefits are paid in the form of a
Joint and Survivor Annuity, the life expectancy of the Participant (or the life
expectancies of the Participant and his designated Beneficiary) in accordance
with Regulations. For Plan Years beginning after December 31, 1988, clause (ii)
above shall not apply to any Participant unless the Participant had attained age
70 1/2 before January 1, 1988 and was not a "five (5) percent owner" at any time
during the Plan Year ending with or within the calendar year in which the
Participant attained age 66 1/2 or any subsequent Plan Year.
(2) Distributions to a Participant and his Beneficiaries shall
only be made in accordance with the incidental death benefit requirements of
Code Section 401(a)(9)(G) and the Regulations thereunder.
Additionally, for calendar years beginning before 1989,
distributions may also be made under an alternative method which provides that
the then present value of the
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payments to be made over the period of the Participant's life expectancy exceeds
fifty percent (50%) of the then present value of the total payments to be made
to the Participant and his Beneficiaries.
(f) For purposes of this Section, the life expectancy of a Participant
and a Participant's spouse (other than in the case of a life annuity) shall be
redetermined annually in accordance with Regulations if permitted pursuant to
the Adoption Agreement. If the Participant or the Participant's spouse may elect
whether recalculations will be made, then the election, once made, shall be
irrevocable. If no election is made by the time distributions must commence,
then the life expectancy of the Participant and the Participant's spouse shall
not be subject to recalculation. Life expectancy and joint and last survivor
expectancy shall be computed using the return multiples in Tables V and VI of
Regulation 1.72-9.
(g) All annuity Contracts under this Plan shall be non-transferable
when distributed. Furthermore, the terms of any annuity Contract purchased and
distributed to a Participant or spouse shall comply with all of the requirements
of this Plan.
(h) Subject to the spouse's right of consent afforded under the Plan,
the restrictions imposed by this Section shall not apply if a Participant has,
prior to January 1, 1984, made a written designation to have his retirement
benefit paid in an alternative method acceptable under Code Section 401(a) as in
effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of
1982.
(i) If a distribution is made at a time when a Participant who has not
terminated employment is not fully Vested in his Participant's Account and the
Participant may increase the Vested percentage in such account:
(1) A separate account shall be established for the Participant's
interest in the Plan as of the time of the distribution, and
(2) At any relevant time the Participant's Vested portion of the
separate account shall be equal to an amount ("V) determined by the formula:
x equals P(AB plus (RxD)) - (R x D)
For purposes of applying the formula: P is the Vested percentage
at the relevant time, AB is the account balance at the relevant time, D is the
amount of distribution, and R is the ratio of the account balance at the
relevant time to the account balance after distribution.
6.6 DISTRIBUTION OF BENEFITS UPON DEATH
(a) Unless otherwise elected as provided below, a Vested Participant who
dies before the annuity starting date and who has a surviving spouse shall have
the Pre-Retirement Survivor Annuity paid to his surviving spouse. The
Participant's spouse may direct that payment of the Pre-Retirement Survivor
Annuity commence within a reasonable period after the Participant's death. If
the spouse does not so direct, payment of such benefit will commence at the time
the Participant would have attained the later of his Normal Retirement Age or
age 62. However, the
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spouse may elect a later commencement date. Any distribution to the
Participant's spouse shall be subject to the rules specified in Section 6.6(h).
(b) Any election to waive the Pre-Retirement Survivor Annuity before the
Participant's death must be made by the Participant in writing during the
election period and shall require the spouse's irrevocable consent in the same
manner provided for in Section 6.5(a)(2). Further, the spouse's consent must
acknowledge the specific nonspouse Beneficiary. Notwithstanding the foregoing,
the nonspouse Beneficiary need not be acknowledged, provided the consent of the
spouse acknowledges that the spouse has the right to limit consent only to a
specific Beneficiary and that the spouse voluntarily elects to relinquish such
right.
(c) The election period to waive the Pre-Retirement Survivor Annuity shall
begin on the first day of the Plan Year in which the Participant attains age 35
and end on the date of the Participant's death. An earlier waiver (with spousal
consent) may be made provided a written explanation of the Pre-Retirement
Survivor Annuity is given to the Participant and such waiver becomes invalid at
the beginning of the Plan Year in which the Participant turns age 35. In the
event a Vested Participant separates from service prior to the beginning of the
election period, the election period shall begin on the date of such separation
from service.
(d) with regard to the election, the Administrator shall provide each
Participant within the applicable period, with respect to such Participant (and
consistent with Regulations), a written explanation of the Pre-Retirement
Survivor Annuity containing comparable information to that required pursuant to
Section 6.5(a)(5). For the purposes of this paragraph, the term "applicable
period" means, with respect to a Participant, whichever of the following periods
ends last:
(1) The period beginning with the first day of the Plan Year in which
the Participant attains age 32 and ending with the close of the Plan Year
preceding the Plan Year in which the Participant attains age 35;
(2) A reasonable period after the individual becomes a Participant.
For this purpose, in the case of an individual who becomes a Participant after
age 32, the explanation must be provided by the end of the three-year period
beginning with the first day of the first Plan Year for which the individual is
a Participant;
(3) A reasonable period ending after the Plan no longer fully
subsidizes the cost of the Pre-Retirement Survivor Annuity with respect to the
Participant;
(4) A reasonable period ending after Code Section 401(a)(11) applies
to the Participant; or
(5) A reasonable period after separation from service in the case of a
Participant who separates before attaining age 35. For this purpose, the
Administrator must provide the explanation beginning one year before the
separation from service and ending one year after separation.
(e) The Pre-Retirement Survivor Annuity provided for in this Section shall
apply only to Participants who are credited with an Hour of Service on or after
August 23, 1984.
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Former Participants who are not credited with an Hour of Service on or after
August 23, 1984 shall be provided with rights to the Pre-Retirement Survivor
Annuity in accordance with Section 303(e)(2) of the Retirement Equity Act of
1984.
(f) If the value of the Pre-Retirement Survivor Annuity derived from
Employer and Employee contributions does not exceed $3,500 and has never
exceeded $3,500 at the time of any prior distribution, the Administrator shall
direct the immediate distribution of such amount to the Participant's spouse, if
permitted in the Adoption Agreement. No distribution may be made under the
preceding sentence after the annuity starting date unless the spouse consents in
writing. If the value exceeds, or has ever exceeded at the time of any prior
distribution, $3,500, an immediate distribution of the entire amount may be made
to the surviving spouse, provided such surviving spouse consents in writing to
such distribution. Any written consent required under this paragraph must be
obtained not more than 90 days before commencement of the distribution and shall
be made in a manner consistent with Section 6.5(a)(2).
(g) (1) In the event there is an election to waive the Pre-Retirement
Survivor Annuity, and for death benefits in excess of the Pre-Retirement
Survivor Annuity, such death benefits shall be paid to the Participant's
Beneficiary by either of the following methods, as elected by the Participant
(or if no election has been made prior to the Participant's death, by his
Beneficiary) subject to the rules specified in Section 6.6(h) and the selections
made in the Adoption Agreement:
(i) one lump-sum payment in cash or in property;
(ii) Payment in monthly, quarterly, semi-annual, or annual cash
installments over a period to be determined by the Participant or his
Beneficiary. After periodic installments commence, the Beneficiary shall have
the right to reduce the period over which such periodic installments shall be
made, and the cash amount of such periodic installments shall be adjusted
accordingly.
(iii) If death benefits in excess of the Pre-Retirement Survivor
Annuity are to be paid to the surviving spouse, such benefits may be paid
pursuant to M or (ii) above, or used to purchase an annuity so as to increase
the payments made pursuant to the Pre-Retirement Survivor Annuity;
(2) In the event the death benefit payable pursuant to Section 6.2 is
payable in installments, then, upon the death of the Participant, the
Administrator may direct that the death benefit be segregated and invested
separately, and that the funds accumulated in the segregated account be used for
the payment of the installments.
(h) Notwithstanding any provision in the Plan to the contrary,
distributions upon the death of a Participant made on or after January 1, 1985,
shall be made in accordance with the following requirements and shall otherwise
comply with Code Section 401(a)(9) and the Regulations thereunder.
(1) If it is determined, pursuant to Regulations, that the
distribution of a Participant's interest has begun and the Participant dies
before his entire interest has been
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distributed to him, the remaining portion of such interest shall be distributed
at least as rapidly as under the method of distribution selected pursuant to
Section 6.5 as of his date of death.
(2) If a Participant dies before he has begun to receive any
distributions of his interest in the Plan or before distributions are deemed to
have begun pursuant to Regulations, then his death benefit shall be distributed
to his Beneficiaries in accordance with the following rules subject to the
selections made in the Adoption Agreement and Subsections 6.6(h)(3) and 6.6(i)
below:
(i) The entire death benefit shall be distributed to the
Participant's Beneficiaries by December 31st of the calendar year in which the
fifth anniversary of the Participant's death occurs;
(ii) The 5-year distribution requirement of (i) above shall not
apply to any portion of the deceased Participant's interest which is payable to
or for the benefit of a designated Beneficiary. In such event, such portion
shall be distributed over the life of such designated Beneficiary (or over a
period not extending beyond the life expectancy of such designated Beneficiary)
provided such distribution begins not later than December 31st of the calendar
year immediately following the calendar year in which the Participant died;
(iii) However, in the event the Participant's spouse (determined
as of the date of the Participant's death) is his designated Beneficiary, the
provisions of (ii) above shall apply except that the requirement that
distributions commence within one year of the Participant's death shall not
apply. In lieu thereof, distributions must commence on or before the later of:
(1) December 31st of the calendar year immediately following the calendar year
in which the Participant died; or (2) December 31st of the calendar year in
which the Participant would have attained age 70 1/2. If the surviving spouse
dies before distributions to such spouse begin, then the 5-year distribution
requirement of this Section shall apply as if the spouse was the Participant.
(3) Notwithstanding subparagraph (2) above, or any selections made in
the Adoption Agreement, if a Participant's death benefits are to be paid in the
form of a Pre-Retirement Survivor Annuity, then distributions to the
Participant's surviving spouse must commence on or before the later of: (1)
December 31st of the calendar year immediately following the calendar year in
which the Participant died; or (2) December 31st of the calendar year in which
the Participant would have attained age 70 1/2.
(i) For purposes of Section 6.6(h)(2), the election by a designated
Beneficiary to be excepted from the 5-year distribution requirement (if
permitted in the Adoption Agreement) must be made no later than December 31st of
the calendar year following the calendar year of the Participant's death.
Except, however, with respect to a designated Beneficiary who is the
Participant's surviving spouse, the election must be made by the earlier of: (1)
December 31st of the calendar year immediately following the calendar year in
which the Participant died or, if later, the calendar year in which the
Participant would have attained age 70 1/2; or (2) December 31st of the calendar
year which contains the fifth anniversary of the date of the Participant's
death. An election by a designated Beneficiary must be in writing and shall be
irrevocable as of
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the last day of the election period stated herein. In the absence of an election
by the Participant or a designated Beneficiary, the 5-year distribution
requirement shall apply.
(j) For purposes of this Section, the life expectancy of a Participant and
a Participant's spouse (other than in the case of a life annuity) shall or shall
not be redetermined annually as provided in the Adoption Agreement and in
accordance with Regulations. If the Participant or the Participant's spouse may
elect, pursuant to the Adoption Agreement, to have life expectancies
recalculated, then the election, once made shall be irrevocable. If no election
is made by the time distributions must commence, then the life expectancy of the
Participant and the Participant's spouse shall not be subject to recalculation.
Life expectancy and joint and last survivor expectancy shall be computed using
the return multiples in Tables V and VI of Regulation Section 1.72-9.
(k) In the event that less than 100% of a Participant's interest in the
Plan is distributed to such Participant's spouse, the portion of the
distribution attributable to the Participant's Voluntary Contribution Account
shall be in the same proportion that the Participant's Voluntary Contribution
Account bears to the Participant's total interest in the Plan.
(l) Subject to the spouse's right of consent afforded under the Plan, the
restrictions imposed by this Section shall not apply if a Participant has, prior
to January 1, 1984, made a written designation to have his death benefits paid
in an alternative method acceptable under Code Section 401(a) as in effect prior
to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982.
6.7 TIME OF SEGREGATION OR DISTRIBUTION
Except as limited by Sections 6.5 and 6.6, whenever a distribution is to be
made, or a series of payments are to commence, on or as of an Anniversary Date,
the distribution or series of payments may be made or begun on such date or as
soon thereafter as is practicable, but in no event later than 180 days after the
Anniversary Date. However, unless a Former Participant elects in writing to
defer the receipt of benefits (such election may not result in a death benefit
that is more than incidental), the payment of benefits shall begin not later
than the 60th day after the close of the Plan Year in which the latest of the
following events occurs: (a) the date on which the Participant attains the
earlier of age 65 or the Normal Retirement Age specified herein; (b) the 10th
anniversary of the year in which the Participant commenced participation in the
Plan; or (c) the date the Participant terminates his service with the Employer.
Notwithstanding the foregoing, the failure of a Participant and, if
applicable, the Participant's spouse, to consent to a distribution pursuant to
Section 6.5(d), shall be deemed to be an election to defer the commencement of
payment of any benefit sufficient to satisfy this Section.
6.8 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal guardian,
or if none, to a parent of such Beneficiary or a responsible adult with whom the
Beneficiary maintains his residence, or to the custodian for such Beneficiary
under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted
by
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the laws of the state in which said Beneficiary resides. Such a payment to the
legal guardian, custodian or parent of a minor Beneficiary shall fully discharge
the Trustee, Employer, and Plan from further liability on account thereof.
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to a
Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid
solely by reason of the inability of the Administrator, after sending a
registered letter, return receipt requested, to the last known address, and
after further diligent effort, to ascertain the whereabouts of such Participant
or his Beneficiary, the amount so distributable shall be treated as a Forfeiture
pursuant to the Plan. In the event a Participant or Beneficiary is located
subsequent to his benefit being reallocated, such benefit shall be restored,
first from Forfeitures, if any, and then from an additional Employer
contribution if necessary.
6.10 PRE-RETIREMENT DISTRIBUTION
If elected in the Adoption Agreement, at such time as a Participant shall
have attained the age specified in the Adoption Agreement, the Administrator, at
the election of the Participant shall direct the Trustee to distribute up to the
entire vested amount then credited to the accounts maintained on behalf of the
Participant. In the event that the Administrator makes such a distribution, the
Participant shall continue to be eligible to participate in the Plan on the same
basis as any other Employee. Any distribution made pursuant to this Section
shall be made in manner consistent with Section 6.5, including but not limited
to all notice and consent requirements required by Code Sections 411(a)(11) and
417 and the Regulations thereunder.
Notwithstanding the above, pre-retirement distributions from a
Participant's Elective Account and Qualified Non-Elective Account shall not be
permitted prior to the Participants attaining 59 1/2 except as otherwise
permitted under the terms of the Plan.
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP
(a) The Administrator, at the election of the Participant, shall direct the
Trustee to distribute to any Participant in any one Plan Year up to the lesser
of (1) 100% of his vested interest in his accounts as specified in the Adoption
Agreement valued as of the last Anniversary Date or other valuation date or (2)
the amount necessary to satisfy the immediate and heavy financial need of the
Participant. Any distribution made pursuant to this Section shall be deemed to
be made as of the first day of the Plan Year or, if later, the valuation date
immediately preceding the date of distribution, and the account from which the
distribution is made shall be reduced accordingly. Withdrawal under this
Section shall be authorized only if the distribution is on account of one of the
following or any other items permitted by the Internal Revenue Service:
(1) medical expenses described in Code Section 213(d) incurred by the
Participant, his spouse, or any of his dependents (as defined in Code Section
152);
(2) The purchase (excluding mortgage payments) of a principal
residence for the Participant;
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(3) Funeral expenses for a member of the Participant's family;
(4) Payment of tuition for the next semester or quarter of post-
secondary education for the Participant, his spouse, children, or dependents; or
(5) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the Participant's
principal residence.
(b) If selected in the Adoption Agreement, no distribution shall be made
pursuant to this Section unless the Administrator, based upon the Participant's
representation and such other facts as are known to the Administrator,
determines that all of the following conditions are satisfied:
(1) The distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant;
(2) The Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans currently available under all
plans maintained by the Employer;
(3) The Plan, and all other plans maintained by the Employer, provide
that the Participant's elective deferrals and voluntary Employee contributions
will be suspended for at least twelve (12) months after receipt of the hardship
distribution; and
(4) The Plan, and all other plans maintained by the Employer, provide
that the Participant may not make elective deferrals for the Participant's
taxable year immediately following the taxable year of the hardship distribution
in excess of the applicable limit under Code Section 402(g) for such next
taxable year less the amount of such Participant's elective deferrals for the
taxable year of the hardship distribution.
(c) Notwithstanding the above, distributions from the Participant's
Elective Account and Qualified Non-Elective Account pursuant to this Section
shall be limited solely to the Participant's Deferred Compensation and any
income attributable thereto credited to the Participant's Elective Account as of
December 31, 1988.
(d) Any distribution made pursuant to this Section shall be made in a
manner which is consistent with and satisfies the provisions of Section 6.5,
including, but not limited to, all notice and consent requirements of Code
Sections 411(a)(11) and 417 and the Regulations thereunder.
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS
All rights and benefits, including elections, provided to a Participant in
this Plan shall be subject to the rights afforded to any "alternate payee" under
a "qualified domestic relations order." Furthermore, a distribution to an
"alternate payee" shall be permitted if such distribution is authorized by a
"qualified domestic relations order," even if the affected Participant has not
reached the "earliest retirement age" under the Plan. For the purposes of this
Section, "alternate payee," qualified domestic relations order" and "earliest
retirement age shall have the meaning set forth under Code Section 414(p).
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6.13 SPECIAL RULE FOR NON-ANNUITY PLANS
If elected in the Adoption Agreement, the following shall apply to a
Participant in a Profit Sharing Plan and to any distribution, made on or after
the first day of the first plan year beginning after December 31, 1988, from or
under a separate account attributable solely to accumulated deductible employee
contributions, as defined in Code Section 72(o)(5)(B), and maintained on behalf
of a participant in a money purchase pension plan, (including a target benefit
plan):
(a) The Participant shall be prohibited from electing benefits in the form
of a life annuity;
(b) Upon the death of the Participant, the Participant's entire Vested
account balances will be paid to his or her surviving spouse, or, if there is no
surviving spouse or the surviving spouse has already consented to waive his or
her benefit, in accordance with Section 6.6, to his designated Beneficiary; and
(c) Except to the extent otherwise provided in this Section and Section
6.5(h), the other provisions of Sections 6.2, 6.5 and 6.6 regarding spousal
consent and the forms of distributions shall be inoperative with respect to this
Plan.
This Section shall not apply to any Participant if it is determined that
this Plan is a direct or indirect transferee of a defined benefit plan or money
purchase plan, or a target benefit plan, stock bonus or profit sharing plan
which would otherwise provide for a life annuity form of payment to the
Participant.
ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities:
(a) Consistent with the "funding policy and method" determined by the
Employer to invest, manage, and control the Plan assets subject, however, to the
direction of an Investment Manager if the Employer should appoint such manager
as to all or a portion of the assets of the Plan;
(b) At the direction of the Administrator, to pay benefits required under
the Plan to be paid to Participants, or, in the event of their death, to their
Beneficiaries;
(c) To maintain records of receipts and disbursements and furnish to the
Employer and/or Administrator for each Plan Year a written annual report per
Section 7.7; and
(d) If there shall be more than one Trustee, they shall act by a majority
of their number, but may authorize one or more of them to sign papers on their
behalf.
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7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) The Trustee shall invest and reinvest the Trust Fund to keep the Trust
Fund invested without distinction between principal and income and in such
securities or property, real or personal, wherever situated, as the Trustee
shall deem advisable, including, but not limited to, group annuity contracts,
stocks, common or preferred, bonds and other evidences of indebtedness or
ownership, and real estate or any interest therein. The Trustee shall at all
times in making investments of the Trust Fund consider, among other factors, the
short and long-term financial needs of the Plan on the basis of information
furnished by the Employer. In making such investments, the Trustee shall not be
restricted to securities or other property of the character expressly authorized
by the applicable law for trust investments; however, the Trustee shall give due
regard to any limitations imposed by the Code or the Act so that at all times
this Plan may qualify as a qualified Plan and Trust.
(b) The Trustee may employ a bank or trust company pursuant to the terms of
its usual and customary bank agency agreement, under which the duties of such
bank or trust company shall be of a custodial, clerical and record-keeping
nature.
(c) The Trustee may from time to time transfer to a common, collective, or
pooled trust fund maintained by any corporate Trustee hereunder pursuant to
Revenue Ruling 81-100, all or such part of the Trust Fund as the Trustee may
deem advisable, and such part or all of the Trust Fund so transferred shall be
subject to all the terms and provisions of the common, collective, or pooled
trust fund which contemplate the commingling for investment purposes of such
trust assets with trust assets of other trusts. The Trustee may withdraw from
such common, collective, or pooled trust fund all or such part of the Trust Fund
as the Trustee may deem advisable.
(d) The Trustee, at the direction of the Administrator and pursuant to
instructions from the individual designated in the Adoption Agreement for such
purpose and subject to the conditions set forth in the Adoption Agreement, shall
ratably apply for, own, and pay all premiums on Contracts on the lives of the
Participants. Any initial or additional Contract purchased on behalf of a
Participant shall have a face amount of not less than $1,000, the amount set
forth in the Adoption Agreement, or the limitation of the Insurer, whichever is
greater. If a life insurance Contract is to be purchased for a Participant, the
aggregate premium for ordinary life insurance for each Participant must be less
than 50% of the aggregate contributions and Forfeitures allocated to a
Participant's Combined Account. For purposes of this limitation, ordinary life
insurance Contracts are Contracts with both non-decreasing death benefits and
non-increasing premiums. If term insurance or universal life insurance is
purchased with such contributions, the aggregate premium must be 25% or less of
the aggregate contributions and Forfeitures allocated to a Participant's
Combined Account. If both term insurance and ordinary life insurance are
purchased with such contributions, the amount expended for term insurance plus
one-half of the premium for ordinary life insurance may not in the aggregate
exceed 25% of the aggregate Employer contributions and Forfeitures allocated to
a Participant's Combined Account. The Trustee must distribute the Contracts to
the Participant or convert the entire value of the Contracts at or before
retirement into cash or provide for a periodic income so that no portion of such
value may be used to continue life insurance protection beyond retirement.
Notwithstanding the above, the limitations imposed herein with respect to the
purchase of life
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insurance shall not apply, in the case of a Profit Sharing Plan, to the portion
of a Participant's Account that has accumulated for at least two (2) Plan Years.
Notwithstanding anything hereinabove to the contrary, amounts credited to a
Participant's Qualified Voluntary Employee Contribution Account pursuant to
Section 4.14, shall not be applied to the purchase of life insurance contracts.
(e) The Trustee will be the owner of any life insurance Contract purchased
under the terms of this Plan. The Contract must provide that the proceeds will
be payable to the Trustee; however, the Trustee shall be required to pay over
all proceeds of the Contract to the Participant's designated Beneficiary in
accordance with the distribution provisions of Article VI. A Participant's
spouse will be the designated Beneficiary pursuant to Section 6.2, unless a
qualified election has been made in accordance with Sections 6.5 and 6.6 of the
Plan, if applicable. Under no circumstances shall the Trust retain any part of
the proceeds. However, the Trustee shall not pay the proceeds in a method that
would violate the requirements of the Retirement Equity Act, as stated in
Article VI of the Plan, or Code Section 401(a)(9) and the Regulations
thereunder.
(f) Notwithstanding anything in the Plan to the contrary, investments under
this Plan shall be limited to the products of, or must be purchased through, Pan
American Life Insurance Company, or any of its affiliates or subsidiaries.
7.3 OTHER POWERS OF THE TRUSTEE
The Trustee, in addition to all powers and authorities under common law,
statutory authority, including the Act, and other provisions of this Plan, shall
have the following powers and authorities to be exercised in the Trustee's sole
discretion:
(a) To purchase, or subscribe for, any securities or other property and to
retain the same. In conjunction with the purchase of securities, margin
accounts may be opened and maintained;
(b) To sell, exchange, convey., transfer, grant options to purchase, or
otherwise dispose of any securities or other property held by the Trustee, by
private contract or at public auction. No person dealing with the Trustee shall
be bound to see to the application of the purchase money or to inquire into the
validity, expediency, or propriety of any such sale or other disposition, with
or without advertisement;
(c) To vote upon any stocks, bonds, or other securities; to give general or
special proxies or powers of attorney with or without power of substitution; to
exercise any conversion privileges, subscription rights or other options, and to
make any payments incidental thereto; to oppose, or to consent to, or otherwise
participate in, corporate reorganizations or other changes affecting corporate
securities, and to delegate discretionary powers, and to pay any assessments or
charges in connection therewith; and generally to exercise any of the powers of
an owner with respect to stocks, bonds, securities, or other property;
(d) To cause any securities or other property to be registered in the
Trustee's own name or in the name of one or more of the Trustee's nominees, and
to hold any investments in
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bearer form, but the books and records of the Trustee shall at all times show
that all such investments are part of the Trust Fund;
(e) To borrow or raise money for the purposes of the Plan in such amount,
and upon such terms and conditions, as the Trustee shall deem advisable; and for
any sum so borrowed, to issue a promissory note as Trustee, and to secure the
repayment thereof by pledging all, or any part, of the Trust Fund; and no person
lending money to the Trustee shall be bound to see to the application of the
money lent or to inquire into the validity, expediency, or propriety of any
borrowing;
(f) To keep such portion of the Trust Fund in cash or cash balances as the
Trustee may, from time to time, deem to be in the best interests of the Plan,
without liability for interest thereon;
(g) To accept and retain for such time as the Trustee may deem advisable
any securities or other property received or acquired as Trustee hereunder,
whether or not such securities or other property would normally be purchased as
investments hereunder;
(h) To make, execute, acknowledge, and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be necessary
or appropriate to carry out the powers herein granted;
(i) To settle, compromise, or submit to arbitration any claims, debts, or
damages due or owing to or from the Plan, to commence or defend suits or legal
or administrative proceedings, and to represent the Plan in all suits and legal
and administrative proceedings;
(j) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation, and such agent or counsel may or may not be agent or
counsel for the Employer;
(k) To apply for and procure from the Insurer as an investment of the Trust
Fund such annuity, or other Contracts (on the life of any Participant) as the
Administrator shall deem proper; to exercise, at any time or from time to time,
whatever rights and privileges may be granted under such annuity, or other
Contracts; to collect, receive, and settle for the proceeds of all such annuity,
or other Contracts as and when entitled to do so under the provisions thereof;
(l) To invest funds of the Trust in time deposits or savings accounts
bearing a reasonable rate of interest in the Trustee's bank;
(m) To invest in Treasury Bills and other forms of United States government
obligations;
(n) To sell, purchase and acquire put or call options if the options are
traded on and purchased through a national securities exchange registered under
the Securities Exchange Act of 1934, as amended, or, if the options are not
traded on a national securities exchange, are guaranteed by a member firm of the
New York Stock Exchange;
(o) To deposit monies in federally insured savings accounts or certificates
of deposit in banks or savings and loan associations;
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(p) To pool all or any of the Trust Fund, from time to time, with assets
belonging to any other qualified employee pension benefit trust created by the
Employer or any Affiliated Employer, and to commingle such assets and make joint
or common investments and carry joint accounts on behalf of this Plan and such
other trust or trusts, allocating undivided shares or interests in such
investments or accounts or any pooled assets of the two or more trusts in
accordance with their respective interests;
(q) To do all such acts and exercise all such rights and privileges,
although not specifically mentioned herein, as the Trustee may deem necessary to
carry out the purposes of the Plan.
(r) Directed Investment Account. The powers granted to the Trustee shall
be exercised in the sole fiduciary discretion of the Trustee. However, if
elected in the Adoption Agreement, each Participant may direct the Trustee to
separate and keep separate all or a portion of his interest in the Plan; and
further each Participant is authorized and empowered, in his sole and absolute
discretion, to give directions to the Trustee in such form as the Trustee may
require concerning the investment of the Participant's Directed Investment
Account, which directions must be followed by the Trustee subject, however, to
restrictions on payment of life insurance premiums. Neither the Trustee nor any
other persons including the Administrator or otherwise shall be under any duty
to question any such direction of the Participant or to review any securities or
other property, real or personal, or to make any suggestions to the Participant
in connection therewith, and the Trustee shall comply as promptly as practicable
with directions given by the Participant hereunder. Any such direction may be
of a continuing nature or otherwise and may be revoked by the Participant at any
time in such form as the Trustee may require. The Trustee may refuse to comply
with any direction from the Participant in the event the Trustee, in its sole
and absolute discretion, deems such directions improper by virtue of applicable
law, and in such event, the Trustee shall not be responsible or liable for any
loss or expense which may result. Any costs and expenses related to compliance
with the Participant's directions shall be borne by the Participant's Directed
Investment Account.
Notwithstanding anything hereinabove to the contrary, the Trustee shall
not, at any time after December 31, 1981, invest any portion of a Directed
Investment Account in "collectibles" within the meaning of that term as employed
in Code Section 408(m).
7.4 LOANS TO PARTICIPANTS
(a) If specified in the Adoption Agreement, the Trustee may, in the
Trustee's sole discretion, make loans to Participants or Beneficiaries under the
following circumstances: (1) loans shall be made available to all Participants
and Beneficiaries on a reasonably equivalent basis; (2) loans shall not be made
available to Highly Compensated Employees in an amount greater than the amount
made available to other Participants; (3) loans shall bear a reasonable rate of
interest; (4) loans shall be adequately secured; and (5) shall provide for
periodic repayment over a reasonable period of time.
(b) Loans shall not be made to any Shareholder-Employee or Owner-Employee
unless an exemption for such loan is obtained pursuant to Act Section 408 and
further provided that such loan would not be subject to tax pursuant to Code
Section 4975.
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(c) Loans shall not be granted to any Participant that provide for a
repayment period extending beyond such Participant's Normal Retirement Date.
(d) Loans made pursuant to this Section (when added to the outstanding
balance of all other loans made by the Plan to the Participant) shall be limited
to the lesser of:
(1) $50,000 reduced by the excess (if any) of the highest outstanding
balance of loans from the Plan to the Participant during the one year period
ending on the day before the date on which such loan is made, over the
outstanding balance of loans from the Plan to the Participant on the date on
which such loan was made, or
(2) one-half (1/2) of the present value of the non-forfeitable accrued
benefit of the Employee under the Plan.
For purposes of this limit, all plans of the Employer shall be
considered one plan. Additionally, with respect to any loan made prior to
January 1, 1987, the $50,000 limit specified in (1) above shall be unreduced.
(e) No Participant loan shall take into account the present value of such
Participant's Qualified Voluntary Employee Contribution Account.
(f) Loans shall provide for level amortization with payments to be made by
active Participants through approximately equal payroll deductions not less
frequent than quarterly over a period not to exceed five (5) year However, loans
used to acquire any dwelling unit which, within a reasonable time, is to be used
(determined at the time the loan is made) as a principal residence of the
Participant shall provide for periodic repayment over a reasonable period of
time that may exceed five (5) years. Notwithstanding the foregoing, loans made
prior to January 1, 1987 which are used to acquire, construct, reconstruct or
substantially rehabilitate any dwelling unit which, within a reasonable period
of time is to be used (determined at the time the loan is made) as a principal
residence of the Participant or a member of his family (within the meaning of
Code Section 267(c)(4)) may provide for periodic repayment over a reasonable
period of time that may exceed five (5) years. Additionally, loans made prior
to January 1, 1987, may provide for periodic payments which are made less
frequently than quarterly and which do not necessarily result in level
amortization.
(g) An assignment or pledge of any portion of a Participant's interest in
the Plan and a loan, pledge, or assignment with respect to any insurance
Contract purchased under the Plan, shall be treated as a loan under this
Section.
(h) Any loan made pursuant to this Section after August 18, 1985 where the
Vested interest of the Participant is used to secure such loan shall require the
written consent of the Participant's spouse in a manner consistent with Section
6.5(a) provided the spousal consent requirements of such Section apply to the
Plan. Such written consent must be obtained within the 90-day period prior to
the date the loan is made. Any security interest held by the Plan by reason of
an outstanding loan to the Participant shall be taken into account in
determining the amount of the death benefit or Pre-Retirement Survivor Annuity.
However, no spousal consent shall be required under this paragraph if the total
accrued benefit subject to the security is not in excess of $3,500.
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(i) with regard to any loans granted or renewed on or after the last day of
the first Plan Year beginning after December 31, 1988, a Participant loan
program shall be established which must include, but need not be limited to, the
following:
(1) the identity of the person or positions authorized to administer
the Participant loan program;
(2) a procedure for applying for loans;
(3) the basis on which loans will be approved or denied;
(4) limitations, if any, on the types and amounts of loans offered,
including what constitutes a hardship or financial need if selected in the
Adoption Agreement;
(5) the procedure under the program for determining a reasonable rate
of interest;
(6) the types of collateral which may secure a Participant loan; and
(7) the events constituting default and the steps that will be taken
to preserve plan assets.
Such Participant loan program shall be contained in a separate written
document which, when properly executed, is hereby incorporated by reference and
made a part of this plan. Furthermore, such Participant loan program may be
modified or amended in writing from time to time without the necessity of
amending this Section of the Plan.
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS
At the direction of the Administrator, the Trustee shall, from time to
time, in accordance with the terms of the Plan, make payments out of the Trust
Fund. The Trustee shall not be responsible in any way for the application of
such payments.
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as set forth in the
Trustee's fee schedule (if the Trustee has such a schedule) or as agreed upon in
writing by the Employer and the Trustee. An individual serving as Trustee who
already receives full-time pay from the Employer shall not receive compensation
from this Plan. In addition, the Trustee shall be reimbursed for any reasonable
expenses, including reasonable counsel fees incurred by it as Trustee. Such
compensation and expenses shall be paid from the Trust Fund unless paid or
advanced by the Employer. All taxes of any kind and all kinds whatsoever that
may be levied or assessed under existing or future laws upon, or in respect of,
the Trust Fund or the income thereof, shall be paid from the Trust Fund.
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7.7 ANNUAL REPORT OF THE TRUSTEE
Within a reasonable period of time after the later of the Anniversary Date
or receipt of the Employer's contribution for each Plan Year, the Trustee, or
its agent, shall furnish to the Employer and Administrator a written statement
of account with respect to the Plan Year for which such contribution was made
setting forth:
(a) the net income, or loss, of the Trust Fund;
(b) the gains, or losses, realized by the Trust Fund upon sales or other
disposition of the assets;
(c) the increase, or decrease, in the value of the Trust Fund;
(d) all payments and distributions made from the Trust Fund; and
(e) such further information as the Trustee and/or Administrator deems
appropriate. The Employer, forthwith upon its receipt of each such statement of
account, shall acknowledge receipt thereof in writing and advise the Trustee
and/or Administrator of its approval or disapproval thereof. Failure by the
Employer to disapprove any such statement of account within thirty (30) days
after its receipt thereof shall be deemed an approval thereof. The approval by
the Employer of any statement of account shall be binding as to all matters
embraced therein as between the Employer and the Trustee to the same extent as
if the account of the Trustee had been settled by judgment or decree in an
action for a judicial settlement of its account in a court of competent
jurisdiction in which the Trustee, the Employer and all persons having or
claiming an interest in the Plan were parties; provided, however, that nothing
herein contained shall deprive the Trustee of its right to have its accounts
judicially settled if the Trustee so desires.
7.8 AUDIT
(a) If an audit of the Plan's records shall be required by the Act and the
regulations thereunder for any Plan Year, the Administrator shall direct the
Trustee to engage on behalf of all Participants an independent qualified public
accountant for that purpose. Such accountant shall, after an audit of the books
and records of the Plan in accordance with generally accepted auditing
standards, within a reasonable period after the close of the Plan Year, furnish
to the Administrator and the Trustee a report of his audit setting forth his
opinion as to whether any statements, schedules or lists, that are required by
Act Section 103 or the Secretary of Labor to be filed with the Plan's annual
report, are presented fairly in conformity with generally accepted accounting
principles applied consistently.
(b) All auditing and accounting fees shall be an expense of and may, at the
election of the Administrator, be paid from the Trust Fund.
(c) If some or all of the information necessary to enable the Administrator
to comply with Act Section 103 is maintained by a bank, insurance company, or
similar institution, regulated and supervised and subject to periodic
examination by a state or federal agency, it shall transmit and certify the
accuracy of that information to the Administrator as provided in Act
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Section 103(b) within one hundred twenty (120) days after the end of the Plan
Year or such other date as may be prescribed under regulations of the Secretary
of Labor.
7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
(a) The Trustee may resign at any time by delivering to the Employer, at
least thirty (30) days before its effective date, a written notice of his
resignation.
(b) The Employer may remove the Trustee by mailing by registered or
certified mail, addressed to such Trustee at his last known address, at least
thirty (30) days before its effective date, a written notice of his removal.
(c) Upon the death, resignation, incapacity, or removal of any Trustee, a
successor may be appointed by the Employer; and such successor, upon accepting
such appointment in writing and delivering same to the Employer, shall, without
further act, become vested with all the estate, rights, powers, discretions, and
duties of his predecessor with like respect as if he were originally named as a
Trustee herein. Until such a successor is appointed, the remaining Trustee or
Trustees shall have full authority to act under the terms of the Plan.
(d) The Employer may designate one or more successors prior to the death,
resignation, incapacity, or removal of a Trustee. In the event a successor is
so designated by the Employer and accepts such designation, the successor shall,
without further act, become vested with all the estate, rights, powers,
discretions, and duties of his predecessor with the like effect as if he were
originally named as Trustee herein immediately upon the death, resignation,
incapacity, or removal of his predecessor.
(e) Whenever any Trustee hereunder ceases to serve as such, he shall
furnish to the Employer and Administrator a written statement of account with
respect to the portion of the Plan Year during which he served as Trustee. This
statement shall be either (i) included as part of the annual statement of
account for the Plan Year required under Section 7.7 or (ii) set forth in a
special statement. Any such special statement of account should be rendered to
the Employer no later than the due date of the annual statement of account for
the Plan Year. The procedures set forth in Section 7.7 for the approval by the
Employer of annual statements of account shall apply to any special statement of
account rendered hereunder and approval by the Employer of any such special
statement in the manner provided in Section 7.7 shall have the same effect upon
the statement as the Employer's approval of an annual statement of account. No
successor to the Trustee shall have any duty or responsibility to investigate
the acts or transactions of any predecessor who has rendered all statements of
account required by Section 7.7 and this subparagraph.
7.10 TRANSFER OF INTEREST
Notwithstanding any other provision contained in this Plan, the Trustee at
the direction of the Administrator shall transfer the Vested interest, if any,
of such Participant in his account to another trust forming part of a pension,
profit sharing, or stock bonus plan maintained by such Participant's new
employer and represented by said employer in writing as meeting the requirements
of Code Section 401(a), provided that the trust to which such transfers are made
permits the transfer to be made. Additionally, the Trustee shall in his sole
discretion accept any
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transfer to the Plan provided he can reasonably assured that the transfer has
been made from a qualified plan.
7.11 TRUSTEE INDEMNIFICATION
The Employer agrees to indemnify and save harmless the Trustee against any
and all claims, losses, damages, expenses and liabilities the Trustee may incur
in the exercise and performance of the Trustee's powers and duties hereunder,
unless the same are determined to be due to gross negligence or willful
misconduct.
7.12 EMPLOYER SECURITIES AND REAL PROPERTY
The Trustee shall be empowered to acquire and hold "qualifying Employer
securities" and "qualifying Employer real property," as those terms are defined
in the Act. However, no more than 100% of the fair market value of all the
assets in the Trust Fund may be invested in "qualifying Employer securities" and
"qualifying Employer real property."
ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
8.1 AMENDMENT
(a) The Employer shall have the right at any time to amend this Plan
subject to the limitations of this Section. However, any amendment which
affects the rights, duties or responsibilities of the Trustee and Administrator
may only be made with the Trustee's and Administrator's written consent. Any
such amendment shall become effective as provided therein upon its execution.
The Trustee shall not be required to execute any such amendment unless the
amendment affects the duties of the Trustee hereunder.
(b) The Employer may (1) change the choice of options in the Adoption
Agreement, (2) add overriding language in the Adoption Agreement when such
language is necessary to satisfy Code Sections 415 or 416 because of the
required aggregation of multiple plans, and (3) add certain model amendments
published by the Internal Revenue Service which specifically provide that their
adoption will not cause the Plan to be treated as an individually designed plan.
An Employer that amends the Plan for any other reason, including a waiver of the
minimum funding requirement under Code Section 412(d), will no longer
participate in this Prototype Plan and will be considered to have an
individually designed plan.
(c) The Employer expressly delegates authority to the sponsoring
organization of this Plan, the right to amend this Plan by submitting a copy of
the amendment to each Employer who has adopted this Plan after first having
received a ruling or favorable determination from the Internal Revenue Service
that the Plan as amended qualifies under Code Section 401(a) and the Act. For
purposes of this Section, the mass submitter shall be recognized as the agent of
the sponsoring organization. If the sponsoring organization does not adopt the
amendments made by the mass submitter, it will no longer be identical to or a
minor modifier of the mass submitter plan.
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(d) No amendment to the Plan shall be effective if it authorizes or permits
any part of the Trust Fund (other than such part as is required to pay taxes and
administration expenses) to be used for or diverted to any purpose other than
for the exclusive benefit of the Participants or their Beneficiaries or estates;
or causes any reduction in the amount credited to the account of any
Participant; or causes or permits any portion of the Trust Fund to revert to or
become property of the Employer.
(e) Except as permitted by Regulations (including Regulation 1.411(d)-4),
no Plan amendment or transaction having the effect of a Plan amendment (such as
a merger, plan transfer or similar transaction) shall be effective if it
eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or
modifies conditions relating to "Section 411(d)(6) protected benefits" the
result of which is a further restriction on such benefit unless such protected
benefits are preserved with respect to benefits accrued as of the later of the
adoption date or effective date of the amendment. "Section 411(d)(6) protected
benefits" are benefits described in Code Section 411(d)(6)(A), early retirement
benefits and retirement-type subsidies, and optional forms of benefit.
8.2 TERMINATION
(a) The Employer shall have the right at any time to terminate the Plan by
delivering to the Trustee and Administrator written notice of such termination.
Upon any full or partial termination all amounts credited to the affected
Participants' Combined Accounts shall become 100% Vested and shall not
thereafter be subject to forfeiture, and all unallocated amounts shall be
allocated to the accounts of all Participants in accordance with the provisions
hereof.
(b) Upon the full termination of the Plan, the Employer shall direct the
distribution of the assets to Participants in a manner which is consistent with
and satisfies the provisions of Section 6.5. Distributions to a Participant
shall be made in cash (or in property if permitted in the Adoption Agreement) or
through the purchase of irrevocable nontransferable deferred commitments from
the Insurer. Except as permitted by Regulations, the termination of the Plan
shall not result in the reduction of "Section 411(d)(6) protected benefits" as
described in Section 8.1.
8.3 MERGER OR CONSOLIDATION
This Plan may be merged or consolidated with, or its assets and/or
liabilities may be transferred to any other plan only if the benefits which
would be received by a Participant of this Plan, in the event of a termination
of the plan immediately after such transfer, merger or consolidation, are at
least equal to the benefits the Participant would have received if the Plan had
terminated immediately before the transfer, merger or consolidation and such
merger or consolidation does not otherwise result in the elimination or
reduction of any "Section 411(d)(6) protected benefits" as described in Section
8.1(e).
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ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS
(a) Any organization may become the Employer hereunder by executing the
Adoption Agreement in form satisfactory to the Trustee, and it shall provide
such additional information as the Trustee may require. The consent of the
Trustee to act as such shall be signified by its execution of the Adoption
Agreement.
(b) Except as otherwise provided in this Plan, the affiliation of the
Employer and the participation of its Participants shall be separate and apart
from that of any other employer and its participants hereunder.
9.2 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the Employer
and any Participant or to be a consideration or an inducement for the employment
of any Participant or Employee. Nothing contained in this Plan shall be deemed
to give any Participant or Employee the right to be retained in the service of
the Employer or to interfere with the right of the Employer to discharge any
Participant or Employee at any time regardless of the effect which such
discharge shall have upon him as a Participant of this Plan.
9.3 ALIENATION
(a) Subject to the exceptions provided below, no benefit which shall be
payable to any person (including a Participant or his Beneficiary) shall be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge the same shall be void; and no
such benefit shall in any manner be liable for, or subject to, the debts,
contracts, liabilities, engagements, or torts of any such person, nor shall it
be subject to attachment or legal process for or against such person, and the
same shall not be recognized except to such extent as may be required by law.
(b) This provision shall not apply to the extent a Participant or
Beneficiary is indebted to the Plan, for any reason, under any provision of this
Plan. At the time a distribution is to be made to or for a Participant's or
Beneficiary's benefit, such proportion of the amount to be distributed as shall
equal such indebtedness shall be paid to the Plan, to apply against or discharge
such indebtedness. Prior to making a payment, however, the Participant or
Beneficiary must be given written notice by the Administrator that such
indebtedness is to be so paid in whole or part from his Participant's Combined
Account. If the Participant or Beneficiary does not agree that the indebtedness
is a valid claim against his Vested Participant's Combined Account, he shall be
entitled to a review of the validity of the claim in accordance with procedures
provided in Sections 2.12 and 2.13.
(c) This provision shall not apply to a "qualified domestic relations
order" defined in Code Section 414(p), and those other domestic relations orders
permitted to be so treated by the Administrator under the provisions of the
Retirement Equity Act of 1984. The Administrator
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shall establish a written procedure to determine the qualified status of
domestic relations orders and to administer distributions under such qualified
orders. Further, to the extent provided under a "qualified domestic relations
order," a former spouse of a Participant shall be treated as the spouse or
surviving spouse for all purposes under the Plan.
9.4 CONSTRUCTION OF PLAN
This Plan and Trust shall be construed and enforced according to the Act
and the laws of the State or Commonwealth in which the Employer's principal
office is located, other than its laws respecting choice of law, to the extent
not pre-empted by the Act.
9.5 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply, and whenever any words are used herein
in the singular or plural form, they shall be construed as though they were also
used in the other form in all cases where they would so apply.
9.6 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the Trust
and/or Plan established hereunder to which the Trustee or the Administrator may
be a party, and such claim, suit, or proceeding is resolved in favor of the
Trustee or Administrator, they shall be entitled to be reimbursed from the Trust
Fund for any and all costs, attorney's fees, and other expenses pertaining
thereto incurred by them for which they shall have become liable.
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically permitted by law,
it shall be impossible by operation of the Plan or of the Trust, by termination
of either, by power of revocation or amendment, by the happening of any
contingency, by collateral arrangement or by any other means, for any part of
the corpus or income of any Trust Fund maintained pursuant to the Plan or any
funds contributed thereto to be used for, or diverted to, purposes other than
the exclusive benefit of Participants, Retired Participants, or their
Beneficiaries.
(b) In the event the Employer shall make a contribution under a mistake of
fact pursuant to Section 403(c)(2)(A) of the Act, the Employer may demand
repayment of such contribution at any time within one (1) year following the
time of payment and the Trustees shall return such amount to the Employer within
the one (1) year period. Earnings of the Plan attributable to the contributions
may not be returned to the Employer but any losses attributable thereto must
reduce the amount so returned.
9.8 BONDING
Every Fiduciary, except a bank or an insurance company, unless exempted by
the Act and regulations thereunder, shall be bonded in an amount not less than
10% of the amount of the funds such Fiduciary handles; provided, however, that
the minimum bond shall be $1,000 and
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the maximum bond, $500,000. The amount of funds handled shall be determined at
the beginning of each Plan Year by the amount of funds handled by such person,
group, or class to be covered and their predecessors, if any, during the
preceding Plan Year, or if there is no preceding Plan Year, then by the amount
of the funds to be handled during the then current year. The bond shall provide
protection to the Plan against any loss by reason of acts of fraud or dishonesty
by the Fiduciary alone or in connivance with others. The surety shall be a
corporate surety company (as such term is used in Act Section 412(a)(2)), and
the bond shall be in a form approved by the Secretary of Labor. Notwithstanding
anything in the Plan to the contrary, the cost of such bonds shall be an expense
of and may, at the election of the Administrator, be paid from the Trust Fund or
by the Employer.
9.9 INSURER'S PROTECTIVE CLAUSE
The Insurer who shall issue Contracts hereunder shall not have any
responsibility for the validity of this Plan or for the tax or legal aspects of
this Plan. The Insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty to
see to the application of any funds paid to the Trustee, nor be required to
question any actions directed by the Trustee. Regardless of any provision of
this Plan, the Insurer shall not be required to take or permit any action or
allow any benefit or privilege contrary to the terms of any Contract which it
issues hereunder, or the rules of the Insurer.
9.10 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary, or
to any guardian or committee appointed for such Participant or Beneficiary in
accordance with the provisions of this Plan, shall, to the extent thereof, be in
full satisfaction of all claims hereunder against the Trustee and the Employer.
9.11 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or required
to do or perform any act or matter or thing, it shall be done and performed by a
person duly authorized by its legally constituted authority.
9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (1) the Employer, (2) the
Administrator, (3) the Trustee, and (4) any Investment Manager appointed
hereunder. The named Fiduciaries shall have only those specific powers, duties,
responsibilities, and obligations as are specifically given them under the Plan.
In general, the Employer shall have the sole responsibility for making the
contributions provided for under Section 4.1; and shall have the sole authority
to appoint and remove the Trustee and the Administrator; to formulate the Plan's
"funding policy and method"; and to amend the elective provisions of the
Adoption Agreement or terminate, in whole or in part, the Plan. The
Administrator shall have the sole responsibility for the administration of the
Plan, which responsibility is specifically described in the Plan. The Trustee
shall have the sole responsibility of management of the assets held under the
Trust, except those assets, the management of which has been assigned to an
Investment Manager, who shall be solely responsible for the management of the
assets assigned to it, all as specifically provided in the
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Plan. Each named Fiduciary warrants that any directions given, information
furnished, or action taken by it shall be in accordance with the provisions of
the Plan, authorizing or providing for such direction, information or action.
Furthermore, each named Fiduciary may rely upon any such direction, information
or action of another named Fiduciary as being proper under the Plan, and is not
required under the Plan to inquire into the propriety of any such direction,
information or action. It is intended under the Plan that each named Fiduciary
shall be responsible for the proper exercise of its own powers, duties,
responsibilities and obligations under the Plan. No named Fiduciary shall
guarantee the Trust Fund in any manner against investment loss or depreciation
in asset value. Any person or group may serve in more than one Fiduciary
capacity.
9.13 HEADINGS
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
9.14 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary, if, pursuant to a
timely application filed by or in behalf of the Plan, the Commissioner of
internal Revenue Service or his delegate should determine that the Plan does not
initially qualify as a tax-exempt plan under Code Sections 401 and 501, and such
determination is not contested, or if contested, is finally upheld, then if the
Plan is a new plan, it shall be void ab initio and all amounts contributed to
the Plan, by the Employer, less expenses paid, shall be returned within one year
and the Plan shall terminate, and the Trustee shall be discharged from all
further obligations. If the disqualification relates to an amended plan, then
the Plan shall operate as if it had not been amended and restated.
(b) Notwithstanding any provisions to the contrary, except Sections 3.5,
3.6, and 4.1(f), any contribution by the Employer to the Trust Fund is
conditioned upon the deductibility of the contribution by the Employer under the
Code and, to the extent any such deduction is disallowed, the Employer may
within one (1) year following the disallowance of the deduction, demand
repayment of such disallowed contribution and the Trustee shall return such
contribution within one (1) year following the disallowance. Earnings of the
Plan attributable to the excess contribution may not be returned to the
Employer, but any losses attributable thereto must reduce the amount so
returned.
(c) If an Employer's Plan fails to attain or retain qualification, then
such Plan will no longer participate in this Prototype Plan and will be
considered an individually designed plan.
9.15 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a uniform,
nondiscriminatory manner.
9.16 PAYMENT OF BENEFITS
Benefits under this Plan shall be paid, subject to Section 6.10 and Section
6.11 only upon death, Total and Permanent Disability, normal or early
retirement, termination of employment, or upon Plan Termination.
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ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER
Notwithstanding anything herein to the contrary, with the consent of the
Employer and Trustee, any Affiliated Employer may adopt this Plan and all of the
provisions hereof, and participate herein and be known as a Participating
Employer, by a properly executed document evidencing said intent and will of
such Participating Employer.
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS
(a) Each Participating Employer shall be required to select the same
Adoption Agreement provisions as those selected by the Employer other than the
Plan Year, the Fiscal Year, and such other items that must, by necessity, vary
among employers.
(b) Each such Participating Employer shall be required to use the same
Trustee as provided in this Plan.
(c) The Trustee may, but shall not be required to, commingle, hold and
invest as one Trust Fund all contributions made by Participating Employers, as
well as all increments thereof.
(d) The transfer of any Participant from or to an Employer participating
in this Plan, whether he be an Employee of the Employer or a Participating
Employer, shall not affect such Participant's rights under the Plan, and all
amounts credited to such Participant's Combined Account as well as his
accumulated service time with the transferor or predecessor, and his length of
participation in the Plan, shall continue to his credit.
(e) Any expenses of the Plan which are to be paid by the Employer or borne
by the Trust Fund shall be paid by each Participating Employer in the same
proportion that the total amount standing to the credit of all Participants
employed by such Employer bears to the total standing to the credit of all
Participants.
10.3 DESIGNATION OF AGENT
Each Participating Employer shall be deemed to be a part of this Plan;
provided, however, that with respect to all of its relations with the Trustee
and Administrator for the purpose of this Plan, each Participating Employer
shall be deemed to have designated irrevocably the Employer as its agent.
Unless the context of the Plan clearly indicates the contrary, the word
"Employer" shall be deemed to include each Participating Employer as related to
its adoption of the Plan.
10.4 EMPLOYEE TRANSFERS
It is anticipated that an Employee may be transferred between Participating
Employers, and in the event of any such transfer, the Employee involved shall
carry with him his accumulated service and eligibility. No such transfer shall
effect a termination of employment hereunder, and the Participating Employer to
which the Employee is transferred shall thereupon
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become obligated hereunder with respect to such Employee in the same manner as
was the Participating Employer from whom the Employee was transferred.
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES
Any contribution or Forfeiture subject to allocation during each Plan Year
shall be allocated among all Participants of all Participating Employers in
accordance with the provisions of this Plan. On the basis of the information
furnished by the Administrator, the Trustee shall keep separate books and
records concerning the affairs of each Participating Employer hereunder and as
to the accounts and credits of the Employees of each Participating Employer.
The Trustee may, but need not, register Contracts so as to evidence that a
particular Participating Employer is the interested Employer hereunder, but in
the event of an Employee transfer from one Participating Employer to another,
the employing Employer shall immediately notify the Trustee thereof.
10.6 AMENDMENT
Amendment of this Plan by the Employer at any time when there shall be a
Participating Employer hereunder shall only be by the written action of each and
every Participating Employer and with the consent of the Trustee where such
consent is necessary in accordance with the terms of this Plan.
10.7 DISCONTINUANCE OF PARTICIPATION
Except in the case of a Standardized Plan, any Participating Employer shall
be permitted to discontinue or revoke its participation in the Plan at any time.
At the time of any such discontinuance or revocation, satisfactory evidence
thereof and of any applicable conditions imposed shall be delivered to the
Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts
and other Trust Fund assets allocable to the Participants of such Participating
Employer to such new Trustee as shall have been designated by such Participating
Employer, in the event that it has established a separate pension plan for its
Employees provided, however, that no such transfer shall be made if the result
is the elimination or reduction of any "Section 411(d)(6) protected benefits" in
accordance with Section 8.1(e). If no successor is designated, the Trustee
shall retain such assets for the Employees of said Participating Employer
pursuant to the provisions of Article VII hereof. In no such event shall any
part of the corpus or income of the Trust Fund as it relates to such
Participating Employer be used for or diverted for purposes other than for the
exclusive benefit of the Employees of such Participating Employer.
10.8 ADMINISTRATOR'S AUTHORITY
The Administrator shall have authority to make any and all necessary rules
or regulations, binding upon all Participating Employers and all Participants,
to effectuate the purpose of this Article.
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE
If any Participating Employer is prevented in whole or in part from making
a contribution which it would otherwise have made under the Plan by reason of
having no current or
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accumulated earnings or profits, or because such earnings or profits are less
than the contribution which it would otherwise have made, then, pursuant to Code
Section 404(a)(3)(B), so much of the contribution which such Participating
Employer was so prevented from making may be made, for the benefit of the
participating employees of such Participating Employer, by other Participating
Employers who are members of the same affiliated group within the meaning of
Code Section 1504 to the extent of their current or accumulated earnings or
profits, except that such contribution by each such other Participating Employer
shall be limited to the proportion of its total current and accumulated earnings
or profits remaining after adjustment for its contribution to the Plan made
without regard to this paragraph which the total prevented contribution bears to
the total current and accumulated earnings or profits of all the Participating
Employers remaining after adjustment for all contributions made to the Plan
without regard to this paragraph.
A Participating Employer on behalf of whose employees a contribution is
made under this paragraph shall not be required to reimburse the contributing
Participating Employers.
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THE ATTACHED PLAN DOCUMENT SHOULD BE REVIEWED
BY THE EMPLOYER'S LEGAL COUNSEL
<PAGE>
EXHIBIT 10.06
OFFER LETTER
Mark Jung
600 Wallea Drive
Menlo Park, CA 94025
Re: Employment Terms
Dear Mr. Jung:
The Board of Directors of Affiliation, Inc. is pleased to offer you the position
of President and Chief Executive Officer of the Company and Member of the Board
of Directors, on the following terms.
You will report directly to the Board of Directors. You will work at our
facility located at 150 North Hill Drive, Brisbane, California.
Your compensation will be two hundred fifty thousand ($250,000.00) per annum,
less payroll deductions and all required withholdings. You will be paid bi-
weekly and you will be eligible for the following executive Company benefits:
medical insurance, vacation, sick leave, and holidays. Details about these
benefit plans are available for your review. Affiliation, Inc. may modify
compensation and benefits from time to time as it deems necessary.
In connection with the commencement of your employment, the Company will sell to
you one million three hundred eighteen thousand six hundred eighty-one
(1,318,681) shares of the Company's Common Stock at a price of seven cents
($.07) per share, subject to a right of repurchase that shall expire ratably
over four years. If your employment with the Company is terminated other than
for Cause or if you resign for Good Reason (as Cause and Good Reason are defined
in your Founder Stock Purchase Agreement dated February 1, 1999), fifty percent
(50%) of the portion of the shares subject to the right of repurchase shall
cease to be subject to that right of repurchase. If there has not been an
Acquisition, Asset Transfer, or Qualified IPO (as those terms are defined in the
Company's Charter as of the date hereof) the Company will repurchase any or all
of the shares, at your option, on or after the fourth anniversary of your
acceptance of this agreement, at a per share price as determined by (i) mutual
agreement; or if the parties cannot reach agreement, (ii) by averaging the
valuations of one independent valuation service selected by you and one
independent valuation service selected by the Company. In the event that the
lower of the two valuations shall be less than eighty percent (80%) of the
larger of the two valuations, a third valuation service shall be mutually agreed
upon by the two chosen valuation services, and the valuation of that mutually
agreed upon valuation service shall be binding on the parties, so long as that
valuation falls between the valuations of the two initial valuation services. In
the event that the third valuation is below the lower of the two initial
valuations, then the lower initial valuation shall be binding on the parties. In
the event that the third valuation is above the higher of the two initial
valuations, then the higher initial valuation shall be binding on the parties.
The Company will pay for such repurchased shares immediately in cash and/or
cancellation of indebtedness, so long as the total amount payable to you does
not
<PAGE>
exceed five million dollars ($5,000,000). If the total amount payable to you
exceeds five million dollars ($5,000,000), then five million dollars
($5,000,000) shall be paid immediately, and any excess over five million dollars
($5,000,000) (the "Excess Amount") shall be paid in three (3) annual
installments, as follows:
One (1) year from date of exercise...... 1/3 of the Excess Amount
Two (2) years from date of exercise..... 1/3 of the Excess Amount
Three (3) years from date of exercise... 1/3 of the Excess Amount
In addition, all accrued and unpaid interest will be paid at each payment date.
Interest shall be calculated by multiplying the unpaid Excess Amount by the
prime rate minus seventy-five hundredths of one percent (0.75%), both measured
as of the option date or the first business day following the most recent
scheduled payment date, whichever is more recent.
The Company will accept as payment for the Common Stock a note for the entire
purchase price, provided that the note shall be collateralized by the shares,
which shares shall cease to be collateral as the note is repaid or forgiven. The
Board of Directors will forgive the principal amount of the note as the stock
vests and is released from the repurchase option (including any acceleration of
vesting upon termination without Cause or resignation for Good Reason) beginning
as of February 1, 1999, provided that you remain in the employment of the
Company. The Board of Directors will forgive the entire outstanding amount of
the note in the event of a merger, initial public offering or sale of all or
substantially all of the assets of the Company. The Board of Directors will
forgive all accrued interest on the note monthly.
As a Affiliation, Inc. employee, you will be expected to abide by Company rules
and regulations, acknowledge in writing that you have read the Company's
Employee Handbook, and sign and comply with the attached Proprietary Information
and Inventions Agreement which prohibits unauthorized use or disclosure of
Affiliation, Inc. proprietary information.
You may terminate your employment with the Company at any time and for any
reason whatsoever with or without good reason simply by notifying the Company.
Likewise, the Company may terminate your employment at any time and for any
reason whatsoever, with or without cause or advance notice. This at-will
employment relationship cannot be changed except in a writing signed by a
Company officer.
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written. As required by law, this offer
is subject to satisfactory proof of your right to work in the United States.
Please sign and date this letter, and return it to me by January 31, 1999, if
you wish to accept employment at Affiliation, Inc. under the terms described
above. If you accept our offer, we would like you to start on February 1, 1999.
<PAGE>
We look forward to your favorable reply and to a productive and enjoyable work
relationship.
Sincerely,
/s/ Chris Anderson
- -------------------------------------
Affiliation, Inc.
By Chris Anderson
ACCEPTED:
/s/ Mark Jung
- -------------------------------------
Mark Jung
February 1, 1999
- -------------------------------------
Date
<PAGE>
EXHIBIT 10.07
January 18, 1999
Janette Chock
4407 Macbeth Circle
Fremont, CA 94555
Dear Janette:
I am pleased to present you with an offer to join Affiliation, Inc. on February
1, 1999 as Controller. You will report to the Chief Executive Officer.
Your compensation package is as follows:
Base Salary: $120,000 per year, less payroll deductions and all required
withholdings, to be reviewed in six months in July (7/31).
Stock Options: Upon hire, and subject to Board approval, you will be granted an
option to purchase 66,000 shares of the Company's Common Stock
with an exercise price of the fair market value on the date of
the grant. The option shares will vest at the rate of 1/8 at the
end of your first six months of employment and thereafter at the
rate of 1/48 per month. Vesting depends on your continued
employment with the Company. The option will be an incentive
stock option to the maximum extent allowed by the tax code and
will be subject to the terms of the Company's Stock Plan and the
Stock Option Agreement between you and the Company. We will give
you further details of the plan upon your acceptance of this
offer.
The Company also offers comprehensive benefits including medical, dental and
vision coverage for you and your eligible dependents. In addition, we will
provide $50,000 in life insurance, short and long term disability plans,
vacation and sick pay and paid holidays.
On the first day of hire, please bring evidence of your U.S. citizenship or
proof of your legal right to work in the U.S. (We are required by federal law
to examine documentation of your employment eligibility within three business
days of your start date.)
Notwithstanding any provision to the contrary contained herein, the working
relationship between you and the Company will be that of "at will employment",
meaning either you or we can terminate the relationship at any time, with or
without cause.
The employment terms in this letter supercede any other agreements or promises
made to you by anyone, whether oral or written.
This offer expires at the end of the day on Friday, January 22, 1999. Please
return this letter to me in the enclosed envelope by that time.
Sincerely, I accept this offer:
/s/ Mark Jung /s/ Janette Chock 1/19/99
--------------------------------------------
Mark Jung Janette Chock Date
CEO & President
Anticipated Start Date: February 1, 1999
<PAGE>
EXHIBIT 10.08
March 4, 1999
Elizabeth G. Murphy
120 Meadow Road
Riverside, CT 06878
Dear Betsy:
On behalf of Affiliation Networks, Inc., I am pleased to offer you the position
of Vice President of Sales on the terms and conditions set forth below (the
"Agreement"), beginning on 17 March 1999 (the "Effective Date").
1. DUTIES. You will report to the President and CEO. As Vice President of
Sales, you will be responsible for all duties and responsibilities associated
with that position. In addition, you will be responsible for all services
requested of you by the Company, including its Board of Directors.
2. COMPENSATION AND BENEFITS.
(a) Compensation. As compensation for your services and for your
covenants and promises in this Agreement, the Company agrees to provide you with
the following:
(i) Base Compensation. A base salary of two hundred thousand
($200,000) annually, less payroll deductions and withholdings, payable biweekly.
(ii) Incentive Compensation. You will be eligible to earn an
additional quarterly bonus of $18,750 at plan ($75,000 annually), based upon
achievement of mutually agreed upon sales performance goals, which will be
provided to you during the first ninety (90) days of your employment. Your bonus
will be 100% guaranteed for the first two (2) quarters of full-time employment.
(iii) Equity Compensation. Subject to your acceptance of employment
with the Company and the approval of the Board of Directors of the Company, the
Company will sell to you two hundred thousand (200,000) shares (each a "Share"
and collectively "Shares") of the Company's Common Stock at a price of seven
cents ($.07) per Share. All of the Shares shall be subject to a right of
repurchase in favor of the Company (the "Repurchase Right") that shall be
exercisable for seven cents ($0.07) per Share within the ninety-day period
following termination of your employment with the Company. Shares shall be
released from the Repurchase Right in the following installments: fifty thousand
(50,000) of the Shares will be released from the Repurchase Right on the first
anniversary of the date you commence employment with the Company, and thereafter
monthly installments equal to the lesser of either (a) four thousand one hundred
sixty-seven (4,167) of the Shares, or (b) the remaining number of Shares subject
to the Repurchase Right, shall be released until the earlier of: (1) all of the
Shares are released from the Repurchase Right, or (2) the date your employment
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with the Company terminates. This offer to purchase the Company's Common Stock
is an integral component of the offer to you of employment by the Company, and
expires or is revoked when such offer of employment expires or is revoked.
Notwithstanding the foregoing, this offer to purchase Shares expires at midnight
on Friday, March 19, 1999.
(b) Benefits. You will also be eligible for standard Company
benefits. The Company offers a comprehensive benefit package including medical,
dental and vision coverage for you and your eligible dependents. In addition,
we will provide $50,000 in life insurance coverage, short and long term
disability plans, vacation and sick pay and paid holidays. The Company may
modify compensation and benefits from time to time as it deems necessary.
3. COMPANY POLICIES. As an Affiliation, Inc. employee, you will be
expected to abide by the Company's policies and procedures. As a condition of
your employment, you also agree to sign and comply with the Proprietary
Information Agreement attached hereto as Exhibit A which prohibits unauthorized
use or disclosure of Affiliation, Inc. proprietary information.
4. OTHER AGREEMENTS. By accepting this offer, you represent and warrant
that your performance of your duties for the Company will not violate any
agreements, obligations or understandings that you may have with any third party
or prior employer.
5. AT-WILL EMPLOYMENT. Your relationship with the Company is one of "at-
will employment," meaning either you or the Company can terminate the
relationship at any time, with or without notice or with or without cause. This
at-will employment relationship cannot be altered except in writing signed by a
Company officer.
6. SEVERANCE BENEFITS.
(a) Termination By The Company Without Cause or Termination By You For
Good Reason. In the event that your employment is terminated by the Company
without Cause or terminated by you with Good Reason, and if you provide the
Company with a signed general release of all claims in a form approved by the
Company, the Company shall provide you with continuation of your base salary for
a period of six (6) months after your termination date. Additionally, the
Company shall release from the Repurchase Right fifty thousand (50,000) of the
Shares beyond what you already have vested as of the date of termination. You
understand and agree that in the event of a termination of employment by the
Company without Cause or by you with Good Reason, you shall not be entitled to
any other severance pay, severance benefits, or any other compensation or
benefits other than as set forth in this paragraph.
(b) Termination By The Company With Cause Or Termination By You
Without Good Reason. If your employment is terminated by the Company at any
time with Cause, or by you without Good Reason, you shall not be entitled to any
severance pay, severance benefits, or any compensation or benefits from the
Company whatsoever.
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(c) Cause. For the purpose of this Agreement, "Cause" shall mean: (i)
conviction of any felony or of any crime involving moral turpitude, including
fraud and dishonesty; (ii) participation in any fraud or act of dishonesty
against the Company; (iii) material breach of your duties to the Company,
including but not limited to unsatisfactory performance of job duties or
violation of Company policy (as determined in good faith by the Company's Board
of Directors), which remains uncured for a period of ninety (90) days following
written notice by the Company; (iv) intentional damage to any material property
of the Company; (v) conduct by you which in the good faith and reasonable
determination of the Board of Directors of the Company, demonstrates gross
unfitness to serve; or (vi) material breach of your responsibilities to the
Company regarding Proprietary Information.
(d) Good Reason. For the purpose of this Agreement, "Good Reason"
shall mean: (i) substantial reduction of your rate of compensation in effect as
of the Effective Date of this Agreement; (ii) material reduction in your duties;
(iii) failure or refusal of a successor to the Company to assume the Company's
obligations under this Agreement in the event of a Change of Control as defined
herein; or (iv) material breach by the Company or any successor the Company of
any of the material provisions of this Agreement, which remains uncured for a
period of thirty (30) days following written notice by you.
(e) Change of Control. For the purpose of this Agreement, a "Change or
Control" shall mean: (a) a sale of substantially all of the assets of the
Company; (b) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation in which shareholders
immediately before the merger or consolidation have, immediately after the
merger or consolidation, equal or greater stock voting power); (c) a reverse
merger in which the company is the surviving corporation but the shares of the
Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise (other than a reverse merger in which stockholders
immediately before the merger have, immediately after the merger, equal or
greater stock voting power); or (d) any transaction or series of related
transactions in which in excess of 50% of the Company's voting power is
transferred.
7. RETURN OF MATERIALS. At the termination of your employment with the
Company, you will promptly return to the Company, and will not take with you or
use, all items of any nature that belong to the Company, and all materials, in
any form, format, or medium (containing or relating to the Company's business).
8. RIGHT TO WORK. As required by law this offer of employment is subject
to satisfactory proof of your right to work in the United States.
9. ENTIRE AGREEMENT. This Agreement, including the attached Proprietary
Information Agreement, constitutes the complete, final and exclusive embodiment
of the entire Agreement between you and the Company with respect to the terms
and conditions of your employment. If you enter into this Agreement you are
doing so voluntarily, and without reliance on any promise, warranty or
representation, written or oral, other than those expressly contained herein.
This Agreement supersedes any other such promises, warranties, representations
or
3
<PAGE>
agreements. This Agreement may not be amended or modified except by a written
instrument signed by you and a duly authorized officer of the Company.
10. ENFORCEABILITY. If any provision of this Agreement is determined to
be invalid or unenforceable, in whole or in part, this determination will not
affect any other provision of this Agreement, and the Agreement, including the
invalid or unenforceable provisions, should be enforced insofar as possible to
achieve the intent of the parties.
11. CHOICE OF LAW. This Agreement will be deemed to have been entered
into and will be construed and enforced in accordance with the laws of the State
of California as applied to contracts made and to be performed entirely within
California.
This offer expires at the end of the day on March 7, 1999. If you choose
to accept our offer under the terms described above, please sign this Agreement
and the attachment and return both to me. If you accept our offer, would like
you to begin employment no later than Wednesday, March 17, 1999.
Betsy, I look forward to your favorable reply and to a productive and
enjoyable work relationship going forward.
Sincerely,
AFFILIATION NETWORKS, INC.
/s/ Mark Jung
-------------------------------
Mark Jung
CEO & President
Accepted and Agreed to as of
the Effective Date setforth above, by:
/s/ Elizabeth G. Murphy
- ---------------------------------
Elizabeth G. Murphy
Start Date: 17 March 1999
4
<PAGE>
EXHIBIT 10.09
March 15, 1999
Teresa M. Crummett
1999 Green Street #104
San Francisco, CA 94123
Dear Teresa:
On behalf of Affiliation Networks, Inc., I am pleased to offer you the
position of Vice President of Corporate Marketing on the terms and conditions
set forth below (the "Agreement"), beginning March 15, 1999 (the "Effective
Date").
1. Duties. You will report to the President and CEO. As Vice President of
Corporate Marketing, you will be responsible for all duties and responsibilities
associated with that position. In addition, you will be responsible for all
services requested of you by the Company, including its Board of Directors.
2. Compensation and Benefits.
(a) Compensation. As compensation for your services and for your
covenants and promises in this Agreement, the Company agrees to provide you with
the following:
(i) Base Compensation. A base salary of one hundred forty
thousand ($140,000) annually, less payroll deductions and withholdings, payable
biweekly.
(ii) Incentive Compensation. During 1999, beginning with the
Fiscal Quarter ending June 30, you will be eligible to earn an additional
quarterly bonus of $7,500 at plan ($22,500 total for the year), based upon
achievement of mutually agreed upon performance objectives, which will be
provided to you during the first thirty (30) days of each quarter.
(iii) Equity Compensation. Subject to your acceptance of
employment with the Company and the approval of the Board of Directors of the
Company, the Company will sell to you one hundred thirty-two thousand (132,000)
shares (each a "Share" and collectively "Shares") of the Company's Common Stock
at a price of seven cents ($.07) per Share. All of the Shares shall be subject
to a right of repurchase in favor of the Company (the "Repurchase Right") that
shall be exercisable for seven cents ($0.07) per Share within the ninety-day
period following termination of your employment with the Company. Shares shall
be released from the Repurchase Right in the following installments: sixteen
thousand five hundred (16,500) of the Shares will be released from the
Repurchase Right on July 1, 1999, and thereafter monthly installments beginning
on August 1, 1999 equal to two thousand seven hundred fifty (2,750) of the
Shares until the earlier of : (1) all of the Shares are released from the
Repurchase Right, or (2) the date your employment with the Company terminates.
This offer to purchase the Company's Common Stock is an integral component of
the offer to you of employment by the Company, and expires or is revoked when
such offer of employment expires or is revoked.
1
<PAGE>
Notwithstanding the foregoing, this offer to purchase Shares expires at midnight
on Friday, March 19, 1999.
(b) Benefits. You will also be eligible for standard Company
benefits. The Company offers a comprehensive benefit package including medical,
dental and vision coverage for you and your eligible dependents. In addition,
we will provide $50,000 in life insurance coverage, short and long term
disability plans, vacation and sick pay and paid holidays. The Company may
modify compensation and benefits from time to time as it deems necessary.
3. Company Policies. As an Affiliation, Inc. employee, you will be
expected to abide by the Company's policies and procedures. As a condition of
your employment, you also agree to sign and comply with the Proprietary
Information Agreement attached hereto as Exhibit A which prohibits unauthorized
use or disclosure of Affiliation, Inc. proprietary information.
4. Other Agreements. By accepting this offer, you represent and warrant
that your performance of your duties for the Company will not violate any
agreements, obligations or understandings that you may have with any third party
or prior employer.
5. At-Will Employment. Your relationship with the Company is one of "at
will employment," meaning either you or the Company can terminate the
relationship at any time, with or without notice or with or without cause. This
at-will employment relationship cannot be altered except in writing signed by a
Company officer.
6. Return Of Materials. At the termination of your employment with the
Company, you will promptly return to the Company, and will not take with you or
use, all items of any nature that belong to the Company, and all materials, in
any form, format, or medium (containing or relating to the Company's business).
7. Right To Work. As required by law this offer of employment is subject
to satisfactory proof of your right to work in the United States.
8. Entire Agreement. This Agreement, including the attached Proprietary
Information Agreement, constitutes the complete, final and exclusive embodiment
of the entire Agreement between you and the Company with respect to the terms
and conditions of your employment. If you enter into this Agreement you are
doing so voluntarily, and without reliance on any promise, warranty or
representation, written or oral, other than those expressly contained herein.
This Agreement supersedes any other such promises, warranties, representations
or agreements. This Agreement may not be amended or modified except by a
written instrument signed by you and a duly authorized officer of the Company.
9. Enforceability. If any provision of this Agreement is determined to be
invalid or unenforceable, in whole or in part, this determination will not
affect any other provision of this Agreement, and the Agreement, including the
invalid or unenforceable provisions, should be enforced insofar as possible to
achieve the intent of the parties.
2
<PAGE>
10. Choice of Law. This Agreement will be deemed to have been entered
into and will be construed and enforced in accordance with the laws of the State
of California as applied to contracts made and to be performed entirely within
California.
This offer expires at the end of the day on March 15, 1999. If you choose
to accept our offer under the terms described above, please sign this Agreement
and the attachment and return both to me. If you accept our offer, would like
you to begin employment no later than Wednesday, March 17, 1999.
Teresa, I look forward to your favorable reply and to a productive and
enjoyable work relationship going forward.
Sincerely,
AFFILIATION NETWORXS, INC.
/s/ Mark Jung
Mark Jung
CEO & President
Accepted and Agreed to as of
the Effective Date set forth above, by:
/s/ Teresa M. Crummett
- ----------------------------
Teresa M. Crummett
Start Date: 3/15/99
-----------------
3
<PAGE>
EXHIBIT 10.10
March 15, 1999
Ken Keller
3386 Royal Meadow Lane
San Jose, CA 95135
Dear Ken:
On behalf of Affiliation Networks, Inc., I am pleased to offer you the position
of Vice President of Engineering on the terms and conditions set forth below
(the "Agreement"), beginning March 15, 1999 (the "Effective Date").
1. Duties. You will report to the President and CEO. As Vice President of
Engineering, you will be responsible for all duties and responsibilities
associated with that position. In addition, you will be responsible for all
services requested of you by the Company, including its Board of Directors.
2. Compensation and Benefits.
(a) Compensation. As compensation for your services and for your
covenants and promises in this Agreement, the Company agrees to provide you with
the following:
(i) Base Compensation. A base salary of one hundred seventy-five
thousand ($175,000) annually, less payroll deductions and withholdings, payable
biweekly.
(ii) Equity Compensation. Subject to your acceptance of employment
with the Company and the approval of the Board of Directors of the Company, the
Company will sell to you three hundred thousand (300,000) shares (each a "Share"
and collectively "Shares") of the Company's Common Stock at a price of seven
cents ($.07) per Share. All of the Shares shall be subject to a right of
repurchase in favor of the Company (the "Repurchase Right") that shall be
exercisable for seven cents ($0.07) per Share within the ninety-day period
following termination of your employment with the Company. Shares shall be
released from the Repurchase Right in the following installments: twenty
thousand (20,000) of the Shares will be released from the Repurchase Right upon
your commencement of employment with the Company, and thereafter monthly
installments beginning on the first month anniversary of your employment with
the Company equal to the lesser of either (a) six thousand eighty-seven (6,087)
of the Shares, or (b) the remaining number of Shares subject to the Repurchase
Right, shall be released until the earlier of : (1) all of the Shares are
released from the Repurchase Right, or (2) the date your employment with the
Company terminates. This offer to purchase the Company's Common Stock is an
integral component of the offer to you of employment by the Company, and expires
or is revoked when such offer of employment expires or is revoked.
Notwithstanding the foregoing, this offer to purchase Shares expires at midnight
on Friday, March 19, 1999.
<PAGE>
(b) Benefits. You will also be eligible for standard Company
benefits. The Company offers a comprehensive benefit package including medical,
dental and vision coverage for you and your eligible dependents. In addition,
we will provide $50,000 in life insurance coverage, short and long term
disability plans, vacation and sick pay and paid holidays. The Company may
modify compensation and benefits from time to time as it deems necessary.
3. Company Policies. As an Affiliation, Inc. employee, you will be
expected to abide by the Company's policies and procedures. As a condition of
your employment, you also agree to sign and comply with the Proprietary
Information Agreement attached hereto as Exhibit A which prohibits unauthorized
use or disclosure of Affiliation, Inc. proprietary information.
4. Other Agreements. By accepting this offer, you represent and warrant
that your performance of your duties for the Company will not violate any
agreements, obligations or understandings that you may have with any third party
or prior employer.
5. At-Will Employment. Your relationship with the Company is one of "at
will employment," meaning either you or the Company can terminate the
relationship at any time, with or without notice or with or without cause. This
at-will employment relationship cannot be altered except in writing signed by a
Company officer.
6. Severance Benefits.
(a) Termination By The Company Without Cause or Termination By You
For Good Reason. In the event that your employment is terminated by the Company
without Cause or terminated by you with Good Reason, and if you provide the
Company with a signed general release of all claims in a form approved by the
Company, the Company shall release from the Repurchase Right seventy-five
thousand (75,000) of the Shares beyond what you already have vested as of the
date of termination. You understand and agree that in the event of a termination
of employment by the Company without Cause or by you with Good Reason, you shall
not be entitled to any other severance pay, severance benefits, or any other
compensation or benefits other than as set forth in this paragraph.
(b) Termination By The Company With Cause Or Termination By You
Without Good Reason. If your employment is terminated by the Company at any
time with Cause, or by you without Good Reason, you shall not be entitled to any
severance pay, severance benefits, or any compensation or benefits from the
Company whatsoever.
(c) Cause. For the purpose of this Agreement, "Cause" shall mean: (i)
conviction of any felony or of any crime involving moral turpitude, including
fraud and dishonesty; (ii) participation in any fraud or act of dishonesty
against the Company; (iii) material breach of your duties to the Company,
including but not limited to violation of Company policy (as determined in good
faith by the Company's Board of Directors), which remains uncured for a period
of thirty (30) days following written notice by the Company; (iv) intentional
damage to
2
<PAGE>
any material property of the Company; (v) in the good faith and reasonable
determination of the Board of Directors of the Company, gross unfitness to
serve; or (vi) material breach of your responsibilities to the Company regarding
Proprietary Information.
(d) Good Reason. For the purpose of this Agreement, "Good Reason"
shall mean: (i) substantial reduction of your rate of compensation in effect as
of the Effective Date of this Agreement; (ii) material reduction in your duties;
(iii) failure or refusal of a successor to the Company to assume the Company's
obligations under this Agreement in the event of a Change of Control as defined
herein; or (iv) material breach by the Company or any successor the Company of
any of the material provisions of this Agreement, which remains uncured for a
period of thirty (30) days following written notice by you.
(e) Change of Control. For the purpose of this Agreement, a "Change
of Control" shall mean: (a) a sale of substantially all of the assets of the
Company; (b) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation in which shareholders
immediately before the merger or consolidation have, immediately after the
merger or consolidation, equal or greater stock voting power); (c) a reverse
merger in which the company is the surviving corporation but the shares of the
Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise (other than a reverse merger in which stockholders
immediately before the merger have, immediately after the merger, equal or
greater stock voting power); or (d) any transaction or series of related
transactions in which in excess of 50% of the Company's voting power is
transferred.
7. Return of Materials. At the termination of your employment with the
Company, you will promptly return to the Company, and will not take with you or
use, all items of any nature that belong to the Company, and all materials, in
any form, format, or medium (containing or relating to the Company's business).
8. Right to Work. As required by law this offer of employment is subject
to satisfactory proof of your right to work in the United States.
9. Entire Agreement. This Agreement, including the attached Proprietary
Information Agreement, constitutes the complete, final and exclusive embodiment
of the entire Agreement between you and the Company with respect to the terms
and conditions of your employment. If you enter into this Agreement you are
doing so voluntarily, and without reliance on any promise, warranty or
representation, written or oral, other than those expressly contained herein.
This Agreement supersedes any other such promises, warranties, representations
or agreements. This Agreement may not be amended or modified except by a written
instrument signed by you and a duly authorized officer of the Company.
10. Enforceability. If any provision of this Agreement is determined to
be invalid or unenforceable, in whole or in part, this determination will not
affect any other provision of this Agreement, and the Agreement, including the
invalid or unenforceable provisions, should be enforced insofar as possible to
achieve the intent of the parties.
3
<PAGE>
11. Choice of Law. This Agreement will be deemed to have been entered
into and will be construed and enforced in accordance with the laws of the State
of California as applied to contracts made and to be performed entirely within
California.
This offer expires at the end of the day on March 15, 1999. If you choose
to accept our offer under the terms described above, please sign this Agreement
and the attachment and return both to me. If you accept our offer, would like
you to begin employment no later than Wednesday, March 17, 1999.
Ken, I look forward to your favorable reply and to a productive and
enjoyable work relationship going forward.
Sincerely,
Affiliation Networks, Inc.
/s/ Mark Jung
Mark Jung
Accepted and Agreed to as
of the Effective Date set forth above, by: CEO & President
/s/ Ken Keller
- ---------------------------------
Ken Keller
Start Date: 3/15/99
---------------------
4
<PAGE>
EXHIBIT 10.11
October 18, 1999
Mr. Jim Tolonen
One Bayview, #4
Los Gatos, CA 95030
Dear Jim:
On behalf of the Board of Directors of Snowball.com ("Snowball"), we
would like to offer you the position of Chief Financial Officer and Chief
Operating Officer of Snowball subject to the following terms and conditions:
1. Title; Salary. Effective October 18, 1999 (the "Commencement
-------------
Date"), you will be employed as Chief Financial Officer and Chief Operating
Officer. You will report to the Chief Executive Officer of Snowball. Your base
salary will be no less than $225,000 annually, subject to review by the Snowball
Board of Directors on January 1, 2000 and then at least annually thereafter.
2. Benefits; Expenses. You will be eligible to participate in
------------------
Snowball's employee benefit plans of general application, including, without
limitation, those plans covering incentive compensation and medical, disability
and life insurance in accordance with the rules established for individual
participation in any such plan and under applicable law. You will be eligible
for vacation and sick leave in accordance with the policies in effect during the
term of this agreement and you will be eligible to receive such other benefits
as Snowball generally provides to its other employees of comparable position and
experience.
3. Indemnification. In the event you are made, or threatened to be
---------------
made, a party to any legal action or proceeding, whether civil or criminal, by
reason of the fact that you are or were an employee, director or officer of
Snowball or serve or served any other corporation fifty percent (50%) or more
owned or controlled by Snowball in any capacity at Snowball's request, you shall
be indemnified by Snowball, and Snowball shall pay your related expenses when
and as incurred, all to the fullest extent permitted by law.
4. Options. You will be granted an option to purchase 600,000 shares
-------
of the Company's common stock (the "Option"). Except as otherwise set forth in
this agreement, the Option will vest on a monthly basis over a 48-month period
beginning on the Commencement Date. The exercise price of the Option will be
$2.00 per share, which is the fair market value of Snowball's common stock on
the Commencement Date. The Option will be immediately exercisable subject to
Snowball's right to repurchase any shares that have not vested pursuant to
<PAGE>
either the preceding sentence or paragraph 8 below, upon your termination of
employment for any reason.
5. Series B Preferred Stock. In addition, you may purchase from
------------------------
Snowball up to 100,000 shares of Series B Preferred Stock at a purchase price of
$6.33 per share (the "Preferred Stock"). You must exercise your right to
purchase the Preferred Stock on or before Wednesday, October 20, 1999. You may
pay up to $333,000 of the purchase price with a full recourse promissory note
(the "Preferred Stock Note") which will be secured by the Preferred Stock and
will accrue interest monthly at the minimum rate sufficient to avoid imputation
of income under the Code. There will be no prepayment penalty. Snowball will
forgive 1/48th of the principal amount of the Preferred Stock Note and any
accrued interest on the last day of each month following the Commencement Date.
In addition, Snowball will forgive the Preferred Stock Note and any accrued
interest in full upon a Change of Control (as defined in Section 7 below). To
the extent the Preferred Stock Note has not been forgiven, except as otherwise
set forth in this agreement, the Preferred Stock Note shall be due and payable
in full on the earlier to occur of (i) the fourth anniversary of the date of the
Preferred Stock Note or (ii) 30 days following your Termination for Cause or
your Voluntary Termination (each as defined in Section 6 below).
6. At-Will Employment. Your employment with Snowball will be at-will
------------------
and may be terminated by you or by Snowball at any time for any reason as
follows:.
(a) You may terminate your employment upon written notice to the
Board of Directors at any time in your discretion ("Voluntary Termination");
(b) You may terminate your employment upon written notice to the
Board of Directors at any time for "Good Reason" as defined below ("Involuntary
Termination").
(c) Snowball may terminate your employment upon written notice to
you at any time following a determination by the Board of Directors that there
is "Cause," as defined below, for such termination ("Termination for Cause");
(d) Snowball may terminate your employment upon written notice to
you at any time in the sole discretion of the Board of Directors without a
determination that there is Cause for such termination ("Termination without
Cause");
(e) Your employment will automatically terminate upon your death
or upon your disability as determined by the Board of Directors ("Termination
for Death or Disability"); provided that "disability" shall mean your complete
inability to perform your job responsibilities for a period of 90 consecutive
days or 90 days in the aggregate in any 12-month period.
7. Definition. For purposes of this agreement, the following terms
----------
will have the following meanings:
<PAGE>
(a) "Cause" means (i) gross negligence or willful misconduct in
the performance of your duties to Snowball (other than as a result of a
disability) that has resulted or is likely to result in substantial and material
damage to Snowball, after a written demand for substantial performance is
delivered to you by the Board of Directors which specifically identifies the
manner in which the Board believes you have not substantially performed your
duties and you have been provided with a reasonable opportunity to cure any
alleged gross negligence or willful misconduct; (ii) repeated failure to perform
your duties to Snowball as requested in writing by the Chief Executive Officer
or the Board of Directors (other than as a result of a disability); (iii)
commission of any act of fraud with respect to Snowball; or (iv) conviction of a
felony or a crime causing material harm to the business and affairs of Snowball.
No act or failure to act by you shall be considered "willful" if done or omitted
by you in good faith with reasonable belief that your action or omission was in
the best interests of Snowball.
(b) "Change of Control" means (i) any person or entity becoming
the beneficial owner, directly or indirectly, of securities of Snowball
representing fifty (50%) percent of the total voting power of all its then
outstanding voting securities, (ii) a merger or consolidation of Snowball in
which its voting securities immediately prior to the merger or consolidation do
not represent, or are not converted into securities that represent, a majority
of the voting power of all voting securities of the surviving entity immediately
after the merger or consolidation, (iii) a sale of substantially all of the
assets of Snowball or a liquidation or dissolution of Snowball, or (iv)
individuals who, as of the Commencement Date, constitute the Board of Directors
(the "Incumbent Board") cease for any reason to constitute at least a majority
of such Board; provided that any individual who becomes a director of Snowball
subsequent to the Commencement Date, whose election, or nomination for election
by Snowball stockholders, was approved by the vote of at least a majority of the
directors then in office shall be deemed a member of the Incumbent Board.
(c) "Good Reason" means the occurrence of any of the following
events without your prior written consent: (i) a reduction in your base salary;
(ii) a material adverse change in your title; (iii) a material adverse change in
your responsibilities or authority; (iv) a material reduction in your employee
benefits other than a reduction in employee benefits which applies to all
Snowball employees of comparable position and experience; or (v) a relocation of
your place of employment outside of the seven (7) Bay Area counties; or (vi)
Snowball's failure to obtain the assumption of this agreement described in
paragraph 10.
8. Separation Benefits. Upon termination of your employment with
-------------------
Snowball for any reason, you will receive payment for all salary and unpaid
vacation accrued to the date of your termination of employment. Your benefits
will be continued under Snowball 's then existing benefit plans and policies for
so long as provided under the terms of such plans and policies and as required
by applicable law. Under certain circumstances, you will also be entitled to
receive severance benefits as set forth below, but you will not be entitled to
any other compensation, award or damages with respect to your employment or
termination; provided, however, that if Snowball implements a severance policy,
program or plan that provides different severance benefits than those described
below, you may elect, at your option, to receive the
<PAGE>
applicable severance benefits under such policy, program or plan in lieu of the
severance benefits described below.
(a) In the event of your Voluntary Termination, Termination for
Death or Disability or Termination for Cause, you will not be entitled to any
cash severance benefits or additional vesting of shares of options or
forgiveness of the Preferred Stock Note.
(b) In the event of your Termination without Cause or
Involuntary Termination, you will not be entitled to any cash severance, but the
vesting of your Option will immediately be accelerated by six months. In
addition, the Preferred Stock Note and any accrued interest thereon will be
forgiven in full.
(c) In the event of your Termination without Cause or your
Involuntary Termination within sixty days prior to or one year following a
Change of Control, you will not be entitled to any cash severance benefits, but
the vesting of your Option will immediately be accelerated by one year. (Such
acceleration shall be in lieu of any acceleration pursuant to paragraph 8(b)
above.) In addition, the Preferred Stock Note and any accrued interest thereon
will be forgiven in full.
(d) If your severance and other benefits provided for in this
Section 8 constitute "parachute payments" within the meaning of Section 280G of
the Code and, but for this subsection, would be subject to the excise tax
imposed by Section 4999 of the Code, then your severance and other benefits
under this Section 8 will be payable, at your election, either in full or in
such lesser amount as would result, after taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, in your receipt on an after-tax basis of the greatest amount of option
vesting, forgiveness of indebtedness and other benefits.
(e) No payments due you hereunder shall be subject to mitigation
or offset.
9. Arbitration. The parties agree that any dispute regarding the
------------
interpretation or enforcement of this agreement shall be decided by
confidential, final and binding arbitration conducted by the American
Arbitration Association ("AAA") under the then existing AAA rules rather than by
litigation in court, trial by jury, administrative proceeding or in any other
forum.
10. Successors. This agreement is binding on and may be enforced by
----------
Snowball and its successors and assigns and is binding on and may be enforced by
you and your heirs and legal representatives. Any successor to Snowball or
substantially all of its business (whether by purchase, merger, consolidation or
otherwise) will in advance assume in writing and be bound by all of Snowball's
obligations under this agreement.
11. Waiver. Neither party shall, by mere lapse of time, without
------
giving notice or taking other action hereunder, be deemed to have waived any
breach by the other party of any
<PAGE>
of the provisions of this agreement. Further, the waiver by either party of a
particular breach of this agreement by the other shall neither be construed as,
nor constitute a, continuing waiver of such breach or of other breaches by the
same or any other provision of this agreement.
12. Entire Agreement. This agreement, the stock option agreement
----------------
between you and Snowball and the Series B-1 Preferred Stock Purchase Agreement
between you and Snowball dated October 20, 1999 represent the entire agreement
between us concerning the subject matter of your employment by Snowball and
supersede any prior agreements.
13. Governing Law. This agreement will be governed by the laws of
-------------
the state of California without reference to conflict of laws provisions.
We look forward to your contributions as part of the Snowball team.
Sincerely yours,
/s/ Mark Jung
Mark Jung
President and Chief Executive Officer
By signing this letter, I am agreeing to the above.
Signature: /s/ James R. Tolonen Date: 10/18/99
------------------------ -------------
<PAGE>
EXHIBIT 10.12
PROMISSORY NOTE
$92,307.67 February 1, 1999
FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay
to the order of AFFILIATION, INC., a Delaware corporation (the "Company"), at
150 North Hill Drive, Brisbane, California 94005, or at such other place as the
holder hereof may designate in writing, in lawful money of the United States of
America and in immediately available funds, the principal sum of ninety-two
thousand three hundred seven dollars and sixty-seven cents ($92,307.67) together
with interest accrued from the date hereof on the unpaid principal at the rate
of 4.64% per annum, or the maximum rate permissible by law (which under the laws
of the State of California shall be deemed to be the laws relating to
permissible rates of interest on commercial loans), whichever is less, as
follows:
Principal Repayment. The outstanding principal amount and any accrued
interest hereunder shall be due and payable in full on February 1, 2003.
Interest Payments. Interest shall be payable annually in arrears and
shall be calculated monthly beginning February 1, 1999 on the basis of a
360-day year for the actual number of days elapsed; provided, however, that
in the event that the undersigned's employment by or association with the
Company is terminated for any reason prior to payment in full of this Note,
this Note shall be accelerated and all remaining unpaid principal and
interest shall become due and payable within ninety (90) days after such
termination or such longer period as may be agreed to by the Company and
the undersigned.
This Note may be prepaid at any time without penalty. All money paid
toward the satisfaction of this Note shall be applied first to the payment of
interest as required hereunder and then to the retirement of the principal.
The full amount of this Note is secured by a pledge of shares of Common
Stock of the Company, and is subject to all of the terms and provisions of the
Founder Stock Purchase Agreement and the Pledge Agreement, each of even date
herewith between the undersigned and the Company.
The undersigned hereby represents and agrees that the amounts due under
this Note are not consumer debt, and are not incurred primarily for personal,
family or household purposes, but are for business and commercial purposes only.
The undersigned hereby waives presentment, protest and notice of protest,
demand for payment, notice of dishonor and all other notices or demands in
connection with the delivery, acceptance, performance, default or endorsement of
this Note.
The holder hereof shall be entitled to recover, and the undersigned agrees
to pay when incurred, all costs and expenses of collection of this Note,
including without limitation, reasonable attorneys' fees.
<PAGE>
This Note shall be governed by, and construed, enforced and interpreted in
accordance with, the laws of the State of California, excluding conflict of laws
principles that would cause the application of laws of any other jurisdiction.
Signed: /s/ Mark Jung
-------------------------------
Mark Jung
<PAGE>
EXHIBIT 10.13
PROMISSORY NOTE
$2,000,000
February 1, 1999
FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay
to the order of Affiliation, Inc., a Delaware corporation (the "Company"), at
150 North Hill Drive, Brisbane, California, or at such other place as the holder
hereof may designate in writing, in lawful money of the United States of America
and in immediately available funds, the principal sum of Two Million Dollars
($2,000,000) together with interest accrued from the date hereof on the unpaid
principal at the rate of 4.57% per annum, or the maximum rate permissible by law
(which under the laws of the State of California shall be deemed to be the laws
relating to permissible rates of interest on commercial loans), whichever is
less, as follows:
Principal Repayment. The outstanding principal amount hereunder shall
be subject to scheduled amortized repayments on the dates and in the
amounts listed below:
Principal Repayment Date Repayment Amount; and
March 1, 1999 1,000,000
April 1, 1999 1,000,000
Interest Payments. Interest shall be payable in arrears on each
Principal Repayment Date and shall be calculated on the basis of a 360-day
year for the actual number of days elapsed;
If the undersigned fails to pay any of the principal and accrued interest
when due, the Company, at its sole option, shall have the right to accelerate
this Note, in which event the entire principal balance and all accrued interest
shall become immediately due and payable, and immediately collectible by the
Company pursuant to applicable law.
This Note may be prepaid at any time without penalty. All money paid toward
the satisfaction of this Note shall be applied first to the payment of interest
as required hereunder and then to the retirement of the principal.
The full amount of this Note is secured by a pledge of shares of Series A
Preferred Stock of the Company, and is subject to all of the terms and
provisions of the Series A Preferred Stock Purchase Agreement and the Pledge
Agreement, each of even date herewith between the undersigned and the Company.
The undersigned hereby represents and agrees that the amounts due under
this Note are not consumer debt, and are not incurred primarily for personal,
family or household purposes, but are for business and commercial purposes only.
<PAGE>
The undersigned hereby waives presentment, protest and notice of protest,
demand for payment, notice of dishonor and all other notices or demands in
connection with the delivery, acceptance, performance, default or endorsement of
this Note.
The holder hereof shall be entitled to recover, and the undersigned agrees
to pay when incurred, all costs and expenses of collection of this Note,
including without limitation, reasonable attorneys' fees.
This Note shall be governed by, and construed, enforced and interpreted in
accordance with, the laws of the State of California, excluding conflict of laws
principles that would cause the application of laws of any other jurisdiction.
Signed /s/ Chris Anderson
------------------------------------------
Chris Anderson
<PAGE>
EXHIBIT 10.14
FULL RECOURSE PROMISSORY NOTE
$333,000.00 October 20, 1999
For Value Received, the undersigned hereby unconditionally promises to pay
to the order of Snowball.com, Inc. (the "Company"), at 250 Executive Park Blvd.,
Suite 4000, San Francisco, CA 94134, or at such other place as the holder hereof
may designate in writing, in lawful money of the United States of America and in
immediately available funds, the principal sum of Three Hundred Thirty-Three
Thousand Dollars ($333,000.00 ) together with interest accrued from the date
hereof on the unpaid principal at the rate of 5.86% per annum compounded
monthly, or the minimum rate permissible by law (which under the laws of the
State of California shall be deemed to be the laws relating to permissible rates
of interest on commercial loans), whichever is less, as follows:
1. Principal Repayment. The outstanding principal amount and any accrued
interest hereunder shall be due and payable in full on October 20, 2003.
2. Interest Payments. Interest shall be payable annually in arrears and
shall be calculated monthly beginning October 20, 1999 on the basis of a 360-day
year for the actual number of days elapsed; provided, however, that in the event
that the undersigned's employment by or association with the Company is
terminated as a result of Termination for Cause or Voluntary Termination, as set
forth in that certain letter agreement between the undersigned and the Company
dated October 19, 1999 prior to payment in full of this Note, this Note shall be
accelerated and all remaining unpaid principal and interest shall become due and
payable within thirty (30) days after such termination or such longer period as
may be agreed to by the Company and the undersigned.
3. Prepayment. This Note may be prepaid at any time without penalty. All
money paid toward the satisfaction of this Note shall be applied first to the
payment of interest as required hereunder and then to the retirement of the
principal.
4. Security. The full amount of this Note is secured by a pledge of
shares of common stock of the Company, and is subject to all of the terms and
provisions of the Stock Pledge Agreement, dated of even date herewith between
the undersigned and the Company. Upon any default of the undersigned under this
Note, the Company shall have, in addition to its rights and remedies under the
Stock Pledge Agreement, full recourse against any real, personal, tangible or
intangible assets of the undersigned.
5. Nature of Debt. The undersigned hereby represents and agrees that the
amounts due under this Note are not consumer debt, and are not incurred
primarily for personal, family or household purposes, but are for business and
commercial purposes only.
6. Waiver. The undersigned hereby waives presentment, protest and notice
of protest, demand for payment, notice of dishonor and all other notices or
demands in connection with the delivery, acceptance, performance, default or
endorsement of this Note.
7. Costs and Expenses. The holder hereof shall be entitled to recover,
and the undersigned agrees to pay when incurred, all costs and expenses of
collection of this Note, including without limitation, reasonable attorneys'
fees.
<PAGE>
8. Governing Law. This Note shall be governed by, and construed, enforced
and interpreted in accordance with, the laws of the State of California,
excluding conflict of laws principles that would cause the application of laws
of any other jurisdiction.
Signed:/s/ James R. Tolonen, Trustee
-------------------------------------------
The Tolonen Family Trust
Dated September 26, 1996
<PAGE>
EXHIBIT 10.16
AFFILIATION, INC.
SERIES A PREFERRED STOCK AND
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK PURCHASE
AGREEMENT (the "Agreement") is entered into as of January 7th, 1999, by and
among AFFILIATION, INC., a Delaware corporation (the "Company") and each of
those persons and entities, severally and not jointly, whose names are set forth
on the Schedule of Purchasers attached hereto as Exhibit A (which persons and
entities are hereinafter collectively referred to as "Purchasers" and each
individually as a "Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale and issuance of an aggregate
of nine million eight hundred ninety thousand one hundred eleven (9,890,111)
shares of its Series A Preferred Stock (the "Series A Shares");
WHEREAS, the Company has authorized the sale and issuance of an aggregate
of five million (5,000,000) shares of its Series B Preferred Stock (the "Series
B Shares") (the Series A Shares and the Series B Shares are referred to herein
collectively as the "Shares");
WHEREAS, Purchasers desire to purchase the Shares on the terms and
conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Shares to Purchasers on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 Authorization of Shares. On or prior to the Closing (as defined
in Section 2 below), the Company shall have authorized (a) the transfer, sale
and issuance to Purchasers of the Shares and (b) the issuance of such shares of
Preferred Stock or Common Stock to be issued upon conversion of the Shares (the
"Conversion Shares"). The Shares and the Conversion Shares shall have the
rights, preferences, privileges and restrictions set forth in the Amended and
Restated Certificate of Incorporation of the Company, in the form attached
hereto as Exhibit B (the "Restated Charter").
1.2 Sale and Purchase. Subject to the terms and conditions hereof,
at the Closing (as hereinafter defined) the Company hereby agrees to issue and
sell to each Purchaser, severally and not jointly, and each Purchaser agrees to
purchase from the Company, severally and not jointly, the number of Series A
Shares and the number of Series B Shares set forth opposite such Purchaser's
name on Exhibit A, at a purchase price of thirty-five cents ($0.35) per Series A
Share and thirty-five cents ($0.35) per Series B Share.
<PAGE>
2. CLOSING, DELIVERY AND PAYMENT.
2.1 Closing. The closing of the sale and purchase of the Shares
under this Agreement (the "Closing") shall take place at 2:00 p.m. on the date
hereof at the offices of Cooley Godward LLP, 3000 Sand Hill Road, Building 3,
Suite 230, Menlo Park, California 94025 or at such other time or place as the
Company and Purchasers may mutually agree (such date is hereinafter referred to
as the "Closing Date").
2.2 Delivery. At the Closing, subject to the terms and conditions
hereof, the Company will deliver to each Purchaser a certificate representing
the number of Series A Shares and the number of Series B Shares to be purchased
at the Closing by such Purchaser, against payment of the consideration listed on
Exhibit A attached hereto by wire transfer, check made payable to the order of
the Company, cancellation of indebtedness or any combination of the foregoing or
the assignment of assets, as applicable.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth on a Schedule of Exceptions delivered by the
Company to the Purchasers at the Closing the Company hereby represents and
warrants to each Purchaser as of the date of this Agreement as follows:
3.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and the Investor Rights Agreement in the form attached hereto as
Exhibit C (the "Investor Rights Agreement"), to issue and sell the Shares and
the Conversion Shares, and to carry out the provisions of this Agreement, the
Investor Rights Agreement and the Restated Charter and to carry on its business
as presently conducted and as presently proposed to be conducted.
3.2 Subsidiaries. The Company does not own or control any equity
security or other interest of any other corporation, limited partnership or
other business entity. The Company is not a participant in any joint venture,
partnership or similar arrangement.
3.3 Capitalization; Voting Rights. The authorized capital stock of
the Company, immediately prior to the Closing, will consist of 20,000,000 shares
of Common Stock, (par value $0.001) per share, none of which are issued and
outstanding and 1,978,022 shares of which are reserved for future issuance to
employees pursuant to the Company's 1999 Stock Option Plan and 15,000,000 shares
of Preferred Stock, (par value $0.001) per share, 10,000,000 of which are
designated Series A Preferred Stock, none of which are issued and outstanding
and 5,000,000 of which are designated Series B Preferred Stock, none of which
are issued and outstanding. All issued and outstanding shares of the Company's
Common Stock and Preferred Stock (a) have been duly authorized and validly
issued. The rights, preferences, privileges and restrictions of the Shares are
as stated in the Restated Charter. Each Series of Series A Preferred Stock is
convertible into Common Stock on a one-for-one basis. The Conversion Shares
have been duly and validly reserved for issuance. Other than the 1,978,022
shares reserved for issuance under the Company's 1999 Stock Option Plan, and
except as may be granted pursuant to
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<PAGE>
the Investor Rights Agreement, there are no outstanding options, warrants,
rights (including conversion or preemptive rights and rights of first refusal),
proxy or shareholder agreements, or agreements of any kind for the purchase or
acquisition from the Company of any of its securities. When issued in compliance
with the provisions of this Agreement and the Restated Charter, the Shares and
the Conversion Shares will be validly issued, fully paid and nonassessable, and
will be free of any liens or encumbrances, provided, however, that the Shares
and the Conversion Shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed. No stock plan, stock purchase,
stock option or other agreement or understanding between the Company and any
holder of any equity securities or rights to purchase equity securities provides
for acceleration or other changes in the vesting provisions or other terms of
such agreement or understanding as the result of any merger, consolidated sale
of stock or assets, change in control or any other transaction(s) by the
Company.
3.4 Authorization; Binding Obligations. All corporate action on the
part of the Company, its officers, directors and shareholders necessary for the
authorization of this Agreement and the Investor Rights Agreement, the
performance of all obligations of the Company hereunder and thereunder at the
Closing and the authorization, sale, issuance and delivery of the Shares
pursuant hereto and the Conversion Shares pursuant to the Restated Charter has
been taken or will be taken prior to the Closing. The Agreement and the
Investor Rights Agreement, when executed and delivered, will be valid and
binding obligations of the Company enforceable in accordance with their terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights, (b) general principles of equity that restrict the
availability of equitable remedies, and (c) to the extent that the
enforceability of the indemnification provisions in Section 2.9 of the Investor
Rights Agreement may be limited by applicable laws. The sale of the Shares and
the subsequent conversion of the Shares into Conversion Shares are not and will
not be subject to any preemptive rights or rights of first refusal that have not
been properly waived or complied with.
3.5 Agreements; Action.
(a) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or to its knowledge by which it is bound which may
involve (i) obligations (contingent or otherwise) of, or payments to, the
Company in excess of $20,000 (other than obligations of, or payments to, the
Company arising from purchase or sale agreements entered into in the ordinary
course of business or arising from this Agreement or the Investor Rights
Agreement), or (ii) the transfer or license of any parent, copyright, trade
secret or other proprietary right to or from the Company (other than licenses
arising from the purchase of "off the shelf" or other standard products), or
(iii) provisions restricting the development, manufacture or distribution of the
Company's products or services, or (iv) indemnification by the Company with
respect to infringements of proprietary rights (other than indemnification
obligations arising from purchase or sale or license agreements entered into in
the ordinary course of business).
(b) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or Series
of its capital
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<PAGE>
stock, (ii) incurred any indebtedness for money borrowed or any other
liabilities (other than with respect to dividend obligations, distributions,
indebtedness and other obligations incurred in the ordinary course of business
or as disclosed in the financial statements) individually in excess of $10,000
or, in the case of indebtedness and/or liabilities individually less than
$10,000, in excess of $25,000 in the aggregate, (iii) made any loans or advances
to any person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than the
sale of its inventory in the ordinary course of business.
(c) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
3.6 Obligations to Related Parties. There are no obligations of the
Company to officers, directors, shareholders, or employees of the Company other
than (a) for payment of salary for services rendered, (b) reimbursement for
reasonable expenses incurred on behalf of the Company and (c) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Board
of Directors of the Company). The Company is not a guarantor or indemnitor of
any indebtedness of any other person, firm or corporation.
3.7 Title to Properties and Assets; Liens, Etc. The Company has
good and marketable title to its properties and assets, including the properties
and assets reflected in the most recent balance sheet included in the Financial
Statements, and good title to its leasehold estates, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those
resulting from taxes which have not yet become delinquent, (b) minor liens and
encumbrances which do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company, and (c)
those that have otherwise arisen in the ordinary course of business. The
Company is in compliance with all material terms of each lease to which it is a
parry or is otherwise bound.
3.8 Patents and Trademarks. To the best of its knowledge, after
taking into account the purchase by the Company of certain assets under this
Agreement, the Company owns or possesses sufficient legal rights to all patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes necessary for its
business as now conducted and as presently proposed to be conducted, without any
known infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to the foregoing, nor is the Company
bound by or a party to any options, licenses or agreements of any kind with
respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and other proprietary rights and processes
of any other person or entity other than such licenses or agreements arising
from the purchase of "off the shelf" or standard products. The Company has not
received any communications alleging that the Company has violated or, by
conducting its business as presently proposed would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of, any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including
4
<PAGE>
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with their duties to the Company or that would conflict with the
Company's business as presently proposed to be conducted. Neither the execution
nor delivery of this Agreement or the Investor Rights Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as presently proposed, will, to the Company's
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract covenant or
instrument under which any employee is now obligated. The Company does not
believe it is or will be necessary to utilize any inventions, made secrets or
proprietary information of any of its employees made prior to their employment
by the Company, except for inventions, trade secrets or proprietary information
that have been assigned to the Company.
3.9 Compliance with other Instruments. The Company is not in
violation or default of any term of its Restated Charter or Bylaws, or of any
provision of any mortgage, indenture, contract, agreement, instrument or
contract to which it is party or by which it is bound or of any judgment,
decree, order, writ. The execution, delivery, and performance of and compliance
with this Agreement, and the Investor Rights Agreement, and the issuance and
sale of the Shares pursuant hereto and of the Conversion Shares pursuant to the
Restated Charter, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or
constitute a default under any such term, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
3.10 Litigation. There is no action, suit, proceeding or
investigation pending or to the Company's knowledge currently threatened in
writing against the Company that questions the validity of this Agreement, or
the Investor Rights Agreement or the right of the Company to enter into any of
such agreements, or to consummate the transactions contemplated hereby or
thereby, or which might result, either individually or in the aggregate, in any
material adverse change in the assets, condition, affairs or prospects of the
Company, financially or otherwise, or any change in the current equity ownership
of the Company, nor is the Company aware that there is any basis for any of the
foregoing. The foregoing includes, without limitation, actions pending or
threatened in writing (or any basis therefor known to the Company) involving the
prior employment of any of the Company's employees, their use in connection with
the Company's business of any information or techniques allegedly proprietary to
any of their former employers, or their obligations under any agreements with
prior employers. The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company intends to initiate.
3.11 Employees. The Company has no collective bargaining agreements
with any of its employees. There is no labor union organizing activity pending
or, to the Company's knowledge, threatened with respect to the Company. To the
Company's knowledge, no employee of the Company, nor any consultant with whom
the Company has controlled, is in
5
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violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual to
be employed by, or to contract with, the Company because of the nature of the
business to be conducted by the Company; and to the Company's knowledge the
continued employment by the Company of its present employees, and the
performance of the Company's contracts with its independent contractors, will
not result in any such violation. The Company has not received any notice
alleging that any such violation has occurred. No employee of the Company has
been granted the right to continued employment by the Company or to any material
compensation following termination of employment with the Company. The Company
is not aware that any officer or key employee, or that any group of key
employees, intends to terminate his, her or their employment with the Company,
nor does the Company have a present intention to terminate the employment of any
officer, key employee or group of key employees.
3.12 Registration Rights and Voting Rights.
(a) Except as required pursuant to the Investor Rights
Agreement, the Company is presently not under any obligation, and has not
granted any rights, to register (as defined in Section 1.1 of the Investor
Rights Agreement) any of The Company's presently outstanding securities or any
of its securities that may hereafter be issued.
(b) To the Company's knowledge, no shareholder of the Company
has entered into any agreement with respect to the voting of equity securities
of the Company.
3.13 Compliance with Laws; Permits. To its knowledge, the Company is
not in violation of any applicable statute, rule, regulation, order or
restriction of any domestic or foreign -government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties which violation would materially and adversely affect The business,
assets, liabilities, financial condition, operations or prospects of the
Company. No governmental orders, permissions, consents. approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Agreement and the issuance of the Shares or the Conversion Shares. except such
as has been duly and validly obtained or filed, or with respect to any filings
that must be made after the Closing, as will be filed in a timely manner. The
Company has all franchises, permits licenses and any similar authority necessary
for the conduct of its business as now being conducted by it, the lack of which
could materially and adversely affect the business, properties, prospects or
financial condition of the Company and believes it can obtain, without undue-
burden or expense, any similar authority for the conduct of its business as
planned to be conducted.
3.14 Offering Valid. Assuming the accuracy of the representations
and warranties of the Purchasers contained in Section 4.2 hereof, the offer,
sale and issuance of the Shares and the Conversion Shares will be exempt from
the registration requirements of the Securities Act of 1933, as amended the
"Securities Act"), and will have been registered or qualified (or are exempt
from registration and qualification) under the registration, permit or
qualification requirements of all applicable state securities laws. Neither the
Company nor any agent on its behalf has solicited or will solicit any offers to
sell or has offered to sell or will offer to sell all or any part of the Shares
to any person or persons so as to bring the sale of such Shares
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<PAGE>
by the Company within the registration provisions of the Securities Act or any
state securities laws.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser hereby represents and warrants to the Company as
follows (such representations and warranties do not lessen or obviate the
representations and warranties of the Company set forth in this Agreement):
4.1 Requisite Power and Authority. Purchaser has all necessary
power and authority under all applicable provisions of law to execute and
deliver this Agreement and the Investor Rights Agreement and to carry out their
provisions. All action on Purchaser's part required for the lawful execution and
delivery of this Agreement and the Investor Rights Agreement have been or will
be effectively taken prior to the Closing. Upon their execution and delivery,
this Agreement and the Investor Rights Agreement will be valid and binding
obligations of Purchaser, enforceable in accordance with their terms, except (a)
as limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors' sights,
(b) general principles of equity That restrict The availability of equitable
remedies, and (c) to the extent that the enforceability of the indemnification
provisions of Section 2.9 of The Investor Rights Agreement may be limited by
applicable laws,
4.2 Investment Representations. Purchaser understands that neither
the Shares nor the Conversion Shares have been registered under the Securities
Act. Purchaser also understands that the Shams are being offered and sold
pursuant to an exemption from registration contained in the Securities Act based
in pan upon Purchaser's representations contained in the Agreement. Purchaser
hereby represents and, warrants as following:
(a) Purchaser Bears Economic Risk. Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests- Purchaser must bear the economic risk of
this investment indefinitely unless the Shares (or the Conversion Shares) are
registered pursuant to The Securities Am or an exemption from registration is
available Purchaser understands that the Company has no present intention of
registering the Shares, the Conversion Shares or any shares of its Common Stock.
Purchaser also understands that there is no assurance that any exemption from
registration under the Securities Act will be available and that, even if
available, such exemption may not allow Purchaser to transfer all or any portion
of the Shares or The Conversion Shares; under the circumstances, in the amounts
or at the times Purchaser might propose.
(b) Acquisition for Own Account. Purchaser is acquiring The
Shares and the Conversion Shares for Purchaser's own account for investment
only, and not with a view towards Their distribution.
(c) Purchaser Can Protect Its Interest. Purchaser represents
that by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity
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to protect its own interests in connection with the Transactions contemplated in
this Agreement. and the Investor Rights Agreement. Further, Purchaser is aware
of no publication of any advertisement in connection with the transactions
contemplated in the Agreement.
(d) Accredited Investor. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
(e) Company Information. Purchaser has received and read the
financial statements and Business Plan and has had an opportunity to discuss the
Company's business, management and financial affairs with directors, officers
and management of the Company and has had the opportunity to review the
Company's operations and facilities. Purchaser has also had the opportunity to
ask questions of and receive answers from, the Company and its management
regarding the terms and conditions of this investment
(f) Rule 144. Purchaser acknowledges and agrees that the
Shares and, if issued, the Conversion Shares must be held indefinitely unless
they are subsequently registered under the Securities Act or an exemption from
such registration is available Purchaser has been advised or is aware of the
provisions of Rule 144 promulgated under the Securities Act as in effect from
time to time, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions. including, among
other things: the availability of certain current public information about the
Company, the resale occurring following the required holding period under Rule
144 and the number of shares being sold during any three-month period not
exceeding specified limitations.
(g) Residence. If the Purchaser is an individual, then the
Purchaser resides in the state or province identified in the address of the
Purchaser set forth on EXHIBIT A; if the Purchaser is a partnership,
corporation, limited liability company or other entity, Then the office or
offices of the Purchaser in which its investment decision was mad is located at
the address or addresses of The Purchaser set forth on Exhibit A.
4.3 Transfer Restrictions. Each Purchaser acknowledges and agrees
that the Shams and, if issued, the Conversion Shares are subject to restrictions
on transfer as set forth in the Investor Rights Agreement.
5. CONDITIONS TO CLOSING.
5.1 Conditions to Purchasers' Obligations at the Closing.
Purchasers' obligations-to purchase the Shares at the Closing am subject to The
satisfaction, at or prior to the Closing Date, of the following conditions:
(a) Representations And Warranties True; Performance of
Obligations. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if they had been made as of the Closing Date,
and the Company shall have performed all obligations and conditions herein
required to be performed or observed by it on or prior to the Closing.
8
<PAGE>
(b) Legal Investment. On the Closing Date, the sale and
issuance of the Share and the proposed issuance of the Conversion Shares shall
be legally permitted by all laws and regulations to which Purchasers and the
Company are subject.
(c) Consents, Permits, and Waivers. The Company shall have
obtained any and all consents permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Investor
Rights Agreement (except for such as may be properly obtained subsequent to the
Closing).
(d) Filing of Restated Charter. The Restated Charter shall have
been filed with the Secretary of State of the State of Delaware and shall
continue to be in fall force and effect as of the Closing Date.
(e) Corporate Documents. The Company shall have delivered to
Purchasers or Their counsel, copies of all corporate documents of the Company as
Purchasers shall reasonably request.
(f) Reservation of Conversion Shares. The Conversion Shams
issuable upon conversion of the Shams shall have; been duly authorized and
reserved for issuance upon such conversion.
(g) Compliance Certificate. The Company shall have delivered to
Purchasers a Compliance Certificate, executed by the President of the Company,
dated the Closing Date, to the effect that the conditions specified in
subsections (a), (c), (d) and (f) of this Section 5.1 have been satisfied.
(h) Investor Rights Agreement. An Investor Rights Agreement
substantially in the form attached hereto as Exhibit C shall have been executed
and delivered by the parties thereto.
(i) Board of Directors. Upon the Closing, the authorized. size
of the Board of Directors of the Company shall be two (2) members and the Board
shall consist of Chris Anderson and Mark Jung.
(j) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
hereby and all documents and instruments incident to such transactions shall be
reasonably satisfactory in substance and form to the Purchasers and their
special counsel, and the Purchasers and their special counsel shall have
received all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
5.2 Conditions to Obligations of the Company. The Company's
obligation to issue and sell the Shares at each Closing is subject to the
satisfaction, an or prior to such Closing, of the following conditions:
(a) Representations and Warranties True. The representations
and warranties in Section 4 made by those Purchasers acquiring Shares hereof
shall be true and
9
<PAGE>
correct in all material respects at the date of Me Closing, with the same force
and effect as if they had been made on and as of said date.
(b) Performance Of Obligations. Such Purchasers shall have
performed and complied with all agreements and conditions herein required to be
performed or complied with by such Purchasers on or before the Closing.
(c) Filing of Restated Charter. The Restated Charter shall
have been filed with the Secretary of State of the State of Delaware.
(d) Investor Rights Agreement. An Investor Rights Agreement
substantially in the form attached hereto as Exhibit C shall have been executed
and delivered by the Purchasers.
(e) Consents, Permits and Waivers. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Investor
Rights Agreement (except for such as may be properly obtained subsequent to the
Closing).
6. Miscellaneous.
6.1 Governing Law. This Agreement shall be governed in all respects
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and performed entirely in California.
6.2 Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by any Purchaser and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
6.3 Successors and Assigns. Except as otherwise expressly provided
herein, The provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Shares from time to time.
6.4 Entire Agreement. This Agreement, the Exhibits and Schedules
hereto, the Investor Rights Agreement and the other documents delivered pursuant
hereto constitute the full and entire understanding and agreement between the
values with regard to the subjects hereof and no party shall be liable or bound
to any other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein.
6.5 Severability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, The validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
10
<PAGE>
6.6 Amendment And Waiver.
(a) This Agreement may be amended or modified only upon the
written. consent of the Company and holders of at least sixty-six and two-thirds
percent (66 2/3%) of the Shares (treated as if converted and including any
Conversion Shares into which the Shares have been converted that have not been
sold to the public).
(b) The obligations of the Company and the rights of the
holders of the Shares and the Conversion Shares under the Agreement may be
waived only with the written consent of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the Shares (treated as if converted and
including any Conversion Shares into which the Shares have been converted that
have not been sold to the public).
6.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement, the Investor
Rights Agreement or the Restated Charter, shall impair any such right, power at
remedy, nor shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. It is further agreed that any
waiver, permit, consent or approval of any kind or character on my Purchaser's
part of any breach, default or noncompliance under This Agreement, the Investor
Rights Agreement or under the Restated Charter or any waiver on such party's
part of any provisions or conditions of the Agreement, the Investor Rights
Agreement, or the Restated Charter must be in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement the Investor Right Agreement, The Restated Charter, by law,
or otherwise afforded to any party, shall be cumulative and not alternative.
6.8 Notices. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified, (b) when seat by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, 'then on the next
business day, (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All communications shall be
sent to the Company at the address as set forth on the signature page hereof and
to Purchaser at the address set forth on Exhibit A attached hereto or at such
other address as the Company or Purchaser may designate by ten (10) days advance
written notice to the other parties hereto.
6.9 Expenses. Each party shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
the Agreement.
6.10 Attorneys' Fees. In the event that any suitor action is
instituted to enforce any provision in this Agreement, the prevailing party in
such dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including without limitation, such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
11
<PAGE>
6.11 Titles and Subtitles. The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in consuming this Agreement.
6.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one
6.13 Broker's Fees. Each party hereto represents and warrants That
no agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other parry for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 6.14 being untrue.
6.14 Exculpation Among Purchasers. Each Purchaser acknowledges that
it is not relying upon any person, firm, or corporation, other than the Company
and its officers and directors, in making its investments or decisions to invest
in the Company-Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents or employees of any
Purchaser shall be liable to any other Purchaser for any action heretofore or
hereafter taken or omitted To be taken by any of them in connection with the
Shares and Conversion Shares.
6.15 Confidentiality. Each party hereto agrees to except with the
prior written consent of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such parry has been
or shall become privy by reason of this Agreement or the Investor Rights
Agreement, discussions or negotiations relating to this Agreement or the
Investor Rights Agreement, the performance of it obligations hereunder or the
ownership of the Shares purchased hereunder. The provisions of this Section
6.16 shall be in addition to, and not in substitution for, the provisions of any
separate nondisclosure agreement executed by the parties hereto.
6.16 Pronouns. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.
6.17 California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION By THE
COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT A" EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION
BEING AVAILABLE.
12
<PAGE>
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
13
<PAGE>
EXHIBIT 10.17
SERVICES AND SUPPORT AGREEMENT
THIS AGREEMENT is made effective as of January 7, 1999, by and between
IMAGINE MEDIA, INC., a California corporation ("Imagine"), and AFFILIATION
NETWORKS, INC., a Delaware corporation ("Affiliation").
RECITALS
A. Imagine has transferred certain assets to Affiliation relating to
internet businesses previously operated by Imagine.
B. In order to assist Affiliation in its organizational and start-up
phase, Imagine desires to provide certain support services Affiliation and to
permit Affiliation to occupy certain space in Imagine's premises, on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
AGREEMENT
1. Engagement of Services. Affiliation hereby engages Imagine as an
----------------------
independent contractor to provide certain support and services, including
permitting Affiliation and its employees to remain located at the Imagine
offices until Affiliation is able to move to offices of its own, all on the
terms and conditions contained herein.
2. Duties of Imagine.
-----------------
(a) Provision of Certain Support Services. During the term of this
-------------------------------------
Agreement, Imagine shall make available to Affiliation the services of one of
its experienced management personnel, namely, Simon Whitcombe, to provide a
variety of administrative, marketing, and other support services, as agreed
between the parties from time to time. Mr. Whitcombe's salary and benefits shall
remain the responsibility of Imagine while he is an employee of Imagine.
(b) Occupancy of Space. During the term of this Agreement, Imagine
------------------
shall permit Affiliation to occupy space at Imagine's premises in a location
determined by Imagine in its absolute and sole discretion.
(c) Provision of Technology and Information Services Support. During
--------------------------------------------------------
the term of this Agreement, Imagine shall make available to Affiliation certain
technological and information services for various periods, including help desk
support through April 1, 1999; e-mail; co-location facility bandwidth; and use
of T-1 lines and certain software.
<PAGE>
3. Duties of Affiliation.
---------------------
(a) Information. Affiliation agrees to cooperate with Imagine in all
-----------
respects and shall furnish Imagine all information required by it for the
performance of its services, and shall permit Imagine to examine and copy any
data in the possession and control of Affiliation affecting management and/or
operations, and shall in every way cooperate to enable Imagine to perform its
services in a satisfactory manner.
(b) Salaries; Costs. Affiliation agrees to be responsible for all of its
---------------
own operating costs, expenses, capital expenditures, fees and losses not
otherwise provided by Imagine under the terms of this Agreement, including
without limitation the cost of employee benefits, equipment, supplies, and
service contracts.
4. Compensation. Affiliation shall pay to Imagine, for services performed
------------
by Imagine on behalf of Affiliation pursuant to this Agreement, as follows:
(a) Direct Expenses. With respect to payroll costs related to the
---------------
services provided by Mr. Whitcombe, Affiliation shall pay the actual costs
thereof plus an amount equal to five percent (5%) thereof.
(b) Occupancy and Technology Costs. In compensation for the right to
------------------------------
occupy space at the Imagine's offices and receive technological and information
services, Affiliation shall pay to Imagine a percentage fee based upon an
allocation of certain costs as set forth with more particularly on Exhibit A
attached hereto. This percentage fee is based upon the number of Affiliation
employees as well as traffic to the Affiliation hub websites utilizing Imagine
file servers and the serving of ads from Imagine computers. The parties agree to
review the percentage allocations set forth on Exhibit A from time to time to
determine whether they need to be adjusted in light of actual experience.
(c) Reimbursement. Affiliation will reimburse Imagine for all out-of-
-------------
pocket costs and other advances made by Imagine for the benefit of Affiliation.
(d) Time for Payment. Affiliation shall pay to Imagine the sums due
----------------
under this Paragraph 4 as follows: within thirty (30) days after the end of
every calendar month, Imagine shall prepare a statement detailing and
reconciling (if necessary) the costs incurred and calculating the actual
compensation due under this Paragraph 4. Affiliation shall pay the amount due
within ten (10) days following receipt of such statement from Imagine.
5. Term. The term of this Agreement shall extend until the earlier of (a)
----
the date on which Affiliation relocates from the Imagine premises, or (b)
October 1, 1999. Upon the termination of this Agreement as provided in (b)
above, the parties agree to negotiate an extension or renewal of this Agreement
if necessary.
6. Arbitration. Any dispute arising out of or relating to this Agreement
-----------
shall be finally settled by one arbiter under the then existing Commercial
Arbitration Rules of the American Arbitration Association in arbitration
proceedings conducted in the City of
2
<PAGE>
San Francisco, California. The arbiter shall have no power or authority in
making his award to modify, enlarge or add to the terms and provisions of this
Agreement. Judgment upon the award of the arbiter shall be binding upon the
parties and may be entered in any court having jurisdiction. Costs and
attorneys' fees shall be paid as the arbiter's award shall specify.
7. Notices. All notices and other communications provided for in this
-------
Agreement shall be given or made by telex, telecopy, telegraph, cable, certified
or registered mail (return receipt requested), or delivered personally or by a
nationally recognized overnight courier service. All such communications shall
be deemed to have been duly given when transmitted by telex or telecopier (if a
copy thereof is also mailed to the recipient, certified or registered mail,
postage prepaid), or personally delivered or delivered by cable, telegraph, or
nationally recognized overnight courier service, or five (5) days after mailing,
postage prepaid.
8. Miscellaneous.
-------------
(a) Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties.
(b) Applicable Law. This Agreement shall be governed in all respects,
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of California.
(c) Binding Effect. This Agreement shall be binding upon and shall
--------------
inure to the benefit of the parties hereto and their respective successors,
assigns, heirs and personal representatives.
(d) Paragraph Headings. The paragraph headings used in this Agreement
------------------
are included solely for the convenience of the parties and shall not affect or
be used in connection with the interpretation of this Agreement.
(e) Severability. In the event any provision or portion of a
------------
provision of this Agreement is held to be invalid, void or unenforceable, the
rest of the Agreement shall, nonetheless, remain in full force and effect and
shall in no way be affected, impaired, or invalidated.
(f) Entire Agreement. This instrument constitutes the entire
----------------
agreement between the parties and supersedes all prior understandings, previous
negotiations, and any memoranda or understanding with respect to the subject
matter hereof.
3
<PAGE>
(g) No Strict Construction. The language used in this Agreement shall
----------------------
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction will be applied against any
person.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective as of the day and year first set forth above.
IMAGINE MEDIA, INC. AFFILIATION NETWORKS, INC.
a California corporation a Delaware corporation
By: /s/ Thomas P. Valentino By: /s/ Mark Jung
-------------------------- ----------------------------
Thomas P. Valentino, CFO Mark Jung, CEO
4
<PAGE>
Exhibit A
Services and Support Agreement
Imagine Medial/Affiliation Networks
<TABLE>
<CAPTION>
Jan-99 Feb-99 Mar-99
- ----------------------------------------------------------------------------------------------------------------------------
mo. rates % fee alloc fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accounting per head $ 475 100% $ 22,800 50% $ 11,400 0% $ -
- ----------------------------------------------------------------------------------------------------------------------------
Accommodation (space)
- ----------------------------------------------------------------------------------------------------------------------------
per sqft $ 2.50 100% 18,600 100% 18,600 100% 19,375
- ----------------------------------------------------------------------------------------------------------------------------
sqft/head 155
- ----------------------------------------------------------------------------------------------------------------------------
Office-Admin per head $ 875 100% $ 42,000 100% $ 42,000 80% $ 35,000
- ----------------------------------------------------------------------------------------------------------------------------
IT
- ----------------------------------------------------------------------------------------------------------------------------
per head $675.00 100% 32,400 100% $ 32,400 50% $ 16,875
- ----------------------------------------------------------------------------------------------------------------------------
internet per avg daily visit $ 0.18 100% $ 50,040 100% $ 50,040 50% $ 25,020
- ----------------------------------------------------------------------------------------------------------------------------
Management per head $ 800 100% $ 0 25% $ 9,600 5% $ 2,000
- ----------------------------------------------------------------------------------------------------------------------------
Production n/a
- ----------------------------------------------------------------------------------------------------------------------------
Circ. n/a
- ----------------------------------------------------------------------------------------------------------------------------
Corp Mkting n/a -------- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
Totals $204,240 $164,040 $ 98,270
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
estimated headcount 42 48 48 50
- ----------------------------------------------------------------------------------------------------------------------------
avg daily visits
- ----------------------------------------------------------------------------------------------------------------------------
ign hub sites 248,000 248,000 248,000
- ----------------------------------------------------------------------------------------------------------------------------
chickclick 5,000 5,000 5,000
- ----------------------------------------------------------------------------------------------------------------------------
den--- 20,000 20,000 20,000
- ----------------------------------------------------------------------------------------------------------------------------
power studnts 5,000 5,000 5,000
- ----------------------------------------------------------------------------------------------------------------------------
278,000 278,000 278,000
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Notes:
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Apr-99 May 99
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounting 0% $ 0% $
- -----------------------------------------------------------------------
Accommodation (space)
- -----------------------------------------------------------------------
100% 21,313 100% 21,313
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Office-Admin 80% $ 38,500 80% $ 38,500
- -----------------------------------------------------------------------
IT
- -----------------------------------------------------------------------
25% $ 9,281 25% $ 9,2815
- -----------------------------------------------------------------------
internet 50% $ 25,020 50% $ 25,020
- -----------------------------------------------------------------------
Management 5% $ 2,200 5% $ 2,200
- -----------------------------------------------------------------------
Production
- -----------------------------------------------------------------------
Circ.
- -----------------------------------------------------------------------
Corp Mkting -------- --------
- -----------------------------------------------------------------------
Totals $ 96,314 $ 96,314
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
estimated headcount 55 55
- -----------------------------------------------------------------------
avg daily visits
- -----------------------------------------------------------------------
ign hub sites 248,000 248,000
- -----------------------------------------------------------------------
chickclick 5,000 5,000
- -----------------------------------------------------------------------
den--- 20,000 20,000
- -----------------------------------------------------------------------
power studnts 5,000 5,000
- -----------------------------------------------------------------------
278,000 278,000
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Notes:
- -----------------------------------------------------------------------
</TABLE>
Accounting assumes affiliation has complete control by 3/1.
Accommodation: 100% chargeback for rents, utilities, insurance, janitorial, etc.
until affiliation relocates.
Office admin: includes HR effort - assumes affiliation handle its own HR
effective 3/1
IT: includes Imagine's IT personnel including help desk and unix; also Imagine's
network infrastructure - assumes eff 3/1 affiliation starts providing some help
desk and eff 4/1 only IT support relates to use of imagine's network
infrastructure.
IT-internet: includes colocation facility bandwidth, T-1 and deprec relating to
internet capital equip - will be reduced as affiliation establishes their own
co-location arrangement, however, charges relating to T-1 and accipitor
will probably remain.
Visits per existing reports- hub sites only, no affiliates.
Management: assumes that affiliation will handle - allows for some of TV's
time.
headcount calc: new starts at beg mo count as 1, if after 15/th/ counted as 1/2.
Represents people located on Imagine premises.
need to retain some flexibility if efforts are more or less than expected
all recharge assumptions are same as rates used for other Imagine-owned
properties
<PAGE>
EXHIBIT 10.18
BRISBANE TECHNOLOGY PARK
LEASE
by and between
GAL-BRISBANE, L.P., a California limited partnership
as Landlord,
and
SNOWBALL.COM, INC., a Delaware corporation
as Tenant
<PAGE>
LEASE SUMMARY
<TABLE>
<S> <C>
Lease Date: November 29, 1999
Landlord: GAL-BRISBANE, L.P., a California limited partnership
Landlord's Address: c/o Stuhlmuller Property Company
4055 Bohannon Drive
Menlo Park, CA 94025
Attn: Mr. Roger Stuhlmuller
Telephone: (415) 321-5900
Fax No.: (415) 321-5933
Tenant: SNOWBALL.COM, INC.,
a Delaware corporation
Tenant's Address:
Prior to the Commencement 250 Executive Park Boulevard, Suite 400
Date: San Francisco, CA 94134
Attn: Ms. Jeanne Montez
Telephone: (415) 508-2000
Fax No: (415) 508-2001
After the Commencement Date: 3280 Bayshore Boulevard
Brisbane, CA 94005
Attn: Ms. Jeanne Montez
Premises: The Premises shall consist of approximately one hundred
eighty-three thousand two hundred eighty-four (183,284)
rentable square feet of space, consisting of (i)
approximately fifty-five thousand eight hundred eighty-
three (55,883) rentable square feet of space located in the
building ("Building A") commonly known as 3280
Bayshore Boulevard, (ii) approximately sixty-one thousand
four hundred fourteen (61,414) rentable square feet of
space located in the building ("Building B") commonly
known as 3260 Bayshore Boulevard and (iii)
approximately sixty-five thousand nine hundred eighty-
seven (65,987) rentable square feet of space located in the
building ("Building C") commonly known as 3240
Bayshore Boulevard. The Premises is located in the City
of Brisbane, State of California.
Premises Address: 3280, 3260 and 3240 Bayshore Blvd., Brisbane,
California 94005
</TABLE>
v.
<PAGE>
<TABLE>
<S> <C>
Project: That certain office business park commonly known as
Brisbane Technology Park, and more particularly described
in Exhibit B, attached hereto. The Project shall consist of
---------
Building A, Building B and Building C, adjacent parking
areas, landscaping and related improvements and will
contain approximately one hundred eighty-three thousand
two hundred eighty-four (183,284) rentable square feet of
space.
Tenant's Project Percentage: A percentage equal to the rentable square footage of the
Project divided by the rentable square footage of the
Premises. As of the Commencement Date, Tenant's
Project Percentage is one hundred percent (100%).
Building A Commencement Date: The earlier of (A) the one hundred thirtieth (130th) day
after Landlord substantially completes the Building A Shell
(as defined in the Work Letter) and delivers possession of
the Building A Shell to Tenant or (B) the date Tenant
commences its business operations within the Building A
Premises.
Building B Commencement Date: The earlier of (A) the one hundred thirtieth (130th) day
after Landlord substantially completes the Building B Shell
(as defined in the Work Letter) and delivers possession of
the Building B Shell to Tenant or (B) the date Tenant
commences its business operations within the Building B
Premises.
Building C Commencement Date: The earlier of (A) the one hundred thirtieth (130th) day
after Landlord substantially completes the Building C Shell
(as defined in the Work Letter) and delivers possession of
the Building C Shell to Tenant or (B) the date Tenant
commences its business operations within the Building C
Premises.
Building A Term: One hundred twenty (120) full calendar months and any
partial calendar month at the commencement of the
Building A Term
Building B Term: One hundred thirty-two (132) full calendar months and any
partial calendar month at the commencement of the
Building B Term
Building C Term: One hundred forty-four (144) full calendar months and any
partial calendar month at the commencement of the
Building C Term
</TABLE>
vi.
<PAGE>
<TABLE>
<S> <C>
Initial Base Rent: Two Dollars ($2.00) per square foot per month (subject to
adjustment pursuant to Paragraph 3.A.(ii))
Security Deposit: Four Million Three Hundred Ninety-Eight Thousand Eight Hundred
Sixteen Dollars ($4,398,816.00) (subject to
adjustment pursuant to Paragraph 28)
Landlord's Broker: BT Commercial Real Estate (Mr. Mike Connor and Mr.
Randy Keller)
Tenant's Broker: BT Commercial Real Estate (Mr. Robert Baumann and
Ms. Taylor Milsal)
</TABLE>
vii
<PAGE>
BRISBANE TECHNOLOGY PARK
LEASE
-----
THIS LEASE (this "Lease"), dated as of November 29, 1999, is entered into
by and between GAL-BRISBANE, L.P., a California limited partnership
("Landlord"), and SNOWBALL.COM, INC., a Delaware corporation ("Tenant").
1. PREMISES
A. Leased Premises. Landlord hereby leases to Tenant, and Tenant hereby
---------------
leases from Landlord, those certain premises (the "Premises") to be constructed
in the Project (defined below) consisting of approximately one hundred eighty-
three thousand two hundred eighty-four (183,284) rentable square feet of space,
as shown on Exhibit A attached hereto. The Premises consists of: (i)
---------
approximately fifty-five thousand eight hundred eighty-three (55,883) rentable
square feet of space (the "Building A Premises") located in Building A (defined
in the Lease Summary) and commonly known as 3280 Bayshore Boulevard, Brisbane,
California, (ii) approximately sixty-one thousand four hundred fourteen (61,414)
rentable square feet of space (the "Building B Premises") located in Building B
(defined in the Lease Summary) and commonly known as 3260 Bayshore Boulevard,
Brisbane, California and (iii) approximately sixty-five thousand nine hundred
eighty-seven (65,987) rentable square feet of space (the "Building C Premises")
located in Building C (defined in the Lease Summary) and commonly known as 3240
Bayshore Boulevard, Brisbane, California. Building A, Building B and Building C
are hereinafter referred to collectively as the "Buildings," and each
interchangeably as the "Building." The Premises are located within that certain
office business park commonly known as Brisbane Technology Park (the "Project"),
and more particularly described in Exhibit B attached hereto. The Project
---------
consists of the Buildings, adjacent parking areas, landscaping and related
improvements. The total rentable square footage of the Project is approximately
one hundred eighty-three thousand two hundred eighty-four (183,284) rentable
square feet. The Project and the Buildings have not been fully constructed as
of the date of this Lease.
For the purposes of this Lease, the term "Premises" shall refer to the
Building A Premises, the Building B Premises and/or the Building C Premises then
leased to Tenant. For example, if the Building A Term commences prior to the
Building B Term and the Building C Term (as each term is hereinafter defined)
and the Building B Term commences prior to the Building C Term, then the term
"Premises" shall mean as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------ ----------------------------------------
Time Period Area Included
----------- -------------
- ------------------------------------------------------ ----------------------------------------
<S> <C>
Building A Commencement Date* up to (but not
including) the Building B Commencement Date* Building A Premises
- ------------------------------------------------------ ----------------------------------------
Building B Commencement Date up to (but not
including) the Building C Commencement Date* Building A Premises and Building B
Premises
- ------------------------------------------------------ ----------------------------------------
</TABLE>
1.
<PAGE>
<TABLE>
- ------------------------------------------------------ ----------------------------------------
<S> <C>
Building C Commencement Date up to (and including)
the Building A Expiration Date* Building A Premises, Building B
Premises and Building C Premises
- ------------------------------------------------------ ----------------------------------------
The day after the Building A Expiration Date up to
(and including) the Building B Expiration Date* Building B Premises and Building C
Premises
- ------------------------------------------------------ ----------------------------------------
The day after the Building B Expiration Date up to Building C Premises
(and including) the Building C Expiration Date*
- ------------------------------------------------------ ----------------------------------------
</TABLE>
*As hereinafter defined.
B. Project Common Areas. Tenant's right to use the Project Common Areas
--------------------
(as hereinafter defined) is a right in common with other tenants of the Project,
if any. For purposes of this Lease, the term "Project Common Areas" shall mean
all areas and facilities within the Project except for the Buildings, including,
but not limited to, parking areas, access and perimeter roads, sidewalks,
landscaped areas, service areas, trash disposal facilities and similar areas,
subject to the reasonable rules and regulations and changes therein from time to
time made by Landlord governing the use of the Project Common Areas. Landlord
shall at all times have exclusive control of the Project Common Areas and may at
any time temporarily close any part thereof, exclude and restrain anyone from
any part thereof, and/or temporarily or permanently change the size,
configuration, composition and/or location of the Project Common Areas.
Specifically, Landlord shall have the right from time to time during the Lease
Term (as hereinafter defined) to (a) grant easements within the boundaries of
the Project, (b) modify the parking areas and ingress and egress to and from the
parking areas and the buildings located within the Project, (c) modify the
directional flow of traffic in the Project, (d) make alterations or additions to
the Buildings and any other buildings located within the Project, and (e)
install, maintain, use, repair and replace pipes, ducts, conduits and wires,
leading through, under or over the Premises to locations serving other parts of
the Project. Landlord also reserves the right to expand or contract the area of
the Project, to make alterations thereof or additions thereto and to construct
and install additional buildings and other improvements within the Project;
provided, however that in such case, Tenant's Project Percentage (as hereinafter
defined) shall be proportionately adjusted. In exercising any of the foregoing
rights, (i) Landlord shall make commercially reasonable efforts to minimize any
disruption of Tenant's business in the Premises, (ii) Landlord may not reduce
the number of parking spaces located within the Project below six hundred twenty
(620) parking spaces unless required by law and (iii) Landlord shall not
materially and adversely restrict or limit Tenant's access to the Premises.
C. Rentable Area
-------------
(i) Calculations Based on Rentable Area. Tenant acknowledges
-----------------------------------
that the Building Shells (as defined in the Work Letter) are not constructed as
of the date of this Lease and that the Base Rent and Additional Rent (each as
hereinafter defined) and certain other items set forth in this Lease will be
calculated based on the rentable area of the Premises and the rentable area of
the Buildings.
2.
<PAGE>
(ii) Determination of Rentable Area. Landlord's architect shall
------------------------------
determine and certify the rentable area of the Premises and the Buildings in
accordance with the Building Owners and Managers Association ("BOMA") definition
American National Standard Z65.1-1996. Landlord shall notify Tenant in writing
of the rentable areas of each Building as determined by Landlord's architect
upon delivery of possession to Tenant of the portion of the Premises within that
Building. Tenant shall have thirty (30) days from the date on which Landlord or
Landlord's architect notifies Tenant in writing of the determination of the
rentable area of the applicable Building to object to the determination made by
Landlord's architect. If Tenant timely notifies Landlord of its objection,
Tenant shall arrange for an architect selected by Tenant to remeasure the
rentable area of the applicable Building in accordance with the BOMA standard
referenced above.
(iii) Arbitration. If Landlord and Tenant are unable to agree upon
-----------
the rentable area of the applicable Building within thirty (30) days after
Tenant notifies Landlord of Tenant's objection to the determination made by
Landlord's architect, Landlord and Tenant shall submit the matter to binding
arbitration before a single neutral arbitrator in accordance with the provisions
below. Until the matter has been resolved by the arbitrator, the Base Rent and
Tenant's Project Percentage shall be calculated according to the rentable area
of the Premises and the Building as calculated by Landlord's architect. The Base
Rent and Tenant's Project Percentage shall be retroactively adjusted upon final
determination of the rentable area of the Premises and the applicable Building.
(a) Selection of Arbitrator. Either party may initiate the
-----------------------
arbitration procedure by delivering a written notice of demand for arbitration
to the other party. Within thirty (30) days after the other party's receipt of
the written notice of demand for arbitration, the parties shall attempt to
select a qualified arbitrator who is acceptable to both parties. Any potential
arbitrator shall (i) be disinterested, have no conflict of interest and have no
business or material social interaction with either of the parties for the prior
five (5) years, (ii) be a licensed architect in California, and (iii) have at
least five(5) years' experience. If the parties are unable to agree within that
time upon an arbitrator who is acceptable to both parties, either party may
request the American Arbitration Association to appoint the arbitrator in
accordance with its Commercial Arbitration Rules.
(b) Rules of Arbitration. The matter shall be decided by
--------------------
arbitration in accordance with the applicable arbitration statutes and the then
existing Commercial Arbitration Rules of the American Arbitration Association.
The arbitrator shall apply California law relating to privileges and work
product. Arbitration hearing(s) shall be conducted in San Mateo County,
California. In rendering his or her award, the arbitrator shall set forth the
reasons for his or her decision. This agreement to arbitrate any dispute shall
be specifically enforceable under the prevailing arbitration law. Judgment on
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
(c) Adjustment of Rent. Upon the arbitrator's determination
------------------
of the rentable areas of the Premises and applicable Building, the Base Rent and
the Tenant's Project Percentage shall be retroactively adjusted as of the
Commencement Date and Landlord and Tenant shall enter into a letter agreement to
memorialize their agreement. If such adjustment results in an underpayment of
Rent by Tenant, Tenant shall pay to Landlord the amount of such
3.
<PAGE>
underpayment within thirty (30) days after the determination thereof. If such
adjustment results in an overpayment of Rent by Tenant, Landlord shall credit
such overpayment against the next installment of Rent due under this Lease and,
to the extent necessary, any subsequent installments until the entire amount of
such overpayment has been credited against Rent.
(d) Fees and Expenses. The fees and expenses of the
-----------------
arbitrator pursuant to this Paragraph shall be shared equally by Landlord and
Tenant.
(e) Attorneys' Fees. Each party shall bear its own attorneys'
---------------
fees incurred in the proceeding.
2. LEASE TERM
A. Term
----
(i) Building A Term. The term of this Lease as it applies to the
---------------
Building A Premises shall be a period of approximately ten (10) years,
commencing on the Building A Commencement Date (defined in Paragraph 2.B(i)) and
ending, unless earlier terminated pursuant to the terms of this Lease, on the
last day of the one hundred twentieth (120th) full calendar month after the
Building A Commencement Date (the "Building A Expiration Date"). Such period,
as the same may be extended pursuant to the terms hereof, shall be referred to
hereinafter as the "Building A Term."
(ii) Building B Term. The term of this Lease as it applies to the
---------------
Building B Premises shall be a period of approximately eleven (11) years,
commencing on the Building B Commencement Date (defined in Paragraph 2.B(ii))
and ending, unless earlier terminated pursuant to the terms of this Lease, on
the last day of the one hundred thirty-second (132nd) full calendar month after
the Building B Commencement Date (the "Building B Expiration Date"). Such
period, as the same may be extended pursuant to the terms hereof, shall be
referred to hereinafter as the "Building B Term."
(iii) Building C Term. The term of this Lease as it applies to
---------------
Building C Premises shall be a period of approximately twelve (12) years,
commencing on the Building C Commencement Date (defined in Paragraph 2.B(iii))
and ending, unless earlier terminated pursuant to the terms of this Lease, on
the last day of the one hundred forty-fourth (144th) full calendar month after
the Building C Commencement Date (the "Building C Expiration Date"). Such
period, as the same may be extended pursuant to the terms hereof, shall be
referred to hereinafter as the "Building C Term."
(iv) Collectively. The Building A Term, Building B Term and
------------
Building C Term are individually or collectively sometimes referred to as the
"Lease Term."
B. Commencement Date; Delivery Dates
---------------------------------
(i) Building A Commencement Date. For purposes of this Lease,
----------------------------
the term "Building A Commencement Date" shall be the earlier of (A) the one
hundred thirtieth (130th) day after Landlord substantially completes the
Building A Shell (as defined in the Work Letter) and delivers possession of the
Building A Shell to Tenant or (B) the date Tenant commences its
4.
<PAGE>
business operations within the Building A Premises. The estimated completion
date for the Building A Shell (the "Estimated Building A Shell Completion Date")
is March 3, 2000.
(ii) Building B Commencement Date. For purposes of this Lease, the
----------------------------
term "Building B Commencement Date" shall be the earlier of (A) the one hundred
thirtieth (130th) day after Landlord substantially completes the Building B
Shell (as defined in the Work Letter) and delivers possession of the Building B
Shell to Tenant or (B) the date Tenant commences its business operations within
the Building B Premises. The estimated completion date for the Building B Shell
(the "Estimated Building B Shell Completion Date") is March 24, 2000.
(iii) Building C Commencement Date. For purposes of this Lease, the
----------------------------
term "Building C Commencement Date" shall be the earlier of (A) the one hundred
thirtieth (130th) day after Landlord substantially completes the Building C
Shell (as defined in the Work Letter) and delivers possession of the Building C
Shell to Tenant or (B) the date Tenant commences its business operations within
the Building C Premises. The estimated completion date for the Building C Shell
(the "Estimated Building C Shell Completion Date") is April 14, 2000.
(iv) Substantial Completion - Building Shells. Each Building Shell
----------------------------------------
shall be deemed "substantially complete" when (i) Landlord's Contractor (as
defined in the Work Letter) has substantially completed the Building Shell even
though minor items may remain to be installed, finished or corrected and
notwithstanding Tenant's delivery to Landlord of a "punchlist" of items that
require correction, provided such minor items do not have any material effect on
the ability of Tenant to utilize the Building Shell for its intended purpose or
to construct the Tenant Improvements in the Building Shell, and (ii) Landlord's
Architect (as defined in the Work Letter) has delivered to Tenant a written
statement declaring (a) that the Building Shell is "substantially complete" in
accordance with the terms of the Work Letter and (b) the date on which the
Building Shell was substantially completed.
(v) Commencement Date; Expiration Date. For purposes of this Lease,
----------------------------------
(i) the term "Commencement Date" shall refer to the earliest to occur of the
Building A Commencement Date, the Building B Commencement Date or the Building C
Commencement Date, and (ii) the term "Expiration Date" shall refer to the latest
to occur of the Building A Expiration Date, the Building B Expiration Date or
the Building C Expiration Date. The term "Estimated Shell Completion Date" shall
mean the Estimated Building A Shell Completion Date, the Estimated Building B
Shell Completion Date and/or the Estimated Building C Shell Completion Date, as
applicable.
C. Commencement Date Memorandum. Within ten (10) days after the
----------------------------
determination of each of the Building A Commencement Date, Building B
Commencement Date and Building C Commencement Date, Landlord and Tenant shall
execute a Commencement Date Memorandum in the form shown in Exhibit D attached
---------
hereto.
D. Tenant's Access. Upon written notice from Landlord that the Building
---------------
Shells have been completed to such extent as to allow Tenant to commence
construction of the Tenant Improvements in the Building Shells, Tenant shall be
allowed access to the Building Shells prior to their completion of the Building
Shells for the purpose of constructing the Tenant Improvements provided that (i)
Tenant's access and construction of the Tenant Improvements in
5.
<PAGE>
the Building Shell does not interfere with Landlord's completion of the Building
Shells or occasion any labor dispute as a result and (ii) Tenant provides
Landlord and Landlord's architect with twenty-four (24) hours' prior written
notice of its intent to enter a Building Shell or perform any work in a Building
Shell. Tenant assumes all risk of loss or damage to Tenant's machinery,
equipment, fixtures and other personal property and the Tenant Improvements, and
hereby agrees to indemnify, defend and hold harmless Landlord from any loss or
damage to such machinery, equipment, fixtures and personal property and the
Tenant Improvements, and all liability, loss or damage arising from any injury
to the property of Landlord, or its contractors, subcontractors or materialmen,
and any death or personal injury to any person or persons to the extent arising
out of Tenant's access or work, except for liability, loss or damage caused by
Landlord's gross negligence or willful misconduct.
E. Failure to Deliver Possession. If, for any reason, Landlord cannot
-----------------------------
deliver possession of Building A, Building B or Building C to Tenant by the
applicable Estimated Shell Completion Date, then except as otherwise
specifically in Paragraph 3.D below, this Lease shall remain in effect, Landlord
shall not be subject to any liability, and such failure shall not extend the
expiration date of this Lease.
F. Ultimate Termination Date. Notwithstanding anything to the contrary
-------------------------
contained in this Lease, if Landlord fails to substantially complete and deliver
possession of a Building Shell to Tenant within one (1) year after the
applicable Estimated Shell Completion Date (the "Ultimate Shell Completion
Date"), then this Lease shall automatically terminate with respect to Tenant's
lease of space in that Building; provided, however, solely with respect to
Tenant's right to terminate this Lease of space in any Building pursuant to this
Paragraph 2.F, the Ultimate Shell Completion Date with respect to each Building
shall be extended one day for each day of a Tenant Delay associated with that
Building.
3. RENT
A. Base Rent
---------
(i) Initial Base Rent. Commencing on the Commencement Date, and
-----------------
continuing thereafter until the Expiration Date or earlier termination of this
Lease, Tenant shall pay to Landlord base rent (the "Base Rent") for the Premises
in the amount of Two Dollars ($2.00) per month per rentable square foot of the
Premises then subject to the Lease. Base Rent shall be paid in advance on the
first day of each calendar month, in lawful money of the United States, without
abatement, deduction, claim, offset, prior notice or demand except as otherwise
specifically provided in this Lease. Tenant shall pay to Landlord the first
full calendar month's Base Rent for Building A upon execution of this Lease.
(ii) Adjustments. The Base Rent shall be increased on the first
-----------
(1st) day of the thirteenth (13th) month after the Commencement Date and on each
anniversary of the Commencement Date thereafter until the Expiration Date (each,
an "Adjustment Date") to reflect any increases in the U.S. Department of Labor,
Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers, All Items
(1982-1984 = 100) San Francisco/Oakland Area (the "Index") as follows: The
increased Base Rent to become effective on any Adjustment Date
6.
<PAGE>
by a fraction, the numerator of which is the most recently
published Index prior to the Adjustment Date and the denominator of which is the
most recently published Index prior to the Commencement Date or the last prior
Adjustment Date, as the case may be, provided, however, that the percentage
increase in the Base Rent on any Adjustment Date shall not be greater than six
percent (6%) or less than three percent (3%) of the Base Rent in effect
immediately prior to such Adjustment Date.
B. Additional Rent. All monies other than Base Rent that Tenant is
---------------
required to pay under this Lease, including, without limitation, a portion of
repair and maintenance charges pursuant to Paragraph 8, Real Property Taxes
pursuant to Paragraph 10, insurance premiums pursuant to Paragraph 11 and
Operating Expenses pursuant to Paragraph 12, shall be deemed "Additional Rent"
and shall be paid to Landlord as provided in this Lease. The term "Rent" as used
herein shall refer to Base Rent plus any Additional Rent. All Rent shall be paid
to Landlord at Landlord's address set forth in the Lease Summary or at such
other place designated by Landlord in a written notice to Tenant.
C. Prorations. If the Commencement Date is not the first (1st) day of a
----------
calendar month, or if the expiration date of this Lease is not the last day of a
calendar month, Base Rent due for the fractional month during which this Lease
commences or expires shall be prorated on the basis of a thirty (30) day month.
If the rentable square footage of the Premises changes in accordance with
Paragraph 1.A of this Lease on other than the first day of a calendar month,
then the Base Rent for such calendar month shall be equitably allocated on a per
diem basis, based on the number of days in such calendar month.
D. Delays
------
(i) Tenant Delay. If Landlord fails to substantially complete and
------------
deliver possession of the Building A Shell, the Building B Shell and/or the
Building C Shell to Tenant by the applicable Estimated Shell Completion Date for
such Building as a result of a Tenant Delay and, as a result, the Building A
Commencement Date, the Building B Commencement Date and/or the Building C
Commencement Date is delayed, then (i) the Building A Commencement Date shall be
the day on which the Building A Commencement Date would have occurred but for
the Tenant Delay, as reasonably determined by Landlord, (ii) the Building B
Commencement Date shall be the day on which the Building B Commencement Date
would have occurred but for the Tenant Delay, as reasonably determined by
Landlord, and (iii) the Building C Commencement Date shall be the day on which
the Building C Commencement Date would have occurred but for the Tenant Delay,
as reasonably determined by Landlord.
(ii) Landlord Delay. Notwithstanding anything to the contrary
--------------
contained in Paragraph 2.E, (a) if Landlord fails to substantially complete and
deliver possession of the Building A Shell to Tenant by the ninetieth (90th) day
after the Estimated Building A Shell Completion Date (which Estimated Shell
Completion Date shall be extended one (1) day for each day of a Tenant Delay and
each day that Landlord is precluded from performing Landlord's Work as a result
of an event of Force Majeure), then the Base Rent for the Building A Premises
shall abate after the Building A Commencement Date one (1) day for each day of
such delay, (b) if Landlord fails to substantially complete and deliver
possession of the Building B Shell to Tenant by the ninetieth (90th) day after
the Estimated Building B Shell Completion Date (which
7.
<PAGE>
Estimated Shell Completion Date shall be extended one (1) day for each day of a
Tenant Delay and each day that Landlord is precluded from performing Landlord's
Work as a result of an event of Force Majeure), then the Base Rent for the
Building B Premises shall abate after the Building B Commencement Date one (1)
day for each day of such delay, and (c) if Landlord fails to substantially
complete and deliver possession of the Building C Shell to Tenant by the
ninetieth (90th) day after the Estimated Building C Shell Completion Date (which
Estimated Shell Completion Date shall be extended one (1) day for each day of a
Tenant Delay and each day that Landlord is precluded from performing Landlord's
Work as a result of an event of Force Majeure), then the Base Rent for the
Building C Premises shall abate after the Building C Commencement Date one (1)
day for each day of such delay.
4. CONDITION OF PREMISES
Landlord shall deliver possession of each Building Shell to Tenant in the
condition required pursuant to the Work Letter. Tenant shall have one (1) year
from the delivery of each Building Shell in which to notify Landlord in writing
of any defects in such Building Shell (or the building systems contained
therein). If Tenant fails to notify Landlord in writing of any defect in such
Building Shell (or the building systems contained therein) within the one (1)
year period referenced above, that Building Shell shall be deemed to have been
delivered to Tenant in good condition and repair and in compliance with all
applicable Laws (defined in Paragraph 5.B.(i)). Tenant acknowledges that,
except as expressly provided in this Lease, neither Landlord nor Landlord's
authorized agents, partners, members, subsidiaries, directors, officers and/or
employees (collectively, "Landlord's Agents") have made any representations or
warranties as to the suitability or fitness of the Premises for the conduct of
Tenant's business or for any other purpose, nor has Landlord or Landlord's
Agents agreed to undertake any Alterations (defined below in Paragraph 7) or
construct any Tenant Improvements to the Premises.
5. USE
A. Tenant's Use. Tenant shall use the Premises solely for office,
------------
administration, research and development, manufacturing and warehousing purposes
and any other legal purpose permitted by the City of Brisbane, California, and
shall not use the Premises for any other use or purpose.
B. Compliance with Laws and Project Rules and Regulations
------------------------------------------------------
(i) Laws
----
(a) Tenant's Compliance. Tenant shall not use the Premises or
-------------------
suffer or permit anything to be done in or about the Premises which shall in any
way conflict with the requirements of any covenants, conditions and/or
restrictions of record, or with any law, statute, zoning restriction, ordinance,
order, rule, regulation or requirement of any duly constituted public
authorities (including, without limitation, state, municipal, county and federal
governments and their departments, bureaus, boards and officials), whether now
in force or which may hereafter be in force, applicable to the condition, use or
occupancy of the Premises whether or not any condition or occupancy is related
to Tenant's particular use of the Premises (collectively, "Laws"), including,
without imitation, (i) the San Bruno Mountain Area Habitat
8.
<PAGE>
Conservation Plan, as amended (the "HCP") and (ii) that certain Declaration of
Covenants and Restrictions on Real Property on San Bruno Mountain. Throughout
the Lease Term, Tenant shall, at its own cost and expense, promptly and properly
observe and comply with all Laws, including, without limitation, the making by
Tenant of any Alteration (as defined in Paragraph 7) to the Premises or any
change to the Tenant Improvements as may be necessitated by such Laws,
including, without limitation, all applicable building codes, Title III of the
Americans with Disabilities Act and all state and local accessibility
requirements (collectively, the "Accessibility Requirements") and Title 24 of
the California Code of Regulations, as such may be amended from time to time.
(b) Landlord's Compliance. Landlord shall construct the Building
---------------------
Shells in compliance with all Laws. In addition, Landlord shall maintain the
Project Common Areas and perform Landlord's maintenance and repair obligations
pursuant to Paragraph 8.A of this Lease in compliance with all Laws, including,
without limitation, all applicable building codes, Accessibility Requirements
and Title 24 of the California Code of Regulations, as such may be amended from
time to time.
(ii) Rules and Regulations. Tenant shall comply with the Rules and
---------------------
Regulations of the Project which are attached hereto as Exhibit E, as the same
---------
may be modified and amended from time to time by Landlord in its reasonable
discretion (the "Rules and Regulations"). In the event of any conflict between
the Rules and Regulations and the Lease, this Lease shall control.
C. Hazardous Materials
-------------------
(1) Definition. As used herein, the term "Hazardous Material" shall
----------
mean any substance: (i) the presence of which requires investigation or
remediation under any federal, state or local statute, regulation, ordinance,
order, action, policy or common law; (ii) which is or becomes defined as a
"hazardous waste," "hazardous substance," pollutant or contaminant under any
federal, state or local statute, regulation, ordinance, rule, directive or order
or any amendments thereto (hereinafter referred to as "Environmental Laws")
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the
Resource Conservation and Recovery Act (41 U.S.C. Section 6901 et seq.); (iii)
which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by
any governmental authority, agency, department, commission, board, agency or
instrumentality of the United States, the State of California or any political
subdivision thereof; (iv) which contains gasoline, diesel fuel or other
petroleum hydrocarbons; (v) which contains polychlorinated biphenyls (PCBs),
asbestos or urea formaldehyde foam insulation; or (vi) radon gas.
(ii) Existing Environmental Condition. Tenant acknowledges and agrees
--------------------------------
that Tenant has received and reviewed a copy of that certain report entitled
"Updated Level One Environmental Site Assessment" dated January 7, 1999,
prepared by Lumina Technologies.
(iii) Indemnity. Tenant shall not, without the prior written consent
---------
of Landlord, store, use, generate, transport, dispose or release any Hazardous
Materials on, in, under or about the Premises or any portion of the Project;
provided, however, that Tenant may
9.
<PAGE>
use and store on the Premises limited quantities of commonly used standard
office and janitorial supplies containing chemicals categorized as Hazardous
Materials so long as Tenant uses, stores and disposes of all such Hazardous
Materials in strict compliance with all Environmental Laws and prudent business
practices. In addition, Tenant shall comply with all guidelines contained in the
HCP with respect to the use, storage and release of pesticides in or on the
Project. Tenant shall be solely responsible for and shall indemnify, defend and
hold harmless Landlord and Landlord's Agents from and against all claims,
demands, judgments, losses, expenses, costs and liabilities, including fees and
costs of attorneys and consultants and engineers (collectively, "Liabilities"),
arising out of or in any way relating to the storage, use, generation,
transportation, disposal or release of any Hazardous Material by Tenant and/or
Tenant's affiliates (defined as any entity which controls, is controlled by or
under common control with Tenant), subsidiaries, divisions, officers, directors,
partners, employees, agents, contractors, invitees, subtenants or assignees
(collectively, "Tenant's Agents") in, on, under or about the Premises or any
portion of the Project, including, without limitation, any Liabilities arising
out of or in any way relating to any investigation, testing, removal, clean-up
and/or restoration services, work, materials and equipment necessary to return
the Project (or any part thereof) to its condition existing prior to the use,
storage, generation, transport, disposal or release by Tenant or Tenant's Agents
of any Hazardous Material in, on, under or about the Premises or the Project,
and to otherwise satisfactorily investigate and remediate the contamination
arising therefrom. If at any time during or after the Lease Term Tenant becomes
aware of any inquiry, investigation, administrative proceeding or judicial
proceeding by any governmental agency regarding the storage, use or disposition
of any Hazardous Materials by Tenant or Tenant's Agents in, on, under or about
the Premises or the Project, Tenant shall, within five (5) days after first
learning of such inquiry, investigation or proceeding, give Landlord written
notice advising Landlord of the same. Tenant's obligations under this Paragraph
5.C.(iii) shall survive the expiration and/or earlier termination of this Lease.
6. ASSIGNMENT AND SUBLETTING
A. Landlord's Consent. Except as otherwise provided in Paragraph 6.H
------------------
below, Tenant shall not assign this Lease, sublease all or any portion of the
Premises or mortgage or hypothecate this Lease or all or any portion of Tenant's
interest in this Lease or the Premises (each, a "Transfer") without Landlord's
prior written consent, which consent shall not be unreasonably withheld. Any
attempted or purported Transfer without Landlord's prior written consent shall
be void and confer no rights upon any third party. If Tenant attempts a
Transfer without Landlord's prior written consent, Landlord may (i) terminate
this Lease, or (ii) accept rent from the purported subtenant or assignee (each,
a "Transferee") and apply such rent against Tenant's Base Rent and Additional
Rent obligations under this Lease. No such acceptance of rent shall be deemed
an express or implied waiver of Tenant's breach of this Paragraph 6.A. unless
such waiver is in writing and signed by Landlord, and Landlord reserves all
rights and remedies arising with respect to such breach by Tenant, including,
without limitation, the right to terminate this Lease. Such acceptance of rent
from a purported Transferee shall not be construed to constitute a consent to
the purported Transfer or to give the purported Transferee a right of possession
with respect to the Premises.
B. Transferee Form. Each Transfer shall be by an instrument in writing in
---------------
a form satisfactory to Landlord, and shall be executed by Tenant and Transferee.
Tenant and the
10.
<PAGE>
proposed Transferee shall agree in writing, for the benefit of Landlord, to be
jointly and severally liable for all costs and expenses in connection with any
obligation to install or construct any Alterations to the Premises or
improvements to other portions of the Project that may be required by any Laws
(including any Accessibility Requirements) as a result of such proposed
Transfer. Each Transferee shall agree in writing, for the benefit of Landlord,
to assume, to be bound by and to perform the terms, conditions and covenants of
this Lease to be performed by Tenant. Notwithstanding anything contained herein,
Tenant shall not be released from personal liability for the performance of each
term, condition and covenant of this Lease by reason of Landlord's consent to a
Transfer unless Landlord specifically grants such release in writing.
C. No Waiver. Consent by Landlord to one Transfer shall not be deemed to
---------
be a consent to any subsequent Transfer.
D. Information to be Furnished. If Tenant desires at any time to Transfer
---------------------------
the Premises or any portion thereof, it shall first notify Landlord of its
desire to do so and shall submit in writing to Landlord: (i) the name of the
proposed Transferee; (ii) the nature of the proposed Transferee's business to be
carried on in the Premises; (iii) the terms and provisions of the proposed
Transfer and a copy of the proposed Transfer agreement and related agreements;
(iv) such financial information, including financial statements, as Landlord may
reasonably request concerning the proposed Transferee. Tenant shall reimburse
Landlord, as Additional Rent, for all reasonable legal and other expenses
incurred by Landlord in connection with any request by Tenant for consent to a
Transfer.
E. Landlord's Alternatives.
-----------------------
(i) Alternatives. At any time within fifteen (15) days after
------------
Landlord's receipt of the information specified in Paragraph 6.D., Landlord may,
by written notice to Tenant, elect: (a) to terminate this Lease and recapture
the entire Premises, in the event of an assignment, or the portion of the
Premises that Tenant proposes to sublease, in the event of a sublease, in which
event this Lease shall terminate as to the subleased space and Tenant shall
surrender to Landlord the portion of the Premises that Landlord has elected to
recapture as of the date specified in Landlord's election notice (which in no
event shall be less than thirty (30) nor more than one hundred twenty (120) days
following the date of Landlord's election notice); (b) to consent to the
Transfer by Tenant; or (c) to refuse its consent to the Transfer, in which case
Landlord shall specify the reasons for its refusal in Landlord's election
notice. If Landlord fails to elect any of the alternatives set forth in
Paragraph 6.E.(i)(a) through Paragraph 6.E.(i)(c) above within the fifteen (15)
day period, it shall be deemed that Landlord has consented to the Transfer, and
this Lease shall remain in full force and effect. If Landlord proceeds with
Paragraph 6.E.(i)(b) and consents to the Transfer, Tenant may thereafter enter
into a valid Transfer of the Premises or portion thereof, upon the terms and
conditions and with the proposed Transferee set forth in the information
furnished by Tenant to Landlord pursuant to Paragraph 6.D., subject, however, to
the conditions that (i) during the first thirty-six (36) months after the
Commencement Date, any excess of the Subrent (defined below) over the Rent
required to be paid by Tenant hereunder, less Tenant's reasonable Transfer
Costs, shall be paid to Landlord and (ii) during any time after the thirty-sixth
(36th) month after the Commencement Date until the Expiration Date or later
termination of this Lease pursuant to the Addendum attached hereto, Tenant shall
pay to Landlord fifty percent (50%) of any excess of the Subrent over the rent
required to be paid by
11.
<PAGE>
Tenant hereunder, less Tenant's reasonable Transfer Costs. For the purposes of
the foregoing, the term "Transfer Costs" shall mean (i) all actual costs and
expenses paid by Tenant in connection with the Transfer, including the amortized
cost of any alterations or leasehold improvements made by Tenant in connection
with the proposed Transfer which were not paid for out of the Tenant Improvement
Allowance or the Additional Tenant Improvement Allowance, amortized on a
straight line basis, without interest, over the term of this Lease, in the event
of an assignment, and the term of the proposed Transfer, in the event of a
sublease, and (ii) any leasing commissions paid by Tenant incidental to such
Transfer, but not including vacancy costs or the cost of any alterations or
leasehold improvements made to the Premises other than those performed in
connection with the Transfer. Any such Subrent to be paid to Landlord pursuant
hereto shall be payable to Landlord as and with the Base Rent payable to
Landlord hereunder pursuant to Paragraph 3.A.
(ii) Limitation on Recapture. Notwithstanding anything to the
-----------------------
contrary contained in Paragraph 6.E(i), in connection with a proposed sublease
by Tenant, Landlord may exercise its right to terminate this Lease as to the
portion of the Premises that Tenant proposes to sublease and recapture said
space only if (a) the portion of the Premises that Tenant proposes to sublease
in the Project, when combined with all of the other space in the Project that is
subleased by Tenant, comprises more than fifty percent (50%) of the total
rentable square footage in the Project or (b) the term of the proposed sublease
expires during the last twelve (12) months of the term of this Lease for the
Building in which the proposed portion of the Premises to be sublet is located
(or during the last twelve (12) months of any extension term relating to such
space to the extent Tenant has previously exercised its option to extend the
term of this Lease with respect to such space). For example, if (i) Tenant
proposes to sublease ten thousand (10,000) rentable square feet of space in
Building A, (ii) at the time Tenant proposes to sublease said space Tenant
currently is subleasing ninety thousand (90,000) rentable square feet of space
in the Project to one or more subtenants, and (iii) the total rentable square
footage in the Project is one hundred eighty three thousand two hundred eighty-
four (183,284) rentable square feet, then Landlord shall have the right to
recapture the portion of the Premises that Tenant proposes to sublease (i.e.,
10,000 rsf) regardless of the term of the proposed sublease. Alternatively, if
(i) Tenant proposes to sublease ten thousand (10,000) rentable square feet of
space in Building A, (ii) at the time Tenant proposes to sublease said space
Tenant currently is subleasing fifty thousand (50,000) rentable square feet of
space in the Project to one or more subtenants, and (iii) the total rentable
square footage in the Project is one hundred eighty three thousand two hundred
eighty-four (183,284) rentable square feet, then Landlord shall have the right
to recapture the portion of the Premises that Tenant proposes to sublease (i.e.,
10,000 rsf) only if the term of the proposed sublease expires during the last
twelve (12) months of the Building A Term.
F. Executed Counterpart. No Transfer shall be valid nor shall any
--------------------
Transferee take possession of the Premises until an executed counterpart of the
Transfer agreement has been delivered to Landlord.
G. Definitions. The following terms as used herein shall have the
-----------
following meanings:
12.
<PAGE>
(i) Subrent. The term "Subrent" shall mean any consideration of
-------
any kind received, or to be received, by Tenant from a Transferee if such sums
are related to Tenant's interest in this Lease or in the Premises.
(ii) Subtenant. The term "Subtenant" shall mean the person or entity
---------
with whom a Sublet agreement is proposed to be or is made.
H. No Consent Required. Notwithstanding anything to the contrary
-------------------
contained in this Lease, Tenant shall have the right to assign this Lease or
sublet all or a portion of the Premises without Landlord's consent (but with
thirty (30) days' prior written notice to Landlord) to (i) an Affiliate, (ii)
any entity resulting from a merger or consolidation with Tenant, or (iii) any
entity acquiring all or substantially all of the stock or assets of Tenant (each
hereinafter referred to as a "Permitted Transferee"). For purposes of this
Paragraph 6, an "Affiliate" is defined as (i) an entity that directly or
indirectly controls, is controlled by or is under common control with Tenant or
(ii) an entity at least a majority of whose economic interest is owned by
Tenant; and "control" means the power to direct the management of such entity
through voting rights, ownership or contractual obligations. Unless Tenant does
not survive as an entity as a result of a transaction with a Permitted
Transferee, no assignment or subletting by Tenant shall relieve Tenant of any
obligation under this Lease, including Tenant's obligation to pay Base Rent and
Additional Rent hereunder.
7. ALTERATIONS
A. Consent to Alterations. Tenant shall not make or permit any
----------------------
modifications, additions or improvements in, on or about the Premises,
including, but not limited to, lighting, heating, ventilating, air conditioning,
electrical, partitioning, fixtures, window and wall covering and carpentry
installations (collectively, "Alterations"), without the prior written consent
of Landlord. Notwithstanding the foregoing, Tenant shall have the right to make
nonstructural Alterations costing in the aggregate not more than Twenty-Five
Thousand Dollars ($25,000) per Building in any twelve (12) month period without
Landlord's prior consent, provided that such Alterations (i) are not visible
from any point outside of the Buildings, (ii) do not involve or require changes
to the basic building system facilities (e.g., HVAC compressors or fans, master
electrical panel) of the Buildings and (iii) do not affect the structure of the
Buildings. Landlord shall not unreasonably withhold its consent to any
nonstructural Alterations provided that the nonstructural Alterations are not
visible from any point outside of the Buildings, do not involve or require
changes to the basic building system facilities (e.g., HVAC compressors or fans,
master electrical panel) of the Buildings and do not affect the structure of the
Buildings. Tenant shall not modify any basic building system facilities or
structural components of the Buildings without Landlord's consent, which consent
may be withheld by Landlord in its sole and absolute discretion. Tenant shall
request Landlord's consent in writing and shall deliver Tenant's written request
to Landlord with reasonably detailed plans and specifications for the proposed
Alterations prepared at Tenant's expense by a licensed architect or engineer,
together with a list of the contractors that Tenant would like to use to install
the subject Alteration(s). Landlord shall consent to or disapprove the
Alterations proposed by Tenant within ten (10) business days after Landlord's
receipt of Tenant's written request and a copy of Tenant's proposed plans and
specifications and list of proposed contractors. If Landlord fails to respond to
Tenant's written request for Landlord's consent to Tenant's proposed Alterations
within the above-referenced ten
13.
<PAGE>
(10) business day period, Landlord shall be deemed to have disapproved Tenant's
request. Additionally, Landlord shall have the right to pre-approve all
contractors selected by Tenant to construct and install the Alterations. Tenant
shall reimburse Landlord for Landlord's reasonable charges for reviewing and
approving or disapproving any request for an Alteration, including the plans and
specifications thereof proposed by Tenant.
B. General Conditions for Alterations. All Alterations shall be
----------------------------------
installed at Tenant's sole expense, in compliance with all applicable Laws and
in accordance with the plans and specifications delivered to and approved by
Landlord; provided, however, that neither Landlord's acceptance nor approval of
any such plans and specifications shall imply that Landlord in any way covenants
or warrants that the same are safe or that they comply with applicable Laws. All
Alterations shall be performed in a good and workmanlike manner conforming in
quality and design with the Premises existing as of the Commencement Date, and
shall not diminish the value of the Premises or the Project. The workmanship and
materials used in all Alterations shall be of a quality equal to or exceeding
that used generally throughout the Project. Tenant shall indemnify and hold
harmless Landlord and Landlord's Agents from any and all Liabilities incurred by
Landlord and/or Landlord's Agents as a result of any defects in the design,
materials or workmanship of the Alterations, and/or failure of Tenant or
Tenant's Agents to comply with applicable Laws, including, without limitation,
all applicable Accessibility Requirements.
C. Notice and Liens. Tenant shall notify Landlord in writing at least
----------------
twenty (20) days prior to the commencement of any work on Alterations approved
by Landlord, and Landlord shall be entitled to post and record Notices of
Nonresponsibility or other notices deemed proper before the commencement of such
work. If Tenant fails to cause any lien filed against the Premises in connection
with any work performed or claimed to have been performed by or at the direction
of Tenant to be released of record by payment or posting of a proper bond
acceptable to Landlord within ten (10) days from the date of such filing, then
Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord for
such amount as Additional Rent. Such reimbursement shall include all sums
disbursed, incurred or deposited by Landlord, including Landlord's costs,
expenses and reasonable attorneys' fees, with interest thereon at an interest
rate of ten percent (10%) per annum from the date of payment by Landlord.
D. Removal of Alterations. Landlord may require Tenant to remove any
----------------------
Alterations that, in Landlord's reasonable judgment, are "Non-General Purpose
Office Improvements," meaning improvements which by their design, nature and
layout would not be usable by a replacement tenant for general office purposes,
such removal to be upon the termination of Tenant's lease of that portion of the
Premises in which the Alterations that are Non-General Purpose Office
Improvements are to be constructed. Landlord shall notify Tenant within ten
(10) days after Landlord receives the plans and specifications for any proposed
Alteration or, if Tenant is not required to obtain Landlord's consent to the
Alteration, within ten (10) days after Tenant notifies Landlord in writing of
its intent to make an Alteration, as to whether the Alteration constitutes a
Non-General Purpose Office Improvement and as to whether Tenant will be required
to remove the proposed Alteration upon the termination of Tenant's lease of that
portion of the Premises in which the Alteration is to be constructed. If
Landlord so notifies Tenant within said ten (10)-day period, then Tenant shall
remove the proposed Alteration and to repair or restore any damage caused by the
installation and removal of such Alteration at the
14.
<PAGE>
expiration or earlier termination of Tenant's lease of that portion of the
Premises in which the Alteration is constructed, all at Tenant's sole cost and
expense; provided, however, Tenant shall only be required to remove those
Alterations which are specified in Landlord's notice. Tenant shall fully and
promptly repair all damage caused by the removal of Alterations from the
Premises.
E. Maintenance of Alterations. Notwithstanding any other provision of this
--------------------------
Lease, Tenant shall be solely responsible for the maintenance and repair of any
and all Alterations to the Premises made by Tenant, or by Landlord at Tenant's
expense.
8. REPAIR AND MAINTENANCE
A. Landlord. Landlord, at its expense, shall keep in good order, condition
--------
and repair the foundations of the Buildings, the concrete subfloors and
structural components of the Buildings, the exterior or bearing walls of the
Buildings (excluding the interior finish surface thereof), and the roof
structures on the Buildings; provided, however, that any damage thereto caused
by the gross negligence or willful acts or omissions of Tenant or Tenant's
Agents, or by reason of the failure of Tenant to perform or comply with any
terms, conditions or covenants in this Lease, or caused by any Alterations made
by or for Tenant, shall be at Tenant's sole expense. In addition, Landlord shall
be responsible for maintaining the roof membranes of the Buildings and the
outside landscaping of the Project in good condition and repair, the cost of
which shall constitute an Operating Expense under this Lease. Landlord, at
Tenant's sole cost and expense, shall enter into regularly scheduled
maintenance/service contracts for servicing the elevators within the Buildings
unless Landlord elects for Tenant to do so pursuant to Paragraph 8.B below. Also
at Tenant's cost and expense, Landlord shall enter into regularly scheduled
preventive maintenance/service contracts with maintenance contractors acceptable
to Landlord for servicing all hot water and heating and air conditioning (the
"HVAC") systems and equipment in the Premises. It is an express condition
precedent to all obligations of Landlord to repair and maintain the Buildings
that Tenant shall have notified Landlord in writing of the need for any such
repairs or maintenance. There shall be no abatement of Rent during the
performance of Landlord's obligations under this Paragraph 8.A., nor shall
Landlord be liable to Tenant for any damage that may result from interruption of
Tenant's use of the Premises during the period that Landlord is performing the
maintenance and repairs required hereunder; provided, however Landlord shall use
commercially reasonable efforts in the performance of its obligations pursuant
to this Paragraph 8.A. to minimize any interference with Tenant's normal
business operations.
B. Tenant. Except for the portions of the Premises expressly required to be
------
maintained by Landlord under Paragraph 8.A., Tenant, at Tenant's sole cost and
expense, shall maintain the Premises and the Buildings in which the Premises is
located in good order, condition and repair, including, without limitation,
subfloors (other than concrete) and floor coverings, walls (other than exterior
or bearing walls) and wall coverings, mechanical, electrical and plumbing
systems, doors and windows. In addition, if Tenant leases all of the rentable
space located within any of the Buildings, Landlord may require Tenant to enter
into regularly scheduled preventive maintenance/service contracts with
maintenance contractors acceptable to Landlord for servicing the elevators in
such Buildings and provide to Landlord a copy of the maintenance/services
contract and written service reports on the elevators on an annual basis. If,
15.
<PAGE>
in the reasonable judgment of Landlord, Tenant fails to maintain the Premises
and the Buildings in which the Premises is located in good order, condition and
repair, Landlord shall have the right to perform such maintenance, repairs or
refurbishing at Tenant's expense. In addition, Tenant shall, at its own
expense, provide, install and maintain in good condition all of its trade
fixtures, furniture, equipment and other personal property ("Tenant's Personal
Property") required in the conduct of its business in the Premises. If any
condition arises in the Premises or the Project which may be unsafe or dangerous
to persons or property in the Project, Tenant shall immediately notify Landlord
of such condition.
C. Waiver. Tenant waives the provisions of Sections 1941 and 1942 of the
------
California Civil Code and any similar or successor Laws regarding Tenant's right
to make repairs and deduct the expenses of such repairs from the Rent due under
this Lease.
9. UTILITIES AND SERVICES
A. Tenant's Obligations. Tenant shall be responsible for and promptly shall
--------------------
pay all charges for gas, electricity, water, telephone and telephone cabling,
HVAC, refuse pickup, janitorial service and all other utilities, materials and
services furnished directly to or used by Tenant in the Premises during the
Lease Term, together with any and all taxes thereon. Landlord shall not be
liable in damages or otherwise for any failure or interruption of any utility
service or other service furnished to the Premises, except to the extent
resulting from the gross negligence or willful misconduct of Landlord. No such
failure or interruption shall entitle Tenant to terminate this Lease or withhold
Rent due hereunder. Notwithstanding the foregoing, to the extent that Landlord
receives insurance proceeds under its insurance policy as a result of the
interruption in utilities to compensate Landlord for lost Rent under this Lease,
then the Rent due hereunder will be abated by such amount.
B. Tenant to Pay Share of Expenses. If any utilities or services described
-------------------------------
in Paragraph 9.A. above are not separately metered to Tenant or are contracted
for by Landlord, then Tenant shall pay, as Additional Rent, a reasonable
proration of the costs of such utilities and services, including the cost of
installing metering devices. Tenant shall pay such prorated amount of such costs
on the first day of the calendar month following receipt of Landlord's itemized
bill therefor, but not sooner than fifteen (15) days following receipt.
10. REAL PROPERTY TAXES
A. Payment by Tenant. Commencing with the Commencement Date, Tenant shall
-----------------
pay to Landlord, as Additional Rent, Tenant's Project Percentage of all Real
Property Taxes (as hereinafter defined). Tenant shall pay Tenant's Project
Percentage of such Real Property Taxes in the manner provided in Paragraph 12
below.
B. Real Property Taxes. For purposes of this Lease, "Real Property Taxes"
-------------------
shall mean any form of assessment, license, fee, rent tax, levy, penalty (if a
result of Tenant's delinquency), or tax of any nature imposed upon or with
respect to the Premises or the Project or any part thereof (other than net
income, estate, succession, inheritance, transfer or franchise taxes of
Landlord) (collectively, "tax"), imposed by any authority having the direct or
indirect power to tax, or by any city, county, state or federal government or
any improvement or other district or
16.
<PAGE>
division thereof, whether such tax is: (i) determined by the area of the
Premises or Project or any part thereof or the rent and other sums payable
hereunder by Tenant or by other tenants, including, but not limited to, any
gross income or excise tax levied by any of the foregoing authorities with
respect to receipt of such rent or other sums due under this Lease; (ii) levied
or assessed upon any legal or equitable interest of Landlord in the Project or
the Premises or any part thereof; (iii) levied or assessed upon this transaction
or any document to which Tenant is a party creating or transferring any interest
in the Premises; (iv) levied or assessed in lieu of, in substitution for, or in
addition to, existing or additional taxes imposed on or with respect to the
Project or the Premises, whether or not now customary or within the
contemplation of the parties; or (v) surcharged against the parking area. The
cost and expenses of contesting the amount or validity of any of the foregoing
taxes shall be included in Real Property Taxes. Real Property Taxes shall also
include all new and increased assessments, taxes, fees, levies and charges which
may be imposed by governmental agencies for such purposes as fire protection,
street, sidewalk, road, utility construction and maintenance, refuse removal,
libraries, street lighting, police services, and for other governmental
services, or any gross or net rental income tax.
C. Tax on Improvements. Without limiting the generality of Paragraph 10.B,
-------------------
Tenant shall pay any increase in Real Property Taxes resulting from any and all
Alterations placed in, on or about the Premises for the benefit of, at the
request of, or by Tenant.
D. Proration. Tenant's liability to pay Real Property Taxes shall be
---------
prorated on the basis of a 365-day year to account for any fractional portion of
a fiscal tax year included at the commencement or expiration of the Lease Term.
With respect to any assessments which may be levied against or upon the
Premises, or which under the Laws then in force may be evidenced by improvement
bonds or other bonds or may be paid in annual installments, only the amount of
the annual installment due each year (with appropriate proration for any partial
year) and interest due thereon shall be included within the computation of the
annual Real Property Taxes levied against the Premises for such year.
E. Personal Property Taxes. Tenant shall pay prior to delinquency all taxes
-----------------------
assessed or levied against Tenant's Personal Property. When possible, Tenant
shall cause Tenant's Personal Property to be assessed and billed separately from
the real and/or personal property of Landlord.
F. Right to Contest Real Estate Taxes. So long as Tenant leases one hundred
----------------------------------
percent of the Project, Tenant shall have the right to contest Real Property
Taxes levied against the Project. If Tenant desires to contest any Real Property
Taxes, Tenant shall provide Landlord written notice thereof, which notice shall
expressly state that if Landlord does not contest such Real Property Taxes,
Tenant intends to do so. If Landlord fails to notify Tenant within ten (10)
business days following Landlord's receipt of Tenant's written notice (or such
shorter time if the deadline for filing any such contest is sooner) that
Landlord intends to contest the Real Property Taxes, then Tenant shall have the
right to contest those Real Property Taxes identified by Tenant in its written
notice to Landlord; provided, however, that Tenant shall timely pay all
contested Real Property Taxes notwithstanding the pendency of any such contest.
Tenant shall notify Landlord in writing of the commencement of any contest
within five (5) days after the commencement of any such contest.
17.
<PAGE>
11. INSURANCE
A. Indemnification
---------------
(i) Tenant's Indemnification of Landlord. Tenant hereby agrees to
------------------------------------
indemnify, defend and hold harmless the Premises, Landlord, Landlord's Agents
and Landlord's lenders, from and against any and all Liabilities arising out of
or in any way relating to, involving, or in dealing with, the Premises during
the term of the Lease, the conduct of Tenant's business, any default or breach
by Tenant in the performance in a timely manner of any obligation on Tenant's
part to be performed under this Lease, the use or occupancy of the Premises or
any part of the Project by Tenant, or by the acts or omissions of Tenant or
Tenant's Agents, except to the extent caused by the gross negligence or willful
misconduct of Landlord, Landlord's Agents and Landlord's lenders, Tenant's
indemnification obligations with respect to Hazardous Materials shall be
pursuant to Paragraph 5.C of this Lease.
(ii) Landlord's Indemnification of Tenant. Landlord hereby agrees to
------------------------------------
indemnify, defend and hold harmless Tenant and Tenant's Agents from any and all
Liabilities arising out of or in any way relating to, involving, or in dealing
with, any part of the Project, to the extent such Liabilities are caused by the
gross negligence or willful misconduct of Landlord or Landlord's Agents.
B. Tenant's Insurance. Tenant agrees to maintain in full force and effect
------------------
at all times during the Lease Term, at its own expense, for the protection of
Tenant and Landlord, as their interests may appear, policies of insurance issued
by a responsible carrier or carriers acceptable to Landlord which afford the
following coverages:
(i) Worker's Compensation. Worker's compensation in an amount equal
---------------------
to the statutory requirements then in effect.
(ii) Employer's Liability. Employer's liability in an amount not less
than One Million Dollars ($1,000,000.00) per accident for bodily injury or
disease.
(iii) Automobile Liability. Automobile liability insurance (ISO form CA
--------------------
0001 (Ed. 1/87), code 1 or its equivalent) for each vehicle owned, leased or
rented by Tenant in connection with its business, in an amount not less than
Five Million Dollars ($5,000,000.00) per accident for bodily injury and property
damage, naming Landlord as additional insured.
(iv) General Liability. Commercial general liability insurance (ISO
-----------------
occurrence form CG 0001 or its equivalent) in an amount not less than Five
Million Dollars ($5,000,000.00), combined single limit for both bodily injury
and property damage, naming Landlord as additional insured. If Commercial
General Liability Insurance with a general aggregate limit is used, the general
aggregate limit shall apply separately to the location of the Premises, using
ISO form CG 25041185 or its equivalent.
(v) Property. Property insurance on Tenant's Personal Property
--------
located on or in the Premises. Such insurance shall be in an amount of one
hundred percent (100%) of the replacement cost of the insured items, as the same
may from time to time increase as a result of inflation or otherwise, and shall
be in a form providing coverage against the perils covered in the
18.
<PAGE>
ISO Special Form. Such policy shall be endorsed, as necessary, to provide
coverage for boilers and machinery and sprinkler leakage. As long as this Lease
is in effect, the proceeds of such policy shall be used for the repair or
replacement of such items so insured. Landlord shall have no interest in the
insurance upon Tenant's Personal Property.
(vi) Business Income. Business Income/Extra Expense Insurance at a
---------------
minimum of 50% co-insurance, including coverage for loss of Business Income due
to damage to Tenant's Personal Property arising from the perils covered in the
ISO Special Form.
C. Landlord's Insurance. During the Lease Term Landlord shall maintain
--------------------
commercial general liability insurance and "All Risk" or ISO Special Form
property insurance (collectively, the "Project Property Insurance") including,
at Landlord's option, earthquake and flood coverage, inflation endorsement,
sprinkler leakage endorsement, and boiler and machinery coverage, covering the
full replacement cost of the Premises, including the Tenant Improvements and,
provided that Tenant delivers to Landlord a copy of Tenant's plans for all of
the Alterations made by Tenant and any other information reasonably requested by
Landlord and Tenant otherwise complies with the provisions contained in
Paragraph 7 with respect to the Alterations, the Alterations, but excluding the
foundations of the Buildings. The Project Property Insurance shall also include
insurance against loss of rents in an amount equal to the Base Rent, Additional
Rent, and any other sums payable to Landlord by the tenants of the Project under
their respective leases for a period of at least twelve (12) months. The Project
Property Insurance shall name Landlord as named insured and include a lender's
loss payable endorsement in favor of Landlord's lender. Tenant shall reimburse
Landlord, as Additional Rent, for Tenant's Project Percentage of the costs of
such policy or policies. Tenant shall pay Tenant's Project Percentage of the
Project Property Insurance in the manner provided in Paragraph 12. Tenant shall
pay the entire amount of any increase in premium rates for the Project Property
Insurance that is caused by Tenant's particular use of the Premises or any
portion of the Project.
D. Certificates. Tenant shall deliver to Landlord at least thirty (30) days
------------
prior to the time such insurance is first required to be carried by Tenant, and
thereafter at least thirty (30) days prior to expiration of each such policy,
certificates of insurance and endorsements evidencing the above coverage with
limits not less than those specified above and naming Landlord as additional
insured thereunder. The certificates and endorsements shall be on a form
approved by Landlord and shall expressly provide that no less than thirty (30)
days' prior written notice shall be given Landlord in the event of cancellation
of the coverages evidenced thereby. Tenant shall notify Landlord in writing of
any material change in the insurance coverages required to be maintained by
Tenant pursuant to this Lease within ten (10) days after Tenant's receipt of
notice of the material change.
E. Increased Coverage. Landlord, by written notice to Tenant, may require
------------------
Tenant to increase the amount of insurance maintained by Tenant in accordance
with this Lease to such amounts as are generally required by landlords of
similar properties located in the Brisbane-San Francisco area.
F. Co-Insurer. If, on account of the failure of Tenant to comply with the
----------
foregoing provisions, Landlord is adjudged a co-insurer by the insurance
carrier, then any Liabilities
19.
<PAGE>
sustained by Landlord as a result thereof shall be borne by Tenant and shall be
immediately paid by Tenant upon receipt of a bill therefor and evidence of such
loss.
G. Insurance Requirements. All of Tenant's insurance shall be in a form
----------------------
satisfactory to Landlord and shall be carried with companies that have a current
A.M. Best's rating of no less than A:VII; shall provide that such policies shall
not be subject to alteration or cancellation except after at least thirty (30)
days' prior written notice to Landlord; and shall be primary as to Landlord and
Landlord's Agents. The policy or policies, or duly executed certificates and
endorsements for them, together with satisfactory evidence of payment of the
premium thereon, shall be deposited with Landlord prior to the Commencement
Date, and upon renewal of such policies, not less than thirty (30) days prior to
the expiration of the term of such coverage. If Tenant fails to procure and
maintain the insurance required hereunder, or fails to provide Landlord with the
policy, policies or duly executed certificates and endorsements thereof required
hereunder, Landlord may, but shall not be required to, order such insurance at
Tenant's expense and Tenant shall reimburse Landlord for such amounts as
Additional Rent. Such reimbursement shall include all sums disbursed, incurred
or deposited by Landlord, including Landlord's costs, expenses and reasonable
attorneys' fees, with interest thereon at an interest rate of ten percent (10%)
per annum from the date of payment by Landlord.
H. Landlord's Disclaimer. Subject to Landlord's insurance obligations under
---------------------
Paragraph 11.C above, Landlord shall be liable for any loss or damage to persons
or property resulting from fire, explosion, falling plaster, glass, tile or
sheetrock, steam, gas, electricity, water or rain which may leak from any part
of the Premises or the Project, or from the pipes, appliances or plumbing works
therein or from the roof, street or subsurface or whatsoever, unless caused by
the gross negligence or willful misconduct of Landlord.
I. Waiver of Subrogation. Landlord and Tenant each hereby waive all rights
---------------------
of recovery against the other on account of loss and damage occasioned to such
waiving party for its property or the property of others under its control to
the extent that such loss or damage is insured against under any insurance
policies which are required hereunder or which otherwise may be in force at the
time of such loss or damage. Tenant and Landlord shall, upon obtaining policies
of insurance required hereunder, give notice to the insurance carrier that the
foregoing mutual waiver of subrogation is contained in this Lease and Tenant and
Landlord shall cause each insurance policy obtained by such party to provide
that the insurance company waives all right of recovery by way of subrogation
against either Landlord or Tenant in connection with any damage covered by such
policy.
12. ADDITIONAL RENT
A. Payment. Tenant shall pay to Landlord, as Additional Rent during each
-------
year commencing on the Commencement Date and ending on the Expiration Date
(prorated for any partial calendar year during the Lease Term), (i) all
Operating Expenses (defined herein) attributable to the ownership, operation,
repair and/or maintenance of Building A which accrue during the Building A Term,
(ii) all Operating Expenses attributable to the ownership, operation, repair
and/or maintenance of Building B which accrue during the Building B Term, (iii)
all Operating Expenses attributable to the ownership, operation, repair and/or
maintenance of Building C which accrue during the Building C Term, (iv) Tenant's
Project Percentage of all
20.
<PAGE>
Operating Expenses attributable to the ownership, operation, repair and/or
maintenance of the Project Common Areas and the Project, and (v) Tenant's
Project Percentage of Real Property Taxes and Project Property Insurance, each
as determined by Landlord.
B. Tenant's Project Percentage. Tenant's Project Percentage is calculated
---------------------------
by dividing the then applicable total rentable square footage of the Premises by
the total rentable square footage in the Project. Tenant's Project Percentage as
of the Commencement Date is set forth in the Lease Summary. Any change in the
total rentable square footage of the Project or the Premises, including any
increase or decrease in the size of the Premises pursuant to Paragraph 1.A of
this Lease, shall increase or decrease Tenant's Project Percentage.
C. Tenant's Building Percentage. Tenant's "Building A Percentage" is a
----------------------------
percentage equal to the total rentable square footage of the Building A Premises
divided by the total rentable square footage in Building A. Tenant's "Building B
Percentage" is a percentage equal to the total rentable square footage of the
Building B Premises divided by the total rentable square footage in Building B.
Tenant's "Building C Percentage" is a percentage equal to the total rentable
square footage of the Building C Premises divided by the total rentable square
footage in Building C.
D. Definition of Operating Expenses. The term "Operating Expenses" shall
--------------------------------
include, without limitation, the cost of labor, materials, supplies and services
used or consumed in maintaining, operating and repairing the Buildings, the
Project and all supporting facilities, including the following: (a) the cost of
maintaining and repairing all sidewalks, landscaping, service areas, elevators,
mechanical rooms, utility systems, building exteriors (and the component parts
thereof), signs, site lighting, walkways, driveways and parking areas of the
Project; (b) all charges for heat, water, gas, electricity, sewer, air
conditioning, trash removal and other utilities used or consumed in the
Buildings or the Project (not separately metered and billed to any individual
tenant of the Project); (c) Landlord's management fee each year, of which
Tenant's proportionate share shall be an amount equal to three and one-half
percent (3.5%) of the total annual Rent due under this Lease; (d) costs incurred
in (1) replacing any existing capital improvements in the Project that have
exceeded their useful life as reasonably determined by Landlord, (2)
constructing new capital improvements in the Project or replacing existing
capital improvements in the Project in each instance primarily for the purpose
of reducing Operating Expenses or otherwise improving the operating efficiency
of the Buildings and (3) constructing new capital improvements to the Project or
replacing existing capital improvements in the Project to the extent necessary
to comply with laws, rules or regulations of any governmental agency enacted or
adopted subsequent to the date of this Lease or any changes after the date of
this Lease in interpretation or enforcement of any existing laws, rules or
regulations of any governmental agency (hereinafter referred to collectively as,
"Capital Expenditures"); provided, however, the cost of Capital Expenditures
shall be amortized on a straight-line basis (with interest on the unamortized
balance at the rate paid by Landlord on funds borrowed to make such Capital
Expenditures or, if Landlord makes such Capital Expenditures without borrowing
funds, the rate Landlord would have paid to borrow such funds as reasonably
determined by Landlord) over the useful life of the Capital Expenditure as
reasonably determined by Landlord; (e) costs incurred for pest control,
janitorial, exterior window washing, sweeping services and security for the
Buildings and the Project; (f) costs incurred in maintaining and repairing
intra-building network cabling within the Project; (g) all business license,
permit and inspection fees, (h) fees,
21.
<PAGE>
expenses, charges or other costs assessed Landlord under any covenants,
conditions and restrictions binding on the Buildings or the Project and (i) all
insurance loss deductibles; provided, however, the deductible under any policy
of earthquake insurance shall be amortized on a straight-line basis over ten
(10) years. Notwithstanding the foregoing, the term "Operating Expenses" shall
not include (i) depreciation, (ii) reserves, (iii) overhead and profit paid to
subsidiaries or affiliates of Landlord for services rendered to the Project or
Buildings or for supplies or other materials to the extent that the costs of the
services, supplies or materials exceed the competitive costs of the services,
supplies or materials if they were not provided by a subsidiary or an affiliate,
(iv) the portion of any insurance deductible in excess of Ten Thousand Dollars
($10,000.00) (other than deductibles under any policy of earthquake insurance
which shall be amortized as provided in subsection (i) above) and (v) costs
incurred in making capital improvements to the Project, except as otherwise
provided in subparagraph (d) above.
E. Estimates. Landlord shall, as soon as practicable after the
---------
Commencement Date and after the end of each calendar year during the Lease Term,
notify Tenant in writing of the amount which Landlord estimates will be Tenant's
Project Percentage of any Real Property Taxes and Project Property Insurance and
Tenant's share of any Operating Expenses for such calendar year, and one-twelfth
(1/12th) thereof shall be added to the Base Rent as Additional Rent for each
ensuing month. If, during any calendar year during the Lease Term, it appears in
the reasonable judgment of Landlord that Real Property Taxes, Project Property
Insurance and Operating Expenses payable under this Paragraph will exceed
Landlord's estimate, Landlord may, by written notice to Tenant, revise its
estimate for such year, and the Base Rent hereunder shall be adjusted
accordingly.
F. Annual Adjustment. If after any calendar year it proves that the
-----------------
amount of Tenant's Project Percentage of Real Property Taxes and Project
Property Insurance or Tenant's share of Operating Expenses for such calendar
year is greater or less than the amount actually billed to and paid for by
Tenant, an adjustment shall be made as soon as practicable following the
commencement of the next calendar year, and Tenant shall forthwith pay Landlord
such amount or be credited accordingly upon Tenant's receipt of a year end
statement of such adjustment, whether or not this Lease is still then in effect.
Tenant shall have ninety (90) days after Tenant receives the year end statement
of the adjustment to the Operating Expenses for the prior calendar year to
notify Landlord in writing of Tenant's desire to conduct, at Tenant's sole cost
and expense, an audit of Landlord's books and records relating to the prior
calendar year. Any such audit must be conducted by Tenant or its agent during
regular business hours at the offices of Landlord or the offices of Landlord's
designated agent and must be completed within one hundred fifty (150) days after
Tenant receives the applicable year end statement. The person or entity
performing the audit or review of Landlord's books and records on Tenant's
behalf or at Tenant's request may not be compensated for the audit or review on
a contingency fee basis.
G. Arbitration. If Landlord objects to the findings of Tenant's audit,
-----------
Landlord and Tenant shall attempt to resolve their disagreement concerning the
amount of Tenant's proportionate share of Operating Expenses within the next
thirty (30) days. If Landlord and Tenant are unable to agree upon the amount of
Tenant's proportionate share of Operating Expenses (after Tenant has completed
its audit), the parties shall submit the matter to binding arbitration before a
single neutral arbitrator having experience in real estate valuation, property
management or accounting or, alternatively, the arbitrator may be a retired
judge or justice of a
22.
<PAGE>
California Superior Court or Court of Appeal. The matter shall be decided by
arbitration in accordance with the applicable arbitration statutes and the then
existing Commercial Arbitration Rules of the American Arbitration Association.
Any party may initiate the arbitration procedure by delivering a written notice
of demand for arbitration to the other party. Within thirty (30) days after the
other party's receipt of the written notice of demand for arbitration, the
parties shall attempt to select a qualified arbitrator who is acceptable to all
parties. If the parties are unable to agree upon an arbitrator who is acceptable
to all parties, either party may request the American Arbitration Association to
appoint the arbitrator in accordance with its Commercial Arbitration Rules. The
provisions of California Code of Civil Procedure Section 1283.05 or its
successor section(s) are incorporated in and made a part of this Lease with
respect to any arbitration requested in accordance with the provisions contained
in this Paragraph. Depositions may be taken and discovery may be obtained in any
arbitration proceeding requested pursuant to this Paragraph in accordance with
the provisions of California Code of Civil Procedure Section 1283.05 or its
successor section(s). Arbitration hearing(s) shall be conducted in San Mateo
County California. Any relevant evidence, including hearsay, shall be admitted
by the arbitrator if it is the sort of evidence upon which responsible persons
are accustomed to rely in the conduct of serious affairs, regardless of the
admissibility of such evidence in a court of law; however, the arbitrator shall
apply California law relating to privileges and work product. In rendering his
or her award, the arbitrator shall set forth the reasons for his or her
decision. The fees and expenses of the arbitrator shall be paid in the manner
allocated by the arbitrator. This agreement to arbitrate any dispute concerning
the findings of Tenant's audit shall be specifically enforceable under the
prevailing arbitration law. Judgment on the award rendered by the award may be
entered in any court having jurisdiction thereof.
13. DAMAGE OR DESTRUCTION
A. Landlord's Obligation to Rebuild. If the Premises are damaged or
--------------------------------
destroyed, Landlord shall promptly and diligently repair the Premises (including
the Tenant Improvements and, provided that Tenant delivers to Landlord a copy of
Tenant's plans for all of the Alterations made by Tenant and any other
information reasonably requested by Landlord and Tenant otherwise complies with
the provisions contained in Paragraph 7 with respect to the Alterations, any
Alterations made by Tenant to the Premises), all to the same quality and
condition as were present at the time of the loss, unless Landlord or Tenant
elects to exercise any right to terminate this Lease as hereinafter provided.
B. Landlord's Right to Terminate. Landlord shall notify Tenant in writing
-----------------------------
within forty-five (45) days after the date of the casualty of Landlord's
estimate of the time period required to substantially repair or restore the
Premises or the Buildings (including the Tenant Improvements, and, provided that
Tenant delivers to Landlord a copy of Tenant's plans for all of the Alterations
made by Tenant and any other information reasonably requested by Landlord and
Tenant otherwise complies with the provisions contained in Paragraph 7 with
respect to the Alterations, any Alterations made by Tenant to the Premises).
Landlord shall have the right to terminate this Lease with respect to the entire
Premises or the damaged Building(s) in the event any of the following events
occurs:
(i) Net insurance proceeds (after deducting the cost of recovery of
such proceeds) available to Landlord are insufficient to pay one hundred
percent (100%) of the cost of
23.
<PAGE>
such repair, excluding the deductible, provided that Landlord has had in force
the insurance required of it under Section 11.C.;
(ii) The entire Premises or the damaged Building(s) cannot, with
reasonable diligence, be substantially repaired or restored by Landlord within
one hundred eighty (180) days after the date that the damage or destruction
occurs; or
(iii) The entire Premises or the damaged Building(s) cannot be safely
repaired because of the presence of hazardous factors, including, but not
limited to, earthquake faults, radiation, chemical waste and other similar
dangers.
If Landlord elects to terminate all or any portion of this Lease, Landlord
shall give Tenant written notice of its election within thirty (30) days after
the date of such damage or destruction, and this Lease (or applicable portion
thereof) shall terminate fifteen (15) days after the date Tenant receives such
notice. If Landlord does not elect to terminate all of this Lease, Landlord
shall diligently commence the process of obtaining any necessary building
permits and governmental approvals with respect to the portion of the Lease that
has not been terminated, and shall commence repair of the Premises or the
Buildings (including the Tenant Improvements, and, provided that Tenant delivers
to Landlord a copy of Tenant's plans for all of the Alterations made by Tenant
and any other information reasonably requested by Landlord and Tenant otherwise
complies with the provisions contained in Paragraph 7 with respect to the
Alterations, any additional Alterations made by Tenant to the Premises), as the
case may be, as soon as practicable and thereafter prosecute the same diligently
to completion, in which event this Lease shall continue in full force and
effect.
C. Tenant's Right to Terminate. If Landlord reasonably determines that
---------------------------
Premises (including the Tenant Improvements, and, provided that Tenant delivers
to Landlord a copy of Tenant's plans for all of the Alterations made by Tenant
and any other information reasonably requested by Landlord and Tenant otherwise
complies with the provisions contained in Paragraph 7 with respect to the
Alterations, any Alterations made by Tenant to the Premises) cannot be
substantially repaired or restored within two hundred seventy (270) days after
the damage or destruction, Tenant shall have the right to terminate this Lease
by written notice to Landlord. Tenant shall exercise such termination right, if
at all, within ten (10) days after Landlord notifies Tenant in writing of the
time estimated by Landlord to substantially complete the repairs or restoration
work. If Tenant does not elect to terminate this Lease within the ten (10) day
period, Tenant shall be deemed to have waived its option to terminate this Lease
pursuant to this Paragraph 13.C in connection with the casualty.
D. Limited Obligation to Repair. Notwithstanding anything to the
----------------------------
contrary contained in this Paragraph 13, in no event shall Landlord be obligated
to repair or replace Tenant's Personal Property. If Tenant desires to repair
and/or replace Tenant's Personal Property, the same shall be undertaken and
completed by Tenant, at Tenant's sole cost and expense, promptly following the
date of the damage or destruction.
E. Abatement of Rent. Rent shall be temporarily abated proportionately,
-----------------
but only to the extent of any net proceeds attributable to the Premises received
by Landlord from rental abatement insurance described in Paragraph 11.C., during
any period when, by reason of such
24.
<PAGE>
damage or destruction, Tenant is unable to use the Premises. Such abatement
shall commence upon such damage or destruction and end upon substantial
completion by Landlord of the repair or reconstruction work which Landlord is
obligated or elects to perform and Landlord's delivery to Tenant of the
Premises, or at such earlier time when Tenant is able to use the Premises
without substantial interference. Tenant shall not be entitled to any
compensation or damages from Landlord for loss of the use of the Premises,
damage to Tenant's Personal Property or any inconvenience occasioned by such
damage, repair or restoration. Tenant hereby waives all rights to terminate this
Lease pursuant to the provisions of California Civil Code Section 1932,
Subdivision 2, and Section 1933, Subdivision 4, and the provisions of any
similar Laws hereinafter enacted.
F. Damage Near End of Lease Term. Anything herein to the contrary
-----------------------------
notwithstanding, if the Premises are destroyed or damaged during the last twelve
(12) months of the Lease Term, then Landlord may, at its option, cancel and
terminate this Lease as of the date of the occurrence of such damage. If
Landlord does not elect to so terminate this Lease, the repair of such damage
shall be governed by Paragraphs 13.A., 13.B. or 13.C., as the case may be. If
this Lease is so terminated, Landlord may keep all the insurance proceeds
resulting from such damage, except for those proceeds payable under policies
obtained by Tenant which specifically insure Tenant's Personal Property.
G. Landlord's Determinations. Landlord's determination of the estimated
-------------------------
costs to repair and/or replace any damaged property and the time period required
for such repair and/or replacement shall be made in good faith and shall be
conclusive for the purposes of this Paragraph 13.
14. NOTICES. Any notice or demand required or desired to be given under this
Lease shall be in writing and shall be personally delivered to the address
herein provided for the addressee, or in lieu of personal delivery may be given
by facsimile transmission, by air courier or other commercial delivery service
which guarantees overnight delivery, or by United States certified or registered
mail service. Notice shall be effective on the day such notice is received or
rejected at the address herein provided for the addressee. For purposes hereof,
the addresses for Landlord and Tenant are as set forth in the Lease Summary;
provided, however, that after the Commencement Date, the address of Tenant shall
be the address of the Premises. Either party may change its address by giving
notice of same in accordance with this Paragraph 14.
15. DEFAULT
A. Tenant's Default. A default under this Lease by Tenant shall exist
----------------
if any of the following events shall occur:
(i) If Tenant shall have failed to pay any amount of Rent within
five (5) days after written notice that such payment is past due; or
(ii) If Tenant shall have failed to perform any term, covenant or
condition of this Lease (including Tenant's obligations pursuant to Exhibit C
---------
attached hereto) other than the payment of Rent (and excluding the defaults
described in clauses (iii) through (ix) below) and such failure continues for
thirty (30) or more days after written notice from Landlord; provided,
25.
<PAGE>
however, that where such failure could not reasonably be cured within the thirty
(30) day period, Tenant shall not be in default if it has commenced such
performance within said thirty (30) day period and thereafter diligently
prosecutes the same to completion; or
(iii) If Tenant shall have assigned its assets for the benefit of its
creditors; or
(iv) If the sequestration or attachment of or execution on any
material part of Tenant's Personal Property essential to the conduct of Tenant's
business shall have occurred, and Tenant shall have failed to obtain a return or
release of such Personal Property within thirty (30) days thereafter, or prior
to sale pursuant to such sequestration, attachment or levy, whichever is
earlier; or
(v) If Tenant shall have abandoned the Premises; or
(vi) If a court shall have made or entered any decree or order other
than under the bankruptcy Laws of the United States adjudging Tenant to be
insolvent; or approving as properly filed a petition seeking reorganization of
Tenant; or directing a winding up or liquidation of Tenant and such decree or
order shall have continued for a period of thirty (30) days; or
(vii) If Tenant shall have failed to comply with the provisions of
Paragraphs 19 or 24; or
(viii) If Tenant shall have Sublet the Premises or any portion thereof
without Landlord's prior written consent; or
(ix) If Tenant fails to deliver to Landlord the Security Deposit
within six (6) days after full execution of this Lease.
Any notice required to be given by Landlord under this Lease shall be in
lieu of, and not in addition to, any notice required under Section 1161 of the
California Civil Code of Procedure.
B. Remedies. Upon a default, Landlord shall have the following remedies,
--------
in addition to all other rights and remedies provided by Law or otherwise
provided in this Lease, to which Landlord may resort cumulatively or in the
alternative, and without notice to Tenant where no cure period is provided for
Tenant's breach:
(i) Continue Lease. Landlord may continue this Lease in full
--------------
force and effect, and this Lease shall continue in full force and effect as long
as Landlord does not terminate this Lease, and Landlord shall have the right to
collect Rent when due and enforce other obligations of Tenant hereunder.
(ii) Terminate Right to Possession. Landlord may terminate Tenant's
-----------------------------
right to possession of the Premises at any time by giving written notice to that
effect, and relet the Premises or any part thereof. Tenant shall be liable
immediately to Landlord for all costs Landlord incurs in reletting the Premises
or any part thereof, including, without limitation, the unamortized amount of
any broker's commissions paid or payable by Landlord in connection with this
Lease (amortized on a straight line basis over the initial term of this Lease)
and
26.
<PAGE>
expenses of cleaning and repairing the Premises. Reletting may be for a period
shorter or longer than the remaining term of this Lease. No act by Landlord
other than giving written notice to Tenant shall terminate this Lease. Acts of
maintenance, efforts to relet the Premises or the appointment of a receiver on
Landlord's initiative to protect Landlord's interest under this Lease shall not
constitute a termination of Tenant's right to possession. On termination,
Landlord has the right to remove all Tenant's Personal Property and store same
at Tenant's cost and to recover from Tenant as damages:
(a) The worth at the time of award of unpaid Rent and other sums
due and payable which had been earned at the time of termination; plus
(b) The worth at the time of award of the amount by which the
unpaid Rent and other sums due and payable which would have been earned or
payable after termination until the time of award exceeds the amount of such
Rent loss that Tenant proves could have been reasonably avoided; plus
(c) The worth at the time of award of the amount by which the
unpaid Rent and other sums due and payable for the balance of the Lease Term
after the time of award exceeds the amount of such Rent loss that Tenant proves
could be reasonably avoided; plus
(d) Any other amount necessary which is to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which, in the ordinary course of things, would
be likely to result therefrom, including, without limitation, any costs or
expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii)
in maintaining, repairing, preserving, restoring or cleaning the Premises or any
portion thereof; (iii) any unamortized leasing commissions paid or payable by
Landlord in connection with this Lease (amortized on a straight line basis over
the initial term of this Lease); or (iv) for any other costs necessary or
appropriate to relet the Premises; plus
(e) At Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by the Laws of
the State of California.
The "worth at the time of award" of the amounts referred to in
Paragraphs 15.B.(ii)(a) and 15.B.(ii)(b) is computed by allowing interest at the
rate of ten percent (10%) per annum on the unpaid Rent and other sums due and
payable from the termination date through the date of award. The "worth at the
time of award" of the amount referred to in Paragraph 15.B.(ii)(c) is computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%). Tenant waives
redemption or relief from forfeiture under California Code of Civil Procedure
Sections 1174 and 1179, or under any other present or future Laws, in the event
Tenant is evicted or Landlord takes possession of the Premises by reason of any
default of Tenant hereunder.
(iii) Re-entry. Landlord may, with or without terminating this
--------
Lease, re-enter the Premises and remove all persons and property from the
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant. No re-entry or taking
possession of the Premises by Landlord pursuant to this paragraph
27.
<PAGE>
shall be construed as an election to terminate this Lease unless a written
notice of such intention is given to Tenant.
(iv) Remedy. So long as this Lease is not terminated, Landlord shall
------
have the right to remedy any default of Tenant pursuant to the terms of
Paragraph 26.
C. Late Charges. Tenant acknowledges that late payment by Tenant to
------------
Landlord of Rent and other charges provided for under this Lease shall cause
Landlord to incur costs not contemplated by this Lease, the exact amount of such
costs being extremely difficult or impracticable to fix. Such costs include, but
are not limited to, processing and accounting charges, and late charges that may
be imposed on Landlord by the terms of any encumbrance and notes secured by any
encumbrance covering the Premises, or late charges and penalties due to late
payment of Real Property Taxes due on the Premises. Therefore, if any
installment of Rent or any other charge due from Tenant is not received by
Landlord within seven (7) days after the date when due, Tenant shall pay to
Landlord an additional sum equal to five percent (5%) of the amount overdue as a
one (1) time late charge, whether or not Landlord has given Tenant written
notice of the non-receipt of the Rent or other charges or has exercised any
remedy herein provided for default by Tenant. The parties agree that this late
charge represents a fair and reasonable estimate of the costs that Landlord
shall incur by reason of the late payment by Tenant. Acceptance of any late
charge shall not constitute a waiver of Tenant's default with respect to the
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies available to Landlord on account thereof.
D. Landlord's Default. Landlord shall not be deemed to be in default in the
------------------
performance of any obligation required to be performed by it hereunder unless
and until it has failed to perform such obligation within thirty (30) days after
receipt of written notice by Tenant to Landlord specifying the nature of such
default; provided, however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be deemed to be in default if it shall commence such performance
within such thirty (30) day period and thereafter diligently prosecute the same
to completion.
16. SURRENDER OF THE PREMISES
A. Condition upon Surrender. Upon the expiration or earlier termination
------------------------
of the Lease Term, Tenant shall surrender the Premises to Landlord broom clean
and in its condition existing as of the Commencement Date, ordinary wear and
tear excepted. The phrase "ordinary wear and tear" means wear which manifests
itself solely through the passage of time. For the purpose of this Lease, items
which are not deemed "ordinary wear and tear" shall include, but not be limited
to, the following items, which items shall be Tenant's obligation to repair or
correct: (i) damage to or defacement of portions of any walls, partitions,
woodwork, plaster or surface finishes or any other portion of the Premises from
any cause (including, without limitation, from nails or screws); (ii) damage to
the flooring (including stains, marks or soiling); (iii) damage to the Premises
from any cause except for any casualty not caused by Tenant or Tenant's Agents;
and (iv) any other damaged or non-functioning improvements within the Premises,
such as light fixtures, electrical outlets, telephone jacks, door knobs and
ceiling panels. Items which are deemed "ordinary wear and tear" shall include
the wear and tear which is attributable to the use of the Premises pursuant to
Paragraph 5.A. hereof.
28.
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B. Removal of Alterations. Tenant shall remove from the Premises prior to
----------------------
the termination or expiration of this Lease all of Tenant's Alterations required
to be removed pursuant to Paragraph 7.D. and all Tenant's Personal Property, and
shall repair any damage and perform any restoration work caused by such removal.
If Tenant is then in default, then notwithstanding any other provision of this
Lease and/or the terms of any other previous notice given by Landlord to Tenant,
Tenant shall only remove such Alterations and Tenant's Personal Property as
specified in written notice from Landlord to Tenant. If Tenant fails to remove
such Alterations and Tenant's Personal Property on or before the termination of
this Lease (or on any such earlier date that Tenant abandons or surrenders the
Premises), Landlord may retain such property and, at Landlord's option, (i)
apply it toward the satisfaction of Tenant's obligations under this Lease, and
all rights of Tenant with respect to such property shall cease, or (ii) place
all or any portion of such property in public storage for Tenant's account.
Tenant shall be liable to Landlord for costs of removal of any such Alterations
and Tenant's Personal Property and storage and transportation costs of same, and
the cost of repairing and restoring the Premises, together with interest at the
rate of ten percent (10%) per annum from the date of expenditure by Landlord.
C. Indemnification of Landlord. If the Premises are not surrendered to
---------------------------
Landlord in accordance with the of this Paragraph 16, Tenant shall indemnify,
defend and hold harmless Landlord and Landlord's Agents against all Liabilities
resulting from Tenant's delay past such date in so surrendering the Premises,
including, without limitation, any claims made by any succeeding tenant, losses
to Landlord due to lost opportunities to lease to succeeding tenants, and
attorneys' fees and costs.
17. ATTORNEYS' FEES. If either party brings any action or legal proceeding for
damages for an alleged breach of any provisions of this Lease, to recover Rent,
to terminate the tenancy of the Premises or to enforce, interpret, protect or
establish any term, condition or covenant of this Lease or right of either
party, the prevailing party shall be entitled to recover as a part of such
action or proceeding, or in a separate action brought for that purpose, its
reasonable attorneys' fees and costs.
18. LIENS. Tenant shall keep the Premises and the Project free from liens
arising of any work performed, materials furnished or obligations incurred by or
on behalf of Tenant. Tenant shall indemnify, defend and hold harmless Landlord
and Landlord's Agents from all Liabilities arising out of or in any way relating
to any such liens or claims of lien. Tenant shall cause any such liens to be
released of record, by payment or posting of a proper bond acceptable to
Landlord, within ten (10) days after the earlier of imposition of the lien or
written request by Landlord.
19. SUBORDINATION
A. Documentation. This Lease is subject and subordinate to all ground
-------------
and underlying mortgages and deeds of trust which now affect the Premises, as
the same may hereafter be renewed, modified, consolidated, replaced and/or
extended (collectively "Encumbrances"); provided, however, if the holder or
holders of any such Encumbrance ("Holder") shall require that this Lease be
prior and superior thereto, then within seven (7) days after written request of
Landlord to Tenant, Tenant shall execute, have acknowledged and deliver
29.
<PAGE>
any and all documents or instruments, in the form presented to Tenant, which
Landlord or Holder deems necessary or desirable for such purposes. Landlord
shall have the right to cause this Lease to be and become and remain subject and
subordinate to any and all future Encumbrances which might hereafter affect the
Premises; provided, however, that in such event, so long as Tenant is not in
default, Holder shall agree not to disturb Tenant's quiet enjoyment of the
Premises as long as Tenant shall pay the Rent timely and observe and perform all
other provisions of this Lease to be observed and performed by Tenant. Within
ten (10) days after Landlord's written request, Tenant shall execute any and all
documents required by Landlord or Holder required to effectuate such
subordination to make this Lease subordinate to any lien of the Encumbrance. If
Tenant fails to do so, such failure shall constitute an irrevocable appointment
of Landlord as Tenant's attorney-in-fact and to act in Tenant's name, place and
stead.
B. Attornment. Notwithstanding anything to the contrary set forth in
----------
this Paragraph 19, hereby attorns and agrees to attorn to any entity purchasing
or otherwise acquiring the Premises at any sale or other proceeding or pursuant
to the exercise of any other rights, powers or remedies under any Encumbrance.
20. MORTGAGEE PROTECTION
In the event of any default on the part of Landlord, Tenant shall give
written notice to any beneficiary of a deed of trust covering the Premises, and
shall allow such beneficiary a reasonable opportunity to cure the default,
including time to obtain possession of the Premises by power of sale or a
judicial foreclosure, if such should prove necessary to effect a cure.
21. CONDEMNATION
A. Total Taking - Termination . If (i) title to all of the Premises or so
--------------------------
much thereof is taken for any or quasi-public use under any statute or by right
of eminent domain so that reconstruction of the Premises will not result in the
Premises being reasonably suitable for Tenant's continued occupancy for the uses
and purposes permitted by this Lease, or (ii) the parking spaces available to
Tenant pursuant to this Lease are taken for any public or quasi-public use under
any statute or by right of eminent domain such that the ratio of parking spaces
to rentable square feet of the Premises falls below that mandated by law and
Landlord is not able to provide alternative parking to Tenant, then this Lease
shall terminate as of the date that possession of the Premises or part thereof
is taken.
B. Partial Taking. If any part of the Premises is taken and the
--------------
remaining part is reasonably suitable for Tenant's continued occupancy for the
purposes and uses permitted by this Lease, this Lease shall, as to the part so
taken, terminate as of the date that possession of such part of the Premises is
taken and the Rent payable hereunder shall be reduced in the same proportion
that the floor area of the portion of the Premises so taken (less any addition
thereto by reason of any reconstruction) bears to the original floor area of the
Premises. Landlord shall, at its own cost and expense, make all necessary
repairs or alterations to the Premises so as to make the portion of the Premises
not taken a complete architectural unit. Such work shall not, however, exceed
the scope of the work done by Landlord in originally constructing the Premises,
or require Landlord to expend sums in excess of the net proceeds awarded to
Landlord on
30.
<PAGE>
account of such condemnation or taking. During the period of any such repair or
alteration, Rent shall be temporarily abated in proportion to the degree that
Tenant's use of the Premises is impaired. Each party hereby waives the
provisions of Section 1265.130 of the California Code of Civil Procedure and any
similar Laws allowing either party to petition the Superior Court to terminate
this Lease in the event of a partial taking of the Premises.
C. No Apportionment of Award. No award for any partial or entire taking
-------------------------
shall be apportioned. Tenant to Landlord its interest in any award which may be
made in such taking or condemnation, together with any and all rights of Tenant
arising in or to the same or any part thereof. Nothing contained herein shall be
deemed to give Landlord any interest in or require Tenant to assign to Landlord
any separate award made to Tenant for the taking of Tenant's Personal Property,
for the interruption of Tenant's business, or its moving costs, or for the loss
of its goodwill.
D. Temporary Taking. No temporary taking of the Premises shall terminate
----------------
this Lease or give Tenant any right to any abatement of Rent. Any award made to
Tenant by reason of such temporary taking shall belong entirely to Tenant and
Landlord shall not be entitled to share therein. Each party agrees to execute
and deliver to the other all instruments that may be required to effectuate the
provisions of this Paragraph 21.
E. Sale Under Threat of Condemnation. A sale by Landlord to any
---------------------------------
authority having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed a
taking under the power of eminent domain for all purposes of this Paragraph 21.
22. HOLDING OVER
If Tenant holds possession of any portion of the Premises after expiration
or termination of the term of this Lease with respect to that portion of the
Premises without the written consent of Landlord, then absent express agreement
of Landlord such holding over shall be a tenancy at sufferance and not for any
periodic or fixed term. Tenant shall pay monthly rental hereunder equal to one
hundred fifty percent (150%) of the amount of Base Rent and Additional Rent
payable immediately prior to expiration of such term with respect to such
Premises during the first thirty (30) days of such holdover period, after which
time Tenant shall pay monthly rental equal to two hundred percent (200%) of the
amount of Base Rent and Additional Rent payable immediately prior to expiration
of such term with respect to such Premise, together with such other amounts as
may become due hereunder, and otherwise all of the terms and conditions of this
Lease shall continue to apply, excluding any options or rights of Tenant to
renew or extend this Lease or expand the Premises hereunder. Nothing herein
shall be construed as a consent in advance by Landlord to any holding over by
Tenant or to any specific terms or conditions of any holding over, and Landlord
expressly reserves the right to require Tenant to surrender possession of the
Premises to Landlord when and as required hereunder. Any holding over with the
written consent of Landlord shall, except as otherwise specified in such
consent, thereafter constitute a lease from month to month but otherwise subject
to all of the terms and conditions of this Lease, excluding any options or
rights of Tenant to renew or extend this Lease or expand the Premises hereunder.
31.
<PAGE>
23. ENTRY BY LANDLORD
Tenant shall permit Landlord and Landlord's Agents to enter the Premises at
all reasonable times with reasonable notice, except for emergencies in which
case no notice shall be required, to inspect the same and to conduct tests
thereon, to post Notices of Nonresponsibility and "For Sale" signs, to show the
Premises to interested parties such as prospective lenders and purchasers, to
make necessary Alterations or repairs, and to discharge Tenant's obligations
hereunder when Tenant has failed to do so within a reasonable time after written
notice from Landlord. Notwithstanding the foregoing, Landlord and Landlord's
Agents may enter the Premises at any reasonable time within nine (9) months
prior to the expiration of the Lease Term, or at any time during the Lease Term
hereof if Tenant is in default hereunder, to place upon the Premises ordinary
"For Lease" signs and to show the Premises to prospective tenants. Tenant shall
have the right to have a representative of Tenant to accompany Landlord or
Landlord's Agents on the Premises. Landlord shall not access Tenant's safes or
enter into any areas maintained by Tenant for the safety and security of monies,
securities, negotiable instruments, confidential documents or files, or similar
items, without Tenant's prior consent, which consent shall not unreasonably be
withheld, delayed or conditioned, except for emergencies in which case Tenant's
consent shall not be required.
24. ESTOPPEL CERTIFICATES; INFORMATION
A. Estoppel Certificates. Tenant shall have twenty (20) days following
---------------------
Landlord's written request to execute and deliver to Landlord any documents,
including estoppel certificates, in the form prepared by Landlord (a) certifying
that this Lease is unmodified and in full force and effect or, if modified,
stating the nature of such modification and certifying that this Lease, as so
modified, is in full force and effect and the date to which the Rent and other
charges are paid in advance, if any, and (b) acknowledging that there are no
uncured defaults on the part of Landlord, or, if there are uncured defaults on
the part of Landlord, stating the nature of such uncured defaults, (c)
certifying that Tenant has no defenses or offsets then outstanding against any
of its obligations under this Lease, or stating those claimed by Tenant, and (d)
certifying any other matters pertaining to the status of this Lease or
performance of obligations thereunder by Landlord or Tenant as to which Tenant
has actual knowledge and as may be reasonably required either by a purchaser of
the Premises or a lender making a loan to Landlord to be secured by the Premises
or Project. Tenant's failure to deliver an estoppel certificate within twenty
(20) days after delivery of Landlord's written request therefor shall be
conclusive upon Tenant that (i) this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) there are no uncured
defaults in Landlord's performance, (iii) Tenant has no defenses or right of
offset against its obligations hereunder, and (iv) no Rent has been paid in
advance.
B. Financial Statements. Tenant shall have seven (7) days following
--------------------
Landlord's written request to deliver to Landlord the most current financial
statements of Tenant, including balance sheets and profit and loss statements,
all prepared in accordance with generally accepted accounting principles
consistently applied and certified by an officer of Tenant as true, correct and
complete. Tenant further agrees that if Tenant fails to perform any of its
obligations hereunder and thereafter Landlord reasonably believes that Tenant
may not have sufficient financial resources to meet its obligations under this
Lease and/or its financial obligations generally, then Tenant shall, within
seven (7) days after receipt of a written request from
32.
<PAGE>
Landlord, furnish Landlord with any financial information within Tenant's
possession or control that is reasonably requested by Landlord. All financial
statements furnished by Landlord pursuant to this Paragraph 24.B. shall be
treated as confidential; provided, however, Lender may disclose Tenant's
financial statements and information to Landlord's lenders, partners, officers,
directors, accountants, attorneys, potential lenders and potential purchasers of
all or any portion of the Project and any other parties to the extent required
by law.
25. TRANSFER OF THE PREMISES BY LANDLORD
In the event of any conveyance of the Premises and assignment by Landlord
of its interest in this Lease, upon the assignee's assumption in writing of this
Lease, Landlord shall be and is hereby entirely released from all liability
under any and all of its covenants and obligations contained in or derived from
this Lease that occur after the date of such conveyance and assignment.
26. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS
If Tenant shall at any time fail to make any payment or perform any other
act on its part to be made or performed under this Lease, Landlord may, but
shall not be obligated to and without waiving or releasing Tenant from any
obligation of Tenant under this Lease, make such payment or perform such other
act to the extent Landlord may deem desirable, and in connection therewith, pay
expenses and employ counsel. Tenant shall reimburse Landlord for all sums so
paid by Landlord and all penalties, interest, legal fees and collection costs
incurred in connection therewith within ten (10) days after Landlord's written
request therefor. If Tenant fails to so reimburse Landlord within such ten (10)
day period, then (a) a late charge shall be assessed in accordance with
Paragraph 15.C. above, (b) interest shall accrue on such delinquent payment at
the rate of ten percent (10%) per annum from the date due to the date of payment
thereof by Tenant to Landlord, and (c) Landlord shall have all other rights and
remedies granted or reserved to Landlord hereunder for the nonpayment of Rent.
27. TENANT'S REMEDY
Except with regard to Landlord's obligation to pay to Tenant the Tenant
Improvement Allowance and Additional Tenant Improvement Allowance in accordance
with the terms of this Lease and refund or return to Tenant the Security Deposit
(defined in Paragraph 28) in accordance with the terms of this Lease, the
obligations of Landlord under this Lease are not personal obligations of the
individual members, partners, directors, officers, shareholders, agents or
employees of Landlord; and Tenant shall look solely to the Project (and any
insurance proceeds relating thereto) for satisfaction of any liability of
Landlord and shall not look to other assets of Landlord nor seek recourse
against the assets of the individual members, partners, directors, officers,
shareholders, agents or employees of Landlord.
28. SECURITY
A. Cash Security Deposit. Within six (6) business days after full
---------------------
execution of this Lease, Tenant shall deliver to Landlord cash (the "Security
Deposit") in the amount specified as the Security Deposit in the Lease Summary.
The Security Deposit shall secure the performance of all of Tenant's obligations
under this Lease, including Tenant's obligation to pay Rent and
33.
<PAGE>
other monetary amounts, to maintain the Premises and repair damages thereto, and
to surrender the Premises to Landlord upon termination of this Lease in the
condition required hereunder. Landlord may use and commingle the Security
Deposit with other funds of Landlord. If Tenant fails to perform Tenant's
obligations hereunder, Landlord may, but without any obligation to do so, apply
all or any portion of the Security Deposit towards fulfillment of Tenant's
unperformed obligations. If Landlord does so apply all or any portion of the
Security Deposit, Tenant, upon written demand by Landlord, shall immediately pay
to Landlord a sufficient amount in cash to restore the Security Deposit to the
full original amount. Tenant's failure to pay to Landlord a sufficient amount in
cash to restore the Security Deposit to its original amount within five (5) days
after receipt of such demand shall constitute a default under this Lease. Tenant
shall not be entitled to interest on the Security Deposit. Within thirty (30)
days after the expiration or earlier termination of this Lease, if Tenant has
then performed all of Tenant's obligations hereunder, Landlord shall return the
Security Deposit to Tenant. If Landlord sells or otherwise transfers Landlord's
rights or interest under this Lease, Landlord shall deliver the Security Deposit
to the transferee, whereupon Landlord shall be released from any further
liability to Tenant with respect to the Security Deposit provided that the
transferee assumes in writing the obligations of Landlord under this Paragraph
28.
B. Letter of Credit. In lieu of providing Landlord with a cash security
----------------
deposit, Tenant may deliver to Landlord an irrevocable standby letter of credit
(the "Letter of Credit") naming Landlord as beneficiary, in the amount of the
Security Deposit. The Letter of Credit shall be in the form attached hereto as
Exhibit F, subject to such commercially reasonable modifications as the issuer
- ---------
shall require that do not materially affect Landlord's rights thereunder. If
Tenant has theretofore provided Landlord a cash security deposit, the amount
thereof shall be returned to Tenant by Landlord upon Landlord's receipt of the
Letter of Credit. The Letter of Credit shall be issued by a major national bank
located in San Francisco or a regional bank located in the San Francisco Bay
Area ("Bank") reasonably satisfactory to Landlord and shall be upon such terms
and conditions as Landlord and Landlord's lender may reasonably require. The
Letter of Credit shall allow draws by Landlord upon sight draft accompanied by a
statement from Landlord that it is entitled to draw upon the Letter of Credit
and shall contain terms which allow Landlord to make partial and multiple draws
up to the face amount of the Letter of Credit. If Tenant has not delivered to
Landlord at least thirty (30) days prior to the expiration of the original
Letter of Credit (or any renewal letter of credit) a renewal or extension
thereof, Landlord shall have the right to draw down the entire amount of
original Letter of credit (or renewal thereof) and retain the proceeds thereof
as the security deposit. If and when Tenant would be entitled to request that
Landlord return the Security Deposit to Tenant or apply the Security Deposit
towards Tenant's obligation to pay Rent, Landlord shall, at Tenant's request,
return to Tenant any Letter of Credit delivered to Landlord pursuant to this
Paragraph.
C. Reduction of Security Deposit. Notwithstanding the foregoing, upon
-----------------------------
Tenant's written request, the Security Deposit shall be reduced to Two Million
One Hundred Ninety-Nine Thousand Four Hundred Eight Dollars (2,199,408.00)
provided and on the condition that (i) Tenant achieves and maintains a net worth
in the United States of Three Hundred Million Dollars ($300,000,000.00) or more
or (ii) Tenant is acquired by a company with a net worth in the United States of
Four Hundred Million Dollars ($400,000,000.00) or more.
34.
<PAGE>
29. FINANCIAL COVENANTS
Tenant represents and warrants that all financial information provided by
Tenant to Landlord prior to execution of this Lease is true and complete and
fairly represents the actual financial condition of Tenant as of the date
indicated on the financial statement, and that no material adverse change in
such financial condition has occurred from such date to the date that Tenant
executes this Lease. Tenant agrees that any material misrepresentation to
Landlord as to Tenant's financial condition, or any failure to provide financial
information required to be provided by Tenant hereunder, shall constitute a
default under this Lease.
30. PARKING
Tenant and Tenant's Agents shall be entitled to use up to six hundred
twenty (620) spaces in the Project's parking facilities. Such parking rights
shall be free of charge and available for Tenant's use on a non-exclusive basis
with the other tenants of the Project and their respective officers, employees,
customers and invitees; provided, however, that (i) Tenant agrees not to
overburden the parking facilities and to cooperate with Landlord and other
tenants of the Project in the use of the parking facilities and (ii) so long as
Tenant leases all of the rentable square footage in the Project, Tenant may
designate certain parking spaces in the Project for its exclusive use. Subject
to Tenant's right to designate certain parking spaces for its exclusive use as
provided in the foregoing sentence, Landlord reserves the right in its absolute
discretion to determine whether the parking facilities are becoming crowded and
to allocate and assign parking spaces among Tenant and the other tenants of the
Project. Landlord shall not be liable to Tenant, nor shall this Lease be
affected, if any parking privileges appurtenant to the Premises are impaired by
reason of any Law or as a result of any other tenants parking in any parking
spaces designated for Tenant's exclusive use. Notwithstanding the foregoing, if
the ratio of parking spaces to rentable square feet of the Premises falls below
the ratio required by law and Landlord is not able to provide alternative
parking to Tenant within sixty (60) days, then Tenant may terminate this Lease
by written notice to Landlord. Tenant shall exercise such termination right, if
at all, within twenty (20) days after Landlord notifies Tenant in writing that
Tenant's parking will be reduced below the ratio required by law.
31. QUIET ENJOYMENT
Landlord covenants that Tenant, upon performing the terms, conditions and
covenants of this Lease, shall have quiet and peaceful possession of the
Premises as against any person claiming the same by, through or under Landlord.
32. SIGNS
So long as Tenant leases more than fifty percent (50%) of the total
rentable square footage in a Building, Tenant shall have the right to install
and display exterior signage ("Exterior Building Signage") on that Building.
All Exterior Building Signage must be in compliance with all applicable
governmental laws, rules and regulations and shall contain only Tenant's name,
or the name of any affiliate or subtenant of Tenant actually occupying the
Premises, and no advertising matter. In addition, Tenant shall have the right
to install or place additional signage in the Project ("Additional Signage")
provided that such additional signage
35.
<PAGE>
complies with the then-current signage program for the Project (a copy of the
current version of which is attached hereto as Exhibit G) and any governmental
---------
restrictions or conditional approvals. The cost of the Exterior Building Signage
and the Additional Signage (collectively, "Tenant's Signage"), including the
cost of design, manufacture, installation, maintenance and removal, shall be
Tenant's sole expense. Tenant shall remove Tenant's Exterior Building Signage
prior to the expiration of the term of this Lease with respect to such Building
or upon the earlier termination of this Lease with respect to such Building and
return the area of the Building previously covered by the Exterior Building
Signage and where the Exterior Building Signage was attached to its condition
existing immediately prior to the placement or erection of said sign or signs.
In addition, prior to the expiration of this Lease or upon the earlier
termination of this Lease, Tenant shall remove all of Tenant's Additional
Signage from the Project. If Tenant fails to maintain its Tenant's Signage, or
if Tenant fails to remove Tenant's Signage upon the expiration or termination of
this Lease (as provide above), Landlord may do so at Tenant's expense and Tenant
shall reimburse Landlord for such amounts as Additional Rent. Such reimbursement
shall include all sums disbursed, incurred or deposited by Landlord, including
Landlord's costs, expenses and reasonable attorneys' fees, with interest thereon
at an interest rate of ten percent (10%) per annum from the date of payment by
Landlord. So long as Tenant (i) leases one hundred percent (100%) of the Project
and (ii) occupies at least eighty percent (80%) of the Project, Landlord shall
make no changes to the signage program without Tenant's consent, which consent
shall not unreasonably be withheld, delayed or conditioned.
33. ACCEPTANCE
Delivery of this Lease, duly executed by Tenant, together with payment of
the Base Rent for the first month of the Lease Term and the Security Deposit
required hereunder, constitutes an offer to lease the Premises, and under no
circumstances shall such delivery and payment be deemed to create an option or
reservation to lease the Premises for the benefit of Tenant. This Lease shall
only become effective and binding upon full execution hereof by Landlord and
delivery of a signed copy to Tenant. Upon acceptance of Tenant's offer to lease
under the terms hereof, Landlord shall be entitled to retain such Base Rent and
Security Deposit and apply same as partial payment toward damages, costs and
expenses incurred by Landlord if Tenant fails to occupy the Premises. If
Landlord declines said offer, any such payments shall be returned to Tenant.
34. RECORDING; QUITCLAIM
Neither party shall record this Lease nor a short form memorandum thereof.
Upon any termination of this Lease, Tenant shall, at Landlord's request,
execute, have acknowledged and deliver to Landlord a quitclaim deed or other
documentation acceptable to Landlord evidencing the termination of Tenant's
interest in the Premises.
35. BROKERS
Tenant represents and warrants to Landlord that it has no dealings with any
real estate broker or agent in connection with the negotiation of this Lease and
that it knows of no real estate broker or agent who is or might be entitled to a
commission or fee in connection with this Lease, except for the brokers
disclosed in the Lease Summary attached hereto (the "Brokers").
36.
<PAGE>
Tenant agrees to indemnify and hold harmless Landlord and Landlord's Agents from
and against any and all Liabilities arising out of or in any way related to any
claims for compensation made by any party claiming to have acted on behalf or
for the benefit of Tenant in connection with this Lease, other than the Brokers.
Landlord shall pay, pursuant to separate agreement, the commissions and fees due
to the Brokers.
36. GENERAL
A. Captions. The captions and headings used in this Lease are for the
--------
purpose of convenience only and shall not be construed to limit or extend the
meaning of any part of this Lease.
B. Executed Copy; Counterparts. Any fully executed copy of this Lease
---------------------------
shall be deemed an original for all purposes. This Lease may be executed in
several counterparts, each of which shall be an original, but all of such
counterparts shall constitute one such Lease.
C. Severability. In case any one or more of the provisions contained
------------
herein, except for the payment of Rent, shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision of this Lease, but this
Lease shall be construed as if such invalid, illegal or unenforceable provision
had not been contained herein.
D. Construction; Choice of Law. This Lease shall be construed and
---------------------------
enforced in accordance with the Laws of the State of California, without giving
effect to the conflict-of-law principles of said State. The language in all
parts of this Lease shall in all cases be construed as a whole according to its
fair meaning and not strictly for or against either Landlord or Tenant.
E. Gender; Singular, Plural. When the context of this Lease requires,
------------------------
the neuter gender includes the masculine, the feminine, a partnership or
corporation or joint venture, and the singular includes the plural.
F. Binding Effect. The covenants and agreements contained in this Lease
--------------
shall be binding on the parties hereto and on their respective successors and
assigns to the extent assignable.
G. Waiver. No covenant, term or condition of this Lease shall be deemed
------
to have been waived by Landlord unless such waiver is in writing and signed by
Landlord. The waiver by Landlord of any breach of any term, condition or
covenant of this Lease shall not be deemed to be a waiver of such provision or
any subsequent breach of the same or any other term, condition or covenant of
this Lease. Landlord shall have the right to accept Base Rent and other payments
due from Tenant hereunder with knowledge of a preceding breach of this Lease,
and no such acceptance shall be deemed an express or implied waiver of such
breach unless such waiver is in writing and signed by Landlord. No further
reservation of rights shall be required of Landlord under this Lease to reserve
all rights and remedies of Landlord arising with respect to such preceding
breach.
H. Entire Agreement. This Lease is the entire agreement between the
----------------
parties, and this Lease expressly supersedes all prior negotiations,
representations and agreements of the
37.
<PAGE>
parties respecting the Premises or the Project. There are no agreements or
representations between the parties except as expressed herein. Except as
otherwise provided herein, no subsequent change or addition to this Lease shall
be binding unless in writing and signed by each of the parties hereto.
I. Authority. If Tenant is a corporation or a partnership, each
---------
individual executing this Lease on behalf of said corporation or partnership, as
the case may be, represents and warrants that he or she is duly authorized to
execute and deliver this Lease on behalf of said entity in accordance with its
corporate bylaws, statement of partnership or certificate of limited
partnership, as the case may be. Landlord, at its option, may require a copy of
such written authorization to enter into this Lease. The failure of Tenant to
deliver the same to Landlord within seven (7) days after Landlord's request
therefor shall be deemed a default under this Lease.
J. Exhibits. All exhibits, amendments, riders and addenda attached
--------
hereto are hereby incorporated herein and made a part hereof.
K. Lease Summary. The Lease Summary attached to this Lease is intended
-------------
to provide general information only. In the event of any inconsistency between
the Lease Summary and the specific provisions of this Lease, the specific
provisions of this Lease shall prevail.
L. Survival. Tenant's covenants and indemnities shall survive the
--------
termination of this Lease where reasonably appropriate to accomplish the purpose
thereof.
M. Time. Time is of the essence for the performance of each term,
----
condition and covenant of this Lease.
N. No Jury Trial. Landlord and Tenant hereby waive their respective
-------------
right to trial by jury of any cause of action, claim, counterclaim or cross-
complaint in any action, proceeding and/or hearing brought by either Landlord
against Tenant or Tenant against Landlord on any matter whatsoever arising out
of, or in any way connected with, this Lease, the relationship of Landlord and
Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or
damage, or the enforcement of any remedy under any Laws now or hereafter in
effect.
O. Shuttle Program. Tenant shall participate in the Brisbane/Crocker
---------------
Park Shuttle Program managed by the Multi-City TSM Agency for the City of
Brisbane at its own expense.
37. ANTENNAS
A. Satellite/Antenna. Tenant shall have the right for the duration of
-----------------
the Term to install, maintain and operate solely for its use (and not for use by
any third party) a satellite dish antenna (collectively, the "Antenna") on the
roof of each Building leased by Tenant in a location selected by Tenant and
approved by Landlord, which approval shall not be unreasonably withheld. In
connection with the installation of cabling from the Antenna to the Premises,
Tenant may use the conduits of the applicable Building, subject to space
limitations and Landlord's reasonable requirements for use of such areas. Tenant
shall not be obligated to pay any additional rent to Landlord in connection with
the installation of the Antenna(s) or Tenant's use thereof. Tenant shall (a)
install and maintain the Antenna(s) at Tenant's sole cost and
38.
<PAGE>
expense, (b) obtain and maintain any required governmental permits for the
Antenna(s), (c) comply with all applicable codes and permits concerning the
installation, maintenance and operation of the Antenna(s), and (d) place the
Antenna(s) within existing visual screening as reasonably required by Landlord.
Tenant shall have access to the Antenna(s) at all times, subject to Landlord's
reasonable regulation thereof. If the installation and/or maintenance of the
Antenna(s) requires any penetration of the roof of a Building, Landlord's
contractor shall perform the installation or maintenance, at Tenant's cost.
Tenant shall not make any physical changes to the Antenna(s) nor to the
Buildings in connection therewith without Landlord's prior written approval,
which approval shall not be unreasonably withheld. Prior to expiration of
Tenant's lease of space within each Building or earlier termination of Tenant
lease of such space, Tenant shall repair, at Tenant's sole cost and expense, all
damage caused to the applicable Building (including without limitation, the roof
and conduits thereof) as a result of the installation, operation, maintenance,
use or removal of the Antenna, and restore that Building to its condition as of
the date of installation of the Antenna. Tenant shall not allow any provider of
telecommunication, video, data or related services to locate any equipment on
the roofs of the Buildings which is used to provide services to persons or
entities other than Tenant.
THIS LEASE is effective as of the date first hereinabove written.
"Tenant"
SNOWBALL.COM, INC.
a Delaware corporation
By: /s/ James R. Tolonen
------------------------------
Name: James R. Tolonen
Its: COO/CFO
By:_______________________________
Name:_____________________________
Its:______________________________
"Landlord"
GAL-BRISBANE, L.P.,
a California limited partnership
By: Brisbane Tech LLC, a Delaware limited
liability company, its General Partner
By: Stuhlmuller Real Estate, LLC, a
Delaware limited liability company
By: /s/ Roger C. Stuhlmuller
------------------------------------
Roger C. Stuhlmuller,
Manager
39.
<PAGE>
EXHIBIT 10.19
SUBLEASE AGREEMENT
THIS AGREEMENT is made effective as of May 1, 1999, by and between IMAGINE
MEDIA, INC., a California corporation ("Imagine"), and AFFILIATION NETWORKS,
INC., a Delaware corporation ("Affiliation").
RECITALS
A. Imagine is lessor of certain premises located at 250 Executive
Boulevard, San Francisco, CA 94134, consisting of approximately 16,063 square
feet (the "Premises"), pursuant to (1) that certain Sublease Agreement between
Imagine and MedPartners, Inc., dated June 30, 1998 (the "Sublease") and (2) that
certain Lease Agreement with Sunpark Properties, Inc. (the "Lease," and
collectively with the Sublease, the "Leases"). Copies of the Leases are attached
hereto and incorporated herein as if set forth in full.
B. Affiliation desires to sublet the Premises, and Imagine is willing to
sublease the Premises to Affiliation, on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises, and the covenants and
conditions contained below, the parties agree as follows:
AGREEMENT
1. Lease. Imagine hereby leases the Premises to Affiliation, and
-----
Affiliation hires the Premises from Imagine for the purpose of conducting
general business operations therein.
2. Term. The term of this Sublease shall begin May 1, 1999, and shall
----
continue on a month-to-month basis until either party notifies the other, at
least thirty (30) days in advance, of its intention to terminate it.
3. Rent. The rent shall be payable in monthly installments of Thirty One
----
Thousand Seven Hundred Eighty Dollars ($31,780.) each on the first day of each
month, plus any CPI adjustment as provided in the Lease.
4. No Sublease. Affiliation may not assign this Sublease or sublease the
-----------
Premises without the express written consent of Imagine; provided, however, that
Affiliation may sublet a portion of the Premises under the Lease Agreement to
Listen.com (f/k/a/ October Media, Inc.).
5. Other Terms. Affiliation shall comply with all other applicable terms
-----------
and conditions of the Leases as if it were the Tenant or Subtenant thereunder,
including without limitation all obligations to maintain insurance.
IN WITNESS WHEREOF, the parties have executed this Sublease Agreement as of
the day and year first set forth above.
IMAGINE MEDIA, INC. AFFILIATION NETWORKS, INC.
By /s/ Thomas P. Valentino By /s/ Mark Jung
------------------------ ------------------------
Thomas P. Valentino, CFO Mark Jung, President CEO
<PAGE>
EXECUTED SUBLEASE
THIS SUBLEASE is made and entered into as of June 30, 1998 by and between
MedPartners, Inc., a Delaware corporation, Federal Tax I.D. Number 63-1151076
("Sublessor") and Imagine Media, Inc., a California corporation, Federal Tax
I.D. Number 22-3157975 ("Sublessee").
Sublessor is the tenant of approximately twelve thousand, five hundred sixty-six
(12,566) square feet of fourth floor space (the "Premises") under that certain
Lease dated December 2, 1996 (the "Master Lease"), by and between Tuntex
Executive Park, Inc. ("Landlord"), landlord of the property commonly known as
250 Executive Park Boulevard, San Francisco, CA 94134 (the "Building"), and
Sublessor.
Sublessee desires to sublease one hundred percent (100%) or approximately 12,566
square feet of the Premises (the "Sublet Premises"), as shown as Exhibit B
hereto.
NOW THEREFORE, in consideration of the foregoing premises and the mutual
promises contained in this Sublease, the parties hereby agree as follows:
1. Sublease of Sublet Premises. Sublessor hereby subleases to Sublessee and
---------------------------
Sublessee hereby hires from Sublessor the Sublet Premises for the rent
hereinafter provided and subject to the terms and conditions of this
Sublease.
2. Provisions Constituting Sublease. This Sublease is subject to and
--------------------------------
subordinate to all the terms and conditions of the Master Lease (a copy of
which is attached hereto as Exhibit A) and the matters to which the Master
Lease is subordinate, to the extent not inconsistent with the provisions of
this Sublease. The provisions of the Master Lease are incorporated herein
by reference with the same force and effect as if they were fully set forth
herein, but specifically excluding Sections 1.1, 1.2, 1.3, 1.4, 1.9, 1.10,
1.11, 1.12, 1.14, 1.15, 1.17, 1.19, and Exhibit F. Sublessee shall assume
and perform the obligations of the Sublessor under the Master Lease. Each
reference in the Master Lease to "Landlord" and "Tenant" shall be read as
referring to "Sublessor" and "Sublessee", respectively, where appropriate.
Sublessor and Sublessee agree that the reference to "Landlord" in the last
sentence of Section 23 of the Master Lease shall not apply to Sublessor.
Notwithstanding the foregoing, Sublessee and Sublessor hereby agree that
Sublessee is relying directly on Landlord's rights and obligations under
the Master Lease with respect to Sections 3.2, 6.8, 13.3, 16, 18, 20, 21,
22, 23, and 34 of the Master Lease and Sublessor will not take any actions
with respect to such provisions of the Master Lease that are contrary to
Landlord's actions with respect thereto. If 1) Landlord shall default in
any of its obligations to Sublessor under the Master Lease, which default
materially and adversely impacts Sublessee's rights hereunder, 2) Sublessee
reasonably determines that legal action against Landlord is required in
order to enforce its rights under the Sublease, and 3) Sublessee is
prevented from pursuing such legal action due to the fact that Sublessee
does not have a direct contractual relationship with Landlord, then
Sublessor shall, upon request by Sublessee and at Sublessee's sole cost and
expense, take such legal action against Landlord. In the event of the
termination of Sublessor's interest as tenant under the Master Lease, then
this Sublease shall terminate without liability of Sublessor to Sublessee
except for any damages resulting from Sublessor's willful misconduct or
gross negligence.
3. Term. The term of this Sublease shall commence, at Sublessor's option,
----
between September 1 and October 31, 1998 (the "Sublease Commencement
Date"), and shall expire on May 31, 2002 (the "Sublease Expiration Date").
Sublessor shall provide Sublessee with no less than sixty (60) days prior
notice of the Sublease Commencement Date.
4. Base Rent. Sublessee shall pay Sublessor in consideration of the Sublease
---------
at the address set forth below a monthly base rent of twenty-three
thousand, thirty-seven dollars and sixty-seven cents ($23,037.67) during
the term hereof, payable in advance on the first day of each month
beginning with the Sublease Commencement Date and continuing through the
Sublease Expiration Date. In addition, Sublessee shall pay Sublessor all
Additional Rent due under the Master Lease. For the purpose of computing
Sublessee's share of Operating Expenses and Real Property Taxes, the Base
Year shall be calendar year 1999.
5. Security Deposit and Advance Rent. Upon execution of this Sublease, the
---------------------------------
Sublessee shall deliver to Sublessor a cashier's check in the amount of
forty-six thousand, seventy-five dollars and thirty-four cents
($46,075.34), which represents the first month's rent and twenty-three
thousand, thirty-seven dollars and sixty-seven cents ($23,037.67) as a
security deposit.
6. Insurance. Sublessee shall throughout the term maintain in force a policy
---------
of insurance in the form and amounts as set forth in the Master Lease,
covering its personal property and shall indemnify Sublessor and Lessor
from liabilities to third parties for personal injury, death and
1
<PAGE>
damage to tangible property resulting from Sublessee's negligence or
willful conduct. Sublessee shall be responsible for any increase to
Sublessor's and Lessor's insurance premiums due to Sublessee's use.
7. Use. Sublessee shall use the Sublet Premises in accordance with the Master
---
Lease.
8. Inspection of Premises. Prior to the Sublease Commencement Date, Sublessor
----------------------
shall, at its sole cost and expense, repaint the Sublet Premises and clean
all carpets in the Sublet Premises. Sublessee warrants that it has
inspected and agrees to accept the Sublet Premises (including all
improvements and systems thereon) on an "as is" basis, with the exception
of the work described in the first sentence of this Section 8. Sublessor
has not warranted to any other condition of the Sublet Premises. Sublessor
and Landlord shall not be liable for damage to property or injury to
persons, sustained by Sublessee or others, caused by conditions or
activities on the Sublet Premises.
9. Repairs by Landlord. Sublessee shall look only to Sublessor for any
-------------------
services to be furnished to Sublessee in accordance with this Sublease.
Sublessor shall use its reasonable efforts to obtain for Sublessee any
services, which are the obligation of the Landlord. If Sublessor does not
use reasonable efforts, then Sublessee can contact Landlord directly.
10. Access. At all reasonable hours, with prior notice, the Sublet Premises
------
shall be open to Lessor and or Sublessor, their agents and representatives,
for inspecting or for repairs, additions or alterations. With respect to
access by Sublessor only, Sublessor shall provide 24-hour advance notice to
Sublessee except in case of emergency.
11. Broker. Sublessee warrants and represents that it has dealt with no broker
------
or any other person who would legally claim to be entitled to receive a
brokerage commission or finder's or consultant's fee with respect to this
transaction, except for BT Commercial and Julien J. Studley, Inc. Sublessee
shall indemnify Sublessor and Landlord against the claim of any person,
firm or corporation arising out of any inaccuracy or alleged inaccuracy of
the above representation.
12. Default by Sublessor under Master Lease. In the event of a default by
---------------------------------------
Sublessor under the Master Lease which results in termination of the Master
Lease, this Sublease shall, at the option of the Landlord, remain in full
force and effect and the Sublessee shall attorn to and recognize Landlord
as Landlord hereunder and shall promptly upon such Landlord's request,
execute and deliver all instruments necessary or appropriate to conform
such attornment and recognition.
13. Notices. All notices or demands of any kind required or desired to be
-------
given to Sublessor or Sublessee to the other hereunder shall be in writing
and shall be deemed delivered four (4) days after depositing the notice of
demand in the United States mail, certified or registered, postage prepaid,
addressed to the Sublessor or Sublessee, respectively, with a copy to the
Landlord, at the addresses set forth below:
Landlord Tuntex Executive Park, Inc.,
150 Executive Park Boulevard, Suite 1000
San Francisco, CA 94134
Sublessor: MedPartners, Inc.
3540 Howard Way
Costa Mesa, California 92626
Attention: Real Estate Department
Tel. (714) 436-4600
Fax (714) 436-4880
Sublessee:
IMAGINE MEDIA
150 North Hill Drive
Brisbane, CA 94005
14. Assignment and Subletting. In the event Sublessee elects to effect a
-------------------------
further Transfer pursuant to the provisions of Article 16 of the Master
Lease, then in such event Sublessor shall not disclose any confidential
information contained in any financial statements received from any
prospective assignee, sublessee or other transferee except to Landlord and
to Sublessor's financial, accounting, real estate, and legal advisors.
2
<PAGE>
IN WITNESS WHEREOF, this Sublease was executed on the date first above written.
SUBLESSOR:
MedPartners, Inc.
By: /s/ Tracy P. Thrasher
-----------------------------------------
Name: Tracy P. Thrasher
---------------------------------------
Title: Exec. V.P. & Corporate Secretary
--------------------------------------
SUBLESSEE:
IMAGINE MEDIA
By: /s/ Tom Valentino
-----------------------------------------
Name: Tom Valentino
---------------------------------------
Title: CFO
--------------------------------------
Agreed and Approved
LANDLORD:
Sunpark Properties, Inc.
By: /s/ Chi-Chun Liao
-----------------------------------------
Name:_______________________________________
Title: GM
--------------------------------------
3
<PAGE>
OFFICE LEASE
This LEASE is made as of the ____________ day of December of 1996, by and
between Landlord and Tenant:
W I T N E S S E T H:
-------------------
1. Terms and Conditions. For the purposes of this Lease, the following terms
--------------------
shall have the following definitions and meanings:
1.1 Landlord: Tuntex Executive Park, Inc.
a Delaware Corporation
1.2 Landlord's Address: 150 Executive Park Blvd.
Suite 1000
San Francisco, CA 94134
1.3 Tenant: MedPartners/Mullikin, Inc.
a Delaware Corporation
1.4 Tenant's Address: 300 Galleria Tower
Suite 1000
Birmingham, AL 35244
1.5 Site: The parcel(s) of real property located at the corner of
Executive Park Blvd. and Thomas Mellon in the City of San Francisco, County of
San Francisco, State of California, as shown on the site plan attached hereto as
Exhibit "A".
- -----------
1.6 Building: A Four (4) story office building located on the Site,
containing proximately 107,831 Rentable Square Feet (subject to adjustment as
set forth in Exhibit "C"), whose address is 250 Executive Park Blvd., San
-----------
Francisco, CA 94134.
1.7 Premises: Those certain premises known as the first floor, as
generally shown on the floor plan(s) attached hereto as Exhibit "C", "located on
-----------
the first floor(s) of the building, and containing approximately 12,566 Rentable
Square Feet (subject to adjustment as set forth in Exhibit "C" and Subparagraph
----------- ------------
1.19).
- ----
1.8 Rentable Square Feet: See Exhibit "C".
-----------
1.9 Commencement Date: See Exhibit "D".
-----------
1.10 Estimated Commencement Date: Upon Completion of Tenant Improvements.
1.11 Term: Five (5) years, with an option to renew for another five (5)
years at 95% of the then market rent.
1.12 Annual Basic Rent: $218,652.00, calculated based upon $17.40 per
Rentable Square Foot within the Premises per year. Annual Basic Rent is payable
in monthly installments "Monthly Basic Rent") of $18,221.00, calculated based
upon $1.45 per Rentable Square Foot
<PAGE>
within the Premises per month. The Annual Basic Rent is subject to adjustment at
$.05 per square foot, annually.
1.13 Tenant's Percentage: 11.65% (See Exhibit "C")
-----------
1.14 Landlord's Contribution to Operating Expenses: Tenant's Percentage of
Operating Expenses incurred by Landlord for the building during the calendar
year in which the Commencement Date occurs, adjusted to reflect an assumption
that the Building is fully assessed real property tax purposes as a completed
Building ready for occupancy and that the Building is ninety-five percent (95%)
occupied during such year.
1.15 Security Deposit: None.
1.16 Permitted Use: Office.
1.17 Brokers: BT Commercial.
1.18 Interest Rate: The lesser of: (a) the rate announced from time to
time by Bank of America or if Bank of America ceases to exist or ceases to
publish such rate, by the largest (as measured by deposits) chartered bank
operating in the state in which the Building is located as its "prime rate" or
"reference rate," plus five percent (5%); or (b) the maximum rate permitted by
law.
1.19 Leasehold Improvements: The tenant improvements installed or to be
installed [for] Premises as described in the Work Letter Agreement attached
hereto as Exhibit "F". The square footage in Subparagraph 1.7 will be confirmed
-----------
by building's architect and may be adjusted prior to commencement of lease if
architect's measurements differ.
1.20 Parking: A total of fifty four (54) parking privileges, subject to
the parking provisions set forth in Paragraph 34.
1.21 Guarantor(s): N/A
2. Lease of Premises. Landlord hereby leases to Tenant, and Tenant hereby
-----------------
leases from Landlord, the Premises described in Subparagraph 1.7 above, improved
or to be improved with Leasehold Improvements. Such lease is upon, and subject
to, the terms, covenants and conditions herein set forth and each party
covenants, as a material part of the consideration for this Lease, to keep and
perform their respective obligations under this Lease.
3. Common Areas.
------------
3.1 Definitions; Tenant's Rights. During the Term of this Lease, Tenant
shall have the exclusive right to use, in common with Landlord and other tenants
in the Building, and subject to the Rules and Regulations referred to in
Paragraph 8 below, the following common as of the Building and/or Site ("Common
Areas"):
(a) the common entrances, lobbies, restrooms on multi-tenant floors,
elevators, stairways and access ways, loading docks, ramps, drive, and platforms
and any
2
<PAGE>
passageways and serviceways thereto, and the common pipes, conduits, wires and
appurtenant equipment serving the Premises; and
(b) the parking structure and parking areas (subject to Paragraph 34
below), loading and unloading areas, trash areas, roadways sidewalks, walkways,
parkways, driveways and landscaped areas and plaza area appurtenant to the
Building.
3.2 Landlord's Reserved Rights. Landlord reserves the right from time to
--------------------------
time to use any of the Common Areas and to do any of the following, as long as
such acts do not unreasonably interfere with Tenant's use of or access to the
Premises or parking:
(a) expand the building and construct or alter other buildings or
improvements on the Site;
(b) make any changes, additions, improvements, repairs or
replacements in or to the Site, the Common Areas and/or the Building (including
the Premises if required to do so by any law or regulation) and the fixtures and
equipment thereof, including, without limitation, (i) maintenance, replacement
and relocation of pipes, ducts, conduits, wires and meters, and (ii) changes in
the location, size, shape and number of driveways, entrances, stairways,
elevators, loading and unloading areas, ingress, egress, direction of traffic,
landscaped areas and walkways, and subject to Paragraph 34 below, parking spaces
and parking area;
(c) close temporarily any of the Common Areas while engaged in making
repairs, improvements or alterations to the Building or the Site; and
(d) perform such other acts and make such other changes with respect
to the Site, Common Areas and Building as Landlord may, in the exercise of sound
business judgment, deem to be appropriate.
4. Term.
----
4.1 Term; Notice of Lease Dates. The Term of this Lease shall be for the
period designated in Subparagraph 1.11 commencing on the Commencement Date (as
determined pursuant to Exhibit "D"), and ending on the expiration of such
-----------
period, unless the Term is sooner terminated as provided in this Lease. Within
ten (10) days after Landlord's written request, Tenant shall execute a written
confirmation of the Commencement Date and expiration date of the Term in the
form of the Notice of Lease Term Dates attached hereto as Exhibit "D". The
-----------
Notice of Lease Term Dates shall be binding upon Tenant unless Tenant objects
thereto in writing within such ten (10) day period.
4.2 Estimated Commencement Date. It is estimated by the parties that the
Term of this Lease will commence on the Estimated Commencement Date set forth in
Subparagraph 1.10. The Estimated Commencement Date is merely an estimate of the
Commencement Date and, consequently, Tenant agrees that Landlord shall have no
liability to Tenant for any loss or damage, nor shall Tenant be entitled to
terminate or cancel this Lease if the Term of this Lease does not commence by
the Estimated Commencement Date for any reason whatsoever, including any delays
in substantial completion of the Leasehold Improvements.
3
<PAGE>
5. Rent.
----
5.1 Basic Rent. Tenant agrees to pay Landlord, as basic rent for the
Premises, the Annual Basic Rent designated in Subparagraph 1.12. The Annual
Basic Rent shall be paid by Tenant in twelve (12) equal monthly installments of
Monthly Basic Rent designated in Subparagraph 1.12 in advance on the first day
of each and every calendar month during the Term, except that the first full
month's Monthly Basic Rent shall be paid upon the execution of this Lease.
Monthly Basic Rent for any partial month shall be prorated in the proportion
that the number of days this Lease is in effect during such month bears to the
actual number of days in such month.
5.2 Additional Rent. All amounts and charges payable by Tenant under this
Lease in addition to the Annual Basic Rent described in Subparagraph 5.1 above
(including, without limitation, payments for insurance, repairs and parking, and
Tenant's Percentage of Operating Expenses in excess of Landlord's Contribution
to Operating Expenses as provided in Paragraph 6) shall be considered additional
rent for the purposes of this Lease, and the word "rent" in this Lease shall
include such additional rent unless the context specifically or clearly implies
that only the Annual Basic Rent is referenced. The Annual Basic Rent and
additional rent shall be paid to Landlord as provided in Paragraph 9, without
any prior demand therefor and without any deduction or offset whatever, in
lawful money of the United States of America.
6. Operating Expenses.
------------------
6.1 Excess Expenses. During each calendar year during the Term of this
Lease (after the calendar year noted in Subparagraph 1.14), Tenant shall pay to
Landlord the amount by which Tenant's Percentage of Operating Expenses exceeds
Landlord's Contribution to Operating Expenses for such calendar year (such
amount shall be referred to in this Paragraph 6 as the "Excess Expenses"), in
the manner and at the times set forth in the following provisions of this
Paragraph 6.
6.2 Definition of Operating Expenses. As used in this Lease, the term
"Operating Expenses" shall mean all direct costs and expenses of operation and
maintenance of the building, the Common Areas and the Site, as determined by
standard accounting practices, calculated assuming the Building is ninety-five
percent (95%) occupied, including the following costs, by way of illustration
but not limitation (but excluding those items specifically set forth in
Subparagraph 6.3 below): (a) Real Property Taxes and Assessments (as defined in
Subparagraph 6.4 below) and any taxes or assessments imposed in lieu thereof;
(b) any and all assessments imposed with respect to the Building, Common Areas,
and/or Site pursuant to any covenants, conditions and restrictions affecting the
Site, Common Areas or Building; (c) water and sewer charges and the costs of
electricity, heating, ventilating, air conditioning and other utilities; (d)
utilities surcharges and any other costs, levies or assessments resulting from
statutes or regulations promulgated by any governmental authority in connection
with the use or occupancy of the Building or the Premises or the parking
facilities serving the Building or the Premises; (e) costs of insurance obtained
by Landlord pursuant to Paragraph 23 of this Lease; (f) waste disposal and
janitorial services; (g) security; (h) labor; (i) costs incurred in the
management of the Building, including, without limitation: (1) supplies, (2)
wages and salaries (and payroll taxes and similar governmental charges related
thereto) of employees used in the
4
<PAGE>
management, operation and maintenance of the Building, (3) Building management
office rental (if such management office is located in the Building), and (4) a
management/administrative fee not to exceed four percent (4%) of the annual
gross revenues of the Building exclusive of the proceeds of financing or a sale
of the Building; (j) supplies, materials, equipment and tools; (k) repair and
maintenance of the elevators and the structural portions of the Building,
including the plumbing, heating, ventilating, air-conditioning and electrical
systems installed or furnished by Landlord; (1) maintenance, costs and upkeep of
all parking and Common Areas; (m) depreciation on a straight-line basis and
rental of personal property used in maintenance; (n) amortization on a straight-
line basis over the useful life [together with interest at the Interest Rate (as
defined in Subparagraph 1.18 of this Lease) on the unamortized balance] of all
costs of a capital nature (including, without limitation, capital improvements,
capital replacements, capital repairs, capital equipment and capital tools): (1)
reasonably intended to produce a reduction in operating charges or energy
consumption; or (2) required after the date of the Lease under any governmental
law or regulation that was not applicable to the Building at the time it was
originally constructed; or (3) for repair or replacement of any Building
equipment needed to operate the Building at the same quality levels as prior to
the replacement; (o) costs and expenses of gardening and landscaping; (p)
maintenance of signs (other than signs of tenants of the Building); (q) personal
property taxes levied on or attributable to personal property used in connection
with the Building, the Common Areas and/or the Site; (r) reasonable accounting,
audit, verification, legal and other consulting fees; and (s) costs and expenses
of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning,
refuse removal, security and similar items, including appropriate reserves.
6.3 Exclusions from Operating Expenses. Notwithstanding the provisions of
Subparagraph 6.2 above to the contrary, "Operating Expenses" shall not include:
(a) any ground lease rental;
(b) costs incurred by Landlord for the repair of damage to the
Building to the extent that Landlord is reimbursed by insurance or condemnation
proceeds or by tenants, warrantors or other third persons;
(c) costs, including permit, license and inspection costs, incurred
with respect to the installation of tenant improvements for tenants in the
Building (including the original Leasehold Improvements for the Premises), or
incurred in renovating or otherwise improving, decorating, painting or
redecorating space for tenants or other occupants of the Building, including
space planning and interior design costs and fees;
(d) depreciation, amortization and interest payments, except as
specifically provided herein, and except on materials, tools, supplies and
vendor-type equipment purchased by Landlord to enable Landlord to supply
services Landlord might otherwise contract for with a third party, where such
depreciation, amortization and interest payments would otherwise have been
included in the charge for such third party's services, all as determined in
accordance with standard accounting practices;
(e) brokerage commissions, finders' fees, attorneys' fees, space
planning costs and other costs incurred by Landlord in leasing or attempting to
lease space in the Building;
5
<PAGE>
(f) attorneys' fees and other costs and expenses incurred in
connection with negotiations or disputes with present or prospective tenants or
other occupants of the Building; provided, however, that Operating Expenses
shall include those attorneys' fees and other costs and expenses incurred in
connection with negotiations, disputes or claims relating to items of Operating
Expenses, enforcement of rules and regulations of the Building, and such other
matters relating to the maintenance of standards required of Landlord under the
Lease; and
(g) interest, principal, points and fees on debt or amortization on
any mortgage, deed of trust or other debt encumbering the Building or Site.
(h) any expenses resulting from environmental damage, not caused by
this tenant, but caused by another tenant or negligence of Landlord.
(i) 250 Executive Park Blvd. is in compliance with all applicable
building codes and regulations. Tenant's share of Operating Expenses during the
term of this lease shall not exceed 10% of the prior years expenses paid by
Tenant.
6.4 Definition of Real Property Taxes and Assessments. All Real Property
Taxes and Assessments shall be adjusted to reflect an assumption that the
Building is fully assessed for real property tax purposes as a completed
building ready for occupancy. As used in this Lease, the term "Real Property
Taxes and Assessments" shall mean: any form of assessment, license fee, license
tax, business license fee, commercial rental tax, levy, charge, improvement
bond, tax or similar imposition imposed by any authority having the direct power
to tax, including any city, county, state or federal government, or any school,
agricultural, lighting, drainage or other improvement or special assessment
district thereof, as against any legal or equitable interest of Landlord in the
Premises, Building, Common Areas or Site, including the following by way of
illustration but not limitation:
(a) any tax on Landlord's "right" to rent or "right" to other income
from the Premises or as against Landlord's business of leasing the Premises;
(b) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge previously
included within the definition of real property tax, it being acknowledged by
Tenant and Landlord that Proposition 13 was adopted by the terms of the State of
California in the June, 1978 election and that assessments, taxes, fees, levies
and charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, refuse removal and for other
governmental services formerly provided without charge to property owners or
occupants. It is the intention of Tenant and Landlord that all such new and
increased assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease;
(c) any assessment, tax, fee, levy or charge allocable to or measured
by the area of Premises or other premises in the Building or the rent payable by
Tenant hereunder or other Tenants of the Building, including, without
limitation, any gross receipts tax or excise tax levied by state, city or
federal government, or any political subdivision thereof, with respect to the
receipt of such rent, or upon or with respect to the possession, leasing,
operation,
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management, maintenance, alteration, repair, use or occupancy by Tenant of the
Premises, or any portion thereof, but not on Landlord's other operations;
(d) any assessment, tax, fee, levy or charge upon this transaction or
any document which Tenant is a party, creating or transferring an interest or an
estate in the Premises; and/or
(e) any assessment, tax, fee, levy or charge by any governmental
agency related to any transportation plan, fund or system (including assessment
districts) instituted within the geographic area of which the Building is a
part.
Notwithstanding the foregoing provisions of this Subparagraph 6.4 above to the
contrary, "Real Property Taxes and Assessments" shall not include Landlord's
federal or state income, franchise, inheritance or estate taxes.
6.5 Estimate Statement. By the first day of April of each calendar year
during the Term of this Lease (after the calendar year noted in Subparagraph
1.14), Landlord shall endeavor to deliver to Tenant a statement ("Estimate
Statement") estimating the Operating Expenses for the current calendar year and
the estimated amount of Excess Expenses payable by Tenant. Landlord shall have
the right no more than three (3) times in any calendar year to deliver a revised
Estimate Statement showing the Excess Expenses for such calendar year if
Landlord determines that the Excess Expenses are greater than those set forth in
the original Estimate Statement (or previously delivered revised Estimate
Statement) for such calendar year. The Excess Expenses shown on the Estimate
Statement (or revised Estimate Statement, as applicable) shall be divided into
twelve (12) equal monthly installments, and Tenant shall pay to Landlord,
concurrently with the regular monthly rent payment next due following the
receipt of Estimate Statement (or revised Estimate Statement, as applicable), an
amount equal to one (1) monthly installment of such Excess Expenses multiplied
by the number of months from January in the calendar year in which such
statement is submitted to the month of such payment, both months inclusive (less
any amounts previously paid by Tenant with respect to any previously delivered
Estimate Statement or revised Estimate Statement for such calendar year).
Subsequent installments shall be paid concurrently with the regular monthly rent
payments for the balance of the calendar year and shall continue until the next
calendar year's Estimate Statement (or current calendar year's revised Estimate
Statement) is received.
6.6 Actual Statement. By the first day of April of each succeeding
calendar year during the Term of this Lease, Landlord shall endeavor to deliver
to Tenant a statement ("Actual Statement") of the actual Operating Expenses and
Excess Expenses for the immediately preceding calendar year. If the Actual
Statement reveals that Excess Expenses were overstated or understated in any
Estimate Statement (or revised Estimate Statement) previously delivered by
Landlord pursuant to Subparagraph 6.5 above, then within thirty (30) days after
delivery of the Actual Statement, Tenant shall pay to Landlord the amount of any
such underpayment, or, Landlord shall pay to Tenant (or credit against the next
monthly rent falling due), the amount of such overpayment, as the case may be.
6.7 No Release. Any delay or failure by Landlord in delivering any
Estimate or Actual Statement pursuant to this Paragraph 6 shall not constitute a
waiver of its right to receive Tenant's payment of Excess
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Expenses, nor shall it relieve Tenant of its obligations to pay Excess Expenses
pursuant to this Paragraph 6, except that Tenant shall not be obligated to make
any payments based on such Estimate or Actual Statement until ten (10) business
days after receipt of such statement.
6.8 Tenant's Audit Rights. If Tenant disputes the amount of Operating
Expenses set forth in any Actual Statement delivered by Landlord, Tenant shall
have the right, to be exercised, if at all, not later than six (6) months
following receipt of such Actual Statement, to cause Landlord's books and
records with respect to the preceding calendar year to be audited, at Tenant's
expense, by a certified public accountant mutually acceptable to Landlord and
Tenant. The amounts payable under Subparagraph 6.6 by Landlord to Tenant or by
Tenant to Landlord as the case may be shall be appropriately adjusted on the
basis of such audit. If Tenant fails to request an audit within the 6-month
period, such Actual Statement shall be conclusively binding upon Landlord and
Tenant.
7. Security Deposit. Concurrently with the execution of this Lease, Tenant
----------------
shall deposit with Landlord the Security Deposit designated in Subparagraph
1.15. The Security Deposit shall be held by Landlord as security for the
faithful performance by Tenant of all of the terms, covenants and conditions of
this Lease to be performed by Tenant during the Term. If Tenant defaults with
respect to any of its obligations under this Lease, Landlord may (but shall not
be required to) use, apply or retain all or any part of the Security Deposit for
the payment of any rent or any other sum in default, or for the payment of any
other amount, loss or damage which Landlord may spend, incur or suffer by reason
of Tenant's default. If any portion of the Security Deposit is so used or
applied, Tenant shall, within ten (10) days after demand therefor, deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
original amount. Landlord shall not be required to keep the Security Deposit
separate from its general funds, and Tenant shall not be entitled to interest on
the Security Deposit. If Tenant shall fully and faithfully perform every
provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to Tenant within two (2) weeks following the
expiration of the Term, provided that Landlord may retain the Security Deposit
until such time as any amount due from Tenant in accordance with Paragraph 6
hereof has been determined and paid in full. If Landlord sells its interest in
the Building during the Term and if Landlord deposits with the purchaser the
Security Deposit (or balance thereof), and such purchaser acknowledges receipt
thereof, then, on such sale, Landlord shall be discharged from any further
liability with respect to the Security Deposit.
8. Use.
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8.1 General. Tenant shall use the Premises solely for the Permitted Use
specified in Subparagraph 1.16, and shall not use or permit the Premises to be
used for any other use or purpose whatsoever. Tenant shall observe and comply
with the "Rules and Regulations" attached hereto as Exhibit "E", and all
-----------
reasonable non-discriminatory modifications thereof and additions thereto from
time to time put into effect and furnished to Tenant by Landlord. Landlord shall
not be responsible to Tenant for the violation or non-performance by any other
tenant or occupant of the Building of any such Rules and Regulations. Tenant
shall also observe and comply with all requirements of any board of fire
underwriters or similar body relating to the Premises, and all laws, rules and
regulations of all governmental agencies having jurisdiction. Tenant shall not
use or allow the Premises to be used (a) in violation of any recorded covenants,
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conditions and restrictions affecting the Site or of any law or governmental
rule or regulation, or any certificate of occupancy issued for the Premises or
Building, or (b) for any improper, immoral, unlawful or reasonably objectionable
purpose. Tenant shall not do or permit to be done anything which will obstruct
or interfere with the rights of other tenants or occupants of the building, or
injure or annoy them. Tenant shall not cause, maintain or permit any nuisance
in, on or about the Premises, the Building or the Site, nor commit or suffer to
be committed any waste in, on or about the Premises.
8.2 Effect on Insurance. Tenant shall not do or permit to be done anything
which will (a) violate or invalidate any insurance policy maintained by Landlord
or Tenant hereunder, or (b) increase the costs of any insurance policy
maintained by Landlord pursuant to Paragraph 23 or otherwise with respect to the
Building or Site. If Tenant's occupancy or conduct of its business in or on the
Premises results in any increase in premiums for any insurance carried by
Landlord with respect to the Building or Site, Tenant shall pay such increase as
additional rent within ten (10) days after being billed therefor by Landlord. If
any insurance coverage carried by Landlord pursuant to Paragraph 23 or otherwise
with respect to the Building or Site shall be canceled or reduced (or
cancellation or reduction thereof shall be threatened) by reason of the use or
occupancy of the Premises by Tenant or by anyone permitted by Tenant to be upon
the Premises, and if Tenant fails to remedy such condition within five (5) days
after notice thereof, Tenant shall be deemed to be in default under this Lease,
without the benefit of any additional notice or cure period specified in
Subparagraph 25.1 below, and Landlord shall have all remedies provided in this
Lease, at law or in equity, including, without limitation, the right (but not
the obligation) to enter upon the Premises and attempt to remedy such condition
at Tenant's cost.
9. Payment and Notices. All rent and other sums payable by Tenant to Landlord
-------------------
hereunder shall be paid to Landlord at the first address designated in
Subparagraph 1.2, or to such other persons and/or at such other places as
Landlord may hereafter designate in writing. Any notice required or permitted to
be given hereunder must be in writing and may be given by personal delivery
(including delivery by nationally recognized overnight courier or express
mailing service), facsimile transmission, or by registered or certified mail,
postage prepaid, return receipt requested, addressed to Tenant at the
address(es) designated in Subparagraph 1.4, or to Landlord at the address(es)
designated in Subparagraph 1.2. Either party may, by written notice to the
other, specify a different address for notice purposes.
10. Brokers. The parties recognize that the broker(s) who negotiated this
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Lease are stated in Subparagraph 1.17, and agree that Landlord shall be solely
responsible for the payment of brokerage commissions to said broker(s), and that
Tenant shall have no responsibility therefor unless written provision to the
contrary has been made. Each party represents and warrants to the other, that,
to its knowledge, no other broker, agent or finder (a) negotiated or was
instrumental in negotiating or consummating this Lease on its behalf, and (b) is
or might be entitled to a commission or compensation in connection with this
Lease. Any broker, agent or finder of Tenant whom Tenant has failed to disclose
herein shall be paid by Tenant. Tenant shall indemnify, defend (by counsel
reasonably approved in writing by Landlord) and hold Landlord harmless from and
against any and all claims, judgments, suits, causes of action, damages, losses,
liabilities and expenses (including attorneys' fees and court costs) resulting
from any breach by Tenant of the foregoing representation, including, without
limitation, any claims that may be asserted against Landlord by any broker,
agent or finder undisclosed by Tenant herein.
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Landlord shall indemnify, defend (by counsel reasonably approved in writing by
Tenant) and hold Tenant harmless from and against any and all claims, judgments,
suits, causes of action, damages, losses, liabilities and expenses (including
attorneys' fees and court costs) resulting from any breach by Landlord of the
foregoing representation, including, without limitation, any claims that may be
asserted against Tenant by any broker, agent or finder undisclosed by Landlord
herein. The foregoing indemnities shall survive the expiration or earlier
termination of this Lease.
11. Surrenders: Holding Over.
------------------------
11.1 Surrender of Premises. Upon the expiration or sooner termination of
this Lease, Tenant shall surrender all keys for the Premises to Landlord, and
exclusive possession of the premises to Landlord broom clean and in first-class
condition and repair, reasonable wear and tear excepted (and casualty damage
excepted if this Lease is terminated as a result thereof pursuant to Paragraph
20), with all of Tenant's personal property (and those items, if any, of
Leasehold Improvements and Tenant Changes identified by Landlord pursuant to
Subparagraph 14.2 below) removed therefrom and all damage caused by such removal
repaired, as required pursuant to Subparagraphs 14.2 and 14.3 below. If, for any
reason, Tenant fails to surrender the Premises on the expiration or earlier
termination of this Lease (including upon the expiration of any subsequent
month-to-month tenancy consented to by Landlord pursuant to Subparagraph 11.2
below). With such removal and repair obligations completed, then, in addition to
the provisions of Subparagraph 11.3 below and Landlord's rights and remedies
under Subparagraph 14.4 and the other provisions of this Lease, Tenant shall
indemnify, defend (by counsel reasonably approved in writing by Landlord) and
hold Landlord harmless from and against any and all claims, judgments, suits,
causes of action, damages, losses, liabilities and expenses (including
attorneys' fees and court costs) resulting from such failure to surrender,
including, without limitation, any claim made by any succeeding tenant based
thereon. The foregoing indemnity shall survive the expiration or earlier
termination of this Lease.
11.2 Hold Over With Landlord's Consent. If, with Landlord's express
written consent, Tenant remains in possession of the Premises after the
expiration or earlier termination of the Lease Term, Tenant shall become a
tenant from month-to-month upon the terms and conditions set forth in this Lease
(including Tenant's obligation to pay all Excess Expenses and any other
additional rent under this Lease), but at a Monthly Basic Rent equal to the
greater of: (a) one hundred twenty-five percent (125%) of the Monthly Basic Rent
applicable to the Premises immediately prior to the date of such expiration or
earlier termination; or (b) one hundred twenty-five percent (125%) of the
prevailing market rate excluding any rental or other concessions (as reasonably
determined by Landlord) for the Premises in effect on the date of such
expiration or earlier termination. Tenant shall pay an entire month's Monthly
Basic Rent calculated in accordance with this Subparagraph 11.2 for any portion
of a month it holds over and remains in possession of the Premises pursuant to
this Paragraph 11.2.
11.3 Hold Over Without Landlord's Consent. If Tenant holds over after the
expiration or earlier termination of the Lease Term without the express written
consent of Landlord, Tenant shall become a tenant at sufferance only, upon the
terms and conditions set forth in this Lease so far as applicable (including
Tenant's obligation to pay all Excess Expenses and other additional rent under
this Lease), but at a Monthly Basic Rent equal to the greater of: (a) two
hundred
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percent (200%) of the Monthly Basic Rent applicable to the Premises immediately
prior to the date of such expiration or earlier termination; or (b) two hundred
percent (200%) of the prevailing market rate excluding any rental or other
concessions (as reasonably determined by Landlord) for the premises in effect on
the date of such expiration or earlier termination. Acceptance by Landlord of
rent after such expiration or earlier termination shall not constitute a consent
to a hold over hereunder or result in an extension of this Lease. Tenant shall
pay an entire month's Monthly Basic Rent calculated in accordance with this
Subparagraph 11.3 for any portion of a month it holds over and remains in
possession of the Premises pursuant to this Paragraph 11.3.
11.4 No Effect on Landlord's Rights. The foregoing provisions of this
Paragraph 11 are in addition to, and do not affect, Landlord's right of re-entry
or any other rights of Landlord hereunder or otherwise provided by law or
equity.
12. Taxes on Tenant's Property. Tenant shall be liable for, and shall pay
--------------------------
before delinquency, all taxes and assessments (real and personal) levied against
(a) any personal property or trade fixtures placed by Tenant in or about the
Premises (including any increase in the assessed value of the Premises based
upon the value of any such personal property or trade fixtures); and (b) any
Leasehold Improvements or alterations in the Premises (whether installed and/or
paid for by Landlord or Tenant) to the extent such items are assessed at a
valuation higher than the valuation at which tenant improvements conforming to
the Building's standard tenant improvements set forth in Schedule "1" to Exhibit
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"Fl" are assessed. If any such taxes or assessments are levied against Landlord
- ----
or Landlord's property, Landlord may, after written notice to Tenant (and under
proper protest if requested by Tenant) pay such taxes and assessments, and
Tenant shall reimburse Landlord therefor within ten (10) business days after
demand by Landlord; provided, however, Tenant, at its sole cost and expense,
shall have the right, with Landlord's cooperation, to bring suit in any court of
competent jurisdiction to recover the amount of any such taxes and assessments
so paid under protest.
13. Condition of Premises; Repairs.
------------------------------
13.1 Condition of Premises. Tenant acknowledges that, except as otherwise
expressly set forth in this Lease, neither Landlord nor any agent of Landlord
has made any representation or warranty with respect to the Premises, the
Building or the Site or their condition, or with respect to the suitability
thereof for the conduct of Tenant's business. The taking of possession of the
Premises by Tenant shall conclusively establish that the Site, the Premises, the
Leasehold Improvements therein, the Building and the Common Areas are at such
time complete and in good, sanitary and satisfactory condition and repair with
all work required to be performed by Landlord, if any, pursuant to Exhibit "F1"
------------
completed and without any obligation on Landlord's part to make any alterations,
upgrades or improvements thereto, except for the repair of any latent defects in
the Building or Premises (excluding any portion of the Premises constructed by
Tenant) disclosed by Tenant and specified in writing to Landlord during the term
of the lease. Landlord shall cause all latent defects so specified in Tenant's
notice to be completed and/or repaired as soon as reasonably possible after
Landlord's receipt thereof. Tenant further acknowledges and agrees to accept
the various start-up inconveniences that may be associated with the use of the
Common Areas and other typical conditions incident to recently constructed
office buildings, such as construction obstacles including scaffolding, delays
in the use of freight
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elevator service, certain elevators not being available to Tenant, the passage
of work crews using elevators, and uneven air conditioning service.
13.2 Tenant's Repair Obligations. Except for Landlord's obligations
specifically set forth in Subparagraphs 13.1, 13.3, 20.1 and 21.2 hereof, Tenant
shall at all times and at Tenant's sole cost and expense, keep, maintain, repair
and preserve the Premises and all Leasehold Improvements, Tenant Changes, and
any alterations, additions and property therein in first-class condition and
repair, reasonable wear and tear excepted. Such maintenance and repairs shall
be performed with due diligence, lien-free and in a first-class workmanlike
manner, by such contractor(s) selected by Tenant and approved by Landlord, which
approval shall not be unreasonably withheld or delayed. Except as otherwise
expressly provided in this Lease, Landlord shall have no obligation to alter,
remodel, improve, repair, renovate, redecorate or paint or any part of the
Premises.
13.3 Landlord's Repair Obligations. Notwithstanding the provisions of
Subparagraph 13.2 above to the contrary, Landlord shall, as part of the
Operating Expenses, repair and maintain (a) the Building shell and other
structural portions of the Building (including the roof and foundations), (b)
the basic plumbing, heating, ventilating, air conditioning, sprinkler and
electrical systems within the Building core (but not any conduits or connections
thereto or distribution systems thereof within the Premises or any other
tenant's premises), and (c) the Common Areas of the Building and Site; provided,
however, to the extent such maintenance or repairs are required as a result of
any act, neglect, fault or omission of Tenant or any of Tenant's agents,
employees, contractors, licensees or invitees, Tenant shall pay to Landlord, as
additional rent, the costs of such maintenance and repairs. Subject to Tenant's
right to self-help and abatement of rent pursuant to Subparagraphs 13.4 and
20.3, respectively, and except as otherwise included in Landlord's indemnity in
Subparagraph 19.3, Landlord shall not be liable to Tenant for, and Tenant hereby
expressly waives all rights to recover, any losses and damages (including
interference with or injury to Tenant's business) resulting from Landlord's
performing or failure to perform any such repairs or maintenance, it being
expressly understood and agreed by Tenant that Tenant shall be solely
responsible for and look solely to its insurance for any such damages and
losses.
13.4 Tenant's Waiver; Self-Help. Tenant waives the right to make repairs
at Landlord's expense under any law, statute or ordinance now or hereafter in
effect (including the provisions of California Civil Code Section 1942 and any
successive sections or statutes of a similar nature); provided, however, subject
to the termination rights set forth in Paragraphs 20 and 21, if Landlord fails
to perform any maintenance or repair work required pursuant to Subparagraph 13.3
within thirty (30) days after Landlord receives Tenant's written notice of the
need for such repairs (or such period of time in excess of thirty (30) days as
is reasonably necessary based upon the nature of such work), and if such failure
to repair unreasonably interferes with Tenant's use of or access to the
Premises, then Tenant shall be permitted to make such repairs, using the
Building's contractors or such other contractors reasonably approved by
Landlord, upon delivery of an additional two (2) business days' prior written
notice to Landlord indicating that Tenant will be undertaking such repairs, and
Tenant shall be entitled to recover from Landlord the reasonable costs of such
repairs made by Tenant, but without any offset rights against the rental or
other amounts payable by Tenant under this Lease.
12
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14. Alterations.
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14.1 Tenant Changes; Conditions. After installation of the initial
Leasehold Improvements for the Premises pursuant to Exhibit "F1", Tenant may, at
------------
its sole cost and expense, make alterations, additions, improvements and
decorations to the Premises (collectively, "Tenant Changes") subject to and upon
the following terms and conditions:
(a) Notwithstanding any provision in this Paragraph 14 to the
contrary, Tenant is absolutely prohibited from making any alterations,
additions, improvements or decorations which: (i) affect any area outside the
Premises; (ii) affect the Building's structure, equipment, services or systems,
or the proper functioning thereof, or Landlord's access thereto; (iii) affect
the outside appearance, character or use of the Building or the Common Areas;
(iv) weaken or impair the structural strength of the Building; (v) in the
reasonable opinion of Landlord, lessen the value of the Building; (vi) will
violate or require a change in any occupancy certificate applicable to the
Premises; or (vii) increase the cost of Landlord's insurance, unless Tenant pays
such increased costs within ten (10) days after written demand therefor by
Landlord.
(b) Before proceeding with any Tenant Change which is not
otherwise prohibited in Subparagraph 14.1(a) above, Tenant must first obtain
Landlord's written approval thereof (including approval of all plans,
specifications and working drawings for such Tenant Change), which approval
shall not be unreasonably withheld or delayed. However, Landlord's prior
approval shall not be required for any Tenant Change which satisfies the
following conditions (hereinafter a "Pre-Approved Change"): (i) the costs of
such Tenant Change does not exceed Five Hundred Dollars ($500.00) individually;
(ii) the costs of such Tenant Change when aggregated with the costs of all other
Tenant Changes made by Tenant during the Term of this Lease do not exceed
Fifteen Hundred Dollars ($1,500.00); (iii) Tenant delivers to Landlord final
plans, specifications and working drawings for such Tenant Change at least ten
(10) days prior to commencement of the work therefor; and (iv) Tenant and such
Tenant Change otherwise satisfy all other conditions set forth in this
Subparagraph 14.1.
(c) After Landlord has approved the Tenant Changes and the plans,
specifications and working drawings therefor (or is deemed to have approved the
Pre-Approved Changes as set forth in Subparagraph 14.1(b) above), Tenant shall:
(i) enter into an agreement for the performance of such Tenant Changes with such
contractors and subcontractors selected by Tenant and approved by Landlord,
which approval shall not be unreasonably withheld or delayed. Before proceeding
with any Tenant Change (including any Pre-Approved Change) Tenant shall (i)
provide Landlord with ten (10) days' prior written notice thereof; and (ii) pay
to Landlord, within ten (10) days after written demand, the costs of any
increased insurance premiums incurred by Landlord to include such Tenant Changes
in the fire and extended coverage insurance obtained by Landlord pursuant to
Paragraph 23 below (however, Landlord shall be required to include the Tenant
Changes under such insurance only to the extent such insurance is actually
obtained by Landlord and such Tenant Changes are insurable under such insurance;
if such Tenant Changes are not or cannot be included in Landlord's insurance,
Tenant shall insure the Tenant Changes under its casualty insurance pursuant to
Subparagraph 22.1(a) below. In addition, before proceeding with any Tenant
Change, Tenant's contractors shall obtain, on behalf of Tenant and at Tenant's
sole cost and expense: (A) all necessary governmental permits and approvals for
the commencement and completion of such Tenant
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Change; and (B) a completion and lien indemnity bond, or other surety,
satisfactory to Landlord for such Tenant Change.
(d) Tenant shall pay to Landlord, as additional rent, the
reasonable costs of Landlord's engineers and other consultants (but not
Landlord's on-site management personnel) for review of all plans, specifications
and working drawings for the Tenant Changes, within ten (10) business days after
Tenant's receipt of invoices either from Landlord or such consultants. In
addition to such costs, Tenant shall pay to Landlord, within ten (10) business
days after completion of any Tenant Change, the actual, reasonable costs
incurred by Landlord for services rendered by Landlord's management personnel
and engineers to coordinate and/or supervise any of the Tenant Changes to the
extent such services are provided in excess of or after the normal on-site hours
of such engineers and management personnel.
(e) All Tenant Changes shall be performed: (i) in accordance with
the approved plans, specifications and working drawings; (ii) lien-free and in a
first-class and workmanlike manner; (iii) in compliance with all laws, rules,
and regulations of all governmental agencies and authorities; (iv) in such a
manner so as not to interfere with the occupancy of any other tenant in the
Building, nor impose any additional expense upon nor delay Landlord in the
maintenance and operation of the Building; and (v) at such times, in such manner
and subject to such rules and regulations as Landlord may from time to time
reasonably designate.
(f) Throughout the performance of the Tenant Changes, Tenant shall
obtain, or cause its contractors to obtain, workers compensation insurance and
general liability insurance in compliance with the provisions of Paragraph 22 of
this Lease.
14.2 Removal of Tenant Changes and Leasehold Improvements. All Tenant
Changes and the initial Leasehold Improvements in the Premises (whether
installed or paid for by Landlord or Tenant), shall become the property of
Landlord and shall remain upon and be surrendered with the Premises at the end
of the Term of this Lease; provided, however Landlord may, by written notice
delivered to Tenant at any time prior to the date which is fifteen (15) days
before the expiration of the Lease Term (or immediately upon any sooner
termination of this Lease) identify those items of the Leasehold Improvements
and Tenant Changes which Landlord shall require Tenant to remove at the end of
the Term of this Lease. If Landlord requires Tenant to remove any such items as
described above, Tenant shall, at its sole cost, remove the identified items on
or before the expiration or sooner termination of this Lease and repair any
damage to the Premises caused by such removal (or, at Landlord's option, shall
pay to Landlord all of Landlord's costs of such removal and repair).
14.3 Removal of Personal Property. All articles of personal property
owned by Tenant or installed by Tenant at its expense in the Premises (including
business and trade fixtures, furniture and moveable partitions), except those
installed by Landlord or approved in writing by Landlord, shall be, and remain,
the property of Tenant, and shall be removed by Tenant from the premises, at
Tenant's sole cost and expense, on or before the expiration or sooner
termination of this Lease. Tenant shall repair any damage caused by such
removal.
14.4 Tenant's Failure to Remove. If Tenant fails to remove by the
expiration or sooner termination of this Lease all of its personal property, or
any items of Leasehold Improvements or
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Tenant Changes identified by Landlord for removal pursuant to Subparagraph 14.2
above, Landlord may, at its option, treat such failure as a hold over pursuant
to Subparagraph 11.3 above, and/or may (without liability to Tenant for loss
thereof), at Tenant's sole cost and in addition to Landlord's other rights and
remedies under this Lease, at law or in equity: (a) remove and store such items;
and/or (b) upon ten (10) days' prior notice to Tenant, sell all or any such
items at private or public sale for such price as Landlord may obtain. Landlord
shall apply the proceeds of any such sale to any amounts due to Landlord under
this Lease from Tenant (including Landlord's attorneys' fees and other costs
incurred in the removal, storage and/or sale such items), with any remainder to
be paid to Tenant.
15. Liens. Tenant shall not permit any mechanic's, materialmen's or other
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liens to be filed against all or any part of the Site, the Building or the
Premises, nor against Tenant's leasehold interest in the Premises, by reason of
or in connection with any repairs, alterations, improvements or other work
contracted for or undertaken by Tenant or any other act or omission of Tenant or
Tenant's agents, employees, contractors, licensees or invitees. Tenant shall,
at Landlord's request, provide Landlord with enforceable, conditional and final
lien releases (and other evidence reasonably requested by Landlord to
demonstrate protection from liens) from all persons furnishing labor and/or
materials with respect to the Premises. Landlord shall have the right at all
reasonable times to post on the Premises and record any notices of non-
responsibility which it deems necessary for protection from such liens. If any
such liens are filed, Tenant shall, at its sole cost, immediately cause such
lien to be released of record or bonded so that it no longer affects title to
the Site, the Building or the Premises. If Tenant fails to cause such lien to
be so released or bonded within ten (10) days after filing thereof, such failure
shall be deemed a material breach by Tenant under this Lease without the benefit
of any additional notice or cure period described in Subparagraph 25.1 below,
and Landlord may, without waiving its rights and remedies based on such breach,
and without releasing Tenant from any of its obligations, cause such lien to be
released by any means it shall deem proper, including payment in satisfaction of
the claim giving rise to such lien. Tenant shall pay to Landlord within five
(5) days after receipt of an invoice from Landlord, any sum paid by Landlord to
remove such liens, together with interest at the Interest Rate from the date of
such payment by Landlord.
16. Assignment and Subletting.
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16.1 General. No assignment or encumbrance of all or any part of this
Lease, and no sublease of all or any part of the Premises, shall be permitted,
except as otherwise expressly provided in this Paragraph 16.
16.2 Restriction on Transfer. Subject to the provisions of Subparagraphs
16.3, 16.4, 16.5 and 16.6, Tenant shall not, without the prior written consent
of Landlord, which consent shall not be unreasonably withheld, assign or
encumber this Lease or any interest herein or sublet the Premises or any part
thereof, or permit the use or occupancy of the Premises by any party other than
Tenant (any such assignment, encumbrance, sublease or the like shall sometimes
be referred to as a "Transfer"). Any Transfer without Landlord's consent (except
for a Transfer pursuant to Subparagraph 16.6 below) shall constitute a default
by Tenant under this Lease, and in addition to all of Landlord's other remedies
at law, in equity or under this Lease, such Transfer shall be voidable at
Landlord's election. In addition, this Lease shall not, nor shall any interest
of Tenant herein, be assignable by operation of law without the written consent
of
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Landlord. For purposes of this Paragraph 16, if Tenant is a corporation,
partnership or other entity, any transfer, assignment, encumbrance or
hypothecation of twenty-five percent (25%) or more (individually or in the
aggregate) of any stock or other ownership interest in such entity, and/or any
transfer, assignment, hypothecation or encumbrance of any controlling ownership
or voting interest in such entity, shall be deemed an assignment of this Lease
and shall be subject to all of the restrictions and provisions contained in this
Paragraph 16. Notwithstanding the foregoing, the immediately preceding sentence
shall not apply to any transfers of stock of Tenant if Tenant is a publicly-held
corporation and such stock is transferred publicly over a recognized security
exchange or over-the-counter market.
16.3 Landlord's Options. If at any time or from time to time during the
Term Tenant desires to effect a Transfer, Tenant shall deliver to Landlord
written notice ("Transfer Notice") setting forth the terms and provisions of the
proposed Transfer and the identity of the proposed assignee, sublessee or other
transferee (sometimes referred to hereinafter as a "Transferee"). Tenant shall
also deliver to Landlord with the Transfer Notice; a current financial statement
and financial statements for the preceding two (2) years of the Transferee, and
such other information concerning the business background and financial
condition of the proposed Transferee as Landlord may reasonably request.
Landlord shall have the option, exercisable by written notice delivered to
Tenant within twenty (20) days after Landlord's receipt of the Transfer Notice,
such financial statements and other information, either to:
(a) approve or disapprove such Transfer, which approval shall not
be unreasonably withheld; or
(b) sublet from Tenant that portion of the Premises which Tenant
has requested to sublease at the rental and on the other terms set forth in this
Lease for the term set forth in Tenant's Notice, or, in the case of an
assignment or encumbrance, terminate this Lease with respect to the entire
Premises, which termination shall be effective thirty (30) days after Tenant's
receipt of Landlord's notice.
If Landlord exercises its option to sublease any such space from Tenant
following Tenant's request for Landlord's approval of the proposed sublease of
such space, (i) Landlord shall be responsible for the construction of any
partitions which Landlord reasonably deems necessary to separate such space from
the remainder of the Premises, and (ii) Landlord and any sub-subtenant assignee
of Landlord with respect to such subleased space shall have the right to use in
common with Tenant all lavatories, corridors and lobbies which are within the
Premises and which are reasonably required for the use of such space.
16.4 Additional Conditions; Excess Rent. If Landlord does not exercise
its sublease or termination option and instead approves of the proposed Transfer
pursuant to Subparagraph 16.3(a) above, Tenant may enter into the proposed
Transfer with such proposed Transferee subject to the following further
conditions:
(a) the Transfer shall be on the same terms set forth in the
Transfer Notice delivered to Landlord (if the terms have changed, Tenant must
submit a revised Transfer Notice to Landlord and Landlord shall have another
twenty (20) days after receipt thereof to make the election in Subparagraphs
16.3(a) or 16.3(b) above);
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(b) no Transfer shall be valid and no Transferee shall take
possession of the Premises until an executed counterpart of the assignment,
sublease or other instrument affecting the Transfer has been delivered to
Landlord pursuant to which the Transferee shall expressly assume all of Tenant's
obligations under this Lease (or with respect to a sublease of a portion of the
Premises or for a portion of the Term, all of Tenant's obligations applicable to
such portion);
(c) no Transferee shall have a further right to assign, encumber
or sublet, except on the terms herein contained; and
(d) any rent or other economic consideration received by Tenant as
a result of such Transfer which exceeds, in the aggregate, (i) the total rent
which Tenant is obligated to pay Landlord under this Lease (prorated to reflect
obligations allocable to any portion of the Premises subleased), plus (ii) any
reasonable brokerage commissions, attorneys' fees and moving costs actually paid
by Tenant in connection with such Transfer, shall be paid to Landlord within ten
(10) days after receipt thereof as additional rental under this Lease, without
affecting or reducing any other obligations of Tenant hereunder.
16.5 Reasonable Disapproval. Landlord and Tenant hereby acknowledge that
Landlord's disapproval of any proposed Transfer pursuant to Subparagraph 16.3(a)
shall be deemed reasonably withheld if based upon any reasonable factor,
including, without limitation, any or all of the following factors: (a) the
proposed Transfer would result in more than two subleases of portions of the
Premises being in effect at any one time during the Term; (b) the net effective
rent payable by the Transferee (adjusted on a rentable square foot basis) is
less than the net effective rent then being quoted by Landlord for new leases in
the Building for comparable size space for a comparable period of time; (c) the
proposed Transferee is an existing tenant of the Building or is negotiating with
Landlord (or has negotiated with Landlord in the last six (6) months) for space
in the Building; (d) the proposed Transferee is a governmental entity; (e) the
portion of the Premises to be sublet or assigned is irregular in shape with
inadequate means of ingress and egress; (f) the use of the Premises by the
Transferee (i) is not permitted by the use provisions in Paragraph 8 hereof, or
(ii) violates any exclusive use granted by Landlord to another tenant in the
Building; (g) the Transfer would likely result in significant increase in the
use of the parking areas or Common Areas by the Transferee's employees or
visitors, and/or significant increase in the demand upon utilities and services
to be provided by Landlord to the Premises; (h) the Transferee does not have the
financial capability to fulfill the obligations imposed by the Transfer; (i) the
Transferee is not in Landlord's reasonable opinion of reputable or good
character or consistent with Landlord's desired tenant mix; or (j) the
Transferee is a real estate developer or landlord or is acting directly or
indirectly on behalf of a real estate developer or landlord.
16.6 Permitted Controlled Transfers. Notwithstanding the provisions of
Subparagraphs 16.1, 16.2 and 16.3 above to the contrary, Tenant may assign this
Lease or sublet the Premises or any portion thereof, without Landlord's consent
and without extending any sublease or termination option to Landlord, to any
corporation which controls, is controlled by or is under common control with
Tenant, or to any corporation resulting from a merger or consolidation with
Tenant, or to any person or entity which acquires all of the assets of Tenant's
business as a going concern, provided that: (a) at least twenty (20) days prior
to such assignment or sublease, Tenant delivers to Landlord the financial
statements and other financial and
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background information of the assignee or sublessee described in Subparagraph
16.3 above; (b) if an assignment, the assignee assumes, in full, the obligations
of Tenant under this Lease (or if a sublease, the sublessee of a portion of the
Premises or Term assumes, in full, the obligations of Tenant with respect to
such portion); (c) the financial net worth of the assignee or sublessee equals
or exceeds that of Tenant as of the date of execution of this Lease; (d) Tenant
remains fully liable under this Lease; (e) the use of the Premises under Article
8 remains unchanged; and (f) such transaction is not entered into as a
subterfuge to avoid the restrictions and provisions of this Paragraph 16.
16.7 No Release. No Transfer shall release Tenant of Tenant's
obligations under this Lease or alter the primary liability of Tenant to pay the
rent and to perform all other obligations to be performed by Tenant hereunder.
Landlord may require that any Transferee remit directly to Landlord on a monthly
basis, all monies due Tenant by said Transferee. However, the acceptance of rent
by Landlord from any other person shall not be deemed to be a waiver by Landlord
of any provision hereof. Consent by Landlord to one Transfer shall not be deemed
consent to any subsequent Transfer. In the event of default by any Transferee of
Tenant or any successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against such Transferee or successor. Landlord may consent to
subsequent assignments of the Lease or sublettings or amendments or
modifications to the Lease with assignees of Tenant, without notifying Tenant,
or any successor of Tenant, and without obtaining its or their consent thereto
and any such actions shall not relieve Tenant of liability under this Lease.
16.8 Administrative and Attorneys' Fees. If Tenant effects a Transfer or
requests the consent of Landlord to any Transfer, then Tenant shall, upon
demand, pay Landlord a non-refundable administrative fee of Two Hundred Fifty
Dollars ($250.00), plus any reasonable attorneys' and paralegal fees incurred by
Landlord in connection with such Transfer or request for consent (whether
attributable to Landlord's in-house attorneys or paralegals or otherwise).
Acceptance of the $250.00 administrative fee and/or reimbursement of Landlord's
attorneys' and paralegal fees shall in no event obligate Landlord to consent to
any proposed Transfer.
16.9 Material Inducement. Tenant understands, acknowledges and agrees
that (a) Landlord's option to sublease from Tenant any space which Tenant
proposes to sublease or terminate this Lease upon any proposed assignment or
encumbrance of this Lease by Tenant as provided in Subparagraph 16.3(b) above
rather than approve the proposed sublease, assignment or encumbrance, and (b)
landlord's right to receive any excess consideration paid by a Transferee in
connection with an approved Transfer as provided in Subparagraph 16.4(d) above,
are a material inducement for Landlord's agreement to lease the Premises to
Tenant upon the terms and conditions herein set forth.
17. Entry by Landlord. Landlord and its employees and agents shall at all
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times have the right to enter the Premises to inspect the same, to supply
janitorial service and any other service required to be provided by Landlord to
Tenant under this Lease, to exhibit the Premises to prospective lenders or
purchasers (or during the last year of the Term, to prospective tenants), to
post notices of non-responsibility, and/or to alter, improve or repair the
Premises or any other portion of the Building, all without being deemed guilty
of or liable for any breach of Landlord's covenant of quiet enjoyment or any
eviction of Tenant, and without abatement of rent. In
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exercising such entry rights, Landlord shall endeavor to minimize, as reasonably
practicable, the interference with Tenant's business, and shall provide Tenant
with reasonable advance written notice of such entry (except in emergency
situations). For each of the foregoing purposes, Landlord shall at all times
have and retain a key with which to unlock all of the doors in, upon and about
the Premises, excluding Tenant's vaults and safes, and Landlord shall have the
means which Landlord may deem proper to open said doors in an emergency in order
to obtain entry to the Premises. Any entry to the Premises obtained by Landlord
by any of said means or otherwise shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into, or a detainer of, the
Premises, or an eviction of Tenant from the Premises or any portion thereof, or
grounds for any abatement or reduction of rent. Any damages or losses on account
of any such entry by Landlord shall be Tenant's sole responsibility except as
otherwise expressly provided in Subparagraph 19.3. Nothing in this Paragraph 17
shall be construed as obligating Landlord to perform any repairs, alterations or
decorations, except as otherwise expressly required in this Lease to be
performed by Landlord.
18. Utilities and Services.
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18.1 Standard Utilities and Services. As long as Tenant has not
committed an uncured default under any of the provisions of this Lease, and
subject to the terms and conditions of this Lease and the obligations of Tenant
as set forth hereinbelow, Landlord shall furnish or cause to be furnished to the
Premises the following utilities and services, the costs of which shall be
included in Operating Expenses, unless otherwise specified below (Landlord
reserves the right to adopt non-discriminatory modifications and additions to
the following provisions from time to time):
(a) Landlord shall make available for Tenant's non-exclusive use,
the non-attended passenger elevator facilities of the Building, Monday through
Friday, except holidays, from 8:00 a.m. to 6:00 p.m., with one (1) elevator
available at all other times.
(b) Landlord shall furnish during "Business Hours" heating,
ventilation and air conditioning ("HVAC") for the Premises as required in
Landlord's judgment for the comfortable and normal occupancy of the Premises.
For purposes of this Subparagraph 18.1, the "Business Hours" shall mean 6:00
a.m. to 6:00 p.m. on Monday through Friday (except holidays). The cost of
maintenance and service calls to adjust and regulate the HVAC system shall be
charged to Tenant if the need for maintenance work results from either Tenant's
adjustment of room thermostats or Tenant's failure to comply with its
obligations under this Paragraph 18, including keeping window coverings closed
as needed. Such work shall be charged at hourly rates equal to then-current
journeyman's wages for HVAC mechanics. If Tenant desires HVAC at any time other
than during Business Hours, Landlord shall provide such "after-hours" usage
after advance reasonable request by Tenant, and Tenant shall pay to Landlord, as
additional rent (and not as part of the Operating Expenses) the cost, as fairly
determined by Landlord, of such after-hours usage (as well as the cost of any
HVAC used by Tenant in excess of what Landlord considers reasonable or normal),
including any minimum hour charges for after-hours requests and any special
start-up costs for after-hours services which require a special start-up (such
as late evenings, weekends and holidays).
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(c) Landlord shall furnish to the Premises twenty-four (24) hours
per day, reasonable quantities of electric current as required in Landlord's
judgment for normal lighting and fractional horsepower office business machines.
In no event shall Tenant's use of electric current ever exceed the capacity of
the feeders to the Building or the risers or wiring installation of the
Building. Landlord shall also furnish water to the Premises twenty-four (24)
hours per day for drinking and lavatory purposes, in such quantities as required
in Landlord's judgment for the comfortable and normal use of the Premises. If
Tenant requires or consumes water or electrical power in excess of what is
considered reasonable or normal by Landlord, Landlord may require Tenant to pay
to Landlord, as additional rent, the cost, as fairly determined by Landlord,
incurred for such excess usage.
(d) Landlord shall furnish janitorial services to the Premises five
(5) days per week pursuant to janitorial and cleaning specifications as may be
adopted by Landlord from time to time. No person(s) other than those persons
approved by Landlord shall be permitted to enter the Premises for such purposes.
Janitor service shall include ordinary dusting and cleaning by the janitor
assigned to do such work and shall not include cleaning of carpets or rugs,
except normal vacuuming, or moving of furniture, interior window cleaning,
coffee or eating area cleaning and other special services. Such additional
services may be rendered by Landlord pursuant to written agreement with Tenant
as to the extent of such services and the payment of the cost thereof. Janitor
service will not be furnished on nights when rooms are occupied after 10:00 p.m.
or to rooms which are locked unless a key is furnished to the Landlord for use
by the janitorial contractor. Window cleaning shall be done only by Landlord, at
such time and frequency as determined by Landlord at Landlord's sole discretion.
Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and
rubbish to the extent that the same exceeds the refuse and rubbish usually
attendant upon the use of the Premises as offices.
(e) At Landlord's option, Landlord may install water, electricity
and/or HVAC meters in the Premises to measure Tenant's consumption of such
utilities, including any after-hours and extraordinary usage described above.
Tenant shall pay to Landlord, within ten (10) days after demand, the cost of the
installation, maintenance and repair of such meter(s).
18.2 Tenant's Obligations. Tenant shall cooperate fully at all times
with Landlord, and abide by all reasonable regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the
Building's services and systems. Tenant shall not use any apparatus or device
in, upon or about the Premises which may in any way increase the amount of
services or utilities usually furnished or supplied to the Premises or other
premises in the Building. In addition, Tenant shall not connect any conduit,
pipe, apparatus or other device to the Building's water, waste or other supply
lines or systems for any purpose. Neither Tenant nor its employees, agents,
contractors, licensees or invitees shall at any time enter, adjust, tamper with,
touch or otherwise in any manner affect the mechanical installations or
facilities of the Building.
18.3 Failure to Provide Utilities. Landlord's failure to furnish any of
the utilities and services described in Subparagraph 18.1 above when such
failure is caused by all or any of the following shall not result in any
liability of Landlord: (a) accident, breakage or repairs; (b) strikes, lockouts
or other labor disturbances or labor disputes of any such character; (c)
governmental regulation, moratorium or other governmental action; (d) inability,
despite the
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exercise of reasonable diligence, to obtain electricity, water or fuel; or (e)
any other cause beyond Landlord's reasonable control. In addition, in the event
of the failure of any said utilities or services, Tenant shall not be entitled
to any abatement or reduction of rent (except as expressly provided in
Subparagraphs 20.3 and 21.2 if such failure is a result of a damage or taking
described therein), no eviction of Tenant shall result, and Tenant shall not be
relieved from the performance of any covenant or agreement in this Lease. In the
event of any stoppage or interruption of services or utilities, Landlord shall
diligently attempt to resume such services or utilities as promptly as is
practicable.
19. Indemnification and Exculpation.
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19.1 Tenant's Indemnification of Landlord. Tenant shall be liable for, and
shall indemnify, defend and hold Landlord and Landlord's partners, officers,
directors, employees, agents, successors and assigns (collectively, "Landlord
Indemnified Parties") harmless from and against any and all claims, damages,
judgments, suits, causes of action, losses, liabilities and expenses, including
attorneys' fees and court costs (collectively, "Indemnified Claims"), arising or
resulting from (a) any act or omission of Tenant or any of Tenant's agents,
employees, contractors, subtenants, assignees, licensees or invitees
(collectively, "Tenant Parties"); (b) the use of the Premises and Common Areas
and conduct of Tenant's business by Tenant or any Tenant Parties, or any other
activity, work or thing done, permitted or suffered by Tenant or any Tenant
Parties, in or about the Premises, the Building or elsewhere on the Site; and/or
(c) any default by Tenant of any obligations on Tenant's part to be performed
under the terms of this Lease. In case any action or proceeding is brought
against Landlord or any Landlord Indemnified parties by reason of any such
Indemnified Claims, Tenant, upon notice from Landlord, shall defend the same at
Tenant's expense by counsel approved in writing by Landlord, which approval
shall not be unreasonably withheld.
19.2 Tenant's Assumption of Risk and Waiver. Except to the extent
specifically included in Landlord's indemnification obligations set forth in
Subparagraph 19.3 below, Tenant, as a material part of the consideration to
Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified
Parties shall be liable to Tenant for, and Tenant expressly assumes the risk of
and waives any and all claims it may have against Landlord or any Landlord
Indemnified Parties with respect to, any and all damage to property or injury to
persons in, upon or about the Premises, the Building or Site resulting from any
act or omission of Landlord or of any Landlord Indemnified Party (whether or not
negligent) or from any other cause whatsoever, including, without limitation,
(a) any damage to property entrusted to employees of the Building, (b) any loss
of or damage to property by theft or otherwise, and (c) any injury or damage to
persons or property resulting from any casualty, explosion, falling plaster or
other masonry or glass, steam, gas, electricity, water or rain which may leak
from any part of the Building or from the pipes, appliances or plumbing works
therein or from the roof, street or subsurface or from any other place, or
resulting from dampness, or any other cause whatsoever. Landlord or its agents
shall not be liable for interference with the light or other intangible rights.
19.3 Landlord's Indemnification. Notwithstanding the provisions of
Subparagraph 19.2 to the contrary, but subject to the limitation on Landlord's
liability set forth in Paragraph 35 below, Landlord shall be liable for, and
shall indemnify, defend and hold Tenant and Tenant's partners, officers,
directors, employees, agents, successors and assigns
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(collectively, "Tenant Indemnified Parties") harmless from and against, any
injury to persons or damage to property located on the Premises or Site (but not
for injury to, or interference with, Tenant's or any Tenant Indemnified Parties'
business or for consequential damages), to the extent such damage or injury
arises or results from (a) the negligence or willful misconduct of Landlord, its
agents or employees and/or (b) the default by Landlord of any obligations on
Landlord's part to be performed under the terms of this Lease; provided,
however, that Landlord's indemnity shall not apply or extend to any such damage
or injury which is covered by any insurance maintained by Tenant or any Tenant
Indemnified Parties (or would have been covered had Tenant obtained the
insurance as required under this Lease). In case any action or proceeding is
brought against Tenant or any Tenant Indemnified Parties by reason of any such
injury or damage indemnified by Landlord as set forth hereinabove, Landlord,
upon notice from Tenant, shall defend the same at Landlord's expense by counsel
approved in writing by Tenant, which approval shall not be unreasonably
withheld.
19.4 Survival; No Release of Insurers. Tenant's and Landlord's
indemnification obligations under Subparagraphs 19.1 and 19.3, respectively,
shall survive the expiration or earlier termination of this Lease. Tenant's
covenants, agreements and indemnification in Subparagraphs 19.1 and 19.2 above,
and Landlord's indemnification in Subparagraph 19.3 above, are not intended to
and shall not relieve any insurance carrier of its obligations under policies
required to be carried by Landlord or Tenant, respectively, pursuant to the
provisions of this Lease.
20. Damage or Destruction.
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20.1 Landlords Rights and Obligations. In the event the Premises or any
part of the Building is damaged by fire or other casualty to an extent not
exceeding twenty-five percent (25%) of the fire replacement cost thereof, and
Landlord's contractor estimates in a writing delivered to the parties that the
damage thereto is such that the Building and/or Premises may be repaired,
reconstructed or restored to substantially its condition immediately prior to
such damage within one hundred twenty (120) days from the date of such casualty,
and Landlord will receive insurance proceeds sufficient to cover the costs of
such repairs, reconstruction and restoration (including proceeds from Tenant
and/or Tenant's insurance which Tenant is required to deliver to Landlord
pursuant to Subparagraph 20.2 below), then Landlord shall commence and proceed
diligently with the work of repair, reconstruction and restoration and this
Lease shall continue in full force and effect. If, however, the Premises or any
other part of the Building is damaged to an extent exceeding twenty-five percent
(25%) of the full replacement cost thereof, or Landlord's contractor estimates
that such work of repair, reconstruction and restoration will require longer
than one hundred twenty (120) days to complete, or Landlord will not receive
insurance proceeds (and/or proceeds from Tenant, as applicable) sufficient to
cover the costs of such repairs, reconstruction and restoration, then Landlord
may elect to either:
(a) repair, reconstruct and restore the portion of the Building and
Premises damaged by such casualty (including the Leasehold Improvements and
Tenant Changes), in which case this Lease shall continue in full force and
effect; or
(b) terminate this Lease effective as of the date which is thirty
(30) days after Tenant's receipt of Landlord's election to so terminate.
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Under any of the conditions of this Subparagraph 20.1, Landlord shall give
written notice to Tenant of its intention to repair or terminate within the
later of ninety (90) days after the occurrence of such casualty, or fifteen (15)
days after Landlord's receipt of the estimate from Landlord's contractor.
20.2 Tenant's Costs and Insurance Proceeds. In the event of any damage or
destruction of all or any part of the Premises, Tenant shall immediately: (a)
notify Landlord thereof; and (b) deliver to Landlord all insurance proceeds
received by Tenant with respect to the Leasehold Improvements and Tenant Changes
in the Premises to the extent such items are not covered by Landlord's casualty
insurance obtained by Landlord pursuant to Paragraph 23 below (excluding
proceeds for Tenant's furniture and other personal property), whether or not
this Lease is terminated as permitted in this Paragraph 20, and Tenant hereby
assigns to Landlord all rights to receive such insurance proceeds. If, for any
reason (including Tenant's failure to obtain insurance for the full replacement
cost of any Tenant Changes which Tenant is required to insure pursuant to
Subparagraphs; 14.1(c) and/or 22.1(a) hereof), Tenant fails to receive insurance
proceeds covering the full replacement cost of such Tenant Changes which are
damaged, Tenant shall be deemed to have self-insured the replacement cost of
such Tenant Changes, and upon any damage or destruction thereof, Tenant shall
immediately pay to Landlord the full replacement cost of such items, less any
insurance proceeds actually received by Landlord from Landlord's or Tenant's
insurance with respect to such items.
20.3 Abatement of Rent. In the event that as a result of any such damage,
repair, construction and/or restoration of the Premises or the Building, Tenant
is prevented from using, and does not use, the Premises or any portion thereof
for five (5) consecutive business days (the "Eligibility Period" then the rent
shall be abated or reduced, as the case may be, during the period after the
expiration of the Eligibility Period that Tenant continues to be so prevented
from using and does not use the Premises or portion thereof, in the proportion
that the Rentable Square Feet of the portion of the Premises that Tenant is
prevented from using, and does not use, bears to the total Rentable Square Feet
of the Premises. Notwithstanding the foregoing to the contrary, if the damage is
due to the negligence or willful misconduct of Tenant or any Tenant Parties,
there shall be no abatement of rent. Except for abatement of rent as provided
hereinabove, Tenant shall not be entitled to any compensation or damages for
loss of, or interference with, Tenant's business or use or access of all or any
part of the Premises resulting from any such damage, repair, reconstruction or
restoration.
20.4 Inability to Complete. Notwithstanding anything to the contrary
contained in this Paragraph 20, in the event Landlord is obligated or elects to
repair, reconstruct and/or restore the damaged portion of the Building or
Premises pursuant to Subparagraph 20.1 above, but is delayed from completing
such repair, reconstruction and/or restoration beyond the date which is six (6)
months after the date estimated by Landlord's contractor for completion thereof
pursuant to Subparagraph 20.1, by reason of any causes beyond the reasonable
control of Landlord (including, without limitation, any acts of God, war,
governmental restrictions, and delays caused by Tenant or Tenant Parties), then
Landlord may elect to terminate this Lease upon thirty (30) days' prior any
written notice to Tenant.
20.5 Damage Near End of Term. In addition to its termination rights in
Subparagraphs 20.1 and 20.4 above, Landlord shall have the right to terminate
this Lease if any damage to the
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Building or Premises occurs during the last twelve (12) months of the Term of
this Lease and Landlord's contractor estimates in a writing delivered to the
parties that the repair, reconstruction or restoration of such damage cannot be
completed within the earlier of (a) the scheduled expiration date of the Lease
Term, or (b) sixty (60) days after the date of such casualty.
20.6 Waiver of Termination Right. The provisions of California Civil Code
Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any successor
statutes thereof permitting Tenant to terminate this Lease as a result of any
damage or destruction) are hereby expressly waived by Tenant.
21. Eminent Domain.
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21.1 Substantial Taking. Subject to the provisions of Subparagraph 21.4
below, in case the [while] of the premises, or such part thereof as shall
substantially interfere with Tenant's use and occupancy of the Premises as
reasonably determined by Landlord, shall be taken for any public or quasi-public
purpose by any lawful power or authority by exercise of the right of
appropriation, condemnation or eminent domain, or sold to prevent such taking,
either party shall have the right to terminate this Lease effective as of the
date possession is required to be surrendered to said authority.
21.2 Partial Taking; Abatement of Rent. In the event of a taking of a
portion of the Premises which does not substantially interfere with the conduct
of Tenant's business, then, except as otherwise provided in the immediately
following sentence, neither party shall have the right to terminate this Lease
and Landlord shall thereafter proceed to make a functional unit of the remaining
portion of the Premises (but only to the extent Landlord receives proceeds
therefor from the condemning authority), and rent shall be abated with respect
to the part of the Premises which Tenant shall be so deprived on account of such
taking. Notwithstanding the immediately preceding sentence to the contrary, if
any part of the Building or the Site shall be taken (whether or not such taking
substantially interferes with Tenant's use of the Premises), Landlord may
terminate this Lease upon thirty (30) days' prior written notice to Tenant as
long as Landlord also terminates leases of other tenants leasing comparably
sized space within the Building for comparable lease terms.
21.3 Condemnation Award. Subject to the provisions of Subparagraph 21.4
below, in connection with any taking of the Premises or Building, Landlord shall
be entitled to receive the entire amount of any award which may be made or given
in such taking or condemnation, without deduction or apportionment for any
estate or interest of Tenant, it being expressly understood and agreed by Tenant
that no portion of any such award shall be allowed or paid to Tenant for any so-
called bonus or excess value of this Lease, and such bonus or excess value shall
be the sole property of Landlord. Tenant shall not assert any claim against
Landlord or the taking authority for any compensation because of such taking
(including any claim for bonus or excess value of this Lease); provided,
however, if any portion of the Premises is taken, Tenant shall be granted the
right to recover from the condemning authority (but not from Landlord) any
compensation as may be separately awarded or recoverable by Tenant for the
taking of Tenant's furniture, fixtures, equipment and other personal property
within the Premises, for Tenant's relocation expenses, and for any loss of
goodwill or other damage to Tenant's business by reason of such taking.
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21.4 Temporary Taking. In the event of a taking of the Premises or any
part thereof for temporary use, (a) this Lease shall be and remain unaffected
thereby and rent shall not abate, and (b) Tenant shall be entitled to receive
for itself such portion or portions of any award made for such use with respect
to the period of the taking which is within the Term, provided that if such
taking shall remain in force at the expiration or earlier termination of this
Lease, Tenant shall then pay to Landlord a sum equal to the reasonable cost of
performing Tenant's obligations under Paragraph 11 with respect to surrender of
the Premises and upon such payment shall be excused from such obligations. For
purpose of this Subparagraph 21.4, a temporary taking shall be defined as a
taking for a period of two hundred seventy (270) days or less.
22. Tenant's Insurance.
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22.1 Types of Insurance. On or before the earlier of the Commencement Date
or the date Tenant commences or causes to be commenced any work of any type in
or on the Premises pursuant to this Lease, and continuing during the entire
Term, Tenant shall obtain and keep in full force and effect, the following
insurance:
(a) All Risk insurance, including fire and extended coverage,
sprinkler leakage (including earthquake sprinkler leakage), vandalism, malicious
mischief and earthquake coverage on property of every description and kind owned
by Tenant and located in the Premises or Building, or for which Tenant is
legally liable or installed by or on behalf of Tenant including, without
limitation, furniture, equipment and any other personal property, and the Tenant
Changes the extent required under Subparagraph 14.1(c) above, (but excluding the
initial Leasehold Improvements previously existing or installed in the
Premises), in an amount not less then the full replacement cost thereof. In the
event that there shall be a dispute as to the amount which comprises full
replacement cost, the decision of Landlord or the mortgagees of Landlord shall
control.
(b) Comprehensive general liability insurance coverage, including
personal injury, bodily injury (including wrongful death), broad form property
damage, operations hazard, owner's protective coverage, contractual liability
(including Tenant's indemnification obligations under this Lease, including
Paragraph 19 hereof), liquor liability (if Tenant serves alcohol on the
Premises), products and completed operations liability, and owned/non-owned auto
liability, with initial combined single limit of liability of not less than Two
Million Dollars ($2,000,000.00). The limits of liability of such comprehensive
general liability insurance shall be increased every five (5) years during the
Term of this Lease to an amount reasonably required by Landlord.
(c) Workers compensation and employees liability insurance, in
statutory amounts and limits.
(d) Loss of income, extra expense and business interruption
insurance in such amounts as will reimburse Tenant for direct or indirect loss
of earnings attributable to all perils commonly insured against by prudent
tenants or attributable to prevention of access to the Premises, Tenant's
parking areas or to the Building as a result of such perils.
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(e) Any other form or forms of insurance as Tenant or Landlord or
the mortgagees of Landlord may reasonably require from time to time, in form,
amounts and for insurance risks against which a prudent tenant would protect
itself, but only to the extent such risks and amounts are available in the
insurance market at commercially reasonable costs.
22.2 Requirements. Each policy required to be obtained by Tenant hereunder
shall: (a) be issued by insurers authorized to do business in the state in which
the Building is located and rated not less than financial class X, and not less
than policyholder rating A in the most recent version of Best's Key Rating Guide
(provided that, in any event, the same insurance company shall provide the
coverages described in Subparagraphs 22.1(a) and 22.1(d) above); (b) be in form
reasonably satisfactory from time to time to Landlord; (c) name Tenant as named
insured thereunder and shall name Landlord and, at Landlord's request,
Landlord's mortgagees and ground lessors of which Tenant has been informed in
writing, as additional insured thereunder, all as their respective interests may
appear; (d) shall not have a deductible amount exceeding Five Thousand Dollars
($5,000.00); (e) specifically provide that the insurance afforded by such policy
for the benefit of Landlord and Landlord's mortgagees and ground lessors shall
be primary, and any insurance carried by Landlord or Landlord's mortgagees and
ground lessors shall be excess and non-contributing; (f) except for worker's
compensation insurance, contain an endorsement that the insurer waives its right
to subrogation as described in Paragraph 24 below; and (9) contain an
undertaking by the insurer to notify Landlord (and the mortgagees and ground
lessors of Landlord who are named as additional insured) in writing not less
than thirty (30) days prior to any material change, reduction in coverage,
cancellation or other termination thereof. In the alternative, Tenant may self-
insure as to the types of insurance identified in Paragraph 22.1. Tenant agrees
to deliver to Landlord, as soon as practicable after the placing of the required
insurance, but in no event later than ten (10) days after the date Tenant takes
possession of all or any part of the Premises, certified copies of each such
insurance policy (or certificates from the insurance company evidencing the
existence of such insurance and Tenant's compliance with the foregoing
provisions of this Paragraph 22). Tenant shall cause replacement policies or
certificates be delivered to Landlord not less than thirty (30) days prior to
the expiration of any such policy or policies. If any such initial or
replacement policies or certificates are not furnished within the time(s)
specified herein, Tenant shall be deemed to be in material default under this
Lease without the benefit of any additional notice or cure period provided in
Subparagraph 25.1 below, and Landlord shall have the right, but not the
obligation, to procure such policies, and certificates at Tenant's expense.
23. Landlord's Insurance. During the Term, Landlord shall be required to
--------------------
insure the Building, the Premises, the Leasehold Improvements initially
installed in the Premises pursuant to Exhibit "F" and certain Tenant Changes to
-----------
the extent described in Subparagraph 14.1(c) above (excluding, however, Tenant's
furniture, equipment and other personal property and those Tenant Changes which
Tenant is obligated to insure pursuant to the provisions of Subparagraphs
14.1(c) and 22.1(a) above) against damage b fire and standard extended coverage
perils and general liability insurance, in such reasonable amounts and with such
reasonable deductibles as would be carried by a prudent owner of a similar
building in San Francisco, California. At Landlord's option, such insurance may
be carried under any blanket or umbrella policies which Landlord has in force
for other buildings and projects. In addition, at Landlord's option, Landlord
may elect to self-insure all or any part of such required insurance coverage.
Landlord may, but shall not be obligated to, carry any other form or forms of
insurance as Landlord or the
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mortgagees or ground lessors of Landlord may reasonably determine is advisable.
The cost of insurance obtained by Landlord pursuant to this Paragraph 23 shall
be included in Operating Expenses.
24. Waivers of Subrogation.
----------------------
24.1 Mutual Waiver of Parties. Landlord and Tenant hereby waive their
rights against each other as well as the officers, partners, directors,
employees, agents and authorized representatives of Landlord and Tenant with
respect to any claims or damages or losses (including any claims for bodily
injury to persons and/or damage to property) which are caused or result from (a)
risks insured against under any insurance policy carried by Landlord or Tenant
(as the case may be) pursuant to the provisions of this Lease and enforceable at
the time of such damage, loss and/or injury, or (b) risks which would have been
covered under any insurance required to be obtained and maintained by Landlord
or Tenant (as the case may be) under Paragraphs 22 and 23 of this Lease (as
applicable) had such insurance been obtained and maintained as required therein.
Foregoing waivers shall be in addition to, and not a limitation of, any other
waivers or releases contained in this Lease.
24.2 Waiver of Insurer. Each party shall cause each insurance policy
required to be obtained by it pursuant to Paragraphs 22 and 23 (excluding
Tenant's worker's compensation insurance) to provide that the insurer waives all
rights of recovery by way of subrogation against either Landlord or Tenant, as
the case may be, and against the officers, employees, agents, partners and
authorized representatives of Landlord and Tenant in connection with any claims,
losses and damages covered by such policy. If either party fails to maintain
insurance required hereunder, such insurance shall be deemed to be self-insured
with a deemed full waiver of subrogation set forth in the immediately preceding
sentence.
25. Tenant's Default and Landlord's Remedies.
----------------------------------------
25.1 Tenant's Default. The occurrence of any one or more of the following
events shall constitute a default under this Lease by Tenant:
(a) the vacation or abandonment of the Premises by Tenant.
"Abandonment" is herein defined to include, but is not limited to, any absence
by Tenant from the Premises for five (5) business days or longer while in
default of any other provision of this Lease;
(b) the failure by Tenant to make any payment of rent or additional
rent or any other payment required to be made by Tenant hereunder, as and when
due;
(c) the failure by Tenant to timely perform any of those covenants
described in Paragraphs 8.2, 15, 22.2 and 27.1 of this Lease, which Paragraphs
expressly provide that such failure shall be deemed a default by Tenant under
this Lease without any additional notice or cure periods;
(d) the failure by Tenant to observe or perform any of the express
or implied covenants or provisions of this Lease to be observed or performed by
Tenant, other than as specified in Subparagraphs 25.1(a), (b) or (c) above,
where such failure shall continue for a period of ten (10) days after written
notice thereof from Landlord to Tenant; provided, however,
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that any such notice shall be in lieu of, and not in addition to, any notice
required under California Code of Civil Procedure, Section 1161 and provided
further that if the nature of Tenant's default is such that more than ten (10)
days are reasonably required for its cure, then Tenant shall not be deemed to be
in default if Tenant shall commence such cure within said ten (10) day period
and thereafter diligently prosecute such cure to completion, which completion
shall occur not later than sixty (60) days from the date of such notice from
Landlord; and
(e) (i) the making by Tenant of any general assignment for the
benefit of creditors, the filing by or against Tenant of a petition to have
Tenant adjudged a bankrupt or a petition for reorganization or arrangement under
any law relating to bankruptcy (unless, in the case of a petition filed against
the Tenant, the same is dismissed within sixty (60) days), (iii) the appointment
of a trustee or receiver to take possession of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, where
possession is not restored to Tenant within sixty (60) days, or (iv) the
attachment, execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease where such
seizure is not discharged within sixty (60) days.
25.2 Landlord's Remedies; Termination. In the event of any such default by
Tenant, in addition to any other remedies available to Landlord under this
Lease, at law or in equity, Landlord shall have the immediate option to
terminate this Lease and all rights of Tenant hereunder. In the event that
Landlord shall elect to so terminate this Lease, then Landlord may recover from
Tenant:
(a) the worth at the time of award of any unpaid rent which had
been earned at the time of such termination; plus
(b) the worth at the time of the award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(c) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which, in the ordinary course of things, would be likely to
result therefrom including, but not limited to: "Unreimbursed Leasehold
Improvement Costs" (as defined below); attorneys' fees; brokers' commissions;
the costs of refurbishment, alterations, renovation and repair of the Premises;
and removal (including the repair of any damage caused by such removal) and
storage (or disposal) of Tenant's personal property, equipment, fixtures, Tenant
Changes, Leasehold Improvements and any other items which Tenant is required
under this Lease to remove but does not remove. As used herein, the term
"Unreimbursed Leasehold Improvement Costs" shall mean the product when
multiplying (i) the sum of any Leasehold Improvement allowance plus any other
costs provided, paid or incurred by Landlord in connection with the design and
construction of the initial Leasehold Improvements installed in the Premises
prior to the Commencement Date pursuant to Exhibit "D", by (ii) the fraction,
-----------
the numerator of which is the number of months of
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the Term of this Lease not yet elapsed as of the date on which this Lease is
terminated (excluding my unexercised renewal options), and the denominator of
which is the total number of months of the Term of this Lease (excluding any
unexercised renewal options). For example, if the total costs paid or incurred
by Landlord with respect to the initial Leasehold Improvements was $100,000.00,
the Lease Term was sixty (60) months, and the Lease was terminated by reason of
Tenant's default at the end of twelve (12) months, the Unreimbursed Leasehold
Improvement costs would be equal to $80,000.00 (i.e., $80,000.00 equals
$100,000.00 x 48/60).
As used in Subparagraphs 25.2(a) and 25.2(b) above, the "worth at the time of
award" is computed by allowing interest at the Interest Rate set forth in
Subparagraph 1.18. As used in Subparagraph 25.2(c) above, the "worth at the time
of award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
25.3 Landlord's Remedies; Re-Entry Rights. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord under
this Lease, at law or in equity, Landlord shall also have the right, with or
without terminating this Lease, to re-enter the Premises and remove all persons
and property from the Premises; such property may be removed, stored and/or
disposed of pursuant to Subparagraph 14.4 of this Lease or any other procedures
permitted by applicable law. No re-entry or taking possession of the Premises by
Landlord pursuant to this Subparagraph 25.3, and no acceptance of surrender of
the Premises or other action on Landlord's part, shall be construed as an
election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction.
25.4 Landlord's Remedies; Continuation of Lease. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord under
this Lease, at law or in equity, Landlord shall have the right to continue this
Lease in full force and effect, whether or not Tenant shall have abandoned the
Premises. The foregoing remedy shall also be available to Landlord pursuant to
California Civil Code Section 1951.4 and any successor statute thereof in the
event Tenant has abandoned the Premises. In the event Landlord elects to
continue this Lease in full force and effect pursuant to this Subparagraph 25.4,
then Landlord shall be entitled to enforce all of its rights and remedies under
this Lease, including the right to recover rent as it becomes due. Landlord's
election not to terminate this Lease pursuant to this Subparagraph 25.4 or
pursuant to any other provision of this Lease, at law or in equity, shall not
preclude Landlord from subsequently electing to terminate this Lease or pursuing
any of its other remedies.
25.5 Rights and Remedies Cumulative. All rights, options and remedies of
Landlord contained in this Paragraph 25 and elsewhere in this Lease (including
Paragraph 30 below) shall be construed and held to be cumulative, and no one of
them shall be exclusive of the other, and Landlord shall have the right to
pursue any one or all of such remedies or any other remedy or relief which may
be provided by law or in equity, whether or not stated in this Lease. Nothing in
this Paragraph 25 shall be deemed to limit or otherwise affect Tenant's
indemnification of Landlord pursuant to any provision of this Lease.
26. Landlord's Default. Landlord shall not be in default in the performance of
------------------
any obligation required to be performed by Landlord under this Lease unless
Landlord has failed to perform such obligation within thirty (30) days, or as
reasonable per occurrence, after the receipt of
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written notice from Tenant specifying in detail Landlord's failure to perform;
provided however, that if the nature of Landlord's obligation is such that more
than thirty (30) days are required for its performance, then Landlord shall not
be deemed in default if it commences such performance within such thirty (30)
day period and thereafter diligently pursues the same to completion. Upon any
such uncured default by Landlord, Tenant may exercise any of its rights provided
in law or at equity; provided, however: (a) Tenant shall have no right to offset
or abate rent in the event of any default by Landlord under this Lease, except
to the extent offset rights are specifically provided to Tenant in this Lease;
and (b) Tenant's rights and remedies hereunder shall be limited to the extent
(i) Tenant has expressly waived in this Lease any of such rights or remedies
and/or (ii) this Lease otherwise expressly limits Tenant's rights or remedies,
including the limitation on Landlord's liability contained in Paragraph 35
hereof.
27. Subordination. Without the necessity of any additional document being
-------------
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee of a mortgage or a beneficiary of a deed
of trust now or hereafter encumbering all or any portion of the Building or
Site, or any lessor of any ground or master lease now or hereafter affecting all
or any portion of the Building or Site, this Lease shall be subject and
subordinate at all times to such ground or master leases (and such extensions
and modifications thereof), and to the lien of such mortgages and deeds of trust
(as well as to any advances made thereunder and to all renewals, replacements,
modifications and extensions thereof). As a condition precedent to the
effectiveness of any such subordination of this Lease to any future ground or
master leases or the lien of any future mortgages or deeds of trust, Landlord
shall provide to Tenant a commercially reasonable non-disturbance and attornment
agreement in favor of Tenant executed by such future ground lessor, master
lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall
provide that Tenant's quiet possession of the Premises shall not be disturbed on
account of such subordination to such future lease or lien so long as Tenant is
not in default under any provisions of this Lease. Notwithstanding the
foregoing, Landlord shall have the right to subordinate or cause to be
subordinated any or all ground or master leases or the lien of any or all
mortgages or deeds of trust to this Lease. In the event that any ground or
master lease terminates for any reason or any mortgage or deed of trust is
foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the
election of Landlord's successor in interest, Tenant shall attorn to and become
the tenant of such successor. Tenant hereby waives its rights under any current
or future law which gives or purports to give Tenant any right to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder in
the event of any such foreclosure proceeding or sale. Tenant covenants and
agrees to execute and deliver to Landlord within ten (10) days after receipt of
written demand by Landlord and in the form reasonably required by Landlord, any
additional documents evidencing the priority or subordination of this Lease with
respect to any such ground or master lease or the lien of any such mortgage or
deed of trust. Should Tenant fail to sign and return any such documents within
said 10-day period, Tenant shall be in default hereunder without the benefit of
any additional notice or cure periods specified in Subparagraph 25.1 above.
28. Estoppel Certificate.
--------------------
28.1 Tenant's Obligations. Within ten (10) business days following
Landlord's written request, Tenant shall execute and deliver to Landlord an
estoppel certificate, in a form substantially similar to the form of Exhibit "G"
----------
attached hereto, certifying: (a) the
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commencement Date of this Lease; (b) that this Lease is unmodified and in full
force and effect (or, if modified, that this Lease is in full force and effect
as modified, and stating the date and nature of such modifications); (c) the
date to which the rent and other sums payable under this Lease have been paid;
(d) that there are not, to the best of Tenant's knowledge, any defaults under
this Lease by either Landlord or Tenant, except as specified in such
certificate; and (e) such other matters as are reasonably requested by Landlord.
Any such estoppel certificate delivered pursuant to this Subparagraph 28.1 may
be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser
of any portion of the Site, as well as their assignees.
28.2 Tenant's Failure to Deliver. Tenant's failure to deliver such
estoppel certificate within such time shall be conclusive upon Tenant that: (a)
this Lease is in full force and effect without modification, except as may be
represented by Landlord; (b) there are no uncured defaults in Landlord's or
Tenant's performance; and (c) not more than one (1) month's rental has been paid
in advance. Tenant shall indemnify, defend (with counsel reasonably approved by
Landlord in writing) and hold Landlord harmless from and against any and all
claims, judgments, suits, causes of action, damages, losses, liabilities and
expenses (including attorneys' fees and court costs) attributable to any failure
by Tenant to timely deliver any such estoppel certificate to Landlord pursuant
to Subparagraph 28.1 above.
29. Building Planning. If Landlord requires the Premises for use by another
-----------------
tenant or for other reasons connected with the Building planning program, then
Landlord shall have the right, upon sixty (60) days' prior written notice to
Tenant, to relocate the Premises to other space in the Building of substantially
similar size as the Premises, and with tenant improvements of substantially
similar age, quality and layout as then existing in the Premises. In the event
of any such relocation, Landlord shall pay for the cost of providing such
substantially similar tenant improvements (but not any furniture or personal
property), and Landlord shall reimburse Tenant, within thirty (30) days after
Landlord's receipt of invoices and paid receipts, for the reasonable moving,
telephone installation and stationery reprinting costs actually paid for by
Tenant in connection with such relocation. If Landlord so relocates Tenant, the
terms and conditions of this Lease shall remain in full force and effect and
apply to the new space, except that (a) a revised Exhibit "B" shall become part
-----------
of this Lease and shall reflect the location of the new space, (b) Paragraph 1
of this Lease shall be amended to include and state all correct data as to the
new space, and (c) such new space shall thereafter be deemed to be the
"Premises". Notwithstanding the foregoing provisions of this Paragraph 29 to
the contrary, if the new space contains more Rentable Square Feet than the
original Premises, Tenant shall not be obligated to pay any more Annual Basic
Rent or Excess Expenses than otherwise applicable to the original Premises.
Landlord and Tenant agree to cooperate fully in order to minimize the
inconvenience of Tenant resulting from such relocation.
30. Performance by Tenant: Interest and Late Charges.
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30.1 Landlord's Right to Perform. Except as specifically provided
otherwise in this Lease, all covenants and agreements by Tenant under this Lease
shall be performed by Tenant at Tenant's sole cost and expense and without any
abatement or offset of rent. If Tenant shall fail to pay any sum of money (other
than Annual Basic Rent) or perform any other act on its part to be paid or
performed hereunder and such failure shall continue for three (3) days with
respect to monetary obligations (or ten (10) days with respect to non-monetary
obligations) after Tenant's
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receipt of written notice thereof from Landlord, Landlord may, without waiving
or releasing Tenant from any of Tenant's obligations, make such payment or
perform such other act on behalf of Tenant. All sums so paid by Landlord and all
necessary incidental costs incurred by Landlord performing such other acts shall
be payable by Tenant to Landlord within five (5) days after demand therefor as
additional rent. The foregoing rights are in addition to any and all remedies
available to Landlord upon Tenant's default as described in Paragraph 25.
30.2 Interest. If any monthly installment of Annual Basic Rent or Excess
Expenses, or other amount payable by Tenant hereunder is not received by
Landlord by the date when due, it shall bear interest at the Interest Rate set
forth in Subparagraph 1.18 from the date due until paid. All interest, and any
late charges imposed pursuant to Subparagraph 30.3 below shall be considered
additional rent due from Tenant to Landlord under the terms of this Lease.
30.3 Late Charges. Tenant acknowledges that, in addition to interest
costs, the late payments by Tenant to Landlord of any Annual Basic Rent or other
sums due under this Lease will cause Landlord to incur costs not contemplated by
this Lease, the exact amount of such costs being extremely difficult and
impractical to fix. Such other costs include, without limitation, processing,
administrative and accounting charges and late charges that may be imposed on
Landlord by the terms of any mortgage, deed of trust or related loan documents
encumbering the Premises, the Building or the Site. Accordingly, if any monthly
installment of Annual Basic Rent or Excess Expenses or any other amount payable
by Tenant hereunder is not received by Landlord by the due date thereof, Tenant
shall pay to Landlord an additional sum of ten percent (10%) of the overdue
amount as a late charge, but in no event more than the maximum late charge
allowed by law. The parties agree that such late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of any late
payment as hereinabove referred to by Tenant, and the payment of late charges
and interest are distinct and separate in that the payment of interest is to
compensate Landlord for the use of Landlord's money by Tenant, while the payment
of late charges is to compensate Landlord for Landlord's processing,
administrative and other costs incurred by Landlord as a result of Tenant's
delinquent payments. Acceptance of a late charge or interest shall not
constitute a waiver of Tenant's default with respect to the overdue amount or
prevent Landlord from exercising any of the other rights and remedies available
to Landlord under this Lease or at law or in equity now or hereafter in effect.
31. Indemnification and Cure Rights of Landlord's Mortgagees and Lessors.
31.1 Modifications. If, in connection with Landlord's obtaining or
entering into any financing or ground lease for any portion of the Building or
Site, the lender or ground lessor shall request modifications to this Lease,
Tenant shall, within ten (10) days after request therefor, execute an amendment
to this Lease including such modifications, provided such modifications are
reasonable, do not increase the obligations of Tenant hereunder, or adversely
affect the leasehold estate created hereby or Tenant's rights hereunder.
31.2 Cure Rights. In the event of any default on the part of Landlord,
Tenant will give notice by registered or certified mail to any beneficiary of a
deed of trust or mortgagee covering the Premises or ground lessor of Landlord
whose address shall have been furnished to Tenant, and shall offer such
beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the
default (including with respect to any such beneficiary or mortgagee, time to
obtain possession
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of the Premises, subject to this Lease and Tenant's rights hereunder, by power
of sale or a judicial foreclosure, if such should prove necessary to effect a
cure).
32. Transfer of Owner's Interest. The term "Landlord" as used in this Lease,
----------------------------
so far as covenants or obligations on the part of the Landlord are concerned,
shall be limited to mean and include only the owner or owners, at the time in
question, of the fee title to, or a lessee's interest in a ground lease of, the
Site. In the event of any transfer or conveyance of any such title or interest
(other than a transfer for security purposes only), the transferor shall be
automatically relieved of all covenants and obligations on the part of Landlord
contained in this Lease accruing after the date of such transfer or conveyance.
Landlord and Landlord's transferees and assignees shall have the absolute right
to transfer all or any portion of their respective title and interest in the
Site, the Building, the Premises and/or this Lease without the consent of
Tenant, and such transfer or subsequent transfer shall not be deemed a violation
on Landlord's part of any of the terms and conditions of this Lease.
33. Quiet Enjoyment. Landlord covenants and agrees with Tenant that, upon
---------------
Tenant performing all of the covenants and provisions on Tenant's part to be
observed and performed under this Lease (including payment of rent hereunder),
Tenant shall and may peaceably and quietly have, hold and enjoy the Premises in
accordance with and subject to the terms and conditions of this Lease.
34. Parking.
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34.1 Tenant's Parking Privileges. During the Term of this Lease, Landlord
shall lease to Tenant, and Tenant shall lease from Landlord, the number of
parking privileges specified in Subparagraph 1.20 hereof for use by Tenant's
employees in the common parking areas of the Building, as designated by Landlord
from time to time. Landlord shall at all times have the right to establish and
modify the nature and extent of the parking areas for the Building (including
whether such areas shall be surface, underground and/or other structures) as
long as Tenant is provided the number of parking privileges designated in
Subparagraph 1.20. In addition, Landlord may, in its sole discretion, assign any
unreserved and unassigned parking privileges, and/or make all or a portion of
such privileges reserved/unreserved.
34.2 Parking Rules. The use of the parking areas shall be subject to the
Parking Rules and Regulations attached hereto as Exhibit "E" and any other
-----------
reasonable, non-discriminatory rules and regulations adopted by Landlord and/or
Landlord's parking operators from time to time, including any system for
controlled ingress and egress and charging visitors and invitees, with
appropriate provision for validation of such charges. Tenant shall not use more
parking privileges than its allotment and shall not use any parking spaces
specifically assigned by Landlord to other tenants or for such other uses as
visitor parking. Tenant's parking privileges shall be used only for parking by
vehicles no larger than normally sized passenger automobiles or pick-up trucks.
Tenant shall not permit or allow any vehicles that belong to or are controlled
by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to
be loaded, unloaded, or parked in areas other than those designated by Landlord
for such activities. If Tenant permits or allows any of the prohibited
activities described herein, then Landlord shall have the right, without notice,
in addition to such other rights and remedies that it may have, to
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remove or tow away the vehicle involved and charge the cost thereof to Tenant,
which cost shall be immediately payable by Tenant upon demand by Landlord.
35. Limitation on Landlord's Liability. Notwithstanding anything contained in
----------------------------------
this Lease to the contrary, the obligations of Landlord under this Lease
(including any actual or alleged breach or default by Landlord) do not
constitute personal obligations of the individual partners, directors, officers
or shareholders of Landlord or Landlord's partners, and Tenant shall not seek
recourse against the individual partners, directors, officers or shareholders of
Landlord or Landlord's partners, or any of their personal assets for
satisfaction of any liability with respect to this Lease. In addition, in
consideration of the benefits accruing hereunder to Tenant and notwithstanding
anything contained in this Lease to the contrary, Tenant hereby covenants and
agrees for itself and all of its successors and assigns that the liability of
Landlord for its obligations under this Lease (including any liability as a
result of any actual or alleged failure, breach or default hereunder by
Landlord), shall be limited solely to, and Tenant's and its successors' and
assigns' sole and exclusive remedy shall be against, Landlord's interest in the
Site and proceeds therefrom, and no other assets of Landlord.
36. Hazardous Materials.
-------------------
36.1 Tenant's Covenants. In addition to its other obligations under
this Lease (including Paragraph 8 hereof), Tenant covenants to comply with all
laws relating to Hazardous Materials with respect to the Premises and the
Building. Except for general office supplies typically used in office area in
the ordinary course of business (such as copier toner, liquid paper, glue, ink,
and cleaning solvents), for use in the manner for which they were designed and
only in accordance with all Hazardous Materials laws and the highest standards
prevailing in the industry for such use, and then only in such amounts as may be
normal for the office business operations conducted by Tenant on the Premises,
neither Tenant nor any Tenant Parties (as defined in Subparagraph 19.1) shall
use, handle, store or dispose of any Hazardous Materials in, on, under or about
the Premises, the Building or the Site. Tenant shall promptly take all actions,
at its sole cost and expense, as are necessary to return the Premises, Building
and Site to the condition existing prior to the introduction of any such
Hazardous Materials by Tenant or any Tenant parties, provided Landlord's
approval of such actions shall first be obtained. Furthermore, Tenant shall
immediately notify Landlord of any inquiry, test, investigation or enforcement
proceeding or against Tenant or the Premises concerning the presence of any
Hazardous Material.
36.2 Tenant's Indemnity. Tenant shall be solely responsible for and shall
indemnify, defend (with counsel reasonably approved by Landlord) and hold
Landlord harmless from and against any and all claims, judgments, suits, causes
of action, damages, penalties, fines, liabilities, losses and expenses
(including, without limitation, investigation and clean-up costs, attorneys'
fees, consultant fees and court costs) which arise during or after the Term of
this Lease as a result of the breach of any of the obligations and covenants set
forth in Subparagraph 36.1 above, and/or any contamination of the Premises,
Building or Site directly or indirectly arising from the activities of Tenant or
any Tenant Parties.
36.3 Definition of Hazardous Materials. For purposes of this Lease, the
term "Hazardous Materials" shall mean, collectively, asbestos, any petroleum
fuel, and any hazardous
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or toxic substance, material or waste which is or becomes regulated by any local
governmental authority, the State of California or the United States Government,
including, but not limited to, material or substance defined as a "hazardous
waste," "extremely hazardous waste," restricted hazardous waste," "hazardous
substance," "hazardous material" or "toxic pollutant" under the California
Health and Safety Code and/or under the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601, et seq.
-- ---
36.4 Survival. The foregoing covenants and indemnities of Tenant shall
survive the expiration or earlier termination of the Lease.
37. Miscellaneous.
-------------
37.1 Governing Law. This Lease shall be governed by, and construed
pursuant to, the laws of the state in which the Building is located.
37.2 Successors and Assigns. Subject to the provisions of Paragraph 32
above, and except as otherwise provided in this Lease, all of the covenants,
conditions and provisions of this Lease shall be binding upon, and shall inure
to the benefit of, the parties hereto and their respective heirs, personal
representatives and permitted successors and assigns; provided, however, no
rights shall inure to the benefit of any Transferee of Tenant unless the
Transfer to such Transferee is made in compliance with the provisions of
Paragraph 16, and no options or other rights which are expressly made
personal to the original Tenant hereunder or in any rider attached hereto shall
be assignable to or exercisable by anyone other than the original Tenant under
this Lease.
37.3 No Merger. The voluntary or other surrender of this Lease by Tenant
or a mutual termination thereof shall not work as a merger and shall, at the
option of Landlord, either (a) terminate all or any existing subleases, or (b)
operate as an assignment to Landlord of Tenant's interest under any or all such
subleases.
37.4 Professional Fees. If either Landlord or Tenant should bring a suit
against the other with respect to this Lease, including for unlawful detainer or
any other relief against the other hereunder, then all costs and expenses
incurred by the prevailing party therein (including, without limitation, its
actual appraisers', accountants', attorneys' and other professional fees and
court costs), shall be paid by the other party.
37.5 Waiver. The waiver by either party of any breach by the other party
of any term, covenant or condition herein contained shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant and
condition herein contained, nor shall any custom or practice which may become
established between the parties in the administration of the terms hereof be
deemed a waiver of, or in any way affect, the right of any party to insist upon
the performance by the other in strict accordance with said terms. No waiver of
any default of either party hereunder shall be implied from any acceptance by
Landlord or delivery by Tenant (as the case may be) of any rent or other
payments due hereunder or any omission by the non-defaulting party to take any
action on account of such default if such default persists or is repeated, and
no express waiver shall affect defaults other than as specified in said waiver.
The subsequent acceptance of rent hereunder by Landlord shall not be deemed to
be a waiver of any
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preceding breach by Tenant of any term, covenant or condition of this Lease
other than the failure of Tenant to pay the particular rent so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such rent.
37.6 Joint and Several Liability. If more than one person or entity
executes this Lease as Tenant: (a) each of them is and shall be jointly and
severally liable for the covenants, conditions, provisions and agreements of
this Lease to be kept, observed and performed by Tenant; and (b) the act or
signature of, or notice from or to, any one or more of them with respect this
Lease shall be binding upon each and all of the persons and entities executing
this Lease Tenant with the same force and effect as if each and all of them had
so acted or signed, or given or received such notice.
37.7 Terms and Headings. The words "Landlord" and "Tenant" as used herein
shall include the plural as well as the singular. Words used in any gender
include other genders. The paragraph headings of this Lease are not a part of
this Lease and shall have no effect upon the instruction or interpretation of
any part hereof.
37.8 Time. Time is of the essence with respect to performance of every
provision of this Lease in which time or performance is a factor. All
references in this Lease to "days" shall mean calendar days unless specifically
modified herein to be "business" days.
37.9 Prior Agreements; Amendments. This Lease (and the Exhibits and
Riders attached hereto) contain all of the covenants, provisions, agreements,
conditions and understandings between Landlord and Tenant concerning the
Premises and any other matter covered or mentioned in this Lease, and no prior
agreement or understanding, oral or written, express or implied, pertaining to
the Premises or any such other matter shall be effective for any purpose. No
provision of this Lease may be amended or added to except by an agreement in
writing signed by the parties hereto or their respective successors in interest.
The parties acknowledge at all prior agreements, representations and
negotiations are deemed superseded by the execution of this Lease to the extent
they are not expressly incorporated herein.
37.10 Severability. The invalidity or unenforceability of any provision of
this Lease except for Tenant's obligation to pay Annual Basic Rent and Excess
Expenses under Paragraphs 5 and 6 hereof) shall in no way affect, impair or
invalidate any other provision hereof, and such other provisions shall remain
valid and in full force and effect to the fullest extent permitted by law.
37.11 Recording. Neither Landlord nor Tenant shall record this Lease. In
addition, either party shall record a short form memorandum of this Lease
without the prior written consent (and signature on the memorandum) of the
other, and provided that prior to recordation Tenant executes and delivers to
Landlord, in recordable form, a properly acknowledged quitclaim deed or other
instrument distinguishing all of the Tenant's rights and interest in and to the
Site, Building and Premises, and designating Landlord as the transferee, which
deed or other instrument shall be held by Landlord and may be recorded by
Landlord once the Lease terminates or expires (but not prior thereto). If such
short form memorandum is recorded in accordance with the foregoing, the party
requesting the recording shall pay for all costs of or
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related to such recording, including, but not limited to, recording charges and
documentary transfer taxes.
37.12 Exhibits and Riders. All Exhibits and Riders attached to this Lease
are hereby incorporated in this Lease as though set forth at length herein.
37.13 Signs and Auctions. Except for Tenant's identity sign on the entry
doors of the premises and Tenant's elevator lobby identity sign on any full
floor of the Building leased by Tenant (which signs shall be consistent with the
Building's signage program and otherwise subject to Landlord's prior written
approval), Tenant shall have no right to place any sign upon the Premises, the
Building or Site or which can be seen from outside the Premises. In addition,
Tenant shall have no right to conduct any auction in, on or about the Premises,
the Building or Site.
37.14 Accord and Satisfaction. No payment by Tenant or receipt by Landlord
of a lesser amount than the rent payment herein stipulated shall be deemed to be
other than on account of the rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy provided in this Lease. Tenant agrees that each of the foregoing
covenants and agreements shall be applicable to any covenant or agreement either
expressly contained in this Lease or imposed by any statute or at common law.
37.15 Financial Statements. Upon ten (10) days prior written request from
Landlord (which Landlord may make at any time during the Term but no more often
that two (2) times in any calendar year), Tenant shall deliver to Landlord (a) a
current financial statement of Tenant and any guarantor of this Lease, and (b)
financial statements of Tenant and such guarantor for the two (2) years prior to
the current financial statement year. Such statements shall be prepared in
accordance with generally acceptable accounting principles and certified as true
in all material respects by Tenant (if Tenant is an individual) or by an
authorized officer or general partner of Tenant (if Tenant is a corporation or
partnership, respectively).
37.16 Tenant's Authority. If Tenant executes this Lease as a partnership
or corporation, then Tenant and the persons and/or entities executing this Lease
on behalf of Tenant represent and warrant that: (a) Tenant is a duly authorized
and existing partnership or corporation, as the case may be, and is qualified to
do business in the state in which the Building is located; (b) such persons
and/or entities executing this Lease are duly authorized to execute and deliver
this Lease on Tenant's behalf in accordance with the Tenant's partnership
agreement (if Tenant is a partnership), or a duly adopted resolution of Tenant's
board of directors and the Tenant's by-laws (if Tenant is a corporation); and
(c) this Lease is binding upon Tenant in accordance with its terms.
37.17 Guaranty. This Lease is not subject to and conditional upon Tenant's
delivery to Landlord, concurrently with Tenant's execution and delivery of this
Lease, of a Guaranty.
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[The remainder of this page is intentionally blank.]
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IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year
first above written.
"TENANT" ________________________________
a Delaware Corporation
By:_____________________________
Its:____________________________
Date:___________________________
"LANDLORD" ________________________________
a Delaware Corporation
By:_____________________________
Its:____________________________
Date:___________________________
39
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OFFICE LEASE
This LEASE is made as of the 19th day of June of 1998, by and between landlord
and Tenant:
WITNESSETH:
----------
1. Terms and Conditions. For the purposes of this Lease, the following terms
shall have the following definitions and meanings:
1.1 Landlord: Sunpark Properties, Inc.
1.2 Landlord's Address: 150 Executive Park Blvd.
Suite 1000
San Francisco, Ca. 94134
1.3 Tenant: Imagine Media, Inc.
1.4 Tenant's Address: 150 North Hill
Brisbane, Ca 94005
1.5 Site: The parcel(s) of real property located at the corner of
Executive Park Blvd. and Thomas Mellon in the City of San Francisco, County of
San Francisco, State of California, as shown on the site plan attached here to
as Exhibit "A".
-----------
1.6 Building: A four (4) story office building located on the Site,
containing, approximately 107,831 Rentable Square Feet (subject to adjustment as
set forth in Exhibit "C"), whose address is 250 Executive Park Blvd., San
-----------
Francisco, California.
1.7 Premises: Those certain premises known as Suite(s) 4200 as generally
shown on the floor plan(s) attached hereto as Exhibit "B", located on the fourth
-----------
floor(s) of the building, and containing approximately 3,497 Rentable Square
Feet (subject to adjustment as set forth in Architect Drawings).
1.8 Rentable Square Feet: See Exhibit "C".
-----------
1.9 Commencement Date: See Exhibit "D".
-----------
1.10 Estimated Commencement Date: September 1, 1998.
1.11 Term: Approximately Two (2) years and six (6) months, commencing upon
completion of tenant improvements or move-in of date of sublease space (Suite
4000 at 250 Executive Park Blvd., whichever comes later, and ending on February
28, 2001.
1.12 Annual Basic Rent: $104,910.00, calculated based upon $30.00 per
Rentable Square Foot within the Premises per year. Annual Basic Rent is payable
in monthly installments ("Monthly Basic Rent") of $8,742.50, calculated based
upon $2.50 per Rentable Square Foot
<PAGE>
within the Premises per month. The Annual Basic Rent is subject to a CPI
adjustment as provided in Rider No. 1.
1.13 Tenant's Percentage: 3.24% (See Exhibit "C")
-----------
1.14 Landlord's Contribution to Operating Expenses: Tenant's Percentage of
Operating Expenses incurred by Landlord for the building during the calendar
year in which the Commencement Date occurs, adjusted to reflect an assumption
that the Building is fully assessed for real property tax purposes as a
completed Building ready for occupancy and that the Building is ninety-five
percent (95%) occupied during such year.
1.15 Security Deposit: Waived.
1.16 Permitted Use: Office
1.17 Brokers: BT Commercial.
1.18 Interest Rate: The lesser of: (a) the rate announced from time to
time by Bank of America or if Bank of America ceases to exist or ceases to
publish such rate, by the largest (as measured by deposits) chartered bank
operating in the state in which the Building is located as its "prime rate" or
"reference rate", plus five percent (5%); or (b) the maximum rate permitted by
law.
1.19 Leasehold Improvements: The tenant improvements installed to be
installed for the Premises as described in the Work Letter Agreement attached
hereto as Exhibit "F".
-----------
1.20 Parking: A ratio of 3 per 1000 rentable square feet, consisting of
unreserved parking spaces, subject to the parking rates and provisions set forth
in Paragraph 34.
1.21 Guarantor(s): None.
2. Lease of Premises. Landlord hereby leases to Tenant, and Tenant hereby
-----------------
leases from Landlord, the Premises described in Subparagraph 1.7 above, improved
or to be improved with the Leasehold Improvements. Such lease is upon, and
subject to, the terms, covenants and conditions herein set forth and each party
covenants, as a material part of the consideration for, this Lease, to keep and
perform their respective obligations under this Lease.
3. Common Areas.
------------
3.1 Definitions; Tenant's Rights. During the Term of this Lease, Tenant
shall have the nonexclusive right to use, in common with Landlord and other
tenants in the Building, and subject to the Rules and Regulations referred
to in Paragraph 8 below, the following common areas of the Building and/or
Site ("Common Areas"):
(a) the common entrances, lobbies, restrooms on multi-tenant floors,
elevators, stairways and access ways, loading docks, ramps, drives and platforms
and any passageways and serviceways thereto, and the common pipes, conduits,
wires and appurtenant equipment serving the Premises; and
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(b) the parking structure and parking areas (subject to a Paragraph 34
below), loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways and landscaped areas and plaza area appurtenant to the
Building.
3.2 Landlord's Reserved Rights. Landlord reserves the right from time to
--------------------------
time to use any of the Common Areas and to do any of the following, as long as
such acts do not unreasonably interfere with Tenant's use of or access to the
Premises or parking:
(a) expand the building and construct or alter other buildings or
improvements on the Site; (b) make any changes, additions, improvements, repairs
or replacements in or to the Site, the Common Areas and/or the Building
(including the Premises if required to do so by any law or regulation) and the
fixtures and equipment thereof, including, without limitation, (i) maintenance,
replacement and relocation of pipes, ducts, conduits, wires and meters, and (ii)
changes in the location, size, shape and number of driveways, entrances,
stairways, elevators, loading and unloading areas, ingress, egress, direction of
traffic, landscaped areas and walkways, and subject to Paragraph 34 below,
parking spaces and parking area;
(c) close temporarily any of the Common Areas while engaged in making
repairs, improvements or alterations to the Building or the Site; and\
(d) perform such other acts and make such other changes with respect
to the Site, Common Areas and Building as Landlord may, in the exercise of sound
business judgment, deem to be appropriate.
4. Term.
----
4.1 Term; Notice of Lease Dates. The Term of this Lease shall be for the
period designated in Subparagraph 1.11 commencing on the Commencement Date (as
determined pursuant to Exhibit "D"), and ending on the expiration of such
-----------
period, unless the Term is sooner terminated as provided in this Lease. Within
ten (10) days after Landlord's written request, Tenant shall execute a written
confirmation of the Commencement Date and expiration date of the Term in the
form of the Notice of Lease Term Dates attached hereto as Exhibit "D". The
-----------
Notice of Lease Term Dates shall be binding upon Tenant unless Tenant objects
thereto in writing within such ten (10) day period.
4.2 Estimated Commencement Date. It is estimated by the parties that the
Term of this Lease will commence on the Estimated Commencement Date set forth in
Subparagraph 1.10. The Estimated Commencement Date is merely an estimate of the
Commencement Date and, consequently, Tenant agrees that Landlord shall have no
liability to Tenant for any loss or damage, nor shall Tenant be entitled to
terminate or cancel this Lease if the Term of this Lease does not commence by
the Estimated Commencement Date for any reason whatsoever, including any delays
in substantial completion of the Leasehold Improvements.
5. Rent.
----
5.1 Basic Rent. Tenant agrees to pay Landlord, as basic rent for the
Premises, the Annual Basic Rent designated in Subparagraph 1.12. The Annual
Basic Rent shall be paid by Tenant in twelve (12) equal monthly installments of
Monthly Basic Rent designated in
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Subparagraph 1.12 in advance on the first day of each and every calendar month
during the Term, except that the first full month's Monthly Basic Rent shall be
paid upon the execution of this Lease. Monthly Basic Rent for any partial month
shall be prorated in the proportion that the number of days this Lease is in
effect during such month bears to the actual number of days in such month.
5.2 Additional Rent. All amounts and charges payable by Tenant under this
Lease in addition to the Annual Basic Rent described in Subparagraph 5.1 above
(including, without limitation, payments for insurance, repairs and parking, and
Tenant's Percentage of Operating Expenses in excess of Landlord's Contribution
to Operating Expenses as provided in Paragraph 6) shall be considered additional
rent for the purposes of this Lease, and the word "rent" in this Lease shall
include such additional rent unless the context specifically or clearly implies
that only the Annual Basic Rent is referenced. The Annual Basic Rent and
additional rent shall be paid to Landlord as provided in Paragraph 9, without
any prior demand therefor and without any deduction or offset whatever, in
lawful money of the United State of America.
6. Operating Expenses.
------------------
6.1 Excess Expenses. During each calendar year during the Term of this
Lease (after the calendar year noted in Subparagraph 1.14), Tenant shall pay to
Landlord the amount by which Tenant's Percentage of Operating Expenses exceeds
Landlord's Contribution to Operating Expenses for such calendar year (such
amount shall be referred to in this Paragraph 6 as the "Excess Expenses"), in
the manner and at the times set forth in the following provisions of this
Paragraph 6.
6.2 Definition of Operating Expenses. As used in this Lease, the term
"Operating Expenses" shall mean all direct costs and expenses of operation and
maintenance of the building, the Common Areas and the Site, as determined by
standard accounting practices, calculated assuming the Building is ninety-five
percent (95%) occupied, including the following costs by way of illustration but
not limitation (but excluding those items specifically set forth in Subparagraph
6.3 below): (a) Real Property Taxes and Assessments (as defined in Subparagraph
6.9 below) and any taxes or assessments imposed in lieu thereof; (b) any and all
assessments imposed with respect to the Building, Common Areas, and/or Site
pursuant to any covenants, conditions and restrictions affecting the Site,
Common Areas or Building; (c) water and sewer charges and the costs of
electricity, heating, ventilating, air conditioning and other utilities; (d)
utilities surcharges and any other costs, levies or assessments resulting from
statutes or regulations promulgated by any governmental authority in connection
with the use or occupancy of the Building or the Premises or the parking
facilities serving the Building or the premises; (e) costs of insurance obtained
by Landlord pursuant to paragraph 23 of this Lease; (f) waste disposal and
janitorial services; (g) security; (h) labor; (i) costs incurred in the
management of the Building, including, without limitation: (1) supplies, (2)
wages and salaries (and payroll taxes and similar governmental charges related
thereto) of employees used in the management, operation and maintenance of the
Building, (3) Building management office rental (if such management office is
located in the Building), and (4) a management/administrative fee not to exceed
four percent (4%) of the annual gross revenues of the Building exclusive of the
proceeds of financing or a sale of the Building; (j) supplies, materials,
equipment and tools; (k) repair and
4
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maintenance of the elevators and the structural portions of the Building,
including the plumbing, heating, ventilating, air-conditioning and electrical
systems installed or furnished by Landlord; (1) maintenance, costs and upkeep of
all parking and Common Areas; (m) depreciation on a straight line basis and
rental of personal property used in maintenance; (n) amortization on a straight-
line basis over the useful life [together with interest at the Interest Rate (as
defined in Subparagraph 1.18 of this Lease) on the unamortized balance] of all
costs of a capital nature (including, without limitation, capital improvements,
capital replacements, capital repairs, capital equipment and capital tools): (1)
reasonably intended to produce a reduction in operating charges or energy
consumption; or (2) required after the date of the Lease under any governmental
law or regulation that was not applicable to the Building at the time it was
originally constructed; or (3) for repair or replacement of any Building
equipment needed to operate the Building at the same quality levels as prior to
the replacement; (o) costs and expenses of gardening and landscaping; (p)
maintenance of signs (other than signs of tenants of the Building); (q) personal
property taxes levied on or attributable to personal property used in connection
with the Building, the Common Areas and/or the Site; (r) reasonable accounting,
audit, verification, legal and other consulting fees; and (s) costs and expenses
of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning,
refuse removal, security and similar items, including appropriate reserves.
6.3 Exclusions from Operating Expenses. Notwithstanding the provisions of
Subparagraph 6.2 above to the contrary, "Operating Expenses" shall not include:
(a) any ground lease rental;
(b) costs incurred by Landlord for the repair of damage to the
Building to the extent that Landlord is reimbursed by insurance or condemnation
proceeds or by tenants, warrantors or other third persons;
(c) costs, including permit, license and inspection costs, incurred
with respect to the installation of tenant improvements for tenants in the
Building (including the original Leasehold Improvement for the Premises), or
incurred in renovating or otherwise improving, decorating, painting or
redecorating space for tenants or other occupants of the Building, including
space planning and interior design posts and fees;
(d) depreciation, amortization and interest payments, except as
specifically provided herein, and except on materials, tools, supplies and
vendor-type equipment purchased by Landlord to enable Landlord to supply
services Landlord might otherwise contract for with a third party, where such
depreciation, amortization and interest payments would otherwise have been
included in the charge for such third party's services, all as determined in
accordance with standard accounting practices;
(e) brokerage commissions, finders' fees, attorneys' fees, space
planning costs and other costs incurred by Landlord in leasing or attempting to
lease space in the Building;
5
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(f) attorneys' fees and other costs and expenses incurred in
connection with negotiations or disputes with present or prospective tenants or
other occupants of the Building; provided, however, that Operating Expenses
shall include those attorneys' fees and other cost and expenses incurred in
connection with negotiations, disputes or claims relating to items of Operating
Expenses, enforcement of rules and regulations of the Building, and such other
matters relating to the maintenance of standards required of Landlord under the
Lease; and
(g) interest, principal, points and fees on debt or amortization on
any mortgage, deed of trust or other debt encumbering the Building or Site.
6.4 Definition of Real Property Taxes and Assessments. All Real Property
Taxes and Assessments shall be adjusted to reflect an assumption that the
Building is fully assessed for real property tax purposes as a completed
building ready for occupancy. As used in this case, the term "Real Property
Taxes and Assessments" shall mean: any form of assessment, license fee, license
tax, business license fee, commercial rental tax, levy, charge, improvement
bond, tax or similar imposition imposed by any authority having the direct power
to tax, including any city, county, state or federal government, or any school,
agricultural, lighting, drainage or other improvement or special assessment
district thereof, as against any legal or equitable interest of Landlord in the
Premises, Building, Common Areas or Site including the following by way of
illustration but not limitation:
(a) any tax on Landlord's "right" to rent or "right" to other income
from the Premises or as against Landlord's business of leasing the Premises;
(b) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge previously
included within the definition of real property tax, it being acknowledged by
Tenant and Landlord that Proposition 13 was adopted by the voters of the State
of California in the June, 1978 election and that assessments, taxes, fees,
levies and charges may be imposed by governmental agencies for such services as
fire protection, street, sidewalk and road maintenance, refuse removal and for
other governmental services formerly provided without charge to property owners
or occupants. It is the intention of Tenant and Landlord that all such new and
increased assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease;
(c) any assessment, tax, fee, levy or charge allocable to or measured
by the area of the Premises or other premises in the Building or the rent
payable by Tenant hereunder or other tenants of the Building, including, without
limitation, any gross receipts tax or excise tax levied by state, city or
federal government, or any political subdivision thereof, with respect to the
receipt of such rent, or upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises, or any portion thereof, but not on Landlord's other
operations;
(d) any assessment, tax, fee, levy or charge upon this transaction or
any document to which Tenant is a party, creating or transferring an interest or
an estate in the Premises; and/or
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(e) any assessment, tax, fee, levy or charge by any governmental
agency related to any transportation plan, fund or system (including assessment
districts) instituted within the geographic area of which the Building is a
part.
Notwithstanding the foregoing provisions of this Subparagraph 6.4 above to the
contrary, "Real Property Taxes and Assessments" shall not include Landlord's
federal or state income, franchise, inheritance or estate taxes.
6.5 Estimate Statement. By the first day of April of each calendar year
during the Term of this Lease (after the calendar year voted in Subparagraph
1.14), Landlord shall endeavor to deliver to Tenant a statement ("Estimate
Statement") estimating the Operating expenses for the current calendar year and
the estimated amount of excess Expenses payable by Tenant. Landlord shall have
the right no more than three (3) times in any calendar year to deliver a revised
Estimate Statement showing the Excess Expenses for such calendar year if
Landlord determines that the Excess Expenses are greater than those set forth in
the original Estimate Statement (or previously delivered revised Estimate
Statement) for such calendar year. The Excess expenses shown on the Estimate
Statement (or revised Estimate Statement, as applicable) shall be divided into
twelve (12) equal monthly installments, and Tenant shall pay to Landlord,
concurrently with the regular monthly rent payment next due following the
receipt of the Estimate Statement (or revised Estimate Statement, as
applicable), an amount equal to one (1) monthly installment of such excess
Expenses multiplied by the number of months from January in the calendar year in
which such statement is submitted to the month of such payment, both months
inclusive (less any amounts previously paid by Tenant with respect to any
previously delivered Estimate Statement for revised Estimate Statement for such
calendar year). Subsequent installments shall be paid concurrently with the
regular monthly rent payments for the balance of the calendar year and shall
continue until the next calendar year's Estimate Statement (or current calendar
year's revised Estimate Statement) is received.
6.6 Actual Statement. By the first day of April of each succeeding
calendar year during the Term of this Lease, Landlord shall endeavor to deliver
to Tenant a statement ("Actual Statement") of the actual Operating Expenses and
Excess Expenses for the immediately preceding calendar year. If the Actual
Statement reveals that Excess expenses were overstated or understated in any
Estimate Statement (or revised Estimate Statement) previously delivered by
Landlord pursuant to Subparagraph 6.5 above, then within thirty (30) days after
delivery of the Actual Statement, Tenant shall pay to Landlord the amount of any
such underpayment, or Landlord shall pay to tenant (or credit against the next
monthly rent falling due, the amount of such overpayment, as the case may be.
6.7 No Release. Any delay or failure by Landlord in delivering any
Estimate or Actual Statement pursuant to this Paragraph 6 shall not constitute a
waiver of its right to receive Tenant's payment of excess Expenses, nor shall it
relieve Tenant of its obligations to pay excess Expenses pursuant to this
Paragraph 6, except that Tenant shall not be obligated to make any payments
based on such Estimate or Actual Statement until ten (10) business days after
receipt of such statement.
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6.8 Tenant's Audit Rights. If Tenant disputes the amount of Operating
Expenses set forth in any Actual Statement delivered by Landlord, Tenant shall
have the right, to be exercised, if at all, no later than six (6) months
following receipt of such Actual Statement to cause Landlord's books and records
with respect to the preceding calendar year to be audited, at Tenant's expense,
by a certified public accountant mutually acceptable to Landlord and Tenant.
The amounts payable under Subparagraph 6.6 by Landlord to Tenant or by Tenant to
Landlord as the case may be shall be appropriately adjusted on the basis of such
audit. If Tenant fails to request an audit with the 67 month period, such
Actual Statement shall be conclusively binding upon Landlord and Tenant.
7. Security Deposit. Concurrently with the execution of this Lease, Tenant
----------------
shall deposit with Landlord the Security Deposit designated in Subparagraph
1.15. The Security Deposit shall be held by Landlord as security for the
faithful performance by Tenant of all of the terms, covenants and conditions of
this Lease to be performed by Tenant during the Term. If Tenant defaults with
respect to any of its obligations under this Lease, Landlord may (but shall not
be require to) use, apply or retain all or any part of the Security Deposit for
the payment of any rent or any other sum in default, or for the payment of any
other amount, loss or damage which Landlord may spend incur or suffer by reason
of Tenant's default. If any portion of the Security Deposit is so used or
applied, Tenant shall, within ten (10 days after demand therefor, deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
original amount. Landlord shall not be required to keep the security Deposit
separate from its general funds, and Tenant shall not be entitled to interest on
the Security Deposit. If Tenant shall fully and faithfully perform every
provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to Tenant within the (2) weeks following the
expiration of the Term, provided that Landlord may retain the Security Deposit
until such time as any amount due from Tenant in accordance with Paragraph 6
hereof has been determined and paid in full. If Landlord sells its interest in
the Building during the Term and if Landlord deposits with the purchaser the
Security Deposit (or balance thereof), and such purchaser acknowledges receipt
thereof, then, upon such sale, Landlord shall be discharged from any further
liability with respect to the Security Deposit.
8. Use.
---
8.1 General. Tenant shall use the Premises solely for the Permitted Use
specified in Subparagraph 1.16, and shall not use or permit the Premises to be
used for any other use or purpose whatsoever. Tenant shall observe and comply
with the "Rules and Regulations" attached hereto as Exhibit and all reasonable
non-discriminatory modifications thereof and additions thereto from time to time
put into effect and furnished to Tenant by Landlord. Landlord shall not be
responsible to Tenant for the violation or non-performance by any other tenant
or occupant of the Building of such Rules and Regulations. Tenant shall also
observe and comply with all requirements of any board of fire underwriters or
similar body relating to the Premises, and all laws, rules and regulations of
all governmental agencies having jurisdiction. Tenant shall not use or allow
the Premises to be used (a) in violation of any recorded covenants, conditions
and restrictions affecting the Site or of any law or governmental rule or
regulation, or of any certificate of occupancy issued for the Premises or
Building, or (b) for any improper, immoral, unlawful or reasonably objectionable
purpose. Tenant shall not do or permit to be done
8
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anything which will obstruct or interfere with the rights of other tenants or
occupants of the Building, or injure or annoy them. Tenant shall not cause,
maintain permit any nuisance in, on or about the Premises, the Building or the
Site, nor commit or suffer to be committed any waste in, on or about the
Premises.
8.2 Effect on Insurance. Tenant shall not do or permit to be done
anything which will (a) violate or invalidate any insurance policy maintained by
Landlord or Tenant hereunder, or (b) increase the cost of any insurance policy
maintained by Landlord pursuant to Paragraph 23 or otherwise with respect to the
Building or Site. If Tenant's occupancy or conduct of its business in or on the
Premises results any increase in premiums for any insurance carried by Landlord
with respect to the Building or Site, Tenant shall pay such increase as
additional rent within ten (10) days after being billed therefor by Landlord.
If any insurance coverage carried by Landlord pursuant to Paragraph 23 or
otherwise with respect to the Building or site shall be canceled or reduced (or
cancellation or reduction thereof shall threatened) by reason of the use or
occupancy of the Premises by Tenant or by anyone permitted by Tenant to be upon
the Premises, and if Tenant fails to remedy such condition within five (5) days
after notice thereof, Tenant shall be deemed to be in default under this Lease,
without the benefit of any additional notice or cure period specified in
Subparagraph 25.1 below, and Landlord shall have all remedies provided in this
Lease, at law or in equity, including, without limitation, the right (but not
the obligation) to enter upon the Premises and attempt to remedy such condition
at Tenant's cost.
9. Payment and Notices. All rent and other sums payable by Tenant to Landlord
-------------------
hereunder shall be paid to Landlord at the first address. Designated in
Subparagraph 1.2, or to such other persons and/or at such other places as
Landlord may hereafter designate in writing. Any notice required or permitted
to be given hereunder must be in writing and may be given by personal delivery
(including delivery by nationally recognized overnight courier or express
mailing service), facsimile transmission, or by registered or certified mail,
postage repaid, return receipt requested, addressed to Tenant at the address(es)
designated in Subparagraph 1.4, or to Landlord at the address(es) designated in
Subparagraph 1.2. Either party may, by written notice to the other, specify a
different address for notice purposes.
10. Brokers. The parties recognize that the broker(s) who negotiated his Lease
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are stated in Subparagraph 1.17, and agree that Landlord shall be solely
responsible for the payment of brokerage commissions to said broker(s), and that
Tenant shall have no responsibility therefor unless written provision to the
contrary has been made. Each party represents and warrants to the other, that,
to its knowledge, no other broker, agent or finder (a) negotiated or was
instrumental in negotiating or consummating this Lease on its behalf, and (b) is
or might be entitled to a commission or compensation in connection with his
Lease. Any broker, agent or finder of Tenant whom Tenant has failed to disclose
herein shall be paid by Tenant. Tenant shall indemnify, defend (by counsel
reasonably approved in writing by Landlord) and hold Landlord harmless from and
against any and all claims, judgments, suits, causes of action,
9
<PAGE>
damages, losses, liabilities and expenses (including attorneys' fees and court
costs) resulting from any breach by Tenant of the foregoing representation,
including, without limitation, any claims that may be asserted against Landlord
by any broker, agent or finder undisclosed by Tenant herein. Landlord shall
indemnify, defend (by counsel reasonably approved in writing by Tenant) and hold
Tenant harmless from and against any and all claims, judgments, suits, causes of
action, damages, losses, liabilities and expenses (including attorneys' fees and
court costs) resulting from any breach by Landlord of the foregoing
representation, including, without limitation, any claims that may be asserted
against tenant, by any broker, agent or finder undisclosed by Landlord herein.
11. Surrender: Holding Over.
------------------------
11.1 Surrender of Premises. Upon the expiration or sooner termination of
this Lease, Tenant shall surrender all keys for the Premises to Landlord, and
exclusive possession of the Premises to Landlord broom clean and in first-class
condition and repair, reasonable wear and tear excepted (and casualty damage
excepted if Lease is terminated as a result thereof pursuant to Paragraph 20)
with all of Tenant's personal property (and those items, if any, of Leasehold
Improvements and Tenant Changes identified by Landlord pursuant to Subparagraph
14.2 below) removed therefrom and all damage caused by such removal repaired, as
required pursuant to Subparagraphs 14.2 and 14.3 below. If, for any reason,
Tenant fails to surrender the Premises on the expiration or earlier termination
of this Lease including upon the expiration of any subsequent month-to-month
tenancy consented to by Landlord pursuant to Subparagraph 11.2 below), with such
removal and repair obligations completed, then, in addition to the provisions of
Subparagraph 11.3 below and Landlord's rights and dies under Subparagraph 14.4
and the other provisions of this Lease, Tenant shall indemnify, defend (by
counsel reasonably approved in writing by Landlord) and hold Landlord harmless
from and against and all claims, judgments, suits, causes of action, damages,
losses, liabilities and expenses (including attorneys' fees and costs) resulting
from such failure to surrender, including, without limitation, any claim made by
any succeeding tenant based thereon. The going indemnity shall survive the
expiration or earlier termination of this Lease.
11.2 Hold Over With Landlord's Consent. If, with Landlord's express
written consent, Tenant remains in possession of the Premises after the
expiration or earlier termination of the Lease Term, Tenant shal1 become a
tenant from month-to-month upon the terms and conditions set forth in this Lease
(including Tenant's obligation to pay all Excess Expenses and any other
additional rent under this Lease), but at a Monthly Basic Rent equal to the
greater of: (a) one hundred twenty-five percent (125%) of the Monthly Basic Rent
applicable to the Premises immediately prior to the date of such expiration or
earlier termination; or (b) one hundred twenty-five percent (125%) of the
prevailing market rate excluding any rental or other concessions (as reasonably
determined by Landlord) for the Premises in effect on the date of such
expiration or earlier termination. Tenant shall pay an entire month's Monthly
Basic Rent calculated in accordance with this Subparagraph 11.2 for any portion
of a month it holds over and remains in possession of the Premises pursuant to
this Paragraph 11.2.
11.3 Hold Over Without Landlord's Consent. If Tenant holds over after the
expiration or earlier termination of the Lease Term without the express written
consent of Landlord, Tenant shall become a tenant at sufferance only, upon the
terms and conditions set forth in this Lease so far as applicable (including
Tenant's obligation to pay all Excess Expenses. and other additional rent under
this Lease), but at a Monthly Basic Rent equal to the greater of: (a) two
hundred percent (100%) of the Monthly Basic Rent applicable to the Premises
immediately prior to the date of such expiration or earlier termination; or (b)
two hundred
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<PAGE>
percent (200%) of the prevailing market rate excluding any rental or other
concessions (as reasonably determined by Landlord) for the premises in effect on
the date of such expiration or earlier termination. Acceptance by Landlord of
rent after such expiration or earlier termination shall not constitute a consent
to a hold over hereunder or result in an extension of this Lease. Tenant shall
pay an entire month's Monthly Basic Rent calculated in accordance with this
Subparagraph 11.3 for any portion a month it holds over and remains in
possession of the Premises pursuant to this Paragraph 11.3.
11.4 No Effect on Landlord's Rights. The foregoing provisions of this
Paragraph 11 are in addition to, and do not affect, Landlord's right of re-entry
or any other rights of Landlord hereunder or otherwise provided by law or
equity.
12. Taxes on Tenant's Property. Tenant shall be liable for, and shall pay
--------------------------
before delinquency, all taxes and assessments (real and personal) levied against
(a) any personal property or trade fixtures placed by Tenant in or about the
Premises (including any increase in the assessed value of the Premises based
upon the value of any such personal property or trade fixtures); and (b) any
Leasehold Improvements or alterations in the Premises (whether installed and/or
paid for by Landlord or Tenant) to the extent such items are assessed a
valuation higher than the valuation at which tenant improvements conforming to
the Building's standard tenant improvements set forth in Schedule "1" to Exhibit
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"F" are assessed. If any such taxes or assessments are levied against Landlord
- --
or Landlord's property, Landlord may, after written notice to Tenant (and under
proper protest if requested by Tenant) pay such taxes and assessments, and
Tenant shall reimburse Landlord therefor within ten (10) business days after
demand by Landlord; provided, however, Tenant, at its sole cost and expense,
shall have the right, with Landlord's cooperation, to bring it in any court of
competent jurisdiction to recover the amount of any such taxes and assessments
so paid under protest.
13. Condition of Premises: Repairs.
------------------------------
13.1 Condition of Premises. Tenant acknowledges that, except as otherwise
expressly set forth in this Lease, neither Landlord nor any agent of Landlord
has made any representation or warranty with respect to the Premises, the
Building or the Site or their condition, or with respect to the suitability
thereof for the conduct of Tenant's business. The taking of possession of the
Premises by Tenant shall conclusively establish that the Site, the Premises, the
Leasehold Improvements therein, the Building and the Common Areas are at such
time complete and in good, sanitary and satisfactory condition and repair with
all work required to be performed by Landlord, if any, pursuant to Exhibit "F"
----------
completed and without any obligation on Landlord's part to make any alterations,
upgrades or improvements hereto, except for the repair of any latent defects in
the Building or Premises (excluding any portion of the Premises constructed by
Tenant) disclosed by Tenant and specified in written notice to Landlord no later
than one (1) year after the Commencement Date. Landlord shall cause all latent
defects so specified in Tenant's notice to be completed and/or repaired as soon
as reasonably possible after Landlord's receipt thereof. Tenant further
acknowledges and agrees to accept the various start-up inconveniences that may
be associated with the use of the Common Areas and other typical conditions
incident to recently constructed office buildings, such as construction
obstacles including scaffolding,
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delays in the use of freight elevator service, certain elevators not being
available to Tenant, the passage of work crews using elevators, and uneven air
conditioning service.
13.2 Tenant's Repair Obligations. Except for Landlord's obligations
specifically set forth in Subparagraphs 13.1, 13.3, 20.1 and 21.2 hereof, Tenant
shall at all times and at Tenant's sole cost and expense, keep, maintain, repair
and preserve the Premises and all Leasehold Improvements, Tenant Changes, and
any alterations, additions and property therein in first-class condition and
repair, reasonable wear and tear excepted. Such maintenance and repairs shall be
performed with due diligence, lien-free and in a first-class workmanlike manner,
by such contractor(s) selected by Tenant and approved by Landlord, which
approval shall not be unreasonably withheld or delayed. Except as otherwise
expressly provided in this Lease, Landlord shall have no obligation to alter,
remodel, improve, repair, renovate, redecorate or paint all or any part of the
Premises.
13.3 Landlord's Repair Obligations. Notwithstanding the provisions of
Subparagraph 13.2 above to the contrary, Landlord shall, as part of the
Operating Expenses, repair and maintain (a) the Building shell and other
structural portions of the Building including the roof and foundations), (b) the
basic plumbing, heating, ventilating, air conditioning, sprinkler and electrical
systems within the Building core (but not any conduits or connections thereto or
distribution systems thereof within the Premises or any other tenant's
premises), and (c) the Common Areas of the Building and Site; provided, however,
to the extent such maintenance or repairs are required as a result of any act,
neglect, fault or omission of Tenant or any of Tenant's agents, employees,
contractors, licensees or invitees, Tenant shall pay to Landlord, as additional
rent, the costs of such maintenance and repairs. Subject to Tenant's right to
self-help and abatement of rent pursuant to Subparagraphs 13.4 and 20.3,
respectively, and except as otherwise included in Landlord's indemnity in
Subparagraph 19.3, Landlord shall not be liable to Tenant for, and Tenant hereby
expressly waives all rights to recover, any losses and damages (including
interference with or injury to Tenant's business) resulting from Landlord's
performing or failure to perform any such repairs or maintenance, it being
expressly understood and agreed by Tenant that Tenant shall be solely
responsible for and look solely to its insurance for any such damages and
losses.
13.4 Tenant's Waiver; Self-Help. Tenant waives the right to make repairs
at Landlord's expense under any law, statute or ordinance now or hereafter in
effect (including the provisions of California Civil Code Section 1942 and any
successive sections or statutes of a similar nature); provided, however, subject
to the termination rights set forth in Paragraphs 20 and 21, if Landlord fails
to perform any maintenance or repair work required pursuant to Subparagraph 13.3
within thirty (30) days after Landlord receives Tenant's written notice of the
need for such repairs (or such period of time in excess of thirty (30) days as
is reasonably necessary based upon the nature of such work), and if such failure
to repair unreasonably interferes with Tenant's use of or access to the
Premises, then Tenant shall be permitted to make such repairs, using the
Building's contractors or such other contractors reasonably approved by
Landlord, upon delivery of an additional two (2) business days, prior written
notice to Landlord indicating that Tenant will be undertaking such repairs, and
Tenant shall be entitled to recover from Landlord the reasonable cost of such
repairs made by Tenant, but without any offset rights against he rental or other
amounts payable by Tenant under this Lease.
12
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4. Alterations.
-----------
14.1 Tenant Changes; Conditions. After installation of the Initial
Leasehold Improvements for the Premises pursuant to Exhibit "F", Tenant may, at
----------
its sole cost and expense, make alterations, additions, improvements and
decorations to the Premises (collectively "Tenant Changes") subject to and upon
the following terms and conditions:
(a) Notwithstanding any provision in this Paragraph 14 to the
contrary, Tenant is absolutely prohibited from making any alterations,
additions, improvements or decorations which: (a) affect any area outside the
Premises; (ii) affect the Building's structure, equipment, services or systems,
or the proper functioning thereof, or Landlord's access thereto; (iii) affect
the outside appearance, character or use of the Building or the Common Areas;
(iv) weaken or impair the structural strength of the Building; (v) in the
reasonable opinion of Landlord, lessen the value of the Building; (vi) will
violate or require a change in any occupancy certificate applicable to the
Premises; or (vii) increase the cost of Landlord's insurance, unless Tenant pays
such increased costs within ten (10) days after written demand therefor by
Landlord.
(b) Before proceeding with any Tenant Change which is not otherwise
prohibited in Subparagraph 14.1(a) above, Tenant must first obtain Landlord's
written approval thereof (including approval of all plans, specifications and
working drawings for such Tenant Change), which approval shall not be
unreasonably withheld or delayed. However Landlord's prior approval shall not be
required for any Tenant Change which satisfies the following conditions
(hereinafter a "Pre-Approved Change"): (i) the costs of such Tenant Change does
not exceed Five Hundred Dollars ($500.00) individually; (ii) the costs of such
Tenant Change when aggregated with the costs of all other Tenant Changes made by
Tenant during the Term of this Lease do not exceed Fifteen Hundred Dollars
($1,500.00); (iii) Tenant delivers to Landlord final plans, specifications and
working drawings for such Tenant Change at least en (10) days prior to
commencement of the work therefor, and (iv) Tenant and such Tenant Change
otherwise satisfy all other conditions set forth in this Subparagraph 14.1.
(c) After Landlord has approved the Tenant Changes and the plans,
specifications and working drawings therefor (or is deemed to have approved the
Pre-Approved Changes as set forth in Subparagraph 4.1(b) above), Tenant shall:
(a) enter into an agreement for the performance of such Tenant Changes with such
contractors and subcontractors selected by Tenant and approved by Landlord,
which approval shall not be unreasonably withheld or delayed. Before proceeding
with any Tenant Change (including any Pre-Approved Change) Tenant shall (i)
provide Landlord with ten (10) days' prior written notice thereof; and (ii) pay
to Landlord, within ten (10) days after written demand, the costs of any
increased insurance premiums incurred by Landlord to include such Tenant Changes
in the fire and extended coverage insurance obtained by Landlord pursuant to
Paragraph 23 below (however, Landlord shall be required to include the Tenant
Changes under such insurance only to the extent such insurance is actually
obtained by Landlord and such Tenant Changes are insurable under such insurance;
if such Tenant Changes are not or cannot be included in Landlord's insurance,
Tenant shall insure the Tenant Changes under its casualty insurance pursuant to
Subparagraph 22.1(a) below. In addition, before proceeding with any Tenant
Change, Tenant's contractors shall obtain on behalf of Tenant and at Tenant's
sole cost and expense: (A) all necessary governmental
13
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permits and approvals for the commencement and completion of such Tenant Change;
and (B) a completion and lien indemnity bond, or other surety, satisfactory to
Landlord for such Tenant Change.
(d) Tenant shall pay to Landlord, as additional rent, the reasonable
costs of Landlord's engineers and other consultants (but not Landlord's on-site
management personnel) for review of all plans, specifications and working
drawings for the Tenant Changes, within ten (10) business days after Tenant's
receipt of invoices either from Landlord or such consultants. In addition to
such costs, Tenant shall pay to Landlord, within ten (10) business days after
completion of any Tenant Change, the actual, reasonable costs incurred by
Landlord for services rendered by Landlord's management personnel and engineers
to coordinate and/or supervise any of the Tenant Changes to the extent such
services are provided in excess of or after the normal on-site hours of such
engineers and management personnel.
(e) All Tenant Changes shall be performed: (i) in accordance the
approved plans, specifications and working drawings; (ii) lien-free and in a
first-class and workmanlike manner; (iii) in compliance with all laws, rules,
and regulations of all governmental agencies and authorities; (iv) in such a
manner so as not to interfere with, the occupancy of any other tenant in the
Building, nor impose any additional expense upon nor delay Landlord in the
maintenance and operation of the Building; and (v) at such times, in such manner
and subject to such rules and regulations as Landlord may from time to me
reasonably designate.
(f) Throughout the performance of the Tenant Changes, Tenant shall
obtain, or cause its contractors to obtain, workers compensation insurance and
general liability insurance in compliance with the provisions of Paragraph 22 of
this Lease.
14.2 Removal of Tenant Changes and Leasehold Improvements. All Tenant
Changes and the initial Leasehold Improvements in the Premises (whether
installed or paid for by Landlord or Tenant), shall become the property of
Landlord and shall remain upon and be surrendered with the Premises at the end
of the Term of this Lease; provided, however, Landlord may, by written notice
delivered to Tenant any time prior to the date which is fifteen (15) days before
the expiration of the Lease Term (or immediately upon any sooner termination of
this Lease) identify those items of the Leasehold Improvements and Tenant
Changes which Landlord shall require Tenant to remove at the end of the Term of
this Lease. If Landlord requires Tenant to remove any such items as described
above, Tenant shall, at its sole cost, remove the identified items on or before
the expiration or sooner termination of this Lease and repair any damage to the
Premises caused by such removal (or, at Landlord's option, shall pay to Landlord
all of Landlord's costs of such removal and repair).
14.3 Removal of Personal Property. All articles of personal property owned
by Tenant or installed by Tenant at its expense in the Premises (including
business and trade fixtures, furniture and moveable partitions) shall be, and
remain, the property of Tenant, and shall be removed by Tenant from the
Premises, at Tenant's sole cost and expense, on or before the expiration or
sooner termination of this Lease. Tenant shall repair any damage caused by such
removal.
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14.4 Tenant's Failure to Remove. If Tenant fails to remove by the
expiration or sooner termination of this Lease all of its personal property, or
any items of Leasehold Improvements or Tenant Changes identified by Landlord for
removal pursuant to Subparagraph 14.2 above, Landlord may, at its option, treat
such failure as a hold over pursuant to Subparagraph 11.3 above, and/or may
(without liability to Tenant for loss thereof), at Tenant's sole cost and in
addition to Landlord's other rights and remedies under this Lease, at law or in
equity: (a) remove and store such items; and/or (b) upon ten (10) days' prior
notice to Tenant, sell all or any such items at private or public sale for such
price as Landlord may obtain. Landlord shall apply the proceeds of any such sale
to any amounts due to Landlord under this Lease from Tenant (including
Landlord's attorneys' fees and other costs incurred in the removal, storage
and/or sale of such items), with any remainder to be paid to Tenant.
15. Liens. Tenant shall not permit any mechanic's, materialmen's or other liens
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to be filed against all or any part of the Site, the Building or the Premises,
nor against Tenant's leasehold interest in the Premises, by reason of or in
connection with any repairs, alterations, improvements or other work contracted
for or undertaken by Tenant or any other act or omission of Tenant or Tenant's
agents, employees, contractors, licensees or invitees. Tenant shall, at
Landlord's request, provide Landlord with enforceable, conditional and final
lien releases, (and other evidence reasonably requested by Landlord to
demonstrate protection from liens) from all person's furnishing labor and/or
materials with respect to the Premises. Landlord shall have the right at all
reasonable times to post on the Premises and record any notices of non-
responsibility which it deems necessary for protection from such liens. If any
such liens are filed Tenant shall, at its sole cost, immediately cause such lien
to be released of record or bonded so that it no longer affects title to the
Site, the Building or the Premises. If Tenant fails to cause such lien to be so
released or bonded within ten (10) days after filing thereof, such failure shall
be deemed a material breach by Tenant under this Lease without the benefit of
any additional notice or cure period described in Subparagraph 25.1 below, and
Landlord may, without waiving its rights and remedies based on such breach, and
without releasing Tenant from any of its obligations, cause such lien to be
released by any means it shall deem proper, including payment in satisfaction of
the claim giving rise to such lien. Tenant shall pay to Landlord within five (5)
days after receipt of an invoice from Landlord, any sum paid by Landlord to
remove such liens, together with interest at the Interest Rate from the date of
such payment by Landlord.
16. Assignment and Subletting.
--------------------------
16.1 General. No assignment or encumbrance of all or any part of his
Lease, and no sublease of all or any part of the Premises, shall be permitted,
except as otherwise expressly provided in this Paragraph 16.
16.2 Restriction on Transfer. Subject to the provisions of Subparagraphs
16.3, 16.4, 16.5 and 16.6, Tenant shall not, without the prior written consent
of Landlord, which consent shall not be unreasonably withheld, assign or
encumber this Lease or any interest herein or sublet the Premises or any part
thereof, or permit the use or occupancy of the Premises by any party other than
Tenant (any such assignment, encumbrance, sublease or the like shall sometimes
be referred to as a "Transfer"). Any Transfer without Landlord's consent except
for a Transfer pursuant to Subparagraph 16.6 below) shall constitute a default
by Tenant under this Lease, and
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in addition to all of Landlord's other remedies at law, in equity or under this
Lease, such Transfer shall be voidable at Landlord's election. In addition, this
Lease shall not, nor shall any interest of Tenant herein, be assignable by
operation of law without the written consent of Landlord. For purposes of this
Paragraph 16, if Tenant is a corporation, partnership or other. entity, any
transfer, assignment, encumbrance or hypothecation of twenty-five percent (25%)
or more (individually or in the aggregate) of any stock or other ownership
interest in such entity, and/or any transfer, assignment, hypothecation or
encumbrance of any controlling ownership or voting interest in such entity,
shall be deemed an assignment of this Lease and shall be subject to all of the
restrictions and provisions contained in this Paragraph 16. Notwithstanding the
foregoing, the immediately preceding sentence shall not apply to any transfers
of stock of Tenant if Tenant is a publicly-held corporation and such stock is
transferred publicly over a recognized security exchange or over-the-counter
market.
16.3 Landlord's Options. If at any time or from time to time during the
Term Tenant desires to effect a Transfer, Tenant shall deliver to Landlord
written notice ("Transfer Notice.") setting forth terms and provisions of the
proposed Transfer and the identity of the proposed assignee, sublessee or other
transferee (sometimes referred to hereinafter as a "Transferee"). Tenant shall
also deliver to Landlord with the Transfer Notice; a current financial statement
and financial statements for the preceding two (2) years of the Transferee, and
such other information concerning the business background and financial
condition of the proposed Transferee as Landlord may reasonably request.
Landlord shall have the option, exercisable by written notice delivered to
Tenant within twenty (20) days after Landlord's receipt of the Transfer Notice,
such financial statements and other information, either to:
(a) approve or disapprove such Transfer, which approval all not be
unreasonably withheld; or
(b) sublet from Tenant that portion of the Premises which Tenant
has requested to sublease at the rental and on the other terms set forth in this
Lease for the term set forth in Tenant's Notice, or, in the case of an
assignment or encumbrance, terminate this Lease with respect to the entire
Premises, which termination shall be effective thirty (30) days after Tenant's
receipt of Landlord's notice.
If Landlord exercises its option to sublease any such space from Tenant
following Tenant's request for Landlord's approval of the proposed sublease of
such space, (i) Landlord shall be responsible for the construction of any
partitions which Landlord reasonably deems necessary to separate such space from
the remainder of the Premises, and (ii) Landlord and any sub-subtenant or
assignee of Landlord with respect to such subleased space shall have the right
to use in common with Tenant all lavatories, corridors and lobbies which are
within the Premises and which are reasonably required for the use of such space.
16.4 Additional Conditions; Excess Rent. If Landlord does not exercise
its sublease or termination option and instead approves of the proposed Transfer
pursuant to Subparagraph 16.3(a) above, Tenant may enter into the proposed
Transfer with such proposed Transferee subject to the following further
conditions:
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(a) the Transfer shall be on the same terms set forth in the
Transfer Notice delivered to Landlord (if the terms have changed, Tenant must
submit a revised Transfer Notice to Landlord and Landlord shall have another
twenty (20) days after receipt thereof to make the election in Subparagraphs
16.3(a) or 16.3(b) above);
(b) no Transfer shall be valid and no Transferee shall take
possession of the Premises until an executed counterpart of the assignment,
sublease or other instrument affecting the Transfer has been delivered to
Landlord pursuant to which the Transferee shall expressly assume all of Tenant's
obligations under this Lease (or with respect to a sublease of a portion of the
Premises or for a portion of the Term, all of Tenant's obligations applicable to
such portion);
(c) no Transferee shall have a further right to assign, encumber or
sublet, except on the terms herein contained; and
(d) any rent or other economic consideration received by Tenant as
a result of such Transfer which exceeds, in the aggregate, (i) the total rent
which Tenant is obligated to pay Landlord under this Lease (prorated to reflect
obligations allocable to any portion of the Premises subleased), plus (ii) any
reasonable brokerage commissions, attorneys, fees and moving costs actually paid
by Tenant in connection with such Transfer, shall be paid to Landlord within ten
(10) days after receipt thereof as additional rental under this Lease, without
affecting or reducing any other obligations of Tenant hereunder.
16.5 Reasonable Disapproval. Landlord and Tenant hereby acknowledge that
Landlord's disapproval of any proposed Transfer pursuant to Subparagraph 16.3(a)
shall be deemed reasonably withheld if based upon any reasonable factor,
including, without limitation, any or all of the following factors: (a) the
proposed Transfer would result in more than two subleases of portions of the
Premises being in effect at any one time during the Term; (b) the net effective
rent payable by the Transferee (adjusted on a rentable square foot basis) is
less than the net effective rent then being quoted by Landlord for new leases in
the Building for comparable size space for a comparable period of time; (c) the
proposed Transferee is an existing tenant of the Building or is negotiating with
Landlord (or has negotiated with Landlord in the last six (6) months) for space
in the Building; (d) the proposed Transferee is a governmental entity; (e) the
portion of the Premises to be sublet or assigned is irregular in shape with
inadequate means of ingress and egress; (f) the use of the Premises by the
Transferee (i) is not permitted by the use provisions in Paragraph 8 hereof, or
(ii) violates any exclusive use granted by Landlord to another tenant in the
Building; (g) the Transfer would likely result in significant increase in the
use of the parking areas or Common Areas by the Transferee's employees or
visitors, and/or significant increase in the demand upon utilities and services
to be provided by Landlord to the Premises; (h) the Transferee does not have the
financial capability to fulfill the obligations imposed by the Transfer; (i) the
Transferee is not in Landlord's reasonable opinion of reputable or good
character or consistent with Landlord's desired tenant mix; or (j) the
Transferee is a real estate developer or landlord or is acting directly or
indirectly on behalf of a real estate developer or landlord.
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16.6 Permitted Controlled Transfers. Notwithstanding the provisions of
Subparagraphs 16.1, 16.2 and 16.3 above to the contrary, Tenant may assign this
Lease or sublet the Premises or any portion thereof, without Landlord's consent
and without extending any sublease or termination option to Landlord, to any
corporation which controls is controlled by or is under common control with
Tenant, or to any corporation resulting from a merger or consolidation with
Tenant, or to any person or entity which acquires all of the assets of Tenant's
business as a going concern, provided that: (a) at least twenty (20) days prior
to such assignment or sublease, Tenant delivers to Landlord the financial
statements and other financial and background information of the assignee or
sublessee described in Subparagraph 16.3 above; (b) if an assignment, the
assignee assumes, in full, the obligations of Tenant under this Lease (or if a
sublease, the sublessee of a portion of the Premises or Term assumes, in full,
the obligations of Tenant with respect to such portion); (c) the financial net
worth of the assignee or sublessee equals or exceeds that of Tenant as of the
date of execution of this Lease; (d) Tenant remains fully liable under this
Lease; (e) the use of the Premises under Article 8 remains unchanged; and (f)
such transaction is not entered into as a subterfuge to avoid the restrictions
and provisions of this Paragraph 16.
16.7 No Release. No Transfer shall release Tenant of Tenant's obligations
under this Lease or alter the primary liability of Tenant to pay the rent and to
perform all other obligations to be performed by Tenant hereunder. Landlord may
require that any Transferee remit directly to Landlord on a monthly basis, all
monies due Tenant by said Transferee. However, the acceptance of rent by
Landlord from any other person shall not be deemed to be a waiver by Landlord of
any provision hereof. Consent by Landlord to one Transfer shall not be deemed
consent to any subsequent Transfer. In the event of default by any Transferee of
Tenant or any successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against such Transferee or successor. Landlord may consent to
subsequent assignments of the Lease or sublettings or amendments or
modifications to the Lease with assignees of Tenant, without notifying Tenant,
or any successor of Tenant, and without obtaining its or their consent thereto
and any such actions shall not relieve Tenant of liability under this Lease.
16.8. Administrative and Attorneys' Fees. If Tenant effects a Transfer or
requests the consent of Landlord to any Transfer, then Tenant shall, upon
demand, pay Landlord a non-refundable administrative fee of Two Hundred Fifty
Dollars ($250.00), plus any reasonable attorneys' and paralegal fees incurred by
Landlord in connection with such Transfer or request for consent (whether
attributable to Landlord's in-house attorneys or paralegals or otherwise).
Acceptance of the $250.00 administrative fee and/or reimbursement of Landlord's
attorneys, and paralegal fees shall in no event obligate Landlord to consent to
any proposed Transfer.
16.9 Material Inducement. Tenant understands, acknowledges and agrees
that (a) Landlord's option to sublease from Tenant any space which Tenant
proposes to sublease or terminate this Lease upon any proposed assignment or
encumbrance of this Lease by Tenant as provided in Subparagraph 16.3(b) above
rather than approve the proposed sublease, assignment or encumbrance, and (b)
landlord's right to receive any excess consideration paid by a Transferee in
connection with an approved Transfer as provided in Subparagraph 16.4(d) above,
are a
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material inducement for Landlord's agreement to lease the remises to Tenant upon
the terms and conditions herein set forth.
17. Entry by Landlord. Landlord and its employees and agents shall at all
-----------------
times have the right to enter the Premises to inspect the same, to supply
janitorial service and any other service required to be provided by Landlord to
Tenant under this Lease, to exhibit the Premises to prospective lenders or
purchasers (or during the last year of the Term, to prospective tenants), to
post notices of non-responsibility, and/or to alter, improve or repair the
Premises or any other portion of the Building, all without being deemed guilty
of or liable for any breach of Landlord's covenant of quiet enjoyment or any
eviction of Tenant, and without abatement of rent. In exercising such entry
rights, Landlord shall endeavor to minimize, as reasonably practicable, the
interference with Tenant's business, and shall provide Tenant with reasonable
advance written notice of such entry except in emergency situations). For each
of the foregoing purposes, Landlord shall at all times have and retain a key
with which to unlock all of the doors in, upon and about the Premises, excluding
Tenant's vaults and safes, and Landlord shall have the means which Landlord may
deem proper to open said doors in an emergency in order to obtain entry to the
Premises. Any entry to the Premises obtained by Landlord by any of said means or
otherwise shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or an eviction
of Tenant from the Premises or any portion thereof, or grounds for any abatement
or reduction of rent. Any damages or losses on account of any such entry by
Landlord shall be Tenant's sole responsibility except as otherwise expressly
provided in Subparagraph 19.3. Nothing in this Paragraph 17 shall be construed
as obligating Landlord to perform any repairs, alterations or decorations,
except as otherwise expressly required in this Lease to be performed by
Landlord.
18. Utilities and Services.
-----------------------
18.1 Standard Utilities and Services. As long as Tenant has not committed
an uncured default under any of the provisions of this Lease, and subject to the
text, and conditions of this Lease and the obligations of Tenant as set forth
hereinbelow, Landlord shall furnish or cause to be furnished to the Premises the
following utilities and services, the costs of which shall be included in
Operating Expenses, unless otherwise specified below (Landlord reserves the
right to adopt non-discriminatory modifications and additions to the following
provisions from time to time):
(a) Landlord shall make available for Tenant's non-exclusive use,
the non-attended passenger elevator facilities of the Building, Monday through
Friday, except holidays, from 6:00 a.m. to 6:00 p.m., with one (1) elevator
available at all other times.
(b) Landlord shall furnish during "Business Hours" heating,
ventilation and air conditioning ("HVAC") for the Premises as required in
Landlord's judgment for the comfortable and normal occupancy of the Premises.
For purposes of this Subparagraph 18.1, the "Business Hours" shall mean 6:00
a.m. to 6:00 p.m. on Monday through Friday (except holidays). The cost of
maintenance and service calls to adjust and regulate the HVAC system shall be
charged to Tenant if the need for maintenance work results from either Tenant's
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adjustment of room thermostats or Tenant's failure to comply with its
obligations under this Paragraph 18, including keeping window coverings closed
as needed. Such work shall be charged at hourly rates equal to then-current
journeyman's wages for HVAC mechanics. If Tenant desires HVAC at any time other
than during Business Hours, Landlord shall provide such "after-hours" usage
after advance reasonable request by Tenant, and Tenant shall pay to Landlord, as
additional rent (and not as part of the Operating Expenses) the cost, as fairly
determined by Landlord, of such after-hours usage (as well as the cost of any
HVAC used by Tenant in excess of what Landlord considers reasonable or normal),
including any minimum hour charges for after-hours requests and any special
start-up costs for after-hours services which require a special start-up (such
as late evenings, weekends and holidays).
(c) Landlord shall furnish to the Premises twenty-four (24) hours
per day, reasonable quantities of electric current as required in Landlord's
judgment for normal lighting and fractional horsepower office business machines.
In no event shall Tenant's use of electric current ever exceed the capacity of
the feeders to the Building or the risers or wiring installation of the
Building. Landlord shall also furnish water to the Premises twenty-four (24)
hours per day for drinking and lavatory purposes, in such quantities as required
in Landlord's judgment for the comfortable and normal use of the Premises. If
Tenant requires or consumes water or electrical power in excess of what is
considered reasonable or normal by Landlord, Landlord may require Tenant to pay
to Landlord, as additional rent, the cost, as fairly determined by Landlord,
incurred for such excess usage.
(d) Landlord shall furnish janitorial services to the Premises five
(5) days per week pursuant to janitorial and cleaning specifications as may be
adopted by Landlord from time to time. No person(s) other than those persons
approved by Landlord shall be permitted to enter the Premises for such purposes.
Janitor service shall include ordinary dusting and cleaning by the janitor
assigned to such work and shall not include cleaning of carpets or rugs, except
normal vacuuming, or moving of furniture, interior window cleaning, coffee or
eating area cleaning and other special services. Such additional services may be
rendered by Landlord pursuant to written agreement with Tenant as to the extent
of such services and the payment of the cost thereof. Janitor service will not
be furnished on nights when rooms are occupied after 10:30 p.m. or to rooms
which are locked unless a key is furnished to the Landlord for use by the
janitorial contractor. Window cleaning shall be done only by Landlord at such
time and frequency as determined by Landlord at Landlord's sole discretion.
Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and
rubbish to the extent that the same exceeds the refuse and rubbish usually
attendant upon the use of the Premises as offices.
(e) At Landlord's option, Landlord may install water, electricity
and/or HVAC meters in the Premises to measure Tenant's consumption of such
utilities, including any after-hours and extraordinary usage described above.
Tenant shall pay to Landlord, within ten (10) days after demand, the cost of the
installation, maintenance and repair of such meter(s).
18.2 Tenant's Obligations. Tenant shall cooperate fully at all times with
Landlord, and abide by all reasonable regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the
Building's services and systems. Tenant shall not use any apparatus or device
in, upon or about the Premises which may in any way increase the
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amount of services or utilities usually furnished or supplied to the Premises or
other premises in the Building. In addition, Tenant shall not connect any
conduit, pipe, apparatus or other device to the Building's water, waste or other
supply lines or systems for any purpose. Neither Tenant nor its employees,
agents, contractors, licensees or invitees shall at any time enter, adjust,
tamper with, touch or otherwise in any manner affect the mechanical
installations or facilities of the Building.
18.3 Failure to Provide Utilities. Landlord's failure to furnish any of
the utilities and services described in Subparagraph 18.1 above when such
failure is caused by all or any of the following shall not result in any
liability of Landlord: (a) accident, breakage or pairs; (b) strikes, lockouts or
other labor disturbances or labor disputes of any such character; (c)
governmental regulation, moratorium. or other governmental action; (d)
inability, despite the exercise of reasonable diligence, to obtain electricity,
water or fuel; or (e) any other cause beyond Landlord's reasonable control. In
addition, in the event of the failure of any said utilities or services, Tenant
shall not be entitled to any abatement or reduction of rent (except as expressly
provided in Subparagraphs 20.3 and 21.2 if such failure is a result of a damage
or taking described therein), no eviction of Tenant shall result, and Tenant
shall not be relieved from the performance of any covenant or agreement in this
Lease. In the event of any stoppage or interruption of services or utilities,
Landlord shall diligently attempt to resume such services or utilities promptly
as is practicable.
19. Indemnification and Exculpation.
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19.1 Tenant's Indemnification of Landlord. Tenant shall be liable for,
and shall indemnify, defend and hold Landlord and Landlord's partners, officers,
directors, employees, agents, successors and assigns (collectively, "Landlord
Indemnified Parties") harmless from and against any and all claims, damages,
judgments, suits, causes of action, losses, liabilities and expenses, including
attorneys' fees and court costs (collectively, "Indemnified Claims"), arising or
resulting from (a) any act or omission of Tenant or any of Tenant's agents,
employees, contractors, subtenants, assignees, licensees or invitees
(collectively, "Tenant Parties"); (b) the use of the Premises and Common Areas
and conduct of Tenant's business by Tenant or any Tenant Parties, or any other
activity, work or thing done, permitted suffered by Tenant or any Tenant
Parties, in or about the Premises, Building or elsewhere on the Site; and/or (c)
any default by Tenant of any obligations on Tenant's part to be performed under
the terms of this Lease. In case any action or proceeding is brought against
Landlord or any Landlord Indemnified Parties by reason of any such Indemnified
Claims, Tenant, upon notice from Landlord, shall lend the same at Tenant's
expense by counsel approved in writing by Landlord, which approval shall not be
unreasonably withheld.
19.2 Tenant's Assumption of Risk and Waiver. Except to the extent
specifically included in Landlord's indemnification obligations set forth in
Subparagraph 19.3 below, Tenant, as a material part of the consideration to
Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified
Parties shall be liable to Tenant for, and Tenant expressly assumes the risk of
and waives any and all claims it may have against Landlord or any Landlord
Indemnified Parties with respect to, any and all damage to property or injury to
persons in, upon or about the Premises, the Building or Site resulting from any
act or omission of Landlord or of any Landlord
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Indemnified Party (whether or not negligent) or from any other cause whatsoever,
including, without limitation, (a) any damage to property entrusted to employees
of the Building, (b) any loss of or damage to property by theft or otherwise,
and (c) any injury or damage to persons or property resulting from any casualty,
explosion, falling plaster or other masonry or glass, steam, gas, electricity,
water or rain which may leak from any part of the Building or from the pipes,
appliances or plumbing works therein or from the roof, street or subsurface or
from any other place, or resulting from dampness, or any other cause whatsoever.
Landlord or its agents shall not be liable for interference with the light or
other intangible rights.
19.3 Landlord's Indemnification. Notwithstanding the provisions
Subparagraph 19.2 to the contrary, but subject to the limitation on Landlord's
liability set forth in Paragraph 35 below, Landlord shall liable for, and shall
indemnify, defend and hold Tenant and Tenant's partners, officers, directors,
employees, agents, successors and assigns (collectively, "Tenant Indemnified
Parties") harmless from and against, any injury to persons or damage to property
located on the Premises or Site (but not for injury to, or interference with,
Tenant's or any Tenant Indemnified Parties, business or for consequential
damages), to the extent such damage or injury arises or results from (a) the
gross negligence or willful misconduct of Landlord, its agents or employees
and/or (b) the default by Landlord any obligations on Landlord's part to be
performed under the terms this Lease; provided, however, that Landlord's
indemnity shall not apply or extend to any such damage or injury which is
covered by any insurance maintained by Tenant or any Tenant Indemnified Parties
(or would have been covered had Tenant obtained the insurance as required under
this Lease). In case any action or proceeding is brought against Tenant or any
Tenant Indemnified Parties by reason of any such injury damage indemnified by
Landlord as set forth hereinabove, Landlord, upon notice from Tenant, shall
defend the same at Landlord's expense counsel approved in writing by Tenant,
which approval shall not be unreasonably withheld.
19.4 Survival; No Release of Insurers. Tenant's and Landlord's
indemnification obligations under Subparagraphs 19.1 and 19.3, respectively,
shall survive the expiration or earlier termination of this Lease. Tenant's
covenants, agreements and indemnification in Subparagraphs 19.1 and 19.2 above,
and Landlord's indemnification in Subparagraph 19.3 above, are not intended to
and shall not relieve any insurance carrier of its obligations under policies
required to be carried by Landlord or Tenant, respectively, pursuant to the
provisions of this Lease.
20. Damage or Destruction.
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20.1 Landlords Rights and Obligations. In the event the Premises or any
part of the Building is damaged by fire or other casualty to an extent not
exceeding twenty-five percent (25%) of the full replacement cost thereof, and
Landlord's contractor estimates in a writing.. livered to the parties that the
damage thereto is such that the Building and/or Premises may be repaired,
reconstructed or restored to substantially its condition immediately prior to
such damage within one hundred twenty (120) days from the date of such casualty,
and Landlord will receive insurance proceeds sufficient to cover the costs such
repairs, reconstruction and restoration (including proceeds from Tenant and/or
Tenant's insurance which Tenant is required to deliver to Landlord pursuant to
Subparagraph 20.2 below), then Landlord shall commence and
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proceed diligently with the work of pair, reconstruction and restoration and
this Lease shall continue full force and effect. If, however, the Premises or
any other part the Building is damaged to an extent exceeding twenty-five
percent (25%) of the full replacement cost thereof, or Landlord's contractor
estimates that such work of repair, reconstruction and restoration will require
longer than one hundred twenty (120) days to complete, Landlord will not receive
insurance proceeds (and/or proceeds from Tenant, as applicable) sufficient to
cover the costs of such repairs, construction and restoration, then Landlord may
elect to either:
(a) repair, reconstruct and restore the portion of the Building and
Premises damaged by such casualty (including the Leasehold Improvements and
Tenant Changes), in which case this Lease all continue in full force and effect;
or
(b) terminate this Lease effective as of the date which is thirty (30)
days after Tenant's receipt of Landlord's election to so terminate.
Under any of the conditions of this Subparagraph 20.1, Landlord shall give
written notice to Tenant of its intention to repair or terminate within the
later of sixty (60) days after the occurrence of such casualty, or fifteen (15)
days after Landlord's receipt of the estimate from Landlord's contractor.
20.2 Tenant's Costs and Insurance Proceeds. In the event of any damage or
destruction of all or any part of the Premises, Tenant shall immediately: (a)
notify Landlord thereof; and (b) deliver to Landlord all insurance proceeds
received by Tenant with respect to the Leasehold Improvements and Tenant Changes
in the Premises to the extent such items are not covered by Landlord's casualty
insurance obtained by Landlord pursuant to Paragraph 23 below (excluding this
Lease upon thirty (30) days' prior written notice to Tenant.
20.5 Damage Near End of Term. In addition to its termination rights in
Subparagraphs 20.1 and 20.4 above, Landlord shall have the right to terminate
this Lease if any damage to the Building or Premises occurs during the last
twelve. (12) months of the Term of this Lease and Landlord's contractor
estimates in a writing delivered to the parties that the repair, reconstruction
or restoration of such damage cannot be completed within the earlier of (a) the
scheduled expiration date of the Lease Term, or (b) sixty (60) days after the
date of such casualty.
20.6 Waiver of Termination Right. The provisions of California Civil Code
Section 1932, Subsection 2, and Section 1933, Subsection 4 and any successor
statutes thereof permitting Tenant to terminate this Lease as a result of any
damage or destruction) are hereby expressly waived by Tenant.
21. Eminent Domain.
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21.1 Substantial Taking. Subject to the provisions of Subparagraph 21.4
below, in case the while of the premises, or such part thereof as shall
substantially interfere with Tenant's use and occupancy of the Premises as
reasonably determined by Landlord, shall be taken for any
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public or quasi-public purpose by any lawful power or authority by exercise of
the right of appropriation, condemnation or eminent domain, or sold to prevent
such taking, either party shall have the right to terminate this Lease effective
as of the date possession is required to be surrendered to said authority.
21.2 Partial Taking; Abatement of Rent. In the event of a taking of a
portion of the Premises which does not substantially interfere with the conduct
of Tenant's business, then, except as otherwise provided in the immediately
following sentence, neither party shall have the right to terminate this Lease
and Landlord shall thereafter proceed to make a functional unit of the remaining
portion of the Premises (but only to the extent Landlord receives proceeds
therefore from the condemning authority), and rent shall be abated with respect
to the part of the Premises which Tenant shall be so deprived on account of such
taking. Notwithstanding the immediately preceding sentence to the contrary, if
any part of the Building or the Site shall be taken (whether or not such taking
substantially interferes with Tenant's use of the Premises), Landlord may
terminate this Lease upon thirty (30) days' prior written notice to Tenant as
long as Landlord also terminates leases of other tenants leasing comparably
sized space within the Building for comparable lease terms.
21.3 Condemnation Award. Subject to the provisions of Subparagraph 21.4
below, in connection with any taking of the Premises Building, Landlord shall be
entitled to receive the entire amount of any award which may be made or given in
such taking or condemnation, without deduction or apportionment for any estate
or interest of Tenant, it being expressly understood and agreed by Tenant that
no portion of any such award shall be allowed or paid to Tenant for any so-
called bonus or excess value of this Lease, and such bonus excess value shall be
the sole property of Landlord. Tenant shall not assert any claim against
Landlord or the taking authority for any compensation because of such taking
(including any claim for bonus or excess value of this Lease); provided,
however, if any portion of the Premises is taken, Tenant shall be granted the
right to recover from e condemning authority (but not from Landlord) any
compensation as be separately awarded or recoverable by Tenant for the taking of
Tenant's furniture, fixtures, equipment and other personal property within the
Premises, for Tenant's relocation expenses, and for any loss of goodwill or
other damage to Tenant's business by reason of such taking.
21.4 Temporary Taking. In the event of a taking of the Premises or any
part thereof for temporary use, (a) this Lease shall be and remain affected
thereby and rent shall not abate, and (b) Tenant shall be titled to receive for
itself such portion or portions of any award made for such use with respect to
the period of the taking which is within the Term, provided that if such taking
shall remain in force at the expiration or earlier termination of this Lease,
Tenant shall then pay to Landlord a sum equal to the reasonable cost of
performing Tenant's obligations under Paragraph 11 with respect to surrender of
the Premises and upon such payment shall be excused from such obligations. For
purpose of this Subparagraph 21.4, a temporary taking shall be defined as a
taking for a period of two hundred seventy (270) days or less.
22. Tenant's Insurance.
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24
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22.1 Types of Insurance. On or before the earlier of the Commencement Date
or the date Tenant commences or causes to be commenced any work of any type in
or on the Premises pursuant to this Lease, and continuing during the entire
Term, Tenant shall obtain and keep in full force and effect, the following
insurance:
(a) All Risk insurance, including fire and extended coverage,
sprinkler leakage (including earthquake sprinkler leakage), vandalism, malicious
mischief and earthquake coverage upon property of every description and kind
owned by Tenant and located in the Premises or Building, or for which Tenant is
legally liable or installed by or on behalf of Tenant including, without
limitation, furniture, equipment and any other personal property, and the Tenant
Changes to the extent required under Subparagraph 14.1(c) above, (but excluding
the initial Leasehold Improvements previously existing or installed the
Premises), in an amount not less then the full replacement cost thereof. In the
event that there shall be a dispute as to the amount which comprises full
replacement cost, the decision of Landlord or the mortgagees of Landlord shall
control.
(b) Comprehensive general liability insurance coverage, including
personal injury, bodily injury (including wrongful death), broad form property
damage, operations hazard, owner's protective coverage, contractual liability
(including Tenant's indemnification obligations under this Lease, including
Paragraph 19 hereof), liquor liability (if Tenant serves alcohol on the
Premises), products and completed operations liability, and owned/non-owned auto
liability, with an initial combined single limit of liability of not less than
Two Million Dollars ($2,000,000.00). The limits of liability of such
comprehensive general liability insurance shall be increased every five (5)
years during the Term of this Lease to an amount reasonably required by
Landlord.
(c) Worker's compensation and employer's liability insurance, in
statutory amounts and limits.
(d) Loss of income, extra expense and business interruption insurance
in such amounts as will reimburse Tenant for direct or indirect loss of earnings
attributable to all perils commonly insured against by prudent tenants or
attributable to prevention of access to the Premises, Tenant's parking areas or
to the Building as a result of such perils.
(e) Any other form or forms of insurance as Tenant or Landlord or the
mortgagees of Landlord may reasonably require from time to time, in form,
amounts and for insurance risks against which a prudent tenant would protect
itself, but only to the extent such risks and amounts are available in the
insurance market at commercially reasonable costs.
22.2 Requirements. Each policy required to be obtained by Tenant hereunder
shall: (a) be issued by insurers authorized to do business in the state in which
the Building is located and rated not less than financial class X, and not less
than policyholder rating A in the most recent version of Best's Key Rating Guide
(provided that, in any event, the same insurance company shall provide the
coverages described in Subparagraphs 22.1 (a) and 22.1 (d) above); (b) be in
form reasonably satisfactory from time to time to Landlord; (c) name Tenant as
named
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insured thereunder and shall name Landlord and, at Landlord's request,
Landlord's mortgagees and ground lessors of which Tenant has been informed in
writing, as additional insured thereunder, all as their respective interests may
appear; (d) shall not have a deductible amount exceeding Five Thousand Dollars
($5,000.00); (e) specifically provide that the insurance afforded by such policy
for the benefit of Landlord and Landlord's mortgagees and ground lessors shall
be primary, and any insurance carried by Landlord or Landlord's mortgagees and
ground lessors shall be excess and non-contributing; (f) except for worker's
compensation insurance, contain an endorsement that the insurer waives its right
to subrogation as described in Paragraph 24 below; and (9) contain an
undertaking by the insurer to notify Landlord (and the mortgagees and ground
lessors of Landlord who are named as additional insured) in writing not less
than thirty (30) days prior to any material change, reduction in coverage,
cancellation or other termination thereof. Tenant agrees to deliver to Landlord,
as soon as practicable after the placing of the required insurance, but in no
event later than ten (10) days after the date Tenant takes possession of all or
any part of the Premises, certified copies of each such insurance policy (or
certificates from the insurance company evidencing the existence of such
insurance and Tenant's compliance with the foregoing provisions of this
Paragraph 22). Tenant shall cause replacement policies or certificates to be
delivered to Landlord not less than thirty (30) days prior to the expiration of
any such policy or policies. If any such initial or replacement policies or
certificates are not furnished within the time(s) specified herein, Tenant shall
be deemed to be in material default under this Lease without the benefit of any
additional notice or cure period provided n Subparagraph 25.1 below, and
Landlord shall have the right, but not the obligation, to procure such policies
and certificates at Tenant's expense.
23. Landlord's Insurance. During the Term, Landlord shall be required to
--------------------
insure the Building, the Premises, the Leasehold Improvements initially
installed in the Premises pursuant to Exhibit "F" and certain Tenant Changes to
----------
the extent described in Subparagraph 14.1(c) above (excluding, however, Tenant's
furniture, equipment and other personal property and those Tenant Changes which
Tenant is obligated to insure pursuant to the provisions of Subparagraphs
14.1(c) and 22.1(a) above) against damage by fire and standard extended coverage
perils and general liability insurance, in such reasonable amounts and with such
reasonable deductibles as would be carried by a prudent owner of a similar
building in San Francisco, Ca. At Landlord's option, such insurance may be
carried under any blanket or umbrella policies which Landlord has in force for
other buildings and projects. In addition, at Landlord's option, Landlord may
elect to self-insure all or any part of such required insurance coverage.
Landlord may, but shall not be obligated to, carry any other form or forms of
insurance as Landlord or the mortgagees or ground lessors of Landlord may
reasonably determine is advisable. The cost of insurance obtained by Landlord
pursuant to this Paragraph 23 shall be included in operating expenses.
24. Waivers of Subrogation.
----------------------
24.1 Mutual Waiver of Parties. Landlord and Tenant hereby waive their
rights against each other as well as the officers, partners, directors,
employees, agents and authorized representatives of Landlord and Tenant with
respect to any claims or damages or losses including any claims for bodily
injury to persons and/or damage to property) which are caused by or result from
(a) risks insured against under any insurance policy carried by Landlord or
Tenant (as the case may be) pursuant to the provisions of this Lease and
enforceable at the time of such
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damage, loss and/or injury, or (b) risks which would have been covered under any
insurance required to be obtained and maintained by Landlord or Tenant (as the
case may be) under Paragraphs and 23 of this Lease (as applicable) had such
insurance been obtained and maintained as required therein. Foregoing waivers
shall in addition to, and not a limitation of, any other waivers or leases
contained in this Lease.
24.2 Waiver of insurer. Each party shall cause each insurance policy
required to be obtained by it pursuant to Paragraphs 22 and 23 (excluding
Tenant's worker's compensation insurance) to provide that the insurer waives all
rights of recovery by way of subrogation against either Landlord or Tenant, as
the case may be, and against the officers, employees, agents, partners and
authorized representatives of Landlord and Tenant in connection with any claims,
losses and damages covered by such policy. If either party fails to maintain
insurance required hereunder, such insurance shall be deemed to be self-insured
with a deemed full waiver of subrogation as set forth in the immediately
preceding sentence.
25. Tenant's Default and Landlord's Remedies.
----------------------------------------
25.1 Tenant's Default. The occurrence of any one or more of the following
events shall constitute a default under this Lease by Tenant:
(a) the vacation or abandonment of the Premises by Tenant.
Abandonment is herein defined to include, but is not limited to, any absence by
Tenant from the Premises for five (5) business days or longer while in default
of any other provision of this Lease;
(b) the failure by Tenant to make any payment of rent or additional
rent or any other payment required to be made by Tenant hereunder, as and when
due;
(c) the failure by Tenant to timely perform any of those covenants
described in Paragraphs 8.2, 15, 22.2 and 27.1 of this Lease, which Paragraphs
expressly provide that such failure shall be deemed a default by Tenant under
this Lease without any additional notice or cure periods;
(d) the failure by Tenant to observe or perform any of the express or
implied covenants or provisions of this Lease to be served or performed by
Tenant, other than as specified in Subparagraphs 25.1(a), (b) or (c) above,
where such failure shall continue for a period of ten (10) days after written
notice thereof from Landlord to Tenant; provided, however, that any such notice
shall be in lieu of, and not in addition to, any notice required under
California Code of Civil Procedure, Section 1161 and provided further that if
the nature of Tenant's default is such that more than ten (10) days are
reasonably required for its cure, then Tenant shall not be deemed to be in
default if Tenant shall commence such cure within said ten (10) day period and
thereafter diligently prosecute such cure to completion, which completion shall
occur not later than sixty (60) days from the date of such notice from Landlord;
and
(e) (i) the making by Tenant of any general assignment for the benefit
of creditors, (ii) the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or
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a petition for reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against the Tenant, the same
is dismissed within sixty (60) days), (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within sixty (60) days, or (iv) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease where such seizure is not
discharged within sixty (60) days.
25.2 Landlord's Remedies; Termination. In the event of any such default by
Tenant, in addition to any other remedies available to Landlord under this
Lease, at law or in equity, Landlord shall have the immediate option to
terminate this Lease and all rights of Tenant hereunder. In the event that
Landlord shall elect to so terminate this Lease, then Landlord may recover from
Tenant:
(a) the worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus
(b) the worth at the time of the award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(c) the worth at the time of award of the amount by which he unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that Tenant proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which, in the ordinary course of things, would be likely to
result therefrom including, but not limited to: "Unreimbursed Leasehold
Improvement Costs" (as defined below); attorneys' fees; brokers, commissions;
the costs of refurbishment, alterations, renovation and repair of the Premises;
and removal including the repair of any damage caused by such removal) and
storage (or disposal) of Tenant's personal property, equipment, fixtures, Tenant
Changes, Leasehold Improvements and any other items which Tenant is required
under this Lease to remove but does not remove. As used herein, the term
"Unreimbursed Leasehold Improvement Costs" shall mean the product when
multiplying (i) the sum of any Leasehold Improvement allowance plus any other
costs provided, paid or incurred by Landlord in connection with the design and
construction of the initial Leasehold Improvements installed in the Premises
prior to he Commencement Date pursuant to Exhibit "F", by (ii) the fraction, he
----------
numerator of which is the number of months of the Term of this Lease not yet
elapsed as of the date on which this Lease is terminated (excluding any
unexercised renewal options), and the denominator of which is the total number
of months of the Term of this Lease (excluding any unexercised renewal options).
For example, if the total costs paid or incurred by Landlord with respect to the
initial Leasehold Improvements was $100,000.00, the Lease Term was sixty (60)
months, and the Lease was terminated by reason of Tenant's default at the end of
twelve (12) months, the Unreimbursed Leasehold Improvement Costs would be equal
to $80,000.00 (i.e., $80,000.00 equals $100,000.00 x 48/60).
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As used in Subparagraphs 25.2(a) and 25.2(b) above, the "worth at the time of
award" is computed by allowing interest at the Interest Rate set forth in
Subparagraph 1.18. As used in Subparagraph 25.2(c) above, the "worth at the
time of award" is computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
25.3 Landlord's Remedies; Re-Entry Rights. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord under
this Lease, at law or in equity, Landlord shall also have the right, with or
without terminating this Lease, to re-enter the Premises and remove all persons
and property from the Premises; such property may be removed, stored and/or
disposed of pursuant to Subparagraph 14.4 of this Lease or any other procedures
permitted by applicable law. No re-entry or taking possession of the Premises
by Landlord pursuant to this Subparagraph 25.31 and no acceptance of surrender
of the Premises or other action on Landlord's part, shall be construed as an
election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination hereof be decreed by a court of
competent jurisdiction.
25.4 Landlord's Remedies; Continuation of Lease. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord under
this Lease, at law or in equity, Landlord all have the right to continue this
Lease in full force and effect, whether or not Tenant shall have abandoned the
Premises. The foregoing remedy shall also be available to Landlord pursuant to
California Civil Code Section 1951.4 and any successor statute thereof in the
event Tenant has abandoned the Premises. In the event Landlord elects to
continue this Lease in full force and effect pursuant to this Subparagraph 25.4,
then Landlord shall be entitled to enforce all of the rights and remedies under
this Lease, including the right to recover rent as it becomes due. Landlord's
election not to terminate this Lease pursuant to this Subparagraph 25.4 or
pursuant to any other provision of this Lease, at law or in equity, shall not
preclude Landlord from subsequently electing to terminate this Lease or pursuing
any of its other remedies.
25.5 Rights and Remedies Cumulative. All rights, options and remedies of
Landlord contained in this Paragraph 25 and elsewhere in his Lease (including
Paragraph 30 below) shall be construed and held to be cumulative, and no one of
them shall be exclusive of the other, and Landlord shall have the right to
pursue any one or all of such remedies or any other remedy or relief which may
be provided by law or in equity, whether or not stated in this Lease. Nothing
in this Paragraph 25 shall be deemed to limit or otherwise affect Tenant's
indemnification of Landlord pursuant to any provision of this Lease.
26. Landlord's Default. Landlord shall not be in default in the performance of
------------------
any obligation required to be performed by Landlord under this Lease unless
Landlord has failed to perform such obligation within thirty (30) days after the
receipt of written notice from Tenant specifying in detail Landlord's failure to
perform; provided however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be deemed in default if it commences such performance within such
thirty (30) day period and thereafter diligently pursues the same to completion.
Upon any such uncured default by Landlord, Tenant may exercise any of its rights
provided in law or at equity; provided, however: (a) Tenant shall have no right
to offset or abate rent in the event of any
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default by Landlord under this Lease, except to the extent offset rights are
specifically provided to Tenant in this Lease; and (b) Tenant's rights and
remedies hereunder shall be limited to the extent (i) Tenant has expressly
waived in this Lease any of such rights or remedies and/or (ii) this Lease
otherwise expressly limits Tenant's rights or remedies, including the limitation
on Landlord's liability contained in Paragraph 35 hereof.
27. Subordination. Without the necessity of any additional document being
-------------
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee of a mortgage or a beneficiary of a deed
of trust now or hereafter encumbering all or any portion of the Building or
Site, or any lessor of any ground or master lease now or hereafter affecting all
or any portion of the Building or Site, this Lease shall be subject and
subordinate at all times to such ground or master leases (and such extensions
and modifications thereof), and to the lien of such mortgages and deeds of trust
(as well as to any advances made thereunder and to all renewals, replacements,
modifications and extensions thereof). As a condition precedent to the
effectiveness of any such subordination of this Lease to any future ground or
master leases or the lien of any future mortgages or deeds of trust, Landlord
shall provide to Tenant a commercially reasonable non-disturbance and attornment
agreement in favor of Tenant executed by such future ground lessor, master
lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall
provide that Tenant's quiet possession of the Premises shall not be disturbed on
account of such subordination to such future lease or lien so long as Tenant is
not in default under any provisions of this Lease. Notwithstanding the
foregoing, Landlord shall have the right to subordinate or cause to be
subordinated any or all ground or master Leases or the lien of any or all
mortgages or deeds of trust to this Lease. In the event that any ground or
master lease terminates for any reason or any mortgage or deed of trust is
foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the
election of Landlord's successor in interest, Tenant shall attorn to and become
the tenant of such successor. Tenant hereby waives its rights under any current
or future law which gives or purports to give Tenant any right to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder in
the event of any such foreclosure proceeding or sale. Tenant covenants and
agrees to execute and deliver to Landlord within ten (10) days after receipt of
written demand by Landlord and in the form reasonably required by Landlord, any
additional documents evidencing the priority or subordination of this Lease with
respect to any such ground or master lease or the lien of any such mortgage or
deed of trust. Should Tenant fail to sign and return any such documents within
said 10-day period, Tenant shall be in default hereunder without' the benefit
of. any additional notice or cure periods specified in Subparagraph 25.1 above.
28. Estoppel Certificate
--------------------
28.1 Tenant's Obligations. Within ten (10) business days following
Landlord's written request, Tenant shall execute and deliver to Landlord an
estoppel certificate, in a form substantially similar o the form of Exhibit "G"
-----------
attached hereto, certifying: (a) the Commencement Date of this Lease; (b) that
this Lease is unmodified and in full force and effect (or, if modified, that
this Lease is in full force and effect as modified, and stating the date and
nature of such modifications); (c) the date to which the rent and other sums
payable under this Lease have been paid; (d) that there are not, to the best of
Tenant's knowledge, any defaults under this Lease by either Landlord or Tenant,
except as specified in such certificate; and (e)
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such other matters as are reasonably requested by Landlord. Any such estoppel
certificate delivered pursuant to this Subparagraph 28.1 may be relied upon by
any mortgagee, beneficiary, purchaser or prospective purchaser of any portion of
the Site, as well as their assignees.
28.2 Tenant's Failure to Deliver. Tenant's failure to deliver such
estoppel certificate within such time shall be conclusive upon Tenant that: (a)
this Lease is in full force and effect without modification, except as may be
represented by Landlord; (b) there are no uncured defaults in Landlord's or
Tenant's performance; and (c) not more than one (1) month's rental has been paid
in advance. Tenant shall indemnify, defend (with counsel reasonably approved by
Landlord in writing) and hold Landlord harmless from and against any and all
claims, judgments, suits, causes of action, damages, losses, liabilities and
expenses (including attorneys' fees and court costs) attributable to any failure
by Tenant to timely deliver any such estoppel certificate to Landlord pursuant
to Subparagraph 28.1 above.
29. Building Planning. If Landlord requires the Premises for use by another
------------------
tenant or for other reasons connected with the Building planning program, then
Landlord shall have the right, upon sixty (60) days' prior written notice to
Tenant, to relocate the Premises to other space in the Building of substantially
similar size as the Premises, and with tenant improvements of substantially
similar age, quality and layout as then existing in the Premises. In the event
of any such relocation, Landlord shall pay for the cost of providing
substantially similar tenant improvements (but not any furniture or personal
property), and Landlord shall reimburse Tenant, within thirty (30) days after
Landlord's receipt of invoices and paid receipts, for the reasonable moving,
telephone installation and stationery reprinting costs actually paid for by
Tenant in connection with such relocation. If Landlord so relocates Tenant, the
terms and conditions of this Lease shall remain in full force and effect and
apply to the new space, except that (a) a revised Exhibit "B" shall become part
----------
of this Lease and shall reflect the location of the new space, (b) Paragraph 1
of this Lease shall be amended to include and state all correct data as to the
new space, and (c) such new space shall thereafter be deemed to be the
"Premises". Notwithstanding the foregoing provisions of this Paragraph 29 to the
contrary, if the new space contains more Rentable Square Feet than the original
Premises, Tenant shall not be obligated to pay any more Annual Basic Rent or
Excess Expenses than otherwise applicable to the original Premises. Landlord and
Tenant agree to cooperate fully in order to minimize the inconvenience of Tenant
resulting from such relocation.
30. Performance by Tenant: Interest and Late Charges.
--------------------------------------------------
30.1 Landlord's Right to Perform. Except as specifically provided
otherwise in this Lease, all covenants and agreements by Tenant under this Lease
shall be performed by Tenant at Tenant's sole cost and expense and without any
abatement or offset of rent. If Tenant shall fai1 to pay any sum of money (other
than Annual Basic Rent) or perform any other act on its part to be paid or
performed hereunder and such failure shall continue for three (3) days with
respect to monetary obligations (or ten (10) days with respect to non-monetary
obligations) after Tenant's receipt of written notice thereof from Landlord,
Landlord may, without waiving or releasing Tenant from any Tenant's obligations,
make such payment or, perform such other act behalf of Tenant. All sums so paid
by Landlord and all necessary incidental costs incurred by Landlord in
performing such other acts shall be payable by Tenant to Landlord within five
(5) days after
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demand therefor as additional rent. The foregoing rights are in addition to any
and all remedies available to Landlord upon Tenant's default as described in
Paragraph 25.
30.2 Interest. If any monthly installment of Annual Basic Rent or Excess
Expenses, or other amount payable by Tenant hereunder is not received by
Landlord by the date when due, it shall bear interest at the Interest Rate set
forth in Subparagraph 1.18 from the date due until paid. All interest, and any
late charges imposed pursuant to Subparagraph 30.3 below shall be considered
additional rent due from Tenant to Landlord under the terms of this Lease.
30.3 Late Charges. Tenant acknowledges that, in addition to interest costs,
the late payments by Tenant to Landlord of any Annual Basic Rent or other sums
due under this Lease will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and impractical
to fix. Such other costs include, without limitation, processing, administrative
and accounting charges and late charges that may be imposed on Landlord by the
terms of any mortgage, deed of trust or related loan documents encumbering the
Premises, the Building or the Site. Accordingly, if any monthly installment of
Annual Basic Rent or Excess Expenses or any other amount payable by Tenant
hereunder is not received by Landlord by the due date thereof, Tenant shall pay
to Landlord an additional sum of ten percent (10%) of the overdue amount as a
late charge, but in no event more than the maximum late charge allowed by law
The parties agree that such late charge represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of any late payment as
hereinabove referred to by Tenant, and the payment of late charges and interest
are distinct and separate in that the payment of interest is to compensate
Landlord for the use of Landlord's money by Tenant while the payment of late
charges is to compensate Landlord for Landlord's processing, administrative and
other costs incurred by Landlord as a result of Tenant's delinquent payments.
Acceptance of a late charge or interest shall not constitute a waiver of
Tenant's default with respect to the overdue amount or prevent Landlord from
exercising any of the other rights and remedies available to Landlord under this
Lease or at law or in equity now or hereafter in effect.
31. Modification and Cure Rights of Landlord's Mortgagees and Lessors.
-----------------------------------------------------------------
31.1 Modifications. If, in connection with Landlord's obtaining or
entering into any financing or ground lease for any portion of the Building or
Site, the lender or ground lessor shall request modifications to this Lease,
Tenant shall, within ten (10) days after request therefor, execute an amendment
to this Lease including such modifications, provided such modifications are
reasonable, do not increase the obligations of Tenant hereunder, or adversely
affect the leasehold estate created hereby or Tenant's rights hereunder.
31.2 Cure Rights. In the event of any default on the part of Landlord,
Tenant will give notice by registered or certified mail to any beneficiary of a
deed of trust or mortgagee covering the Premises or ground lessor of Landlord
whose address shall have been furnished to Tenant and shall offer such
beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the
default (including with respect to any such beneficiary or mortgagee, time to
obtain possession of the Premises, subject to this Lease and Tenant's rights
hereunder by power of sale or a judicial foreclosure, if such should prove
necessary to effect a cure).
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32. Transfer of Owner's Interest. The term "Landlord" as used in this Lease, so
----------------------------
far as covenants or obligations on the part of the Landlord are concerned,
shall be limited to mean and include only the owner or owners, at the time in
question, of the fee title to, or a lessee's interest in a ground lease of, the
Site. In the event of any transfer or conveyance of any such title or interest
(other than a transfer for security purposes only), the transferor shall be
automatically relieved of all covenants and obligations on the part of Landlord
contained in this Lease accruing after the date of such transfer or conveyance.
Landlord and Landlord's transferees and assignees shall have the absolute right
to transfer all or any portion of their respective title and interest in the
Site, the Building, the Premises and/or this Lease without the consent of
Tenant, and such transfer or subsequent transfer shall not be deemed a violation
on Landlord's part any of the terms and conditions of this Lease.
33. Quiet Enjoyment. Landlord covenants and agrees with Tenant that, upon
---------------
Tenant performing all of the covenants and provisions on Tenant's part to be
observed and performed under this Lease (including payment of rent hereunder),
Tenant shall and may peaceably and quietly have, hold and enjoy the Premises in
accordance with and subject to the terms and conditions of this Lease.
34. Parking.
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34.1 Tenant's Parking privileges. During the Term of this Lease, Landlord
shall lease to Tenant, and Tenant shall lease from Landlord, the number of
parking privileges specified in Subparagraph 1.20 hereof for use by Tenant's
employees in the common parking areas of the Building, as designated by Landlord
from time to time. Landlord shall at all times have the right to establish and
modify the nature and extent of the parking areas for the Building (including
whether such areas shall be surface, underground and/or other structures) as
long as Tenant is provided the number of parking privileges designated in
Subparagraph 1.20. In addition, Landlord may, in its sole discretion, assign any
unreserved and unassigned parking privileges, and/or make all or a portion of
such privileges unreserved/reserved.
34.2 Parking Rules. The use of the parking areas shall be subject to the
Parking Rules and Regulations attached hereto as Exhibit "H" and any other
-----------
reasonable, non-discriminatory rules and regulations adopted by Landlord and/or
Landlord's parking operators from time to time, including any system for
controlled ingress and egress and charging visitors and invitees, with
appropriate provision for validation of such charges. Tenant shall not use more
parking privileges than its allotment and shall not use any parking spaces
specifically assigned by Landlord to other tenants or for such other uses as
visitor parking. Tenant's parking privileges shall be used only for parking by
vehicles no larger than normally sized passenger automobiles or pick-up trucks.
Tenant shall not permit or allow any vehicles that belong to or are controlled
by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to
be loaded, unloaded, or parked in areas other than those designated by Landlord
or such activities. If Tenant permits or allows any of the prohibited activities
described herein, then Landlord shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove or tow
away the vehicle involved and charge the cost thereof to Tenant, which cost
shall be immediately payable by Tenant upon demand by Landlord.
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35. Limitation on Landlord's Liability. Notwithstanding anything contained in
----------------------------------
this Lease to the contrary, the obligations of Landlord under this Lease
(including any actual or alleged breach or default by Landlord) do not
constitute personal obligations of the individual partners, directors, officers
or shareholders of Landlord or Landlord's partners, and Tenant shall not seek
recourse against the individual partners, directors, officers or shareholders of
Landlord or Landlord's partners, or any of their personal assets for
satisfaction of any liability with respect to this Lease. In addition, in
consideration of the benefits accruing hereunder to Tenant and notwithstanding
anything contained in this Lease to the contrary, Tenant hereby covenants and
agrees for itself and all of its successors and assigns that the liability of
Landlord for its obligations under this Lease (including any liability as a
result of any actual or alleged failure, breach or default hereunder by
Landlord), shall be limited solely to, and Tenant's and its successors, and
assigns' sole and exclusive remedy shall be against, Landlord's interest in the
Site and proceeds therefrom, and no other assets of Landlord.
36. Hazardous Materials.
-------------------
36.1 Tenant's Covenants. In addition to its other obligations under this
Lease (including Paragraph 8 hereof), Tenant covenants to comply with all laws
relating to Hazardous Materials with respect to the Premises and the Building.
Except for general office supplies typically used in an office area in the
ordinary course of business (such as copier toner, liquid paper, glue, ink, and
cleaning solvents), for use in the manner for which they were designed and only
in accordance with all Hazardous Materials laws and the highest standards
prevailing in the industry for such use, and then only in such amounts as may be
normal for the office business operations conducted by Tenant on the Premises,
neither Tenant nor any Tenant Parties (as defined in Subparagraph 19.1) shall
use, handle, store or dispose of any Hazardous Materials in, on, under or about
the Premises, the Building or the Site. Tenant shall promptly take all actions,
at its sole cost and expense, as are necessary to return the Premises, Building
and Site to the condition existing prior to the introduction of any such
Hazardous Materials by Tenant or any Tenant Parties, provided Landlord's
approval of such actions shall first be obtained. Furthermore, Tenant shall
immediately notify Landlord of any inquiry, test, investigation or enforcement
proceeding by or against Tenant or the Premises concerning the presence of any
Hazardous Material.
36.2 Tenant's Indemnity. Tenant shall be solely responsible for and shall
indemnify, defend (with counsel reasonably approved by Landlord) and hold
Landlord harmless from and against any and all claims, judgments, suits, causes
of action, damages, penalties, fines, liabilities, losses and expenses
(including, without limitation, investigation and clean-up costs, attorneys'
fees, consultant fees and court costs) which arise during or after the Term of
this Lease as a result of the breach of any of the obligations and covenants set
forth in Subparagraph 36.1 above, and/or any contamination of the Premises,
Building or Site directly or indirectly arising from the activities of Tenant or
any Tenant Parties.
36.3 Definition of Hazardous Materials. For purposes of this Lease, the
term "Hazardous Materials" shall mean, collectively, asbestos, any petroleum
fuel, and any hazardous or toxic substance, material or waste which is or
becomes regulated by any local governmental authority, the State of California
or the United States government, including, but not limited to,
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<PAGE>
any material or substance defined as a "hazardous waste," "extremely hazardous
waste," "restricted hazardous waste," "hazardous substance," "hazardous
material" or "toxic pollutant" under the California Health and Safety) Code
and/or under the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601, et seq.
------
36.4 Survival. The foregoing covenants and indemnities of Tenant all
survive the expiration or earlier termination of the Lease.
37. Miscellaneous.
-------------
37.1 Governing Law. This Lease shall be governed by, and construed
pursuant to, the laws of the state in which the Building is located.
37.2 Successors and Assigns. Subject to the provisions of Paragraph 32
above, and except as otherwise provided in this Lease, all of the covenants,
conditions and provisions of this Lease shall be binding upon, and shall inure
to the benefit of, the parties hereto d their respective heirs, personal
representatives and permitted successors and assigns; provided, however, no
rights shall inure to the benefit of any Transferee of Tenant unless the
Transfer to such Transferee is made in compliance with the provisions of
Paragraph 16, and no options other rights which are expressly made personal to
the original Tenant hereunder or in any rider attached hereto shall be
assignable to or exercisable by anyone other than the original Tenant under this
Lease.
37.3 No Merger. The voluntary or other surrender of this Lease by Tenant
or a mutual termination thereof shall not work as a merger and shall, at the
option of Landlord, either (a) terminate all or any existing subleases, or (b)
operate as an assignment to Landlord of Tenant's interest under any or all such
subleases.
37.4 Professional Fees. If either Landlord or Tenant should bring suit
against the other with respect to this Lease, including for unlawful detainer or
any other relief against the other hereunder, then all costs and expenses
incurred by the prevailing party therein (including, without limitation, its
actual appraisers', accountants', attorneys' and other professional fees and
court costs), shall be paid the other party.
37.5 Waiver. The waiver by either party of any breach by the other party
of any term, covenant or condition herein contained shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant and
condition herein contained, nor shall any custom or practice which may become
established between the parties in the administration of the terms hereof be
deemed a waiver of, or in any way affect, the right of any party to insist upon
the performance the other in strict accordance with said terms. No waiver of any
fault of either party hereunder shall be implied from any acceptance by Landlord
or delivery by Tenant (as the case may be) of any rent or other payments due
hereunder or any omission by the non-defaulting party to take any action on
account of such default if such default persists or is repeated, and no express
waiver shall affect defaults, other than as specified in said waiver. The
subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a
waiver of any preceding
35
<PAGE>
breach by Tenant of any term, covenant or condition of this Lease other than the
failure of Tenant to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
37.6 Joint and Several Liability. If more than one person or entity
executes this Lease as Tenant: (a) each of them is and shall be jointly and
severally liable for the covenants, conditions, provisions and agreements of
this Lease to be kept, observed and performed by Tenant; and (b) the act or
signature of, or notice from or to, any one or more of them with respect to this
Lease shall be binding upon each and all of the persons and entities executing
this Lease as Tenant with the same force and effect as if each and all of them
had so acted or signed, or given or received such notice.
37.7 Terms and Readings. The words "Landlord" and "Tenant" as used herein
shall include the plural as well as the singular. Words used in any gender
include other genders. The paragraph headings of this Lease are not a part of
this Lease and shall have no effect upon the construction or interpretation of
any part hereof.
37.8 Time. Time is of the essence with respect to performance of every
provision of this Lease in which time or performance is a factor. All references
in this Lease to "days" shall mean calendar days unless specifically modified
herein to be "business" days.
37.9 Prior Agreements; Amendments. This Lease (and the Exhibits and
Riders attached hereto) contain all of the covenants, provisions, agreements,
conditions and understandings between Landlord and Tenant concerning the
Premises and any other matter covered or mentioned in this Lease, and no prior
agreement or understanding, oral or written, express or implied, pertaining to
the Premises or any such other matter shall be effective for any purpose. No
provision of this Lease may be amended or added to except by an agreement in
writing signed by the parties hereto or their respective successors in interest.
The parties acknowledge that all prior agreements, representations and
negotiations are deemed superseded by the execution of this Lease to the extent
they are not expressly incorporated herein.
37.10 Severability. The invalidity or unenforceability of any provision of
this Lease (except for Tenant's obligation to pay Annual Basic Rent and Excess
Expenses under Paragraphs 5 and 6 hereof) shall in no way affect, impair or
invalidate any other provision hereof, and such other provisions shall remain
valid and in full force and effect to the fullest extent permitted by law.
37.11 Recording. Neither Landlord nor Tenant shall record this Lease. In
addition, neither party shall record a short form memorandum of this Lease
without the prior written consent (and signature on the memorandum) of the
other, and provided that prior to recordation Tenant executes and delivers to
Landlord, in recordable form, a properly acknowledged quitclaim deed or other
instrument distinguishing all of the Tenant's rights and interest in and to the
Site, Building and Premises, and designating Landlord as the transferee, which
deed or other instrument shall be held by Landlord and may be recorded by
Landlord once the Lease terminates or expires (but not prior thereto). If such
short form memorandum is recorded in
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accordance with the foregoing, the party requesting the recording shall pay for
all costs of or related to such recording, including, but not limited to,
recording charges and documentary transfer taxes.
37.12 Exhibits and Riders. All Exhibits and Riders attached to this Lease
are hereby incorporated in this Lease as though set forth at length herein.
37.13 Signs and Auctions. Except for Tenant's identity sign on the entry
doors of the Premises and Tenant's elevator lobby identity sign on any full
floor of the Building leased by Tenant (which signs shall be consistent with the
Building's signage program and otherwise subject to Landlord's prior written
approval), Tenant shall have no right to place any sign upon the Premises, the
Building or Site or which can be seen from outside the Premises. In addition,
Tenant shall have no right to conduct any auction in, on or about the Premises,
the Building or Site.
37.14 Accord and Satisfaction. No payment by Tenant or receipt by
Landlord of a lesser amount than the rent payment herein stipulated shall be
deemed to be other than on account of the rent, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment as rent
be deemed an accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
rent or pursue any other remedy provided in this Lease. Tenant agrees that each
of the foregoing covenants and agreements shall be applicable to any covenant or
agreement either expressly contained in this Lease or imposed by statute or at
common law.
37.15 Financial Statements. Upon ten (10) days prior written request from
Landlord (which Landlord may make at any time during the Term but no more often
that two (2) times in any calendar year), Tenant shall deliver to Landlord (a) a
current financial statement of Tenant and any guarantor of this Lease, and (b)
financial statements of Tenant and such guarantor for the two (2) years prior to
the current financial statement year. Such statements shall be prepared in
accordance with generally acceptable accounting principles and certified as true
in all material respects by Tenant (if Tenant is an individual) or by an
authorized officer or general partner of Tenant if Tenant is a corporation or
partnership, respectively).
37.16 Tenant's Authority. If Tenant executes this Lease as a partnership
or corporation, then Tenant and the persons and/or entities executing this Lease
on behalf of Tenant represent and warrant that: (a) Tenant is a duly authorized
and existing partnership or corporation, as the case may be, and is qualified to
do business in the state in which the Building is located; (b) such persons
and/or entities executing this Lease are duly authorized to execute and deliver
this Lease on Tenant's behalf in accordance with the Tenant's partnership)
agreement (if Tenant is a partnership), or a duly adopted resolution of Tenant's
board of directors and the Tenant's by-laws (if Tenant is a corporation); and
(c) this Lease is binding upon, Tenant in accordance with its terms.
37.17 Guaranty. If this Lease is subject to and conditional upon Tenant's
delivery to Landlord, concurrently with Tenant's execution and delivery of this
Lease of a Guaranty in the form of and
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upon the terms contained in Exhibit "H" attached hereto and incorporated-herein
----------
by this reference, which shall be fully executed by the Guarantor (s) specified
in Subparagraph 1.21.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year
first above written.
"TENANT" Sunpark Properties, Inc.
By: ____________________________________
Chi-Chun Liao, Its General Manager
Date: ____________________________________
"LANDLORD" Imagine Media, Inc.
By: ____________________________________
Its: ____________________________________
Date: ____________________________________
38
<PAGE>
EXHIBIT 10.20
- --------------------------------------------------------------------------------
SNOWBALL.COM, INC.
LOAN AND SECURITY AGREEMENT
SAND HILL CAPITAL II, L.P.
- --------------------------------------------------------------------------------
<PAGE>
This Loan and Security Agreement is entered into as of November 8, 1999 by
and between SAND HILL CAPITAL II, L.P., as Lender ("Lender") and SNOWBALL.COM,
INC. ("Borrower").
RECITALS
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Borrower wishes to obtain credit from Lender, and Lender desires to extend
credit to Borrower. This Agreement sets forth the terms on which Lender will
Advances credit to Borrower, and Borrower will repay the amounts owing to
Lender.
AGREEMENT
---------
The parties agree as follows:
I. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a cash Advance or Advances under
Section 2. 1.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"Borrower's Books" means all of Borrower's books and records
including without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of the Borrower and its Subsidiaries
taken as a whole to any "person" or "group" (within the
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meanings of Sections 13(d)(3) and 14(d)(2), respectively, of the Exchange Act)
other than (y) the holders of the Borrower's capital stock as of the date of
this Agreement, (ii) the adoption of a plan relating to the liquidation or
dissolution of the Borrower and (iii) the consummation of any transaction
(including any merger or consolidation) the result of which is that any "person"
or "group" (as defined above), other than (y) the holders of the Borrower's
capital stock as of the date of this Agreement, becomes the "beneficial owner"
(as such term is defined in Rules 13(d)-3 and 13(d)-5 of the Exchange Act)
directly or indirectly, of more than 50% of the voting stock of Borrower or (iv)
during any consecutive two-year period, individuals who at the beginning of such
period constituted the board of directors of Borrower (together with any new
directors whose election to such board of directors or whose nomination for
election by the stockholders of Borrower was approved by a vote of a majority of
the directors of the Borrower then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
board of directors of Borrower then in office.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit B attached
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hereto.
"Commitment" means the obligation of Lender to make Advances
to Borrower under this Agreement.
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
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"Credit Extension" means the Advances or any other extension of
credit by Lender for the benefit of Borrower hereunder.
"Domain Names" means the names set forth on Exhibit D to the
Intellectual Property Security Agreement of even date.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means all of Borrower's right,
title and interest in and to the following:
(a) Copyrights, Trademarks, Patents, Domain Names, and Mask
Works;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
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(e) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, Domain Names or Mask Works, and all license fees and
royalties arising from such use to the extent permitted by such license or
rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, Domain Names or Mask Works; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Intellectual Property Security Agreement" means an intellectual
property security agreement in a form reasonably acceptable to Lender.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, Advances or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lender Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred by Lender in
connection with the preparation, negotiation, administration, and enforcement of
the Loan Documents; and the reasonable attorneys' fees and expenses incurred by
Lender in amending, enforcing or defending the Loan Documents (including fees
and expenses of appeal or review, or those incurred in any Insolvency
Proceeding), whether or not suit is brought.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Lender in connection with this
Agreement, all as amended, extended or restated from time to time.
"Mask Works" means all mask works or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired.
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<PAGE>
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Lender
Expenses and other amounts owed to Lender by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Lender may have obtained by
assignment or otherwise.
"Patents" means all patents, patent applications and like
protections, including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the
same.
"Payment Date" means the tenth calendar day of each month during
the term of this Agreement.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Lender
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Lender.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Lender arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Indebtedness to trade creditors and with respect to surety
bonds, letters of credit and similar obligations incurred in the ordinary course
of business;
(d) Subordinated Debt;
(e) Indebtedness of Borrower to any Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of Borrower (provided
that the primary obligations are not prohibited hereby), and Indebtedness of any
Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary
with respect to obligations of any other Subsidiary (provided that the primary
obligations are not prohibited hereby);
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(f) Capital leases or indebtedness incurred solely to purchase
equipment which is secured in accordance with clause (c) of "Permitted Liens"
below and is not in excess of the lesser of the purchase price of such equipment
or the fair market value of such equipment on the date of acquisition; and
(g) Extensions, refinancings, modifications, amendments and
restatements of any of items of Permitted Indebtedness (a) through (f) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof; (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having a high rating obtainable from either Standard &
Poor's Corporation or Moody's Investors Service, Inc.; (iii) Investments made in
accordance with Borrower's investment policy, as approved from time to time by
Borrower's Board of Directors; and (iv) certificates of deposit maturing no more
than one (1) year from the date of investment therein issued by Lender; an d
(c) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or its Subsidiaries so long as the Board of
Directors of Borrower determines that such compensation is in the best interests
of Borrower, (ii) travel Advances, employee relocation loans and other employee
loans and Advances in the ordinary course of business, and (iii) loans to
employees, officers or directors relating to the purchase of equity securities
of Borrower or its Subsidiaries pursuant to employee stock purchase plans or
agreements approved by Borrower's Board of Directors.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
--------
over any of Lender's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
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acquired and improvements thereon, and the proceeds of such Equipment;
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<PAGE>
(d) Liens on Equipment leased by Borrower or any Subsidiary
pursuant to an operating or capital lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such Equipment (including Liens pursuant to
leases permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement);
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a), (c) and (d) above, provided that any extension, renewal or
--------
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Responsible Officer" means each of the Chief Executive Officer,
the President, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Lender on terms acceptable to
Lender (and identified as being such by Borrower and Lender).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or one
or more Affiliates of such Person.
"Term Facility" means the facility under which Borrower may
request Lender to issue the Advances, as specified in Section 2.1 hereof.
"Term Maturity Date" means the earlier of (i) the day before
the first anniversary of the Closing Date or (ii) ten business days following
the closing of the Borrower's initial public offering, or such earlier dates
as all amounts become due hereunder pursuant to Section 9. 1.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but excluding unearned revenue.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks.
7
<PAGE>
"Warrant" means the warrant to purchase Borrower's capital stock,
delivered in connection with this Agreement.
1.2 Accounting and Other Terms. All accounting terms not specifically
--------------------------
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including" / "includes" shall always be read as
meaning "including (or includes) without limitation," when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Advances.
--------
(a) Borrower promises to pay to the order of Lender, in lawful
money of the United States of America, the aggregate unpaid principal amount of
all Credit Extensions made by Lender to Borrower hereunder. Borrower shall also
pay interest on the unpaid principal amount of such Credit Extensions at rates
in accordance with the terms hereof.
(b) Subject to and upon the terms and conditions of this
Agreement, Lender agrees to make up to three (3) Advances to Borrower in an
aggregate amount not to exceed Fifteen Million One Hundred Fifty Thousand
Dollars ($15,150,000). Each Advance shall be in an amount not less than Five
Million Dollars ($5,000,000), provided that, with Lender's prior consent, an
Advance may be for a lower amount. To obtain an Advance, Borrower shall notify
Lender in writing (which shall be irrevocable) not less than two (2) Business
Days before the Business Day that an Advance is requested. Each such request
shall constitute a representation by Borrower that the Representations and
Warranties set forth in Article 5 are true and correct, that Borrower is in
compliance with the covenants contained in Articles 6 and 7, and that an Event
of Default has not occurred and is continuing. Not later than 3:00 p.m.
California time on the funding date, Lender will transfer to such account as
Borrower designates the amount of the Advance.
(c) The Advances made by Lender pursuant hereto shall be
evidenced by a promissory note of Borrower, substantially in the form of Exhibit
-------
A-I hereto (the "Term Note"), payable to the order of Lender and representing
- ---
the obligation of Borrower to pay the aggregate unpaid principal amount of the
Advances made by Lender, with interest thereon as prescribed in Section 2.2.
Lender is authorized to record in its books and records and on any schedule
annexed to its Term Note, the date and amount of each payment of principal
thereof, and any such recordation shall constitute prima facie evidence of the
accuracy of the information so recorded; provided that failure by Lender to
effect such recordation shall not affect Borrower's obligations hereunder. Prior
to the transfer of a Term Note, the transferring Lender shall record such
information on any schedule annexed to and forming a part of such Term Note.
(d) The Term Facility shall terminate on the Term Maturity Date,
at which time all amounts outstanding under this Agreement shall be immediately
due and payable.
2.2 Interest Rates, Payments, and Calculations.
------------------------------------------
8
<PAGE>
(a) Interest Rate. Except as set forth in Section 2.2(b), the
-------------
Advances shall bear interest, on the outstanding daily balance thereof, at a
fixed rate equal to Eleven Percent (11 %). All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed. Interest shall accrue from the date
of each Advances and shall be payable monthly on the Payment Date for each month
through the Maturity Date.
(b) Late Fee; Default Rate. If any payment is not made within
----------------------
ten (10) days of the date on which such payment is due, Borrower shall pay
Lender, a late fee equal to five percent (5%) of the amount of such unpaid
amount. All Obligations shall bear interest, from and the occurrence of an Event
of Default, at a rate equal to eighteen percent (18%) per annum. If any amount
remains outstanding hereunder after the Term Maturity Date, Lender may purchase
an aggregate of 1,666 additional shares under the Warrants at the then-
applicable Warrant Price in accordance with the terms thereof for each day that
any amount remains outstanding.
(c) Payments. Interest hereunder shall be due and payable by
--------
wire transfer to Lender's account no. 650-000-617 at Far East National Bank, ABA
No. 122034103 not later than 12:00 noon California time on each Payment Date.
(d) Prepayments/Scheduled Payments. On July 15, 2000, Borrower
------------------------------
shall make a scheduled payment on account of the Advances in an amount of not
less than the lesser of Seven Million Dollars ($7,000,000) or the outstanding
balance hereunder. Borrower may prepay all or any portion of the Advances up to
an outstanding balance of Three Million Dollars ($3,000,000) without penalty or
premium upon not less than three (3) days' prior written notice to Lender, which
shall be irrevocable. Borrower may prepay the remaining balance of Three Million
Dollars ($3,000,000) only with the written consent of Lender. Borrower is not
required to give advance notice of the scheduled payment due on July 15, 2000.
2.3 Conversion. On or after the closing of an Equity Event on or
----------
before the Term Maturity Date, Lender may elect to convert up to Three Million
Dollars ($3,000,000) of the outstanding principal balance hereunder into the
number of shares of capital stock issued by Borrower in such Equity Event as is
obtained by dividing (a) such amount designated by Lender by (b) the price per
share of the capital stock issued in the Equity Event (the "Conversion Stock").
"Equity Event" means an equity financing in which Borrower sells equity
securities and obtains net proceeds in an amount not less than Five Million
Dollars ($5,000,000). Upon such conversion, Borrower shall issue to Lender a
share certificate evidencing Lender's shares of the Conversion Stock. Lender
shall be entitled to all of the rights and privileges accorded to the purchasers
of the Conversion Stock in the Equity Event. Borrower shall give Lender not less
than ten (10) days notice prior to the consummation of any Equity Event.
2.4 Crediting Payments. Lender shall apply each payment received
------------------
from Borrower as follows: first to Lender's Expenses, next to any accrued
interest, and finally to any principal. The receipt by Lender of any wire
transfer of funds, check, or other item of payment, shall be immediately applied
to conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for
9
<PAGE>
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Lender after 12:00 noon Pacific time shall be
deemed to have been received by Lender as of the opening of business on the
immediately following Business Day. Whenever any payment under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Lender the following:
----
(a) Facility Fee. On the Closing Date, a Facility Fee equal to
------------
One Hundred Fifty Thousand Dollars ($150,000) which fee shall be nonrefundable;
(b) Financial Examination and Appraisal Fees. Lender's customary
----------------------------------------
fees and out-of-pocket expenses for Lender's audits of Borrower's Books, and for
each appraisal of Collateral and financial analysis and examination of Borrower
performed from time to time by Lender or its agents; and
(c) Lender Expenses. Upon demand from Lender, including, without
---------------
limitation, upon the date hereof, all Lender Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses not to exceed
Thirty-Five Thousand Dollars ($35,000) with offset and recoverability for the
$20,000 deposit already made by Borrower to Lender in connection with this
Agreement and, after the date hereof, all Lender Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or
----------------
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Lender to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Lender imposed by the United States of America or
any political subdivision thereof)
and the result of any of the foregoing is to increase the cost to Lender, reduce
the income receivable by Lender or impose any expense upon Lender with respect
to any loans, Lender shall notify Borrower thereof. Borrower agrees to pay to
Lender the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or determined,
upon presentation by Lender of a statement of the amount and setting forth
Lender's calculation thereof, all in reasonable detail, which statement shall be
deemed true and correct absent manifest error.
2.7 Term. Except as otherwise set forth herein, this Agreement shall
----
become effective on the Closing Date and, subject to Section 10.12, shall
continue in full force and effect for so long as any Obligations are
outstanding. Notwithstanding the foregoing, Lender shall have
10
<PAGE>
the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Advances. The obligation of Lender to
--------------------------------
make the Advances is subject to the condition precedent that Lender shall have
received, in form and substance satisfactory to Lender, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a warrant in the name of Lender;
(d) the Intellectual Property Security Agreement;
(e) a promissory note evidencing Borrower's indebtedness to
Lender under the Term Facility;
(f) an agreement to provide insurance;
(g) financing statement (Form UCC-1) filed with the appropriate
offices;
(h) payment of the fees and Lender Expenses then due specified
in Section 2.5 hereof, and
(i) such other documents, and completion of such other matters,
as Lender may reasonably deem necessary or appropriate.
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants, assigns and pledges
--------------------------
to Lender a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt payment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Lender may place a "hold" on any deposit account
pledged as Collateral to secure the Obligations. Notwithstanding termination of
this Agreement, Lender's Lien on the Collateral shall remain in effect for so
long as any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall
---------------------------------------------
from time to time execute and deliver to Lender, at the request of Lender, all
Negotiable Collateral, all financing statements and other documents that Lender
may reasonably request, in form
11
<PAGE>
satisfactory to Lender, to perfect and continue perfected Lender's security
interests in the Collateral and in order to fully consummate all of the
transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Lender (through any of its officers,
----------------
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
------------------------------
follows except as set forth in the Schedule:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
----------------------------------
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified, except for states as to which any
failure to so qualify would not have a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could reasonably be expected to have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and marketable title to
---------------------
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Accounts. The Accounts are bona fide existing
------------------
obligations. The service or property giving rise to such Accounts has been
performed or delivered to the account debtor or to the account debtor's agent
for immediate shipment to and unconditional acceptance by the account debtor.
5.5 Merchantable Inventory. All Inventory is in all material
----------------------
respects of good and marketable quality, free from all material defects.
5.6 Intellectual Property. Borrower owns or has rights to use all
---------------------
intellectual property (including all Patents, Trademarks, Copyrights, Domain
Names, licenses to use any of the foregoing, trade secrets, and know-how)
necessary to continue to conduct its business as now or heretofore conducted by
it or proposed to be conducted by it, and each patent, trademark, copyright and
license held by Borrower is listed, together with application or registration
numbers, as applicable on Exhibit A, B, C, and D to the Intellectual Property
Security Agreement. Borrower conducts its business and affairs without
infringement of or interference with any intellectual property of any other
Person. Each of the Patents is valid and enforceable, and no part of the
Intellectual Property Collateral has been judged invalid or unenforceable, in
12
<PAGE>
whole or in part, and no claim has been made that any part of the Intellectual
Property Collateral violates the rights of any third party. Except for and upon
the filing with the California Secretary of State a financing statement on Form
UCC-1 and with the United States Patent and Trademark Office with respect to the
Patents and Trademarks and the Register of Copyrights with respect to the
Copyrights and Mask Works necessary to perfect the security interests created
hereunder, and except as has been already made or obtained, no authorization,
approval or other action by, and no notice to or filing with, any United States
governmental authority or United States regulatory body is required either (i)
for the grant by Borrower of the security interest granted hereby or for the
execution, delivery or performance of Loan Documents by Borrower in the United
States or (ii) for the perfection in the United States or the exercise by Lender
of any rights and remedies hereunder.
5.7 Name; Location of Chief Executive Office. Except as disclosed
----------------------------------------
in the Schedule, Borrower has not done business and will not, without at least
twenty (20) days prior written notice to Lender, do business under any name
other than that specified on the signature page hereof. The chief executive
office of Borrower is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no
----------
actions or proceedings pending or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could reasonably be expected to have a Material
Adverse Effect or a material adverse effect on Borrower's interest or Lender's
security interest in the Collateral.
5.9 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Lender fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Lender on or about the Closing Date.
5.10 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could reasonably be expected to have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940.
Borrower is not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations T and U of the Board of
Governors of the Federal Reserve System). Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act. Borrower has not violated
any statutes, laws, ordinances or rules applicable to it, violation of which
could have a Material Adverse Effect.
5.11 Environmental Condition. To the best of Borrower's knowledge,
-----------------------
none of Borrower's or any Subsidiary's properties or assets has ever been used
by Borrower or any
13
<PAGE>
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release or other disposition of hazardous waste or
hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
-----
filed all material tax returns required to be filed on a timely basis, and has
paid, or has made adequate provision for the payment of, all taxes reflected
therein, except those being contested in good faith by proper proceedings with
adequate reserves under GAAP.
5.13 Subsidiaries. Borrower does not own any stock, partnership
------------
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. Borrower and each Subsidiary has obtained
-------------------
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted except
where the failure to obtain any such consent, approval or authorization, to make
any such declaration or filing, or to be given any such notice could not
reasonably be expected to have a Material Adverse Effect.
5.15 Year 2000. Borrower and its Subsidiaries have reviewed the
---------
areas within their operations and business which could be adversely affected by,
and have developed or are developing a program to address on a timely basis, and
based on such review and program, the Year 2000 Problem will not have a material
adverse effect upon the financial condition, operations or business of the
Borrower and its Subsidiaries as now conducted. "Year 2000 Problem" means the
possibility that any computer applications or equipment used by Borrower and its
Subsidiaries may be unable to recognize and properly perform date sensitive
functions involving certain dates prior to and any dates on or after December
31, 1999.
5.16 Full Disclosure. No representation, warranty or other statement
---------------
made by Borrower in any certificate or written statement furnished to Lender
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading (it being recognized that the projections and
forecasts provided by Borrower are not to be viewed as facts and that actual
results during the period or period covered by any such projections and
forecasts may differ from the projected or forecasted results).
14
<PAGE>
6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, until
---------------------
payment in full of all outstanding Obligations, and for so long as Lender may
have any commitment to make a Credit Extension hereunder, Borrower shall do all
of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a Material Adverse
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain in force all licenses, approvals and agreements, the loss of which
could reasonably be expect to have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could reasonably be expected to have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Lender's Lien on
the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
-------------------------------------------
deliver to Lender: (a) as soon as available, but in any event within thirty (30)
days after the end of each calendar month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during such period, in a form acceptable to Lender and certified by a
Responsible Officer; (b) as soon as available, but in any event within one
hundred twenty (120) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Lender; (c) if applicable, copies of all statements, reports and
notices sent or made available generally by Borrower to its security holders or
to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed
with the Securities and Exchange Commission; (d) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (e) within
thirty (30) days of the last day of each fiscal quarter, a report signed by
Borrower, in form reasonably acceptable to Lender, listing any applications or
registrations that Borrower has made or filed in respect of any Patents,
Copyrights, Domain Names or Trademarks and the status of any outstanding
applications or registrations, as well as any material change in Borrower's
intellectual property, including but not limited to any subsequent ownership
right of Borrower in or to any Trademark, Patent or Copyright not specified in
Exhibits A, B, C, and D of the Intellectual Property Security Agreement
- ---------- - - -
delivered to Lender in connection with this Agreement.
Lender shall have a right from time to time hereafter to audit Borrower's
Accounts and appraise Collateral at Borrower's expense, provided that such
audits will be conducted no more often than every six (6) months unless an Event
of Default has occurred and is continuing.
15
<PAGE>
6.4 Taxes. Borrower shall make, and shall cause each Subsidiary to
-----
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Lender, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Lender with
proof satisfactory to Lender indicating that Borrower or a Subsidiary has made
such payments or deposits.
6.5 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, and all other hazards and
risks, and in such amounts, as ordinarily insured against by other owners in
similar businesses conducted in the locations where Borrower's business is
conducted on the date hereof. Borrower shall also maintain insurance relating to
Borrower's ownership and use of the Collateral in amounts and of a type that are
customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as are reasonably satisfactory to Lender.
All such policies of property insurance shall contain Lender's loss payable
endorsement, in a form satisfactory to Lender, showing Lender as an additional
loss payee thereof and all liability insurance policies shall show Lender as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Lender before canceling its policy for any reason. At
Lender's, request, Borrower shall deliver to Lender certified copies of such
policies of insurance and evidence of the payments of all premiums therefor. So
long as no Event of Default has occurred and is continuing, Borrower shall have
the option of applyin g the proceeds of any casualty policy to the replacement
or repair of destroyed or damaged property; provided, that after the occurrence
--------
and during the continuance of an Event of Default, all proceeds payable under
any such policy shall, at the option of Lender, be payable to Lender to be
applied on account of the Obligations.
6.6 Registration of Intellectual Property Rights.
--------------------------------------------
(a) Borrower shall register or cause to be registered, on an
expedited basis, (to the extent not already registered) with the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable, those intellectual property rights (if any) listed on Exhibits A, B,
C and D to the Intellectual Property Security Agreement delivered to Lender by
Borrower in connection with this Agreement within thirty (30) days of the date
of this Agreement, but only to the extent such registration is necessary as a
condition to perfecting Lender's security interest in the Collateral. Borrower
shall register or cause to be registered with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable, those
additional intellectual property rights developed or acquired by Borrower from
time to time in connection with any product prior to the sale or licensing of
such product to any third party, including without limitation revisions or
additions to the intellectual property rights listed on such Exhibits A, B, C
and D, but only to the extent such registration is necessary as a
16
<PAGE>
condition to perfecting Lender's security interest in any material intellectual
property right included within the Collateral.
(b) Borrower shall execute and deliver such additional
instruments and documents from time to time as Lender shall reasonably request
to perfect Lender's security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain the
validity and enforceability of the Domain Names, Trademarks, Patents and
Copyrights, (ii) use its best efforts to detect infringements of the Trademarks,
Patents and Copyrights and promptly advise Lender in writing of material
infringements detected, (iii) keep current all fees due to maintain the Domain
Names, and maintain the sites represented by each of the Domain Names and (iv)
not allow any Domain Names, Trademarks, Patents or Copyrights to be abandoned,
forfeited or dedicated to the public without the written consent of Lender,
which shall not be unreasonably withheld, unless Lender determines that
abandonment will not have an adverse effect on the Collateral.
(d) Lender shall have the right, but not the obligation, to
take, at Borrower's sole expense, any actions that Borrower is required under
this Section 6.7 to take but which Borrower fails to take, after fifteen (15)
days' notice to Borrower. Borrower shall reimburse and indemnify Lender for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.7.
6.7 Year 2000 Compliance. Borrower shall perform all acts
--------------------
reasonably necessary to ensure that Borrower and any business in which Borrower
holds a substantial interest become Year 2000 Compliant in a timely manner. Such
acts shall include, without limitation, performing a comprehensive review and
assessment of all Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. As used in
this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. Borrower shall immediately upon request, provide to Lender such
certifications or other evidence of Borrower's compliance with the terms of this
paragraph as Lender may from time to time require.
6.8 Further Assurances. At any time and from time to time Borrower
------------------
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Lender to effect the purposes of this
Agreement.
7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as
------------------
any Credit Extension hereunder shall be available and until payment in full of
the outstanding Obligations or for so long as Lender may have any commitment to
make any Advances, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise
------------
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than Transfers (i)
of non-exclusive licenses and similar arrangements
17
<PAGE>
for the use of the property of Borrower or its Subsidiaries in the ordinary
course of business, (ii) Transfers of worn-out or obsolete Equipment or
Equipment financed by other vendors, and (iii) other Transfers not otherwise
permitted by this Section 7.1 not exceeding Two Hundred Thousand Dollars
($200,000) in the aggregate.
7.2 Changes in Business, Ownership, Management or Business Locations.
----------------------------------------------------------------
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto), or
suffer a Change in Control. Borrower will not, without at least twenty (20) days
prior written notification to Lender, relocate its chief executive office
outside the State of California or add any new material offices or business
locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
-----------------------
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person; provided
that Borrower may do any of the foregoing (i) if the aggregate consideration
(exclusive of Borrower's stock) is less than Two and a Half Million Dollars
($2,500,000) or (ii) if the sole consideration is Borrower's stock, provided in
either case that Borrower is the surviving entity and that an Event of Default
does not exist before such transaction or after giving effect to such
transaction.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any provisions
that could or might in any way prevent the creation of a security interest in
Borrower's rights and interests in any property.
7.6 Distributions. Pay any dividends or make any other distribution
-------------
or payment on account of or in redemption, retirement or purchase of any capital
stock, provided, that (i) Borrower may declare and make any dividend payment or
other distribution payable in its equity securities, (ii) Borrower may convert
any of its convertible securities into other securities pursuant to the terms of
such convertible securities or otherwise in exchange therefor and (iii) for so
long as an Event of Default has not occurred, Borrower may repurchase stock from
former employees of Borrower in accordance with the terms of repurchase or
similar agreements between Borrower and such employees.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments or as allowed under Section 7.3.
7.8 Transactions with Affiliates. Directly or indirectly enter into
----------------------------
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less
18
<PAGE>
favorable to Borrower than would be obtained in an arm's length transaction with
a non-affiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Lender's prior written consent.
7.10 Equipment and Inventory. Store its Equipment or Inventory with
-----------------------
a bailee, warehouseman, or similar party unless Lender has received a pledge of
any warehouse receipt covering such Inventory. Except for such other locations
as Lender may approve in writing, Borrower shall keep its Equipment and
Inventory only at its principal place of business and such other locations of
which Borrower gives Lender prior written notice and as to which Borrower signs
and files a financing statement where needed to perfect Lender's security
interest in any Collateral. Lender acknowledges that Borrower is moving its
offices to Brisbane, California. Within ten (10) days of such move, Borrower
will deliver an amendment to Lender's financing statement reflecting such change
of address.
7.11 Compliance. Become an "investment company" or a company
----------
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advances for
such purpose; fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Lender's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT. Any one or more of the following events shall
-----------------
constitute an Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, within ten (10) days
---------------
of the date when due, any of the Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
----------------
under Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or if Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Lender and as to any default under such other
term, provision, condition, covenant or agreement that can be cured, has failed
to cure such default within ten (10) days after the occurrence thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days) to attempt to cure such default,
and within such reasonable time period the failure to have cured such default
shall not be deemed an Event of
19
<PAGE>
Default (provided that no Credit Extensions will be required to be made during
such cure period);
8.3 Material Adverse Change. If there (i) occurs a material adverse
-----------------------
change in the business, operations, or condition (financial or otherwise) of
Borrower or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Lender's security interests in the Collateral;
8.4 Attachment. If any portion of Borrower's assets is attached,
----------
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Credit Extensions will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
----------------
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of Two Hundred Fifty
Thousand Dollars ($250,000) or that could reasonably be expected to have a
Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with or for the benefit of Lender;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, of at least Two Hundred Fifty
Thousand Dollars ($250,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
------------------
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate or writing delivered to any Lender by
Borrower or any Person acting on Borrower's
20
<PAGE>
behalf pursuant to this agreement or to induce lender to enter into this
agreement or any other Loan Document.
9. RIGHTS AND REMEDIES
-------------------
9.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Lender may, without notice of its election
and without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any action
by Lender or Lender);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and any Lender;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Lender reasonably
considers advisable;
(d) Make such payments and do such acts as Lender considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Lender so requires, and to make
the Collateral available to Lender as Lender may designate. Borrower authorizes
Lender to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any encumbrance, charge, or lien which in Lender's
determination appears to be prior or superior to its security interest and to
pay all expenses incurred in connection therewith. With respect to any of
Borrower's premises, Borrower hereby grants Lender a license to enter such
premises and to occupy the same, without charge, in order to exercise any of
Lender's rights or remedies provided herein, at law, in equity, or otherwise;
(e) Set off and apply to the Obligations any and all (i) balances
and deposits of Borrower held by any Lender, or (ii) indebtedness at any time
owing to or for the credit or the account of Borrower held by any Lender;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Lender is hereby granted a non-exclusive, royalty-free
license or other right to use, without charge, Borrower's labels, patents,
copyrights, mask works, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with
Lender's exercise of its rights under this Section 9.1, Borrower's rights under
all licenses and all franchise agreements shall inure to Lender's benefit;
21
<PAGE>
(g) Dispose of the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Lender
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order Lender deems appropriate;
(h) Lender may credit bid and purchase at any public sale, or at
any private sale as permitted by law; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
-----------------
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Lender (and any of Lender's designated officers, or employees) as Borrower's
true and lawful attorney to: (a) send requests for verification of Accounts or
notify account debtors of Lender's security interest in the Accounts; (b)
endorse Borrower's name on any checks or other forms of payment or security that
may come into Lender's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Lender determines to be reasonable; (f) to modify, in its
sole discretion, the Intellectual Property Security Agreement without first
obtaining Borrower's approval of or signature to such modification by amending
Exhibit A, Exhibit B, Exhibit C and Exhibit D, thereof, as appropriate, to
include reference to any right, title or interest in any Copyrights, Patents,
Trademarks, or Domain Names acquired by Borrower after the execution hereof or
to delete any reference to any right, title or interest in any Copyrights,
Patents, Trademarks or Domain Names in which Borrower no longer has or claims
any right, title or interest; (g) to file, in its sole discretion, one or more
financing or continuation statements and amendments thereto, relative to any of
the Collateral without the signature of Borrower where permitted by law; and (h)
to dispose of the Collateral to the extent permitted under the Code, provided
Lender may exercise such power of attorney to sign the name of Borrower on any
of the documents described in Section 4.2 only when an Event of Default has
occurred. The appointment of Lender as Borrower's attorney in fact, and each and
every one of Lender's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Lender's obligation to provide Advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this Agreement,
-------------------
Lender may notify any Person owing funds to Borrower of Lender's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Lender, receive in trust all payments
as Lender's trustee, and, after the occurrence of an Event of Default,
immediately deliver such payments to Lender in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Lender Expenses. If Borrower fails to pay any amounts or furnish
---------------
any required proof of payment due to third persons or entities, as required
under the terms of this
22
<PAGE>
Agreement, then Lender may do any or all of the following: (a) make payment of
the same or any part thereof; (b) set up such reserves under the Term Committed
Line as Lender deems necessary to protect Lender from the exposure created by
such failure; or (c) obtain and maintain insurance policies of the type
discussed in Section 6.6 of this Agreement, and take any action with respect to
such policies as Lender deems prudent. Any amounts so paid or deposited by
Lender shall constitute Lender Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Lender shall not
constitute an agreement by Lender to make similar payments in the future or a
waiver of any Event of Default under this Agreement.
9.5 Liability for Collateral. Lender shall not in any way or manner
------------------------
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause other than from Lender's gross negligence; (c) any diminution in the value
thereof, or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other person whomsoever. All risk of loss, damage or
destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Lender's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Lender shall have all other rights and remedies not expressly set forth herein
as provided under the Code, by law, or in equity. No exercise of one right or
remedy shall be deemed an election, and no waiver of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay shall constitute a
waiver, election, or acquiescence by it. No waiver shall be effective unless
made in a written document signed on behalf of Lender and then shall be
effective only in the specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
---------------
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Lender on which Borrower may in any way be
liable.
10. MISCELLANEOUS
-------------
10.1 Amendments. No amendment or waiver of any provision of the Loan
----------
Documents nor consent to any departure by the Borrower therefrom, shall in any
event be effective unless the same shall be in writing and signed by Lender, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given.
10.2 Notices, Etc. Except as otherwise set forth in this Agreement,
------------
all notices and other communications provided for hereunder shall be in writing
(including telegraphic, email, telex or facsimile communication) and mailed or
telegraphed or telexed or sent by facsimile or email or delivered, if to the
Borrower, at its address set forth on the signature page hereof; and if to
Lender, at its address set forth on the signature page hereof; or, as to each
party, at such other address as shall be designated by such party in a written
notice to the other parties. All such notices and communications shall be
effective three (3) Business Days after deposit in
23
<PAGE>
the U.S. mail, postage prepaid, when sent by telex, email, facsimile, or when
delivered, respectively.
10.3 Additional Lender; Assignments; Participations.
----------------------------------------------
(a) None of the Loan Documents nor any rights thereunder may be
assigned by Borrower without the prior written consent of Lender, which consent
may be granted or withheld in the Lender's sole discretion. Lender may assign,
from time to time, all or any portion of the Commitments and its Note to an
Affiliate of Lender, provided that the parties to each such assignment shall
--------
execute and deliver to Borrower an assignment agreement reasonably satisfactory
to Lender. Upon (a) such execution and delivery from and after the effective
date of such assignment (x) the assignee thereunder shall be a party hereto and,
to the extent that rights and obligations hereunder have been assigned to it,
have the rights and obligations of a Lender hereunder and (y) the Lender
assignor thereunder shall, to the extent that rights and obligations hereunder
have been assigned by it, relinquish its rights and be released from its
obligations under this Agreement (other than pursuant to Section 10.3(e)), and,
in the case of an assignment covering all or the remaining portion of an
assigning Lender's rights and obligations under this Agreement, such Lender
shall cease to be a party hereto, subject to its continuing obligations under
Section 10.3(e). If any such assignment occurs while any Note is outstanding, a
new Note shall, upon the surrender of the assigning Lender's Note, be issued to
such assignee and to the assigning Lender as necessary to reflect the new
Commitment of the assigning Lender and of its assignee.
(b) Lender may sell, negotiate or grant participations to other
parties in all or part of the obligations of the Borrower outstanding under the
Loan Documents, without notice to or the approval of Borrower; provided that any
--------
such sale, negotiation or participation shall be in compliance with the
applicable federal and state securities laws and the other requirements of this
Section 10.3. No participant shall constitute a "Lender" under any Loan
Document, and the Borrower shall continue to deal solely and directly with
Lender.
(c) Lender may disclose to any proposed assignee or participant
any information relating to the Borrower or any of its Subsidiaries; provided,
--------
that prior to such disclosure such proposed assignee or participant shall have
agreed in writing to keep any such information confidential substantially on the
terms of Section 10.3(e).
(d) The grant of a participation interest shall be on such terms
as the granting Lender determines are appropriate, provided only that (i) the
holder of such a participation interest shall not have any of the rights of
Lender under this Agreement except, if the participation agreement so provides,
rights to demand the payment of costs of the type described in Section 2.5(c),
(ii) the consent of the holder of such a participation interest shall not be
required for amendments or waivers of provisions of the Loan Documents other
than those that (a) increase the amount of the Commitment, (b) extend the term
of the Commitment, (c) decrease the rate of interest or the amount of any fee or
any other amount payable to Lender under the Loan Documents, (d) reduce the
principal amount payable under the Loan Documents, or (e) extend the date fixed
for the payment of principal or interest or any other amount payable under the
Loan Documents, and (iii) the holder may not transfer or participate any of its
interest without the consent of the Lender.
24
<PAGE>
(e) Lender understands that some of the information and
documents furnished to it pursuant to this Agreement may be confidential and
Lender agrees that it will keep all non-public information, documents and
agreements so furnished to it confidential and will make no disclosure to other
Persons of such information or agreements until it shall have become public,
except (i) to the extent required in connection with matters involving
operations under or enforcement or amendment of the Loan Documents; (ii)
Lender's examiners and auditors or in accordance with Lender's obligations under
law or regulations or pursuant to subpoenas or other process to make information
available to governmental agencies and examiners or to others; (iii) to any
corporate parent of Lender so long as such parent agrees in writing to accept
such information or agreement subject to the restrictions provided in this
Section 10.3(e); (iv) to any participant bank or trust company of any Lender or
any participant so long as such participant shares the corporate parent with
such Lender and agrees to keep such information, documents or agreement
confidential in accordance with the restrictions provided in this Section
10.3(e); (v) to any other Lender or participant and their respective counsel and
other professional advisors and to its own counsel and professional advisors so
long as such Persons are instructed to keep such information confidential in
accordance with the provisions of this Section 10.3(e); (vi) to proposed
assignees and participants in accordance with Section 10.4(c); and (vii) with
the prior written consent of the Borrower.
10.4 Effectiveness; Binding Effect; Governing Law. This Agreement
--------------------------------------------
shall become effective when it shall have been executed by Borrower and Lender
and thereafter shall be binding upon and inure to the benefit of Borrower,
Lender and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest herein
without the prior written consent of Lender THIS AGREEMENT AND THE NOTES SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE.
10.5 Waiver of Jury Trial. BORROWER AND LENDER HEREBY AGREE TO WAIVE
--------------------
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS, OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION
AND THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of
this waiver is intended to be all-encompassing of any and all disputes that may
be filed in any court and that relate to the subject matter of this transaction,
including contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. Lender and Borrower each acknowledge that this
waiver is a material inducement to enter into a business relationship, that each
has already relied on the waiver in entering into this Agreement, and that each
will continue to rely on the waiver in their related future dealings. Lender and
Borrower further warrant and represent that each has reviewed this waiver with
its legal counsel, and that each knowingly and voluntarily waives its jury trial
rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO
25
<PAGE>
THE LOAN. In the event of litigation, this Agreement may be filed as a written
consent to a trial by the court.
10.6 Consent to Jurisdiction; Venue; Lender for Service of Process.
-------------------------------------------------------------
All judicial proceedings brought against Borrower with respect to this Agreement
and the Loan Documents may be brought in any state or federal court of competent
jurisdiction in the County of Santa Clara in the State of California, and by
execution and delivery of this Agreement, Borrower accepts for itself and in
connection with its properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement. Borrower
irrevocably waives any right it may have to assert the doctrine of forum non
---------
conveniens or to object to venue to the extent any proceeding is brought in
- ----------
accordance with this Section. Borrower designates and appoints Borrower's Chief
Financial Officer, from time to time, and such other Persons as may hereafter be
selected by Borrower irrevocably agreeing in writing to so serve as its agent to
receive on its behalf service of all process in any such proceedings in any such
court, such service being hereby acknowledged by Borrower to be effective and
binding service in every respect. A copy of any such process so served shall be
mailed by registered mail to Borrower at its address provided in the applicable
signature page hereto, except that unless otherwise provided by applicable law,
any failure to mail such copy shall not affect the validity of service of
process. If any agent appointed by Borrower refuses to accept service, Borrower
hereby agrees that service upon it by mail shall constitute sufficient notice.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of either Lender to bring proceedings
against Borrower in courts of any jurisdiction.
10.7 Entire Agreement. This Agreement with Exhibits and Schedules
----------------
and the other Loan Documents embody the entire agreement and understanding
between the par-ties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof.
10.8 Separability of Provisions. In case any one or more of the
--------------------------
provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
10.9 Indemnification. Borrower shall indemnify, defend, protect and
---------------
hold harmless Lender, and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Lender Expenses in any way suffered, incurred, or paid as
a result of or in any way arising out of, following, or consequential to
transactions between Lender and Borrower under the Loan Documents (including
without limitation reasonable attorneys fees and expenses), except for losses
caused by Lender's gross negligence or willful misconduct.
10.10 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
26
<PAGE>
10.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
10.12 Survival. All covenants, representations and warranties made
--------
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Lender
with respect to the expenses, damages, losses, costs and liabilities described
in Section 10.9 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against any of them have
run.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above' written.
"Borrower"
SNOWBALL.COM, INC.
By: /s/ James R. Tolonen
----------------------------------
Title: COO/CFO
-------------------------------
250 Executive Park Boulevard
Suite 4000
San Francisco, CA 94134
Attn: Chief Financial Officer
Fax: 415-508-2001
Email: [email protected]
"Lender"
SAND HILL CAPITAL II, L.P.
By: /s/ Daniel Corry
---------------------------------
Title: General Partner
--------------------------------
3000 Sand Hill Road, Bldg. 2, Suite 110
Menlo Park, CA 94025
Attn: Daniel Corry
Fax: (650) 234-0414
Email: [email protected]
-------------------------------
28
<PAGE>
EXHIBIT 10.21
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT is dated as of June 1, 1999, by and between
RICHARD LEFURGY ("Lefurgy") and AFFILIATION NETWORKS, a Delaware corporation
("Affiliation").
WHEREAS, LeFurgy is presently a director of Affiliation; and
WHEREAS, LeFurgy was retained to provide consulting services in the area of
internet advertising to Affiliation; and
WHEREAS, LeFurgy's participation as a consultant and as a member of the
Board of Directors of Affiliation is specifically limited to advice with respect
to internet advertising, and LeFurgy has neither been asked to, nor has
participated in any other aspect of Affiliation's business except with respect
to his duties as a member of the Board of Directors; and
WHEREAS, LeFurgy does not participate directly or indirectly in connection
with any recruiting, hiring, evaluation of potential employees, identification
of potential employees, or any other aspect of the personnel recruiting
decisions at Affiliation (collectively "personnel decisions").
NOW, THEREFORE, for good and adequate consideration, receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Nonparticipation. Notwithstanding LeFurgy's pariticipation as a member
----------------
of its Board of Directors, Affiliation and LeFurgy each agree and acknowledge
that LeFurgy has not, and it is not contemplated that LeFurgy will in the future
participate in any personnel recruiting decisions at Affiliation pertaining to
individuals who are or were employed by or affiliated with the Walt Disney
Company or its affiliates ("Disney").
2. Indemnification. Affiliation agrees to indemnify, defend and hold
---------------
harmless LeFurgy, his attorneys, accountants, successors and assigns from and
against any and all claims, demands, actions, causes of action, suits,
controversies, losses, costs, expenses, fines, penalties, forfeitures,
obligations, liabilities, damages, settlements, judgments, consequential damages
(including all lost wages, consulting fees, options, and all other consequential
damages) and executions whatsoever, which may arise, result from, relate to, or
be connected with any activity by Affiliation which relates to personnel
recruiting decisions pertaining to individuals who are or were employed by or
affiliated with Disney to the extent arising from a claim by Disney with respect
to any personnel recruiting decisions of Affiliation with respect to any such
individuals
3. Further Documents and Acts. Each party shall execute and deliver all
--------------------------
such further instruments, documents and papers, and shall perform any and all
acts necessary to give full force and effect to all of the terms and provisions
of this Agreement.
4. Attorneys' Fees. If any party hereto takes any action concerning the
---------------
validity, construction, administration, performance, or enforcement of this
Agreement, the prevailing party in such action shall be entitled to recover all
of its costs and expenses, including actual attorneys' fees, incurred in
connection therewith, whether or not such action proceeds to final judgment or
determination. Any litigation between the parties shall occur exclusively in
the State of California.
5. Severability. If any provision of this Agreement, as applied to any
------------
party or to any circumstance, shall be found by a court to be void, invalid or
unenforceable, the same shall in no way affect
-1-
<PAGE>
any other provision of this Agreement, the application of any such provision in
any other circumstance, or the validity or enforceability of this Agreement.
6. Construction. This Agreement shall be construed in accordance with the
------------
laws of the State of California applicable to contracts entered into and fully
to be performed therein. In all matters of interpretation, whenever necessary to
give effect to any provision of this Agreement, each gender shall include the
others, the singular shall include the plural, and the plural shall include the
singular. The titles of the paragraphs of this Agreement are for convenience
only and shall not in any way affect the interpretation of any provision or
condition of this Agreement. Except as may be expressly set forth herein, the
parties hereto do not intend to confer any rights or remedies upon any person
other than the parties hereto.
7. Entire Understanding. This Agreement contains the entire understanding
--------------------
of the parties hereto relating to the subject matter contained herein and
supersedes all prior and collateral agreements, understandings, statements and
negotiations of the parties. Each party acknowledges that no representations,
inducements, promises, or agreements, oral or written, with reference to the
subject matter hereof have been made other than as expressly set forth herein.
This Agreement cannot be changed, rescinded or terminated orally. This Agreement
shall be binding on and shall inure to the benefit of the successors, personal
representatives, heirs, and assignees of the parties hereto.
8. Counterparts. This Agreement may be executed in two or more
------------
counterparts, which, taken together, shall constitute the whole of the agreement
as between the parties.
9. No Waiver. No delay or omission on the part of either party in
---------
exercising any of its rights or remedies shall operate as a waiver, estoppel or
other preclusion against the exercise of such rights or remedies at any time. A
waiver of any rights or remedies on any one occasion shall not serve as a waiver
for any subsequent or prior occasions.
10. No Strict Construction. The language of this Agreement shall be
----------------------
construed as a whole, according to its fair meaning and intent, and not strictly
for or against either party hereto, regardless of who drafted or was principally
responsible for drafting the Agreement or any specific term or conditions
hereof. This Agreement shall be deemed to have been drafted by all parties
hereto, and no party shall urge otherwise. In executing this Agreement,
Affiliation and LeFurgy acknowledge and represent that each: (a) has fully and
carefully read and considered this Agreement; (b) has been or has had the
opportunity to be fully apprised by his or its attorneys of the legal effect and
meaning of this document and all terms and conditions hereof; (c) has had the
opportunity to make whatever investigation or inquiry he or it deemed necessary
or appropriate in connection with the subject matter of this Agreement; (d) has
been afforded the opportunity to negotiate as to any and all terms hereof; and
(e) is executing this Agreement voluntarily, free from any influence, coercion
or duress of any kind.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
RICHARD LEFURGY AFFILIATION NETWORKS, INC.
a Delaware corporation
/s/ Richard LeFurgy By: /s/ Mark Jung
- ------------------------------------ --------------------------------
Mark Jung, President
-3-
<PAGE>
Exhibit 21.01
Snowball.com, Inc. has the following subsidiaries:
Ameritrack, Inc., a Delaware corporation
Extreme Interactive, Inc., a Oklahoma corporation
<PAGE>
Exhibit 23.02
Consent of Ernst & Young LLP, Independent Auditors
--------------------------------------------------
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated November 19, 1999,
except as to Note 10, as to which the date is December 20, 1999 in the
Registration Statement (Form S-1) and related Prospectus of Snowball.com, Inc.
for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
December 22, 1999
<PAGE>
EXHIBIT 23.03
Consent of Independent Accountants
We hereby consent to the use in this registration statement of Snowball.com on
Form S-1 of our report dated December 9, 1999 relating to the audited financial
statements of Extreme Interactive Media, Inc. which appear in such registration
statement. We also consent to the reference to use under heading "Experts" in
such registration statement.
Sincerely,
/s/ Hamilton & Associates, Inc.
Hamilton & Associates, Inc.
<PAGE>
Exhibit 23.04
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated October 8, 1999, with respect to the financial
statements and schedules of Ameritrack, Inc. included in the Registration
Statement (Form S-1) and related Prospectus of Snowball.com, Inc. for the
registration of shares of its common stock.
/s/ J.W. Hunt and Company, LLP
Columbia, South Carolina
December 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SNOWBALL.COM, INC. AUDITED FINANCIAL STATEMENT AND RELATED FOOTNOTES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 7,799 0
<SECURITIES> 2,991 0
<RECEIVABLES> 1,343 1,019
<ALLOWANCES> (344) (99)
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,550 148
<PP&E> 8,021<F4> 153<F4>
<DEPRECIATION> (1,266)<F5> (60)<F5>
<TOTAL-ASSETS> 20,094 1,161
<CURRENT-LIABILITIES> 6,814 399
<BONDS> 1,253 0
0 0
0<F1> 0<F1>
<COMMON> 35,393<F6> 5,701<F6>
<OTHER-SE> (23,366)<F3> (4,939)<F3>
<TOTAL-LIABILITY-AND-EQUITY> 20,094 1,161
<SALES> 3,214 3,256
<TOTAL-REVENUES> 3,214 3,256
<CGS> 2,286 1,322
<TOTAL-COSTS> 19,692 5,594
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (337) 0
<INCOME-PRETAX> (18,427) (3,660)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (18,427) (3,660)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (18,427) (3,660)
<EPS-BASIC> (1.08)<F2> 0<F2>
<EPS-DILUTED> (1.08)<F2> 0<F2>
<FN>
<F1>ALL PREFERRED SHARES CONVERT TO COMMON AT EFFECTIVE DATE OF PUBLIC OFFERING
<F2>ASSUMING CONVERSION OF ALL PREFERRED SHARES
<F3>ACCUMULATED DEFICIT
<F4>INCLUDES GOODWILL & INTANGIBLE ASSETS
<F5>INCLUDES AMORTIZATION AND DEPRECIATION
<F6>INCLUDES COMMON STOCK AT THE FILING DATE, DEFERRED STOCK COMPENSATION AND STOCKHOLDERS' NOTES RECEIVABLE.
</FN>
</TABLE>
