U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
----------- -----------
Commission file number: 1-13360
ENTERACTIVE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3272662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 West 40th Street, Suite 2100, New York, NY 10018
(Address of Principal Executive Offices)
(212) 221-6559
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
---- ----
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Number Outstanding
Title of Class as of January 14, 1997
-------------- ----------------------
Common Stock, $.01 Par Value 7,679,441
Transitional Small Business Disclosure Format: Yes No X
---- ----
<PAGE>
TABLE OF CONTENTS
Page
PART I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at November 30, 1996 3
and May 31, 1996
Consolidated Statements of Operations for the six 4
month and three month periods ended November 30,
1996 and 1995, respectively
Consolidated Statements of Cash Flow for the six 5
months ended November 30, 1996 and November 30,
1995
Notes to Financial Statements 6-10
Item 2 - Management's Discussion and Analysis of 11-15
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Change in Securities 16
Item 3 - Defaults upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
ENTERACTIVE INC.
Consolidated Balance Sheets
November 30 May 31
------------ ------------
1996 1996
------------ ------------
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 1,278,400 $ 6,005,400
Accounts receivable 646,400 147,400
Income taxes receivable 16,400 16,400
Inventories 595,800 439,500
Prepaid expenses and other 242,300 10,200
------------ ------------
Total current assets 2,779,300 6,618,900
Capitalized Software 856,500 1,070,600
Property and equipment, net 181,500 231,300
Other 24,200 24,200
------------ ------------
$ 3,841,500 $ 7,945,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,342,700 $ 1,404,300
Accrued expenses 155,900 895,300
Current maturities of long-term debt 516,100 498,900
------------ ------------
Total current liabilities 2,014,700 2,798,500
Long-term debt, excluding current maturities 40,200 167,800
------------ ------------
Total liabilities 2,054,900 2,966,300
Commitments and contingencies
Stockholders' Equity
Preferred Stock $.01 par value,
2,000,000 shares authorized and none issued -- --
Common Stock $.01 par value, 30,000,000
shares authorized; 7,679,441 and 7,656,435
shares issued and outstanding for November
30, 1996 and May 31, 1996
respectively 76,800 76,600
Additional paid-in capital 19,932,000 19,620,900
Accumulated deficit (18,222,200) (14,718,800)
------------ ------------
Total stockholders' equity 1,786,600 4,978,700
$ 3,841,500 $ 7,945,000
============ ============
See notes to financial statements.
<PAGE>
ENTERACTIVE INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months Ended November 30 For the Six Months Ended November 30
----------------------------------- ------------------------------
1996 1995 1996 1995
------------------------------ ------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net product sales $ 441,500 $ 204,100 $ 766,100 $ 229,600
Product development revenue -- 152,000 40,700 200,500
Royalty revenue 197,600 100,200 375,300 102,400
----------- ----------- ----------- -----------
Total revenues 639,100 456,300 1,182,100 532,500
Cost of product sales 219,900 47,000 348,900 55,300
Amortization of capitalized software 107,100 0 214,200
Cost of development revenue 9,400 150,000 37,000 188,200
Research and development expenses 619,400 709,200 1,440,200 1,457,300
Marketing and selling expenses 1,109,300 569,700 1,805,800 1,010,400
General and administrative expenses 468,200 324,600 907,500 659,600
----------- ----------- ----------- -----------
Total costs and expenses 2,533,300 1,800,500 4,753,600 3,370,800
Operating loss (1,894,200) (1,344,200) (3,571,500) (2,838,300)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (4,800) (100) (22,200) (700)
Interest income 26,400 56,500 83,400 90,200
Other 6,900 (400) 6,900 8,900
----------- ----------- ----------- -----------
Loss before income taxes (1,865,700) (1,288,200) (3,503,400) (2,739,900)
Income tax benefit -- --
----------- ----------- ----------- -----------
Net loss $(1,865,700) $(1,288,200) $(3,503,400) $(2,739,900)
=========== =========== =========== ===========
Loss per common and
common equivalent share $ (0.24) $ (0.27) $ (0.46) $ (0.57)
=========== =========== =========== ===========
Weighted average shares of common
stock and common stock equivalents 7,679,441 4,775,489 7,679,222 4,775,489
</TABLE>
See notes to financial statements.
<PAGE>
ENTERACTIVE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended November 30
---------------------------
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,503,400) $(2,739,900)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 297,600 92,500
Gain on disposal of assets -- (9,000)
Stock option consulting expense 237,500 --
Changes in assets and liabilities:
Accounts receivable (499,000) (218,300)
Notes receivable -- (225,000)
Inventories (156,300) (154,400)
Prepaid expenses and other (232,100) 19,000
Other assets -- (2,700)
Accounts payable (61,600) 609,200
Accrued expenses (739,400) (213,200)
----------- -----------
Net cash used in operating activities (4,656,700) (2,841,800)
----------- -----------
Cash flows from investing activities
Proceeds from sale of investments -- 988,100
Purchases of property and equipment (33,700) (28,700)
----------- -----------
Net cash (used in) provided by investing activities (33,700) 959,400
----------- -----------
Cash flows from financing activities
Exercise of stock options 73,800 --
Principal payments under long-term debt (110,400) (15,200)
Principal payments under capital lease obligations -- (1,600)
----------- -----------
Net cash used in financing activities (36,600) (16,800)
Net decrease in cash and equivalents (4,727,000) (1,899,200)
Cash and equivalents
Beginning of period 6,005,400 2,932,400
----------- -----------
End of period $ 1,278,400 $ 1,033,200
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited financial statements have been prepared
in accordance with the instructions to Form 10-QSB and in the
opinion of management contain all adjustments (consisting of only
normal recurring entries) necessary to present fairly the Company's
financial position as of November 30, 1996, and the results of its
operations and its cash flows for the six months ended November 30,
1996 and 1995. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted. The
interim financial statements should be read in conjunction with the
Company's financial statements and related notes in the May 31, 1996
Annual Report on Form 10-KSB. The results for the six month period
ended November 30, 1996 are not necessarily indicative of the
results to be obtained for the full year.
2. Business
Enteractive, Inc. (the "Company") designs, publishes and markets
interactive multimedia titles to the home and school markets
On February 29, 1996, the Company acquired Lyriq International
Corporation ("Lyriq"), a developer and publisher of interactive
multimedia software, whereby Lyriq was merged into a wholly-owned
subsidiary of the Company. The merger was accounted for under the
purchase method of accounting and, accordingly, the net assets and
operations of Lyriq are included in the Company's consolidated
financial statements commencing February 29, 1996.
The purchase price was determined as follows:
725,212 shares of Enteractive common
stock at fair value ($4.00 per share) $2,900,800
Excess of fair value of liabilities
assumed over assets acquired of Lyriq 625,400
Acquisition costs 52,100
----------
Total $3,578,300
==========
In connection with the acquisition, the Company recorded a
$2,293,500 expense for purchased research and development and
$1,284,800 of capitalized software which is being amortized on a
straight-line basis over three years. The charge for purchased
research and development equaled the estimated current fair value of
the future related cash flows to be derived from specifically
identified technologies (discounted at a risk-adjusted rate of 30%)
for which technological feasibility had not yet been established
pursuant to SFAS No. 86 (consistent with management's definition of
internally developed software). In addition, such technologies have
no alternative future use.
1
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ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Business (continued)
The following unaudited pro forma consolidated results of operations
reflects the results of the Company's operations for the six months
ending November 30, 1995 as if the merger with Lyriq had occurred at
the beginning of the period and reflect the historical results of
operations of the purchased business adjusted for increased
amortization expense and increased common shares outstanding from
the acquisition.
Six months ended
November 30, 1995
-----------------
Total revenues $ 1,126,645
Net loss $ (3,269,752)
Net loss per share $ (.59)
The pro forma information does not necessarily indicate what would
have occurred had the acquisition been consummated at the beginning
of the respective periods, or of the results that may occur in the
future.
3. Public Offerings of Common Stock
On October 20, 1994, 2,300,000 units of interest in the Company were
sold in an initial public offering(IPO). Each unit, which was sold
for $4.00, consisted of one share of the Company's common stock and
one common stock purchase warrant, which entitles the warrant holder
to purchase one share of the Company's common stock for $4.00
through October 20, 1997. Proceeds of approximately $7,600,000, net
of related expenses of approximately $1.6 million, were received in
exchange for the units issued. In connection with this sale of
units, the Company sold to the underwriter, for an aggregate of $50,
the right to purchase 200,000 units with identical terms to those
sold in the initial public offering, except that the exercise price
of the warrants is $5.20. Such units are exercisable at $6.60 per
unit through October 20, 1999, and have certain "piggy back" and
demand registration rights.
In May, 1996, the Company sold 2,415,000 shares of the Company's
common stock to the public at a price of $3.375 per share. Proceeds
were approximately $6,791,600, net of related expenses of
approximately $1,359,000. In connection with this offering the
Company sold to the underwriter, for an aggregate of $100, the right
to purchase 210,000 shares of common stock at a price of $3.71 per
share through May 21, 2001. In connection with this right, the
underwriter also received certain "piggyback" and demand
registration rights.
4. Revenue Recognition
Revenue from product sales is recognized upon shipment, provided no
significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Revenue under fixed price
product development contracts is recognized using the percentage of
completion method based on progress to date, which is
2
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
measured by comparing costs to date to total estimated costs.
Royalty revenue is recognized when earned.
The Company's agreements with certain product distributors and
retailers permit them to exchange or return products for which the
Company provides an allowance reflected as a reduction of accounts
receivable in the accompanying balance sheets.
5. Cost of Product Sales
Cost of product sales consist of manufacturing, packaging, and
customer support costs.
6. Software Development Costs
Capitalization of costs associated with internally developed
software begins upon the determination by the Company of a product's
technological feasibility, as evidenced by a working model.
Capitalized software development costs are amortized over related
sales on a per-unit basis based on estimated total sales, with a
minimum amortization based on a straight-line method over three
years. Capitalized software at November 30, 1996 resulted from the
Lyriq acquisition and is net of accumulated amortization of
$428,400.
7. 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
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Among the more
significant estimates included in these financial statements are the
estimated allowance for doubtful accounts receivable, reserves for
returns and exchanges and charges for purchased research and
development. Actual results could differ from those estimates.
8. Subsequent Events
(a) USWeb Affiliation
On December 4, 1996 the Company signed an agreement with USWeb
Corporation and paid $625,000 for the right to operate USWeb
affiliate offices in New York, Long Island, Philadelphia, Baltimore,
Stamford, CT and Bergen County and Newark, NJ., for a ten year
period. The Company has formed a subsidiary, which will be named
USWeb Cornerstone, and is intended to provide a full range of
Internet and Intranet-based business solutions; including Web site
design, hosting and management, design and implementation of
database and e-commerce solutions, educational programs and
Web-related strategic consulting and marketing.
(b) Private Placement
3
<PAGE>
ENTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 12, 1996 the Company completed a private placement of 84
units each consisting of 80 shares of Class A Convertible Preferred
Stock ("Preferred Stock") and 50,000 Common Stock Purchase Warrants
to purchase in the aggregate 50,000 shares of Common Stock at an
exercise price of $4.00 per share. Proceeds were approximately
$7,872,000, net of related expenses of $528,000. The Preferred Stock
has a stated value of $1,250 per share and each share is convertible
at any time after April 30, 1998 into such whole number of shares of
Common Stock equal to the aggregate stated value of the Preferred
Stock to be converted divided by the lesser of (i) $2.00 or (ii) 50%
of the average closing sale price for the Common Stock for the last
ten trading days in the fiscal quarter of the Company prior to such
conversion. The Company must use the proceeds, if any, derived from
the exercise of the Company's currently outstanding public Common
Stock Warrants, which expire in October 1997, to redeem the
Preferred Stock at 110% of stated value. The Company also has the
option to redeem the Preferred Stock at any time upon 30 days prior
written notice, at a redemption price equal to 110% of the stated
value.
(c)Early extinguishment of debt
As a result of agreements among the Company, certain former
employees and GKN Securities Corp., in January, 1997 the Company
repaid $475,800 of it's long-term debt plus related accrued
interest.
4
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion and analysis below should be read in conjunction with the
Financial Statements of Enteractive and the Notes to Financial Statements
included elsewhere in this Form 10-QSB.
OVERVIEW
Enteractive was formed in December 1993 to develop, publish and market
interactive multimedia software products, and consummated the merger with Sonic
Images Productions, Inc. ("Sonic"), an established multimedia software
developer, in May 1994. Prior to fiscal 1996, the Company derived the majority
of its revenues from grants or contracts to develop specific titles. In the
fiscal year ended May 31, 1995, the Company undertook a transition from such
externally-funded development projects to developing, either by itself or with a
co-publisher, its own titles and, accordingly, planned to derive its revenues
principally from product sales and royalties. The Company is currently
evaluating the extent to which, it will continue to incur additional costs in
connection with developing and marketing its own titles.
On February 29, 1996, the Company completed the acquisition of Lyriq, whereby
Lyriq was merged into a wholly-owned subsidiary of the Company. The Lyriq
acquisition was accounted for under the purchase method of accounting with the
Company as the acquiring entity. See footnote 1 to the accompanying consolidated
financial statements.
REORGANIZATION
On July 15, 1996 the Company announced a restructuring, comprised of a 45%
reduction of its Washington DC based development staff, and changes in senior
management. In connection with the downsizing, John Ramo, president and chief
operating officer and Jolie Barbiere, a vice president, resigned as officers and
members of the Company's Board of Directors.
AFFILIATION WITH USWEB
On December 4, 1996 the Company signed an agreement with USWeb Corporation under
which the Company has established a subsidiary to operate USWeb affiliate
offices in New York and subject to regulatory approval, the exclusive rights to
develop new USWeb affiliate offices in Long Island, Philadelphia, Baltimore,
Stamford, CT and Bergen County and Newark, NJ. The subsidiary, which will be
named USWeb Cornerstone, is intended to provide a full range of Internet and
Intranet-based business solutions; including Web site design, hosting and
management, design and implementation of database and e-commerce solutions,
educational programs and Web-related strategic consulting and marketing.
QUARTERLY RESULTS
The Company's quarterly operating results from its sales of entertainment and
recreational software have in the past and are likely in the future to vary
significantly depending on factors such as the timing of new hardware and
software title introductions, the degree of market acceptance of such titles and
the introduction of titles competitive with those of the Company. In addition,
the home recreation and entertainment software business is highly seasonal.
Typically, revenues are highest during the last calendar quarter (which includes
the holiday buying season), decline in the first calendar quarter and are lowest
in the second and third calendar quarters. This seasonal pattern is due
primarily to the increased demand for home recreation and entertainment software
titles during the year-end holiday buying season. The Company expects its future
software revenues and operating results will reflect these seasonal factors.
1
<PAGE>
For the quarters ended November 30, 1996 and November 30, 1995 approximately
68.2% and 71.0% of the Company's costs and expenses were incurred in connection
with the development and/or marketing of specific titles. The Company's costs
vary significantly based on the number of titles being developed for and
marketed by the Company. Accordingly, adjustments in the level of expenditures
can be readily implemented.
The Company expects that the operating results from its USWeb related operations
will reflect the costs of establishing offices, hiring personnel and marketing
its services. Cost will exceed related revenues during the start up phase of
this business. However, management believes that since a significant component
of the business cost will be personnel related it can quickly adjust staffing
levels to correspond to anticipated demand.
RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED NOVEMBER 30, 1996 V.
NOVEMBER 30, 1995.
The Company recognized product sales, net of estimated returns of $766,100 and
$441,500, in the six and three months ended November 30, 1996, respectively, an
increase of $536,500 and $237,400 over the six and three month period ended
November 30, 1995. This significant increase is due to increased volumes. The
increases in both accounts receivable and inventory are related to the Company's
software publishing operations.
Royalty revenue was $375,300 and $197,600 in the six and three months ended
November 30, 1996, respectively, an increase of $272,900 and $97,400 over the
six and three month period ended November 30, 1995, respectively. The increase
is primarily due to greater royalties from international licenses.
Cost of product sales was $348,900 and $219,900 in the six and three months
ended November 30, 1996, respectively, an increase of $293,600 and $172,900 over
the six and three month period ended November 30, 1995, respectively. The
increase in cost of product sales in absolute dollars is due to increases in
sales volume. The increase in the percentage of cost of product sales to net
product sales in the current year reflects the increase in allowances for
returns and other sales credits which is recorded as a reduction in net product
sales.
Amortization of capitalized software was $214,200 and $107,100 in the six and
three months ended November 30, 1996, respectively. This amortization is a
result of the capitalized software acquired in connection with the Lyriq
acquisition.
Research and development expenses were $1,440,200 and $619,400 in the six and
three months ended November 30, 1996, respectively, a decrease of $17,100 and
$89,800 over the six and three month period ended November 30, 1995,
respectively. This decrease reflects lower spending as a result of the
previously announced reorganization, which was completed by the beginning of the
quarter ended November 30, 1996.
Marketing and selling expenses were $1,805,800 and $1,109,300 in the six and
three months ended November 30, 1996, respectively, an increase of $795,400 and
$539,600 over the six and three month period ended November 30, 1995,
respectively. This increase reflects a greater number of titles being marketed
and the company's shift to entertainment and recreational products which require
higher levels of marketing support to generate sales. The quarterly increase
also reflects trade and consumer cooperative advertising allowances to secure
shelf space for product.
General and administrative expenses were $907,500 and $468,200 in the six and
three months ended November 30, 1996, respectively, an increase of $247,900 and
$143,600 over the six and three month period ended November 30, 1995,
respectively. This increase primarily results from non-cash charges for
consulting expenses incurred to implement the company's business strategy.
2
<PAGE>
Interest expense was $22,200 and $4,800 in the six and three months ended
November 30, 1996, respectively, an increase of $21,500 and $4,700 over the six
and three month period ended November 30, 1995, respectively. This increase is
due to the interest on the loans for repurchased shares of Company Common Stock.
Interest income was $83,400 and $26,400 in the six and three months ended
November 30, 1996, respectively, a decrease of $6,800 and $30,100 over the six
and three month period ended November 30, 1995, respectively. This decrease is
due to lower cash balances during the current fiscal year.
No income tax provisions are necessary as the Company is in a net tax loss
carryforward position.
The Company does not believe it will generate taxable income during the period
ending May 31, 1997. Beyond such time, using the standards set forth in
Financial Accounting Standard No. 109, management cannot currently determine
whether the Company will generate taxable income during the period that the
Company's net operating loss carry forward may be applied towards the Company's
taxable income. Accordingly, the Company has established a valuation allowance
against its deferred tax asset.
3
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, the Company's principal sources of capital have been as follows:
(i) In a bridge financing consummated in January 1996, the Company
received approximately $2,460,000 in net proceeds from the sale
of convertible notes and warrants. Simultaneously with the
closing on May 21, 1996 of the pubic offering described below
convertible notes with an aggregate principal of $2,250,000
were converted into 740,734 shares of Common Stock, while
$450,000 of convertible notes were repaid.
(ii) On May 21, 1996, the Company consummated a public offering by
issuing 2,415,000 shares of Common Stock to the public. The
net proceeds from this offering were $6,791,600.
(iii) On December 12, 1996 the Company completed a private placement
of 84 units each consisting of 80 shares of Class A
Convertible Preferred Stock ("Preferred Stock") and 50,000
Common Stock Purchase Warrants to purchase in the aggregate
50,000 shares of Common Stock at an exercise price of $4.00
per share. Proceeds were approximately $7,872,000, net of
related expenses of $528,000. The Preferred Stock has a stated
value of $1,250 per share and each share is convertible at any
time after April 30, 1998 into such whole number of shares of
Common Stock equal to the aggregate stated value of the
Preferred Stock to be converted divided by the lesser of (i)
$2.00 or (ii) 50% of the average closing sale price for the
Common Stock for the last ten trading days in the fiscal
quarter of Company prior to such conversion. The Company must
use the proceeds, if any, derived from the exercise of the
Company's currently outstanding public Common Stock Warrants,
which expire in October 1997, to redeem the Preferred Stock at
110% of the stated value. The company also has the option to
redeem the Preferred Stock at any time upon 30 days prior
written notice, at a redemption price equal to 110% of the
stated value.
In May 1996 the Company consummated an agreement with certain of its officers
pursuant to which the Company repurchased 1,000,000 shares of Common Stock at
$1.00 per share. At November 30, 1996 $443,700 of the purchase price had been
paid. As a result of agreements among the Company, certain former employees and
GKN Securities Corp. in January, 1997 the Company repaid $475,800 of it's
long-term debt plus related accrued interest. Interest will accrue on the unpaid
balances at the prime rate and is payable quarterly.
At November 30, 1996, the Company had cash and equivalents of $1,278,400. The
decrease of $4,727,000 in cash and equivalents from May 31, 1996 was used to
fund operating activities. As described above, the Company received
approximately $7,872,000 in net proceeds from a private placement consummated in
December 1996. The increase in both accounts receivable and inventory are
related to the Company's software publishing operations.
Capital expenditures were $33,700 and $19,200 in the six and three months ended
November 30, 1996, respectively, an increase of $5,000 and a decrease of $1,000
from the six and three month period ended November 30, 1995, respectively. The
Company expects capital expenditures in the fiscal year ending May 31, 1997 to
be higher than the average of both fiscal 1996 and 1995 principally as a result
of the cost of acquiring the equipment required for the US Web affiliate offices
and development center.
The Company believes that its existing cash and equivalents, net proceeds from
the December 1996 financing and anticipated revenues will be sufficient to meet
its liquidity and cash requirements for at least the next 18 months. However,
these funds may not be sufficient to meet the Company's longer term cash
requirements for operations. Based on management's assessment of the future
marketability of its titles and demand for Web
4
<PAGE>
related services, the Company may significantly alter the level of expenses both
within the next 18 months and thereafter.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to develop its products, the success of
its USWeb Cornerstone subsidiary as well as general market conditions,
competition and pricing. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Form 10-QSB will prove to
be accurate. In light of significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
INFLATION
The past and expected future impact of inflation on the financial statements is
not significant.
5
<PAGE>
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-
Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 10.1 -- Affiliate Agreement by and between USWeb
Corporation and Enteractive Web Services
Exhibit 27
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ENTERACTIVE, INC.
----------------------------------------
(Registrant)
Date January 21, 1997
/s/ Kennth Gruber
----------------------------------------
Kenneth Gruber
Chief Financial Officer and
Principal Accounting Officer
USWEB
AFFILIATE AGREEMENT
This Affiliate Agreement is made this ______ day of _________________, 19__,
(the "Effective Date") by and between USWEB Corporation, a Utah Corporation with
its principal place of business at 3000 Lakeside Drive, Santa Clara, California
95054 ("USWEB"), and
Enteractive Web Services
110 West 40th Street
New York, NY 10018
("Affiliate") (sometimes a "Party" or, collectively, "the Parties").
PREAMBLES
1. USWEB has developed and owns a proprietary business system (the
"USWEB System"), identified by the mark "USWEB(TM)", relating to the development
and operation of businesses offering services for the development, operation,
and maintenance of customer sites on the Internet.
2. The USWEB System includes, and will include, without limitation,
software, products, and services for the development, operation, service, and
support of Internet Web sites for Affiliate's customers, including turnkey
development and deployment systems and specifications; development content,
aids, and templates; techniques and materials for promotion, advertising, and
marketing to customers; customer education programs, record keeping and
reporting methods; training in operation of the USWEB Business; and other
tangible and intangible property contributing to the continuity and uniformity
of the USWEB Network.
3. Affiliate's Application to become a USWEB Affiliate has been
approved by USWEB in reliance upon all of the representations made and
information contained in that Application.
4. The Parties intend this Agreement to establish the basis for
ensuring uniform standards of quality, performance, operation, and reputation of
Affiliate's USWEB business; enhancing and protecting the USWEB names and marks;
ensuring the full and fair collection of Affiliate's financial obligations to
USWEB; and, generally, providing an objective contractual basis for a fair and
mutually satisfactory business relationship between the Parties.
THEREFORE, the Parties, in consideration of the undertakings and
commitments of each Party to the other Party contained in this Agreement, and
for other good and valuable consideration, agree as follows:
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1. DEFINITIONS
These terms shall have the following meanings in this Agreement:
1.1 "USWEB" means USWEB Corporation, the Franchisor under this Agreement,
which is a Utah Corporation with its principal place of business at
3000 Lakeside Drive, Santa Clara, California 95054, and its successors
and assigns pursuant to this Agreement.
1.2 "Affiliate" shall mean the individual, corporation, partnership, or
other legal person which is the signatory to this Agreement.
1.3 "USWEB Business" shall mean the business operated by Affiliate pursuant
to this Agreement, utilizing the USWEB System and Marks in the design,
development, operation, and maintenance of customer's sites on the
Internet, and providing customer education on Internet-related topics.
1.4 "USWEB Network" shall mean the network of USWEB and all USWEB
Businesses operated by all USWEB Affiliates, utilizing the USWEB System
and Marks.
1.5 "USWEB System" shall mean USWEB's prescribed methods for operating a
USWEB Business and all component elements of such methods used in the
design, development, operation, and maintenance of customer's sites on
the Internet and providing customer education on Internet-related
topics, including the use of the name and style "USWEB(TM)"; licensed
USWEB Intellectual Property and USWEB Proprietary Information; and
various programs, procedures, techniques, know-how, and other methods
of doing business used in the operation of USWEB Business.
1.6 "Adjusted Gross Revenues" shall mean Affiliate's gross revenues from
the operation of the USWEB Business established pursuant to this
Agreement, determined using United States Generally Accepted Accounting
Principles (USGAAP), adjusted for (a) the amount of Affiliate's
unburdened direct cost for (i) computer hardware products resold to
Affiliate's customers, (ii) goods and/or services purchased from USWEB
and resold to Affiliate's customers, and (iii) Internet access services
purchased from USWEB-approved suppliers and resold to Affiliate's
customers, and for (b) sales discounts and/or rebates which are
determinable at the time Affiliate contracts with its customers.
Adjusted Gross Revenues shall not be adjusted for discounts and/or
rebates granted at any time after Affiliate contracts with its
customers, or for any costs of generating revenues, operating expenses
(including the write off of uncollectible accounts receivable or other
bad debt expenses), non-operating expenses, or other expenses relating
to the operation of the USWEB Business established pursuant to this
Agreement.
1.7 "Advertising & Marketing Fund" or "the Fund" shall mean the fund
administered by USWEB, pursuant to the provisions of Section 7.0 of
this Agreement.
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1.8 "Authorized Offering" shall mean those products or services which are
authorized by USWEB for offering to Affiliate's customers.
1.9 "Incapacity" shall mean the inability of Affiliate to operate or
oversee the operation of the USWEB Business on a regular basis, by
reason of any continuing physical, mental, or emotional disability,
chemical dependency, or any other limitation resulting in Affiliate's
inability to operate or oversee the operation of the USWEB Business.
Any dispute as to the existence of Incapacity shall be resolved by
majority decision of three licensed medical physicians practicing in
the state of the location of the USWEB Business, with each Party
selecting one medical physician, and the two medical physicians so
designated selecting the third medical physician. The decision of the
majority of the three medical physicians shall be binding upon the
Parties and all costs of making such decision shall be borne by the
Party against whom it is made.
1.10 "USWEB Intellectual Property" shall mean any and all patents, patent
applications (including any amendments, continuations, divisions,
subdivisions, substitutes, reissues, or re-examinations), inventions,
industrial models, designs, copyrights, trademarks, service marks
(including all registered, unregistered, and common law copyrights,
trademarks, or service marks), logos, slogans, characters, trade
secrets (including USWEB Proprietary Information, as defined in this
Agreement), know-how, show-how, licenses, sublicenses, and permissions
to use copyrighted materials of others, including all forms of
implementations incorporating such USWEB Intellectual Property, and
including assignments of "derivative works" [as defined in the U.S.
Copyright Act, 17 U.S.C. ss. 101 (1994)] of USWEB Intellectual Property
from Affiliate and other USWEB Affiliates, which may be licensed or
sublicensed by USWEB, either to Affiliate or to Affiliate's customers.
1.11 "Mark" or "Marks" shall mean the trademark and service mark USWEB(TM),
in approved form or style as set forth from time to time in the
Operations Manual or other communication from USWEB relating to the
Marks, as well as all other trademarks, service marks, trade names,
slogans, designs, packaging, trade dress, or other descriptive,
distinctive, or identifying characteristics which may be adopted and
used by USWEB for use in the USWEB System, as set forth from time to
time in the Operations Manual.
1.12 "Operations Manual" shall mean the set of materials, however published
and delivered, which sets forth the standards, specifications,
policies, procedures, methods, approved products, services, suppliers,
and other USWEB Proprietary Information relating to the operation of a
USWEB Business using the USWEB System, and all amendments, supplements,
bulletins, notices, and memoranda relating to such materials which may
be provided to Affiliate by USWEB in its sole discretion, from time to
time.
1.13 "USWEB Proprietary Information" shall mean all information, in any
form, relating to the USWEB System or the operation of a USWEB Business
which has not been publicly disclosed by a duly authorized
representative of USWEB. USWEB Proprietary
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Information shall include, but not be limited to, the contents of the
Operations Manual, marketing and sales information and plans,
operations, specifications, procedures, Authorized Offerings, technical
and pricing information, and other items, tangible or intangible, which
relate to the USWEB System, as modified from time to time by USWEB in
its sole discretion, but which modifications shall not materially
modify any term or condition of this Agreement.
1.14 "SMSA Class" shall mean USWEB's classification of the Standard
Metropolitan Statistical Area ("SMSA"), as defined by the U.S. Census
Bureau or its successor, from time to time, in which Affiliate's USWEB
Business is located.
1.15 "Transfer" shall mean any act by Affiliate to sell, assign, transfer,
convey, give away, or encumber to any person, firm, or corporation, all
or any part of its interest in this Agreement or its interest in the
franchise granted by this Agreement or a controlling interest in any
proprietorship, partnership, or corporation that owns any interest in
this Agreement or in the franchise, or any offer, permit, or sufferance
of any sale, assignment, transfer, conveyance, gift, or encumbrance in
any way to any person, firm, or corporation.
2. GRANT OF FRANCHISE
2.1 Subject to all terms and conditions of this Agreement and to the
continuing good faith performance of such terms and conditions by
Affiliate, USWEB grants to Affiliate a nonexclusive franchise:
a. to adopt and use the USWEB System to operate a USWEB Business
at the location in the SMSA specified in Exhibit A to this
Agreement;
b. to operate the USWEB Business continuously during business
hours necessary to complete projects in a timely manner and in
compliance with customer expectations, in accordance with the
terms and conditions of this Agreement and the Operations
Manual;
c. to advertise the USWEB Business to the public as a USWEB
Business; and
d. to promote, market, offer, sell, and provide to the public
authorized USWEB products and services ("Authorized
Offerings"), in accordance with the terms and conditions of
this Agreement, the Operations Manual, related licenses and
other communications from USWEB to Affiliate from time to
time.
2.2 USWEB also grants to Affiliate the following nonexclusive licenses, to
be used by Affiliate only during the term of this Agreement and only in
conjunction with the franchise granted by this Agreement:
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a. a nonexclusive license to use the Marks, including the Mark
USWEB(TM) and all other Marks adopted and used by USWEB as a
part of the USWEB System, as published from time to time in
the Operations Manual, in strict accordance with USWEB's
standards and requirements for usage of the Marks, as set
forth in this Agreement, in the Operations Manual, and in
other communications from USWEB to Affiliate from time to
time; and
b. a nonexclusive license to use USWEB Intellectual Property, as
distributed by USWEB to Affiliate from time to time during the
term of this Agreement, in strict accordance with the terms
and conditions of any related licenses for USWEB Intellectual
Property, and in strict accordance with USWEB's standards and
requirements for USWEB Intellectual Property, as set forth in
this Agreement, in the Operations Manual, and in other
periodic communications from USWEB to Affiliate relating to
USWEB Intellectual Property; and
c. a nonexclusive license to use USWEB Proprietary Information,
as disclosed by USWEB to Affiliate from time to time during
the term of this Agreement, in strict accordance with USWEB's
standards and requirements for usage of USWEB Proprietary
Information, as set forth in this Agreement, in the Operations
Manual, and in other periodic communications from USWEB to
Affiliate relating to USWEB Proprietary Information.
2.3 USWEB shall deliver to Affiliate a current version of the Operations
Manual, which USWEB shall update and revise, from time to time during
the term of this Agreement in its sole discretion.
2.4 The term of this Agreement shall be five (5) years from the Effective
Date set forth above.
2.5 The success of the business venture contemplated to be undertaken by
Affiliate by virtue of this Agreement is speculative and depends, to a
large extent, upon the ability of Affiliate as an independent business
operator and the active participation of Affiliate in the daily affairs
of the USWEB Business, as well as other factors. USWEB does not make
any representation or warranty, express or implied, as to the potential
success of the business venture contemplated by this Agreement.
2.6 If, upon expiration of the term of this Agreement, Affiliate has
complied with Sections 2.6(a) and 2.6(b) of this Agreement, and is not
otherwise in default under this Agreement, then Affiliate may elect to
continue operating the USWEB Business by complying with the provisions
of Sections 2.6 and 2.7 of this Agreement, unless Affiliate has
received notice from USWEB in accordance with Section 2.9 of this
Agreement that the franchise will not be renewed. In order to qualify
to continue to operate as a USWEB Affiliate:
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a. Affiliate must have substantially complied with all the terms
and conditions of this Agreement and any other agreement
between Affiliate and USWEB; and
b. Affiliate must have given written notice of its election to
continue to operate as a USWEB Affiliate to USWEB not less
than six (6) months and not more than nine (9) months prior to
the expiration of the term of this Agreement.
2.7 If Affiliate has complied with the requirements of Section 2.6 of this
Agreement, then the following additional conditions precedent must be
satisfied at least ninety (90) days prior to the expiration of the term
of this Agreement in order to continue to operate as a USWEB Affiliate:
a. Affiliate must qualify under USWEB's then-current criteria for
a new USWEB franchise, including all financial, operational,
and business suitability criteria then-utilized by USWEB in
evaluating and approving Applications to become a USWEB
Affiliate. If USWEB is not offering new franchises at the time
of Affiliate's renewal, then the requirements of this Section
2.7(a) shall be deemed waived.
b. USWEB and Affiliate must execute the then-current form of
Franchise Agreement for USWEB Affiliates, including all other
ancillary agreements and legal instruments then used by USWEB
in connection with the granting of USWEB franchises; refusal
by Affiliate to execute such agreements and instruments within
thirty (30) days of delivery to Affiliate shall be deemed an
election by Affiliate not to continue to operate as a USWEB
Affiliate;
c. Affiliate must satisfactorily complete USWEB's renewal
training program, provided that such training shall not be
longer than the training period then-required of new
Affiliates;
d. Affiliate must execute a general release, in a form
satisfactory to USWEB, generally releasing any and all claims
Affiliate may have against USWEB, its subsidiaries,
Affiliates, or predecessors, and their respective partners,
officers, directors, agents, shareholders, and employees, for
any acts or omissions that may have occurred during the
relationship of the Parties prior to the date of the release;
and
e. Affiliate shall pay to USWEB a fee of Two Thousand Five
Hundred Dollars ($2,500).
2.8 All supplements, additions, or other modifications to this Agreement of
whatever kind, nature, and description shall terminate upon the
expiration of this Agreement or execution
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of the then-current form of Franchise Agreement. No supplements,
additions, or other modifications to this Agreement shall survive
expiration or termination of this Agreement.
2.9 If USWEB elects not to renew the franchise granted by this Agreement,
then USWEB shall give Affiliate written notice of its election not to
renew the franchise, specifying the reasons for non-renewal, not later
than ninety (90) days prior to the expiration of the term of this
Agreement.
2.10 The franchise and licenses granted to Affiliate by this Agreement are
nonexclusive. USWEB shall have, at all times throughout the term of
this Agreement and at all places the unqualified right to open and
operate, or to franchise and license others to open and operate,
businesses utilizing the USWEB System and Marks.
2.11 USWEB expressly reserves any and all rights not explicitly granted to
Affiliate by the terms and conditions of this Agreement.
3. MARKS
3.1 Affiliate acknowledges and shall not contest the validity of the Marks
and acknowledges that the Marks are the sole and exclusive property of
USWEB. Affiliate shall not oppose or seek to cancel any registration of
any of the Marks, in the United States or elsewhere, or aid or abet
others in such activities, during or after the term of this Agreement.
Affiliate may use the Marks solely for the purposes and to the extent
of the rights, licenses, and franchise granted by this Agreement and
only in accordance with the provisions of this Agreement.
3.2 All goodwill associated with the Marks, including any goodwill which
might be generated by Affiliate and all other USWEB Affiliates, shall
remain the sole property of USWEB.
3.3 Affiliate shall not use the Marks, or any colorable imitation or
similar mark, directly or indirectly, for any purpose whatsoever, other
than the purposes intended by this Agreement, at any time during or
after expiration or termination of this Agreement.
3.4 Affiliate shall not use the Marks as part of any corporate or trade
name, or with any prefix, suffix, or other modifying words, terms,
designs, or symbols, or in any modified form, during or after
expiration or termination of this Agreement, except as a fictitious
business name, which shall be in the form prescribed by, and subject to
the prior written approval of, USWEB, as set forth in the Operations
Manual.
3.5 USWEB shall indemnify and hold harmless Affiliate against all claims
arising from Affiliate's proper or authorized use of the Marks in
accordance with the terms and conditions of this Agreement.
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3.6 Affiliate shall not attempt, authorize, or purport, in any manner, to
license, sublicense, or grant, in any manner, any interest in the Marks
to any person at any time, during or after expiration or termination of
this Agreement. Any such act by Affiliate shall constitute irreparable
harm to USWEB and other USWEB Affiliates and shall constitute a
material breach of this Agreement.
3.7 Affiliate shall notify USWEB immediately of any apparent infringement
of or challenge to Affiliate's use of any of the Marks or claim by any
person of any rights in any of the Marks. USWEB shall have sole
discretion to take such action, if any, as it deems appropriate, and
Affiliate shall cooperate with USWEB in all activities reasonably
required by USWEB to preclude or terminate unauthorized use of the
Marks or any confusingly similar name or Mark. Affiliate shall not be
liable for attorneys fees, court costs, or other legal expenses
incurred by USWEB in pursuit of infringement actions. Any and all
damages or other amounts recovered in any such action or proceeding
shall be the sole property of USWEB.
3.8 USWEB shall provide Affiliate with specifications for exterior and
interior signs required to be displayed at the location of the USWEB
Business. Alteration of the sign specifications shall be permitted only
to conform to local ordinances, and only with the prior written
approval of USWEB, which approval shall not be unreasonably withheld.
3.9 If it becomes advisable at any time, in USWEB's sole discretion, for
USWEB and/or Affiliate to modify or discontinue use of any Marks,
and/or use one or more additional or substitute trade names,
trademarks, service marks, or other commercial symbols, or any items of
trade dress or decor, then Affiliate shall comply with USWEB's
directions within a reasonable time after notice to Affiliate by USWEB,
and USWEB shall have no liability or obligation whatsoever with respect
to Affiliate's modification or discontinuance of use of any Marks.
3.10 Affiliate shall not use any of the Marks in the offering of any product
or service which is not an Authorized Offering, or in any other manner
not expressly authorized by this Agreement, by the Operations Manual,
or separately in writing by USWEB.
4. COMMENCEMENT OF OPERATIONS
4.1 The location and premises of the USWEB Business identified in Exhibit A
shall be approved in advance and in writing by USWEB. USWEB shall
provide to Affiliate a list of modifications, if any, necessary to
convert the approved location to the USWEB System, and Affiliate shall
complete all interior and exterior modifications for the location and
commence operations at the location under the USWEB System within six
(6) months of the Effective Date.
4.2 In the event USWEB disapproves of Affiliate's location, Affiliate shall
have sixty (60) days from the Effective Date of this Agreement within
which to enter into a lease at an
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approved location and, thereafter, to complete the modifications and
preparations of the location in accordance with USWEB's requirements,
in order to commence operations at the location under the USWEB System
within six (6) months of the Effective Date. Affiliate acknowledges and
agrees that time is of the essence in this regard, and that Affiliate's
failure to meet the time limits imposed in Section 4.1 or this Section
4.2 of this Agreement, unless extended in writing by USWEB, shall be a
material breach of this Agreement and may be grounds for termination of
the Agreement at the sole option of USWEB, without further liability to
Affiliate.
4.3 Upon completion of all activities reasonably necessary for Affiliate to
commence operations as a USWEB Center at the location, but in no event
later than the first day of the month after six (6) months after the
Effective Date of this Agreement, the Parties shall execute the Startup
Addendum, attached as Exhibit B to this Agreement, confirming the date
on which Affiliate's obligations to pay Royalty & Service Fees and
Advertising Marketing Fees, under Sections 9.2 and 9.3 of this
Agreement, shall commence.
4.4 Affiliate shall be solely responsible for maintaining suitable,
approved premises for the operation of the USWEB Business during the
term of this Agreement and for all lease payments for the space. USWEB
does not guarantee any such payments, and Affiliate may not act in any
way which might bind or obligate, or attempt to bind or obligate, USWEB
to the terms of any premises lease.
4.5 Affiliate shall not relocate the USWEB Business (a) from the location
or (b) outside the SMSA set forth in Exhibit A to this Agreement,
without the prior written consent of USWEB, which consent shall not be
unreasonably withheld. USWEB may impose conditions precedent to
approval of any relocation as USWEB deems necessary in its sole
discretion. Any such relocation of the USWEB Business shall be at
Affiliate's sole expense, and USWEB shall have the right to charge
Affiliate for all costs incurred by USWEB, including a reasonable fee
for its services in connection with any such relocation.
4.6 Although USWEB utilizes its experience and expertise in the approval of
the location of a USWEB Business, nothing contained in this Agreement
shall be interpreted as a guarantee of success at such location. It
shall be the sole responsibility of Affiliate to secure premises for
the site of Affiliate's USWEB Business and to initiate a request for
relocation approval in the event that the original premises become
unsuitable.
5. OPERATING STANDARDS
5.1 In order to maintain the high quality and consistent standards
associated with the USWEB System and Marks, Affiliate shall:
a. Devote full time and best efforts to establish and develop the
USWEB Business in accordance with all terms and conditions of
this Agreement; Affiliate may
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designate a qualified employee for such purpose, and USWEB
reserves the right to approve the person so designated by
Affiliate;
b. Maintain the condition and appearance of the location of the
USWEB Business, consistent with USWEB's standards for USWEB
Business; and to improve and upgrade the location from time to
time as may be required or necessary, including, but not
limited to, replacement of worn or obsolete computer or office
equipment, fixtures, or decor, maintenance and repair of
exterior and interior areas, and redecorating of the USWEB
Business premises, in accordance with standards and
specifications set forth by USWEB in the Operations Manual,
the lease for the premises, and in other communications from
USWEB to Affiliate, from time to time;
c. Promote the USWEB Business using the advertising, operations,
and promotion materials developed and made available by USWEB
to Affiliate from time to time.
d. Use only prescribed forms of customer agreements and licenses,
as set forth from time to time in the Operations Manual, and
not enter into any other forms of agreement with customers
which would have the effect of abrogating any provision in any
prescribed form;
e. Complete and submit to USWEB, on a timely basis, the
then-current forms and reports prescribed and made available
in various USWEB publications.
f. Maintain an accounting and record keeping system, approved in
accordance with the standards and specifications set forth in
the Operations Manual, including the basic accounting
information necessary to prepare financial statements and a
general ledger in accordance with United States Generally
Accepted Accounting Principles (USGAAP) utilizing a standard
chart of accounts as set forth in the Operations Manual, with
adequate and verifiable records and supporting documentation,
including, without limitation, invoices, payroll records,
check registers, sales tax records, cash receipts and
disbursements, journals, and general ledgers;
g. Except as otherwise provided in this Agreement, purchase
products and services for use in the USWEB Business from
vendors that meet USWEB's standards and specifications, as set
forth in the Operations Manual; Affiliate shall not offer to
its customers any products or services through the USWEB
Business which are not Authorized Offerings or otherwise in
accordance with USWEB's standards and specifications;
h. In order to assure uniformly high standards and quality of
service and operations, provide Internet hosting services to
Affiliate's customers which are operated only by USWEB or by
approved suppliers;
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i. Use and display the USWEB name and Marks only in such manner
as contemplated or provided for in this Agreement and USWEB's
published standards;
j. Comply at all times with all federal, state, and municipal
laws, regulations, bylaws, orders, rulings, permits, and
licensing requirements, and pay promptly any and all taxes,
assessments, fees, fines, and penalties arising out of the
operation of the USWEB Business;
k. Respond promptly to any and all customers' inquiries or
complaints and resolve to the customer's satisfaction all
reasonable complaints;
l. Comply with the standards, specifications, procedures, and
other requirements of the USWEB System, as set forth in the
Operations Manual, as the USWEB System may be subsequently
modified by USWEB, in its sole discretion, from time to time;
m. Use the location of the USWEB Business solely for the purpose
of operating a USWEB Business, and not for any other purpose,
without the prior written consent of USWEB;
n. Notify USWEB in writing within three (3) business days of the
commencement of any action, suit, or legal proceeding by any
person, or of the issuance of any order, writ, injunction
award, or decree of any court, agency, or other governmental
instrumentality, which may adversely affect the operation or
financial condition of the USWEB Business, or the reputation
of the USWEB Network;
o. Hire and train only competent and qualified employees; and
p. Obtain and maintain in force, at its sole expense, a policy or
policies of liability insurance, in such form and such limits
(of not less than $1 million) as USWEB, in its sole
discretion, deems necessary, (including motor vehicle
liability insurance, if a motor vehicle is employed in the
operation of the USWEB Business,) as set forth in the
Operations Manual. All such insurance policies shall name
USWEB Corporation as an additional insured and shall provide
that USWEB will receive ten (10) days prior written notice of
termination, expiration, or cancellation of any such policy;
not less than annually, Affiliate shall submit to USWEB a copy
of the certificate or other evidence of the renewal or
extension of each such insurance policy; if Affiliate fails to
comply with the obligations of thisss.5.1 (p), then USWEB
shall have the right to procure such insurance and Affiliate
shall reimburse USWEB for all related costs incurred.
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5.2 Affiliate shall maintain the confidentiality, both during and after the
term of this Agreement, of all USWEB Proprietary Information disclosed
to Affiliate by USWEB pursuant to this Agreement, and not disclose,
duplicate, or otherwise use in an unauthorized manner any portion of
the USWEB Proprietary Information; Affiliate shall not use any USWEB
Proprietary Information for any purpose or in any business activity
other than in the USWEB Business, or in any manner not contemplated by
this Agreement, unless such use has been specifically authorized or
approved in writing by USWEB;
5.3 USWEB Proprietary Information shall remain, at all times, the sole
property of USWEB and shall be returned to USWEB promptly upon the
expiration or termination of this Agreement
5.4 Affiliate shall insure, at all times, that the Operations Manual and
USWEB Proprietary Information provided to it are maintained in their
most current version, and in the event of any dispute as to the
contents of such materials, the terms of the master copy of such
materials maintained by USWEB shall be controlling.
5.5 Affiliate may use USWEB Intellectual Property authorized by USWEB in
the delivery of products or services to Affiliate's customers, in
accordance with the terms and conditions of various license agreements
pertaining to USWEB Intellectual Property, including licenses
agreements with third parties, which licenses may grant to Affiliate
the right to prepare "derivative works" [as defined in the U.S.
Copyright Act, 17 U.S.C. ss. 101 (1994)] from such licensed USWEB
Intellectual Property. With respect to such derivative works, Affiliate
hereby assigns to USWEB all right, title, and interest in such
derivative works, including any patent, copyright, know-how, or similar
rights relating to such derivative works, under methods and procedures
set forth in the Operations Manual, from time to time, and shall do,
execute, acknowledge, and deliver all such further acts, transfers,
assignments, conveyances, or assurances as USWEB may require to better
transfer, assign, convey, grant, and assure the assignment of and
delivery of code for such derivative works to USWEB.
6. OTHER OBLIGATIONS OF USWEB
6.1 USWEB will revise and update the Operations Manual, from time to time,
during the term of this Agreement and distribute such revisions and
updates to Affiliate.
6.2 USWEB will test and evaluate computer hardware and software products,
and recommend certain systems and configurations for use in various
parts of the USWEB Business, in USWEB's sole discretion, in accordance
with the standards, specifications, and procedures set forth from time
to time in the Operations Manual.
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6.3 USWEB will test and evaluate products and services for designation as
Authorized Offerings, in accordance with the standards, specifications,
and procedures set forth from time to time in the Operations Manual.
6.4 USWEB will sell and/or distribute products and services, including
products and services developed by other USWEB Affiliates and assigned
to USWEB pursuant to Section 5.5 of the Franchise Agreement (or future
equivalents), in USWEB's sole discretion, in accordance with the
standards, specifications, and procedures set forth from time to time
in the Operations Manual.
6.5 USWEB will provide such other ongoing consultation, advice, and
assistance as USWEB, in its sole discretion, deems appropriate to
assist Affiliate in the operation of the USWEB Business, the
performance of Affiliate's obligations under this Agreement, and the
maintenance of high standards and reputation of the USWEB Network.
7. ADVERTISING
Affiliate acknowledges the value of advertising and the importance of the
standardization of advertising and promotion to the furtherance of the goodwill
and the public image of the USWEB franchise network and to other USWEB
Affiliates. Therefore, it is agreed as follows:
7.1 USWEB, or its designee, shall develop, in its sole discretion, all
creative concepts, advertising campaigns, and marketing and promotional
materials used in the USWEB System. Affiliate shall not perform any of
these activities, and shall utilize only USWEB-approved concepts,
campaigns, and materials, in accordance with this Agreement, the
Operations Manual, and other communications from USWEB, from time to
time.
7.2 USWEB, or its designee, shall utilize The Advertising & Marketing Fund
in its sole discretion, for advertising, marketing, and public
relations activities to promote the sale of products or services
offered by USWEB Affiliates, to promote the sale of new USWEB
franchises, to produce advertising campaigns and marketing and
promotional materials for use by all USWEB Affiliates, and to assist
specific USWEB Affiliates, as well as to pay all costs associated with
the general marketing and promotion of the USWEB Network, including,
without limitation, corporate employee and other reasonable
administrative costs relating to advertising, marketing, and promotion;
engagement of advertising, public relations, and media buying firms;
and costs for development and placement of advertising campaigns in all
forms of media.
7.3 In addition to the Advertising & Marketing Fee payable pursuant to
Section 9.3 of this Agreement, Affiliate shall spend, on an annual
basis, not less than one percent (1%) of Adjusted Gross Revenues on
marketing and advertising activities related solely to Affiliate's
USWEB Business. Categories of such activities will be described, from
time to time, in the Operations Manual.
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7.4 Affiliate agrees and acknowledges that The Advertising & Marketing Fund
is intended to maximize marketplace recognition of USWEB and acceptance
of the Marks for the benefit of the USWEB franchise network and that
USWEB or its designee undertake no obligation in administering the Fund
to make expenditures for any USWEB Affiliate that are equivalent or
proportionate to its contribution, or to ensure that any particular
Affiliate benefits directly or pro rata from the placement of such
advertising. Affiliate shall have no right to any refund of monies
contributed to the Fund upon termination, expiration, or transfer of
this Agreement.
7.5 Affiliate shall maintain a business telephone and advertise
continuously in the classified or "Yellow Pages" of its local telephone
directory under such listing(s) and in such format as approved by
USWEB. Where multiple Affiliates serve a common geographic area covered
by a common telephone directory, such advertisements shall list all
then-existing Affiliates under a collective listing(s) and Affiliate
shall contribute its equal share in the cost of such advertising.
7.6 Affiliate shall advertise consistently with all standards, terms, and
conditions of this Agreement and the Operations Manual, and shall not
advertise or use, in advertising or any other form of promotion, the
Marks without displaying appropriate or approved copyright and
trademark registration marks or other designations, as required.
8. ACCOUNTING AND RECORDS
8.1 Affiliate must maintain an accounting and record keeping system in
accordance with United States Generally Accepted Accounting Principles
(USGAAP), approved in accordance with the standards and specifications
set forth in the Operations Manual. This system shall utilize a
standard chart of accounts, as set forth in the Operations Manual, and
shall include the basic accounting information necessary to prepare
financial statements, a general ledger, and reports required by this
Agreement and the Operations Manual. Affiliate shall maintain adequate
and verifiable records and supporting documentation relating to such
accounting information, in accordance with USWEB's specifications, as
set forth in the Operations Manual, including vendor and customer
invoices, payroll records, check registers, cash receipts and
disbursements journals, and general ledgers.
8.2 Affiliate shall, at its expense, submit to USWEB within ninety (90)
days of the end of Affiliate's fiscal year during the term of this
Agreement, an income statement for such fiscal year and a balance sheet
as of the last day of such fiscal year, prepared on an accrual basis
(unless otherwise required by law), including all adjustments necessary
for fair presentation of the financial statements, as adjusted and
reconciled after the closing and review of Affiliate's books and
records, all in accordance with USGAAP. Such financial statements will
be certified to be true and correct by Affiliate. USWEB reserves the
right to require annual financial statements, prepared in accordance
with USGAAP, reviewed or audited by an independent certified public
accountant.
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8.3 Affiliate shall submit to USWEB, within five (5) days of the end of
each calendar month, a true, correct, and complete statement of
Adjusted Gross Revenues for the previous calendar month, containing all
information required and in the format prescribed, by USWEB, as set
forth in the Operations Manual, and certified as true, correct,
complete and accurate by Affiliate.
8.4 Affiliate shall provide to USWEB copies of Affiliate's annual federal
income tax returns and quarterly (or other periodic) sales tax returns,
including all schedules, exhibits, and tables included in such returns,
within thirty (30) days of the date of filing each such return. In the
event that such returns are not filed by Affiliate in a timely manner,
Affiliate shall provide to USWEB copies of all extensions of time filed
and granted within thirty (30) days of each such filing or granting of
such extension(s).
8.5 If any statement submitted to USWEB by Affiliate discloses any
underpayment of monthly Royalty & Service Fees or Advertising &
Marketing Fees, then Affiliate shall pay to USWEB, at the time such
statement is submitted, the amount of any such underpayment. Any
overpayment shall be credited to Affiliate's account with USWEB.
8.6 USWEB or its designated agents shall have the right at all reasonable
times to examine, at its expense, the books and records of Affiliate.
USWEB shall also have the right, at any time, to have an independent
audit made of Affiliate's books and records, by auditors selected by
USWEB and at USWEB's expense. In the event any such inspection or audit
shall disclose an under-reporting of Adjusted Gross Revenues for any
period which exceeds five percent (5%) of Affiliate's Adjusted Gross
Revenues during such period, then Affiliate shall pay to USWEB, within
ten (10) days of receipt of a demand based on the report, the amount(s)
due as a result of such under-statement, plus all costs associated with
the audit, not to exceed $10,000. Further, in the event such audit is
made necessary by the failure of Affiliate to furnish reports or
statements as required in this Agreement, Affiliate shall reimburse
USWEB for all costs of such inspection or audit, including without
limitation the charges of any independent accountant and all travel
expenses, room and board, and other reasonable expenses and
compensation of USWEB employees relating to such inspection or audit.
9. PAYMENTS AND FEES
9.1 INITIAL FRANCHISE FEES:
a. Upon execution of the Agreement, Affiliate shall pay to USWEB
a nonrecurring Initial Franchise Fee in the amount of Fifty
Thousand Dollars ($50,000).
b. The Initial Franchise Fee will be reduced for the first 50
USWEB Affiliates. If Affiliate is USWEB Affiliate Nos. 1-10,
then the Initial Franchise Fee is zero ($0.00). If Affiliate
is USWEB Affiliate Nos. 11-50, then the Initial Franchise Fee
is Twenty-Five Thousand Dollars ($25,000).
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[CIRCLE REDUCED AMOUNT AND INITIAL].
c. The Initial Franchise Fees are payable in full at the time of,
and deemed fully earned by USWEB and nonrefundable upon,
Affiliate's execution of this Agreement.
9.2 Affiliate shall pay to USWEB a monthly Royalty & Service Fee,
calculated at Five Percent (5%) of Adjusted Gross Revenues, but not
less than the following Monthly Minimum Royalty & Service Fee,
determined by the SMSA Class specified in Exhibit A to this Agreement:
================================================================================
SMSA Class 1 SMSA Class 2 SMSA Class 3 SMSA Class 4
- ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------
$3,800 $3,100 $2,000 $1,400
================================================================================
9.3 Affiliate shall pay to USWEB a monthly Advertising & Marketing Fee
equal to Two Percent (2%) of Adjusted Gross Revenues, but not less than
the following Monthly Minimum Advertising & Marketing Fee, determined
by the SMSA Class specified in Exhibit A to this Agreement:
================================================================================
SMSA Class 1 SMSA Class 2 SMSA Class 3 SMSA Class 4
- ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------
$1,700 $1,300 $800 $500
================================================================================
9.4 All amounts due to USWEB shall be payable on the tenth (10th) business
day of each calendar month.
9.5 Any amount properly owing from Affiliate to USWEB for Royalty & Service
Fees, Advertising & Marketing Fees, or any other purpose whatsoever, if
not paid when due, whether such amount has been shown on any report
required to be submitted by Affiliate or has subsequently been
determined by verification, examination, or audit to have been due for
any month, shall bear interest from the date such amount was due until
paid, at the lesser of one and one-half percent (1.5%) per month of
delinquency or the maximum rate permitted by law. Affiliate
acknowledges that this provision does not constitute USWEB's agreement
to accept any payments after the due date or a commitment by USWEB to
extend credit for or otherwise to finance Affiliate's operation of the
USWEB Business.
9.6 Affiliate shall pay all costs incurred by USWEB due and owing to USWEB
in connection with the operation of Affiliate's USWEB Business,
including, without limitation, the costs
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of enforcing the provisions of this Agreement and the cost of all
related attorneys' fees, accountants' fees, court costs, and general
and administrative expenses, including travel.
9.7 Notwithstanding any designation by Affiliate, USWEB shall have the sole
discretion to apply any receipts from or on the accounts of Affiliate
for any indebtedness to USWEB.
9.8 During the initial 4 calendar months of the term of this Agreement,
Affiliate shall not be obligated to pay the Monthly Minimum obligations
set forth in Sections 9.2 and 9.3, and shall be obligated to pay only
the percentages of Adjusted Gross Revenues payable pursuant to those
Sections.
10. COVENANTS
10.1 During the term of this Agreement, neither Affiliate nor any officer,
director, or holder of a beneficial interest of ten percent (10%) or
more of the ownership, and of any corporation directly or indirectly
controlling Affiliate, if Affiliate is a corporation; or the general
partners or any limited partner (including any corporation and the
officers, directors, and holders of any beneficial interest of ten
percent (10%) or more of the ownership of a corporation that controls,
directly or indirectly, any general or limited partner), if Affiliate
is a partnership, shall:
a. engage in, or own any interest (except as a passive investor
of less than five percent (5%) of total debt and equity) in,
any business or other activity that would compete with the
USWEB Business or otherwise conflict with the performance of
Affiliate's obligations under this Agreement, except as a
USWEB Affiliate; or
b. divert or attempt to divert any business or any customers of
the USWEB Business to any other person or entity, by direct or
indirect inducement or otherwise, or do or perform, directly
or indirectly, any other act injurious or prejudicial to the
goodwill associated with USWEB, the Marks, the USWEB Business,
or the USWEB Network; or
c. solicit any person for employment with Affiliate who is at
that time already employed by USWEB or another USWEB
Affiliate, or otherwise directly or indirectly induce or seek
to induce such person to leave his or her employment.
10.2 For a period of two (2) years following expiration or termination of
this Agreement, neither Affiliate nor any officer, director, or holder
of a beneficial interest of ten percent (10%) or more of the ownership,
and of any corporation directly or indirectly controlling Affiliate, if
Affiliate is a corporation; or the general partners or any limited
partner (including any corporation and the officers, directors, and
holders of any beneficial interest of ten percent (10%) or more of the
ownership of a corporation that controls, directly or indirectly, any
general or limited partner), if Affiliate is a partnership, shall:
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a. engage in, or own any interest (except as a passive investor
of less than five percent (5%) of total debt and equity) in,
any business or other activity, in the SMSA where the USWEB
Business was located, that would compete with the former USWEB
Business, except as a USWEB Affiliate; or
b. divert or attempt to divert any business or any customers of
the USWEB Business to any other person or entity in the SMSA
where the USWEB Business was located, by direct or indirect
inducement or otherwise, or do or perform, directly or
indirectly, any other act injurious or prejudicial to the
goodwill associated with USWEB, the Marks, the USWEB Business,
or the USWEB Network; or
c. solicit any person for employment who is at that time already
employed by USWEB or another USWEB Affiliate, or otherwise
directly or indirectly induce or seek to induce such person to
leave his or her employment.
10.3 Sections 10.1 and 10.2 of this Agreement shall not apply to any
business activities of Affiliate, or of any officer, director, or
holder of a beneficial interest of ten percent (10%) or more of the
ownership, and of any corporation directly or indirectly controlling
Affiliate, if Affiliate is a corporation; or of the general partners or
any limited partner (including any corporation and the officers,
directors, and holders of any beneficial interest of ten percent (10%)
or more of the ownership of a corporation that controls, directly or
indirectly, any general or limited partner), if Affiliate is a
partnership, which have been conducted by such person(s) prior to the
Effective Date of this Agreement, as such activities are described in
Exhibit A to this Agreement.
11. TRAINING AND ASSISTANCE
11.1 Prior to opening of the USWEB Business to be conducted pursuant to this
Agreement, Affiliate, or Affiliate's designated manager, shall attend
and successfully complete to USWEB's satisfaction, an Initial Training
Course of not more than four (4) days duration, to be conducted at a
location designated by USWEB. Two additional employees of Affiliate may
attend the initial training course without additional charge. The
Initial Training Course shall cover all material aspects of the
operation of a USWEB Business.
11.2 USWEB may offer, from time to time, training programs for previously
trained and experienced Affiliate personnel, to be conducted at such
place as USWEB shall designate. The content and duration of such
training shall be in USWEB's sole discretion. USWEB may charge a
reasonable fee for such additional courses.
11.3 USWEB may provide additional optional training and assistance,
including on-location training and assistance, at Affiliate's request.
The content and duration of such training and assistance shall be in
USWEB's sole discretion and Affiliate may be required to pay
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per diem costs and expenses for such training and assistance, as set
forth in the Operations Manual.
11.4 Affiliate, and key Affiliate personnel as may be designated by USWEB,
shall attend the USWEB Annual Conference as mandatory annual training,
in order to remain current and informed about developments in the USWEB
System including, but not limited to, methods of operations, products
and services, marketing strategies, advertising campaigns and programs,
and other matters of topical interest. Affiliate may be required, from
time to time, to pay registration fees to attend the Annual Conference.
11.5 All expenses incurred by Affiliate and its employees in attending all
USWEB training programs, including the initial training course, any
optional training, and the mandatory USWEB Annual Conference,
including, without limitation, travel, room and board, and employee
compensation, shall be the sole responsibility of Affiliate.
12. DEFAULT AND TERMINATION
12.1 Except as otherwise provided in this Section 12.0, USWEB may terminate
this Agreement before the expiration of its term only for good cause.
Good cause shall include, but not be limited to, Affiliate's failure to
comply with any lawful requirement of this Agreement after being given
notice of Affiliate's failure to comply and a reasonable opportunity,
which in no event need be longer than thirty (30) days, to cure such
failure.
12.2 In addition to USWEB's right to terminate this Agreement upon the
failure of Affiliate to complete development of or open the office(s)
for business (as provided in Section 4.2), USWEB may terminate this
Agreement effective immediately upon delivery of notice of termination
to Affiliate without an opportunity to cure if, during the term of this
Agreement, any of the following events occurs:
a. The discovery by USWEB that Affiliate made a material
misrepresentation in the Application or otherwise relating to
the acquisition of Affiliate's USWEB franchise or entering
into this Agreement, or that Affiliate and/or its USWEB
Business has engaged in conduct reflecting materially and
unfavorably upon the operation and reputation of USWEB, the
Marks, or the USWEB Network; or
b. Affiliate is convicted of or pleads no contest to a felony or
other criminal or civil offense involving charges of moral
turpitude or that is otherwise likely to affect adversely the
reputation of USWEB, the Marks, or the USWEB Network; or
c. Affiliate and/or its USWEB Business makes any unauthorized
use, disclosure, or duplication of any portion of the
Operations Manual, any USWEB Intellectual Property, or any
USWEB Proprietary Information; or
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d. Affiliate abandons, surrenders, or transfers control of, or
fails or refuses to actively operate the USWEB Business
continuously for have (5) days during any twelve (12) months
period unless the USWEB Business has been closed for a purpose
approved by USWEB, or Affiliate fails to relocate to an
approved location within an approved period of time following
expiration or termination of the lease for the premises of the
USWEB Business; or
e. Affiliate surrenders or transfers control of the operation of
the USWEB Business, makes or attempts to make an unauthorized
direct or indirect Transfer not in accordance with Section
13.0 of this Agreement, or fails or refuses to assign this
Agreement or the interest in Affiliate of a deceased or
disabled controlling owner as required by Section 13.5 of this
Agreement; or
f. Affiliate commits any affirmative act of insolvency, or files
any petition or action of insolvency, or for appointment of a
receiver or trustee, or makes any assignment for the benefit
of creditors, or fails to vacate or dismiss within sixty (60)
days after filing any such proceedings commenced against
Affiliate by a third party; or
g. Affiliate repeatedly fails to submit when due reports or other
information or supporting records, to pay when due Royalty &
Service Fees, Advertising & Marketing Fees, amounts due for
license fees or purchases from USWEB and/or its affiliates, or
any other payments due to USWEB and/or its affiliates, or
otherwise fails to comply with this Agreement, whether or not
such failures to comply are corrected after notice is
delivered to Affiliate; or
h. Affiliate commits any other material breach of this Agreement.
12.3 Affiliate shall be evaluated annually, in comparison to all other USWEB
Affiliates in the same SMSA Class, on (a) Adjusted Gross Revenues, (b)
customer satisfaction, based upon Network-wide survey results, and (c)
customer retention. At the end of each annual period, if Affiliate
fails to perform in the top 90% of all USWEB Affiliates in its SMSA
Class for any two or more of the three categories, then Affiliate shall
be deemed in default of this Agreement and shall have twelve (12)
months, until the next annual evaluation, to cure such default. If, at
the end of the cure period, Affiliate again fails to perform in the top
90% of all USWEB Affiliates in its SMSA Class in any two or more of the
three categories, then this Agreement shall be terminated.
12.4 If Affiliate is in substantial compliance with this Agreement and USWEB
materially breaches this Agreement and fails to cure such breach within
a reasonable time after written notice thereof is delivered to USWEB,
Affiliate may terminate this Agreement. Such termination shall be
effective thirty (30) days after delivery to USWEB of notice that such
breach has not been cured and Affiliate elects to terminate this
Agreement. A termination of this Agreement by Affiliate for any reason
other than breach of this
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Agreement by USWEB and USWEB's failure to cure such breach, within a
reasonable time after USWEB's receipt of written notice from Affiliate,
shall be deemed a termination without cause.
12.5 Upon expiration or termination of this Agreement for any reason,
Affiliate shall:
a. Within fifteen (15) days after the effective date of such
expiration or termination, pay to USWEB all liquidated and
ascertainable sums owing from Affiliate to USWEB, including
all damages, costs, expenses, and attorneys' fees incurred by
USWEB as a result of the termination or expiration; and
b. Immediately and permanently discontinue the use of the Marks,
the USWEB System, all USWEB Intellectual Property and USWEB
Proprietary Information, and any other materials which may in
any way indicate that Affiliate is or ever was operating a
USWEB Business; and
c. Immediately and permanently remove, destroy, or obliterate at
Affiliate's expense, all signs containing any of the Marks; if
Affiliate fails to remove items bearing the Marks within a
reasonable time following termination, then USWEB shall have
the right to enter Affiliate's premises to remove items
bearing the Marks; the cost of such removal shall be borne by
Affiliate; and
d. Immediately return to USWEB all copies of the Operations
Manual, all USWEB Intellectual Property, all USWEB Proprietary
Information, and any and all other materials relating to the
USWEB System; and
e. Immediately deliver to USWEB all customer lists, customer
information, and customer content managed by Affiliate, and
all architecture and usage instructions for all customer
Internet sites under management and/or being constructed by
Affiliate, and take such other and further steps to convert
all Affiliate's customers to USWEB's account; and
f. Take such action as may be required to cancel all assumed
names or equivalent registrations relating to Affiliate's use
of any Marks, and notify the local telephone company and all
telephone listing agencies of the termination or expiration of
Affiliate's right to use any telephone number associated with
any Marks and with the USWEB Business, and to authorize
transfer of the telephone number to USWEB or its designed; and
g. In the event Affiliate continues to operate or subsequently
begins to operate any other business, not to use any
reproduction, counterfeit, copy, or colorable imitation of the
Marks either in connection with such other business or the
promotion of such business, which would be likely to cause
confusion, mistake, or deception, or to dilute USWEB's
exclusive rights in and to the Marks. Affiliate
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shall make such modifications or alterations to the location
of the USWEB Business immediately upon termination or
expiration of this Agreement, as may be reasonably necessary
to prevent any association between the USWEB Network and any
business subsequently operated by Affiliate or others, subject
to all other terms and conditions of this Agreement. Affiliate
shall make such specific additional changes to the location as
USWEB may reasonably request for that purpose, including,
without limitation, removal of all signage and any other
distinctive physical and structural features identifying the
USWEB System.
12.6 Immediately upon the expiration or termination of this Agreement, for
any reason, all rights granted to Affiliate pursuant to this Agreement,
including all licenses of USWEB Intellectual Property and USWEB
Proprietary Information granted pursuant to Section 2.2 of this
Agreement, shall terminate immediately and concurrently with such
expiration and termination.
12.7 All obligations of USWEB and Affiliate which expressly or by their
nature survive the expiration or termination of this Agreement shall
continue in full force and effect subsequent to and notwithstanding
such expiration or termination and until they are satisfied or by their
nature expire.
13. OWNERSHIP AND TRANSFER
13.1 This Agreement and all rights and obligations set forth in this
Agreement may be transferred by USWEB and, if so, shall be binding upon
and inure to the benefit of USWEB's successors and assigns; USWEB's
transferee shall assume all USWEB's obligations in this Agreement.
13.2 Subject to all terms and conditions of this Agreement, Affiliate may
make a Transfer of this Agreement and all of Affiliate's rights and
obligations under this Agreement, which Transfer shall be binding upon
and inure to the benefit of Affiliate's successors and assigns, and
subject to the following conditions and requirements:
a. Affiliate, or any partner (if Affiliate is a partnership), or
shareholder (if Affiliate is a corporation) of Affiliate,
shall not Transfer by operation of law or otherwise, the
franchise granted by this Agreement, or any interest in the
franchise, or this Agreement, without the prior written
consent of USWEB. Affiliate may not, without the prior written
consent of USWEB, fractionalize any of the rights or
obligations of Affiliate under this Agreement. Any purported
assignment of any of Affiliate's rights or obligations under
this Agreement without the prior written consent of USWEB
shall be null and void and shall constitute a material breach
under this Agreement.
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b. USWEB shall not unreasonably withhold its consent to any
Transfer of this Agreement when requested; provided, however,
that such Transfer shall be subject to the following
conditions and requirements, in USWEB's sole discretion:
(1) If Affiliate is an individual and desires to Transfer
its rights to a partnership or corporation, then such
Transfer shall be subject to the following
conditions:
(a) The transferee corporation or partnership
shall not conduct any business other than a
USWEB Business under agreement(s) with
USWEB.
(b) Affiliate shall actively manage the
partnership or corporation and shall own
and/or control not less than fifty-one
percent (51%) of (i) the general partnership
interests in a partnership or (ii) the
combined debt and equity and voting power in
a corporation.
(c) The transferee partnership or corporation
shall enter into a written assignment (in a
form satisfactory to USWEB), by which the
transferee corporation assumes all of
Affiliate's obligations under this
Agreement.
(d) All general partners in a transferee
partnership, or shareholders of greater than
ten percent (10%) interest in a transferee
corporation, shall enter into a written
agreement, in a form satisfactory to USWEB,
jointly and severally guaranteeing the full
payment and performance of the transferee's
obligations to USWEB.
(e) All accrued then-outstanding financial
obligations of Affiliate to USWEB, or any of
USWEB's subsidiaries, Affiliates, or
assignees, shall be satisfied prior to
Transfer.
(2) If any Transfer would be to a person other than an
original signatory to this Agreement, then such
Transfer shall be subject to the following
conditions:
(a) The transferee(s) shall be of good moral
character and reputation and shall have a
good credit rating and competent business
qualifications which meet then-current
standards for new USWEB Affiliates at the
time USWEB's approval is requested.
Affiliate shall provide USWEB with such
information as USWEB may require to make
such determination concerning each such
proposed transferee(s).
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(b) The transferee(s) shall not be engaged in,
or own any interest in (except as a passive
investor holding not greater than five
percent (5%) of total debt and equity), any
business which competes with, or could
compete with, USWEB, the USWEB Network, any
USWEB Affiliate, or the USWEB Business,
except as a USWEB Affiliate.
(c) The transferee(s) or such other person as
shall be the actual manager of the USWEB
Business shall have successfully completed
and passed the then-current initial training
course for USWEB Affiliates.
(d) The transferee shall execute USWEB's
then-current form of Affiliate Agreement for
a term ending on the expiration date of this
Agreement, together with such other
ancillary documents as USWEB may require for
the USWEB Business, which agreements shall
supersede this Agreement in all respects.
The terms of these agreements may differ in
material respects from the terms of this
Agreement, provided, however, that the
transferee shall not be required to pay any
initial franchise fee.
(e) All accrued money obligations of Affiliate
to USWEB, and/or its subsidiaries,
affiliates, or assignees, shall be satisfied
prior to assignment or transfer, and
Affiliate shall not be in default under the
terms of this Agreement.
(f) Affiliate, prior to the transfer, shall
execute a general release, in a form
prescribed by USWEB of any and all claims
against USWEB, and/or its subsidiaries,
affiliates, and assignees, and their
respective officers, directors, agents, and
employees, except such claims as are not
permitted to be released by applicable law.
(g) USWEB's approval of any Transfer or any of
Affiliate's rights under this Agreement
shall in no way be deemed a release by USWEB
of Affiliate's obligations pursuant to this
Agreement. Consent by USWEB to a transfer of
the USWEB Business shall not constitute or
be interpreted as consent for any future
transfer.
13.3 Affiliate shall have paid to USWEB a Transfer fee equal to Five
Thousand Dollars ($5,000) for the training, supervision, administrative
costs, overhead, attorneys fees, accounting, and other expenses of
USWEB in connection with such Transfer.
13.4 Affiliate shall give USWEB thirty (30) days written notice prior to any
Transfer by Affiliate, or such other period as reasonably may be
required to permit USWEB to
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comply with any applicable state or federal franchise disclosure laws.
Affiliate shall indemnify and hold harmless USWEB for Affiliate's
failure to comply with this Paragraph. Payment of the Transfer fee and
all required documents must accompany this notice; the thirty (30) days
notice period shall commence upon USWEB's receipt of all materials
required by this Section 13.0.
13.5 In the event of the death or Incapacity of an individual Affiliate, or
any partner of an Affiliate that is a partnership or any shareholder
owning fifty percent (50%) or more of the total debt and equity of an
Affiliate that is a corporation, the heirs, beneficiaries, devisees, or
legal representatives of said individual, partner, or shareholders,
within ninety (90) days of such event, shall apply to USWEB for the
right to continue to operate the USWEB Business for the duration of the
term of this Agreement, which right shall be granted upon the
fulfillment of all of the conditions set forth in Section 13.2 of this
Agreement.
14. GENERAL PROVISIONS
14.1 This Agreement does not constitute Affiliate as an agent, legal
representative, joint venturer, partner, employee, or servant of USWEB
for any purpose whatsoever; and it is understood between the Parties to
this Agreement that Affiliate shall be an independent contractor and is
in no way authorized to make any contract, agreement, warranty, or
representation on behalf of USWEB, or to create any obligation, express
or implied, on behalf of USWEB.
14.2 Affiliate shall defend and indemnify and hold harmless USWEB, and
USWEB's shareholders, directors, officers, employees, and agents, at
Affiliate's sole cost and expense from and against any and all claims,
losses, costs, expenses (including USWEB's reasonable attorneys' fees,
in accordance with Section 14.5 of this Agreement), damages, and
liabilities ("Claims"), however caused or incurred, whether in
preparation for, response to, or conduct or settlement (whether before
or after filing of any court or other proceeding) of actual litigation,
resulting directly or indirectly from or pertaining to the use,
condition, or construction, equipping, maintenance, or operation of the
USWEB Business. Such Claims may include, without limitation, those
arising from latent or other defects in the products or services
provided in the operation of the USWEB Business, including any
Authorized Offerings, whether or not discoverable by USWEB, and those
arising from the death or injury to any person or arising from damage
to the property or business of Affiliate or USWEB, and their respective
officers, directors, employees, and agents, or any third person, firm,
or corporation, whether or not such Claims were actually or allegedly
caused wholly or in part through the active or passive negligence, or
resulted from any strict liability being imposed upon USWEB or any of
its officers, directors, employees, or agents. The indemnities and
assumptions of liabilities and obligations in this Agreement shall
continue in full force and effect subsequent to the expiration or
termination of this Agreement for any reason.
-25-
<PAGE>
14.3 No failure of USWEB to exercise any power reserved to it by this
Agreement, or to insist upon strict compliance by Affiliate with any
obligation or condition of this Agreement, and no custom or practice of
the Parties in variance with the terms of this Agreement, shall
constitute a waiver of USWEB's right to demand exact compliance with
any term or condition of this Agreement. Waiver by USWEB of any
particular default by Affiliate shall not be binding unless in writing
and executed by and shall not affect or impair USWEB's right with
respect to any subsequent default of the same or of a different nature.
14.4 Any and all notices required or permitted under this Agreement shall be
in writing and shall be personally delivered or mailed by certified
mail, return receipt requested, to the respective Parties at the
following addresses unless and until a different address has been
designated by written notice to the other Party:
Notices to USWEB:
USWEB Corporation
3000 Lakeside Drive
Santa Clara, California 95054
Attention: Chief Financial Officer
Notices to Affiliate:
Enteractive Web Services
110 West 40th Street
New York, NY 10018
Any notice by certified mail shall be deemed to have been given three
(3) business days after the date and time of mailing.
14.5 In the event that either Party to this Agreement is required to employ
legal counsel or to incur other expenses to enforce any obligation of
the other Party under this Agreement, or to defend against any claim,
demand, action, or proceeding by reason of the other Party's failure to
perform any obligation imposed upon such other Party by this Agreement,
and provided that legal action is filed and a final order in such
action or the settlement of such action establishes the other Party's
default under this Agreement, then the that Party shall be entitled to
recover from the other Party the amount of all reasonable fees of such
counsel (including the cost of in-house counsel, calculated at outside
counsel rates for attorneys of comparable background and experience)
and all other expenses incurred in enforcing such obligation or in
defending against such claim, demand, action, or proceeding, whether
incurred prior to, or in preparation for, or in contemplation of the
filing of such action or thereafter.
-26-
<PAGE>
14.6 Each section, subsection, part, term, and/or provision of this
Agreement shall be considered severable, and if, for any reason, any
section, subsection, part, term, and/or provision of this Agreement is
determined in a final order by a court of competent jurisdiction to be
invalid and contrary to, or in conflict with, any existing or future
law or regulation, then such determination shall not impair the
operation of or affect the remaining sections, subsections, portions,
parts, terms, and/or provisions of this Agreement, and, to the fullest
extent possible, such remainder shall continue to be given full force
and effect and to bind the Parties to this Agreement, and any invalid
or illegal sections, subsections, portions, parts, terms, and/or
provisions shall be deemed not part of this Agreement; provided,
however, that if USWEB determines that said finding of invalidity or
illegality adversely affects the basic consideration of this Agreement,
then USWEB, at its option, may terminate this Agreement.
14.7 No amendment, change, or variance from this Agreement shall be binding
on either Party unless executed in writing by both Parties.
14.8 All captions used in this Agreement are intended solely for the
convenience of the Parties, and none shall be deemed to affect the
meaning or construction of any provision of this Agreement. Pronouns
are used without regard to gender or number. References to numbers of
days refer to calendar days.
14.9 This Agreement may be executed in multiple counterparts, and each copy
so executed shall be deemed an original.
14.10 This Agreement shall be interpreted and construed under the laws of the
State of California, excluding its conflicts of laws principles, except
to the extent governed by the United States Trademark Act of 1946
(LANHAM ACT, 15 U.S.C.ss.ss.1051 et seq.)
14.11 Any action commenced for the purpose of interpreting or enforcing any
term or condition of this Agreement shall be commenced in either the
United States District Court for the Northern District of California,
San Jose Division or the Superior Court of the State of California for
the County of Santa Clara. The Parties submit to and accept the
jurisdiction and venue of these courts and agree to be bound by any
judgments and orders rendered by these courts.
14.12 No right or remedy conferred upon or reserved to USWEB or Affiliate by
this Agreement is intended to be, nor shall be deemed, exclusive of any
other right or remedy provided in this Agreement or otherwise provided
or permitted by law or equity, but each shall be cumulative of every
other right or remedy.
14.13 This Agreement, and any Exhibits attached to this Agreement, shall be
construed together and constitute the entire, full, and complete
agreement between USWEB and Affiliate concerning the subject matter of
this Agreement, and shall supersede all prior agreements.
-27-
<PAGE>
14.14 USWEB and Affiliate acknowledge that the USWEB System and the Franchise
and other licenses and rights granted by this Agreement are undertaken
by the Parties in the context of the present nature of the Internet.
USWEB and Affiliate acknowledge that the rapidly evolving nature of
business activities relating to the Internet and the World Wide Web
makes comprehensive foresight impossible: neither USWEB nor Affiliate
can anticipate marketplace response to the evolution of the Internet or
the World Wide Web and, therefore, the prospects for the USWEB
Business. USWEB and Affiliate acknowledge their fundamental mutual
interest in providing high quality content and service to customers and
that achievement of these goals will require flexibility, resources,
and commitment to the development of the USWEB System.
14.15 Affiliate represents and acknowledges as follows:
a. Affiliate has not received, or relied upon, any warranty or
guaranty, express or implied, as to the revenues, profits, or
success of the business venture contemplated by this
Agreement, including any oral or written representations that
USWEB will (1) provide customers or locate customers for
Affiliate; (2) purchase any portion of Affiliate's products or
services; (3) guarantee to Affiliate that Affiliate will
derive income in excess of any price paid for this franchise,
or refund any portion of such payment; or (4) provide any
sales program or marketing plan which will enable Affiliate to
derive income in excess of any price paid for this franchise.
b. Affiliate has received, read and understood this Agreement and
USWEB's Uniform Franchise Offering Circular and that it has no
knowledge of any representations by USWEB or its officers,
directors, stockholders, employees, or agents that are
contrary to the statements made in USWEB's Uniform Franchise
Offering Circular or to the terms of this Agreement; and that
USWEB has fully and adequately explained the provisions of
each of these documents to Affiliate's satisfaction; and that
USWEB has accorded Affiliate ample time and opportunity to
consult with its own advisors about the potential benefits and
risks of entering into this Agreement.
c. Affiliate has received (i) a copy of this Agreement and the
all Exhibits to this Agreement, at least five (5) business
days prior to the date on which this Agreement was executed
and (ii) the disclosure document required by the Trade
Regulation Rule of the Federal Trade Commission entitled
Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures (the "FTC
Rule"), at least ten (10) business days prior to the - date on
which this Agreement was executed.
d. Other than the information contained in USWEB's Uniform
Franchise Offering Circular, no other representation has
induced Affiliate to execute this Agreement, and there are no
representations, inducements, promises, or agreements, oral or
-28-
<PAGE>
otherwise, between the Parties not embodied in this Agreement,
which are of any force or effect with reference to this
Agreement or otherwise.
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have
duly executed, sealed, and delivered this Agreement effective on the day and
year first above written.
USWEB Corporation Affiliate: Enteractive Web Services
BY:___________________ BY: _________________________________
Kenneth G. Campbell Andy Gyenes
EVP Affiliate Development and Operations Chairman
- ---------------------------------------- -------------------------------------
Name/Title Name/Title
Date: Date:
---------------------------------- --------------------------------
-29-
<PAGE>
USWEB
AFFILIATE AGREEMENT
EXHIBIT A
1. AFFILIATE NAME: TBD
--------------------------------------------------------
2. AFFILIATE COMPANY NAME: To Be Determined
-----------------------------------------------
ADDRESS: TBD-New York City, NY
-----------------------------------------------
3. AFFILIATE #:
-----------------------------------------------
4. SMSA NAME: New York City
-----------------------------------------------
5. SMSA CLASS: #1
-----------------------------------------------
6. APPROVED LOCATION: To Be Determined
-----------------------------------------------
-----------------------------------------------
7. EXISTING GOODS AND SERVICES (ss. 10.3):
-----------------------------------------------------------------------
Please complete as appropriate
-----------------------------------------------------------------------
8. DATE:____________________
ACCEPTED AND AGREED TO:
USWEB Corporation Affiliate: Enteractive Web Services
BY:___________________ BY: _______________________________
Kenneth G. Campbell Andy Gyenes
EVP Affiliate Development and Operations Chairman
- ---------------------------------------- -----------------------------------
Name/Title Name/Title
Date: Date:
---------------------------- ------------------------------
-30-
<PAGE>
ADDENDUM TO AFFILIATE AGREEMENT
EXHIBIT B
The Affiliate Agreement dated ________________, 1996, is amended as follows:
It is agreed that, pursuant to Section 4.3 of this Agreement, the Affiliate
Startup Date shall be:
To Be Determined
- --------------------------------------------------------------------------------
and Affiliate shall commence payment of Royalty & Service Fees and Advertising &
Marketing Fees for all accounting periods after this date.
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have been duly
executed, sealed, and delivered this Addendum effective on the day and year
first above written.
USWEB Corporation Affiliate: Enteractive Web Services
BY:___________________ BY: _______________________________
Kenneth G. Campbell Andy Gyenes
EVP Affiliate Development and Operations Chairman
- ---------------------------------------- -----------------------------------
Name/Title Name/Title
Date: Date:
---------------------------- ------------------------------
-31-
<PAGE>
ADDENDUM TO AFFILIATE AGREEMENT
EXHIBIT C
The Affiliate Agreement and _________________________, 1996, is amended as
follows:
A. For all accounting periods prior to April 1, 1997, Affiliate shall not
be required to pay the Monthly Minimum Royalty & Service Fee of Monthly
Minimum Advertising & Marketing Fee. During the period prior to April
1, 1997, Affiliate shall pay the Royalty & Service Fee and Advertising
& Marketing Fee, calculated at Five Percent (5%) and Two Percent (2%)
of Adjusted Gross Revenues respectively.
B. All other fees and conditions of this Affiliate Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have duly
executed, sealed, and delivered this Addendum effective on the day and year
first above written.
USWEB Corporation Affiliate: Enteractive Web Services
BY:___________________ BY: _______________________________
Kenneth G. Campbell Andy Gyenes
EVP Affiliate Development and Operations Chairman
- ---------------------------------------- -----------------------------------
Name/Title Name/Title
Date: Date:
---------------------------- ------------------------------
-32-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 1,278,400
<SECURITIES> 0
<RECEIVABLES> 949,700
<ALLOWANCES> (303,000)
<INVENTORY> 595,800
<CURRENT-ASSETS> 2,779,300
<PP&E> 1,094,500
<DEPRECIATION> (913,000)
<TOTAL-ASSETS> 3,841,500
<CURRENT-LIABILITIES> 2,014,700
<BONDS> 0
0
0
<COMMON> 76,800
<OTHER-SE> 19,932,000
<TOTAL-LIABILITY-AND-EQUITY> 3,841,500
<SALES> 441,500
<TOTAL-REVENUES> 639,100
<CGS> 219,900
<TOTAL-COSTS> 2,533,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,800
<INCOME-PRETAX> (1,865,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,865,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,865,700)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
