-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZPPDs/0GJcu59ct3dJyOEdFtBaoYIubuV4qMUY/XCepD5T/JMb/8nqQ0fIrYMR8 uK/MU6A0VAAI+C24BWbPsg== 0000891618-96-000684.txt : 19960531 0000891618-96-000684.hdr.sgml : 19960531 ACCESSION NUMBER: 0000891618-96-000684 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19960530 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WIRED VENTURES INC CENTRAL INDEX KEY: 0001015089 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943241924 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-04739 FILM NUMBER: 96574304 BUSINESS ADDRESS: STREET 1: 520 THIRD STREET STREET 2: FOUTH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94107 BUSINESS PHONE: 4152226200 MAIL ADDRESS: STREET 1: 520 THIRD STREET STREET 2: FOUTH FLOOR CITY: SAN FRANISCO STATE: CA ZIP: 94107 S-1 1 WIRED VENTURES, INC FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- WIRED VENTURES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2721 94-3241924 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
520 THIRD STREET, FOURTH FLOOR SAN FRANCISCO, CA 94107 (415) 222-6200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------------- JEFFREY SIMON CHIEF FINANCIAL OFFICER WIRED VENTURES, INC. 520 THIRD STREET, FOURTH FLOOR SAN FRANCISCO, CA 94107 (415) 222-6200 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------------- COPIES TO: KENNETH L. GUERNSEY ROBERT T. CLARKSON JODIE M. BOURDET KENNETH M. SIEGEL BRADLEY P. MACMILLIN TAMARA G. MATTISON COOLEY GODWARD CASTRO HUDDLESON & TATUM WILSON, SONSINI, GOODRICH & ROSATI, P.C. ONE MARITIME PLAZA, 20TH FLOOR 650 PAGE MILL ROAD SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304 (415) 693-2000 (415) 493-9300
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------------- CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(3) PRICE(3) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value.............. 6,325,000 shares $12.00 $75,900,000 $26,173 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Includes 825,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) The shares of Common Stock are not being registered for the purpose of sales outside the United States. (3) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act of 1933. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 WIRED VENTURES, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS -------------------------------------------------- -------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus........................................ Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges......................... Prospectus Summary; Risk Factors 4. Use of Proceeds................................... Use of Proceeds 5. Determination of Offering Price................... Outside Front Cover Page; Underwriting 6. Dilution.......................................... Dilution 7. Selling Security Holders.......................... Not Applicable 8. Plan of Distribution.............................. Outside Front and Inside Front Cover Pages; Underwriting 9. Description of Securities to be Registered........ Prospectus Summary; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel............ Legal Matters 11. Information with Respect to the Registrant........ Outside Front and Inside Front Cover Pages; Prospectus Summary; Risk Factors; The Company; Dividend Policy; Capitalization; Selected Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Change in Accountants; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 30, 1996 5,500,000 SHARES [WIRED LOGO] WIRED VENTURES, INC. COMMON STOCK (PAR VALUE $0.001 PER SHARE) --------------------- Of the 5,500,000 shares of Common Stock offered, 4,400,000 shares are being offered hereby in the United States and 1,100,000 shares are being offered in a concurrent international offering outside the United States. The initial public offering price and the aggregate underwriting discount per share will be identical for both offerings. See "Underwriting". All of the shares of Common Stock offered hereby are being sold by Wired Ventures, Inc. (the "Company"). Prior to the offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $10.00 and $12.00 per share. For factors to be considered in determining the initial public offering price, see "Underwriting". SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. Application has been made for the listing of the Company's Common Stock on the Nasdaq National Market under the symbol "WWWW". --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) COMPANY(2) ------------------ ------------------ ------------------ Per Share.......................... $ $ $ Total(3)........................... $ $ $
- --------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting". (2) Before deducting estimated expenses of $1,300,000 payable by the Company. (3) The Company has granted the Underwriters an option for 30 days to purchase up to an additional 825,000 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. If such option is exercised in full, the total initial public offering price, underwriting discount, and proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting". --------------------- The shares offered hereby are offered severally by the U.S. Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York on or about August , 1996, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. ROBERTSON, STEPHENS & COMPANY --------------------- The date of this Prospectus is , 1996. 4 Smart Media for Smart People Around the World Wired Ventures' mission is to build a new kind of global, diversified media company for the 21st century. [PICTURES OF COMPANY PRODUCTS] 5 [PICTURES OF COMPANY PRODUCTS] Wired(R) is a registered trademark and HotWired(TM), HardWired(TM), HotBot(TM), Wired TV(TM), and Wired Online(TM) and certain other terms used in this Prospectus are trademarks of the Company. Trade names and trademarks of other companies appearing in this Prospectus are the property of their respective holders. --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Except in the historical financial statements and where otherwise indicated, all share and per-share information in this Prospectus has been adjusted to reflect the completion in May 1996 of the Reorganization described in "The Company" and conversion of all outstanding shares of Preferred Stock of the Company into shares of Common Stock, which will occur upon the completion of the offerings. In addition, unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. See "Description of Capital Stock" and "Underwriting." THE COMPANY Wired Ventures, Inc. (the "Company") is a new kind of global, diversified media company engaged in creating compelling, branded content with attitude for print, online, and television. Its current businesses include publishing Wired magazine and programming original content on the World Wide Web (the "Web") primarily through its HotWired network of online content sites (the "HotWired Network"). The Company believes that it has developed Wired and HotWired into strong brands that symbolize new media and the digital age. Wired magazine and the Company's online content sites have award-winning content and design that have attracted large and rapidly growing audiences with young, well-educated, and affluent demographics that the Company believes are highly sought after by advertisers. The Company also believes that with its creative, research, technological, sales, and management expertise, and its established brands, it has created a platform from which to launch additional brands across multiple media. In addition, the Company believes that its brands and media properties are well-positioned to capitalize on the expected growth in the use of the Internet and the Internet advertising market. Industry sources estimate that the number of Internet users will reach approximately 200 million by the end of 1999, up from approximately 56 million at the end of 1995, and that the market for advertising on the Internet will exceed $2 billion by 2000, up from $74 million in 1996. Wired magazine was launched in January 1993 to cover the Digital Revolution, a term popularized by the Company to describe the profound changes caused by the convergence of the computer, media, and communications industries. With Wired magazine's blend of leading-edge editorial and highly innovative design, the Company has created a unique magazine genre. Wired magazine is not a computer magazine; it is about the people, companies, and ideas of the Digital Revolution. Wired magazine's paid circulation has grown from 90,000 at the end of 1993 to an estimated 300,000 at the end of April 1996. The magazine's advertisers range from consumer goods companies such as General Motors Corporation and Calvin Klein Inc. to technology and telecommunications companies such as Microsoft Corporation and Motorola, Inc. The Company believes that Wired magazine is the first major technology-related publication that has been able to attract such a broad mix of advertisers. Wired magazine has won a number of prestigious awards, including a 1994 National Magazine Award for General Excellence and the 1996 National Magazine Award for Design Excellence, both given by the American Society of Magazine Editors. The Company's online programming is primarily distributed through the Web. Its flagship offering, the HotWired Network, was launched in October 1994 and features original content on topics such as politics, travel, arts, entertainment, health, careers, and lifestyle, as well as content based on Wired magazine. Users can access the HotWired Network's programs through the main HotWired Network site (http://www.hotwired.com) or through each program's own distinct Web address. The Company also produces the popular Suck.com online content site (http://www.suck.com), a source of sharp commentary on the Web and popular culture. During April 1996, the Company's Web sites received between 25,000 and 30,000 visitors per weekday, up 3 7 from 12,000 to 19,000 visitors per weekday in September 1995. The Company's online advertisers range from consumer products companies such as Toyota Motor Corp. and VISA International to technology and telecommunications companies such as Silicon Graphics, Inc. and AT&T Corp. The HotWired Network has won a number of prestigious awards, including the Digital Hollywood 1995 and 1996 Best Site of the Year award and the National Information Infrastructure Award for Best Arts and Entertainment Site in 1995. In order to further leverage its online brand presence and its Web advertising sales capabilities, the Company recently launched HotBot (http://www.hotbot.com), a Web-wide search engine designed to search the complete text of all documents on the Web. The Company is extending its brands into new print, online, and television media properties, all of which are aimed at the core demographic groups reached by Wired magazine and the HotWired Network. The Company is currently developing a television program based on the HotWired Network's The Netizen political commentary program (http://www.netizen.com). The Company is in discussions with a cable television service regarding a potential strategic alliance for the production and distribution of the program. The Company, through its HardWired book brand, is also in the process of publishing several book titles. The first of these, Mind Grenades, is scheduled for release in September 1996 and will be featured as an alternate selection by the Book of the Month Club. In addition, the Company is exploring several new magazine, online, and television concepts that are editorially and creatively distinct from the Company's current products. The Company aims to create "smart media for smart people around the world" - high-quality information and entertainment products aimed at a well-educated, affluent, technologically savvy, and influential consumer group. Its mission is to build a new kind of global, diversified media company for the 21st century utilizing its ability to create compelling, branded content with attitude across multiple media, its research and technological capabilities, its strong connection to consumers and advertisers, and its commitment to journalistic and artistic excellence. RISK FACTORS For a discussion of considerations relevant to an investment in the Common Stock, see "Risk Factors." THE OFFERINGS Common Stock offered: U.S. Offering......................................... 4,400,000 shares International Offering................................ 1,100,000 shares Total.............................................. 5,500,000 shares Common Stock to be outstanding after the offerings...... 37,250,002 shares(1) Use of proceeds......................................... Repayment of approximately $5.0 million of indebtedness and general corporate purposes, including working capital, product development, and international expansion. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................. WWWW
4 8 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------ ------------------- 1993 1994 1995 1995 1996 ------------ ------- ------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues.................... $ 2,928 $ 9,181 $25,255 $ 4,278 $ 7,621 Total costs and expenses.......... 3,952 12,718 33,188 6,709 11,461 Operating loss.................... (1,024) (3,537) (7,933) (2,431) (3,840) Net loss.......................... (1,036) (3,457) (6,505) (2,418) (3,361) Pro forma net loss per share(2)... $ (0.19) $ (0.10)
MARCH 31, 1996 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(4) -------- ------------ -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 2,604 $ 14,904 $ 67,369 Working capital (deficit).......................... (5,795) 6,355 61,320 Total assets....................................... 9,154 26,122 78,587 Long-term obligations.............................. 1,216 1,216 1,216 Minority interest.................................. 867 -- -- Accumulated deficit................................ (14,575) (24,481) (24,481) Total stockholders' equity (deficit)............... (5,034) 12,651 67,616
- --------------- (1) Based on shares outstanding as of May 31, 1996. Excludes: (i) 3,970,078 shares issuable upon the exercise of stock options outstanding as of such date at a weighted average exercise price of $5.89 per share; (ii) 5,869,712 shares reserved for future issuance under the Company's 1996 Equity Incentive Plan; and (iii) 100,000 shares reserved for future issuance under the Company's 1996 Non-Employee Director Stock Option Plan. (2) See Note 2 of Notes to Consolidated Financial Statements. (3) Reflects on a pro forma basis: (i) the completion of the Reorganization described in "The Company"; (ii) the sale by the Company of 1,250,000 shares of Series B Preferred Stock at a price of $10.00 per share in May 1996; (iii) the recording of deferred compensation expense associated with certain stock option grants; and (iv) the conversion into Common Stock of all outstanding shares of Preferred Stock. (4) As adjusted to reflect the sale by the Company of 5,500,000 shares of Common Stock in the offerings at an assumed initial public offering price per share of $11.00 and after deducting the estimated underwriting discount and offering expenses and applying the net proceeds therefrom as described herein. See "Capitalization." This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. 5 9 RISK FACTORS In addition to the other information presented in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. LIMITED OPERATING HISTORY AND ANTICIPATION OF LOSSES The Company commenced the publishing of Wired magazine in January 1993 and launched the HotWired Network in October 1994. Accordingly, the Company has a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company has incurred operating losses since inception, including operating losses of $1.0 million for 1993, $3.5 million for 1994, $7.9 million for 1995, and $3.8 million for the three months ended March 31, 1996. Partially as a result of a one-time charge of approximately $21.3 million resulting from the write-off of in-process research and development pursuant to the Reorganization described in "The Company," the Company expects to incur a substantial loss for the three months ending June 30, 1996. Moreover, deferred compensation expense of $9.1 million relating to stock options granted prior to May 31, 1996 will be recognized over the four-year vesting periods of the options. Of such amount, $5.5 million will be recognized in the three months ending June 30, 1996. The Company and its prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by new media companies and companies in the new and rapidly evolving market for online products and services. To address these risks, the Company must, among other things, continue to respond to competitive developments, attract, retain, and motivate qualified personnel, continue to successfully execute its advertising and print sales strategies, and develop and successfully commercialize new media properties. There can be no assurance that the Company will be successful in addressing these risks. The Company's ability to maintain or increase its revenues or become profitable depends on many factors, including its ability to increase advertising rate bases and the resulting revenues for its print publications and online content sites and increase the paid circulation of its print publications. There can be no assurance that the Company will be successful in any of these efforts. Since its inception, the Company has experienced substantial growth, which has required it to significantly increase the scale of its operations and, correspondingly, its operating expenses. The increase in operating expenses reflects the hiring of additional personnel in all functional areas, an increase in sales and marketing activities, and the funding of development of new products and technologies. The Company expects that operating expenses will increase faster than revenues for the foreseeable future and, as a result, the Company expects to incur operating and net losses for the foreseeable future. There can be no assurance that the Company can maintain or increase its revenues in the future to offset its increased operating expenses. See "The Company," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," and "Business -- Development Projects." FLUCTUATIONS IN OPERATING RESULTS As a result of the Company's limited operating history, the Company does not have relevant historical financial information for a significant number of periods on which to base planned revenues and operating expenses. The Company expects to experience significant fluctuations in future quarterly and annual operating results that may be caused by many factors, including (i) the seasonal nature of the advertising business, where the second and fourth calendar quarters for magazine publishers are generally characterized by higher advertising revenues; (ii) the ability of the Company to maintain or increase the paid circulation for Wired magazine and future publications; (iii) the cost of paper, postage, and other costs associated with magazine production and distribution; (iv) the ability to maintain or increase print and online audiences; (v) the ability to 6 10 reasonably predict newsstand and store sales of its magazines and books and thereby limit the returns of unsold products; (vi) the anticipated increases in operating expenses to support the expansion of its existing print and online businesses, the development of new magazine and online content sites, and the Company's book publishing and television efforts; (vii) the size and rate of growth of the market for Internet products and online content; (viii) the introduction by others of products that are competitive with those of the Company; and (ix) the general economic conditions in the United States and worldwide. As a result of the foregoing, period-to-period comparisons of the Company's results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. The Company believes that advertising sales in traditional media, such as magazines and television, are generally lower in the first and third calendar quarters than in the respective preceding quarters and that advertising expenditures fluctuate significantly with economic cycles. Depending on the extent to which the Web is accepted as an advertising medium, seasonality and cyclicality in the level of advertising expenditures generally could become more pronounced for Web advertising. Seasonality and cyclicality in advertising expenditures generally, or with respect to Web-based advertising specifically, could have a material adverse effect on the Company's business, financial condition, or operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEVELOPING MARKET FOR ONLINE MEDIA; UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM The Company's future growth is dependent to a significant extent upon its ability to increase the amount of revenue it derives from advertising through online media, principally the Web and proprietary online services. The market for advertising through online media has only recently begun to develop, is rapidly evolving, and is characterized by an increasing number of market entrants who have introduced or developed products and services for information, entertainment, and commerce through the Web and online services. Demand and market acceptance for recently introduced online products and services are subject to a high level of uncertainty. There can be no assurance that the market for commerce, entertainment, and information through online media will continue to grow. The use of the Web and online services as a medium for advertising, particularly by those individuals and enterprises that have historically relied upon traditional means of marketing and advertising, generally requires the acceptance of a new way of conducting business and exchanging information. In particular, enterprises that have already invested substantial resources in other means of advertising may be particularly reluctant or slow to adopt advertising through online media. If the Web and online services do not develop as a significant means for companies to advertise their products and services, there will be a material adverse effect on the Company's business, financial condition, and operating results. See "Business -- Products." In connection with the development and expansion of the Company's online products and distribution channels, the Company is exploring new methods of deriving and increasing revenue, including long-term advertising contracts and frequency discounts, cross-publication advertising packages, co-branding of program content, user-customized online advertising, use of detailed demographic data of online and print consumers, and relationships with online services for the delivery of online content in exchange for royalties based on user fees. There can be no assurance that the Company will be able to negotiate such arrangements with advertisers or strategic partners or that any such arrangements will generate revenues sufficient to offset the costs incurred by the Company in developing and maintaining such business arrangements. The Company's ability to derive revenues from online advertising will also depend on a robust online industry and the infrastructure for providing Internet access and carrying Internet traffic, particularly with respect to the Web. The Internet in general and the Web in particular may not prove to be viable commercial marketplaces because of inadequate development of the necessary infrastructure, such as a reliable network backbone, or timely development of affordable complementary products, such as high-speed modems and accurate methods for auditing online usage and 7 11 advertising. Because global commerce and the exchange of information on the Internet are new and evolving, it is difficult to predict with any assurance whether the Internet or the Web will prove to be and remain a viable commercial marketplace. Moreover, critical issues concerning the commercial use of the Internet and the Web, including security, technical reliability, cost, ease of use and access, and quality of service, remain unresolved and may impact the growth of Internet and Web use. If the necessary infrastructure or complementary products are not developed, or if the Internet or the Web does not continue to develop as a viable commercial marketplace, there will be a material adverse effect on the Company's business, financial condition, and operating results. See "Business -- Advertising Sales." NO ASSURANCE OF SUCCESSFUL EXPANSION OR DIVERSIFICATION OF OPERATIONS It is the Company's strategy to expand its editorial and creative vision to new magazines and online media products and to other media, including books and television. The development of such new products generally involves significant expense and diversion of management, creative, technical, and personnel resources from the Company's current businesses. The Company's past performance in print and online media is not an indicator of the performance of future products, if developed. There can be no assurance that the Company will be successful in developing, marketing, or selling new magazines or online media products, or that the cost of establishing such products, whether successful or not in the market, will not have a material adverse effect on the Company's business, financial condition, and operating results. In connection with the Company's recent introduction of the HotBot Web-wide search engine, some users experienced difficulties with HotBot, such as improperly displayed graphics, long query times, and incomplete searches. While the Company and its HotBot strategic partner are working to solve the technical issues with the HotBot service, there can be no assurance that HotBot will perform at a level sufficient to achieve market acceptance. Moreover, there can be no assurance that the Company will not experience similar or other difficulties in connection with future online product offerings. In addition, the Company and its management have only limited prior experience in book publishing, television, and other distribution channels. There can be no assurance that the Company will be able to successfully develop, market, sell, or deliver its book products or television programming or that the cost of establishing a business in either medium, whether successful or not in the market, will not have a material adverse effect on the Company's business, financial condition, and operating results. See "Business -- Development Projects." DEPENDENCE ON TECHNOLOGICAL ENHANCEMENTS A key element of the Company's strategy is to continue to develop technological innovations for its online media properties that allow it to enhance the user's experience and strengthen relationships with advertisers. The Company believes such technological leadership is required for the Company to remain competitive. There can be no assurance that the Company will be able to conceive, develop, or acquire such technological innovations successfully or that the Company's competitors will not successfully implement features on their online media properties that are superior to those of the Company's online media properties. Moreover, the cost associated with developing new technology can be significant. There can be no assurance that these costs will not have a material adverse effect on the Company's business, financial condition, and operating results. See "Business -- Products." MANAGING A CHANGING BUSINESS Since its inception, the Company has experienced significant change and expansion in its business and operations, which have placed significant demands on the Company's administrative, operational, financial, and other resources. Future growth, if any, could place a significant strain on the Company's management, operational, financial, and other resources. The Company's ability to manage future growth will depend upon a significant expansion of its accounting and other internal 8 12 management systems and the implementation and subsequent improvement of a variety of systems, procedures, and controls. Moreover, the Company will need to continue to train, motivate, and manage its employees and attract and retain qualified senior managers and technical professionals. If the Company's management is unable to manage growth effectively, there could be a material adverse effect on the Company's business, financial condition, and operating results. See "Business -- Employees" and "Management." DEPENDENCE UPON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL The Company's performance is substantially dependent on the performance of its executive officers and key personnel. The Company is dependent on its ability to retain and motivate high-quality personnel, especially its editorial, creative, and management personnel. The loss of any of the Company's key personnel, particularly its co-founders Louis Rossetto and Jane Metcalfe, could have a material adverse effect on the Company's business, financial condition, and operating results. The Company does not have "key person" life insurance policies on any of its employees. The Company's future success also depends on its continuing ability to identify, hire, train, and retain other highly qualified creative, technical, and managerial personnel. The Company anticipates hiring a large number of new employees in all functional areas within the next two years. Competition for highly qualified personnel is intense. There can be no assurance that the Company will be successful in attracting, assimilating, and retaining such personnel, and the failure to do so could have a material adverse effect on the Company's business, financial condition, and operating results. Moreover, in the event of the loss of any such personnel, there can be no assurance that the Company would be able to prevent the unauthorized disclosure or use of its proprietary technology, practices, procedures, or customer lists. See "Business -- Employees" and "Management." COMPETITION The Company faces significant competition from a large number of companies, many of which have significantly greater financial, creative, technical, and marketing resources than the Company. These companies may be better positioned to compete in the evolving media and technology industries. In addition, the Company faces broad competition for advertising revenue from other media companies that produce magazines, newspapers, online content, radio, and television, as well as other promotional vehicles such as direct mail, coupons and billboard advertising. Each of the Company's products competes with other media and many other types of leisure activities for audiences and advertising revenue. Overall competitive factors in these segments include editorial and design quality, price, and customer service. Competition for advertising dollars is primarily based on advertising rates, reader response to advertisers' products and services, and effectiveness of sales teams. There can be no assurance that one or more of the Company's competitors will not significantly undermine the sales efforts of the Company or reduce the Company's audiences, either of which would have a material adverse effect on the Company's business, financial condition, and operating results. Competition in the magazine publishing business is also intense with respect to subscription sales and single copy distribution and display. There can be no assurance that one or more other magazines or online content sites will not significantly undermine the marketing efforts of Wired magazine or significantly impact the sources of its circulation or advertising revenues. If this were to occur, there would be a material adverse effect on the Company's business, financial condition, and operating results. To the extent that the Internet infrastructure is expanded and access to the Web is made easier and less expensive, the Company expects the number of Web users to continue to grow at a rapid rate. In response to this anticipated growth, there is an increasing number of companies, some with significantly greater resources than the Company, developing online content and services for delivery on the Web, and competing for audiences and the advertising dollars that are currently 9 13 being devoted to the Web. The Company's online content sites compete with other online content sites such as America Online's Global Network Navigator, cnet, ESPNet, Starwave, and Time-Warner's Pathfinder. The Company's search engine service competes with services such as Alta Vista, Excite, Infoseek, Lycos, and Yahoo!. All of the Company's online media properties compete for advertising dollars with Web browser companies such as Netscape. There can be no assurance that one or more of the Company's competitors will not significantly undermine the Company's marketing efforts for its online media properties or attract a significant amount of advertising revenues away from the Company. The Company's book publishing operations will compete for sales with numerous other publishers and retailers, as well as with other media, including the Company's own magazine and online media products. In addition, the acquisition of publishing rights to books by leading authors is highly competitive, and the Company will compete with numerous other book publishers. There can be no assurance that the Company's book publishing efforts will be successful, or that the costs of such efforts will not have a material adverse effect on the Company's business, financial condition, and operating results. The creation, production, and distribution of television programming is a highly competitive business, as each television program competes with other television programming and with other forms of entertainment. Furthermore, competition in the television industry is expected to increase as the number and variety of basic cable and pay television services available continue to grow. There is active competition among all production companies in these industries for the services of producers, directors, actors, and others and for the acquisition of literary properties. With respect to the distribution of television product, there is significant competition from independent producers and distributors as well as major studios. Revenues for filmed entertainment product depend in part on general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace. There can be no assurance that the Company's efforts in television programming will result in programming that is marketable to advertisers and distributors or will be commercially successful, or that the cost of creating and producing television programming, whether successful or not in the market, will not have a material adverse effect on the Company's business, financial condition, and operating results. UNCERTAINTY OF CONTENT AVAILABILITY The success of the Company's products is largely dependent on the availability of high-quality editorial and artistic content that will appeal to consumers and, in the case of the Company's print publications, generate circulation revenue. Without strong consumer interest in the Company's publications, advertisers will not begin or continue to advertise with the Company, and the Company's ability to generate revenues from advertising will be materially adversely affected. The Company believes the most important factor influencing consumer acceptance and support of its products is the quality of the content. There can be no assurance that the Company's direct content development efforts will produce media products that attract consumer interest and generate advertising and subscription revenues in the future. The failure of the Company to create compelling content and generate and maintain consumer and advertiser interest would risk diluting its brands and would have a material adverse effect on the Company's business, financial condition, and operating results. In addition to its own direct content development efforts, the Company depends substantially on third parties, including both occasional and regular outside contributors, to create content for the Company's media products. The dependence on third party content providers is expected to continue in the future. In many cases, the Company is required to compete with other business opportunities for the attention of these content providers, including other print and online publications that are or will be directly competitive with the Company's media products. There can be no assurance that the Company will succeed in attracting and retaining third party contributors in 10 14 sufficient numbers or quality to supply the requisite content for its products to succeed. The inability of the Company to retain third parties that develop high-quality content that appeals to consumers would have a material adverse effect on the success of the Company's publications and its business, financial condition, and operating results. See "Business -- Products." DEPENDENCE ON INFORMATION TECHNOLOGY INDUSTRIES The Company's products are generally targeted toward users and developers of information technology and are susceptible to shifts in this rapidly changing market. The information technology industries are characterized by intense competition among various technologies and their respective proponents. The markets for the technologies to which the Company's editorial content and product distribution are devoted, including the Internet, are in the early stages of development. The Company's growth is dependent upon a developing market for these technologies. If information technologies, including the Internet, develop more slowly than anticipated, or become obsolete, there will be a material adverse effect on the revenues from the Company's products devoted to or reliant on such technologies, and on the Company's business, financial condition, and operating results as a whole. Furthermore, even if these segments of the information technology market do develop as the Company anticipates, there can be no assurance that the demand for the Company's products and services will also increase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Competition." RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION A component of the Company's strategy is further expansion into international markets. The Company has only limited experience in developing localized versions of its print and digital publications and marketing and distributing them internationally. Moreover, the Company believes that in order for it to expand internationally, it must continue to enter into strategic alliances with companies outside of the United States. There can be no assurance that the Company will be able to obtain such alliances on terms favorable to the Company, if at all, or that any strategic alliance will be successful. In addition, there are certain risks inherent in doing business in international markets, such as unexpected changes in regulatory requirements, currency fluctuations, state-imposed restrictions on the repatriation of funds, potentially adverse tax consequences, import and export duties and restrictions, difficulties in staffing and managing multinational operations, the uncertainty of product acceptance by different cultures, and seasonal reductions in business activity during the summer months in Europe and certain other parts of the world. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's future international operations and, consequently, on the Company's business, financial condition, and operating results. As a result of the foregoing, there can be no assurance that the Company will be able to successfully market, sell, and deliver its products and services in international markets. See "Business -- Products." DEPENDENCE ON ADVERTISERS The majority of the Company's revenues have been and are expected to continue to be attributable to advertising. In 1995 and the first quarter of 1996, 66% and 58%, respectively, of the Company's total revenues were from advertising. The majority of the Company's print magazine advertising space is sold on a monthly basis. Longer-term advertising contracts with magazine and online advertisers are subject to cancellation upon advance notice of 30 days or less. In addition, the nature of certain of the Company's editorial materials has from time to time resulted in the loss of advertising accounts. To the extent that the Company's major advertisers do not continue to advertise in the Company's products, and the Company is unable to replace these advertisers, there would be a material adverse effect on the Company's business, financial condition, and operating results. See "Business -- Advertising Sales." 11 15 UNCERTAINTY OF GOVERNMENT REGULATION Laws and regulations may be enacted with respect to the Internet, covering issues such as access to content, pricing, user privacy, and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for advertising and increase the Company's cost of doing business, or could otherwise have a material adverse effect on the Company's business, financial condition, and operating results. In February 1996, the Communications Decency Act ("CDA") was signed into law as part of the Telecommunications Act of 1996. Under its provisions, the CDA creates criminal liability for the expression of "indecent" and similar communications via online systems accessible to minors, and carries penalties generally consisting of minimum monetary fines of approximately $250,000 or up to two years of incarceration for each occurrence. Although aspects of the statute are being challenged in federal court by a variety of traditional and new media publishers, access service providers, and other organizations, including the Company, there can be no assurance that enforcement of the provisions of the new law that might apply to the Company's online products will be permanently enjoined or that material created by or on behalf of the Company or that is otherwise distributed through the Company's online sites, including those provided via online services such as America Online, will not be deemed in violation of the CDA. In addition, there can be no assurance that similar state, federal, or international laws have not or will not be enacted and enforced that would criminalize or otherwise penalize or restrict such communications. The inability of the Company to continue publishing any of its current or planned online content or displaying the online submissions of its users as a result of the CDA, or any penalties incurred by the Company under its provisions, may have a material adverse effect on the Company's business, financial condition, and operating results. CLAIMS OF DEFAMATION Publishing of print and online content and television programming involves the risk of claims of libel or other forms of defamation. Civil and criminal liability for libelous or otherwise defamatory content posted to the interactive spaces in the Company's online publications is not settled under law. Although the Company has obtained insurance coverage for potential claims of libel and other forms of defamation, there can be no assurance the Company will not be exposed to litigation, forcing the Company to expend funds and other resources not anticipated in the current operating budgets and projections. Any such litigation, whether or not resulting in a ruling requiring the payment of damages, could have a material adverse effect on the Company's business, financial condition, and operating results. The Company has already defended and settled, without payment or other concession but at significant expense, one defamation lawsuit. See "Business -- Litigation." RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY RIGHTS The Company regards its copyrights, trademarks, trade dress, trade secrets, and similar intellectual property as critical to its success, and the Company relies upon trademark and copyright law, trade secret protection, and confidentiality and license agreements with its employees, strategic partners, and others to protect its proprietary rights. The Company pursues the registration of its material trademarks in the United States and, based upon anticipated use, in certain other countries. The Company has applied for and registered the "Wired" mark in a variety of classes in the United States and numerous other countries and has applied for the registration of certain of its other trademarks, including "HotWired," "Wired TV," "HardWired," and "Wired Online." Effective trademark, copyright, and trade secret protection may not be available in every country in which the Company's products are available. The Company has licensed in the past, and it expects that it may license in the future, elements of its trademarks, trade dress, and similar proprietary rights to third parties, including in connection with Wired magazine's international editions and other media 12 16 properties that may be controlled operationally by third parties. While the Company attempts to ensure that the quality of its brands is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially and adversely affect the value of the Company's proprietary rights or the reputation of its products, either of which could have a material adverse effect on the Company's business. Moreover, while the Company believes that it has the right to use Wired, HotWired, and its other marks in connection with its business, and it generally has the right to prohibit others from using such marks in certain fields of use, there can be no assurance that the Company will be able to maintain such rights. From time to time the Company has been, and it expects to continue to be, subject to legal proceedings and claims in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company's business, financial condition, and results of operations. See "Business -- Litigation." CONCENTRATION OF STOCK OWNERSHIP Upon the completion of the offerings, the present directors, executive officers, and greater than 5% stockholders and their respective affiliates will beneficially own approximately 61.7% of the outstanding Common Stock of the Company (60.4% of the outstanding Common Stock if the over-allotment option is exercised in full). As a result of their ownership, the directors, executive officers, and greater than 5% stockholders and their respective affiliates collectively will be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. See "Principal Stockholders" and "Description of Capital Stock." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the offerings, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Company's Common Stock will develop or be sustained after the offerings. The initial offering price will be determined by negotiation between the Company and the representatives of the U.S. Underwriters based upon several factors. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new media properties by the Company or its competitors, changes in financial estimates by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to the Company, and other events or factors. Moreover, in some future quarter the Company's operating results may fall below the expectations of securities analysts and investors. In such event, the market price of the Company's Common Stock would likely be materially and adversely affected. In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the trading price of the Company's Common Stock, regardless of the Company's operating performance. SHARES ELIGIBLE FOR FUTURE SALE; NO PRIOR TRADING MARKET; REGISTRATION RIGHTS Sales of a substantial number of shares of the Company's Common Stock in the public market could have the effect of depressing the prevailing market price of its Common Stock. Upon the completion of the offerings, the Company will have outstanding 37,250,002 shares of Common Stock (assuming no exercise of outstanding options after May 31, 1996). Of these shares, the 13 17 5,500,000 shares sold in the offerings will be freely transferable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless purchased by "affiliates" of the Company as that term is defined in Rule 144 of the Securities Act ("Affiliates"), which shares will be subjected to the resale limitations of Rule 144 adopted under the Securities Act. Of the other shares outstanding upon the completion of the offerings, 30,500,000 shares will also be freely tradeable without restriction or further registration under the Securities Act, unless held by Affiliates (in which case they would be subject to the volume limitations of Rule 144), because such shares were issued pursuant to the exemption afforded by Section 3(a)(10) of the Securities Act. The remaining 1,250,002 shares, all of which were sold in May 1996, will be "restricted securities" as that term is defined under Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below, and the provisions of Rule 144 or 701, additional shares will be available for sale in the public market as follows: (i) no currently outstanding shares will be available for immediate sale in the public market on the date of the Prospectus; (ii) 30,500,000 currently outstanding shares will be eligible for sale upon expiration of lock-up agreements 180 days after the date of this Prospectus (as well as 3,970,078 additional shares issuable upon the exercise of stock options, to the extent exercisable as of such date), subject to (a) earlier waiver of such lock-up provisions by Goldman, Sachs & Co., on behalf of the Underwriters, (b) compliance with certain volume restrictions with respect to the 22,595,355 shares (plus 998,629 shares subject to options) held by Affiliates, and (c) vesting restrictions with the Company in certain cases; and (iii) 1,250,002 currently outstanding shares will be eligible for sale from time to time thereafter. See "Shares Eligible for Future Sale." All of the stockholders of the Company have entered into lock-up agreements with the Representatives of the Underwriters providing that, with certain limited exceptions, such stockholders will not offer, sell, contract to sell, grant an option to purchase, make a short sale, or otherwise dispose of or engage in any hedging or other transaction that is designed or reasonably expected to lead to a disposition of any shares of Common Stock or any option or warrant to purchase shares of Common Stock or any securities exchangeable for or convertible into shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Goldman, Sachs & Co. Other than the 5,500,000 shares being offered hereby, as of the Effective Date no shares of Common Stock of the Company will be eligible for immediate sale in the public market until the expiration of the 180-day lock-up agreements with the Representatives of the Underwriters. Goldman, Sachs & Co. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. As of May 31, 1996, options to purchase 3,970,078 shares of Common Stock were issued and outstanding. Rule 701 under the Securities Act provides that, beginning 90 days after the date of this Prospectus, shares of Common Stock acquired upon the exercise of outstanding options may be resold by persons other than Affiliates subject only to the manner of sale provisions of Rule 144, and by Affiliates subject to all provisions of Rule 144 except the two-year minimum holding period. The Company intends to file one or more registration statements on Form S-8 under the Securities Act to register shares of Common Stock subject to stock options that will permit the resale of such shares, subject to the Rule 144 volume limitations applicable to Affiliates, vesting restrictions with the Company, and lock-up agreements between the option holders and the Company and the Underwriters. Holders of 30,991,349 shares of outstanding Common Stock have the right to require the Company to register their shares of Common Stock under the Securities Act. If such registration rights are exercised, the shares can be sold without any holding period or sales volume limitation. Registration and sale of such shares could have an adverse effect on the trading price of the Common Stock. See "Description of Capital Stock -- Registration Rights." 14 18 Prior to the offerings, there has been no public market for the Common Stock of the Company, and no predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional Common Stock will have on the trading price of the Common Stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could adversely affect the trading price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. See "Description of Capital Stock." ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS After the completion of the offerings, the Board of Directors will have the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deferring, or preventing a change of control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The Company has no present plans to issue shares of Preferred Stock. Further, certain provisions of the Company's charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of the Company's Common Stock. See "Description of Capital Stock." NO SPECIFIC USE OF PROCEEDS The Company has not designated any specific use for the net proceeds from the sale by the Company of Common Stock offered hereby, except for the application of approximately $5.0 million of such net proceeds for the repayment and termination of the Company's revolving credit facility. Rather, the Company intends to use the remaining net proceeds primarily for general corporate purposes, including working capital, product development, and international expansion. Accordingly, management will have significant flexibility in applying the net proceeds of the offerings. See "Use of Proceeds." DILUTION The initial public offering price is higher than the book value per outstanding share of Common Stock. Accordingly, purchasers in the offerings will suffer an immediate and substantial dilution of $9.31 in the net tangible book value per share of the Common Stock from the initial public offering price. Additional dilution will occur upon exercise of outstanding options granted by the Company. See "Dilution." 15 19 THE COMPANY Wired Ventures, Inc. is a new kind of global, diversified media company engaged in creating compelling, branded content with attitude for print, online, and television. Its current businesses include publishing Wired magazine and programming original content on the Web primarily through the HotWired Network. The Company believes that it has developed Wired and HotWired into strong brands that symbolize new media and the digital age. The Company's businesses historically have been conducted in partnership and limited liability company form through Wired Partners, a California general partnership (from its formation in October 1992 through January 1993), Wired USA Ltd., a California limited partnership (from its formation in January 1993 through January 1994), Wired Ventures, Ltd., a California limited partnership (from its formation in January 1994 through May 1996), and Wired Ventures, Ltd.'s majority interest in HotWired Ventures LLC, a California limited liability company (from its formation in January 1995 through May 1996). All operations and operating assets and liabilities resided in Wired Ventures, Ltd. and HotWired Ventures LLC from January 1994 through May 1996. Except for the historical financial information presented in this Prospectus and as otherwise indicated, all information in this Prospectus gives effect to (i) a reorganization transaction effected in May 1996 in which (a) the Company succeeded to the assets, liabilities and businesses of Wired Holdings Inc., a California corporation, Wired USA Ltd., and Wired Ventures, Ltd. and issued approximately 28 million shares of the Company's Series A Preferred Stock therefor (the "Recapitalization"); and (b) the Company acquired the minority participants' interests in HotWired Ventures LLC in exchange for approximately 2.5 million shares of the Company's Series A Preferred Stock (the "Business Combination") (the Recapitalization and the Business Combination being collectively referred to as the "Reorganization"); and (ii) a financing transaction in May 1996 in which 1,250,000 shares of the Company's Series B Preferred Stock were issued to investors for $10.00 in cash per share (the "Preferred Stock Financing"). Unless otherwise indicated, all references to the "Company" in this Prospectus include the above-named predecessors in interest to the Company as a result of the Reorganization and the wholly owned subsidiaries of the Company: HardWired, Inc., a Delaware corporation; HotWired, Inc., a Delaware corporation; Wired Magazine Group, Inc., a California corporation; Wired New York, a California corporation; Wired World, L.L.C., a Delaware limited liability company; and Wired UK, a United Kingdom unlimited company. See "Certain Transactions" and "Description of Capital Stock." The Company was incorporated in Delaware in March 1996. The Company's executive offices are located at 520 Third Street, Fourth Floor, San Francisco, California 94107, and its telephone number is (415) 222-6200. 16 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the 5,500,000 shares of Common Stock offered hereby are estimated to be approximately $54,965,000 ($63,405,000 if the Underwriters' over-allotment option is exercised in full) at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discount and offering expenses. The principal purposes of the offerings are to obtain additional capital, to create a public market for the Company's Common Stock, and to facilitate future access by the Company to the public equity markets. The Company anticipates that it will use the net proceeds for working capital, product development, international expansion, and other general corporate purposes. The Company also intends to use approximately $5.0 million of such net proceeds for the repayment and termination of the Company's revolving credit facility, which bears interest at a rate equal to adjusted LIBOR plus 3.25% and is due in September 2000. The borrowings under this line of credit have been used for direct mail activities to increase the subscription base for Wired magazine. Although the Company may use a portion of the net proceeds to license or acquire new products or technologies from others or to acquire or invest in businesses complementary to the Company's current business, the Company currently has no specific agreements or commitments in this regard. The Board of Directors and management of the Company will have significant flexibility in applying the net proceeds from the offerings. The amounts and timing of the Company's actual expenditures will depend upon numerous factors, including the status of the Company's product development efforts, competition, and marketing and sales activities. Pending such uses, the Company intends to invest the net proceeds from the offerings in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY The Company has not declared or paid any cash dividends since its inception. The Company currently intends to retain future earnings, if any, for use in the operation and expansion of the business. The Company does not intend to pay any cash dividends in the foreseeable future. 17 21 DILUTION The pro forma net tangible book value of the Company as of March 31, 1996, after giving effect to: (i) the Reorganization; (ii) the Preferred Stock Financing; and (iii) the conversion of all preferred stock into common stock, was approximately $8.0 million, or $0.25 per share of Common Stock. "Pro forma net tangible book value per share" is determined by dividing the number of outstanding shares of Common Stock into the pro forma net tangible book value of the Company (total tangible assets less total liabilities). After giving effect to the sale by the Company of the 5,500,000 shares of Common Stock offered hereby (based upon an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discount and offering expenses), the pro forma net tangible book value of the Company as of March 31, 1996 would have been $62.9 million, or $1.69 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $1.44 per share to the Company's existing stockholders and an immediate dilution in pro forma net tangible book value of $9.31 per share to new investors purchasing shares of Common Stock in this offering. The following table illustrates the per share dilution in pro forma net tangible book value to new investors: Assumed initial public offering price per share................... $11.00 Pro forma net tangible book value per share as of March 31, 1996......................................................... $0.25 Increase per share attributable to new investors................ 1.44 ------ Pro forma net tangible book value per share after the offerings... 1.69 ------- Dilution per share to new investors............................... $ 9.31 =======
The following table summarizes, on a pro forma basis as of March 31, 1996, the differences in the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders and by the investors purchasing shares of Common Stock in the offerings, based upon an assumed initial public offering price of $11.00 per share (before deducting the estimated underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders......... 31,750,002 85.2% $24,109,759 28.5% $ 0.76 New investors................. 5,500,000 14.8 60,500,000 71.5 11.00 ----------- ----- ------------ ----- Total............... 37,250,002 100.0% $84,609,759 100.0% =========== ===== ============ =====
The foregoing table assumes no exercise of outstanding stock options. As of May 31, 1996, there were options outstanding to purchase a total of 3,970,078 shares of Common Stock at a weighted average exercise price of $5.89 per share. To the extent that any of these options is exercised, there will be further dilution to new investors. See "Capitalization" and Note 12 of Notes to Consolidated Financial Statements. 18 22 CAPITALIZATION The following table sets forth: (i) the capitalization of the Company as of March 31, 1996; (ii) the pro forma adjustments required to reflect the capitalization of the Company on a pro forma basis as of such date after giving effect to the Recapitalization, the Business Combination, the Preferred Stock Financing, the recording of deferred compensation expense associated with certain stock option grants, and the conversion into Common Stock of all outstanding shares of Preferred Stock; and (iii) the pro forma capitalization of the Company as adjusted as of such date to give effect to the sale of the 5,500,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discount and offering expenses).
MARCH 31, 1996 ---------------------------------------------------------------------------------------------------------- PRO FORMA ADJUSTMENTS ----------------------------------------------------------------------- PREFERRED MAY 1996 CONVERSION PRO FORMA BUSINESS STOCK GRANT OF OF AS ACTUAL RECAPITALIZATION COMBINATION FINANCING STOCK OPTIONS PREFERRED PRO FORMA ADJUSTED -------- ---------------- ----------- --------- ------------- ---------- --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Long-term note payable............ $ 1,216 $ -- $ -- $ -- $ -- $ -- $ 1,216 $ 1,216 Minority interest.... 867 -- (867) -- -- -- -- -- Stockholders' equity (deficit)(1): Preferred Stock, $0.001 par value per share; 50,000,000 shares authorized, 28,014,693 shares issued and outstanding actual; 5,000,000 shares authorized, none issued or outstanding pro forma and as adjusted......... 28 -- 2 1 -- (31) -- -- Common Stock, $0.001 par value per share(2); 60,000,000 shares authorized; 2 shares issued and outstanding actual; 31,750,002 shares issued and outstanding pro forma; 37,250,002 shares issued and outstanding as adjusted......... -- -- -- -- -- 32 32 37 Additional paid-in capital............ 10,123 (14,575) 24,851 12,299 9,129 (1) 41,826 96,786 Deferred compensation....... (664) -- -- -- (4,116) -- (4,780) (4,780) Deficit accumulated prior to Recapitalization... (14,575) 14,575 -- -- -- -- -- -- Accumulated deficit............ -- -- (19,468) -- (5,013) -- (24,481) (24,481) Other................ 54 -- -- -- -- -- 54 54 ------- ------ ------ ------ --- ------ ------ ------ Total stockholders' equity (deficit)... $ (5,034) $ -- $ 5,385 $12,300 $ -- $ -- $ 12,651 $ 67,616 ======= ====== ====== ====== === ====== ====== ====== Total capitalization..... $ (2,951) $ -- $ 4,518 $12,300 $ -- $ -- $ 13,867 $ 68,832 ======= ====== ====== ====== === ====== ====== ======
- --------------- (1) See Note 7 of Notes to Consolidated Financial Statements. (2) Excludes: (i) 3,970,078 shares issuable upon the exercise of stock options granted in May 1996 at a weighted average exercise price of $5.89 per share; (ii) 5,869,712 shares reserved for future issuance under the Company's 1996 Equity Incentive Plan; and (iii) 100,000 shares reserved for future issuance under the Company's 1996 Non-Employee Director Stock Option Plan. 19 23 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below as of December 31, 1994 and 1995, and for the years ended December 31, 1993, 1994, and 1995 are derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are included elsewhere herein. The consolidated balance sheet data as of December 31, 1993 is derived from audited consolidated financial statements of the Company that are not included in this Prospectus. The selected consolidated financial data set forth below as of March 31, 1996 and for the three-month periods ended March 31, 1995 and 1996 are unaudited but have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, that management believes necessary for a fair presentation of the financial position and results of operations for these periods. Historical results are not necessarily indicative of the results of operations to be expected in the future. The selected consolidated financial information set forth below should be read in conjunction with "The Company," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and notes thereto included elsewhere in this Prospectus.
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA(1): Revenues: Magazine..................................... $ 2,928 $ 8,833 $23,313 $ 3,936 $ 7,124 Online....................................... -- 348 1,942 342 497 ------- -------- -------- -------- -------- Total revenues........................ 2,928 9,181 25,255 4,278 7,621 ------- -------- -------- -------- -------- Costs and expenses: Magazine production and distribution......... 2,356 7,638 14,897 3,147 4,309 Online production and development............ 51 318 1,854 166 1,245 Sales and marketing.......................... 748 2,795 9,776 1,952 3,397 General and administrative................... 797 1,967 6,661 1,444 2,510 ------- -------- -------- -------- -------- Total costs and expenses.............. 3,952 12,718 33,188 6,709 11,461 ------- -------- -------- -------- -------- Operating loss........................ (1,024) (3,537) (7,933) (2,431) (3,840) Interest income (expense), net................. (10) 98 156 15 (11) Minority interest(2)........................... -- -- 427 -- 499 Wired UK preacquisition loss(3)................ -- -- 854 -- -- ------- -------- -------- -------- -------- Loss before taxes.............................. (1,034) (3,439) (6,496) (2,416) (3,352) Tax expense.................................... 2 18 9 2 9 ------- -------- -------- -------- -------- Net loss.............................. $(1,036) $(3,457) $(6,505) $(2,418) $(3,361) ======= ======== ======== ======== ======== Pro forma net loss per share(2).............. $ (0.19) $ (0.10) ======== ========
DECEMBER 31, MARCH ---------------------------------------- 31, 1993 1994 1995 1996 ---- ------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents......................... $ 645 $ 1,750 $ 7,234 $ 2,604 Working capital deficit........................... (12) (797) (1,244) (5,795) Total assets...................................... 1,859 5,111 13,218 9,154 Long-term obligations............................. -- -- 1,185 1,216 Accumulated deficit............................... (1,252) (4,709) (11,214) (14,575) Total stockholders' deficit....................... (381) (153) (1,507) (5,034)
- --------------- (1) The Company began operations in October 1992. For the period from October 1992 (inception) to December 31, 1992, the Company had no revenues and the net loss was approximately $216,000. (2) See Note 2 of Notes to Consolidated Financial Statements. (3) See Note 4 of Notes to Consolidated Financial Statements. 20 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including, but not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. OVERVIEW The Company commenced operations in October 1992. Wired magazine was launched in January 1993 and is now in its fourth year of publishing. In October 1994, the Company launched the HotWired Network, a network of online content sites available on the Web. The Company is actively pursuing the extension of its editorial and creative vision to other media, including books and television, and the development of new media products, including online media properties, magazines, books, television, and international editions of existing media products. From inception through March 31, 1996, the Company generated cumulative net revenues of approximately $45.0 million and realized cumulative operating losses of approximately $16.6 million. Although the Company has experienced significant growth in revenues each year since its inception, prior growth rates are not necessarily indicative of future operating results. Due to the Company's limited operating history and limited resources, among other factors, there can be no assurance that profitability or significant revenues on a quarterly or annual basis will be realized in the future. Moreover, the Company expects to continue to incur operating losses for the foreseeable future. Since its inception, the Company has experienced substantial growth, which has required it to significantly increase the scale of its operations and, correspondingly, its operating expenses. The increase in operating expenses reflects the hiring of additional personnel in all functional areas, an increase in sales and marketing activities, and the funding of development of new products and technologies. The Company expects that operating expenses will increase faster than revenues for the foreseeable future, and as a result the Company expects to incur operating and net losses for the foreseeable future. There can be no assurance that the Company can maintain or increase its revenues in the future to offset its increased operating expenses. The Company recognizes print advertising revenue and magazine production costs at the time the issue is circulated. Subscription circulation revenue for Wired magazine is deferred and recognized over the life of the subscription period, generally one to two years. Sales to single copy distributors are recognized as revenue in the month of distribution utilizing historical experience to estimate the ultimate single copy sales of magazines. The Company recognizes online advertising revenue over the period in which the advertisements are displayed. Product development expenditures are expensed as incurred. The Company's businesses historically have been conducted in partnership and limited liability company form through Wired Partners, Wired Holdings Inc., Wired USA Ltd., Wired Ventures, Ltd., and Wired Ventures, Ltd.'s majority ownership interest in HotWired Ventures LLC. The Recapitalization, which consists of the combination of the various equity interests in Wired Ventures, Ltd., including those of Wired Holdings Inc. and Wired USA Ltd., to form Wired Ventures, Inc., reflects a combination of companies under common control and has been accounted for on a historical cost basis. The Company will account for the acquisition of minority interests in HotWired Ventures LLC under the purchase method. The effect of the pro forma allocation of the purchase price as of March 31, 1996 would have resulted in the recording of an intangible asset of approximately $25.9 million, of which approximately $21.3 million of such asset would have been expensed as in-process research and development. The $4.6 million balance of these intangible assets would be amortized over their estimated useful lives of two to three years. 21 25 The Company will record deferred compensation of $9.1 million for the difference between the grant price and the deemed fair market value of the Company's Common Stock for shares subject to options granted prior to May 31, 1996. Such deferred compensation expense will be amortized over the four-year vesting periods of the options. Of such amount, $5.5 million will be recognized in the three months ending June 30, 1996. RESULTS OF OPERATIONS The following table sets forth, as a percentage of total revenues, consolidated statement of operations data for the periods indicated:
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, ------------------------ ------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Revenues: Magazine................................... 100 % 96 % 92 % 92 % 93 % Online..................................... -- 4 8 8 7 ---- ---- ---- ---- ---- Total revenues..................... 100 100 100 100 100 ---- ---- ---- ---- ---- Costs and expenses: Magazine production and distribution....... 80 83 59 73 56 Online production and development.......... 2 4 7 4 16 Sales and marketing........................ 26 31 39 46 45 General and administrative................. 27 21 26 34 33 ---- ---- ---- ---- ---- Total costs and expenses........... 135 139 131 157 150 ---- ---- ---- ---- ---- Operating loss..................... (35 ) (39 ) (31 ) (57 ) (50 ) Minority interest............................ -- -- 2 -- 6 Wired UK preacquisition loss................. -- -- 3 -- -- ---- ---- ---- ---- ---- Net loss........................... (35 )% (39 )% (26 )% (57 )% (44 )% ==== ==== ==== ==== ====
REVENUES Magazine revenues consist principally of print advertising and circulation (subscription and single copy sales) revenues. Online revenues consist of advertising revenues. Total revenues were $2.9 million, $9.2 million, and $25.3 million in 1993, 1994, and 1995, respectively. Total revenues were $4.3 million and $7.6 million for the three months ended March 31, 1995 and 1996, respectively. The increases were attributable to increases in all components of revenue. Print advertising revenues were $1.6 million, $4.5 million, and $14.8 million for 1993, 1994, and 1995, respectively. Print advertising revenues were $2.2 million and $3.9 million for the three months ended March 31, 1995 and 1996, respectively. The increases in print advertising revenues were primarily due to increases in the number of advertising pages per issue and increased advertising rate bases corresponding to increased circulation. Circulation revenues were $1.3 million, $4.0 million, and $7.8 million in 1993, 1994, and 1995, respectively. Circulation revenues were $1.5 million and $2.7 million for the three months ended March 31, 1995 and 1996, respectively. The increases in circulation revenues were attributable to increased subscriptions and, to a lesser extent, increased single copy sales. Online advertising revenues were $348,000 and $1.9 million in 1994 and 1995, respectively, and there were no online advertising revenues in 1993. Online advertising revenues were $342,000 and $497,000 for the three months ended March 31, 1995 and 1996, respectively. The increases in online revenues were primarily due to growth in the number of advertisements on the HotWired Network. While the Company cannot predict with certainty the amounts or sources of its future revenues, it currently anticipates that subscription revenues will increase as a percentage of total circulation revenues and that online advertising revenues will increase as a percentage of total revenues. 22 26 MAGAZINE PRODUCTION AND DISTRIBUTION COSTS Magazine production and distribution costs include editorial, production, and design expenditures associated with the Company's magazine products. Magazine production and distribution costs were $2.4 million, $7.6 million, and $14.9 million in 1993, 1994, and 1995, respectively. Magazine production and distribution costs were $3.1 million and $4.3 million for the three months ended March 31, 1995 and 1996, respectively. The increases are attributable to the growth in circulation of Wired magazine and the costs associated with increased staffing in the editorial and design areas. Magazine production costs as a percent of magazine revenues increased from 80% in 1993 to 86% in 1994 and declined to 64% in 1995, and to 60% in the first quarter of 1996. The overall decline in magazine production and distribution costs as a percent of magazine revenues was primarily attributable to the increase in magazine advertising revenues as a percentage of magazine revenues, increased operating efficiencies, and a change in the mix of single copy sales and subscriptions as components of total circulation. Subscription revenues, which generally carry lower production and distribution costs per unit sold than single copy revenues, have increased as a percentage of total circulation revenues in each period presented. The Company expects magazine production costs to increase in absolute dollars to the extent its circulation increases. ONLINE PRODUCTION AND DEVELOPMENT COSTS Online production and development costs consist primarily of the payroll costs associated with developing, producing, and delivering content on the Company's online media properties. Online production costs were $51,000, $318,000, and $1.9 million in 1993, 1994, and 1995, respectively. Online production and development costs were $166,000 and $1.2 million for the three months ended March 31, 1995 and 1996, respectively. These increases were attributable to increased staffing of editorial, design, engineering, and production departments to expand the Company's online programming. The Company anticipates substantial increases in online production costs in the future as it increases the scope of its online activities. There can be no assurance that the Company will be able to generate sufficient online revenues to cover its online production costs, and failure to do so will have a material adverse effect on the Company's business, financial condition, and operating results. SALES AND MARKETING EXPENSES Sales and marketing expenses consist primarily of direct mail costs associated with Wired magazine, payroll and related expenses, consulting fees, commission paid to sales representatives, and advertising expenses. Sales and marketing expenses were $748,000, $2.8 million, and $9.8 million in 1993, 1994, and 1995, respectively. Sales and marketing expenses were $2.0 million and $3.4 million for the three months ended March 31, 1995 and 1996, respectively. These increases primarily resulted from expenditures on direct marketing campaigns for Wired magazine of $11,000, $1.6 million, and $5.7 million in 1993, 1994, and 1995, respectively, and $824,000 and $1.9 million for the three months ended March 31, 1995 and 1996, respectively. In addition, a portion of such increases is attributable to increased staffing of the online sales force during the latter part of 1995. The Company anticipates a substantial increase in sales and marketing expenses in the future, both in absolute dollars and as a percentage of revenues, as it expands its online efforts. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses consist of payroll and related expenses for executive, finance, and administrative personnel, professional fees, and other general corporate expenses. General and administrative expenses were $797,000, $2.0 million, and $6.7 million in 1993, 1994, and 1995, respectively. General and administrative expenses were $1.4 million and $2.5 million for the three months ended March 31, 1995 and 1996, respectively. These increases are primarily attributable to the growth in the Company's finance, senior management, and support personnel associated with the online business. The Company expects general and administrative expenses to 23 27 increase in absolute dollars in future periods as the Company incurs additional costs related to being a public company and expands its administrative staff and facilities. MINORITY INTEREST Minority interest represents the minority participants' share of the losses of HotWired Ventures LLC prior to the Business Combination. WIRED UK PREACQUISITION LOSS In 1994, the Company entered into a joint venture with Guardian Media Group plc ("Guardian") for the purpose of publishing the United Kingdom version of Wired magazine. At formation, the Company contributed the right to use certain intellectual property to the joint venture and Guardian contributed cash of approximately $216,000 in exchange for their respective 50% interests. In July 1995, the Company purchased Guardian's 50% interest in the joint venture for a nominal amount. The Company recorded this acquisition using step acquisition accounting, has included the joint venture in its consolidated financial statements as though it had been acquired at the beginning of 1995, and has recorded in its consolidated statement of operations the preacquisition losses applicable to Guardian's 50% interest up to the date of acquisition. As a result, in 1995 the Company reduced its net loss by the $854,000 of preacquisition losses attributable to Guardian's interest in Wired UK up to the date of the acquisition. INCOME TAXES From inception until the Recapitalization, because the Company was incurring net operating losses but was operating as a series of "flow through" entities (partnerships, "S" corporations, and limited liability companies) for tax purposes, it incurred minimal income tax expenses and has minimal net operating loss ("NOL") carryforwards. As a result of the Reorganization and incorporation of the Company's businesses into a taxable "C" corporation, future losses incurred by the Company will result in the accumulation of NOL carryforwards. Such NOL carryforwards should be available to offset future profits, if any. QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited consolidated statement of operations data for each of the four quarters of 1995 and the first quarter of 1996, as well as the percentage of the Company's total revenues represented by each item. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements contained herein and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, that management believes necessary for a fair presentation of the financial position and results of operations for such periods. Such data should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. In view of the Company's recent growth and other factors, the 24 28 Company believes that quarter-to-quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
THREE MONTHS ENDED --------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1995 1995 1995 1995 1996 -------- -------- --------- -------- -------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Magazine................................... $ 3,936 $5,606 $ 5,846 $ 7,925 $ 7,124 Online..................................... 342 461 545 594 497 -------- ------ ------ ------ -------- Total revenues..................... 4,278 6,067 6,391 8,519 7,621 -------- ------ ------ ------ -------- Costs and expenses: Magazine production and distribution....... 3,147 3,386 3,448 4,916 4,309 Online production and development.......... 166 311 527 850 1,245 Sales and marketing........................ 1,952 1,883 1,974 3,967 3,397 General and administrative................. 1,444 1,259 1,601 2,357 2,510 -------- ------ ------ ------ -------- Total costs and expenses........... 6,709 6,839 7,550 12,090 11,461 -------- ------ ------ ------ -------- Operating loss..................... (2,431) (772) (1,159) (3,571) (3,840) Interest income (expense), net............... 15 15 42 84 (11) Minority interest............................ -- -- 107 320 499 -------- ------ ------ ------ -------- Wired UK preacquisition loss................. -- -- 854 -- -- Loss before taxes............................ (2,416) (757) (156) (3,167) (3,352) Tax expense.................................. 2 1 2 4 9 -------- ------ ------ ------ -------- Net loss........................... $ (2,418) $ (758) $ (158) $ (3,171) $ (3,361) ======== ====== ====== ====== ========
THREE MONTHS ENDED --------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1995 1995 1995 1995 1996 -------- -------- --------- -------- -------- PERCENT OF TOTAL REVENUES DATA: Revenues: Magazine................................... 92% 92% 91% 93% 93% Online..................................... 8 8 9 7 7 -------- ------ ------ ------ -------- Total revenues..................... 100 100 100 100 100 Costs and expenses: Magazine production and distribution....... 73 56 54 58 56 Online production and development.......... 4 5 8 10 16 Sales and marketing........................ 46 31 31 46 45 General and administrative................. 34 21 25 28 33 -------- ------ ------ ------ -------- Total costs and expenses........... 157 113 118 142 150 -------- ------ ------ ------ -------- Operating loss..................... (57) (13) (18) (42) (50) Interest income (expense), net............... -- -- 1 1 -- Minority interest............................ -- -- 2 4 6 Wired UK preacquisition loss................. -- -- 13 -- -- -------- ------ ------ ------ -------- Loss before taxes............................ (57) (13) (2) (37) (44) Tax expense.................................. -- -- -- -- -- -------- ------ ------ ------ -------- Net loss........................... (57)% (13)% (2)% (37)% (44)% ======== ====== ====== ====== ========
Magazine revenues increased from quarter to quarter in 1995 reflecting the impact of growth in the subscriber base on advertising rates and growth in advertising pages. The increase in magazine 25 29 revenue from the third quarter of 1995 to the fourth quarter of 1995 as well as the decrease in magazine revenues from the fourth quarter of 1995 to the first quarter of 1996 are the result of seasonal factors that generally result in higher advertising revenues during the fourth quarter. The Company further capitalized on these seasonal factors by issuing a special 13th edition of the magazine in the fourth quarter of 1995. Online revenues increased from quarter to quarter in 1995, reflecting the impact of increased traffic to, and thus increased capacity for advertising on, the HotWired Network. Online revenues decreased from the fourth quarter of 1995 to the first quarter of 1996, reflecting the impact of eliminating from the HotWired Network one program that was not meeting the Company's expectations. New programs launched during the second quarter of 1996 are not expected to generate revenues until the third quarter of 1996. Generally, the Company's costs and expenses as a percentage of revenue were higher in the first and fourth quarters of 1995 and the first quarter of 1996 resulting from two distinct development phases of the Company's business. During the first quarter of 1995, the Company was focused on building the circulation base of Wired magazine, and during the fourth quarter of 1995 and the first quarter of 1996, the Company was expanding its online programming operations. Magazine production and distribution costs have increased from quarter to quarter, reflecting the impact of growing circulation. Magazine production and distribution costs as a percentage of magazine revenues were higher in the first quarter of 1995 as compared to the second and third quarters of 1995 as a result of a higher proportion of single copy sales in total circulation during the first quarter of 1995, and was higher in the fourth quarter of 1995 as a result of the production of a special edition of the magazine during the period. Online production costs, sales and marketing expenses, and general and administrative expenses increased most notably in the fourth quarter of 1995 and first quarter of 1996 as the online business developed and expanded its editorial, production, design, engineering, senior management, and finance staffs. Sales and marketing expenses as a percentage of total revenues were higher during the first and fourth quarters of 1995 and the first quarter of 1996 due to the costs of significant direct mail campaigns undertaken in such periods. Partly as a result of the emerging nature of the markets in which the Company competes, it is unable to accurately forecast its future revenues. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and a shortfall in actual revenues as compared to estimated revenues would have an immediate material adverse effect on the Company's business, financial condition, and operating results. In addition, the Company currently intends to increase substantially its operating expenses to develop new online and television programming, magazines, and books, and to expand its sales and marketing activities. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, financial condition, and operating results will be materially adversely affected. As a result of the Company's limited operating history, the Company does not have relevant historical financial information for a significant number of periods on which to base planned revenues and operating expenses. The Company expects to experience significant fluctuations in future quarterly and annual operating results that may be caused by many factors, including (i) the seasonal nature of the advertising business, where the second and fourth calendar quarters for magazine publishing are generally characterized by higher advertising revenues; (ii) the ability of the Company to maintain or increase the paid circulation for Wired magazine and future publications; (iii) the cost of paper, postage, and other costs associated with magazine production and distribution; (iv) the ability to maintain or increase print and online advertising rate bases; (v) the ability to reasonably predict newsstand and store sales of its magazines and books and thereby limit the returns of unsold products; (vi) the anticipated increases in operating expenses to support the expansion of its existing print and online businesses, the development of new magazine and online content sites, and the Company's book publishing and television efforts; (vii) the size and rate of growth of the market for Internet products and online content; (viii) the introduction by others of products that are competitive with those of the Company; and (ix) the general economic conditions 26 30 in the United States and worldwide. As a result of the foregoing, period-to-period comparisons of the Company's results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. The Company believes that advertising sales in traditional media, such as magazines and television, are generally lower in the first and third calendar quarters than in the respective preceding quarters and that advertising expenditures fluctuate significantly with economic cycles. Depending on the extent to which the Web is accepted as an advertising medium, seasonality and cyclicality in the level of advertising expenditures generally could become more pronounced for Web advertising. Seasonality and cyclicality in advertising expenditures generally, or with respect to Web-based advertising specifically, could have a material adverse effect on the Company's business, financial condition, or operating results. Due to all of the foregoing factors, it is likely that the Company's operating results will fall below the expectations of the Company, securities analysts, or investors in some future quarter. In such event, the trading price of the Common Stock will be materially and adversely affected. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its operations primarily through private sales of equity securities, the sale of products and advertising, and debt. Through March 31, 1996, the Company raised approximately $15.7 million from the sale of equity interests in private financings and debt. In May 1996, the Company raised an additional $12.3 million of net proceeds from the sale of Series B Preferred Stock. In 1993, 1994, and 1995, the Company used $769,000, $1.1 million, and $3.3 million, respectively, in operating activities. In the three months ended March 31, 1996, the Company used $4.7 million in operating activities. Since inception, cash used in operating activities resulted primarily from operating losses and increases in accounts receivable associated with the increases in revenues, partially offset by increases in accrued expenses and deferred subscription revenues. In 1993, 1994, and 1995 and for the three months ended March 31, 1996, the Company's investing activities consisted primarily of purchases of capital equipment, primarily computer and communications equipment and software. Capital expenditures were $53,000, $688,000, $1.5 million, and $602,000 in 1993, 1994, 1995, and the three months ended March 31, 1996, respectively. The Company expects that its capital expenditures will increase as the Company's employee base continues to grow. At March 31, 1996, the Company had cash and cash equivalents of $2.6 million and a working capital deficit of $5.8 million. The Company believes that the net proceeds from the sale of the Common Stock to be sold in the offerings, together with proceeds from the sale of Series B Preferred Stock in May 1996, will be sufficient to meet its working capital and capital expenditure requirements through the end of 1997. 27 31 BUSINESS The following discussion of the Company's business contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Wired Ventures, Inc. is a new kind of global, diversified media company engaged in creating compelling, branded content with attitude for print, online, and television. Its current businesses include publishing Wired magazine and programming original content on the Web primarily through its HotWired network of online content sites (the "HotWired Network"). The Company believes that it has developed Wired and HotWired into strong brands that symbolize new media and the digital age. Wired magazine and the Company's online content sites have award-winning content and design that have attracted large and rapidly growing audiences with young, well-educated, and affluent demographics that the Company believes are highly sought after by advertisers. The Company also believes that with its creative, research, technological, sales, and management expertise, and its established brands, it has created a platform from which to launch additional brands across multiple media. In addition, the Company believes that its brands and media properties are well-positioned to capitalize on the expected growth of the use of the Internet and the Internet advertising market. International Data Corporation has estimated that the number of Internet users will reach approximately 200 million by the end of 1999, up from approximately 56 million at the end of 1995; a report by Forrester Research in September 1995 estimated that the market for advertising on the Internet will reach $74 million in 1996 and will exceed $2 billion by 2000. MISSION AND STRATEGY The Company aims to create smart media for smart people around the world - high-quality information and entertainment products aimed at a well-educated, affluent, technologically savvy, and influential consumer group. Its mission is to build a new kind of global, diversified media company for the 21st century utilizing its ability to create compelling, branded content with attitude across multiple media, its technological and research capabilities, its strong connection to consumers and advertisers, and its commitment to journalistic and artistic excellence. The Company's strategy to achieve its mission includes the following elements: CREATE SMART MEDIA FOR SMART PEOPLE AROUND THE WORLD. The Company believes that creating high-quality information and entertainment products aimed at a well-educated, affluent, technologically savvy, and influential consumer group is the key to sustaining the rapid growth of its audiences, attracting advertisers, and maintaining advertising rates generally higher than those of its competitors. In addition, the Company believes that by focusing on a demographic group that includes today's thought leaders and early adopters of new ideas and technologies, it will also attract a broader group of consumers who are influenced by this group's ideas and viewpoints. LEVERAGE EXISTING BRANDS AND CREATE NEW BRANDS. The Company believes it has developed Wired, HotWired, and their related brands into brands that symbolize new media and the digital age. The Company intends to strengthen its existing brands by continuing to publish compelling print and online content for growing audiences and extending its existing brands across media including books and television. In addition, the Company intends to apply its creative resources and its expertise to develop new brands with distinct creative visions for print, online, and television. The Company believes that this diversification will enable it to create products that appeal to wider audiences with demographic characteristics similar to those of its existing consumers. The Com- 28 32 pany also believes that its HotWired Network and other online media properties provide a platform from which to rapidly and cost-effectively launch and test new brands, which can then be extended across media. EXPAND GLOBALLY. The Company's products are available to consumers worldwide by subscription or through the Web. Localized editions of Wired magazine, which contain a significant amount of original content, are currently published in Japan and the United Kingdom, and the Company also expects to publish a German edition in 1997. The Company believes that it has gained valuable experience from its Japanese and United Kingdom publishing activities. The Company intends to leverage this experience to new opportunities to broaden the global production and dissemination of its branded products and to create additional localized editions of its print and online properties. INCREASE TECHNOLOGICAL LEADERSHIP. The Company believes it is a leader in the development of new technologies for online media properties and intends to increase its technological capabilities in the future. The Company develops and acquires proprietary software technologies to deliver online content and services with advanced features that help create a richer experience for its users and strengthen advertiser relationships. The Company is also exploring the possibility of licensing certain aspects of its own proprietary technologies to third parties as a revenue source. CAPITALIZE ON CONSUMER PROFILING CAPABILITIES. The Company believes that its ability to target and develop relationships with its consumers will enhance the success of its media properties. In addition to collecting and maintaining profiles of its magazine readers, the Company uses proprietary technologies to obtain, manage, and analyze large amounts of volunteered or observed data regarding its online users. This information is then used by the Company's sales team in soliciting specific advertiser categories. It is also used by the Company's online advertisers to target particular users with advertising messages and by the Company to generate personalized editorial material for its online users. The Company also frequently surveys a panel of more than 20,000 online members that have volunteered to answer in-depth queries. The Company believes these capabilities enable it to develop and refine its own content, enhance the user's experience, and develop and strengthen its relationships with advertisers, thereby supporting its premium advertising rates. DEVELOP UNIQUE ADVERTISING PROGRAMS. The Company intends to continue developing unique advertising programs that increase advertiser retention rates and leverage the favorable demographics of Wired magazine, the HotWired Network, and the Company's other products. To date, these programs have included advertising packages that involve placement across different Wired products, online placements that directly associate an advertiser's product with editorial content, and increased access to the Company's online marketing research and experience in exchange for increased advertising commitments. In addition, the Company is developing new forms of commercial sponsorship whereby the sponsor gains the full benefit of co-branding program content in exchange for ongoing financial and co-marketing commitments to the program. For example, Dockers has committed to become the exclusive co-sponsor of the HotWired Network's Dream Jobs program starting in July 1996. DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS. Strategic relationships with publishers, online media, and television programmers and distributors are important to the Company's success. The Company develops and maintains such strategic relationships to expand brand awareness and to extend the reach of its products through product and content distribution, expansion into international markets, and the development of products for different media. For example, the Japanese edition of Wired magazine is being published through a license agreement with Dohosha Digital Publishing, and HotBot is being operated through a strategic alliance with Inktomi Corporation. The Company's strategy involves substantial risk. There can be no assurance that the Company will be successful in implementing its strategy or that its strategy, even if implemented, will lead to growth or profitability of the Company. If the Company is unable to implement its strategy effectively, 29 33 the Company's business, financial condition, and operating results would be materially adversely affected. PRODUCTS WIRED MAGAZINE -- UNITED STATES EDITION BACKGROUND. Wired magazine was launched in January 1993 to cover the Digital Revolution, a term popularized by the Company to describe the profound changes caused by convergence of the computer, media, and communications industries. With Wired's blend of leading-edge editorial and highly innovative design, the Company has created a unique magazine genre. Wired is not a computer magazine; it is about the people, companies, and ideas of the Digital Revolution. Wired magazine's standard monthly departments and columns include: [ICON] Rants & Raves: Reader feedback [ICON] Electric Word: Bulletins from the front line of the Digital Revolution [ICON] Fetish: The latest objects of technolust [ICON] Scans: People, companies, and ideas that matter [ICON] Reality Check: The real timetable for the implementation of new technologies [ICON] Follow the Money: The art of the deal [ICON] Deductible Junkets: Conferences and events for the digital vanguard [ICON] Electrosphere: Short features on topics important to the Digital Revolution [ICON] Idees Fortes: One-page pieces about interesting ideas [ICON] Street Cred: User criticism of software, hardware and new media products [ICON] Net Surf: Notable sites on the Web [ICON] Nicholas Negroponte: Insight and ideas from MIT's Media Lab Director
In addition to retaining its own staff writers, the Company draws from a community of well-known contributors, including: Steven Levy, the author of Hackers; Po Bronson, the author of Bombardiers; Esther Dyson, Chair of the Electronic Frontier Foundation and publisher of Release 1.0; Nicholas Negroponte, Director of the MIT Media Lab and the author of Being Digital; Mitch Kapor, founder of Lotus Development Corporation; John Perry Barlow, the author of The Economy of Ideas; and Paul Saffo, Research Fellow at the Institute for the Future. Wired magazine's growth has been strong from its launch, as shown in the following table:
PERCENT OF PAID CIRCULATION CIRCULATION AVERAGE FROM AT PERIOD ADVERTISING REVENUES SUBSCRIPTIONS PERIOD END PER ISSUE AT PERIOD END ----------------------------------------- ----------- -------------------- ------------- 1993..................................... 90,000 $ 265,000 25% 1994..................................... 168,000 $ 377,000 37% 1995..................................... 245,000 $1,084,000 60% First Quarter 1996....................... 300,000(est.) $1,281,000 63% (est.)
30 34 AWARDS. Wired magazine has been reviewed favorably by industry sources. Listed below are some of the awards that Wired magazine has received: American Society of Magazine Editors: National Magazine Award for General Excellence (1994) American Society of Magazine Editors: National Magazine Award for Design Excellence (1996) ADWEEK Magazine: Startup of the Year Award (1993) Digital Hollywood Awards: Best Digital Magazine (1995 and 1996) Folio Magazine: Editorial Excellence Award (1994 and 1995) International Press Awards: Best International Smaller Publisher (1994) International Press Awards: Runner-up for Best International Major Publisher (1995) Tenth Annual Computer Press Awards: Best Broad Interest Magazine (1994) DEMOGRAPHICS. Wired's readership is young, affluent, and well-educated. The Company believes this group is largely comprised of people who are influential in making corporate and household purchasing decisions and are therefore highly sought after by advertisers. Based on an independent survey conducted by Intelliquest in 1995, the Company believes that Wired magazine was the magazine most effective in reaching senior management involved in worksite computer software purchase decisions, surpassing such competitors as Fortune, PC Magazine, and Business Week. Wired magazine's 1995 Subscriber Survey, conducted by Beta Research Corp., showed that readers of Wired magazine spend an average of over two hours reading each issue of Wired magazine, a statistic the Company believes compares favorably with that of its competitors, and revealed the following demographics: Average age.......................................... 37 Average annual household income...................... $122,000 Average household net worth.......................... over $600,000 Percent with post-graduate study..................... 48% Percent working in managerial positions.............. 52%
ADVERTISERS. Wired magazine's advertisers range from consumer goods companies to computer software and hardware vendors. The Company believes Wired magazine is the first major technology-related publication that has been able to attract such a broad mix of advertisers. Wired magazine's top 50 advertisers in terms of advertising revenues for the first six issues of 1996 are: Absolut Vodka Acer, Inc. Adaptec, Inc. Anthro Technology Furniture BMW Incorporated Calvin Klein Inc. Capcom USA Inc. Capital Records Chrysler Corporation CMP Publications Inc. COMPAQ Computer Corporation Computerworld Connectix Data Translation, Inc. Dewar's Digital Equipment Corporation Dodge Car/Truck Division, Chrysler Corporation Epson America, Inc. Excalibur Technologies Corp. Fujitsu Ltd. Global Village Communication, Inc. The Hewlett-Packard Company Hitachi, Ltd. InContext Systems Intel Corporation International Business Machines Corporation Kingston Technology Corp. Lotus Development Corp. Luckman Interactive, Inc. Maxis Mercedes-Benz of North America Mindscape, Inc. Motorola, Inc. NEC Corporation New Balance Athletic Shoe Inc. PC Financial Network Pipeline Associates, Inc. Plymouth Division, Chrysler Corporation Prodigy Services Co. Quarterdeck Office Systems, Inc. Ray Ban Sabre Computers International, Ltd. The Saturn Corporation Sea Doo/Ski-Doo Division, Bombardier Inc. Sony Corp. Swatch Watch USA U.S. Robotics, Inc. Video On Line Volkswagen of America Inc. Wollongong Group, Inc. 31 35 Since its inception, Wired magazine has been able to maintain a consistently high advertising rate, in terms of cost per thousand readers ("CPM"). In addition, in contrast to its competitors, which the Company believes offer significant volume-related discounts that are not disclosed on their published rate cards, the Company does not offer discounts not disclosed on its published rate cards. Over 50% of Wired magazine's advertisers during 1995 committed to at least six pages of advertising (generally one page in each of at least six issues). In 1995, six of Wired magazine's top 10 advertisers also purchased advertising on the HotWired Network. WIRED MAGAZINE - INTERNATIONAL EDITIONS Wired magazine is currently published in the United States, Japan, and the United Kingdom, is available by subscription worldwide, and is available for newsstand purchase in 39 countries. In addition, the Company expects to publish a German edition in 1997. Each international edition of Wired magazine contains both a significant amount of original content written specifically for such edition, as well as content taken from the United States or other international editions of Wired magazine. The Company believes that this global pool of editorial material gives the Company a global point of view that appeals to Wired magazine readers. The Company also believes that these features distinguish Wired magazine from other international publications, which are often merely translations of domestic editions, and also increase its chances for consumer acceptance. See "Risk Factors -- Risks Associated with International Expansion." INTERACTIVE MEDIA The Company's current online media properties consist of multiple brands on the HotWired Network (including the newly-launched HotBot search engine), the Suck.com online content site, and Wired magazine's content site on America Online. These online media content sites feature original, branded content with attitude that changes on a regular, and in some cases daily, basis. Underpinning the Company's online media enterprise is a commitment to technological leadership - the ability to anticipate and meet user and advertiser needs through innovative technology. The Company has developed several proprietary technologies, shared among all of the Company's online media properties, that the Company believes enable it to enhance the user's experience and strengthen advertiser relationships. THE HOTWIRED NETWORK BACKGROUND. The Company's flagship online media offering, launched in October 1994, is the HotWired Network, which features original editorial material on topics such as politics, travel, arts, entertainment, health, careers, and lifestyle. In addition, it contains highlights of the current issues of Wired magazine and full text archives of past issues of Wired magazine. Users can access the HotWired Network's "programs" through the main HotWired Network site (http://www.hotwired.com) or through each program's own distinct Web address. The HotWired Network's users have the option to become members of the HotWired Network. Membership is free and gives members access to many features not available to non-members, including a personalized "What's New" feature that enables users to receive custom generated lists of materials the user has not yet viewed, and the ability to participate in the Company's interactive discussion spaces. The member registration system allows the Company to obtain and maintain online user profile data, which it then uses to create, maintain, and enhance user and advertiser relationships. In addition to providing strong editorial content, the Company believes it is breaking new ground in the use of digital audio and video on the Web and in its development and use of live chat and asynchronous discussion spaces. 32 36 Standard programming on the HotWired Network includes: [ICON] Signal (http://www.signalsalon.com): Daily stories and commentary about Web commerce, technology, people, and culture [ICON] The Netizen (http://www.netizen.com): Political coverage designed to reflect the interests of the online community [ICON] Pop (http://www.pop.com): Reporting on the arts and entertainment of the new digital culture [ICON] Ask Dr. Weil (http://www.docweil.com): Dr. Andrew Weil, M.D., a Harvard-trained physician and best-selling author who is an expert in traditional and alternative medicine, answers questions about health and wellness in an interactive format [ICON] Wired Magazine (http://www.wired.com): Wired magazine content and highlights, as well as interactive forums where users can communicate with each other and with Wired magazine's writers, editors, and designers [ICON] Dream Jobs (http://www.dreamjobs.com): The editor's choice of the best jobs currently available in the media, technology, and online industries [ICON] Cocktail (http://www.cocktailhour.com): Includes classic drink recipes introduced every Friday, a mixologist's dream database of drinks, and opinionated bartender commentary [ICON] Talk.com (http://www.talk.com): The Company's proprietary chat environment, written entirely in Sun Microsystems' Java language [ICON] Threads (http://www.hotwired.com/threads): The Company's proprietary conference space, where users can read and members can initiate, read, or respond to threaded discussions [ICON] ClubWired (http://www.clubwired.com): The Company's auditorium space, based on its proprietary Java-based chat environment, which features guests from U.S. Senators to popular musicians to prominent authors [ICON] Rough Guides (http://www.roughguides.com): Interactive database of travel destinations and discussion forums for independent travelers, provided through an alliance with the publishers of the Rough Guides travel book series [ICON] HotBot (http://www.hotbot.com): A comprehensive Web-wide search engine
As with Wired magazine, growth in the use of and advertising on the HotWired Network has been strong from the start. Since its inception in October 1994, the HotWired Network has grown to over 360,000 registered members as of March 31, 1996. For the three months ended March 31, 1996, the HotWired Network had an average of over 19,000 visitors per day, and it had over 7 million page views during that period. Online advertising revenues for the three months ended March 31, 1996 were approximately $500,000. AWARDS. The HotWired Network has been reviewed favorably by industry sources. Listed below are some of the awards the HotWired Network has received: Digital Hollywood Awards: Best Site of the Year (1996) Digital Hollywood Awards: Best of Digital Hollywood (1995) The National Information Infrastructure Award: Best Arts And Entertainment Internet Site (1995) Entertainment Weekly Magazine: One of the Top Ten Sites for 1995 (Flux) Tenth Annual Computer Press Awards: Best Online Publication (1995) Advertising Age Magazine: Best Online Magazine (1994) Japanese Multimedia Grand Prix: Best in Multimedia (1994) 33 37 DEMOGRAPHICS. Like that of Wired magazine, the audience of the HotWired Network represents a demographic group with strong advertiser appeal. The Company believes that the users of the HotWired Network are technologically savvy thought leaders and early adopters of new ideas and technology who will be influential in the continuing development of the Web. The HotWired Network's 1995 member research revealed the following demographics: Average age............................................... 32 Median annual household income............................ $50,000 Percent with post-graduate study.......................... 34% Percent who have been online two years or more............ 42%
- --------------- The survey was conducted on the HotWired Network between July 27, 1995 and August 24, 1995. Sixteen percent of members visiting the site during this period completed the survey. Data presented is for adults 18 years and older (97% of survey respondents). ADVERTISERS. The HotWired Network's demographics have attracted a unique mix of premier advertisers. The HotWired Network's top 25 advertisers in terms of advertising revenues for the first three months of 1996 were: Accent Software, Inc. Adaptec, Inc. Apple Computer, Inc. Architext, Inc. Checkfree Corp. The Hewlett-Packard Company Infoseek Corp. Individual, Inc. Inscape Insignia Solutions, Inc. Intel Corporation International Business Machines Corporation Magnet Interactive Studios Microsoft Corporation NEXT Software NYNEX Interactive Yellow Pages Open Text Corp. Pontiac (Division of General Motors Corporation) Salsa The Saturn Corporation Songline Studios Sun Microsystems (Java) Toyota Motor Corp. Travelocity VISA International The Company has consistently commanded CPMs that are substantially higher than the published rates of its competitors. The Company believes it has been able to maintain its relatively high CPMs due to the quality of its content, the length of time spent by users per page view, the attractiveness of its user demographics, and its research capabilities. The following table, which is based on data published in the November 20, 1995 edition of Advertising Age magazine, illustrates this fact:
SITE CPM ---------------------------------- ------- THE HOTWIRED NETWORK.............. $150.00 cnet.............................. $ 75.00 IUMA.............................. $ 73.68 Netscape.......................... $ 30.00 Internet Shopping Network......... $ 25.00 ESPNet............................ $ 20.83 Pathfinder........................ $ 13.33 Playboy........................... $ 5.00
The HotWired Network's planned advertising model for real-time chat forums (in the Talk.com and Club Wired programs) is slightly different: because there are no page views in chat forums, advertising is expected to be sold in time-based increments. SEARCH ENGINE. The Company's search engine service, HotBot, was launched in May 1996 in order to further leverage the Company's online brand presence and its Web advertising sales capabilities. HotBot is being commercialized through a strategic alliance with Inktomi Corporation. Under the agreement, Inktomi licenses its search engine technology to the Company and operates 34 38 the service, and the Company provides interface design, marketing, and advertising sales. A significant portion of net advertising revenues is paid to Inktomi as a licensing fee. HotBot is the first search engine service designed to search the complete text of the 50 to 60 million documents currently estimated to be on the Web. Many of the currently popular services search only half that number. HotBot is also able to provide advertisers with the ability to target ads based on the keywords from a user's query, the domain from which the user is accessing the service, and the type of browser and computer the user is running. Advertising on HotBot is priced competitively with other search engine offerings at a CPM of $20.00. The Company expects that the number of page views for HotBot will be substantially higher than those of the HotWired Network, although there can be no assurance that this will be the case. GLOBAL EXPANSION. The HotWired Network is accessible throughout the world on the Web. The Company is exploring the development of localized versions, involving customized language, content, and advertising, of the HotWired Network, in regions of Western Europe and Asia. SUCK.COM Suck.com (http://www.suck.com) began as an underground, anonymously produced Web site containing sharp commentary on the Web and popular culture. Since its debut in August 1995, the Company believes that Suck.com has become one of the most popular, most discussed, and most imitated sites on the Web. In April 1996, Suck.com had approximately 7,000 to 9,000 visitors per weekday. Purchased by the Company in March 1996, Suck.com remains editorially independent from the HotWired Network and maintains a separate brand identity. In May 1996, Suck.com added a series of new content areas that expanded and reinforced the attitudes established on the original Suck.com Web site. These five weekly programs are: Vacuum: Parody of Internet community (reader mail) The Pitch: The latest Web concept that's "too stupid to fail" Filler: Facts, quotes, figures, and search results, as filtered by the Suck.com editors Zero Baud: Discussions of offline living Net.Moguls: Virtual "trading cards" highlighting conspicuous characters from the Internet world Suck.com began generating revenues through advertising in May 1996. Its current advertisers are comprised of the following charter sponsors: Big Book, Black Star Beer, Marinex Multimedia/The East Village, and Tripod, Inc. Each advertiser is guaranteed that its advertising message will be viewed at least 100,000 times every four weeks. In return for this guarantee, sponsors are required to commit to between eight and 24 weeks of advertising. Each advertisement is rotated through the daily Suck.com home page and the five weekly programs. In May 1996, the basic price for eight weeks of advertising was $20,000; this rate is discounted by up to 10% as the term of the commitment increases. Suck.com requires that each advertisement be animated using Sun Microsystems Inc.'s Java language. WIRED MAGAZINE ON AMERICA ONLINE The Company provides programming related to Wired magazine on America Online (keyword: Wired). This programming includes highlights of the current issue of the magazine and full-text archives of past issues. In addition, this site offers an interactive discussion space where users can communicate with each other as well as with writers, editors, and designers of the magazine. The Company earns a percentage of America Online's user fees based on traffic to the site. While the revenues attributable to this site have not been significant to date, this site is a cost-effective way of generating Wired magazine subscriptions and single copy sales. 35 39 PROPRIETARY TECHNOLOGIES The Company believes that a key to its future success is to develop innovative software technologies and to deliver online content with advanced features that create a richer experience for its users and strengthen relationships with advertisers. In keeping with its commitment to technology leadership, the Company believes it was the first Web publisher to offer an integrated threaded discussion space, a member registration system, and custom pages dynamically generated through database queries. The Company's current development efforts include the incorporation of full motion video and digital sound into its online content sites. In order to remain at the forefront of Web technology, the Company has an in-house engineering staff of 25 people devoted to such efforts. Some of the software technologies developed by the Company are described below: REAL-TIME CHAT. Talk.com incorporates familiar "chat room" features of popular online services and can be used on any platform with any browser that supports Java. Among the key features of Talk.com are multiple user nicknames, member-created chat rooms, "instant" private messages, and live auditorium events. Because the chat service is written in Java, new features and updates can instantly be made available to users. The Company believes the Talk.com server software is one of the first high-performance server applications written entirely in Java. The software is designed to be scalable to support large numbers of simultaneous users. The software is also able to run in a distributed mode over several machines and is designed to take advantage of Internet protocol multicasting, enabling enhanced performance on multicast networks such as @Home. THREADED DISCUSSION. Threads is based on the idea of threaded discussions, which are conversations consisting of a series, or "thread," of user-posted messages. The system provides users with a discussion area to discuss issues and topics of interest to the HotWired Network community. The Company believes Threads is unique on the Web in its feature set and scale, and its threaded discussion areas have been some of the HotWired Network's most popular features. Every piece of editorial content on the HotWired Network is linked into threaded discussion pages created by the HotWired Network's users and contributors. The standout feature of Threads is the ability to post to the discussion using HTML, the language of the Web itself. In other words, each user can employ the exact same tools as the Company's contributors and editors, allowing a level of expression not seen in prior conferencing systems. The Company believes this development is a step toward two-way content creation. PERSONALIZED WEB PAGES AND BROWSER TARGETING. The Company has developed user customization technology that generates personalized Web pages that are created "on the fly" and are specific to each user. An example is the HotWired Network's custom "What's New" page, which uses data captured by the Company's user tracking and database system to generate a custom page for each registered HotWired Network member that highlights the content sections that the specific member has not previously viewed. The highlights are based on the member's previous visits to the HotWired Network, preferences expressed by the member, and newly-posted features and articles. This technology also enables the Company to send versions of the HotWired Network's Web pages that are optimized for the user's computer and Web browser software. The Company's technology allows a user who is running Netscape Navigator on a Macintosh to have a HotWired Network experience that is substantially similar to that of a user who is visiting the HotWired Network from America Online and running Windows 95 on a PC. This capability is implemented through the integration of database technology with the HotWired Network's publishing system. TARGETED ADVERTISING. The Company has created an advertisement insertion system that allows advertisers to target specific users. The first use of this system in early 1996 allowed the Company to sell to United Kingdom-based advertisers advertisements that will be viewed only by United Kingdom-based users. By targeting Internet domain names specific to the United Kingdom, the Company can ensure that an advertisement is only being displayed for a relevant user. In addition, the software allows the Company to provide advertisers with detailed reports. The 36 40 Company believes that its targeted advertising technology provides the Company with a competitive advantage by enabling advertisers to establish a one-to-one marketing relationship with the HotWired Network's users. DEVELOPMENT PROJECTS The Company has many creative and business concepts in various stages of development. These development projects include the following: NEW ONLINE MEDIA PROPERTIES The Company is continually exploring new ideas for online media properties. The Company uses the HotWired Network as a cost-effective vehicle for market-testing these new ideas. As such concepts mature, they may become full-fledged programs on the HotWired Network, such as Ask Dr. Weil or Dream Jobs, or completely separate online media properties, such as Suck.com. In addition, successful online concepts may be extended to other media. The Company also believes that its HotWired Network and other online media properties provide a platform from which to rapidly and cost-effectively launch and test new brands, which can then be extended across media. NEW MAGAZINES The Company is currently exploring several new magazine concepts that are editorially distinct from the Company's existing products. The Company expects to begin assembling dedicated staff for one or more such magazines in 1996 and may launch one or more new magazines in 1997. Each of these magazines will cover a specific topic of interest to consumers with attractive demographics similar to those of Wired magazine readers and the Company's online media property users. These magazines will also feature high-quality editorial material and innovative design. TELEVISION Leveraging the Company's programming and design resources, as well as the strength of the Wired and related brands, the Company is exploring the development of television programming. The Company expects that its first television production will be a brand extension building on The Netizen Web site on the HotWired Network and section in Wired magazine, and will be distributed on a cable television service through an arrangement with a strategic partner. This program, which the Company expects will premiere in 1996, is planned as a 30-minute weekly program of political coverage from the perspective of the Digital Revolution. The Netizen program is expected to be a combination of a studio discussion format and on-site location reports. The Company expects to license the initial The Netizen programs to its partner for distribution. As the Company continues to explore programming possibilities, it will evaluate other sources of television revenues, including sharing in advertising revenues. The Company has developed several additional programming concepts, and is currently in discussions with several media companies regarding the concepts and business terms for these efforts. In addition to The Netizen, the Company expects to begin production of one or more other programs in 1996. BOOKS The Company has established a book publishing division, HardWired, which will publish its first books in 1996. A total of six books, many of which will contain content derived from Wired magazine, are scheduled for publishing in the Fall/Winter 1996 book season. The books to be published in the upcoming season are: Mind Grenades - Manifestos From the Future, by John Plunkett and Louis Rossetto: A compilation of the stunning and provocative graphic introductions from the first 30 issues of Wired magazine The Medium is the Massage - An Inventory of Effects, by Marshall McLuhan: A reprint of Marshall McLuhan's 1967 best-seller 37 41 Wired Style - Principles of English Usage in the Digital Age, by the editors of Wired magazine Digerati - Encounters with the Cyber Elite, by John Brockman Reality Check, by Brad Wieners and David Pescovitz: The real timetable for the implementation of new technologies BOTS - The Origin of a New Species, by Andrew Leonard: An investigation of the emerging, complex world of intelligent agents The Company's development projects involve substantial risk. There can be no assurance that the Company's new business efforts will result in new products or will be successful. If the Company is unable to create or commercialize new products, its business, financial condition, and operating results may be materially adversely affected. The foregoing discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. ADVERTISING SALES The Company's sales organization includes professionals with advertising agency backgrounds, as well as experienced sales executives hired from other media companies. The Company believes that understanding the sales process from both the buyer's and seller's point of view provides a strong foundation for both traditional media packages and more innovative and complex sponsorship-type sales. The Company provides regular training and education to its sales staff and believes it has built one of the most knowledgeable sales teams in the new media sector. The Company believes it enjoys stable, long-term relationships with many top national advertisers in the technology and consumer categories. Many advertisers, including Absolut Vodka, Apple Computer, Inc., and NEC Corporation, have been advertising with Wired magazine since the first issues in 1993. Of the Company's top 50 advertisers in the first quarter of 1996, approximately 64% and 40% also advertised in the Company's products in 1995 and 1994, respectively. The Company believes the basis for these strong relationships is client satisfaction with advertising results, as well as the Company's commitment to innovative marketing solutions, research, and customer service. Because the Company's print and interactive environments are perceived to be leading-edge in both content and design, many advertisers create advertising campaigns specifically for the Company's products. The Company believes it was the first technology-related publisher to reach beyond technology advertisers to include consumer advertisers. Key advertiser categories in Wired magazine include computer hardware and software, telecommunications, online services, automotive, liquor, fashion, entertainment, and financial services. When the Company expanded into online media with the launch of the HotWired Network, many of its existing advertisers, including AT&T Corp. and IBM, allocated additional funds to advertising on the HotWired Network. In addition, many advertisers, including VISA International and MCI Communications Corporation, were initially attracted to the HotWired Network and subsequently also purchased magazine advertising. For example, 42% of the HotWired Network's advertisers in the first quarter of 1996 have also advertised in Wired magazine. The magazine sales force consists of in-house sales professionals in San Francisco, New York, and London. As of April 30, 1996, there were a total of 30 members of the United States magazine sales department, including 13 sales executives, sales support staff, and personnel who provide research, promotional support, and value-added programs for advertisers. In addition to the full-time magazine sales staff, the Company has contracts with outside representatives based in Detroit, Atlanta, and Dallas. Initially, the magazine sales staff was also responsible for selling online advertising. Due to the rapid growth in online advertising, the differences between interactive and print sales, and the frequently separate handling of interactive and print budgets within advertising agencies, the 38 42 Company is now building a separate sales team dedicated to the Company's online media properties. As of April 30, 1996, the interactive sales force consisted of six people in San Francisco and three people in New York. The HotWired Network's sales opportunities include both standard advertising banners and sponsorship models. In the case of banner sales, the advertiser provides a banner across the top of a HotWired Network page that generally links to the advertiser's Web site. In the case of sponsorship sales, the advertiser has a deeper relationship with the content of a particular program, which identifies the advertiser's brand more directly with the Company's program. For example, the Company recently entered into a one-year sponsorship arrangement with Levi Strauss, under which Dockers will co-market the Dream Jobs program. The Company is currently selling advertising packages that combine both print and online opportunities. As the Company creates new properties in print, online, and television, advertisers will be offered packages that follow media lines, brand lines, or geography. The Company believes these packages enable its advertisers to cost-effectively reach their target audiences, while providing the Company the opportunity to capture a larger portion of their advertising and promotional budgets. MARKETING AND DISTRIBUTION The Company continually seeks to identify and develop cross-promotional opportunities in all areas of the Company. For example, the Company uses Wired magazine's online content sites to generate subscriptions, uses its HotFlash electronic mailing list to promote new online brands, and advertises its online media properties in Wired magazine. In addition, the Company's in-house telephone and e-mail customer service staffs cross-sell the Company's products. The Company uses publicity and promotions to increase brand awareness and position its brands, as well as to generate subscriptions and increase online traffic. Many of the Company's editors, designers, programmers, and contributors are recognized as experts in their fields and are regularly contacted by the press to comment on developments and trends in business, politics, technology, and lifestyle. The Company intends to invest in expanded marketing and promotional activities including billboard, bus, and other outdoor advertising, targeted cable television advertising, and continued print advertising in both trade and consumer publications. MAGAZINE MARKETING AND DISTRIBUTION Wired magazine is distributed through both subscriptions and single copy sales. The majority of growth in paid circulation has come from subscription sales, which have grown from roughly 21,000 subscriptions at the end of 1993 to approximately 190,000 subscriptions at the end of the first quarter of 1996. These subscriptions are generated through a mix of direct mail marketing, online promotion, insert cards in the magazine and other publications, and advertising. Another source of subscriptions is the magazine's content areas on the HotWired Network and America Online. As the Company develops a presence on other online services, additional subscription business is expected. Single copy sales have grown from an average of 64,000 copies per month during 1993 to approximately 110,000 copies per month during the first quarter of 1996. The single copy price has been $4.95 since inception. The Company sells approximately 45% of all copies shipped for single copy distribution, which the Company believes compares favorably with its competitors. The Company uses third-party distributors to distribute the United States and international editions of Wired. The United States version of Wired magazine is distributed nationally by International Circulation Distributors - The Hearst Corporation and to retailers, smaller stores, computer stores, and internationally by various other distributors. The United Kingdom version is published by the Company and distributed through a third-party distributor. The Japanese version is published by Dohosha Digital Publishing under a licensing arrangement. The Company expects both single copy and subscription sales to increase but expects subscription sales to increase as a percentage of total circulation revenues. There can be no assurance, however, that circulation sales will increase at the rate anticipated or at all. 39 43 The primary tool used for circulation marketing is direct mail. After extensive and ongoing testing, the current tested list universe is 12 million names, indicating potential for continued growth through direct mail. The list universe is comprised of several distinct groups, including computer users, business people, retail consumer groups, and similar demographic groups. The Company has also found that many of the new mailing lists coming onto the market from Internet-related businesses are effective in attracting new subscribers. To the extent Internet-related business continues to grow, the Company expects that additional attractive mailing lists will become available. The Company mails major campaigns on a quarterly basis. The average subscription price for direct mail offers is $24.95, with renewals occurring at either the basic rate of $39.95 or $29.95. Historically, approximately 42% of all first-time direct mail subscribers and approximately 63% of all other subscribers have renewed their subscriptions. INTERACTIVE MEDIA MARKETING AND DISTRIBUTION The Company's marketing of its online media properties has been focused to date almost exclusively on online venues. This has included: outreach to the supervisors of Web sites ("Webmasters") to increase the number of online links made to the HotWired Network's programs, which has resulted in the creation of more than 14,000 links to the HotWired Network; promotion of the HotWired Network's programs, particularly live events, in appropriate Usenet newsgroups; purchase of advertising space on frequently visited sites, including Netscape, Yahoo!, and Infoseek; and creation of online promotions using internal marketing banners on the HotWired Network. Traditional advertising for the HotWired Network has been limited to the monthly placement of advertisements in Wired magazine. In addition, the HotWired Network has co-sponsored several trade shows and entertainment events, including the DCI Web World conference and exposition, the SIGGRAPH multimedia conference and exposition, the MacIntosh New York Music Festival, and the Toyota Comedy Festival. The Company plans to increase total marketing expenditures for its online media properties in order to increase traffic and aggressively build brand awareness. The Company is also engaged in active discussions with third parties regarding the distribution of its online content through such third parties' proprietary services. HARDWIRED MARKETING AND DISTRIBUTION HardWired books will be published by the Company and distributed through Publisher's Group West ("PGW"). The Company's book marketing program includes a cooperative agreement with PGW for advertising in wholesaler catalogs, book trade publications, consumer outlets, and national account promotions. The Company also expects to promote its books through trade shows, trade and consumer print advertisements (including Wired magazine), electronic kiosks, and online advertising (including on the Company's online media properties), author appearances on television and radio, book tours, and speaking engagements. TELEVISION MARKETING AND DISTRIBUTION The Company expects to employ the same cross-promotion techniques for its television programming as it does for its other media properties. In addition, the Company is currently exploring various methods for marketing its television programming, including billboards and television advertisements. COMPETITION The Company faces significant competition from a large number of companies, many of which have significantly greater financial, creative, technical, and marketing resources than the Company. These companies may be better positioned to compete in the evolving media and technology industries. In addition, the Company faces broad competition for advertising revenue from other media companies that produce magazines, newspapers, online content, radio, and television, as well as other promotional vehicles such as direct mail, coupons, and billboard advertising. Each of 40 44 the Company's products competes with other media and many other types of leisure activities for audiences and advertising revenue. Overall competitive factors in these segments include editorial and design quality, price, and customer service. Competition for advertising dollars is primarily based on advertising rates, reader response to advertisers' products and services, and effectiveness of sales teams. There can be no assurance that one or more of the Company's competitors will not significantly undermine the sales efforts of the Company or reduce the Company's audiences, either of which would have a material adverse effect on the Company's business, financial condition, and operating results. Competition in the magazine publishing business is also intense with respect to subscription sales and single copy distribution and display. There can be no assurance that one or more other magazines or online content sites will not significantly undermine the marketing efforts of Wired magazine or significantly impact the sources of its circulation or advertising revenues. If this were to occur, there would be a material adverse effect on the Company's business, financial condition, and operating results. To the extent that the Internet infrastructure is expanded and access to the Web is made easier and less expensive, the Company expects the number of Web users to continue to grow at a rapid rate. In response to this anticipated growth, there is an increasing number of companies, some with significantly greater resources than the Company, developing online content and services for delivery on the Web, and competing for audiences and the advertising dollars that are currently being devoted to the Web. The Company's online content sites compete with other online content sites such as America Online's Global Network Navigator, cnet, ESPNet, Starwave, and Time-Warner's Pathfinder. The Company's search engine service competes with services such as Alta Vista, Excite, Infoseek, Lycos, and Yahoo! . All of the Company's online media properties compete for advertising dollars with Web browser companies such as Netscape. There can be no assurance that one or more of the Company's competitors will not significantly undermine the Company's marketing efforts for its online media properties or attract a significant amount of advertising revenues away from the Company. The Company's book publishing operations will compete for sales with numerous other publishers and retailers, as well as with other media, including the Company's own magazine and online media products. In addition, the acquisition of publishing rights to books by leading authors is highly competitive, and the Company will compete with numerous other book publishers. There can be no assurance that the Company's book publishing efforts will be successful, or that the costs of such efforts will not have a material adverse effect on the Company's business, financial condition, and operating results. The creation, production, and distribution of television programming is a highly competitive business, as each television program competes with other television programming and with other forms of entertainment. Furthermore, competition in the television industry is expected to increase as the number and variety of basic cable and pay television services available continue to grow. There is active competition among all production companies in these industries for the services of producers, directors, actors, and others and for the acquisition of literary properties. With respect to the distribution of television product, there is significant competition from independent producers and distributors as well as major studios. Revenues for filmed entertainment product depend in part on general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace. There can be no assurance that the Company's efforts in television programming will result in programming which is marketable to advertisers and distributors or will be commercially successful, or that the cost of creating and producing television programming, whether successful or not in the market, will not have a material adverse effect on the Company's business, financial condition, and operating results. 41 45 TRADEMARKS AND INTELLECTUAL PROPERTY RIGHTS The Company regards its copyrights, trademarks, trade dress, trade secrets, and similar intellectual property as critical to its success, and the Company relies upon trademark and copyright law, trade secret protection, and confidentiality and license agreements with its employees, customers, partners, and others to protect its proprietary rights. The Company pursues the registration of its material trademarks in the United States and, based upon anticipated use, in certain other countries. The Company has applied for and registered the "Wired" mark in a variety of classes in the United States and numerous other countries and has applied for the registration of certain of its other trademarks, including "HotWired," "Wired TV," "HardWired," and "Wired Online." Effective trademark, copyright, and trade secret protection may not be available in every country in which the Company's products are available. The Company has licensed in the past, and it expects that it may license in the future, elements of its trademarks, trade dress, and similar proprietary rights to third parties, including in connection with Wired magazine's international editions and other media properties that may be controlled operationally by third parties. While the Company attempts to ensure that the quality of its brands is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially and adversely affect the value of the Company's proprietary rights or the reputation of its products, either of which could have a material adverse effect on the Company's business. Moreover, while the Company believes that it has the right to use Wired, HotWired, and its other marks in connection with its business, and it generally has the right to prohibit others from using such marks in certain fields of use, there can be no assurance that the Company will be able to maintain such rights. From time to time the Company has been, and it expects to continue to be, subject to legal proceedings and claims in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company's business, financial condition, or results of operations. See "Business -- Litigation." EMPLOYEES The Company believes that a key to its future success is the continued contribution of its management, creative, technical, and sales employees. In particular, the Company benefits from the reputation, imagination, and experience of key creative managers, such as Louis Rossetto, the Company's Chief Executive Officer, and Kevin Kelly, Wired magazine's Executive Editor, and the Company's Creative Directors, John Plunkett and Barbara Kuhr. In addition, the Company's senior management team, including Jane Metcalfe, the Company's President, has extensive advertising and publishing experience, and has created sales teams for the Company's print and online businesses that the Company believes are key to its success. As of March 31, 1996, the Company had a total of 284 employees. Of these employees, 137 are engaged in content development and design, 25 are engaged in engineering and technology development, 54 are engaged in sales and marketing, 17 are engaged in circulation, and 51 are engaged in general, finance, and administrative activities. Of these employees, 129 work on Wired magazine, 128 work on the Company's online media properties, 3 work on the Company's book properties, and 24 work for all Wired businesses in a general, finance, or administrative capacity. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and considers its relations with employees to be good. LITIGATION The Company is not presently party to any material litigation. However, as a new media publisher, the Company has been and anticipates that it will in the future be subject to litigation including allegations of defamation. For example, during 1994 and 1995, the Company was involved in a dispute involving a claim of defamation arising out of an article that appeared in the January 42 46 1994 issue of Wired magazine. Although the Company expended substantial resources in its defense, this matter was settled without any payment or other concession by the Company. FACILITIES The Company's headquarters are located in San Francisco, California, and the Company has offices in New York City, Washington D.C., and London. All 94,000 square feet of office space are leased under agreements that expire on various dates through 2006. The Company believes that suitable additional or alternative space, including space available under lease options, will be available at commercially reasonable terms for future expansion. 43 47 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The executive officers, key employees and directors of the Company are as follows:
NAME AGE POSITION - ----------------------------------- --- ------------------------------------------------- Louis Rossetto(1).................. 46 Chief Executive Officer and Chair of the Board Jane Metcalfe(1)................... 34 President and Director Jeffrey Simon(1)................... 34 Chief Financial Officer and Secretary Andrew Anker(1).................... 30 Vice President -- Interactive Rex Ishibashi(1)................... 32 Vice President -- Corporate and Business Development John Plunkett...................... 43 Creative Director Barbara Kuhr....................... 41 Creative Director Kevin Kelly........................ 43 Executive Editor -- Wired magazine H. William Jesse, Jr.(2)........... 44 Director
- --------------- (1) Executive Officer (2) Member of the Audit and Compensation Committee Mr. Rossetto, a founder of the Company and Publisher and Editor-In-Chief of Wired magazine since its launch in January 1993, has served as the Chief Executive Officer and Chair of the Board of Wired Ventures, Inc. since its inception in March 1996. Prior to the Reorganization, Mr. Rossetto served as Chief Executive Officer of Wired Holdings Inc., predecessor in interest to the Company, since its inception in January 1993. From November 1989 until January 1993, Mr. Rossetto worked on developing Wired magazine. From April 1989 to November 1989, Mr. Rossetto served as Editor-In-Chief of O Magazine, a Dutch language men's lifestyle magazine. In 1986, Mr. Rossetto founded Electric Word, a computer magazine. In 1994, he was named Co-Journalist of the Year (along with Ms. Metcalfe) by the Society of Professional Journalists, Northern California chapter. Mr. Rossetto holds a B.A. in Political Science and an M.B.A. from Columbia University. Ms. Metcalfe, a founder of the Company, has served as the President and a director of Wired Ventures, Inc. since its inception in March 1996. Prior to the Reorganization, Ms. Metcalfe served as President of Wired Holdings Inc. since its inception in January 1993. From December 1990 to January 1993, Ms. Metcalfe worked on developing Wired magazine. From March 1988 to December 1990, Ms. Metcalfe worked for Electric Word magazine, most recently as Associate Publisher. Prior to that, she was Director of Export Sales at Valentine Palomba, a Paris couturier. In 1994, Ms. Metcalfe was named Co-Journalist of the Year (along with Mr. Rossetto) by the Society of Professional Journalists, Northern California Chapter. Ms. Metcalfe holds a B.A. in International Relations from The University of Colorado. Mr. Simon has served as Chief Financial Officer and Secretary of Wired Ventures, Inc. since May 1996. From December 1995 to May 1996, Mr. Simon was Vice President and Chief Financial Officer of HotWired Ventures LLC. Prior to joining the Company, from February 1994 to November 1995, Mr. Simon was Director of Business Planning and Analysis for GE Capital Commercial Real Estate Services, a real estate finance company, and from December 1992 to February 1994, was the Controller for GE Capital Aircraft Leasing Corporation, an aircraft leasing company. From August 1990 to October 1992, he was Assistant Controller for Wells Fargo Nikko Investment Advisors, an investment advisory firm. From 1984 to 1990, Mr. Simon worked at KPMG Peat Marwick, an independent certified public accounting firm, most recently in the positions of Senior Tax Manager and Audit Manager. Mr. Simon is a Certified Public Accountant and holds an M.B.A. and a B.S. in Business Administration from the University of California, Berkeley. 44 48 Mr. Anker has served as Vice President - Interactive of Wired Ventures, Inc. and Chief Executive Officer of its subsidiary, Hotwired, Inc., since May 1996. Prior to the Reorganization, he served as President and Chief Executive Officer of HotWired Ventures LLC from its founding in January 1995 to May 1996, after joining as Wired Ventures, Ltd.'s Vice President and Chief Technology Officer in March 1994. From January 1992 to March 1994, Mr. Anker was a principal of Sterling Payot Company, an investment banking firm. From February 1991 to January 1992, he served as Director of Development of AdExpress Company, an advertising technology firm. Mr. Anker holds a B.A. in Economics from Columbia University. Mr. Ishibashi has served as Vice President - Corporate and Business Development of Wired Ventures, Inc. since May 1996, previously serving as its Chief Financial Officer and Secretary since its inception in March 1996. From December 1995 to May 1996, he served as Chief Financial Officer and Vice President of Business Affairs for Wired Ventures, Ltd. Prior to joining the Company, Mr. Ishibashi worked for The 3DO Company, an interactive games company, from March 1993 to November 1995, most recently as Director of Finance. From July 1992 to March 1993, Mr. Ishibashi served as an independent financial consultant, and the Executive Vice President and Chief Financial Officer of Wilderness Trail Bikes, a mountain bike company. From August 1985 to July 1992, Mr. Ishibashi worked for KPMG Peat Marwick, an independent certified public accounting firm, most recently as Senior Audit Manager in the Tokyo and San Francisco offices. Mr. Ishibashi is a Certified Public Accountant and holds a B.S. in Business Administration from the University of California, Berkeley. Mr. Plunkett has served as Creative Director for Wired magazine since its launch in January 1993 and for Wired Ventures, Inc. since March 1996. Together Mr. Plunkett and Ms. Kuhr are the co-creators of the look and feel of both Wired magazine and the HotWired Network, as well as the recently launched HardWired books. For the past six years, Mr. Plunkett also has been a partner in Plunkett + Kuhr, a design firm whose work has been featured in numerous national and international design publications, including Communication Arts and Graphis, and received awards from the American Institute of Graphic Arts, the American Center for Design, and the Society of Publication Designers. Previously, Mr. Plunkett was a senior designer for the corporate design firm Pentagram Design in New York. In total, Mr. Plunkett has over 15 years of experience with electronic pre-press and high-end printing. Mr. Plunkett holds a graduate degree in design from the California Institute of the Arts. Ms. Kuhr has served as Creative Director for the HotWired Network since its launch in October 1994, and for Wired Ventures, Inc. since March 1996. Together Mr. Plunkett and Ms. Kuhr are the co-creators of the look and feel of both Wired magazine and the HotWired Network, as well as the recently launched HardWired books. For the past six years, Ms. Kuhr also has been a partner in Plunkett + Kuhr, a design firm whose work has been featured in numerous national and international design publications, including Communication Arts and Graphis, and received awards from the American Institute of Graphic Arts, the American Center for Design, and the Society of Publication Designers. From 1987 to 1990, Ms. Kuhr was a senior designer for the corporate design firm Chermayeff and Geismar Associates in New York. Ms. Kuhr holds a design degree from Montana State University. Mr. Kelly has served as the Executive Editor of Wired magazine since September 1992. From 1985 to January 1990, Mr. Kelly was Editor and Publisher of Whole Earth Review, a national magazine reporting on unorthodox technical and cultural news. In January 1990, Mr. Kelly left the Whole Earth Review on sabbatical. During the time between his sabbatical and joining the Company, he authored Out of Control, a book on future technology published by Addison Wesley. He also launched the Electronic Whole Earth Catalog on CD-ROM, edited Signal, a book on personal communication tools, and founded and owned Nomadic Books, a mail order company. Mr. Kelly serves as a director of the WELL, one of the first online communities. 45 49 H. William Jesse, Jr. has served as a director of the Company since its inception in March 1996. Prior to that, he served as a director of Wired Holdings Inc. since its inception in January 1993. Mr. Jesse is Chairman and President of HWJesse&Co, a San Francisco-based firm providing financial and business advisory services to private and closely-held companies. He co-founded and has served as a director since 1989 of Sterling Payot Company, an investment banking company, and has served as President of Jesse, Payot & Co., Inc., an investment holding company since 1988. Mr. Jesse has also served since 1988 as Chair and Chief Executive Officer of Vineyard Properties Corporation, a manager of California vineyard properties. Mr. Jesse also serves on the boards of: AdExpress Company, The Wine Group, Inc., Specialized Bicycle Components, Inc., Aidells Sausage Company LLC, Sonic Force LLC, and Trans Ocean Ltd. Mr. Jesse has a B.S. and an M.S. from Lehigh University and an M.B.A. from Harvard University. BOARD OF DIRECTORS The Board of Directors is currently comprised of three members. Within 90 days following the offerings, the Company intends to increase the size of the Board of Directors to at least four directors and appoint at least one additional independent member to the Board of Directors and its Audit Committee and Compensation Committee. The Audit Committee of the Board of Directors, which currently consists of Mr. Jesse, was formed in May 1996 to review the internal accounting procedures of the Company and consult with and review the services provided by the Company's independent public accountants. The Compensation Committee of the Board of Directors, which currently consists of Mr. Jesse, was formed in May 1996 to review and recommend to the Board the compensation and benefits of all officers of the Company and review general policies relating to compensation and benefits of employees of the Company. The Compensation Committee also administers the issuance of stock options and other awards under the Company's 1996 Equity Incentive Plan. DIRECTOR COMPENSATION All directors are reimbursed for expenses incurred in connection with attendance at meetings of the Company's Board of Directors. Each non-employee director of the Company will be eligible to receive stock option grants under the Company's 1996 Director Stock Option Plan. Directors who are also employees of the Company are eligible to receive stock options and other equity grants under the Company's 1996 Equity Incentive Plan. See "-- Employee Benefit Plans." 46 50 EXECUTIVE COMPENSATION The following table sets forth the compensation awarded to or earned by the Company's Chief Executive Officer and the other executive officers of the Company for the year ended December 31, 1995 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) --------------- ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) COMPENSATION - ---------------------------------------------------------- --------------- --------------- Louis Rossetto............................................ $88,558 -- Chief Executive Officer Jane Metcalfe............................................. 88,558 -- President Jeffrey Simon............................................. 12,500(2) $15,000(3) Chief Financial Officer and Secretary Andrew Anker.............................................. 140,369 4,938(4) Vice President - Interactive Rex Ishibashi............................................. 4,167(5) -- Vice President - Corporate and Business Development
- --------------- (1) Includes amounts earned but deferred at the election of the Named Executive Officer under the Company's 401(k) plan. (2) Mr. Simon joined the Company in November 1995; this number reflects an annual salary of $110,000. (3) Represents reimbursement for relocation costs. (4) Represents medical insurance premiums paid by the Company on behalf of Mr. Anker. (5) Mr. Ishibashi joined the Company in December 1995; this number reflects an annual salary of $110,000. STOCK OPTION INFORMATION The Company did not grant options to any of the Named Executive Officers in 1995 and none of the Named Executive Officers exercised any options during 1995 or held any options at the end of 1995. EMPLOYEE BENEFIT PLANS 1996 EQUITY INCENTIVE PLAN The Company's 1996 Equity Incentive Plan (the "Incentive Plan") under which 8,500,000 shares of Common Stock are reserved for future issuance, was adopted by the Board of Directors in May 1996. The Incentive Plan provides for the grant of stock options, stock bonuses and stock appreciation rights and the sale and issuance of restricted stock by the Company to its employees, officers, directors and consultants. The term of stock options granted under the Incentive Plan may not exceed 10 years. The exercise price of options granted under the Incentive Plan will be determined by the Board of Directors but, in the case of a nonstatutory stock option, cannot be less than 85% of the fair market value of the Common Stock on the date of the option grant and, in the case of an incentive stock option, cannot be less than 100% of the fair market value of the Common Stock on the date of grant. Options granted under the Incentive Plan generally vest in periodic installments that are determined by the Board. No option may be transferred by the optionee other than by will or the laws of descent or distribution or, in certain limited circumstances, pursuant to a qualified domestic relations order. 47 51 An optionee whose relationship with the Company or any affiliate ceases for any reason (other than death or disability) may exercise options in the three-month period following such cessation unless such options terminate or expire sooner by their terms. In addition to, or in tandem with, awards of stock options, the Board of Directors may grant participants restricted stock awards to purchase the Company's Common Stock or stock bonus awards of the Company's Common Stock for not less than 85% of its fair market value at the time of grant. Shares of stock sold or awarded under the Incentive Plan may, but need not be, subject to a repurchase option in favor of the Company in accordance with a vesting schedule determined by the Board of Directors or Compensation Committee. The Board of Directors may also grant stock appreciation rights of the Company's Common Stock in addition to, or in tandem or concurrently with, other awards under the Incentive Plan. The terms of all such awards will be determined by the Board of Directors. Shares that (a) are subject to issuance upon exercise of an option but cease to be subject to such stock option for any reason other than exercise of such stock option, (b) are subject to another award granted under the Incentive Plan but are forfeited or are repurchased by the Company at the original issue price, or (c) are subject to an award that otherwise terminates without shares being issued will again be available for grant and issuance in connection with future awards under the Incentive Plan. In the event of a merger of the Company with or into another corporation or the acquisition by any entity of 50% of the voting stock of the Company, all outstanding options must either be assumed or substituted by the surviving entity. If the surviving entity determines not to assume or substitute such options, the options terminate as of the closing of the merger or consolidation if not exercised prior to the closing. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN The Board of Directors adopted a 1996 Non-Employee Director Stock Option Plan (the "Directors' Plan") in May 1996. The total number of shares of Common Stock reserved for issuance and granted under the Directors' Plan is 100,000. The Directors' Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company. The Directors' Plan is designed to work automatically without administration; however, to the extent administration is necessary, it will be performed by the Board. The Directors' Plan provides that each person who is a non-employee director of the Company upon the closing of the offerings, or becomes a non-employee director after such date will be granted an option (the "First Option") to purchase 2,500 shares of Common Stock on the date on which the optionee first becomes a non-employee director of the Company. Thereafter, on January 1 of each year each non-employee director will be granted an additional option to purchase 2,500 shares of Common Stock (a "Subsequent Option") if, on such date, he or she shall have served on the Company's Board of Directors for at least three months. Each First Option and Subsequent Option will be subject to vesting over a four-year period. The exercise price of all stock options granted under the Directors' Plan will be equal to the fair market value of a share of the Company's Common Stock on the date of grant of the option. Options granted under the Directors' Plan will have a term of 10 years. The Directors' Plan does not set a maximum or a minimum number of shares for which options may be granted to any one non-employee director. No option granted under the Directors' Plan will be transferable by the optionee other than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Internal Revenue Code of 1986, as amended (the "Code")), and each option will be exercisable, during the lifetime of the optionee, only by such optionee. In the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each non-employee director will have a reasonable time within which (i) to exercise his or her options, including any part of an option that would not otherwise be exercisable prior to the effectiveness of the transaction, at which time the options will terminate or the right to exercise their options, including any part of an option that would not otherwise be exercisable, or (ii) to receive a substitute option with comparable terms, for an 48 52 equivalent number of shares of stock of the acquiring or successor corporation. The Board of Directors may amend or terminate the Directors' Plan; provided, however, that no such action may adversely affect any outstanding option, and the provisions regarding the grant of options under the plan may be amended only once in any six-month period, other than to comport with changes in the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or the Code. If not terminated earlier, the Directors' Plan has a term of 10 years. 401(K) PLAN In August 1995, the Company adopted an employee savings plan (the "401(k) Plan") covering all of the Company's eligible full-time employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 20% of their annual compensation or the statutorily prescribed annual limit ($9,500 in 1996) and have the amount of such reduction contributed to the 401(k) Plan. In addition, eligible employees may make rollover contributions to the 401(k) Plan from a tax-qualified retirement plan. The 401(k) Plan is intended to qualify under Section 401 of the Code, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The Company does not presently intend to make any matching or discretionary contributions. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY The Company's Restated Certification of Incorporation provides that directors of the Company will not be personally liable for monetary damages to the Company or its stockholders for any breach of their fiduciary duty as directors, except for (i) any breach of such director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) liability arising under Section 174 of the General Corporation Law of the State of Delaware, or (iv) any transaction from which a director derives an improper personal benefit. The Company's Restated Certificate of Incorporation and Bylaws provide that directors and officers of the Company may be indemnified to the fullest extent permitted by Delaware law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company, including payment of expenses in defending an action or proceeding in advance of the final disposition of such action or proceeding upon receipt of an undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to indemnification. The Restated Certificate of Incorporation and Bylaws also provide that the rights of directors and officers to such indemnification is not exclusive of any other right now possessed or hereafter acquired under any statute, agreement or otherwise. The Company has entered into indemnification agreements with each of its executive officers and directors. Each indemnification agreement provides that such officer or director will be indemnified by the Company to the fullest extent permitted by the Company's Bylaws and Delaware law, as it now exists or may in the future be amended, and against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. The Company will also authorize under the indemnification agreements to advance payment of expenses in defending an action or proceeding upon receipt of an undertaking by the person indemnified to repay such payment if it is ultimately determined that such person is not entitled to indemnification. CERTAIN TRANSACTIONS Prior to the completion of the Reorganization, which occurred in May 1996, the Company's businesses were conducted in partnership and limited liability company form, principally through 49 53 Wired Partners, a California general partnership (from its formation in October 1992 through January 1993), Wired USA Ltd. (from its formation in January 1993 through January 1994), Wired Ventures, Ltd. (from its formation in January 1994 to May 1996) and HotWired Ventures LLC (from its formation in January 1995 to May 1996). The ownership of the Company's constituent entities prior to the Reorganization is summarized below: Wired Holdings Inc. ("Holdings"). Holdings, which was owned by 22 individual shareholders (none of whom individually held a controlling interest), was the majority owner and general partner of Wired USA Ltd. and a minority owner and the general partner of Wired Ventures, Ltd. Holdings' only assets were its ownership interests in these two entities. Wired USA Ltd. ("USA"). The majority interest in USA was held by its general partner, Holdings. The remaining interest was held by various limited partners. From its formation in January 1993 through January 1994, USA owned the assets associated with Wired magazine and certain other entities. Upon the formation of Wired Ventures, Ltd. in January 1994, USA transferred its assets to such entity and thereafter was its majority owner and limited partner. After January 1994, USA's only asset was its ownership interest in Wired Ventures, Ltd. Wired Ventures, Ltd. ("Wired Ventures"). Wired Ventures was owned by Holdings, USA, Advance Magazine Publishers, Inc. ("Advance") (which owned a minority limited partnership interest) and certain employees (who each owned a minority limited partnership interest). Wired Ventures owned the assets associated with Wired magazine and certain other entities, including a majority membership interest in HotWired Ventures LLC. HotWired Ventures LLC ("HotWired Ventures"). HotWired Ventures was owned by Wired Ventures and certain employees and investors (who each owned a minority membership interest). HotWired Ventures owned the assets associated with the Company's online media properties. The Reorganization was intended to simplify the ownership structure outlined above into a single corporate holding company, Wired Ventures, Inc. ("WVI"), which has wholly-owned subsidiaries that conduct the various aspects of the Company's business. In the Reorganization, the shareholders of Holdings, the limited partners of USA (other than Holdings), the limited partners of Wired Ventures (other than USA) and the members of HotWired Ventures (other than Wired Ventures) contributed their respective interests in such entities to WVI in exchange for Series A Preferred Stock of WVI. WVI then contributed its interests in Wired USA, Wired Ventures and HotWired Ventures to Holdings, resulting in a dissolution of Wired USA, Wired Ventures and HotWired Ventures and leaving Holdings as a wholly-owned subsidiary of WVI. The magazine-related assets held by WVI were contributed to Holdings (which was renamed Wired Magazine Group, Inc.) and the HotWired-related assets held by WVI were contributed to a separate, newly-formed subsidiary of WVI. Since its inception, the Company has financed a portion of its operations through the private sales of equity securities of its constituent entities, as follows: Launch Financing. In January 1993, Holdings was capitalized with cash and other property rights valued at $79,333 contributed by its predecessor, Wired Partners, a general partnership comprised of Louis Rossetto, Jane Metcalfe, Charles Jackson and Nicholas Negroponte. In addition, various investors affiliated with Sterling Payot Company, a merchant banking firm ("Sterling Payot"), contributed a total of $14,000 to Holdings. Concurrently with the initial capitalization of Holdings in January 1993, USA was organized and assumed the business of its predecessor, Wired Partners. In connection with USA's formation, (a) Holdings contributed cash and other property rights with an aggregate value of $93,333 in exchange for a general partnership interest in USA representing a 62% interest in USA, (b) two seed investors contributed a total of $225,000 in cash in exchange for Class A limited partnership interests in USA representing an 18.7% ownership interest in USA, and (c) various new investors 50 54 contributed a total of $606,400 in cash in exchange for Class A limited partnership interests in USA representing an 18.9% ownership interest in USA (the "Launch Financing"). Sterling Payot served as the Company's placement agent for the Launch Financing, and certain affiliates of Sterling Payot were investors in such financing. In connection with the completion of the Launch Financing, H. William Jesse, Jr., a director of Sterling Payot, became a director of Holdings. Subsequently, in November 1993, Holdings issued additional shares of stock to certain key employees of and consultants to the Company, subject to vesting over a period of two years. Circulation Financing. In January 1994, USA entered into a limited partnership agreement with Holdings and Advance, an affiliate of Conde Nast, to form Wired Ventures for the purpose of owning and operating Wired magazine. Holdings contributed the Wired brands, logos and trade names to the new partnership in exchange for a general partnership interest representing a 3% ownership interest in Wired Ventures. USA contributed all operations, assets and liabilities relating to Wired magazine in exchange for a limited partnership interest representing an 82% ownership interest in Wired Ventures. Advance contributed $3.0 million in cash to Wired Ventures and an outstanding $500,000 non-interest-bearing convertible note (which was converted to capital) in exchange for a limited partnership interest representing a 15% ownership interest in Wired Ventures. Wired Ventures subsequently issued Class B limited partnership interests constituting subordinated profit interests to certain Wired Ventures employees. Online Spinoff and Financing. In January 1995, certain Wired Ventures employees formed HW Acquisition Group LLC, a California limited liability company (the "LLC"), and purchased equity interests therein. In March 1995, Wired Ventures contributed its online publishing business to the LLC in exchange for Class A membership units representing a 90% ownership interest in the LLC. In connection with the spinoff of the online business, the LLC changed its name to HotWired Ventures LLC, and the outstanding employee units were recharacterized as Class B membership units and subordinated to the return of capital of the Class A membership units issued to Wired Ventures. In August 1995, additional Class A membership units were issued to 25 business enterprises and individuals for an aggregate purchase price of $7.0 million, which reduced Wired Ventures' interest in HotWired Ventures to 74.5%. HotWired Ventures subsequently issued Class C membership units constituting subordinated profit interests to certain key employees and advisors of HotWired Ventures. Sterling Payot, certain principals of which were Class A investors in HotWired Ventures, has performed ongoing business advisory services for HotWired Ventures and prior to the Reorganization held 600 fully vested Class C membership units and has received options to purchase 14,751 shares of Common Stock at an exercise price of $1.00 per share. Debt Financing. The Company has financed certain of its operations through bank and other debt financing. In its first year of operation, USA received two loans from related parties. The first loan, from a relative of the publisher, was for $50,000 at 6% interest per annum and was repaid subsequent to the formation and financing of Wired Ventures in 1994. The second loan, in the principal amount of $275,000 at 10% interest per annum, was from the Jackson Living Trust, a limited partner in USA, and was canceled in connection with the formation and financing of Wired Ventures in 1994, with part of it being converted into equity and the remainder being repaid in cash. In connection with the restructuring of its United Kingdom operations in mid-1995, the Company guaranteed a non-interest-bearing note payable by Wired UK to its former U.K. joint venture partner, Guardian Media Group plc, for L1.0 million (approximately $1.6 million), which is due in July 1998. In November 1995, the Company entered into a $6.5 million revolving credit facility with Signet Bank of Virginia to fund the further expansion of its magazine business, which is secured by all Wired magazine-related assets. The line bears interest at a rate equal to adjusted LIBOR plus 3.25% (9% at December 31, 1995). See "Use of Proceeds." Series B Preferred Stock Financing. In May 1996, the Company sold a total of 1,250,000 shares of its Series B Preferred Stock to various investors for $10.00 per share. Advance purchased 100,000 shares in such financing. 51 55 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of May 31, 1996, after giving effect to the conversion of all shares of Preferred Stock into shares of Common Stock, which will occur automatically upon the completion of this offering, and as adjusted to reflect the sale of Common Stock offered hereby, for (i) each stockholder who is known by the Company to own beneficially more than 5% of the Common Stock; (ii) each Named Executive Officer; (iii) each director of the Company; and (iv) all executive officers and directors of the Company as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) NUMBER OF SHARES --------------------- BENEFICIALLY OWNED BEFORE AFTER NAME OF BENEFICIAL OWNER (1) OFFERING OFFERING - ---------------------------------------------------- --------------------- -------- -------- Louis Rossetto(2)................................... 5,943,050 18.5% 15.8% Wired Ventures, Inc. 520 Third Street Fourth Floor San Francisco, CA 94107 Jane Metcalfe(3).................................... 5,661,325 17.7% 15.1% Wired Ventures, Inc. 520 Third Street Fourth Floor San Francisco, CA 94107 Advance Magazine Publishers, Inc.................... 4,186,112 13.2% 11.2% 350 Madison Avenue 14th Floor New York, NY 10017 Jackson Living Trust dtd July 15, 1992.............. 2,744,736 8.6% 7.4% 12674 Acacia Avenue Poway, CA 92064 Nicholas Negroponte................................. 2,420,478 7.6% 6.5% MIT Research 20 Ames Street Cambridge, MA 02139 H. William Jesse, Jr. (4)........................... 1,655,207 5.2% 4.4% HWJesse&Co 222 Sutter Street San Francisco, CA 94108 Andrew Anker(5)..................................... 583,076 1.8% 1.6% Rex Ishibashi(6).................................... 200,000 * * Jeffrey Simon(7).................................... 200,000 * * All executive officers and directors as a group (6 persons)(8).................................... 14,242,658 43.5% 37.2%
- --------------- * less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the Company believes, based on information furnished by such persons, that the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 31,750,002 shares of Common Stock outstanding as of May 31, 1996 and 37,250,002 shares of Common Stock outstanding after completion of the offerings. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock 52 56 subject to options held by that person that will be exercisable on or before July 31, 1996 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes 400,000 shares of Common Stock subject to immediately exercisable stock options, of which options to purchase 245,171 shares will be vested as of July 31, 1996 and the remaining 154,829 shares would be subject to repurchase if purchased ahead of vesting. (3) Includes 300,000 shares of Common Stock subject to immediately exercisable stock options, of which options to purchase 196,781 shares will be vested as of July 31, 1996 and the remaining 103,219 shares would be subject to repurchase if purchased ahead of vesting. (4) Includes 1,161,106 shares held by Jesse, Payot & Co., of which Mr. Jesse is the President, Chief Executive Officer and sole shareholder, and 116,111 shares held by Pensco Pension Services for the benefit of Mr. Jesse. (5) Owned by Mr. Anker and his wife as co-trustees of the Anker 1996 Trust. Includes 50,000 shares of Common Stock subject to immediately exercisable stock options, of which options to purchase 30,240 shares will be vested as of July 31, 1996 and the remaining 19,760 shares would be subject to repurchase if purchased ahead of vesting. (6) Includes 68,845 shares of Common Stock subject to immediately exercisable stock options, none of which will be vested as of July 31, 1996. (7) Includes 179,784 shares of Common Stock subject to immediately exercisable stock options, none of which will be vested as of July 31, 1996. (8) Includes 998,629 shares of Common Stock subject to immediately exercisable stock options, of which options to purchase 472,192 shares will be vested as of July 31, 1996 and the remaining 526,437 shares would be subject to repurchase if purchased ahead of vesting. See Notes 2, 3, 5, 6 and 7. DESCRIPTION OF CAPITAL STOCK Immediately following the completion of the offerings, the authorized capital stock of the Company will consist of 60,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred Stock, $0.001 par value per share. As of May 31, 1996, and assuming the conversion of each outstanding share of Preferred Stock into one share of Common Stock, there were outstanding 31,750,002 shares of Common Stock held of record by 86 stockholders. COMMON STOCK Subject to preferences that may apply to any Preferred Stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. Each stockholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in the Company's Amended and Restated Certificate of Incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding-up of the Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock and any participating Preferred Stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding Preferred Stock and payment of other claims of creditors. Each outstanding share of Common Stock is, and all shares of Common Stock to be outstanding upon completion of the offerings will be, fully paid and nonassessable. 53 57 PREFERRED STOCK Upon the completion of the offerings, all outstanding shares of Preferred Stock (the "Convertible Preferred") will be converted into shares of Common Stock. See Note 7 of Notes to Consolidated Financial Statements for a description of the Convertible Preferred. The Board of Directors is authorized, subject to any limitations prescribed by Delaware law, to provide for the issuance of additional shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and rights of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding) without any further vote or action by the stockholders. The Board of Directors may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Common Stock. Thus, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no current plan to issue any shares of Preferred Stock. DELAWARE'S ANTI-TAKEOVER LAW Upon the completion of the offerings, the Company will be subject to the provisions of Section 203 of the Delaware General Corporation Law (the "Anti-Takeover Law") regulating corporate takeovers. The Anti-Takeover Law prevents certain Delaware corporations, including those whose securities are listed on the Nasdaq National Market, from engaging, under certain circumstances, in a "business combination" not approved in advance by the Board (which includes a merger or sale of more than 10% of the corporation's assets) with any "interested stockholder" (a stockholder who owns 15% or more of the corporation's outstanding voting stock) for three years following the date that such stockholder became an "interested stockholder." The effect of the Anti-Takeover Law is to discourage takeover attempts, including attempts that might result in a premium over the market price of the Common Stock. A Delaware corporation may "opt out" of the Anti-Takeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. The Company has not "opted out" of the provisions of the Anti-Takeover Law. REGISTRATION RIGHTS The holders of 30,991,349 shares (the "Registrable Securities") have certain rights with respect to the registration of those shares under the Securities Act. If the Company proposes to register any of its shares of Common Stock under the Securities Act other than in connection with a Company employee benefit plan or a corporate reorganization, the holders of Registrable Securities may require the Company to include all or a portion of their shares in such registration, subject to certain conditions and limitations. In addition, beginning one year after the closing date of the offerings, holders of Registrable Securities may require the Company to register all or any portion of their Registrable Securities on Form S-3 when such form becomes available to the Company, subject to certain conditions and limitations. The Company may be required to effect up to one such registration on Form S-3 per year, and is not required to effect more than two such registrations. All expenses incurred in connection with such registrations (other than underwriters' or brokers' discounts and commissions) will be borne by the Company. All expenses incurred in connection with such registrations (other than underwriters' discounts and commissions) will be borne by the Company. The registration rights expire three years after the date of this Prospectus. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is The First National Bank of Boston. 54 58 SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of the Company's Common Stock in the public market could have the effect of depressing the prevailing market price of its Common Stock. Upon the completion of the offerings, the Company will have outstanding 37,250,002 shares of Common Stock (assuming no exercise of outstanding options after May 31, 1996). Of these shares, the 5,500,000 shares sold in the offerings will be freely transferable without restriction or further registration under the Securities Act of 1933 (the "Securities Act") unless purchased by "affiliates" of the Company as that term is defined in Rule 144 of the Securities Act ("Affiliates"), which shares will be subjected to the resale limitations of Rule 144 adopted under the Securities Act. Of the other shares outstanding upon the completion of the offerings, 30,500,000 shares will also be freely tradeable without restriction or further registration under the Securities Act, unless held by Affiliates (in which case they would be subject to the volume limitations of Rule 144), because such shares were issued pursuant to the exemption afforded by Section 3(a)(10) of the Securities Act. The remaining 1,250,002 shares, all of which were sold in May of 1996, will be "restricted securities" as that term is defined under Rule 144 ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below, and the provisions of Rule 144 or 701, additional shares will be available for sale in the public market as follows: (i) no currently outstanding shares will be available for immediate sale in the public market on the date of the Prospectus; (ii) 30,500,000 currently outstanding shares will be eligible for sale upon expiration of lock-up agreements 180 days after the date of this Prospectus (as well as 3,970,078 additional shares issuable upon the exercise of stock options, to the extent exercisable as of such date), subject to (a) earlier waiver of such lock-up provisions by Goldman, Sachs & Co., on behalf of the Underwriters, (b) compliance with certain volume restrictions with respect to the 22,595,355 shares (plus 998,629 shares subject to options) held by Affiliates, and (c) vesting restrictions with the Company in certain cases; and (iii) 1,250,002 currently outstanding shares will be eligible for sale from time to time thereafter. All of the stockholders of the Company have entered into lock-up agreements with the Representatives of the Underwriters providing that, with certain limited exceptions, such stockholders will not offer, sell, contract to sell, grant an option to purchase, make a short sale, or otherwise dispose of or engage in any hedging or other transaction that is designed or reasonably expected to lead to a disposition of any shares of Common Stock or any option or warrant to purchase shares of Common Stock or any securities exchangeable for or convertible into shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Goldman, Sachs & Co. Other than the 5,500,000 shares being offered hereby, as of the Effective Date no shares of Common Stock of the Company will be eligible for immediate sale in the public market until the expiration of the 180-day lock-up agreements with the Representatives of the Underwriters. Goldman, Sachs & Co. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years (and, with respect to non-affiliates of the Company, a person who has beneficially owned Restricted Shares less than three years), will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 372,500 shares immediately after the offerings) or (ii) the average weekly trading volume of the Company's Common Stock in the Nasdaq National Market during the four calendar weeks immediately preceding the date of which notice of the sale is filed with the Securities and Exchange Commission. Such sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. The Securities and Exchange Commission has recently proposed to reduce the two year holding periods 55 59 under Rule 144 to one year. If enacted, such modification will have a material effect on the timing of when certain shares of Common Stock become eligible for resale. As of May 31, 1996, options to purchase 3,970,078 shares of Common Stock were issued and outstanding. Rule 701 under the Securities Act provides that, beginning 90 days after the date of this Prospectus, shares of Common Stock acquired upon the exercise of outstanding options may be resold by persons other than Affiliates subject only to the manner of sale provisions of Rule 144, and by Affiliates subject to all provisions of Rule 144 except the two-year minimum holding period. The Company intends to file one or more registration statements on Form S-8 under the Securities Act to register shares of Common Stock subject to stock options that will permit the resale of such shares, subject to the Rule 144 volume limitations applicable to Affiliates, vesting restrictions with the Company, and lock-up agreements between the option holders and the Company and the Underwriters. Holders of 30,991,349 shares of outstanding Common Stock have the right to require the Company to register their shares of Common Stock under the Securities Act. If such registration rights are exercised, the shares can be sold without any holding period or sales volume limitation. Registration and sale of such shares could have an adverse effect on the trading price of the Common Stock. See "Description of Capital Stock -- Registration Rights." Prior to the offerings, there has been no public market for the Common Stock of the Company, and no predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional Common Stock will have on the trading price of the Common Stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could adversely affect the trading price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. See "Description of Capital Stock." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by its counsel, Cooley Godward Castro Huddleson & Tatum, San Francisco, California. Certain legal matters will be passed upon for the Underwriters by Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of the date of this Prospectus, certain members of and persons associated with Cooley Godward Castro Huddleson & Tatum beneficially owned 150,534 shares of Common Stock. EXPERTS The consolidated financial statements and schedules of the Company as of December 31, 1994 and 1995 and for the three year period ended December 31, 1995 have been included in this Prospectus and Registration Statement in reliance upon the report of KMPG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and in the Registration Statement, and upon the authority of such firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS In February 1996, the Company decided to retain KPMG Peat Marwick LLP as the Company's independent accountants and dismissed Coopers & Lybrand LLP, the Company's former accountants. The decision to change independent accountants was ratified and approved by the Company's Board of Directors in May 1996. During the period from the Company's inception through February 1996 and with respect to the Company's financial statements for the years ended December 31, 1993 and 1994, there were no disagreements with Coopers & Lybrand LLP regarding any matters with respect to accounting principles or practices, financial statement disclosure or audit scope or 56 60 procedure, which disagreements, if not resolved to the satisfaction of the former accountants, would have caused Coopers & Lybrand LLP to make reference to the subject matter of the disagreement in connection with its report. The former accountants' reports for the years ended December 31, 1993 and 1994 are not a part of the financial statements of the Company included in this Prospectus and the related financial statement schedules included elsewhere in the Registration Statement. Such reports did not contain an adverse opinion or disclaimer of opinion or qualifications or modifications as to uncertainty, audit scope or accounting principles. Prior to retaining KPMG Peat Marwick LLP, the Company had not consulted with KPMG Peat Marwick LLP regarding accounting principles. ADDITIONAL INFORMATION A Registration Statement on Form S-1, including amendments thereto, relating to the shares of Common Stock offered hereby has been filed by the Company with the Commission under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. A copy of the Registration Statement may be inspected by anyone without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional offices of the Commission located at Room 1228, 75 Park Place, New York, New York 10007 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the Registration Statement and the exhibits and schedules thereto may be obtained from those offices upon the payment of certain fees prescribed by the Commission. In addition, the Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. 57 61 WIRED VENTURES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report......................................................... F-2 Consolidated Balance Sheets.......................................................... F-3 Consolidated Statements of Operations................................................ F-4 Consolidated Statements of Minority Interest and Stockholders' Equity (Deficit)...... F-5 Consolidated Statements of Cash Flows................................................ F-6 Notes to Consolidated Financial Statements........................................... F-7
F-1 62 INDEPENDENT AUDITORS' REPORT The Board of Directors Wired Ventures, Inc.: We have audited the accompanying consolidated balance sheets of Wired Ventures, Inc., a Delaware Corporation, and subsidiaries (the Company) as of December 31, 1994 and 1995, and the related consolidated statements of operations, minority interest and stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wired Ventures, Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. San Francisco, California May 24, 1996 F-2 63 WIRED VENTURES, INC. (A DELAWARE CORPORATION) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, 1996 DECEMBER 31, --------------------- ------------------ PRO FORMA 1994 1995 ACTUAL (NOTE 1) ------- ------- --------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................................... $ 1,750 $ 7,234 $ 2,604 $ 14,904 Accounts receivable, net of allowances for returns and doubtful accounts of $2,022, $2,564, $3,617 and $3,617, respectively............................ 2,198 3,071 2,920 2,920 Deferred production costs.................................................... 261 341 405 405 Prepaid expenses............................................................. 95 160 258 258 ------- ------- -------- -------- Total current assets.................................................. 4,304 10,806 6,187 18,487 Property and equipment, net.................................................... 791 2,216 2,745 2,745 Goodwill and other intangibles................................................. -- -- -- 4,668 Other assets................................................................... 16 196 222 222 ------- ------- -------- -------- $ 5,111 $13,218 $ 9,154 $ 26,122 ======= ======= ======== ======== LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............................................................. $ 2,261 $ 4,237 $ 2,082 $ 2,082 Accrued expenses............................................................. 306 2,356 3,021 3,171 Deferred revenue............................................................. 2,534 3,957 4,379 4,379 Notes payable to bank........................................................ -- 1,500 2,500 2,500 ------- ------- -------- -------- Total current liabilities............................................. 5,101 12,050 11,982 12,132 Deferred revenue............................................................... 163 124 123 123 Notes payable.................................................................. -- 1,185 1,216 1,216 ------- ------- -------- -------- Total liabilities..................................................... 5,264 13,359 13,321 13,471 Minority interest.............................................................. -- 1,366 867 -- Commitments and contingencies Stockholders' equity (deficit): Undesignated preferred stock; no par value; 15,000,000 shares authorized, none issued and outstanding as of March 31, 1996; 5,000,000 shares authorized, none issued and outstanding on a pro forma basis............... -- -- -- -- Series A preferred stock; $0.001 par value; 30,500,000 shares authorized; 28,661,007, 28,208,711, and 28,014,693 shares issued and outstanding as of December 31, 1994 and 1995 and March 31, 1996, respectively; none authorized, issued and outstanding on a pro forma basis (liquidation preference of $10.00 per share)............................................ 28 28 28 -- Series B preferred stock; $0.001 par value; 4,500,000 shares authorized; none issued and outstanding as of December 31, 1994 and 1995, and March 31, 1996, respectively; none authorized, issued and outstanding on a pro forma basis (liquidation preference of $10.00 per share)......................... -- -- -- -- Common stock, $0.001 par value; 60,000,000 shares authorized; 2 shares issued and outstanding as of December 31, 1994 and 1995, and March 31, 1996, respectively; 31,750,002 shares issued and outstanding on a pro forma basis...................................................................... -- -- -- 32 Additional paid-in capital................................................... 4,528 9,629 10,123 41,826 Deferred compensation........................................................ -- -- (664) (4,780) Deficit accumulated prior to recapitalization................................ (4,709) (11,214) (14,575) -- Accumulated deficit.......................................................... -- -- -- (24,481) Translation adjustment....................................................... -- 50 54 54 ------- ------- -------- -------- Total stockholders' equity (deficit).................................. (153) (1,507) (5,034) 12,651 ------- ------- -------- -------- $ 5,111 $13,218 $ 9,154 $ 26,122 ======= ======= ======== ========
See accompanying notes to consolidated financial statements. F-3 64 WIRED VENTURES, INC. (A DELAWARE CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------- --------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (UNAUDITED) Revenues: Magazine......................... $ 2,928 $ 8,833 $23,313 $ 3,936 $ 7,124 Online........................... -- 348 1,942 342 497 ------- ------- ------- ------- ------- Total revenues........... 2,928 9,181 25,255 4,278 7,621 ------- ------- ------- ------- ------- Costs and expenses: Magazine production and distribution.............. 2,356 7,638 14,897 3,147 4,309 Online production and development................... 51 318 1,854 166 1,245 Sales and marketing.............. 748 2,795 9,776 1,952 3,397 General and administrative....... 797 1,967 6,661 1,444 2,510 ------- ------- ------- ------- ------- Total costs and expenses............... 3,952 12,718 33,188 6,709 11,461 ------- ------- ------- ------- ------- Operating loss........... (1,024) (3,537) (7,933) (2,431) (3,840) Interest income (expense), net..... (10) 98 156 15 (11) Minority interest.................. -- -- 427 -- 499 Wired UK preacquisition loss (Note 4).................... -- -- 854 -- -- ------- ------- ------- ------- ------- Loss before taxes.................. (1,034) (3,439) (6,496) (2,416) (3,352) Tax expense........................ 2 18 9 2 9 ------- ------- ------- ------- ------- Net loss................. $(1,036) $(3,457) $(6,505) $(2,418) $(3,361) ======= ======= ======= ======= ======= Pro forma net loss data (Notes 2 and 4): Pro forma net loss............... $(6,505) $(3,361) ======= ======= Pro forma net loss per share..... $ (0.19) $ (0.10) ======= ======= Shares used in computing pro forma net loss per share...... 34,362 33,620 ======= =======
See accompanying notes to consolidated financial statements. F-4 65 WIRED VENTURES, INC. (A DELAWARE CORPORATION) CONSOLIDATED STATEMENTS OF MINORITY INTEREST AND STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
PREFERRED STOCK DEFICIT COMMON STOCK ADDITIONAL ACCUMULATED MINORITY ---------------- -------------- PAID-IN DEFERRED PRIOR TO INTEREST SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECAPITALIZATION -------- ------- ------- ------ ------ ---------- ------------ ---------------- Balances, December 31, 1992.................. $ -- 3,894 $ -- -- $ -- $ 252 $ -- $ (216) Issuance of Series A Preferred Stock........ -- 19,617 23 -- -- 650 -- -- Syndication costs........................... -- -- -- -- -- (54) -- -- Net loss.................................... -- -- -- -- -- -- -- (1,036) ------- ------ ----- ------- ------- -------- -------- -------- Balances, December 31, 1993.................. -- 23,511 23 -- -- 848 -- (1,252) Issuance of Series A Preferred Stock........ -- 3,875 4 -- -- 2,996 -- -- Conversion of debt to Series A Preferred Stock..................................... -- 1,275 1 -- -- 684 -- -- Net loss.................................... -- -- -- -- -- -- -- (3,457) ------- ----- ----- ------- ------- -------- -------- -------- Balances, December 31, 1994.................. -- 28,661 28 -- -- 4,528 -- (4,709) Capital contribution to HotWired Ventures LLC....................................... 1,793 -- -- -- -- 5,105 -- -- Stock repurchase............................ -- (452 ) -- -- -- (4) -- -- Translation adjustment...................... -- -- -- -- -- -- -- -- Net loss.................................... (427 ) -- -- -- -- -- -- (6,505) ------- ----- ----- ------- ------- -------- -------- ------- Balances, December 31, 1995.................. 1,366 28,209 28 -- -- 9,629 -- (11,214) Issuance of Series A Preferred Stock (unaudited)............................... -- 158 -- -- -- 790 (790) -- Amortization of deferred compensation expense (unaudited)....................... -- -- -- -- -- -- 126 -- Stock repurchase (unaudited)................ -- (352 ) -- -- -- (296) -- -- Translation adjustment (unaudited).......... -- -- -- -- -- -- -- -- Net loss (unaudited)........................ (499 ) -- -- -- -- -- -- (3,361) ------- ----- ----- ------- ------- -------- -------- ------- Balances, March 31, 1996 (unaudited)......... $ 867 28,015 $ 28 -- $ -- $ 10,123 $ (664) $(14,575) ======= ===== ===== ======= ======= ======== ======== ======= Pro forma adjustments (Note 1) (unaudited): Recapitalization (unaudited)................ $ -- -- $ -- -- $ -- $(14,575) $ -- $ 14,575 Business Combination (unaudited)............ (867 ) 2,485 2 -- -- 24,851 -- -- Series B Preferred Stock Private Placement (unaudited)............................... -- 1,250 1 -- -- 12,299 -- -- May 1996 stock option grants (unaudited).... -- -- -- -- -- 9,129 (4,116) -- Conversion of Preferred Stock to Common (unaudited)............................... -- (31,750) (31 ) 31,750 32 (1) -- -- ------- ----- ----- ------- ------- -------- -------- ------- Pro forma balances, March 31, 1996 (unaudited)................................. $ -- -- $ -- 31,750 $ 32 $ 41,826 $ (4,780) $ -- ======= ===== ===== ======= ======= ======== ======== ======= TOTAL STOCKHOLDERS' ACCUMULATED TRANSLATION EQUITY DEFICIT ADJUSTMENT (DEFICIT) ----------- ----------- ------------- Balances, December 31, 1992.................. $ -- $ -- $ 36 Issuance of Series A Preferred Stock........ -- -- 673 Syndication costs........................... -- -- (54) Net loss.................................... -- -- (1,036) --------- -------- ---------- Balances, December 31, 1993.................. -- -- (381) Issuance of Series A Preferred Stock........ -- -- 3,000 Conversion of debt to Series A Preferred Stock..................................... -- -- 685 Net loss.................................... -- -- (3,457) --------- -------- ---------- Balances, December 31, 1994.................. -- -- (153) Capital contribution to HotWired Ventures LLC....................................... -- -- 5,105 Stock repurchase............................ -- -- (4) Translation adjustment...................... -- 50 50 Net loss.................................... -- -- (6,505) --------- -------- ---------- Balances, December 31, 1995.................. -- 50 (1,507) Issuance of Series A Preferred Stock (unaudited)............................... -- -- -- Amortization of deferred compensation expense (unaudited)....................... -- -- 126 Stock repurchase (unaudited)................ -- -- (296) Translation adjustment (unaudited).......... -- 4 4 Net loss (unaudited)........................ -- -- (3,361) --------- -------- ---------- Balances, March 31, 1996 (unaudited)......... $ -- $ 54 $(5,034) ========= ======== ========== Pro forma adjustments (Note 1) (unaudited): Recapitalization (unaudited)................ $ -- $ -- $ -- Business Combination (unaudited)............ (19,468) -- 5,385 --------- -------- ---------- Series B Preferred Stock Private Placement (unaudited)............................... -- -- 12,300 May 1996 stock option grants (unaudited).... (5,013) -- -- Conversion of Preferred Stock to Common (unaudited)............................... -- -- -- --------- -------- ---------- Pro forma balances, March 31, 1996 (unaudited)................................. $ (24,481) $ 54 $12,651 ========= ======== ==========
See accompanying notes to consolidated financial statements. F-5 66 WIRED VENTURES, INC. (A DELAWARE CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss..................................... $(1,036) $(3,457) $(6,505) $(2,418) $(3,361) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest.......................... -- -- (427) -- (499) Preacquisition losses...................... -- -- (854) -- -- Depreciation and amortization.............. 18 87 470 69 204 Amortization of deferred compensation...... -- -- -- -- 126 Loss on disposition of property and equipment................................ 17 -- -- -- 56 Equipment acquired in exchange for advertising.............................. (132) (34) (361) (66) (153) Changes in operating assets and liabilities: Accounts receivable, net................. (824) (1,372) (873) 157 151 Deferred production costs................ (88) (66) (80) (72) (64) Prepaid expenses......................... (29) (65) (65) (162) (98) Accounts payable and accrued expenses.... 791 1,697 4,026 1,571 (1,490) Deferred revenue......................... 514 2,153 1,384 497 421 ------- ------- ------- ------- ------- Net cash used in operating activities.......................... (769) (1,057) (3,285) (424) (4,707) ------- ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures......................... (53) (688) (1,509) (184) (602) Proceeds from sale of equipment.............. 8 -- -- -- -- Other assets................................. 15 (10) (205) (122) (60) ------- ------- ------- ------- ------- Net cash used in investing activities.......................... (30) (698) (1,714) (306) (662) ------- ------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions by HotWired Ventures LLC minority participants.................. -- -- 6,898 -- -- Convertible loan from related parties........ 500 -- -- -- -- Repurchase of Series A preferred stock....... -- -- (4) -- (296) Loans (repayments) from related parties...... 325 (140) -- -- -- Issuance of Series A preferred stock......... 673 3,000 -- -- -- Loan and advances from Guardian Media Group plc........................................ -- -- 2,039 239 31 Syndication costs............................ (54) -- -- -- -- Net proceeds from bank loan.................. -- -- 1,500 -- 1,000 ------- ------- ------- ------- ------- Net cash provided by financing activities.......................... 1,444 2,860 10,433 239 735 Effect of foreign exchange rate................ -- -- 50 (1) 4 ------- ------- ------- ------- ------- Increase (decrease) in cash and cash equivalents.................................. 645 1,105 5,484 (492) (4,630) Cash and cash equivalents, beginning of period....................................... -- 645 1,750 1,750 7,234 ------- ------- ------- ------- ------- Cash and cash equivalents, end of period....... $ 645 $ 1,750 $ 7,234 $ 1,258 $ 2,604 ======= ======= ======= ======= ======= Supplemental cash flow disclosure -- cash paid for interest................................. $ 1 $ 16 $ 16 $ -- $ 17 ======= ======= ======= ======= ======= Supplemental disclosure of noncash investing and financing activities: Equipment acquired in exchange for advertising................................ $ 132 $ 34 $ 361 $ 66 $ 153 ======= ======= ======= ======= ======= Conversion of notes payable to capital....... $ -- $ 685 $ -- $ -- $ -- ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. F-6 67 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) (1) THE COMPANY Wired Ventures, Inc. ("Wired" or the "Company"), is a new kind of global, diversified media company engaged in creating content for print, online, and other media. The Company (a Delaware C corporation) was recapitalized in May 1996 such that the ownership interests of Wired Holdings Inc. (previously a California S corporation), Wired USA Ltd., and Wired Ventures Ltd. were contributed to the Company and 28,014,692 shares of the Company's Series A preferred stock were issued to the owners of such entities. The effective ownership percentage of each respective equity holder in the Company after the recapitalization is the same as their respective interests in the operating assets and liabilities of the Company prior to the recapitalization, and there was no change in control as a result of the recapitalization. The consolidated financial statements reflect the accounting for this transaction as a combination of companies under common control. The Company's businesses were historically conducted in partnership and limited liability company form, beginning with Wired Partners in 1992, and continuing through Wired USA Ltd., a California limited partnership (from its formation in January 1993 to January 1994) and Wired Ventures, Ltd., a California limited partnership (from its formation in January 1994 to May 1996). From January 1994 to May 1996, all businesses were conducted by Wired Ventures, Ltd. Wired Holdings Inc. and Wired USA Ltd. had no operations, operating assets, or operating liabilities. The Company's principal subsidiaries as of March 31, 1996 can be summarized as follows:
WIRED VENTURES, INC. COMPANY LEGAL FORM OWNERSHIP % ----------------------------- ------------------------------------- -------------------- HotWired Ventures LLC........ California Limited Liability Company 74% Wired UK..................... United Kingdom Unlimited Company 100%
Wired Ventures, Inc. publishes Wired magazine, which is sold on newsstands and through subscriptions. HotWired Ventures LLC publishes editorial material on the World Wide Web through its HotWired network of online content sites. Wired UK publishes a local edition of Wired magazine in the United Kingdom, which is sold on newsstands and through subscriptions. Pro Forma Balance Sheet In May 1996, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission (SEC) permitting Wired to sell shares of its common stock in connection with a proposed initial public offering (IPO). If the offering is consummated under the terms presently anticipated, all the currently outstanding shares of preferred stock, including the preferred stock issued subsequent to the date of these financial statements in connection with the acquisition of the minority interest of HotWired Ventures LLC and the closing of the private financing which generated net proceeds of $12.3 million (see Note 12), will convert to 31,750,000 shares of common stock upon closing of the IPO. The conversion of the preferred stock, the recapitalization of the combined entity described above into a C corporation, the sale of preferred stock in the private financing, the acquisition of the minority interest of HotWired Ventures LLC, and the May 1996 issuance of options to purchase approximately 4.0 million shares of common stock (and their corresponding deferred compensation expense) have been reflected in the accompanying pro F-7 68 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) forma balance sheet and statement of minority interest and stockholders' equity (deficit) as of March 31, 1996. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. Minority interest represents the minority participants' share of the equity of HotWired Ventures LLC, the Company's 74% owned subsidiary. All material intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition Revenue from the sale of advertising space in magazines is recognized at the time the issue is circulated. Proceeds from subscriptions are recognized as revenue over the terms of the subscriptions, generally one to two years, upon commencement of subscription services. Subscriptions expiring within one year are included as a current liability and the portion of the subscriptions in excess of one year are classified as a noncurrent liability. Sales to newsstand distributors are recognized as revenue in the month of distribution utilizing historical experience to estimate the ultimate sales of magazines to the newsstand. In the event that actual sales differ from estimates, adjustments are made in subsequent months. Historically, these adjustments have not been material. Revenue from the sale of online advertising is recognized over the period advertisements are displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include guarantees of minimum numbers of page views, or times that the page containing the advertisement is viewed by users. To the extent minimum guaranteed page views are not met, the Company defers recognition of the corresponding revenues until guaranteed page view levels are achieved. Cash received in advance for online advertising is classified as deferred revenue and is recognized as revenue over the time the advertisements are displayed. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its consolidated financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the financial statements. The Company expects to continue to use the intrinsic value based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for all of its employee stock-based compensation plans. Therefore, in its financial statements for fiscal 1996, the Company will make the required pro forma disclosures in a footnote to the consolidated financial statements. F-8 69 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) SFAS No. 123 is not expected to have a material effect on the Company's consolidated results of operations or financial position. Cash and Cash Equivalents Cash and cash equivalents consist of amounts held with banks with original maturities of 90 days or less. As of December 31, 1995, the Company had no significant cash investments subject to the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Concentrations of Credit Risk Financial instruments, which potentially subject the Company to a concentration of credit risk, consist of cash and cash equivalents and accounts receivable. The Company holds cash in deposit accounts with various major banks. The Company's accounts receivable are principally with trade advertisers and newsstand distributors. The Company generally does not require collateral. Wired's five primary newsstand distributors accounted for substantially all of the Company's newsstand revenue and receivables. The Company has historically been dependent on these five distributors for newsstand revenues and has outsourced its printing and distribution activities, on which all magazine revenue is dependent. The Company contracts with all such parties on a month to month basis. Deferred Production Costs Deferred production costs are comprised of those expenses incurred to produce magazines which have yet to be released. Property and Equipment Property and equipment are stated at cost. Depreciation is provided on the straight-line basis over an estimated useful life of five years for equipment and three years for leasehold improvements. Maintenance and repairs are charged to expense as incurred. Promotion Costs AICPA Statement of Position 93-7 requires that the Company defer the costs of direct mail promotions to the extent that they are expected to result in additional subscription revenues in excess of incremental fulfillment costs. As the Company estimates that its incremental fulfillment costs are in excess of its additional subscription revenue, these costs have been expensed as incurred. Direct mail promotion costs totaled $11,154, $1,602,323, and $5,674,000, in 1993, 1994, and 1995, respectively. Nonmonetary Transactions Agreements to exchange advertising in Wired magazine and the HotWired network of online content sites for equipment or services are recorded at the estimated fair value of the equipment or service. F-9 70 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) Foreign Currency Translation The functional currency of the Company's foreign operations is the U.S. dollar. All monetary assets and liabilities are translated at the current rate at the end of the period; nonmonetary assets and liabilities are translated at historical rates; revenues and expenses are translated at average exchange rates in effect during the period. Translation and transaction gains and losses have not been material in any of the periods presented. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes Wired accounts for income taxes under the asset and liability method of accounting. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. Prior to the recapitalization discussed in Note 1, Wired consisted of an S corporation and several partnerships and limited liability companies for federal income tax purposes. As such, income was taxed at the individual shareholder or partner level. Accordingly, tax expense in the accompanying statements of operations for the years ended December 31, 1993, 1994, and 1995 only includes the state minimum franchise taxes. The accompanying pro forma net loss data for the year ended December 31, 1995, and the three months ended March 31, 1996, reflect provisions for taxes on a pro forma basis, using the asset and liability method, as if Wired had been a C corporation since the beginning of those respective periods, fully subject to federal and state income taxes. Other than state minimum franchise tax liabilities, no pro forma income taxes have been reflected in the pro forma net loss data for the year ended December 31, 1995, or for the three month period ended March 31, 1996, due to the current period losses. Pro Forma Net Loss Per Share Pro forma net loss per share is computed based on the weighted average number of shares of common stock outstanding and common equivalent shares from stock options (under the treasury stock method, if dilutive) and preferred stock outstanding (on an "as if converted" basis, even if antidilutive), giving effect to the recapitalization as though it had occurred at the beginning of the earliest period presented. In accordance with certain SEC Staff Accounting Bulletins, such computations include all common and common equivalent shares (using the treasury stock method) and F-10 71 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) preferred shares (on an "as if converted" basis) issued within 12 months of the offering date as if they were outstanding for all periods presented using the anticipated IPO price. Interim Financial Statements The accompanying unaudited consolidated financial statements as of March 31, 1996 and for the three months ended March 31, 1995 and 1996 have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial information set forth therein. (3) BALANCE SHEET AND STATEMENT OF OPERATIONS COMPONENTS Accounts Receivable Accounts receivable are recorded net of allowances for potential credit losses, estimated newsstand returns, and other charges. Accounts receivable as of December 31, 1994 and 1995 are summarized as follows (in thousands):
DECEMBER 31, ----------------- 1994 1995 ------ ------ Magazine: Advertising, less allowances of $463 and $767, respectively.... $ 798 $1,869 Newsstand, less allowances of $1,544 and $1,774, respectively................................................ 621 549 Subscription................................................... 510 219 Online: Advertising, less allowances of $15 and $23, respectively...... 269 434 ------ ------ $2,198 $3,071 ====== ======
Property and Equipment Property and equipment as of December 31, 1994 and 1995 consisted of the following (in thousands):
DECEMBER 31, --------------- 1994 1995 ---- ------ Leasehold improvements............................................. $301 $ 561 Computer and communications equipment.............................. 569 2,136 Other.............................................................. 29 71 ---- ------ 899 2,768 Less accumulated depreciation and amortization..................... 108 552 ---- ------ $791 $2,216 ==== ======
Depreciation and amortization expense for property and equipment for the years ended December 31, 1994 and 1995 was $87,491 and $444,953, respectively. F-11 72 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) Magazine Revenue Magazine revenue for the years ended December 31, 1993, 1994, and 1995 and for the three month periods ended March 31, 1995 and 1996 are summarized as follows (in thousands):
DECEMBER 31, MARCH 31, ----------------------------- ------------------- 1993 1994 1995 1995 1996 ------ ------ ------- ------- ------- Advertising..................... $1,589 $4,524 $14,756 $ 2,234 $ 3,927 Subscriptions................... 381 1,930 4,940 965 1,864 Newsstand sales, net............ 958 2,114 2,896 542 834 Mailing lists and other......... -- 265 721 195 499 ------ ------ ------ ------ ------ $2,928 $8,833 $23,313 $ 3,936 $ 7,124 ====== ====== ====== ====== ======
Online Advertising Revenue Online advertising revenue consists of revenue from selling advertisements to corporate sponsors which are placed in content sections. (4) ACQUISITION -- WIRED UK Wired UK was formed in 1994. The Company contributed intellectual property in exchange for a 50% interest and Guardian Media Group plc (Guardian), a United Kingdom corporation, contributed cash of approximately $216,000 for its 50% interest. Wired UK had no material results of operations prior to 1995. In July 1995, Ventures purchased Guardian's 50% interest in Wired UK for an insignificant amount. Accordingly, the net assets of Wired UK have been included in the accompanying consolidated balance sheet as of December 31, 1995. The Company recorded this acquisition using step acquisition accounting, in accordance with Accounting Research Bulletin No. 51, by including the joint venture in its consolidated financial statements as though it had been acquired at the beginning of 1995, and reduced its net loss by the $854,000 of preacquisition losses attributable to Guardian's 50% interest up to the date of acquisition. The pro forma combined results of operations for the year ended December 31, 1995, as if the acquisition had occurred at the beginning of that year, would have reflected no change in consolidated total revenues and would have reflected an increase in the consolidated net loss of $854,000 ($0.02 per share). This effect is included in the pro forma combined results of operations presented in Note 12. The fair value of assets and liabilities acquired generally approximated historical cost, except for the forgiveness of approximately $270,000 of a note balance as part of the acquisition agreement. The note bears no interest and, therefore, was discounted by approximately $370,000 to its present value of approximately $1,200,000, based on a rate of 9%. (5) NOTE PAYABLE AND LINE OF CREDIT Note Payable Wired UK has a note payable with a stated value of L1,000,000 (approximately $1,600,000) to Guardian (see Note 4), which is due in July 1998, bears no interest, and has an estimated present value of approximately $1,200,000. The note is payable on demand with a stated interest rate of 5% F-12 73 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) in the event of certain changes in ownership or certain transactions with Guardian. In the event that the Company enters into certain joint venture transactions in Continental Europe, Guardian has the right to convert its loan to equity of the new joint venture. Line of Credit The Company maintains a $6,500,000 line of credit collateralized by all of the Company's magazine-related tangible and intangible assets. The line bears an interest rate of adjusted LIBOR plus 3.25% (9% as of December 31, 1995) and expires on September 30, 2000. The line of credit prescribes that $5,000,000 thereof may be used only to increase Wired magazine's subscription base. The remaining $1,500,000 may be used only to repay the note payable to Guardian by Wired UK (see Note 4). The outstanding balance on the line of credit was $1,500,000 and $2,500,000 at December 31, 1995 and March 31, 1996, respectively. The proceeds of the financing were used to finance certain direct mail promotion costs of Wired magazine. The Company was not in compliance with certain nonfinancial covenants as of December 31, 1995 and March 31, 1996, but has obtained waivers with respect to those covenants from the bank through June 1996. Accordingly, the obligation has been classified as a current liability. (6) INCOME TAXES Tax expense recorded in the accompanying historical consolidated financial statements represents state minimum franchise taxes of approximately $1,600, $18,000, $9,000 and $9,000 for the years ended December 31, 1993, 1994, and 1995 and the three months ended March 31, 1996, respectively. Prior to the recapitalization discussed in Note 1, Wired consisted of an S corporation and several partnerships and limited liability companies. After the recapitalization, Wired will be taxed as a C corporation. The pro forma provisions for income taxes reflect the tax expense that would have been reported if Wired had been a C corporation. The components of pro forma income taxes are as follows (in thousands):
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ----------------- ------------------ Pro forma income taxes: Current: Federal.............................. $ -- $ -- State................................ 9 9 ----------------- ------------------ Total pro forma tax expense..... $ 9 $ 9 ================== ====================
F-13 74 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) The following tabulation reconciles the statutory corporate federal income tax benefit (computed by multiplying Wired's loss before income taxes by 34%) to Wired's pro forma income tax expense (in thousands):
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ----------------- ------------------ Pro forma expected income tax benefit............................ $(2,209) $ (1,140) State taxes, net of federal effect... 9 9 Unutilized net operating losses...... 2,209 1,140 ----------------- ------------------ Pro forma tax expense...... $ 9 $ 9 =============== ================
The tax effects of temporary differences that give rise to significant portions of the pro forma deferred tax assets as of December 31, 1995 are presented below (in thousands): Pro forma deferred tax assets: Reserves and accruals.............. $ 754 Deferred revenue................... 1,650 Capitalized production costs....... 188 Net operating loss carryforwards... 2,364 Property and equipment............. 103 ----------------- Total gross pro forma deferred tax assets.......................... 5,059 Valuation allowance................ (5,059) ----------------- Net pro forma deferred tax assets................... $ -- ===============
(7) STOCKHOLDERS' EQUITY Preferred Stock Each share of Series A and B preferred stock is convertible into common stock at the exchange rate in effect at the time of conversion, currently one-to-one, and is subject to appropriate adjustment for common stock splits, stock dividends, and similar transactions. Conversion is automatic upon the closing of a public offering of common stock in which the aggregate gross proceeds to the Company are $7.5 million or more, and the IPO price per share is $12.50 or more. Each holder of Series A and B preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such preferred stock is convertible. Each holder of preferred stock is entitled to receive, when and as declared by the Board, noncumulative dividends at the annual rate of $0.40 per share of Series A preferred stock and $0.80 per share of Series B preferred stock in preference and priority to any payment of any dividend on common stock. Each holder of preferred stock will participate pro rata on dividends paid on the common stock. In the event of liquidation, the holders of Series B preferred stock are entitled to a per share liquidation preference equal to $10.00, plus all declared and unpaid dividends, after which all Series A preferred stock are entitled to a per share liquidation preference equal to $10.00, plus all declared but unpaid dividends. F-14 75 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) There are no redemption or sinking fund provisions applicable to preferred stock. In January 1996, the Company issued equity interests which represented approximately 158,000 shares of Series A preferred stock to certain of its employees, and recorded deferred compensation expense of approximately $790,000, based on their deemed fair value. This amount is being amortized over the vesting period of the Company's repurchase rights to such shares. The Company repurchased approximately 452,000 and 352,000 shares of Series A preferred stock in December 1995 and January 1996, respectively, at a total cost of approximately $4,000 and $296,000, respectively. (8) EMPLOYEE BENEFIT PLANS Retirement and Savings Program The salary deferral "401(k)" plan allows employees to defer up to 20% of their salary subject to certain limitations. The Company may make discretionary contributions to the plan, however, no employer contributions have been made since inception. (9) COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases certain office space and office equipment under noncancelable operating leases with terms exceeding one year. Future minimum lease payments under noncancelable operating leases as of December 31, 1995 are as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1996............................................... $ 738 1997............................................... 984 1998............................................... 962 1999............................................... 936 2000 and thereafter................................ 5,847 $9,467
Net rental expense under operating leases for the years ended December 31, 1993, 1994, and 1995 were $29,463, $70,038, and $238,931, respectively. Legal Matters Wired and its subsidiaries are involved in a number of claims arising in the ordinary course of business. Wired and its subsidiaries believe these matters will be resolved without material adverse effect on the Company's or its subsidiaries' financial position, results of operations or cash flows. (10) RELATED PARTY TRANSACTIONS In November 1993, the Company received a noninterest bearing convertible loan from AMPI for $500,000. This loan was converted to capital upon formation of Wired Ventures, Ltd. in January 1994. F-15 76 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) During 1993, Wired USA Ltd. received two loans. The first loan of $50,000 earned interest at the rate of 6% per annum and was payable to a relative of the editor/publisher. The $50,000 loan was repaid in 1994 subsequent to the formation of Wired Ventures, Ltd. The second loan of $275,000 earned interest at the rate of 10% per annum and was payable to a partner of Wired USA Ltd. As part of the formation of Wired Ventures, Ltd. in 1994, $184,676 of this loan was converted to capital and the remaining principal of $90,324 was repaid. (11) INDUSTRY SEGMENT AND GEOGRAPHIC AREA SEGMENT INFORMATION The Company's major operations are in magazine production and distribution and in the publication of online editorial material on the World Wide Web. Consolidated revenues derived from foreign based operations totaled approximately $988,000 for the year ended December 31, 1995. Operating loss, indentifiable assets, depreciation and amortization and capital expenditures for foreign based operations as of or for the year ended December 31, 1995 were $2.6 million, $472,000, $61,000 and $311,000, respectively. There were no foreign based operations in 1993 and 1994. Revenue, operating loss, identifiable assets, depreciation and amortization, and capital expenditures pertaining to the industries in which the Company operates are presented below (in thousands):
MAGAZINE ONLINE CONSOLIDATED -------- ------- ------------ 1995 Revenues..................................... $23,313 $ 1,942 $ 25,255 Operating loss............................... (5,734 ) (2,199) (7,933) Identifiable assets.......................... 7,498 5,893 13,218 Depreciation and amortization................ 336 134 470 Capital expenditures......................... 788 721 1,509 1994 Revenues..................................... $ 8,833 $ 348 $ 9,181 Operating loss............................... (3,505 ) (32) (3,537) Identifiable assets.......................... 4,699 412 5,111 Depreciation and amortization................ 72 15 87 Capital expenditures......................... 544 144 688 1993 Revenues..................................... $ 2,928 $ -- $ 2,928 Operating loss............................... (1,024 ) -- (1,024) Identifiable assets.......................... 1,859 -- 1,859 Depreciation and amortization................ 18 -- 18 Capital expenditures......................... 53 -- 53
Intersegment transactions, to date, have not been significant. F-16 77 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) (12) SUBSEQUENT EVENTS 1996 Equity Incentive Plan In May 1996, the Board adopted the 1996 Equity Incentive Plan ("1996 Equity Plan") and reserved 8,500,000 shares of common stock for issuance under the 1996 Equity Plan. The Company's stockholders approved the 1996 Equity Plan in May 1996. The 1996 Equity Plan provides for the grant of stock options and stock bonuses and the issuance of restricted stock by the Company to its employees, officers, directors and consultants. In May 1996, the Company issued 3,970,078 options pursuant to the plan at prices varying between $1 and $10. The options generally vest to the extent of 25% upon the first anniversary of the employee hire date and an additional 1/36 of the unvested shares vest ratably over the following 36 months. As of the grant date, approximately 1.7 million options were vested. Options are generally exercisable on the date of grant, with shares subject to repurchase provisions. The Company will record $9.1 million in deferred compensation expense in May, 1996 for the difference between the grant price and the deemed fair value of the common stock underlying certain options. The deferred compensation will be amortized over the vesting period of the individual options, generally four years. The Company expects to record $5.5 million in compensation expense related to such options in the quarter ending June 30, 1996. 1996 Non-Employee Director Stock Option Plan In May 1996, the Board of Directors adopted the 1996 Non-Employee Director Stock Option Plan (the "Directors' Plan") and expects to submit such plan to the stockholders for approval prior to the completion of the proposed IPO. The Directors' Plan provides for the grant of nonstatutory stock options to non-employee directors of the Company. The total number of shares of Common Stock reserved under the Directors' Plan is 100,000. Business Combination with HotWired Ventures LLC In May 1996, the Company purchased the minority interest in HotWired Ventures LLC in exchange for approximately 2.5 million shares of Series A preferred stock. The Company will account for this transaction using the purchase method, and accordingly, the operating results of HotWired Ventures LLC previously attributable to minority interests will be included in the consolidated financial statements from the date of acquisition. The value of the stock would have been allocated as follows, had the transaction occurred as of March 31, 1996 (in thousands): Fair value of net tangible assets acquired................................ $ 717 Research and development in-process....................................... 21,268 Purchased technology and goodwill......................................... 4,668 Deferred income taxes..................................................... (1,800) ------- $24,853 ========
The amounts allocated to purchased technology and other intangibles will be amortized over two to three years. The research and development in-process will be written off and charged to operations in the second quarter of 1996. F-17 78 WIRED VENTURES, INC. (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) The following pro forma combined results of operations for the year ended December 31, 1995 and the three months ended March 31, 1996 are presented as if the business combination with HotWired Ventures LLC had occurred at the beginning of the period (HotWired Ventures LLC had no significant operations prior to 1995). The charges associated with in-process research and development and deferred income taxes have not been reflected in the following pro forma summary as they are non-recurring. The pro forma summary also reflects the acquisition of Wired UK (see Note 4) as if the acquisition had occurred at the beginning of 1995. The pro forma summary does not necessarily reflect the results of operations as they would have been if the Company and the minority interest in HotWired Ventures LLC had constituted a single entity during such periods.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED 1995 MARCH 31, 1996 ------------ ------------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues........................... $ 25,255 $ 7,621 ------------ ------------------ Net loss................................. $ (9,342) $ (4,249) ------------ ------------------ Net loss per share....................... $ (0.27) $ (0.13) ------------ ------------------
Presented below is a condensed consolidated balance sheet as of March 31, 1996 as if the HotWired Ventures LLC business combination had occurred on March 31, 1996.
PRO FORMA MARCH 31, 1996 --------------- (IN THOUSANDS) Current assets............................................ $ 6,187 Property plant and equipment, net......................... 2,745 Goodwill and other intangibles............................ 4,668 Other noncurrent assets................................... 222 ------- $ 13,822 ======= Current liabilities....................................... $ 12,132 Noncurrent liabilities.................................... 1,339 ------- 13,471 ------- Series A preferred stock and additional paid-in capital... 35,004 Accumulated deficit....................................... (34,043) Other..................................................... (610) Stockholders' deficit................................ 351 ------- $ 13,822 =======
Private Financing In May 1996, the Company sold 1,250,000 shares of Series B preferred stock for total net proceeds of $12,300,000. As discussed in Notes 1 and 7, these shares are expected to convert into common stock upon completion of the proposed IPO. F-18 79 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the U.S. Underwriters named below, and each of such U.S. Underwriters, for whom Goldman, Sachs & Co. and Robertson, Stephens & Company LLC are acting as representatives, has severally agreed to purchase from the Company, the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES OF UNDERWRITER COMMON STOCK ---------------------------------------------------------------------- ------------ Goldman, Sachs & Co. ................................................. Robertson, Stephens & Company LLC..................................... --------- Total....................................................... 4,400,000 =========
Under the terms and conditions of the Underwriting Agreement, the U.S. Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The U.S. Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus, and in part to certain securities dealers at such price less a concession of $ per share. The U.S. Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company has entered into an underwriting agreement (the "International Underwriting Agreement") with the underwriters of the international offering (the "International Underwriters") providing for the concurrent offer and sale of 1,100,000 shares of Common Stock in an international offering outside the United States. The offering price and aggregate underwriting discounts and commissions per share for the two offerings are identical. The closing of the offering made hereby is a condition to the closing of the international offering, and vice versa. The representatives of the International Underwriters are Goldman Sachs International and Robertson, Stephens & Company LLC. Pursuant to an Agreement between the U.S. and International Underwriting Syndicates (the "Agreement Between") relating to the two offerings, each of the U.S. Underwriters named herein has agreed that, as a part of the distribution of the shares offered hereby and subject to certain exceptions, it will offer, sell or deliver the shares of Common Stock, directly or indirectly, only in the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction (the "United States") and to U.S. persons, which term shall mean, for purposes of this paragraph: (a) any individual who is a resident of the United States or (b) any corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof and whose office most directly involved with the purchase is located in the United States. Each of the International Underwriters has agreed pursuant to the Agreement Between that, as a part of the distribution of the shares offered as a part of the international offering, and subject to certain exceptions, it will (i) not, directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the United States or to any U.S. persons or (b) to any person who it believes intends to reoffer, resell or deliver the shares in the United States or to any U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any concession to agree to observe a similar restriction. U-1 80 Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. The Company has granted the U.S. Underwriters an option, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of 660,000 additional shares of Common Stock solely to cover over-allotments, if any. If the U.S. Underwriters exercise their over-allotment option, the U.S. Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 4,400,000 shares of Common Stock offered. The Company has granted the International Underwriters a similar option exercisable up to an aggregate of 165,000 additional shares of Common Stock. The Company and its stockholders have agreed, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, not to offer, sell, or otherwise dispose of any securities of the Company (other than pursuant to employee stock option plans existing, or on the conversion or exchange of convertible or exchangeable securities outstanding, on the date of the Prospectus) that are substantially similar to the shares of Common Stock or that are convertible or exchangeable into securities that are substantially similar to the shares of Common Stock, without the prior written consent of Goldman, Sachs & Co. See "Shares Eligible for Future Sale." The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed five percent of the total number of shares of Common Stock offered by them. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price will be negotiated between the Company and the representatives of the U.S. Underwriters and International Underwriters. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the Company's historical performance, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "WWWW", subject to official notice of issuance. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. U-2 81 - --------------------------------------------------------- - --------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................... 3 Risk Factors............................ 6 The Company............................. 16 Use of Proceeds......................... 17 Dividend Policy......................... 17 Dilution................................ 18 Capitalization.......................... 19 Selected Consolidated Financial Data.... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 21 Business................................ 28 Management.............................. 44 Certain Transactions.................... 49 Principal Stockholders.................. 52 Description of Capital Stock............ 53 Shares Eligible for Future Sale......... 55 Legal Matters........................... 56 Experts................................. 56 Change in Accountants................... 56 Additional Information.................. 57 Index to Consolidated Financial Statements............................ F-1 Underwriting............................ U-1
------------------ THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - --------------------------------------------------------- - --------------------------------------------------------- - --------------------------------------------------------- - --------------------------------------------------------- 5,500,000 SHARES WIRED VENTURES, INC. COMMON STOCK (PAR VALUE $0.001 PER SHARE) ------------------ [WIRED LOGO] ------------------ GOLDMAN, SACHS & CO. ROBERTSON, STEPHENS & COMPANY REPRESENTATIVES OF THE UNDERWRITERS - --------------------------------------------------------- - --------------------------------------------------------- 82 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the shares of Common Stock being registered. All the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market application fee. SEC Registration fee.................................................. $ 26,173 NASD filing fee....................................................... 8,090 Nasdaq National Market application fee................................ 17,500 Blue Sky qualification fee and expenses............................... 7,500 Printing and engraving expenses....................................... 200,000 Legal fees and expenses............................................... 300,000 Accounting fees and expenses.......................................... 250,000 Transfer agent and registrar fees..................................... 10,000 Directors and officers insurance premium.............................. 250,000 Miscellaneous......................................................... 230,737 ---------- Total....................................................... $1,300,000 ==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. The Registrant's Restated Certificate and Restated Bylaws provide for mandatory indemnification of its directors and permissive indemnification of officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. The Registrant has entered into indemnification agreements with its directors and officers, a form of which is attached as Exhibit 10.1 hereto and incorporated herein by reference. The indemnification agreements provide the Registrant's directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. The Company is also in the process of obtaining directors and officers insurance to insure its directors and officers against certain liabilities under the Securities Laws. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since its incorporation in March 1996, the Registrant has sold and issued the following unregistered securities: (a) In May 1996, the Company issued 30,500,000 shares of its Series A Preferred Stock to the equity owners of Wired Holdings Inc., Wired USA Ltd., Wired Ventures, Ltd. and HotWired Ventures LLC in exchange for their interests therein. (b) In May 1996, the Company issued one share of Common Stock to each of Jane Metcalfe and Louis Rossetto for $10.00 in cash per share. (c) In May 1996, the Company issued 1,250,000 shares of its Series B Preferred Stock to 10 investors for $10.00 in cash per share. The securities described in the transaction described in paragraph (a) above were exempt from registration under the Securities Act by virtue of Rule 3(a)(10) thereunder in that they were II-1 83 issued in exchange for bona fide outstanding securities and the terms and conditions of such issuance and exchange were approved, after a hearing upon the fairness of such terms and conditions upon which all persons to whom the Registrant proposed to issue securities in such exchange had the right to appear, by the California Commissioner of Corporations. The sale and issuance of securities in the transactions described in paragraphs (b) and (c) were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) or Regulation D promulgated thereunder as transactions not involving a public offering. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ------------------------------------------------------------------------------------ 1.1* Form of Underwriting Agreement 2.1 Form of Exchange Agreement, dated as of May 28, 1996, among the Registrant and the holders of its Series A Preferred Stock 3.1 Amended and Restated Certificate of Incorporation of the Registrant 3.2 Bylaws of the Registrant 3.3* Amended and Restated Certificate of Incorporation to be effective upon completion of the offering 4.1 Reference is made to Exhibits 3.1 through 3.3 4.2* Specimen stock certificate 4.3 Form of Investor Rights Agreement, dated May 28, 1996, among the Registrant and certain of its stockholders 5.1* Opinion of Cooley Godward Castro Huddleson & Tatum 10.1 Form of Indemnification Agreement between the Registrant and each of its executive officers and directors 10.2 1996 Equity Incentive Plan, together with forms of agreements to be used thereunder 10.3 1996 Non-Employee Director Stock Option Plan, together with form of agreement to be used thereunder 10.4 Letter of Agreement, Loan Note and Related Guaranty, dated as of July 22, 1995, by and among the Registrant, Wired World, L.L.C., Wired New York, Wired UK, Guardian Media Group, Karadean Limited, Guardian Magazines Limited and Guardian Newspapers Limited 10.5+ License Agreement, dated as of May 30, 1994, between the Registrant and Dohosha Publishing Co., Ltd. 10.6+ Letter of Intent, dated as of April 5, 1996, between HotWired Ventures LLC and Inktomi Corporation 10.7+ Agreement, dated as of November 5, 1992, as amended on August 2, 1994, April 11, 1995, and May 22, 1996, between the Registrant and International Circulation Distributors - The Hearst Corporation 10.8+ Master Agreement for Neodata Services, dated as of June 20, 1994, between the Registrant and Neodata Services, Inc. 10.9 Real Property Lease, dated as of May 20, 1994, between the Registrant and 500 Third Street Associates
II-2 84
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ------------------------------------------------------------------------------------ 10.10 Real Property Lease, dated as of November 15, 1995, between HotWired, Inc. and GORR Partners, LLC 11.1 Statement re: Computation of Pro Forma Net Loss Per Share 16.1 Letter from Coopers & Lybrand LLC 21.1 Subsidiaries of the Registrant 23.1 Report on Financial Statement Schedule and Consent of Independent Auditors. 23.2* Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. Reference is made to Page II-4. 27.1 Financial Data Schedule
- --------------- * To be filed by amendment. + Confidential treatment requested. (b) FINANCIAL STATEMENT SCHEDULES. Schedule II -- Valuation and Qualifying Accounts -- Page S-1. All other schedules are omitted because they are not required, they are not applicable or the information is already included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the registration statement as of the time it was declared effective, and (2) for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 85 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City and County of San Francisco, State of California, on the 29th day of May, 1996. WIRED VENTURES, INC. By: /s/ Louis Rossetto ---------------------------- Louis Rossetto Chief Executive Officer and Chair of the Board (Principal Executive Officer) POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Louis Rossetto and Jeff Simon as his true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement on Form S-1, and to any registration statement filed under Rule 462 under the Securities Act of 1933, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------------------------ /s/ Louis Rossetto Chief Executive Officer and May 29, 1996 - --------------------- Chair of the Board (Principal Louis Rossetto Executive Officer) /s/ Jeffrey Simon Chief Financial Officer and May 29, 1996 - -------------------- Secretary (Principal Financial Jeffrey Simon and Accounting Officer) /s/ Jane Metcalfe President and Director May 29, 1996 - -------------------- Louis Rossetto /s/ H. William Jesse, Jr. Director May 29, 1996 - --------------------------- H. William Jesse, Jr.
II-4 86 SCHEDULE II WIRED VENTURES, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING CHARGED TO END ACCOUNT DESCRIPTION OF PERIOD OPERATIONS DEDUCTIONS OF PERIOD - ------------------------------------------------- ----------- ----------- ----------- ----------- YEAR ENDED DECEMBER 31, 1993 Magazine advertising Allowance for doubtful accounts............. $ -- $ 168 $ 22 $ 146 Newsstand and single copy Allowance for newsstand returns............. -- 767 367 400 ----------- ----------- ----------- ----------- $ -- $ 935 $ 389 $ 546 ========= ========= ========= ========= YEAR ENDED DECEMBER 31, 1994 Magazine advertising Allowance for doubtful accounts............. $ 146 $ 482 $ 165 $ 463 Online advertising Allowance for doubtful accounts............. -- 15 -- 15 Newsstand and single copy Allowance for newsstand returns............. 400 1,480 336 1,544 ----------- ----------- ----------- ----------- $ 546 $ 1,977 $ 501 $ 2,022 ========= ========= ========= ========= YEAR ENDED DECEMBER 31, 1995 Magazine advertising Allowance for doubtful accounts............. $ 463 $ 304 $ -- $ 767 Online advertising Allowance for doubtful accounts............. 15 8 -- 23 Newsstand and single copy Allowance for newsstand returns............. 1,544 2,030 1,800 1,774 ----------- ----------- ----------- ----------- $ 2,022 $ 2,342 $ 1,800 $ 2,564 ========= ========= ========= =========
S-1 87 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE - -------- ------------------------------------------------------------------------- ------------ 1.1* Form of Underwriting Agreement 2.1 Form of Exchange Agreement, dated as of May 28, 1996, among the Registrant and the holders of its Series A Preferred Stock 3.1 Amended and Restated Certificate of Incorporation of the Registrant 3.2 Bylaws of the Registrant 3.3* Amended and Restated Certificate of Incorporation to be effective upon completion of the offering 4.1 Reference is made to Exhibits 3.1 through 3.3 4.2* Specimen stock certificate 4.3 Form of Investor Rights Agreement, dated May 28, 1996, among the Registrant and certain of its stockholders 5.1* Opinion of Cooley Godward Castro Huddleson & Tatum 10.1 Form of Indemnification Agreement between the Registrant and each of its executive officers and directors 10.2 1996 Equity Incentive Plan, together with forms of agreements to be used thereunder 10.3 1996 Non-Employee Director Stock Option Plan, together with form of agreement to be used thereunder 10.4 Letter of Agreement, Loan Note and Related Guaranty, dated as of July 22, 1995, by and among the Registrant, Wired World, L.L.C., Wired New York, Wired UK, Guardian Media Group, Karadean Limited, Guardian Magazines Limited and Guardian Newspapers Limited 10.5+ License Agreement, dated as of May 30, 1994, between the Registrant and Dohosha Publishing Co., Ltd. 10.6+ Letter of Intent, dated as of April 5, 1996, between HotWired Ventures LLC and Inktomi Corporation 10.7+ Agreement, dated as of November 5, 1992, as amended on August 2, 1994, April 11, 1995, and May 22, 1996, between the Registrant and International Circulation Distributors - The Hearst Corporation 10.8+ Master Agreement for Neodata Services, dated as of June 20, 1994, between the Registrant and Neodata Services, Inc. 10.9 Real Property Lease, dated as of May 20, 1994, between the Registrant and 500 Third Street Associates 10.10 Real Property Lease, dated as of November 15, 1995, between HotWired, Inc. and GORR Partners, LLC 11.1 Statement re: Computation of Pro Forma Net Loss Per Share 16.1 Letter from Coopers & Lybrand LLC 21.1 Subsidiaries of the Registrant 23.1 Report on Financial Statement Schedule and Consent of Independent Auditors 23.2* Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. Reference is made to Page II-4. 27.1 Financial Data Schedule
- --------------- * To be filed by amendment. + Confidential treatment requested. EX-2.1 2 EXCHANGE AGREEMENT 1 EXHIBIT 2.1 WIRED VENTURES, INC. EXCHANGE AGREEMENT MAY 28, 1996 2 TABLE OF CONTENTS PAGE ---- 1. AGREEMENT TO ISSUE AND ACQUIRE . . . . . . . . . . . . . . . . 1 1.1 Authorization Of Shares . . . . . . . . . . . . . . . 1 1.2 Sale And Purchase . . . . . . . . . . . . . . . . . . 1 2. CLOSING, DELIVERY AND PAYMENT . . . . . . . . . . . . . . . . 2 2.1 Closing . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Delivery . . . . . . . . . . . . . . . . . . . . . . . 2 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . 2 3.1 Organization, Good Standing And Qualification . . . . 2 3.2 Capitalization; Voting Rights . . . . . . . . . . . . 2 3.3 Authorization; Binding Obligations . . . . . . . . . . 3 3.4 Compliance With Other Instruments . . . . . . . . . . 3 3.5 Litigation. . . . . . . . . . . . . . . . . . . . . . 3 3.6 Compliance With Laws; Permits . . . . . . . . . . . . 4 3.7 Offering Valid . . . . . . . . . . . . . . . . . . . . 4 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS . . . . . . . 4 4.1 Requisite Power And Authority . . . . . . . . . . . . 4 4.2 Consents . . . . . . . . . . . . . . . . . . . . . . . 5 4.3 Investment Representations . . . . . . . . . . . . . . 5 4.4 Transfer Restrictions . . . . . . . . . . . . . . . . 5 4.5 Title To Assets . . . . . . . . . . . . . . . . . . . 6 4.6 Compliance With Other Instruments . . . . . . . . . . 6 4.7 Legends . . . . . . . . . . . . . . . . . . . . . . . 6 5. CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . 6 5.1 Conditions To Investors' Obligations At The Closing. . 6 5.2 Conditions To Obligations Of The Company. . . . . . 7 6. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 7 6.1 Governing Law . . . . . . . . . . . . . . . . . . . . 7 6.2 Successors And Assigns . . . . . . . . . . . . . . . . 7 6.3 Entire Agreement . . . . . . . . . . . . . . . . . . . 7 6.4 Severability . . . . . . . . . . . . . . . . . . . . . 8 6.5 Amendment And Waiver . . . . . . . . . . . . . . . . . 8 i. 3 TABLE OF CONTENTS PAGE 6.6 Notices . . . . . . . . . . . . . . . . . . . . . . . 8 6.7 Expenses . . . . . . . . . . . . . . . . . . . . . . . 8 6.8 Attorneys' Fees . . . . . . . . . . . . . . . . . . . 8 6.9 Titles And Subtitles . . . . . . . . . . . . . . . . . 8 6.10 Counterparts . . . . . . . . . . . . . . . . . . . . . 8 6.11 Broker's Fees . . . . . . . . . . . . . . . . . . . . 9 6.12 Exculpation Among Investors . . . . . . . . . . . . . 9 ii. 4 INDEX OF EXHIBITS Schedule of Purchasers Exhibit A Certificate of Incorporation Exhibit B Investor Rights Agreement Exhibit C iii. 5 WIRED VENTURES, INC. EXCHANGE AGREEMENT THIS EXCHANGE AGREEMENT (the "Agreement") is entered into as of May 28, 1996 by and among WIRED VENTURES, INC., a Delaware corporation (the "Company"), and each of those persons and entities, severally and not jointly, whose names are set forth on the Schedule of Investors attached hereto as Exhibit A (which persons and entities are hereinafter collectively referred to as "Investors" and each individually as a "Investor"). RECITALS A. The Company has authorized the issuance of an aggregate of Thirty Million Five Hundred Thousand (30,500,000) shares of its Series A Preferred Stock (the "Shares") in exchange for certain equity interests in Wired Holdings Inc., Wired USA Ltd., Wired Ventures, Ltd., and HotWired Ventures LLC held by Investors (as more fully set forth on Exhibit A hereto) as a transfer to a controlled corporation pursuant to Section 351 of the Internal Revenue Code of 1986, as amended. B. Investors desire to acquire the Shares on the terms and conditions set forth herein. C. The Company desires to issue the Shares to Investors on the terms and subject to the conditions set forth herein. AGREEMENT The parties hereto agree as follows: 1. AGREEMENT TO ISSUE AND ACQUIRE. 1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as defined in Section 2 below), the Company will have authorized the issuance to Investors of the Shares having the rights, preferences, privileges and restrictions set forth in the Amended and Restated Certificate of Incorporation of the Company attached hereto as Exhibit B (the "Certificate"). 1.2 SALE AND PURCHASE. On the terms and subject to the conditions hereof, at the Closing, the Company will issue to each Investor, severally and not jointly, and each Investor will acquire from the Company, severally and not jointly, the number of Shares set forth opposite such Investor's name on Exhibit A under the heading "Shares Acquired" for the consideration set forth opposite such Investor's name on Exhibit A under the heading "Consideration." 1. 6 2. CLOSING, DELIVERY AND PAYMENT. 2.1 CLOSING. The closing of the issuance of the shares under this Agreement (the "Closing") will take place at 10:00 a.m. on May 22, 1996, at the offices of Cooley Godward Castro Huddleson & Tatum, One Maritime Plaza, 20th Floor, San Francisco, California 94111 or at such other time or place as the Company and a majority in interest of the Investors may mutually agree (such date is hereinafter referred to as the "Closing Date"). 2.2 DELIVERY. At the Closing, on to the terms and subject to the conditions hereof, the Company will deliver to the Investors certificates representing the number of Shares to be acquired at the Closing by each Investor, against valid and effective transfer of the consideration therefor as set forth on Exhibit A hereto. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Investor as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement and the Investor Rights Agreement in the form attached hereto as Exhibit C (the "Investor Rights Agreement"), to issue the Shares and the Common Stock issuable upon conversion thereof (the "Conversion Shares") and to carry out the provisions of this Agreement, the Investor Rights Agreement and the Certificate and to carry on its business as presently conducted and as presently proposed to be conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business (a "Material Adverse Effect"). The Company owns no equity securities of any other corporation, limited partnership or similar entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 3.2 CAPITALIZATION; VOTING RIGHTS. The authorized capital stock of the Company immediately prior to the Closing will consist of (a) Sixty Million (60,000,000) shares of Common Stock, Two (2) of which are issued and outstanding and Six Million (6,000,000) of which are reserved for future issuance to key employees pursuant to the Company's 1996 Equity Incentive Plan, and (b) Fifty Million (50,000,000) shares of Preferred Stock, Thirty Million Five Hundred Thousand (30,500,000) of which are designated Series A Preferred Stock and Four Million Five Hundred Thousand (4,500,000) of which are designated Series B Preferred Stock, none of which is issued and outstanding. The rights, preferences, privileges and restrictions of the Shares are as stated in the Certificate. The Conversion Shares have been duly and validly reserved for issuance. Other than as contemplated by the Information Statement, including all amendments and supplements thereto, provided to each Investor (the "Statement"), and except as may be granted pursuant to the Investor Rights Agreement, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or 2. 7 stockholder agreements, or agreements of any kind for the purchase or acquisition from the Company of any of its securities. When issued in compliance with the provisions of this Agreement and the Certificate, the Shares and the Conversion Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.3 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization of this Agreement and the Investor Rights Agreement, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Certificate has been taken or will be taken prior to the Closing. The Agreement and the Investor Rights Agreement, when executed and delivered, will be valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; (b) as limited by general principles of equity that restrict the availability of equitable remedies; and (c) to the extent that the enforceability of the indemnification provisions of Section 6.11 of this Agreement and Section 2.7 of the Investor Rights Agreement may be limited by applicable laws. The issuance of the Shares and the subsequent conversion of Shares into Conversion Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 3.4 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any term of its Certificate or Bylaws, or of any provision of any mortgage, indenture, contract, agreement or instrument to which it is a party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any statute, rule or regulation applicable to the Company that would have a Material Adverse Effect. The execution, delivery and performance of and compliance with this Agreement and the Investor Rights Agreement, and the issuance of the Shares pursuant hereto and of the Conversion Shares pursuant to the Certificate, will not, with or without the passage of time or giving of notice, result in any such material violation, or conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 3.5 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of this Agreement or the Investor Rights Agreement or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in a Material Adverse Effect, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or 3. 8 instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. 3.6 COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would have a Material Adverse Effect. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the Investor Rights Agreement and the issuance of the Shares or the Conversion Shares, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could have a Material Adverse Effect, and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. 3.7 OFFERING VALID. Assuming the accuracy of the representations and warranties of the Investors contained in Section 4.3 hereof, the offer and issuance of the Shares and the Conversion Shares will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act. 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor hereby represents and warrants to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 4.1 REQUISITE POWER AND AUTHORITY. Investor has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Investor Rights Agreement and to carry out their provisions. All action on Investor's part required for the lawful execution and delivery of this Agreement and the Investor Rights Agreement have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Investor Rights Agreement will be valid and binding obligations of Investor, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (b) as limited by general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions of Section 6.11 of this Agreement and Section 2.7 of the Investor Rights Agreement may be limited by applicable laws. 4. 9 4.2 CONSENTS. All consents, approvals, orders, authorizations, registrations, qualifications, designations, declarations or filings with any governmental or banking authority on the part of Investor required in connection with the consummation of the transactions contemplated in the Agreement or the Investor Rights Agreement have been or will have been obtained prior to and be effective as of the Closing. 4.3 INVESTMENT REPRESENTATIONS. Investor understands that neither the Shares nor the Conversion Shares have been registered under the Securities Act. Investor hereby represents and warrants as follows: (a) INVESTOR BEARS ECONOMIC RISK. Investor is capable of evaluating the merits and risks of its investment in the Company. Investor may be required to bear the economic risk of this investment indefinitely. (b) ACQUISITION FOR OWN ACCOUNT. Investor is acquiring the Shares and the Conversion Shares for Investor's own account for investment only, and not with a view towards their distribution. (c) INVESTOR CAN PROTECT ITS INTEREST. Investor, by reason of its, or of its management's, business or financial experience, has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement and the Investor Rights Agreement. Further, Investor is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement. (d) COMPANY INFORMATION. Investor has received and read the Statement and has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. Investor has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment. (e) RESIDENCE. If the Investor is an individual, then the Investor resides in the state or province identified in the address of the Investor set forth on Investor's signature page hereto; if the Investor is a partnership, corporation, limited liability company or other entity, then the office of the Investor in which its investment decision was made is located at the address of the Investor set forth on Investor's signature page hereto. 4.4 TRANSFER RESTRICTIONS. Investor agrees that the Company (or a representative of the Company's underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that the Investor not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act as may be requested by the Company (or a representative of the Company's underwriters). Investor further agrees that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 5. 10 4.5 TITLE TO ASSETS. Investor has good and marketable title to the assets identified opposite such Investor's name on Exhibit A under the heading "Consideration" (the "Consideration"), subject to no mortgage, pledge, lien, lease, encumbrance or charge. To the extent such Investor's Consideration is subject to vesting or similar restrictions, Investor acknowledges that the Shares to be issued to such Investor will remain subject to such restrictions after the Closing unless otherwise modified in writing by the Company and the Investor. 4.6 COMPLIANCE WITH OTHER INSTRUMENTS. The execution, delivery and performance of and compliance with this Agreement and the Investor Rights Agreement, and the acquisition of the Shares pursuant hereto and the acquisition of the Conversion Shares pursuant to the Certificate, will not, with or without the passage of time or giving of notice, result in (a) any material violation of, conflict with, or default under any charter document, mortgage, indenture, contract, agreement or instrument to which it is a party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any statute, rule or regulation applicable to it; (b) the creation of any mortgage, pledge, lien, lease, encumbrance or charge upon such Investor's Consideration. 4.7 LEGENDS. Investor understands that each certificate representing Shares or Conversion Shares will be stamped or imprinted with the following legend (in addition to any other legend required under applicable state securities laws): IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO INVESTORS' OBLIGATIONS AT THE CLOSING. Investors' obligations to acquire the Shares at the Closing are subject to the satisfaction, at or prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Section 3 hereof will be true and correct in all material respects as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and the Company will have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing. (b) LEGAL INVESTMENT. On the Closing Date, the issuance of the Shares and the proposed issuance of the Conversion Shares will be legally permitted by all laws and regulations to which Investors and the Company are subject. 6. 11 (c) CONSENTS, PERMITS, AND WAIVERS. The Company will have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement and the Investor Rights Agreement (except for such as may be properly obtained subsequent to the Closing). (d) INVESTOR RIGHTS AGREEMENT. The Investor Rights Agreement will have been executed and delivered by the parties thereto. 5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation to issue the Shares at the Closing is subject to the satisfaction, on or prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties made by Investors in Section 4 hereof will be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of said date. (b) CONSENTS, PERMITS, AND WAIVERS. The Company will have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement and the Investor Rights Agreement (except for such as may be properly obtained subsequent to the Closing). (c) INVESTOR RIGHTS AGREEMENT. The Investor Rights Agreement will have been executed and delivered by the parties thereto. (d) DELIVERY OF CERTIFICATES. Each Investor will have delivered all certificates (if any) representing its Consideration, duly endorsed for transfer. 6. MISCELLANEOUS. 6.1 GOVERNING LAW. This Agreement will be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and performed entirely in California. 6.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof will inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and will inure to the benefit of and be enforceable by each person who will be a holder of the Shares from time to time. 6.3 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party will be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 7. 12 6.4 SEVERABILITY. In case any provision of the Agreement will be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired thereby. 6.5 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and holders of at least a majority of the Shares (treated as if converted and including any Conversion Shares into which the Shares have been converted that have not been sold to the public). (b) The obligations of the Company and the rights of the holders of the Shares and the Conversion Shares under the Agreement may be waived only with the written consent of the holders of at least a majority of the Shares (treated as if converted and including any Conversion Shares into which the Shares have been converted that have not been sold to the public). 6.6 NOTICES. All notices required or permitted hereunder will be in writing and will be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications will be sent to the Company at the address as set forth on the signature page hereof and to Investor at the address set forth on Investor's signature page hereto or at such other address as the Company or Investor may designate by ten (10) days' advance written notice to the other parties hereto. 6.7 EXPENSES. Each party will pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement and the Investor Rights Agreement. 6.8 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute will be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which will include, without limitation, all fees, costs and expenses of appeals. 6.9 TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be an original, but all of which together will constitute one instrument. 8. 13 6.11 BROKER'S FEES. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 6.11 being untrue. 6.12 EXCULPATION AMONG INVESTORS. Each Investor acknowledge that it is not relying upon any person, firm, or corporation other than the Company in making its investment or decision to invest in the Company. Each Investor agrees that no Investor nor the respective controlling persons, officers, directors, partners, agents, or employees of any Investor will be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Shares and Conversion Shares. [THIS SPACE INTENTIONALLY LEFT BLANK] 9. 14 The parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof. COMPANY: WIRED VENTURES, INC. By: ------------------------------- Chief Executive Officer Address: 520 Third Street Fourth Floor San Francisco, CA 94107 INVESTORS: [SIGNATURE PAGES FOLLOW] 15 INVESTOR SIGNATURE PAGE TO EXCHANGE AGREEMENT Investor Name: --------------------------------- Signature: --------------------------------- Name and Title of Signatory (if Investor is not an individual): --------------------------------- Address: --------------------------------- --------------------------------- --------------------------------- 16 EXHIBIT A
SHARES INVESTOR NAME ACQUIRED CONSIDERATION ------------- -------- ------------- Advance Magazine Publishers, Inc. 4,086,112 105,000 Wired Ventures, Ltd. ("Wired Ventures") Class A limited partnership Units ("Class A Units") Anker, Andrew L. and Renee S., 533,076 366 shares of Wired Holdings Inc. ("Holdings") as Co-Trustees of the Common Stock; 7,220 Wired Ventures Class B Anker 1996 Trust limited partnership Units ("Class B Units"); 4,000 HotWired Ventures LLC ("HotWired Ventures") Class B Membership Units Anker, Peter M. and Margaret 116,111 50 Wired USA Ltd. ("Wired USA") Class A Units Anuff, Joey 10,108 305 HotWired Ventures Class C Membership Units Aversa, Fabio 56,012 399 shares of Holdings Common Stock; 57 HotWired Ventures Class A Membership Units Bates Living Trust u/a/d July 6, 1987 116,111 50 Wired USA Class A Units Battelle, John 354,336 1,776 shares of Holdings Common Stock; 3,610 Wired Ventures Class B Units Bayers III, Albert F. 49,197 857 HotWired Ventures Class B Membership Units Boyce, Richard D. 49,197 857 HotWired Ventures Class B Membership Units Burda Digital, Inc. 263,860 2,857 HotWired Ventures Class A Membership Units Cannon, W. Dilworth 2,678 29 HotWired Ventures Class A Membership Units CSK Corporation 263,860 2,857 HotWired Ventures Class A Membership Units Dilworth, Robert P. 2,678 29 HotWired Ventures Class A Membership Units Durtschi, Jefferson 6,557 71 HotWired Ventures Class A Membership Units Eagan, Michael Q. 116,111 50 Wired USA Class A Units Frauenfelder, Mark 25,690 722 Wired Ventures Class B Units GC&H Investments 150,534 62 Wired USA Class A Units; 71 HotWired Ventures Class A Membership Units
1. 17
SHARES INVESTOR NAME ACQUIRED CONSIDERATION ------------- -------- ------------- Gerhauser, Lisa C. 10,108 305 HotWired Ventures Class C Membership Units Glynn, John 117,394 923 shares of Holdings Common Stock Glynn Family Trust, The 13,207 143 HotWired Ventures Class A Membership Units Graves, Mark 42,106 310 shares of Holdings Common Stock; 29 HotWired Ventures Class A Membership Units H.W. Jesse & Co. Inc. 1,161,106 500 Wired USA Class A Units Henson, Lori 2,417 19 shares of Holdings Common Stock Herst, Douglas 34,833 15 Wired USA Class A Units Himmel Trust, Jeffrey B. Braun as the 26,414 266 HotWired Ventures Class A Membership Units Trustee of the Hromadko, Gary F. 3,971 43 HotWired Ventures Class A Membership Units Huffard, Joshua C. 3,971 43 HotWired Ventures Class A Membership Units Huffard, Jay C. 1,293 14 HotWired Ventures Class A Membership Units Ishibashi, Rex 131,155 3,686 Wired Ventures Class B Units Jackson Living Trust dtd July 15, 1992 2,744,736 1,188 Wired USA Class A Units Jesse, Jr., H. William 377,990 2,059 shares of Holdings Common Stock; 50 Wired USA Class A Units Jesse, Jr., Pensco Pension Services fbo 116,111 50 Wired USA Class A Units H. William Johnson, Jeri 4,833 38 shares of Holdings Common Stock Kamin, Anthony N. 13,207 143 HotWired Ventures Class A Membership Units Kelly, Kevin 354,336 1,776 shares of Holdings Common Stock; 3,610 Wired Ventures Class B Units Louie, Jonathan P. 16,490 286 HotWired Ventures Class B Membership Units Lyon, Dana 26,224 737 Wired Ventures Class B Units McCaw, Jr., John E. 580,553 250 Wired USA Class A Units McElravy, Rebecca 2,417 19 shares of Holdings Common Stock
2. 18
SHARES INVESTOR NAME ACQUIRED CONSIDERATION ------------- -------- ------------- McShane Living Trust, O. Lynn and 116,111 50 Wired USA Class A Units Susan M. Meckfessel, David 7,250 57 shares of Holdings Common Stock Metcalfe, Jane 5,361,324 42,153 shares of Holdings Common Stock Mosier, Eugene 338,954 2,665 shares of Holdings Common Stock Negroponte, Nicholas 2,420,478 10,000 shares of Holdings Common Stock; 500 Wired USA Class A Units Orca Bay Capital Corporation 263,860 2,857 HotWired Ventures Class A Membership Units Pacific Telesis Ventures 263,860 2,857 HotWired Ventures Class A Membership Units Petersen, Julie 13,146 229 HotWired Ventures Class B Membership Units Plunkett, John and Barbara Kuhr 1,016,735 7,994 shares of Holdings Common Stock Plunkett + Kuhr 65,615 1,143 HotWired Ventures Class B Membership Units Raptor Global Fund, L.P. 22,073 239 HotWired Ventures Class A Membership Units Raptor Global Fund, Ltd. 26,137 283 HotWired Ventures Class A Membership Units Ried, Christine 4,833 38 shares of Holdings Common Stock Rossetto, Jr., Louis 5,543,049 42,153 shares of Holdings Common Stock; 50 Wired USA Class A Units; 1,143 HotWired Ventures Class B Membership Units San Tomo Partners 290,277 125 Wired USA Class A Units Sanner, David 13,157 229 HotWired Ventures Class B Membership Units Schneider, Thomas 25,690 722 Wired Ventures Class B Units Scileppi, James and Michelle 58,055 25 Wired USA Class A Units Simon, Jeffrey 20,216 610 HotWired Ventures Class C Membership Units Smelick, Robert M. 405,467 2,701 shares of Holdings Common Stock; 25 Wired USA Class A Units; 42 HotWired Class A Membership Units
3. 19
SHARES INVESTOR NAME ACQUIRED CONSIDERATION ------------- -------- ------------- Smelick 1990 Trust u/a dated April 17, 60,733 25 Wired USA Class A Units; 29 HotWired Ventures 1990, Alexandra McBryde Class A Membership Units Smelick 1990 Trust u/a dated April 17, 60,733 25 Wired USA Class A Units; 29 HotWired Ventures 1990, Gillian Sterling Class A Membership Units Smelick 1990 Trust u/a dated April 17, 60,733 25 Wired USA Class A Units; 29 HotWired Ventures 1990, Christopher Paine Class A Membership Units Smelick IRA, Delaware Charter Guarantee 11,914 129 HotWired Ventures Class A Membership Units & Trust Company fbo Robert M. Sotkiewicz, Todd 51,380 1,444 Wired Ventures Class B Units Spence, Kristin 225,885 1,776 shares of Holdings Common Stock Steadman, Carl 10,108 305 HotWired Ventures Class C Membership Units Sterling Payot Company 19,884 600 HotWired Ventures Class C Membership Units Stewart, Ian 812,468 356 Wired USA Class B Units Stites, Larry 11,956 94 shares of Holdings Common Stock Stupski Revocable Trust, Lawrence J. 174,166 75 Wired USA Class A Units Tudor BVI Futures, Ltd. 73,607 797 HotWired Ventures Class A Membership Units Tudor Arbitrage Partners, L.P. 10,159 110 HotWired Ventures Class A Membership Units Vanderslice, Elizabeth 40,114 57 shares of Holdings Common Stock; 571 HotWired Ventures Class B Membership Units Veen, Jeffrey 6,544 114 HotWired Ventures Class B Membership Units Wakin, R. Christopher and Brenda M. 19,764 214 HotWired Ventures Class A Membership Units as JTWROS Wilkinson, Lawrence 32,511 14 Wired USA Class A Units Wolf, Gary 26,234 457 HotWired Ventures Class B Membership Units WPP Group USA, Inc. 527,720 5,714 HotWired Ventures Class A Membership Units ---------- TOTAL 30,500,000 ==========
4. EX-3.1 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF WIRED VENTURES, INC. Jane Metcalfe and Jeff Simon hereby certify that: 1. The original name of this corporation is Wired Ventures, Inc. and the date of filing of the original Certificate of Incorporation of this corporation with the Secretary of State of the State of Delaware is March 29, 1996. 2. They are the duly elected and acting President and Secretary, respectively, of Wired Ventures, Inc., a Delaware corporation. 3. The Certificate of Incorporation of this corporation is hereby amended and restated to read as follows: "I. The name of this corporation is Wired Ventures, Inc. II. The address of the registered office of the corporation in the State of Delaware is Nine East Loockerman Street, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is the National Registered Agents, Inc. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that the corporation is authorized to issue is One Hundred Ten Million (110,000,000) shares. Sixty Million (60,000,000) shares will be Common Stock, each having a par value of one-tenth of one cent ($.001). Fifty Million (50,000,000) shares will be Preferred Stock, each having a par value of one-tenth of one cent ($.001). 2 B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series will be decreased in accordance with the foregoing sentence, the shares constituting such decrease will resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. Thirty Million Five Hundred Thousand (30,500,000) of the authorized shares of Preferred Stock are hereby designated "Series A Preferred Stock" (the "Series A Preferred") and Four Million Five Hundred Thousand (4,500,000) of the authorized shares of Preferred Stock are hereby designated "Series B Preferred Stock" (the "Series B Preferred"). D. The rights, preferences, privileges, restrictions of, and other matters relating to, the Series A Preferred and the Series B Preferred are as follows: 1. DIVIDEND RIGHTS. Holders of Series B Preferred, prior to and in preference to the holders of Series A Preferred or Common Stock, will be entitled to receive, when and as declared by the Board of Directors, but only out of funds that are legally available therefor, noncumulative cash dividends at the rate of Eighty Cents ($.80) per annum on each outstanding share of Series B Preferred (as adjusted for any stock dividends, combinations or splits with respect to such shares). After payment of the full dividend preference of the Series B Preferred, holders of Series A Preferred, prior to and in preference to the holders of Common Stock, will be entitled to receive, when, as and if declared by the Board of Directors, but only of funds that are legally available therefor, noncumulative cash dividends at the rate of Eighty Cents ($0.80) per annum on each outstanding share of Series A Preferred (as adjusted for any stock dividends, combinations or splits with respect to such shares). 2. VOTING RIGHTS. (a) Except as required by law or as provided in this Section 2, the Series A Preferred and Series B Preferred will vote together with the Common Stock, and not as a separate class, at any annual or special meeting of stockholders, and may act by written consent in the same manner as the Common Stock. In either case, each holder of shares of Series A Preferred or Series B Preferred will be entitled to such number of votes as will be equal to the number of whole shares of Common Stock into which such holder's aggregate number of shares of Series A Preferred and Series B Preferred are convertible (pursuant to Section 4 hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. 2. 3 (b) SEPARATE VOTE OF SERIES B PREFERRED. For so long as at least One Hundred Thousand (100,000) shares of Series B Preferred (subject to adjustment for any stock split, reverse stock split or other similar event affecting the Series B Preferred) remain outstanding, in addition to any other vote or consent required herein or by law, the vote or written consent of the holders of at least a majority of the outstanding Series B Preferred shall be necessary for effecting or validating the following actions: (1) Any amendment, alteration or repeal of any provision of the Certificate of Incorporation or the Bylaws of the Company (including any filing of a Certificate of Designation) that affects adversely the voting powers, preferences or other special rights or privileges, qualifications, limitations or restrictions of the Series B Preferred; or (2) Any authorization or any designation, whether by reclassification or otherwise, of any new class or series of stock or any other securities convertible into equity securities of the Company ranking on a parity with or senior to the Series B Preferred in right of redemption, liquidation preference, voting or dividends or any increase in the authorized or designated number of any such new class or series. 3. LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary: (a) The holders of Series B Preferred will be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Series A Preferred or the Common Stock by reason of their ownership thereof, the sum of (1) Ten Dollars ($10.00) per share of Series B Preferred, as adjusted for any stock dividends, combinations, splits or the like, then held by them and (2) all declared but unpaid dividends on each such share of Series B Preferred then held by them. If the assets of the corporation are insufficient to make payment in full to all holders of Series B Preferred, then such assets will be distributed among the holders of Series B Preferred at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. (b) After the payment of the full liquidation preference of the Series B Preferred as set forth in Section 3(a) above, the holders of Series A Preferred will be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership thereof, the sum of (1) Ten Dollars ($10.00) per share of Series A Preferred, as adjusted for any stock dividends, contributions, splits or the like, then held by them and (2) all declared but unpaid dividends on each such share of Series A Preferred then held by them. If the remaining assets of the corporation are insufficient to make payment in full to all holders of Series A Preferred, then such assets will be distributed among the holders of Series A Preferred at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be entitled. (c) After the payment of the full liquidation preferences of the Series A Preferred and Series B Preferred as set forth in Sections 3(a) and 3(b) above, the holders of the Common Stock will receive the remaining assets. 3. 4 4. CONVERSION RIGHTS. The holders of the Series A Preferred and Series B Preferred will have the following rights with respect to the conversion of the Series A Preferred and Series B Preferred into shares of Common Stock: (a) OPTIONAL CONVERSION. Subject to and in compliance with the provisions of this Section 4, any shares of Series A Preferred and Series B Preferred may, at the option of the holder, be converted at any time into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series A Preferred will be entitled upon conversion will be the product obtained by multiplying the "Series A Conversion Rate" then in effect (determined as provided in Section 4(c)) by the number of shares of Series A Preferred being converted. The number of shares of Common Stock to which a holder of Series B Preferred will be entitled upon conversion will be the product obtained by multiplying the "Series B Conversion Rate" then in effect (determined as provided in Section 4(c)) by the number of shares of Series B Preferred being converted. (b) AUTOMATIC CONVERSION. (1) Each share of Series A Preferred and Series B Preferred will automatically be converted into shares of Common Stock, based on the then-effective Series A Conversion Price and Series B Conversion Price, respectively, at any time upon the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred or the holders of a majority of the outstanding Series B Preferred, respectively, or immediately upon the closing of a firmly-underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation in which (a) the per share price is at least Twelve Dollars and Fifty Cents ($12.50) (as adjusted for stock splits, recapitalizations and the like), and (b) the gross cash proceeds to the corporation (before underwriting discounts, commissions and fees) are at least Seven Million Five Hundred Thousand Dollars ($7,500,000). Upon such automatic conversion, any declared and unpaid dividends will be paid in accordance with the provisions of Section 4(e). (2) Upon the occurrence of either event specified in paragraph (1) above, the outstanding shares of Series A Preferred and Series B Preferred, as the case may be, will be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent; provided, however, that the corporation will not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series A Preferred and Series B Preferred, respectively, are either delivered to the corporation or its transfer agent as provided below, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of the Series A Preferred and Series B Preferred, the holders of Series A Preferred 4. 5 and Series B Preferred will surrender the certificates representing such shares at the office of the corporation or any transfer agent for the Series A Preferred or the Series B Preferred, as the case may be. Thereupon, there will be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series A Preferred and Series B Preferred surrendered were convertible on the date on which such automatic conversion occurred, and the corporation will promptly pay in cash or, at the option of the corporation, Common Stock (at the Common Stock's fair market value determined by the Board as of the date of such conversion), or, at the option of the corporation, both, all declared and unpaid dividends on the shares of Series A Preferred and Series B Preferred being converted, to and including the date of such conversion. (c) CONVERSION RATE. The conversion rate in effect at any time for conversion of the Series A Preferred (the "Series A Conversion Rate") will be the quotient obtained by dividing Ten Dollars ($10.00) by the "Series A Conversion Price," calculated as provided in Section 4(d). The conversion rate in effect at any time for conversion of the Series B Preferred (the "Series B Conversion Rate") will be the quotient obtained by dividing Ten Dollars ($10.00) by the "Series B Conversion Price," calculated as provided in Section 4(d). (d) CONVERSION PRICE. The conversion price for the Series A Preferred and the Series B Preferred will initially be Ten Dollars ($10.00) (the "Series A Conversion Price") and Ten Dollars ($10.00) (the "Series B Conversion Price"), respectively. Such initial Series A Conversion Price and Series B Conversion Price will be adjusted from time to time in accordance with this Section 4. All references to the Series A Conversion Price and Series B Conversion Price herein will mean the Series A Conversion Price and Series B Conversion Price, respectively, as so adjusted. (e) MECHANICS OF CONVERSION. Each holder of Series A Preferred or Series B Preferred who desires to convert the same into shares of Common Stock pursuant to this Section 4 will surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or any transfer agent for the Series A Preferred or Series B Preferred, as the case may be, and will give written notice to the corporation at such office that such holder elects to convert the same. Such notice will state the number of shares of Series A Preferred or Series B Preferred, as the case may be, being converted. Thereupon, the corporation will promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and will promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Series A Preferred or Series B Preferred, as the case may be, being converted. Such conversion will be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series A Preferred or Series B Preferred, as the case may be, to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion will be treated for all purposes as the record holder of such shares of Common Stock on such date. 5. 6 (f) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the corporation at any time or from time to time after the date that the first share of Series A Preferred or Series B Preferred is issued (the "Original Issue Date") effects a subdivision of the outstanding Common Stock, the Series A Conversion Price and Series B Conversion Price in effect immediately before that subdivision will be proportionately decreased. Conversely, if the corporation at any time or from time to time after the Original Issue Date combines the outstanding shares of Common Stock into a smaller number of shares, the Series A Conversion Price and Series B Conversion Price in effect immediately before the combination will be proportionately increased. Any adjustment under this Section 4(f) will become effective at the close of business on the date the subdivision or combination becomes effective. (g) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, in each such event the Series A Conversion Price and Series B Conversion Price that are then in effect will be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Series A Conversion Price or the Series B Conversion Price, as the case may be, then in effect by a fraction (1) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price and the Series B Conversion Price will be recomputed accordingly as of the close of business on such record date and thereafter the Series A Conversion Price and the Series B Conversion Price will be adjusted pursuant to this Section 4(g) to reflect the actual payment of such dividend or distribution. (h) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the corporation other than shares of Common Stock, in each such event provision will be made so that the holders of the Series A Preferred and Series B Preferred will receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the corporation which they would have received had their Series A Preferred and Series B Preferred been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Series A Preferred and Series B Preferred or with respect to such other securities by their terms. 6. 7 (i) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at any time or from time to time after the Original Issue Date the Common Stock issuable upon the conversion of the Series A Preferred or Series B Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4 or in Section 3(c)), in any such event each holder of Series A Preferred or Series B Preferred, as the case may be, will have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series A Preferred or Series B Preferred, as the case may be, could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. (j) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If at any time or from time to time after the Original Issue Date there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 4 or in Section 3(c)), as a part of such capital reorganization, provision will be made so that the holders of the Series A Preferred and Series B Preferred will thereafter be entitled to receive upon conversion of the Series A Preferred or Series B Preferred, as the case may be, the number of shares of stock or other securities or property of the corporation to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment will be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Series A Preferred and Series B Preferred after the capital reorganization to the end that the provisions of this Section 4 (including adjustment of the Series A Conversion Price and the Series B Conversion Price then in effect and the number of shares issuable upon conversion of the Series A Preferred and the Series B Preferred) will be applicable after that event and be as nearly equivalent as practicable. (k) SALE OF SHARES BELOW SERIES B CONVERSION PRICE. (1) If at any time or from time to time after the Original Issue Date, the Company issues or sells, or is deemed by the express provisions of this Section 4(k) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in Section 4(g) above, and other than a subdivision or combination of shares of Common Stock as provided in Section 4(f) above, for an Effective Price (as hereinafter defined) less than the then effective Series B Conversion Price, then and in each such case the then existing Series B Conversion Price will be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying the Series B Conversion Price by a fraction (A) the numerator of which will be (1) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale, plus (2) the number of shares of Common Stock that the aggregate 7. 8 consideration received (as defined in subsection (k)(2)) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Series B Conversion Price, and (B) the denominator of which will be the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale plus the total number of Additional Shares of Common Stock so issued. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date will be the sum of (A) the number of shares of Common Stock actually outstanding, (B) the number of shares of Common Stock into which the then outstanding shares of Series A Preferred and Series B Preferred could be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of Common Stock that could be obtained through the exercise or conversion of all other rights, options and convertible securities on the day immediately preceding the given date. (2) For the purpose of making any adjustment required under this Section 4(k), the consideration received by the Company for any issue or sale of securities will (A) to the extent it consists of cash, be computed at the net amount of cash received by the Company after deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Company in connection with such issue or sale but without deduction of any expenses payable by the Company, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors, and (C) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration that covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (3) For the purpose of the adjustment required under this Section 4(k), if the Company issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") and if the Effective Price of such Additional Shares of Common Stock is less than the Series B Conversion Price then in effect, in each case the Company will be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Company shall be deemed to have received the 8. 9 minimum amounts of consideration without reference to such clauses; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price will be recalculated using the figure to which such minimum amount of consideration is reduced; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price will be again recalculated using the increased minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of the Series B Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, will be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Series B Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities will be readjusted to the Series B Conversion Price that would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of Series B Preferred. (4) "Additional Shares of Common Stock" means all shares of Common Stock issued by the Company or deemed to be issued pursuant to this Section 4(k), whether or not subsequently reacquired or retired by the Company other than (A) shares of Common Stock issued upon conversion of the Series A Preferred or Series B Preferred; (B) up to Six Million (6,000,000) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) after the Original Issue Date to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; and (C) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date. The "Effective Price" of Additional Shares of Common Stock means the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under this Section 4(k), into the aggregate consideration received, or deemed to have been received by the Company for such issue under this Section 4(k), for such Additional Shares of Common Stock. 9. 10 (l) ACCOUNTANTS' CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or readjustment of the Series A Conversion Price or the Series B Conversion Price for the number of shares of Common Stock or other securities issuable upon conversion of the Series A Preferred or the Series B Preferred, the corporation, at its expense, will compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and will mail such certificate, by first class mail, postage prepaid, to each registered holder of Series A Preferred or Series B Preferred, as the case may be, at the holder's address as shown in the corporation's books. The certificate will set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (1) the Series A Conversion Price and Series B Conversion Price at the time in effect, and (2) the type and amount, if any, of other property that at the time would be received upon conversion of the Series A Preferred and the Series B Preferred. (m) NOTICES OF RECORD DATE. Upon (1) any taking by the corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (2) any capital reorganization of the corporation, any reclassification or recapitalization of the capital stock of the corporation, any merger or consolidation of the corporation with or into any other corporation, or any transfer of all or substantially all the assets of the corporation to any other person, or any voluntary or involuntary dissolution, liquidation or winding up of the corporation, the corporation will mail to each holder of Series A Preferred and Series B Preferred at least twenty (20) days prior to the record date specified therein a notice specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (3) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) will be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. (n) FRACTIONAL SHARES. No fractional shares of Common Stock will be issued upon conversion of Series A Preferred or Series B Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred or Series B Preferred by a holder thereof will be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the corporation will, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board) on the date of conversion. (o) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The corporation will at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred 10. 11 and Series B Preferred, such number of its shares of Common Stock as will from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred and Series B Preferred. If at any time the number of authorized but unissued shares of Common Stock is not sufficient to effect the conversion of all then outstanding shares of the Series A Preferred and Series B Preferred, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as will be sufficient for such purpose. (p) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of the Series A Preferred or Series B Preferred will be deemed given upon the earlier of actual receipt or seventy-two (72) hours after the same has been deposited in the United States mail, by certified or registered mail, return receipt requested, postage prepaid, and addressed to each holder of record at the address of such holder appearing on the books of the corporation. (q) PAYMENT OF TAXES. The corporation will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series A Preferred and Series B Preferred, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred and Series B Preferred so converted were registered. 5. NO REISSUANCE. No share or shares of Series A Preferred or Series B Preferred acquired by the corporation by reason of redemption, purchase, conversion or otherwise will be reissued, and all such shares will acquire the status of undesignated shares of Preferred Stock. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. The management of the business and the conduct of the affairs of the corporation will be vested in its Board of Directors. The number of directors which will constitute the whole Board of Directors will be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors will be elected at each annual meeting of stockholders for a term of one year. Each director will serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors will shorten the term of any incumbent director. 11. 12 3. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (a) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock") or (b) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. 4. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, will, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships will be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor will have been elected and qualified. B. 1. Subject to paragraph (h) of Section 42 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors will also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action will be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws and following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock to the public, no action will be taken by the stockholders by written consent. 4. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (a) the Chairman of the Board of Directors, (b) the Chief Executive Officer, (c) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption), or (d) by the holders of the shares entitled to cast not less that ten percent (10%) of the votes at the meeting, and will be held at such place, on such date, and at such time as the Board of Directors will fix. 5. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation will be given in the manner provided in the Bylaws of the corporation. 12. 13 VI. A. A director of the corporation will not be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, or (4) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director will be eliminated or limited to the fullest extent permitted by the Delaware General corporation Law, as so amended. B. Any repeal or modification of this Article VI will be prospective and will not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, will be required to alter, amend or repeal Articles V, VI and VII." 4. This Amended and Restated Certificate of Incorporation has been duly approved by the Board of Directors of this Corporation. 5. This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 241 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the Corporation. There are no shares of capital stock outstanding. 13. 14 IN WITNESS WHEREOF , Wired Ventures, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by the President and the Secretary in San Francisco, California this 23rd day of May, 1996. WIRED VENTURES, INC. By: /s/ Jane Metcalfe ---------------------------- Jane Metcalfe President ATTEST: By: /s/ Jeff Simon ---------------------------- Jeff Simon Secretary 14. EX-3.2 4 BYLAWS 1 EXHIBIT 3.2 BYLAWS OF WIRED VENTURES, INC. (A DELAWARE CORPORATION) 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1. Registered Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 3. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 4. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 5. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 6. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 7. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 8. Adjournment and Notice of Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 9. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 10. Joint Owners of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 11. List of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 12. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 13. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 14. Number and Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 15. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 16. Classes of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 17. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 18. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 19. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 20. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 21. Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 22. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 23. Fees and Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 24. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 25. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 26. Officers Designated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 27. Tenure and Duties of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 28. Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 29. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 30. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION . . . . . . . . . . . . 13 Section 31. Execution of Corporate Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 32. Voting of Securities Owned by the Corporation . . . . . . . . . . . . . . . . . . . . . . . . 14 i.
3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE VI SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 33. Form and Execution of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 34. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 35. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 36. Fixing Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 37. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 38. Execution of Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VIII DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 39. Declaration of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 40. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE IX FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 41. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE X INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 42. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents . 17 ARTICLE XI NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 43. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE XII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 44. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE XIII LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 45. Loans to Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE XIV MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 46. Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ii. 4 Exhibit 3.2 BYLAWS OF WIRED VENTURES, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Dover, County of Kent. SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS SECTION 3. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. SECTION 4. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (2) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (3) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof 1. 5 in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (1) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (2) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (3) the class and number of shares of the corporation which are beneficially owned by the stockholder, (4) any material interest of the stockholder in such business and (5) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 4. Such stockholder's notice shall set forth (1) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to 2. 6 which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (2) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 4. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. (d) For purposes of this Section 4, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. SECTION 5. SPECIAL MEETINGS. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (1) the Chairman of the Board of Directors, (2) the Chief Executive Officer, (3) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (4) by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the Board of Directors, shall fix. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 6 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. 3. 7 SECTION 6. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. SECTION 7. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the vote cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, however, that directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast, including abstentions, by the holders of shares of such class or classes or series shall be the act of such class or classes or series. SECTION 8. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 4. 8 SECTION 9. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 11 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. SECTION 10. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. SECTION 11. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. SECTION 12. ACTION WITHOUT MEETING. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action 5. 9 referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of the State of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. (d) Notwithstanding the foregoing, no such action by written consent may be taken following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation (the "Initial Public Offering"). SECTION 13. ORGANIZATION. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. 6. 10 ARTICLE III DIRECTORS SECTION 14. NUMBER AND TERM OF OFFICE. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. SECTION 15. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. SECTION 16. CLASSES OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders for a term of one year. Each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 17. VACANCIES. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director. SECTION 18. RESIGNATION. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. 7. 11 SECTION 19. REMOVAL. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (a) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock") or (b) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. SECTION 20. MEETINGS. (a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors. (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) NOTICE OF MEETINGS. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, facsimile, telegraph or telex, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, 8. 12 shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 21. QUORUM AND VOTING. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 42 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. SECTION 22. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 23. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. SECTION 24. COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, including without limitation the power or authority to declare a dividend, to authorize the issuance of stock and to adopt a certificate of ownership and 9. 13 merger, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation. (b) OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (c) TERM. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 24 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such 10. 14 special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. SECTION 25. ORGANIZATION. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE IV OFFICERS SECTION 26. OFFICERS DESIGNATED. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. SECTION 27. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the 11. 15 Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 27. (c) DUTIES OF PRESIDENT. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. 12. 16 SECTION 28. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. SECTION 29. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. SECTION 30. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 31. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 13. 17 SECTION 32. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. ARTICLE VI SHARES OF STOCK SECTION 33. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. SECTION 34. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. 14. 18 SECTION 35. TRANSFERS. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. SECTION 36. FIXING RECORD DATES. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) Prior to the Initial Public Offering, in order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders 15. 19 entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 37. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII OTHER SECURITIES OF THE CORPORATION SECTION 38. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 33), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. 16. 20 ARTICLE VIII DIVIDENDS SECTION 39. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 40. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE IX FISCAL YEAR SECTION 41. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. ARTICLE X INDEMNIFICATION SECTION 42. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS AND OFFICERS. The corporation shall indemnify its directors and officers to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and officers; and, provided, further, that the corporation shall not be required to indemnify any director in connection with any proceeding (or part thereof) initiated by such person unless (1) such indemnification is expressly required to be made by law, (2) the proceeding was authorized by the Board of Directors of the corporation, (3) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or (4) such indemnification is required to be made under subsection (d). 17. 21 (b) EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its employees and other agents as set forth in the Delaware General Corporation Law. (c) EXPENSES. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (d) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer. Any right to indemnification or advances granted by this Bylaw to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (1) the claim for indemnification or advances is denied, in whole or in part, or (2) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances 18. 22 because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. (e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. (f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) INSURANCE. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (h) AMENDMENTS. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. (j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following definitions shall apply: (1) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (2) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. 19. 23 (3) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (4) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (5) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. ARTICLE XI NOTICES SECTION 43. NOTICES. (a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (b) NOTICE TO DIRECTORS. Any notice required to be given to any director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. 20. 24 (c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (e) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom and all notices of meetings or of the taking of action by written consent without a meeting to (1) notice of two consecutive annual meetings, such person during the period between such two consecutive annual meetings, or (2) all, and at least two (2), payments (if sent by first class mail) of dividends or interest on securities during a twelve (12) month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been 21. 25 duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. ARTICLE XII AMENDMENTS SECTION 44. AMENDMENTS. Subject to paragraph (h) of Section 42 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. ARTICLE XIII LOANS TO OFFICERS SECTION 45. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. ARTICLE XIV MISCELLANEOUS SECTION 46. ANNUAL REPORT. (a) Subject to the provisions of paragraph (b) of this Bylaw, the Board of Directors shall cause an annual report to be sent to each stockholder of the corporation not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accounts or, if there is no such report, the certificate of an authorized 22. 26 officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than one hundred (100) stockholders of record of the corporation's shares, as determined by Section 605 of the California Corporations Code, additional information as required by Section 1501(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the 1934 Act, that Act shall take precedence. Such report shall be sent to stockholders at least fifteen (15) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than one hundred (100) holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. 23. EX-4.3 5 INVESTOR RIGHTS 1 EXHIBIT 4.3 WIRED VENTURES, INC. INVESTOR RIGHTS AGREEMENT MAY 28, 1996 2 TABLE OF CONTENTS
PAGE 1. GENERAL.............................................................. 1 2. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS........................ 2 2.1 Restrictions On Transfer.................................... 2 2.2 Piggyback Registrations..................................... 3 2.3 Form S-3 Registration....................................... 4 2.4 Expenses Of Registration.................................... 5 2.5 Obligations Of The Company.................................. 6 2.6 Termination Of Registration Rights.......................... 7 2.7 Delay Of Registration; Furnishing Information............... 7 2.8 Indemnification............................................. 7 2.10 Amendment Of Registration Rights............................ 10 2.11 "Market Stand-Off" Agreement................................ 10 3. INFORMATION RIGHTS................................................... 11 3.1 Basic Financial Information And Reporting................... 11 3.2 Inspection Rights........................................... 11 3.3 Confidentiality Of Records.................................. 11 3.4 Termination Of Covenants.................................... 12 4. RIGHT OF FIRST REFUSAL............................................... 12 4.1 Subsequent Offerings........................................ 12 4.2 Exercise Of Rights.......................................... 13 4.3 Issuance Of Equity Securities To Other Persons.............. 13 4.4 Termination Of Rights Of First Refusal...................... 13 4.5 Transfer Of Rights Of First Refusal......................... 13 4.6 Excluded Securities......................................... 13 5. MISCELLANEOUS........................................................ 14 5.1 Governing Law............................................... 14 5.2 Successors And Assigns...................................... 14 5.3 Entire Agreement............................................ 14 5.4 Severability................................................ 14 5.5 Amendment And Waiver........................................ 14 5.6 Notices..................................................... 14 5.7 Expenses.................................................... 15 5.8 Attorneys' Fees............................................. 15 5.9 Titles And Subtitles........................................ 15 5.10 Counterparts................................................ 15
3 INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT (this "Agreement") is entered into as of May 28, 1996 by and among WIRED VENTURES, INC., a Delaware corporation (the "Company"), and each of those persons and entities whose names are set forth on Exhibit A to this Agreement (which persons and entities are hereinafter collectively referred to as "Investors" and each individually as an "Investor"). RECITALS A. The Company proposes to sell and issue up to Thirty Million Five Hundred Thousand (30,500,000) shares of its Series A Preferred Stock and up to Four Million Five Hundred Thousand (4,500,000) shares of its Series B Preferred Stock to Investors and certain other persons and entities. B. As a condition of purchasing such shares, Investors have requested that the Company extend to them registration rights and information rights as set forth below. AGREEMENT The parties hereby agree as follows: 1. GENERAL. 1.1 DEFINITIONS. As used in this Agreement: (a) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (b) "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (c) "Holder" means any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 2.9 hereof. (d) "Initial Offering" means the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. (e) "Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. 1. 4 (f) "Registrable Securities" means (1) Common Stock of the Company issued or issuable upon conversion of the Shares; and (2) any Common Stock of the Company issued (or issuable upon the conversion or exercise of any warrant, right or other security that is issued) as a dividend or other distribution with respect to, or in exchange for or in replacement of, such securities. Notwithstanding the foregoing, Registrable Securities will not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under Section 2 of this Agreement are not assigned. (g) "Registrable Securities then outstanding" means the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (1) are then issued and outstanding or (2) are issuable pursuant to then exercisable or convertible securities. (h) "Registration Expenses" means all expenses incurred by the Company in complying with Section 2.2 or Section 2.3 including, without limitation, all registration and filing fees, printing expenses, blue sky fees and expenses and the expense of any special audits or accountant's consents incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which will be paid by the Company in any event). (i) "Securities Act" means the Securities Act of 1933, as amended. (j) "Selling Expenses" means, with respect to a sale of securities, all underwriting discounts and selling commissions applicable to such sale. (k) "Shares" means the Company's Series A Preferred Stock and Series B Preferred Stock held by the Investors as of the date hereof. (l) "SEC" means the Securities and Exchange Commission. 2. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS. 2.1 RESTRICTIONS ON TRANSFER. (a) Each Holder will not make any disposition of all or any portion of the Shares or Registrable Securities unless and until: (1) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (2) (A) The transferee has agreed in writing to be bound by this Section 2.1, (B) such Holder has notified the Company of the proposed disposition and has furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder has furnished the 2. 5 Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. (3) Notwithstanding the provisions of paragraphs (1) and (2) above, no such registration statement or opinion of counsel will be necessary for a transfer by a Holder that is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, or (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company. (b) Each certificate representing Shares or Registrable Securities will (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. (c) The Company will be obligated to reissue unlegended certificates promptly at the request of any Holder thereof if the Holder has obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities will be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 2.2 PIGGYBACK REGISTRATIONS. (a) The Company will notify all Holders in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or 3. 6 any part of the Registrable Securities held by it will, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder will nevertheless continue to have the right to include any Registrable Securities in any subsequent such registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and subject to the conditions set forth herein. (b) If the registration statement under which the Company gives notice under this Section 2.2 is for an underwritten offering, the Company will so advise the Holders. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.2 will be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting will enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting will be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to the stockholders of the Company (other than Holders) on a pro rata basis. No such reduction will reduce the securities being offered by the Company for its own account to be included in the registration and underwriting. (c) The Company will have the right to terminate or withdraw any registration initiated by it under this Section 2.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 2.3 FORM S-3 REGISTRATION. In case the Company receives from any Holder or Holders of Registrable Securities after the first anniversary of the closing of the Company's Initial Offering a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company will not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.3: 4. 7 (1) if Form S-3 (or any successor or similar form) is not available for such offering by the Holders; (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than One Million Dollars ($1,000,000); (3) if the Company furnishes to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company will have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 2.3; provided, however, that such right to delay a request will be exercised by the Company nor more than twice in any one-year period; (4) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one (1) registration on Form S-3 for the Holders pursuant to this Section 2.3 or has effected a total of two (2) registrations on Form S-3 for the Holders pursuant to this Section 2.3; or (5) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company will file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. 2.4 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration pursuant to Section 2.2 or Section 2.3 will be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder will be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company will not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.3, the request of which has been subsequently withdrawn by the Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Holders were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 2.3, in which event such right will be forfeited by all Holders. If the Holders are required to pay the Registration Expenses, such expenses will be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. 5. 8 2.5 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company will, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days or, if earlier, until the participating Holder or Holders have completed the distribution related thereto. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as will be reasonably requested by the Holders, provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting will also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of the Holders of a majority of the Registrable Securities being registered, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (1) an opinion, dated as of such date, of counsel to the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to the Holders of a majority of the Registrable Securities being registered, addressed to the under- 6. 9 writers, if any, and to the Holders requesting registration of Registrable Securities and (2) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 2.6 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted under this Section 2 will terminate and be of no further force and effect three (3) years after the date of the Company's Initial Offering. In addition, a Holder's registration rights will expire if (a) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act, and (b) all Registrable Securities held by and issued to such Holder may be sold under Rule 144 during any ninety-one (91) day period. 2.7 DELAY OF REGISTRATION; FURNISHING INFORMATION. (a) No Holder will have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2. (b) It will be a condition precedent to the obligations of the Company to take any action pursuant to Sections 2.2 and 2.3 that the selling Holders will furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as will be required to effect the registration of their Registrable Securities. 2.8 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Section 2.2 or Section 2.3: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers, directors, affiliates and legal counsel of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (1) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (2) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (3) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will 7. 10 reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 2.8(a) will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent will not be unreasonably withheld, nor will the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration is being effected, indemnify and hold harmless the Company and each of its directors, officers, affiliates and legal counsel and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 2.8(b) will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent will not be unreasonably withheld; provided further, that in no event will any indemnity under this Section 2.8 exceed the proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party will have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel 8. 11 retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under this Section 2.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8. (d) If the indemnification provided for in this Section 2.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, will to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party will be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event will any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. (e) The obligations of the Company and Holders under this Section 2.8 will survive completion of any offering of Registrable Securities in a registration statement. No indemnifying party, in the defense of any such claim or litigation, will, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. In the event any offering of Registrable Securities is underwritten, and the underwriting agreement provides for indemnification and/or contribution by the Company and the Holders offering securities thereunder, the indemnification and/or contribution obligations of the Company and the Holders hereunder will in no event exceed the obligations of the parties set forth in such underwriting agreement. 2.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned by a Holder to a transferee or assignee of Registrable Securities that (a) is a subsidiary, parent, general partner, limited partner or retired partner of a Holder, or (b) acquires at least fifty thousand (50,000) shares of Registrable Securities (as adjusted for stock splits and combinations); provided, however, that (A) the transferor will, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (B) such transferee will agree to be subject to all restrictions set forth in this Agreement. 9. 12 2.10 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 2.10 will be binding upon each Holder and the Company. By acceptance of any benefits under this Section 2, each Holder hereby agrees to be bound by the provisions of this Agreement. 2.11 "MARKET STAND-OFF" AGREEMENT. If requested by the Company as the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder will not sell or otherwise transfer or dispose of any Shares or Common Stock (or other securities) of the Company held by each such Holder (other than those included in the registration) for a period specified by the representative of the underwriters not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act. The obligations described in this Section 2.11 will not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a SEC Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 2.12 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC that may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 10. 13 3. INFORMATION RIGHTS. 3.1 BASIC FINANCIAL INFORMATION AND REPORTING. (a) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, the Company will furnish each Investor a consolidated balance sheet of the Company, as at the end of such fiscal year, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements will be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors. (b) The Company will furnish each Investor, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within sixty (60) days thereafter, a consolidated balance sheet of the Company as of the end of each such quarterly period, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments need not have been made. 3.2 INSPECTION RIGHTS. Each Investor will have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times; provided, however, that the Company will not be obligated under this Section 3.2 with respect to a competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed. 3.3 CONFIDENTIALITY OF RECORDS. (a) Each Investor will not use Confidential Information (as hereinafter defined) of the Company for its own use or for any purpose except to evaluate and enforce its equity investment in the Company. Each Investor will undertake to treat such Confidential Information in a manner consistent with the treatment of its own information of such proprietary nature and will protect the confidentiality of and use reasonable best efforts to prevent disclosure of the Confidential Information to prevent it from falling into the public domain or the possession of unauthorized persons. Each transferee of any Investor who receives Confidential Information will be bound by such provisions. For purposes of this Section 3.3(a), "Confidential Information" means any information, technical data or know-how, including, but not limited to, the Company's research, products, software, services, development, inventions, processes, designs, drawings, engineering, marketing or finances, disclosed by the Company either directly or indirectly in writing, orally or by drawings or inspection of parts or equipment which written 11. 14 material is stamped "Confidential" or "Proprietary" or if disclosed orally, is promptly confirmed in writing to be Confidential Information. (b) Confidential Information does not include information, technical data or know-how that (1) is in the Investor's possession at the time of disclosure as shown by Investor's files and records immediately prior to the time of disclosure; (2) before or after it has been disclosed to the Investor, it is part of the public knowledge or literature, not as a result of any action or inaction of the Investor; or (3) is disclosed to an Investor on a non-confidential basis by a third party having a legal right to such information, (4) is independently developed by Investor, as properly documented by the Investor, or (5) is approved for release by written authorization of Company. (c) The provisions of this Section will not apply (1) to the extent that an Investor is required to disclose Confidential Information pursuant to any law, statute, rule or regulation or any order of any court or jurisdiction process or pursuant to any direction, request or requirement (whether or not having the force of law but if not having the force of law being of a type with which institutional investors in the relevant jurisdiction are accustomed to comply) of any self-regulating organization or any governmental, fiscal, monetary or other authority; (2) to the disclosure of Confidential Information to an Investor's employees, counsel, accountants or other professional advisors; (3) to the extent that an Investor needs to disclose Confidential Information for the protection of any of such Investor's rights or interest against the Company, whether under this Agreement or otherwise; or (4) to the disclosure of Confidential Information to a prospective transferee of securities which agrees to be bound by the provisions of this Section in connection with the receipt of such Confidential Information. 3.4 TERMINATION OF COVENANTS. All covenants of the Company contained in Section 3 of this Agreement will expire and terminate as to each Holder on the effective date of the registration statement pertaining to the Initial Offering. 4. RIGHT OF FIRST REFUSAL. 4.1 SUBSEQUENT OFFERINGS. Each Investor will have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 4.6 hereof. Each Investor's pro rata share is equal to the ratio of (A) the total number of shares of the Company's Common Stock (1) issued or issuable upon conversion of the Company's outstanding Series B Preferred Stock and (2) acquired pursuant to this Section 4 (including all shares of Common Stock issued or issuable upon conversion or exercise thereof) that such Investor holds immediately prior to the issuance of such Equity Securities to (B) the total number of shares of the Company's outstanding Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Company's outstanding Preferred Stock) immediately prior to the issuance of the Equity Securities and assuming exercise of all outstanding options and warrants to purchase Equity Securities of the Company. The term "Equity Securities" means (a) any Common Stock, Preferred Stock or other security of the Company, (b) any security convertible, with or without consideration, into any Common Stock, Preferred Stock or other security (including any option to purchase such a 12. 15 convertible security), (c) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other security or (d) any such warrant or right. 4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity Securities, it will give each Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each Investor will have fifteen (15) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company will not be required to offer or sell such Equity Securities to any Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. 4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If the Investors fail to exercise in full the rights of first refusal, the Company will have ninety (90) days thereafter to sell the Equity Securities in respect of which the Investors' rights were not exercised, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Investors pursuant to Section 4.2 hereof. If the Company has not sold such Equity Securities within such ninety (90) day period, the Company will not thereafter issue or sell any Equity Securities, without first offering such securities to the Investors in the manner provided above. 4.4 TERMINATION OF RIGHTS OF FIRST REFUSAL. The rights of first refusal established by this Section 4 will terminate upon the effective date of the registration statement pertaining to the Initial Offering. 4.5 TRANSFER OF RIGHTS OF FIRST REFUSAL. The right of first refusal of each Investor under this Section 4 may be transferred to the same parties, subject to the same restrictions as any transfer of registration rights pursuant to Section 2.9. 4.6 EXCLUDED SECURITIES. The rights of first refusal established by this Section 4 will have no application to any of the following Equity Securities: (a) shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors; (b) stock issued pursuant to any rights or agreements outstanding as of the date of this Agreement, options and warrants outstanding as of the date of this Agreement, and stock issued pursuant to any such rights or agreements granted after the date of this Agreement, provided that the rights of first refusal established by this Section 4 applied with respect to the initial sale or grant by the Company of such rights or agreements; 13. 16 (c) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination; (d) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (e) shares of Common Stock issued upon conversion of the Company's outstanding Preferred Stock; (f) any Equity Securities issued pursuant to any bank financing; and (g) any Equity Securities that are issued by the Company pursuant to a registration statement filed under the Securities Act. 5. MISCELLANEOUS. 5.1 GOVERNING LAW. This Agreement will be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and performed entirely within California. 5.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof will inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and will inure to the benefit of and be enforceable by each Holder. 5.3 ENTIRE AGREEMENT. This Agreement and the Exhibit hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party will be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 5.4 SEVERABILITY. In case any provision of the Agreement will be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired thereby. 5.5 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and Holders representing at least a majority of the Registrable Securities (assuming the conversion of all Shares). (b) The obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of Holders representing at least a majority of the Registrable Securities (assuming the conversion of all Shares). 5.6 NOTICES. All notices required or permitted hereunder will be in writing and will be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent 14. 17 by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications will be sent to the Company at the address as set forth on the signature page hereof and to each Investor at the address set forth in the agreement pursuant to which such Investor acquired his, her or its Shares or at such other address as the Company or an Investor may designate by ten (10) days' advance written notice to the other parties hereto. 5.7 EXPENSES. Except as specifically set forth herein, each party will pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. 5.8 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute will be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement including, without limitation, reasonable fees and expenses of attorneys and accountants, which will include, without limitation, all fees, costs and expenses of appeals. 5.9 TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 5.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be an original, but all of which together will constitute one instrument. [THIS SPACE INTENTIONALLY LEFT BLANK] 15. 18 The parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof. COMPANY: WIRED VENTURES, INC. By:______________________________________ Chief Executive Officer Address: 520 Third Street Fourth Floor San Francisco, CA 94107 INVESTORS: [SIGNATURE PAGES FOLLOW] 19 INVESTOR SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT Investor Name: ________________________________ Signature: ________________________________ Name and Title of Signatory (if Investor is not an individual): ________________________________ EX-10.1 6 INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement") is entered as of _____________________, 1996 by and between WIRED VENTURES, INC., a Delaware corporation (the "Corporation"), and 1~ ("Agent"). RECITALS A. Agent performs a valuable service to the Corporation in 2~ capacity as 3~ of the Corporation. B. The stockholders of the Corporation have adopted bylaws (the "Bylaws") providing for the indemnification of the directors, officers, employees and other agents of the Corporation, including persons serving at the request of the Corporation in such capacities with other corporations or enterprises, as authorized by the Delaware General Corporation Law, as amended (the "Code"). C. The Bylaws and the Code, by their non-exclusive nature, permit contracts between the Corporation and its agents, officers, employees and other agents with respect to indemnification of such persons. D. In order to induce Agent to continue to serve as 3~ of the Corporation, the Corporation has determined and agreed to enter into this Agreement with Agent. AGREEMENT The parties hereto agree as follows: 1. SERVICES TO THE CORPORATION. Agent will serve, at the will of the Corporation or under separate contract, if any such contract exists, as 3~ of the Corporation or as a director, officer or other fiduciary of an affiliate of the Corporation (including any employee benefit plan of the Corporation) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws or other applicable charter documents of the Corporation or such affiliate; provided, however, that Agent may at any time and for any reason resign from such position (subject to any contractual obligation that Agent may have assumed apart from this Agreement) and that the Corporation or any affiliate shall have no obligation under this Agreement to continue Agent in any such position. 2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold harmless and indemnify Agent to the fullest extent authorized or permitted by the provisions of the Bylaws and the Code, as the same may be amended from time to time (but, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the Bylaws or the Code permitted prior to adoption of such amendment). 1. 2 3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the exclusions set forth in Section 4 hereof, the Corporation hereby further agrees to hold harmless and indemnify Agent: (a) against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative (including an action by or in the right of the Corporation) to which Agent is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Agent is, was or at any time becomes a director, officer, employee or other agent of Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Agent by the Corporation under the non-exclusivity provisions of the Code and Section 40 of the Bylaws. 4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3 hereof shall be paid by the Corporation: (a) on account of any claim against Agent for an accounting of profits made from the purchase or sale by Agent of securities of the Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) on account of Agent's conduct that was knowingly fraudulent or deliberately dishonest or that constituted willful misconduct; (c) on account of Agent's conduct that constituted a breach of Agent's duty of loyalty to the Corporation or resulted in any personal profit or advantage to which Agent was not legally entitled; (d) for which payment is actually made to Agent under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; (e) if indemnification is not lawful (and, in this respect, both the Corporation and Agent have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); or (f) in connection with any proceeding (or part thereof) initiated by Agent, or any proceeding by Agent against the Corporation or its directors, officers, employees or other 2. 3 agents, unless (1) such indemnification is expressly required to be made by law, (2) the proceeding was authorized by the Board of Directors of the Corporation, (3) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Code, or (4) the proceeding is initiated pursuant to Section 9 hereof. 5. CONTINUATION OF INDEMNITY. All agreements and obligations of the Corporation contained herein shall continue during the period Agent is a director, officer, employee or other agent of the Corporation (or is or was serving at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Agent shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Agent was serving in the capacity referred to herein. 6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Corporation shall indemnify Agent for the portion thereof to which Agent is entitled. 7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Agent of notice of the commencement of any action, suit or proceeding, Agent will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability which it may have to Agent otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Agent notifies the Corporation of the commencement thereof: (a) the Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Agent. After notice from the Corporation to Agent of its election to assume the defense thereof, the Corporation will not be liable to Agent under this Agreement for any legal or other expenses subsequently incurred by Agent in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Agent shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Agent unless (1) the employment of counsel by Agent has been authorized by the Corporation, (2) Agent shall have reasonably concluded that there may be a conflict of interest between the Corporation and Agent in the conduct of the defense of such action or (3) the Corporation shall not in fact have 3. 4 employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Agent's separate counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Agent shall have made the conclusion provided for in clause (2) above; and (c) the Corporation shall not be liable to indemnify Agent under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Agent without Agent's written consent, which may be given or withheld in Agent's sole discretion. 8. EXPENSES. The Corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Agent in connection with such proceeding upon receipt of an undertaking by or on behalf of Agent to repay said amounts if it shall be determined ultimately that Agent is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Code or otherwise. 9. ENFORCEMENT. Any right to indemnification or advances granted by this Agreement to Agent shall be enforceable by or on behalf of Agent in any court of competent jurisdiction if (1) the claim for indemnification or advances is denied, in whole or in part, or (2) no disposition of such claim is made within ninety (90) days of request therefor. Agent, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Corporation) that Agent is not entitled to indemnification because of the limitations set forth in Section 4 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Agent is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or its stockholders) that such indemnification is improper shall be a defense to the action or create a presumption that Agent is not entitled to indemnification under this Agreement or otherwise. 10. SUBROGATION. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Agent, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this Agreement shall not be exclusive of any other right which Agent may have or hereafter acquire under any statute, provision of the Corporation's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. 4. 5 12. SURVIVAL OF RIGHTS. (a) The rights conferred on Agent by this Agreement shall continue after Agent has ceased to be a director, officer, employee or other agent of the Corporation or to serve at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Agent's heirs, executors and administrators. (b) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 13. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Corporation shall nevertheless indemnify Agent to the fullest extent provided by the Bylaws, the Code or any other applicable law. 14. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 15. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 17. HEADINGS. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified or registered mail with postage prepaid: (a) If to Agent, at the address indicated on the signature page hereof. 5. 6 (b) If to the Corporation, to 520 Third Street Fourth Floor San Francisco, CA 94107 Attention: Chief Executive Officer or to such other address as may have been furnished to Agent by the Corporation. 6. 7 The parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof. WIRED VENTURES, INC. By: ------------------------ Name: ------------------------ Title: ------------------------ AGENT ------------------------------ 1~ ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ 7. EX-10.2 7 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.2 WIRED VENTURES, INC. EQUITY INCENTIVE PLAN ADOPTED MARCH 29, 1996, AS AMENDED ON MAY 26, 1996 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (1) Incentive Stock Options, (2) Nonstatutory Stock Options, (3) stock bonuses, (4) rights to purchase restricted stock, and (5) stock appreciation rights, all as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Stock Awards issued under the Plan will, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (1) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (2) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (3) stock appreciation rights granted pursuant to Section 8 hereof. All Options will be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Wired Ventures, Inc., a Delaware corporation. 1. 2 (f) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a right granted pursuant to subsection 8(b)(2) of the Plan. (g) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" will not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant will be considered interrupted in the case of: (1) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (2) transfers between locations of the Company or between the Company, Affiliates or their successors. (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board. (k) "DISINTERESTED PERSON" means a Director: who either (1) was not during the one year prior to service as an administrator of the Plan granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any Affiliate entitling the participants therein to acquire equity securities of the Company or any Affiliate except as permitted by Rule 16b-3(c)(2)(i); or (2) is otherwise considered to be a "disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. (l) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company will be sufficient to constitute "employment" by the Company. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" means the value of the common stock of the Company as determined in good faith by the Board and in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. 2. 3 (p) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a right granted pursuant to subsection 8(b)(3) of the Plan. (q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (r) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "OPTION" means a stock option granted pursuant to the Plan. (t) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement will be subject to the terms and conditions of the Plan. (u) "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option. (v) "OUTSIDE DIRECTOR" means a Director who either (1) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (2) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (w) "PLAN" means this 1996 Equity Incentive Plan. (x) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (y) "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. (z) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right. (aa) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement will be subject to the terms and conditions of the Plan. (ab) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right granted pursuant to subsection 8(b)(1) of the Plan. 3. 4 3. ADMINISTRATION. (a) The Plan will be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan will be granted Stock Awards; when and how each Stock Award will be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person will be permitted to receive stock pursuant to a Stock Award; whether a person will be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award will be granted to each such person. (2) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it will deem necessary or expedient to make the Plan fully effective. (3) To amend the Plan or a Stock Award as provided in Section 14. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee will be Disinterested Persons and may also be, in the discretion of the Board, Outside Directors. If administration is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board will thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Additionally, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, and notwithstanding anything to the contrary contained herein, the Board may delegate administration of the Plan to any person or persons and the term "Committee" will apply to any person or persons to whom such authority has been delegated. Notwithstanding anything in this Section 3 to the contrary, at any time the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (A) not then Covered Employees and are 4. 5 not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (B) not persons with respect to whom the Company wishes to avoid the application of Section 162(m) of the Code. (d) Any requirement that an administrator of the Plan be a Disinterested Person will not apply (1) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (2) if the Board or the Committee expressly declares that such requirement will not apply. Any Disinterested Person will otherwise comply with the requirements of Rule 16b-3. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards will not exceed in the aggregate eight million five hundred thousand (8,500,000) shares of the Company's common stock. If any Stock Award for any reason expires or otherwise terminates, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award will revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan will not be available for subsequent issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. (b) A Director will in no event be eligible for the benefits of the Plan unless at the time discretion is exercised in the selection of the Director as a person to whom Stock Awards may be granted, or in the determination of the number of shares which may be covered by Stock Awards granted to the Director: (1) the Board has delegated its discretionary authority over the Plan to a Committee which consists solely of Disinterested Persons; or (2) the Plan otherwise complies with the requirements of Rule 16b-3. The Board will otherwise comply with the requirements of Rule 16b-3. This subsection 5(b) will not apply (1) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (2) if the Board or Committee expressly declares that it will not apply. (c) No person will be eligible for the grant of an Option or an award to purchase restricted stock if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise 5. 6 price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant, or in the case of a restricted stock purchase award, the purchase price is at least one hundred percent (100%) of the Fair Market Value of such stock at the date of grant. (d) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, no person will be eligible to be granted Options and Stock Appreciation Rights covering more than One Hundred Thousand (100,000) shares of the Company's common stock in any calendar year. 6. OPTION PROVISIONS. Each Option will be in such form and will contain such terms and conditions as the Board will deem appropriate. The provisions of separate Options need not be identical, but each Option will include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option will be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option will be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option will be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option will be paid, to the extent permitted by applicable statutes and regulations, either (1) in cash at the time the Option is exercised, or (2) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest will be payable at least annually and will be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Incentive Stock Option will not be transferable except by will or by the laws of descent and distribution, and will be exercisable during the lifetime of the 6. 7 person to whom the Incentive Stock Option is granted only by such person. A Nonstatutory Stock Option will not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and any administrative interpretations or pronouncements thereunder (a "QDRO"), and will be exercisable during the lifetime of the person to whom the Option is granted only by such person or any transferee pursuant to a QDRO. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, will thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary but in each case will provide for vesting of at least twenty percent (20%) per year of the total number of shares subject to the Option. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (1) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period, which in no event will be less than thirty (30) days, specified in the Option Agreement), or (2) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option will terminate, and the shares covered by such Option will revert to and again become available for issuance under the Plan. An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option will terminate on the earlier of (1) the expiration of the term of the Option set forth in the Option Agreement, or (2) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option will terminate on the earlier of (1) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (2) the expiration of a period of three (3) 7. 8 months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements. (g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (1) the date twelve (12) months following such termination (or such longer or shorter period, which in no event will be less than six (6) months, specified in the Option Agreement), or (2) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option will revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option will terminate, and the shares covered by such Option will revert to and again become available for issuance under the Plan. (h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period, which in no event will be less than six (6) months, specified in the Option Agreement), or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option will revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option will terminate, and the shares covered by such Option will revert to and again become available for issuance under the Plan. (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased will be subject to a repurchase right in favor of the Company, with the repurchase price to be equal to the original purchase price of the stock, or to any other restriction the Board determines to be appropriate; provided, however, that (1) the right to repurchase at the original purchase price will lapse at a minimum rate of twenty percent (20%) per year over five (5) years from the date the Option was granted, and (2) such right will be exercisable only within (A) the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the Optionee (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding "qualified small business stock")), and (3) such right will be exercisable only for cash or cancellation of purchase money indebtedness for the shares. Should the right of repurchase be assigned by the Company, the 8. 9 assignee will pay the Company cash equal to the difference between the original purchase price and the stock's Fair Market Value if the original purchase price is less than the stock's Fair Market Value. (j) RIGHT OF REPURCHASE. The Option may, but need not, include a provision whereby the Company may elect, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, to repurchase all or any part of the vested shares exercised pursuant to the Option; provided, however, that (1) such repurchase right will be exercisable only within (A) the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the Optionee (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding "qualified small business stock")), and (2) such right will be exercisable only for cash or cancellation of purchase money indebtedness for the shares at a repurchase price equal to the greater of (A) the stock's Fair Market Value at the time of such termination, or (B) the original purchase price paid for such shares by the Optionee. (k) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a provision whereby the Company may elect, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, to exercise a right of first refusal following receipt of notice from the Optionee of the intent to transfer all or any part of the shares exercised pursuant to the Option. (l) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee will have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (1) will be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (2) will have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (3) will have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option that is granted to a 10% stockholder (as described in subsection 5(c)), will have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option and will have a term which is no longer than five (5) years. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option will be subject to the one hundred thousand dollar ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 12(e) of the Plan and in Section 422(d) of the Code. There will be no Re-Load Options on a Re-Load Option. Any such Re-Load Option will be subject to the availability of sufficient shares under subsection 4(a) and will be subject to such other terms and conditions as 9. 10 the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement will be in such form and will contain such terms and conditions as the Board or the Committee will deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement will include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (a) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement will be such amount as the Board or Committee will determine and designate in such agreement, but in no event will the purchase price be less than eighty-five percent (85%) of the stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (b) TRANSFERABILITY. No rights under a stock bonus or restricted stock purchase agreement will be transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and any administrative interpretations or pronouncements thereunder, so long as stock awarded under such agreement remains subject to the terms of the agreement. (c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock purchase agreement will be paid either: (1) in cash at the time of purchase; (2) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (3) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee; provided, however, that (1) the right to repurchase at the original purchase price will lapse at a minimum rate of twenty percent (20%) per year over five (5) years from the date the Stock Award was granted, and (2) such right will be exercisable only (A) within the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the holder of the Stock Award (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding "qualified small business stock")), and (3) such right will be exercisable only for cash or cancellation of purchase 10. 11 money indebtedness for the shares. Should the right of repurchase be assigned by the Company, the assignee will pay the Company cash equal to the difference between the original purchase price and the stock's Fair Market Value if the original purchase price is less than the stock's Fair Market Value. (e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire, subject to the limitations described in subsection 7(d), any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. STOCK APPRECIATION RIGHTS. (a) The Board or Committee will have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. If a Stock Appreciation Right is granted to an individual who is at the time subject to Section 16(b) of the Exchange Act (a "Section 16(b) Insider"), the Stock Award Agreement of grant will incorporate all the terms and conditions at the time necessary to assure that the subsequent exercise of such right will qualify for the safe-harbor exemption from short-swing profit liability provided by Rule 16b-3 promulgated under the Exchange Act (or any successor rule or regulation). Except as provided in subsection 5(d), no limitation will exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Rights. (b) Three types of Stock Appreciation Rights will be authorized for issuance under the Plan: (1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and will, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right will be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares. (2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and will, except as specifically set forth in this Section 8, be 11. 12 subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right will be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right will be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as will be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. (3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will be granted independently of any Option and will, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They will be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right will be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. 9. CANCELLATION AND RE-GRANT OF OPTIONS. (a) The Board or the Committee will have the authority to effect, at any time and from time to time, (1) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (2) with the consent of the affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option) or, in the case of a 10% stockholder (as described in subsection 5(c)), not less than one hundred ten percent (110%) of the Fair Market Value) per share of stock on the new grant date. Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Right is granted as part of a transaction to which section 424(a) of the Code applies. (b) Shares subject to an Option or Stock Appreciation Right canceled under this Section 9 will continue to be counted against the maximum award of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(d) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 9, resulting in a 12. 13 reduction of the exercise price, will be deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Right; in the event of such repricing, both the original and the substituted Options and Stock Appreciation Rights will be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(d) of the Plan. The provisions of this subsection 9(b) will be applicable only to the extent required by Section 162(m) of the Code. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company will keep available at all times the number of shares of stock required to satisfy such Stock Awards. (b) The Company will seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking will not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company will be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards will constitute general funds of the Company. 12. MISCELLANEOUS. (a) Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) will be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (b) Throughout the term of any Stock Award, the Company will deliver to the holder of such Stock Award, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the term of such Stock Award, a balance sheet and an income statement. This section will not apply when issuance is limited to key employees whose duties in connection with the Company assure them access to equivalent information. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto will confer upon any Employee, Director, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as 13. 14 a Director or Consultant) or will affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without cause the right of the Company's Board of Directors and/or the Company's shareholders to remove any Director pursuant to the terms of the Company's By-Laws and the provisions of the Delaware General Corporation Law or the right to terminate the relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate. (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) will be treated as Nonstatutory Stock Options. (e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, will be inoperative if (1) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 14. 15 13. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection 5(d), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments will be made by the Board or the Committee, the determination of which will be final, binding and conclusive. (The conversion of any convertible securities of the Company will not be treated as a "transaction not involving the receipt of consideration by the Company".) (b) In the event of: (1) a merger or consolidation in which the Company is not the surviving corporation or (2) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (3) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent not prohibited by applicable law: (i) any surviving or acquiring corporation shall assume any Options outstanding under the Plan or shall substitute similar Options (including an option to acquire the same consideration paid to the stockholders in the transaction described in this subsection 13(b)) for those outstanding under the Plan, or (ii) such Options shall continue in full force and effect. In the event any surviving or acquiring corporation refuses to assume such Options, or to substitute similar options for those outstanding under the Plan, then such Options shall be terminated if not exercised prior to such event. In the event of a dissolution or liquidation of the Company, any Options outstanding under the Plan shall terminate if not exercised prior to such event. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in stock, no amendment will be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (1) Increase the number of shares reserved for Stock Awards under the Plan; 15. 16 (2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (3) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan will not be impaired by any amendment of the Plan unless (1) the Company requests the consent of the person to whom the Stock Award was granted and (2) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award will not be impaired by any such amendment unless (1) the Company requests the consent of the person to whom the Stock Award was granted and (2) such person consents in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan will terminate on March 28, 2006, which will be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect will not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted. 16. 17 16. EFFECTIVE DATE OF PLAN. The Plan will become effective as determined by the Board, but no Stock Awards granted under the Plan will be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval will be within twelve (12) months before or after the date the Plan is adopted by the Board, and, if required, an appropriate permit has been issued by the Commissioner of Corporations of the State of California. 17. 18 IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. INCENTIVE STOCK OPTION _________________________, Optionee: WIRED VENTURES, INC. (the "Company"), pursuant to its 1996 Equity Incentive Plan (the "Plan"), has granted to you, the optionee named above, an option to purchase shares of the common stock of the Company ("Common Stock"). This option is intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees (including officers) directors and consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). Defined terms not explicitly defined in this agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of shares of Common Stock subject to this option is _________________ (_______). 2. VESTING. Subject to the limitations contained herein, of the shares will vest (become exercisable) on ____________, 19__ and __________ of the shares will then vest each ____________ thereafter until either (1) you cease to provide services to the Company for any reason, or (2) this option becomes fully vested. 3. EXERCISE PRICE AND METHOD OF PAYMENT. (a) EXERCISE PRICE. The exercise price of this option is _______________________ ($____) per share, being not less than the fair market value of the Common Stock on the date of grant of this option. 1. 19 (b) METHOD OF PAYMENT. Payment of the exercise price per share is due in full upon exercise of all or any part of each installment which has accrued to you. You may elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (1) Payment of the exercise price per share in cash (including check) at the time of exercise; (2) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; (3) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise; (4) Provided that the option exercise price for the installment, or portion thereof, being purchased exceeds one thousand dollars ($1,000), payment pursuant to the deferred payment alternative as described in paragraph 3(c) hereof; or (5) Payment by a combination of the methods of payment permitted by subparagraph 3(b)(1) through 3(b)(4) above. (c) CONDITIONS OF DEFERRED PAYMENT. In the event that you elect to make payment of the exercise price pursuant to the deferred payment alternative: (1) Not less than _______________ percent (___%) of the aggregate exercise price shall be due at the time of exercise, not less than _______________ percent (____%) of said exercise price, plus accrued interest, shall be due each year after the date of exercise, and final payment of the remainder of the exercise price, plus accrued interest, shall be due _________________ (_____) years from date of exercise or, at the Company's election, upon termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company; (2) Interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any portion of any amounts other than amounts stated to be interest under the deferred payment arrangement; and (3) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, 2. 20 if the Company so requests, you must tender to the Company a promissory note and a security agreement covering the purchased shares, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request. 4. EXERCISE PRIOR TO VESTING PERMITTED. (a) Subject to the provisions of this option you may elect at any time during your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company, to exercise the option as to any part or all of the shares subject to this option at any time during the term hereof, including without limitation, a time prior to the date of earliest exercise ("vesting") stated in paragraph 2 hereof; provided, however, that: (1) a partial exercise of this option shall be deemed to cover first vested shares and then the earliest vesting installment of unvested shares; (2) any shares so purchased from installments which have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Early Exercise Stock Purchase Agreement attached hereto; (3) you shall enter into an Early Exercise Stock Purchase Agreement in the form attached hereto with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and (4) this option shall not be exercisable under this paragraph 4 to the extent such exercise would cause the aggregate fair market value of any shares subject to incentive stock options granted you by the Company or any Affiliate of the Company (valued as of their grant date) which would become exercisable for the first time during any calendar year to exceed $100,000. (b) EXPIRATION OF EARLY EXERCISE ELECTION. The election provided in this paragraph 4 to purchase shares upon the exercise of this option prior to the vesting dates shall cease upon termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company and may not be exercised after the date thereof. 5. WHOLE SHARES. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. 6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Act. 3. 21 7. TERM. The term of this option commences on __________, 19__, the date of grant, and expires on ______________, 20__ (the "Expiration Date," which date shall be no more than ten (10) years from date this option is granted), unless the option expires sooner as set forth below or in the Plan. In no event may this option be exercised on or after the Expiration Date. This option shall terminate prior to the Expiration Date three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company unless one of the following circumstances exists: (a) Your termination of Continuous Status as an Employee, Director or Consultant is due to your disability. This option will then terminate on the earlier of the termination date set forth above or twelve (12) months following such termination of Continuous Status as an Employee, Director or Consultant. You should be aware that if your disability is not considered a permanent and total disability within the meaning of Section 422(c)(6) of the Code, and you exercise this option more than three (3) months following the date of your termination of employment, your exercise will be treated for tax purposes as the exercise of a "nonstatutory stock option" instead of an "incentive stock option." (b) Your termination of Continuous Status as an Employee, Director or Consultant is due to your death or your death occurs within three (3) months following your termination of Continuous Status as an Employee, Director or Consultant for any other reason. This option will then expire on the earlier of the Expiration Date set forth above or eighteen (18) months after your death. (c) If during any part of such three (3) month period you may not exercise your option solely because of the condition set forth in paragraph 6 above, then your option will not expire until the earlier of the Expiration Date set forth above or until this option shall have been exercisable for an aggregate period of three (3) months after your termination of Continuous Status as an Employee, Director or Consultant. (d) If your exercise of the option within three (3) months after termination of your Continuous Status as an Employee, Director or Consultant with the Company or with an Affiliate of the Company would result in liability under section 16(b) of the Securities Exchange Act of 1934, then your option will expire on the earlier of (1) the Expiration Date set forth above, (2) the tenth (10th) day after the last date upon which exercise would result in such liability or (3) six (6) months and ten (10) days after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company. However, this option may be exercised following termination of Continuous Status as an Employee, Director or Consultant only as to that number of shares as to which it was exercisable on the date of termination of Continuous Status as an Employee, Director or Consultant under the provisions of paragraph 2 of this option. In order to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of the option and ending on the day three (3) months before the date of the option's exercise, you must be an employee of the Company or an Affiliate of 4. 22 the Company, except in the event of your death or permanent and total disability. The Company has provided for continued vesting or extended exercisability of your option under certain circumstances for your benefit, but cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you provide services to the Company or an Affiliate of the Company as a consultant or exercise your option more than three (3) months after the date your employment with the Company and all Affiliates of the Company terminates. 8. EXERCISE. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to the Plan. (b) By exercising this option you agree that: (1) as a precondition to the completion of any exercise of this option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (A) the exercise of this option; (B) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (C) the disposition of shares acquired upon such exercise; (2) you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of this option that occurs within two (2) years after the date of this option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of this option; and (3) the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that you not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date (the "Effective Date") of the registration statement of the Company filed under the Act as may be requested by the Company or the representative of the underwriters. You further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 9. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. 10. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company or any Affiliate of the Company, or their respective stockholders, Board of Directors, officers 5. 23 or employees to continue any relationship which you might have as a Director or Consultant for the Company or Affiliate of the Company. 11. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 12. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including, without limitation, the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the ____ day of __________________, 19__. Very truly yours, WIRED VENTURES, INC. By ------------------------------- Duly authorized on behalf of the Board of Directors ATTACHMENTS: 1996 Equity Incentive Plan Regulation 260.141.11 Notice of Exercise 6. 24 The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (1) the options previously granted and delivered to the undersigned under stock option plans of the Company, and (2) the following agreements only: NONE ---------- (Initial) OTHER ----------------------------- ----------------------------- ----------------------------- (C) Acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Code of Regulations. ----------------------------- OPTIONEE Address: -------------------- -------------------- -------------------- 7. 25 IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. NONSTATUTORY STOCK OPTION _________________________, Optionee: WIRED VENTURES, INC. (the "Company"), pursuant to its 1996 Equity Incentive Plan (the "Plan"), has granted to you, the optionee named above, an option to purchase shares of the common stock of the Company ("Common Stock"). This option is not intended to qualify as and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's employees (including officers) directors or consultants and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). Defined terms not explicitly defined in this agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of shares of Common Stock subject to this option is ____________________ (__________). 2. VESTING. Subject to the limitations contained herein, ___________ of the shares will vest (become exercisable) on ____________, 19__ and __________ of the shares will then vest each ____________ thereafter until either (1) you cease to provide services to the Company for any reason, or (2) this option becomes fully vested. 1. 26 3. EXERCISE PRICE AND METHOD OF PAYMENT. (a) EXERCISE PRICE. The exercise price of this option is ___________________________ ($___________) per share, being not less than eighty-five percent (85%) of the fair market value of the Common Stock on the date of grant of this option. (b) METHOD OF PAYMENT. Payment of the exercise price per share is due in full upon exercise of all or any part of each installment which has accrued to you. You may elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (1) Payment of the exercise price per share in cash (including check) at the time of exercise; (2) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; (3) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise; (4) Provided that the option exercise price for the installment, or portion thereof, being purchased exceeds one thousand dollars ($1,000), payment pursuant to the deferred payment alternative as described in paragraph 3(c) hereof; or (5) Payment by a combination of the methods of payment permitted by subparagraph 3(b)(1) through 3(b)(4) above. (c) CONDITIONS OF DEFERRED PAYMENT. In the event that you elect to make payment of the exercise price pursuant to the deferred payment alternative: (1) Not less than _______________ percent (___%) of the aggregate exercise price shall be due at the time of exercise, not less than _______________ percent (____%) of said exercise price, plus accrued interest, shall be due each year after the date of exercise, and final payment of the remainder of the exercise price, plus accrued interest, shall be due _________________ (_____) years from date of exercise or, at the Company's election, upon termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company; (2) Interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable 2. 27 provisions of the Code, of any portion of any amounts other than amounts stated to be interest under the deferred payment arrangement; and (3) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a security agreement covering the purchased shares, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request. 4. EXERCISE PRIOR TO VESTING PERMITTED. (a) CONDITIONS OF EARLY EXERCISE. Subject to the provisions of this option you may elect at any time during your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company, to exercise the option as to any part or all of the shares subject to this option at any time during the term hereof, including without limitation, a time prior to the date of earliest exercise ("vesting") stated in paragraph 2 hereof; provided, however, that: (1) a partial exercise of this option shall be deemed to cover first vested shares and then the earliest vesting installment of unvested shares; (2) any shares so purchased from installments which have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Early Exercise Stock Purchase Agreement attached hereto; and (3) you shall enter into an Early Exercise Stock Purchase Agreement in the form attached hereto with a vesting schedule that will result in the same vesting as if no early exercise had occurred. (b) EXPIRATION OF EARLY EXERCISE ELECTION. The election provided in this paragraph 4 to purchase shares upon the exercise of this option prior to the vesting dates shall cease upon termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company and may not be exercised after the date thereof. 5. WHOLE SHARES. This option may not be exercised for any number of shares which would require the issuance of anything other than whole shares. 6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Act or, if such Shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Act. 3. 28 7. TERM. The term of this option commences on __________, 19__, the date of grant, and expires on ________________, 20__ (the "Expiration Date," which date shall be no more than ten (10) years from the date this option is granted), unless this option expires sooner as set forth below or in the Plan. In no event may this option be exercised on or after the Expiration Date. This option shall terminate prior to the Expiration Date three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company for any reason or for no reason unless: (a) such termination of Continuous Status as an Employee, Director or Consultant is due to your disability, in which event the option shall expire on the earlier of the Expiration Date set forth above or twelve (12) months following such termination of Continuous Status as an Employee, Director or Consultant; or (b) such termination of Continuous Status as an Employee, Director or Consultant is due to your death or your death occurs within three (3) months following your termination for any other reason, in which event the option shall expire on the earlier of the Expiration Date set forth above or eighteen (18) months after your death; or (c) during any part of such three (3) month period the option is not exercisable solely because of the condition set forth in paragraph 6 above, in which event the option shall not expire until the earlier of the Expiration Date set forth above or until it shall have been exercisable for an aggregate period of three (3) months after the termination of Continuous Status as an Employee, Director or Consultant; or (d) exercise of the option within three (3) months after termination of your Continuous Status as an Employee, Director or Consultant with the Company or with an Affiliate of the Company would result in liability under section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act), in which case the option will expire on the earlier of (1) the Expiration Date set forth above, (2) the tenth (10th) day after the last date upon which exercise would result in such liability or (3) six (6) months and ten (10) days after the termination of your Continuous Status as an Employee, Director or Consultant with the Company or an Affiliate of the Company. However, this option may be exercised following termination of Continuous Status as an Employee, Director or Consultant only as to that number of shares as to which it was exercisable on the date of termination of Continuous Status as an Employee, Director or Consultant under the provisions of paragraph 2 of this option. 8. EXERCISE. (a) This option may be exercised, to the extent specified above, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during 4. 29 regular business hours, together with such additional documents as the Company may then require pursuant to the Plan. (b) By exercising this option you agree that: (1) as a precondition to the completion of any exercise of this option, the Company may require you to enter an arrangement providing for the cash payment by you to the Company of any tax withholding obligation of the Company arising by reason of: (A) the exercise of this option; (B) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (C) the disposition of shares acquired upon such exercise. You also agree that any exercise of this option has not been completed and that the Company is under no obligation to issue any Common Stock to you until such an arrangement is established or the Company's tax withholding obligations are satisfied, as determined by the Company; and (2) the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that you not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date (the "Effective Date") of the registration statement of the Company filed under the Act as may be requested by the Company or the representative of the underwriters. You further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 9. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 of the Exchange Act (a "QDRO"), and is exercisable during your life only by you or a transferee pursuant to a QDRO. 10. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company or any Affiliate of the Company, or their respective stockholders, Board of Directors, officers, or employees to continue any relationship which you might have as a Director or Consultant for the Company or Affiliate of the Company. 11. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at 5. 30 the address specified below or at such other address as you hereafter designate by written notice to the Company. 12. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including, without limitation, the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the ____ day of __________________, 19__. Very truly yours, WIRED VENTURES, INC. By ----------------------------------- Duly authorized on behalf of the Board of Directors ATTACHMENTS: 1996 Equity Incentive Plan Regulation 260.141.11 Notice of Exercise 6. 31 The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; and (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (1) the options previously granted and delivered to the undersigned under stock option plans of the Company, and (2) the following agreements only: NONE ---------- (Initial) OTHER ---------------------- ---------------------- ---------------------- (c) Acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Code of Regulations. ----------------------------- OPTIONEE Address: -------------------- -------------------- 7. 32 STOCK BONUS AGREEMENT THIS STOCK BONUS AGREEMENT (this "Agreement") is made by and between WIRED VENTURES, INC., a Delaware corporation (the "Company"), and ____________ ("Grantee"). RECITALS The Company wishes to grant to Grantee, and Grantee wishes to receive, pursuant to the Company's 1996 Equity Incentive Plan (the "Plan"), a Stock Award (as such term is defined in the Plan). AGREEMENT The parties agree as follows: 1. The Company hereby agrees to issue to Grantee an aggregate of _____ ________ shares of the common stock (the "Stock") of the Company as a stock bonus in consideration of Grantee's services to the Company. The issuance hereunder will occur at the offices of the Company on the date of this Agreement or at such other time and place as the Company may determine. 2. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement will have endorsed thereon legends in substantially the following form: (a) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or a determination of the corporation or its counsel that such registration is not required." (b) Any legend required to be placed thereon by the California Commissioner of Corporations. 3. Grantee acknowledges that he or she is aware that the Stock to be issued to him or her by the Company pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Company is relying on the following representations: Grantee warrants and represents to the Company that he or she is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of the Stock or with any present intention of distributing or selling the Stock and he or she does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him or her to sell the Stock. Grantee recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an 1. 33 exemption from such registration is available and, further, recognizes that the Company is under no obligation to register the Stock or to comply with any exemption from such registration. 4. Grantee agrees that the Company (or a representative of the Company's underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that Grantee not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date (the "Effective Date") of the registration statement of the Company filed under the Act as may be requested by the Company or the representative of the underwriters. For purposes of this restriction Grantee will be deemed to own securities that (a) are owned directly or indirectly by Grantee, including securities held for Grantee's benefit by nominees, custodians, brokers or pledgees; (b) may be acquired by Grantee within one hundred eighty (180) days of the Effective Date; (c) are owned directly or indirectly, by or for Grantee's brothers or sisters (whether by whole or half blood) spouse, ancestors and lineal descendants; or (d) are owned, directly or indirectly, by or for a corporation, partnership, estate or trust of which Grantee is a shareholder, partner or beneficiary, but only to the extent of Grantee's proportionate interest therein as a shareholder, partner or beneficiary thereof. Grantee further agrees that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 5. Grantee is aware that the Stock may not be sold pursuant to Rule 144 or Rule 701 adopted under the Act unless certain conditions are met. Among the conditions for use of Rule 144 and Rule 701 is the availability of specified current public information about the Company. Grantee recognizes that the Company presently has no plans to make such information available to the public. Grantee further agrees not to make any disposition of any of the Stock in any event unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (1) Grantee has notified the Company of the proposed disposition and has furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (2) the Company or its counsel has determined that such disposition will not require registration of the Stock under the Act. 6. The Company will not be required (a) to transfer on its books any shares of Stock of the Company that have been sold or transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 7. Grantee (but not any unapproved transferee) will, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Stock. 2. 34 8. Grantee acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Administrative Code, attached hereto as Exhibit A. 9. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 10. Any notice required or permitted hereunder will be given in writing and will be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto as his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 11. This Agreement will bind and inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Grantee and his or her heirs, executors, administrators, successors, and assigns. The parties have executed this Agreement as of the _______ day of ____ ___________, ____. WIRED VENTURES, INC. By: -------------------------- Address: 520 Third Street Fourth Floor San Francisco, CA 94107 ----------------------------- Grantee Address: ----------------------------- ----------------------------- ATTACHMENTS: Exhibit A Cal. Admin. Code, Title 10, Section 260.141.11 3. 35 EXHIBIT A CAL. ADMIN. CODE, TITLE 10, SECTION 260.141.11 (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; 36 (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchase a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." 2. 37 EARLY EXERCISE STOCK PURCHASE AGREEMENT THIS EARLY EXERCISE STOCK PURCHASE AGREEMENT (this "Agreement") is made by and between WIRED VENTURES, INC., a Delaware corporation (the "Company"), and ____________________________ ("Purchaser"). RECITALS A. Purchaser holds, and desires to exercise, a/an __________ stock option to purchase shares of common stock of the Company pursuant to the Company's 1996 Equity Incentive Plan (the "Plan"). B. Purchaser wishes to take advantage of the early exercise provision of his or her option and therefore to enter into this Agreement. AGREEMENT The parties agree as follows: 1. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Purchaser, an aggregate of _______ shares of the common stock (the "Stock") of the Company, for an exercise price of $_______ per share (total exercise price: ______________ ($______)), payable in cash. The closing hereunder will occur at the offices of the Company on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. At the closing, Purchaser will deliver three (3) stock assignments in the form of Exhibit B duly endorsed by Purchaser (with date and number of shares left blank), joint escrow instructions (the "Joint Escrow Instructions") in the form of Exhibit C, duly executed by Purchaser, and the total exercise price in cash. At the closing or as soon thereafter as practicable, the Company will deliver to the Escrow Agent (as defined in paragraph 8 below) share certificates for all of the Stock that is to be subject to the Purchase Option (as defined in paragraph 2 below), and will deliver share certificates to Purchaser for all of the Stock, if any, that is not to be subject to the Purchase Option. 2. In accordance with the provisions of section 408(b) of the California General Corporation Law, the Stock to be purchased by Purchaser pursuant to this Agreement will be subject to the following option ("Purchase Option"): (a) In the event that Purchaser will cease to be an employee of the Company for any reason (including his death), or no reason, with or without cause, the Purchase Option 1. 38 may be exercised. The Company will have the right at any time within the ninety (90) day period after Purchaser's termination of service with the Company and its affiliates or such longer period as may be agreed to by the Company and Purchaser (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Internal Revenue Code) to purchase from Purchaser or his personal representative, as the case may be, at the price per share paid by Purchaser pursuant to this Agreement ("Option Price"), the number of shares of the Stock shown on Exhibit A hereto, which is incorporated herein by this reference; provided, however, that, with the consent of Purchaser or his personal representative, as the case may be, the Company may purchase less than the applicable number of shares set forth on Exhibit A hereto. (b) In addition, and without limiting the foregoing Purchase Option, if at any time during the term of the Purchase Option, there occurs: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation involving the Company in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of other securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then: (a) if there will be no successor to the Company, the Company will have the right to exercise its Purchase Option as to all or any portion of the Stock then subject to the Purchase Option set forth above to the same extent as if Purchaser's employment by the Company had ceased on the date preceding the date of consummation of said event or transaction, or (b) the Purchase Option may be assigned to any successor of the Company, and the Purchase Option will apply if Purchaser will cease for any reason to be an employee of such successor on the same basis as set forth above. In that case, references herein to the "Company" will be deemed to refer to such successor. (c) The Company will be entitled to pay for any shares purchased pursuant to its Purchase Option at the Company's option in cash, by offset against any indebtedness owing to the Company and given in payment for the Stock by Purchaser, or a combination of both. (d) As used herein, employment with the Company will include employment with an affiliate of the Company and acting as a consultant to or director of the Company or any of its affiliates. (e) This Agreement is not an employment contract and nothing in this Agreement will be deemed to create in any way whatsoever any obligation on the part of the Purchaser to continue in the employ of the Company, or of the Company to continue Purchaser in the employ of the Company. (f) In the event that the Stock's Fair Market Value (as defined in the Plan) is equal to or exceeds the Option Price on the date that the Purchaser ceases to be employed, the Company will exercise its purchase option to the extent permitted by law. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 15. Upon providing such notice and payment or 2. 39 tender of the purchase price, the Company will become the legal and beneficial owner of the Stock being purchased and all rights and interests therein or related thereto. 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Stock will be immediately subject to the Purchase Option and be included in the word "Stock" for all purposes of the Purchase Option with the same force and effect as the shares of Stock then subject to the Purchase Option. While the total Option Price will remain the same after each such event, the Option Price per share of Stock upon exercise of the Purchase Option will be appropriately adjusted. 5. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement will have endorsed thereon legends in substantially the following form: (a) "The shares represented by this certificate are subject to an option set forth in an agreement between the corporation and the registered holder, or his predecessor in interest, a copy of which is on file at the principal office of the corporation. Any transfer or attempted transfer of any shares subject to such option is void without the prior express written consent of the issuer of these shares." (b) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or a determination of the corporation or its counsel that such registration is not required." (c) Any legend required to be placed thereon by the California Commissioner of Corporations. 6. Purchaser acknowledges that he or she is aware that the Stock to be issued to him or her by the Company pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Company is relying on the following representations: Purchaser warrants and represents to the Company that he or she is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of the Stock or with any present intention of distributing or selling the Stock and he or she does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him or her to sell the Stock. Purchaser recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available and, further, recognizes that the Company is under no obligation to register the Stock or to comply with any exemption from such registration. 7. Purchaser agrees that the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the 3. 40 Company under the Act, require that Purchaser not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date (the "Effective Date") of the registration statement of the Company filed under the Act as may be requested by the Company or the representative of the underwriters. For purposes of this restriction Purchaser will be deemed to own securities that (a) are owned directly or indirectly by Purchaser, including securities held for Purchaser's benefit by nominees, custodians, brokers or pledgees; (b) may be acquired by Purchaser within one hundred eighty (180) days of the Effective Date; (c) are owned directly or indirectly, by or for Purchaser's brothers or sisters (whether by whole or half blood) spouse, ancestors and lineal descendants; or (d) are owned, directly or indirectly, by or for a corporation, partnership, estate or trust of which Purchaser is a shareholder, partner or beneficiary, but only to the extent of Purchaser's proportionate interest therein as a shareholder, partner or beneficiary thereof. Purchaser further agrees that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 8. Purchaser is aware that the Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met and until Purchaser has held the Stock for at least two (2) years. Among the conditions for use of Rule 144 is the availability of specified current public information about the Company. Purchaser recognizes that the Company presently has no plans to make such information available to the public. Whether or not the Purchase Option is exercised or has lapsed, Purchaser further agrees not to make any disposition of any of the Stock in any event unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (1) Purchaser has notified the Company of the proposed disposition and has furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (2) the Company or its counsel has determined that such disposition will not require registration of the Stock under the Act. 9. As security for his or her faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Stock upon exercise of the Purchase Option herein provided for, Purchaser will deliver (or have the Company deliver on the Purchaser's behalf) to and deposit with the Secretary of the Company, as escrow agent in this transaction (the "Escrow Agent"), at the closing hereunder (or as soon thereafter as practicable), three (3) stock assignments duly endorsed (with date and number of shares left blank) in the form attached hereto as Exhibit B, together with a certificate or certificates evidencing all of the Stock subject to the Purchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit C attached hereto and incorporated herein by this reference, which instructions will also be delivered to the Escrow Agent at the closing hereunder (or as soon thereafter as practicable). 4. 41 10. Purchaser will not sell or transfer any of the Stock subject to the Purchase Option or any interest therein so long as such Stock is subject to the Purchase Option. 11. The Company will not be required (a) to transfer on its books any shares of Stock of the Company that have been sold or transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 12. Subject to the provisions of paragraphs 10 and 11 above, Purchaser (but not any unapproved transferee) will, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Stock. 13. Purchaser acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Administrative Code, attached hereto as Exhibit D. 14. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 15. Any notice required or permitted hereunder will be given in writing and will be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto as his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 16. This Agreement will bind and inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser and his or her heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of the Company hereunder will be assignable by the Company at any time or from time to time, in whole or in part. 5. 42 The parties have executed this Agreement as of the________day of___________, 19__. WIRED VENTURES, INC. By: -------------------------- Address: 520 Third Street Fourth Floor San Francisco, CA 94107 ----------------------------- Purchaser Address: ----------------------------- ----------------------------- ATTACHMENTS: Exhibit A Vesting Schedule Exhibit B Assignment Separate from Certificate Exhibit C Joint Escrow Instructions Exhibit D Cal. Admin. Code, Title 10, Section 260.141.11 6. 43 EXHIBIT A VESTING SCHEDULE NUMBER OF SHARES SUBJECT TO IF CESSATION OF EMPLOYMENT OCCURS: PURCHASE OPTION: Before shares ----------, ---- --------- After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares After ----------, ---- but before ----------, ---- --------- shares 44 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement dated as of ____________, ____, ____________________________ hereby sells, assigns and transfers unto ___________________________ (_________) shares of common stock of Wired Ventures, Inc., a Delaware corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No. _____ herewith, and does hereby irrevocably constitute and appoint __________________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: _____________________ Signature: __________________ Printed Name: _______________ 45 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary Wired Ventures, Inc. 520 Third Street Fourth Floor San Francisco, CA 94107 Dear Sir or Madam: As Escrow Agent for both Wired Ventures, Inc. a Delaware corporation (the "Company"), and the undersigned purchaser of stock of the Company ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement"), dated ____________________, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Company or an assignee will elect to exercise the Purchase Option set forth in the Agreement, the Company or its assignee will give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (which may include suitable acknowledgment of cancellation of indebtedness) of the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated. 4. This escrow will terminate upon expiration or exercise in full of the Purchase Option, whichever occurs first. 1. 46 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you will deliver all of same to Purchaser and will be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that the property subject to this escrow is the subject of a pledge or other security agreement, you will deliver all such property to the pledgeholder or other person designated by the Company. 6. Except at otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You will be obligated only for the performance of such duties as are specifically set forth herein and may rely and will be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You will not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys will be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you will not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You will not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You will not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You will be entitled to employ such legal counsel (including without limitation the firm of Cooley, Godward, Castro, Huddleson & Tatum) and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder will terminate if you will cease to be Secretary of the Company or if you will resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Purchaser hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment. 2. 47 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto will join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you may (but are not obligated to) retain in your possession without liability to anyone all or any part of said securities until such dispute will have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you will be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder will be given in writing and will be deemed effectively given upon personal delivery or upon deposit in any United States Post Box, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' written notice to each of the other parties hereto: COMPANY: WIRED VENTURES, INC. 520 Third Street Fourth Floor San Francisco, CA 94107 PURCHASER: ____________________________ ____________________________ ____________________________ SECRETARY: Secretary WIRED VENTURES, INC. 520 Third Street Fourth Street San Francisco, CA 94107 16. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Company may at any time or 3. 48 from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. Very truly yours, WIRED VENTURES, INC. Signature: __________________ Printed Name: _______________ Title: ______________________ PURCHASER: Signature:___________________ Printed Name:________________ ESCROW AGENT: ___________________________ Secretary 4. 49 EXHIBIT D CAL. ADMIN. CODE, TITLE 10, SECTION 260.141.11 (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; 1. 50 (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchase a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." 2. 51 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement") is made by and between WIRED VENTURES, INC., a Delaware corporation (the "Company"), and ____________________________ ("Purchaser"). RECITALS The Company wishes to grant to Purchaser, and Purchaser wishes to receive, pursuant to the Company's 1996 Equity Incentive Plan (the "Plan"), a Stock Award (as such term is defined in the Plan). AGREEMENT The parties agree as follows: 1. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Purchaser, an aggregate of _______________ shares of the common stock (the "Stock") of the Company, for a purchase price of $__________ per share (total purchase price: $__________), payable in cash. The closing hereunder will occur at the offices of the Company on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. At the closing, Purchaser will deliver three (3) stock assignments in the form of Exhibit B duly endorsed by Purchaser (with date and number of shares left blank), joint escrow instructions (the "Joint Escrow Instructions") in the form of Exhibit C, duly executed by Purchaser, and the total purchase price in cash. At the closing or as soon thereafter as practicable, the Company will deliver to the Escrow Agent (as defined in paragraph 8 below) share certificates for all of the Stock that is to be subject to the Purchase Option (as defined in paragraph 2 below), and will deliver share certificates to Purchaser for all of the Stock, if any, that is not to be subject to the Purchase Option. 2. In accordance with the provisions of section 408(b) of the California General Corporation Law, the Stock to be purchased by Purchaser pursuant to this Agreement will be subject to the following option ("Purchase Option"): (a) In the event that Purchaser will cease to be an employee of the Company for any reason (including his death), or no reason, with or without cause, the Purchase Option may be exercised. The Company will have the right at any time within the ninety (90) day period after Purchaser's termination of service with the Company and its affiliates or such longer period as may be agreed to by the Company and Purchaser (for example, for purposes of 1. 52 satisfying the requirements of Section 1202(c)(3) of the Internal Revenue Code) to purchase from Purchaser or his personal representative, as the case may be, at the price per share paid by Purchaser pursuant to this Agreement ("Option Price"), the number of shares of the Stock shown on Exhibit A hereto, which is incorporated herein by this reference; provided, however, that, with the consent of Purchaser or his or her personal representative, as the case may be, the Company may purchase less than the applicable number of shares set forth on Exhibit A hereto. (b) In addition, and without limiting the foregoing Purchase Option, if at any time during the term of the Purchase Option, there occurs: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation involving the Company in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of other securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then: (a) if there will be no successor to the Company, the Company will have the right to exercise its Purchase Option as to all or any portion of the Stock then subject to the Purchase Option set forth above to the same extent as if Purchaser's employment by the Company had ceased on the date preceding the date of consummation of said event or transaction, or (b) the Purchase Option may be assigned to any successor of the Company, and the Purchase Option will apply if Purchaser will cease for any reason to be an employee of such successor on the same basis as set forth above. In that case, references herein to the "Company" will be deemed to refer to such successor. (c) The Company will be entitled to pay for any shares purchased pursuant to its Purchase Option at the Company's option in cash, by offset against any indebtedness owing to the Company and given in payment for the Stock by Purchaser, or a combination of both. (d) As used herein, employment with the Company will include employment with an affiliate of the Company and acting as a consultant to or director of the Company or any of its affiliates. (e) This Agreement is not an employment contract and nothing in this Agreement will be deemed to create in any way whatsoever any obligation on the part of the Purchaser to continue in the employ of the Company, or of the Company to continue Purchaser in the employ of the Company. (f) In the event that the Stock's Fair Market Value (as defined in the Plan) is equal to or exceeds the Option Price on the date that the Purchaser ceases to be employed, the Company will exercise its purchase option to the extent permitted by law. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 15. Upon providing such notice and payment or tender of the purchase price, the Company will become the legal and beneficial owner of the Stock being purchased and all rights and interests therein or related thereto. 2. 53 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Stock will be immediately subject to the Purchase Option and be included in the word "Stock" for all purposes of the Purchase Option with the same force and effect as the shares of Stock then subject to the Purchase Option. While the total Option Price will remain the same after each such event, the Option Price per share of Stock upon exercise of the Purchase Option will be appropriately adjusted. 5. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement will have endorsed thereon legends in substantially the following form: (a) "The shares represented by this certificate are subject to an option set forth in an agreement between the corporation and the registered holder, or his predecessor in interest, a copy of which is on file at the principal office of the corporation. Any transfer or attempted transfer of any shares subject to such option is void without the prior express written consent of the issuer of these shares." (b) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or a determination of the corporation or its counsel that such registration is not required." (c) Any legend required to be placed thereon by the California Commissioner of Corporations. 6. Purchaser acknowledges that he or she is aware that the Stock to be issued to him or her by the Company pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Company is relying on the following representations: Purchaser warrants and represents to the Company that he or she is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of the Stock or with any present intention of distributing or selling the Stock and he or she does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him or her to sell the Stock. Purchaser recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available and, further, recognizes that the Company is under no obligation to register the Stock or to comply with any exemption from such registration. 7. Purchaser agrees that the Company (or a representative of the Company's underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that Purchaser not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date (the "Effective 3. 54 Date") of the registration statement of the Company filed under the Act as may be requested by the Company or the representative of the underwriters. For purposes of this restriction Purchaser will be deemed to own securities that (a) are owned directly or indirectly by Purchaser, including securities held for Purchaser's benefit by nominees, custodians, brokers or pledgees; (b) may be acquired by Purchaser within one hundred eighty (180) days of the Effective Date; (c) are owned directly or indirectly, by or for Purchaser's brothers or sisters (whether by whole or half blood) spouse, ancestors and lineal descendants; or (d) are owned, directly or indirectly, by or for a corporation, partnership, estate or trust of which Purchaser is a shareholder, partner or beneficiary, but only to the extent of Purchaser's proportionate interest therein as a shareholder, partner or beneficiary thereof. Purchaser further agrees that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. 8. Purchaser is aware that the Stock may not be sold pursuant to Rule 144 or Rule 701 adopted under the Act unless certain conditions are met. Among the conditions for use of Rule 144 and Rule 701 is the availability of specified current public information about the Company. Purchaser recognizes that the Company presently has no plans to make such information available to the public. Whether or not the Purchase Option is exercised or has lapsed, Purchaser further agrees not to make any disposition of any of the Stock in any event unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (1) Purchaser has notified the Company of the proposed disposition and has furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (2) the Company or its counsel has determined that such disposition will not require registration of the Stock under the Act. 9. As security for his or her faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Stock upon exercise of the Purchase Option herein provided for, Purchaser will deliver (or have the Company deliver on the Purchaser's behalf) to and deposit with the Secretary of the Company, as escrow agent in this transaction (the "Escrow Agent"), at the closing hereunder (or as soon thereafter as practicable) three stock assignments duly endorsed (with date and number of shares left blank) in the form attached hereto as Exhibit B, together with a certificate or certificates evidencing all of the Stock subject to the Purchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit C attached hereto and incorporated herein by this reference, which instructions will also be delivered to the Escrow Agent at the closing hereunder (or as soon thereafter as practicable). 10. Purchaser will not sell or transfer any of the Stock subject to the Purchase Option or any interest therein so long as such Stock is subject to the Purchase Option. 4. 55 11. The Company will not be required (a) to transfer on its books any shares of Stock of the Company that have been sold or transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 12. Subject to the provisions of paragraphs 10 and 11 above, Purchaser (but not any unapproved transferee) will, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Stock. 13. Purchaser acknowledges receipt of a copy of Section 260.141.11 of Title 10 of the California Administrative Code, attached hereto as Exhibit D. 14. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 15. Any notice required or permitted hereunder will be given in writing and will be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto as his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 16. This Agreement will bind and inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser and his or her heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of the Company hereunder will be assignable by the Company at any time or from time to time, in whole or in part. 5. 56 The parties have executed this Agreement as of the _____ day of ______________, ____. WIRED VENTURES, INC. By:__________________________ Address: 520 Third Street Fourth Floor San Francisco, CA 94107 _____________________________ Purchaser Address: _____________________________ _____________________________ ATTACHMENTS: Exhibit A Vesting Schedule Exhibit B Assignment Separate from Certificate Exhibit C Joint Escrow Instructions Exhibit D Cal. Admin. Code, Title 10, Section 260.141.11 57 EXHIBIT A VESTING SCHEDULE NUMBER OF SHARES SUBJECT TO IF CESSATION OF EMPLOYMENT OCCURS: PURCHASE OPTION: Before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares After ___________________, ___ but before __________________, ___ ___________________ shares 58 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement dated as of ____________, ____ (the "Agreement"),____________________ hereby sells, assigns and transfers unto ______________________________________ (_________) shares of common stock of Wired Ventures, Inc., a Delaware corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No. _____ herewith, and does hereby irrevocably constitute and appoint __________________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: ______________________ Signature:__________________________________ Printed Name:_______________________________ 59 EXHIBIT C JOINT ESCROW INSTRUCTIONS Secretary Wired Ventures, Inc. 520 Third Street Fourth Floor San Francisco, CA 94107 Dear Sir or Madam: As Escrow Agent for both Wired Ventures, Inc. a Delaware corporation (the "Company"), and the undersigned purchaser of stock of the Company ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement"), dated ____________________, to which a copy of these Joint Escrow Instructions is attached as Exhibit C, in accordance with the following instructions: 1. In the event the Company or an assignee will elect to exercise the Purchase Option set forth in the Agreement, the Company or its assignee will give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (which may include suitable acknowledgment of cancellation of indebtedness) of the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated. 4. This escrow will terminate upon expiration or exercise in full of the Purchase Option, whichever occurs first. 1. 60 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you will deliver all of same to Purchaser and will be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that the property subject to this escrow is the subject of a pledge or other security agreement, you will deliver all such property to the pledgeholder or other person designated by the Company. 6. Except at otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You will be obligated only for the performance of such duties as are specifically set forth herein and may rely and will be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You will not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys will be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you will not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You will not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You will not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You will be entitled to employ such legal counsel (including without limitation the firm of Cooley, Godward, Castro, Huddleson & Tatum) and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder will terminate if you will cease to be Secretary of the Company or if you will resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Purchaser hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment. 2. 61 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto will join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you may (but are not obligated to) retain in your possession without liability to anyone all or any part of said securities until such dispute will have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you will be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder will be given in writing and will be deemed effectively given upon personal delivery or upon deposit in any United States Post Box, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' written notice to each of the other parties hereto: COMPANY: WIRED VENTURES, INC. 520 Third Street Fourth Floor San Francisco, CA 94107 PURCHASER: _____________________________ _____________________________ _____________________________ SECRETARY: Secretary WIRED VENTURES, INC. 520 Third Street Fourth Floor San Francisco, CA 94107 16. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all 3. 62 successor Escrow Agents. It is understood and agreed that the Company may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. Very truly yours, WIRED VENTURES, INC. Signature: ____________________________ Printed Name: _________________________ Title: ________________________________ PURCHASER: Signature: ____________________________ Printed Name: _________________________ ESCROW AGENT: __________________________________ Secretary 4. 63 EXHIBIT D CAL. ADMIN. CODE, TITLE 10, SECTION 260.141.11 (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113, or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; 1. 64 (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchase a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." 2. EX-10.3 8 1996 NON EMPLOYEE DIRECTOR STOCK OPTION PLAN 1 Exhibit 10.3 WIRED VENTURES, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN ADOPTED ON MAY 21, 1996 APPROVED BY STOCKHOLDERS ON ______________, 1996 1. PURPOSE. (a) The purpose of the 1996 Non-Employee Director Stock Option Plan (the "Plan") is to provide a means by which each director of Wired Ventures, Inc., a Delaware corporation (the "Company"), who is not otherwise at the time of grant an employee of or consultant to the Company or of any Affiliate of the Company (each such person being hereafter referred to as a "Non-Employee Director") will be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. 2. ADMINISTRATION. (a) The Plan will be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in subparagraph 2(b). (b) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan will not exceed in the aggregate one hundred thousand (100,000) shares of the Company's common stock. If any option granted under the Plan for any reason expires or otherwise terminates without having 1. 2 been exercised in full, the stock not purchased under such option will again become available for the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. ELIGIBILITY. Options will be granted only to Non-Employee Directors of the Company. 5. NON-DISCRETIONARY GRANTS. (a) Upon the effective date of the initial public offering of the Company's common stock (the "IPO Date"), each person who is then a Non-Employee Director automatically will be granted an option to purchase two thousand five hundred (2,500) shares of common stock of the Company on the terms and conditions set forth herein. (b) Each person who is, after the IPO Date, elected for the first time to be a Non-Employee Director automatically will, upon the date of his or her initial election to be a Non-Employee Director by the Board or stockholders of the Company, be granted an option to purchase two thousand five hundred (2,500) shares of common stock of the Company on the terms and conditions set forth herein. (c) On January 1 of each year, commencing with January 1, 1997, each person who is then a Non-Employee Director will be granted an option to purchase a number of shares of common stock of the Company (rounded to the nearest one hundred (100) shares) equal to the Proration Factor (as defined below) multiplied by two thousand five hundred (2,500) shares of common stock of the Company. The "Proration Factor" shall mean a fraction the numerator of which is the number of calendar days during the preceding calendar year on which such person served as a Non-Employee Director and the denominator of which is three hundred sixty-five (365). 6. OPTION PROVISIONS. Each option will be subject to the following terms and conditions: (a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ("Expiration Date") ten (10) years from the date of grant. If the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate terminates for any reason or for no reason, the option will terminate on the earlier of the Expiration Date or the date three (3) months following the date of termination of all such service; provided, however, that if such termination of service is due to the optionee's death or disability, the option will terminate on the earlier of the Expiration Date and six (6) months following the date of the optionee's death or disability. In any and all circumstances, an option may be exercised following termination of the optionee's service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate only as to that number of shares as to which it was exercisable as of the date of termination of all such service under the provisions of subparagraph 6(e). 2. 3 (b) The exercise price of each option will be one hundred percent (100%) of the fair market value of the stock subject to such option on the date such option is granted. (c) Payment of the exercise price of each option is due in full in cash upon an exercise when the number of shares being purchased upon such exercise is less than one thousand (1,000) shares, but when the number of shares being purchased upon an exercise is one thousand (1,000) or more shares, the optionee may elect to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash at the time of exercise; or (ii) Provided that at the time of the exercise the Company's common stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of shares of common stock of the Company already owned by the optionee, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which common stock will be valued at its fair market value on the date preceding the date of exercise; or (iii) Payment by a combination of the methods of payment specified in subparagraph 6(c)(i) and 6(c)(ii) above. Notwithstanding the foregoing, options may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company either prior to the issuance of shares of the Company's common stock or pursuant to the terms of irrevocable instructions issued by the optionee prior to the issuance of shares of the Company's common stock. (d) An option will not be transferable except by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 ("Rule 16b- 3") and will be exercisable during the lifetime of the person to whom the option is granted only by such person (or by his guardian or legal representative) or transferee pursuant to such an order. Notwithstanding the foregoing, the optionee may, by delivering written notice to the Company in a form satisfactory to the Company, designate a third party who, in the event of the death of the optionee, will thereafter be entitled to exercise the option. (e) The option will become exercisable in installments over a period of four (4) years from the date of grant; one fourth (1/4) of the shares will vest on the first anniversary of the date of grant and one forty-eighth (1/48) of the shares will vest on the first day of each calendar month thereafter, provided that the optionee has, during the entire period prior to such vesting date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate of the Company, whereupon such option will become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. 3. 4 (f) The Company may require any optionee, or any person to whom an option is transferred under subparagraph 6(d), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, will be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then-currently-effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require any optionee to provide such other representations, written assurances or information which the Company will determine is necessary, desirable or appropriate to comply with applicable securities laws as a condition of granting an option to the optionee or permitting the optionee to exercise the option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. (h) The Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that any optionee not sell or otherwise transfer or dispose of any shares of common stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act as may be requested by the Company or the representative of the underwriters. 7. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Plan, the Company will keep available at all times the number of shares of stock required to satisfy such options. (b) The Company will seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; provided, however, that this undertaking will not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory 4. 5 commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company will be relieved from any liability for failure to issue and sell stock upon exercise of such options. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to options granted under the Plan will constitute general funds of the Company. 9. MISCELLANEOUS. (a) Neither an optionee nor any person to whom an option is transferred under subparagraph 6(d) will be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Nothing in the Plan or in any instrument executed pursuant thereto will confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate in any capacity or will affect any right of the Company, its Board or stockholders or any Affiliate to remove any Non-Employee Director pursuant to the Company's By-Laws and the provisions of the Delaware General Corporation Law (or the applicable laws of the Company's state of incorporation if the Company's state of incorporation should change in the future). (c) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, will have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as will have been reserved for him pursuant to an option granted to him. (d) In connection with each option made pursuant to the Plan, it will be a condition precedent to the Company's obligation to issue or transfer shares to a Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. (e) As used in this Plan, "fair market value" means, as of any date, the value of the common stock of the Company determined as follows: (i) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of common stock will be the closing sales price for such stock (or the 5. 6 closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) If the common stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock will be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the common stock, the Fair Market Value will be determined in good faith by the Board. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding options. Such adjustments will be made by the Board, the determination of which will be final, binding and conclusive. (The conversion of any convertible securities of the Company will not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (i) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (ii) a merger or consolidation in which the Company is not the surviving corporation; (iii) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (iv) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent not prohibited by applicable law, the time during which options outstanding under the Plan may be exercised will be accelerated prior to such event and the options terminated if not exercised after such acceleration and at or prior to such event. 6. 7 11. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan and/or some or all outstanding options granted under the Plan, provided, however, that the Board will not amend the Plan more than once every six (6) months, with respect to the provisions of the Plan which relate to the amount, price and timing of grants, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules thereunder. Except as provided in paragraph 10 relating to adjustments upon changes in stock, no amendment will be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares which may be issued under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3); or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3 or Section 162(m) of the Internal Revenue Code. (b) Rights and obligations under any option granted before any amendment of the Plan will not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan will terminate on May 21, 2006. No options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any option granted while the Plan is in effect will not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted. (c) The Plan will terminate upon the occurrence of any of the events described in Section 10(b) above. 7. 8 13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE. (a) The Plan will become effective upon adoption by the Board of Directors, subject to the condition subsequent that the Plan is approved by the stockholders of the Company. (b) No option granted under the Plan will be exercised or exercisable unless and until the condition of subparagraph 13(a) above has been met. 8. 9 WIRED VENTURES, INC. NONSTATUTORY STOCK OPTION (1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN) ___________________________________, Optionee: Wired Ventures, Inc., a Delaware corporation (the "Company"), pursuant to its 1996 Non-Employee Director Stock Option Plan (the "Plan") has this day granted to you, the optionee named above, an option to purchase shares of the common stock of the Company ("Common Stock"). This option is not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for participation of the Company's Non-Employee Directors (as defined in the Plan). The details of your option are as follows: 1. The total number of shares of Common Stock subject to this option is _______________________ (_______). Subject to the limitations contained herein, this option will be exercisable in accordance with the Plan. 2. The exercise price of this option is ($ ) per share, being the Fair Market Value of the Common Stock on the date of grant of this option (as defined in the Plan). 3. (a) This option may be exercised, to the extent specified in the Plan, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to paragraph 6 of the Plan. This option may not be exercised for any number of shares that would require the issuance of anything other than whole shares. (b) By exercising this option you agree that the Company may require you to enter an arrangement providing for the cash payment by you to the Company of any tax withholding obligation of the Company arising by reason of the exercise of this option or the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise. 4. Any notices provided for in this option or the Plan will be given in writing and will be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, 10 addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 5. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of paragraph 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations that may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan will control. Dated the ___ day of _____________________ , 19__. Very truly yours, WIRED VENTURES, INC. By: _________________________ Duly authorized on behalf of the Board of Directors ATTACHMENTS: 1995 Non-Employee Directors' Stock Option Plan 2. 11 The undersigned: (A) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; (B) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its affiliates regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the options previously granted and delivered to the undersigned under stock options plans of the Company, and (ii) the following agreements only: NONE _______________________________________ (Initial) OTHER _______________________________________ _______________________________________ _______________________________________ _______________________________________ Optionee _______________________________________ Address _______________________________________ _______________________________________ EX-10.4 9 LETTER OF AGREEMENT 1 EXHIBIT 10.4 CONFORMED COPY 22 July 1995 1. INTRODUCTION 1.1 This is a letter of agreement in relation to Wired UK (registered no. 2972399) ("the Company") between the parties listed on pages 21 to 22 of this letter. Various definitions used in this letter are contained in paragraph 19. 1.2 The Company wishes to cancel one of its 'A' Shares by acquiring that share. Wired Investments and Wired New York wish to acquire the remaining 'A' Shares in the proportions of 48 and one respectively. 2. SALE AND PURCHASE 2.1 Guardian Investments agrees to sell with full title guarantee and the Purchasers (in the proportions of 48 Shares to Wired Investments, one Share to Wired New York and one Share to the Company) agree to buy the Shares and each right attaching to the Shares at or after the date of this Agreement. 2.2 The purchase price of the Shares is (pound sterling)50. 2.3 Guardian Investments covenants to the Purchasers that it is the only legal and only beneficial owner of the Shares, that there is no Encumbrance, and there is no agreement, arrangement or obligation to create or give an Encumbrance, in relation to any of the Shares and that no person has claimed to be entitled to an Encumbrance in relation to any of the Shares. 3. COMPLETION Completion of this agreement ("Completion") will take place immediately after its signing when all of the following will take place:- 3.1 The Guardian will deliver to Wired Investments the following documents:- (a) a transfer of 48 of the Shares to Wired Investments, a transfer of one of the Shares to Wired New York and a transfer of one of the Shares to the Company in each case duly executed on behalf of Guardian Investments (the "Share Transfers") and the share certificate (or duly executed indemnity in respect of any lost share certificate) for the Shares: (b) duly executed resignations in the agreed form from David Brook, Anthony Ageh and Paul Naismith as directors of the Company and of Wired 1. 2 Limited and from Julian Turner as secretary of the Company and of Wired Limited; (c) (i) confirmation that the Guardian has paid (pound sterling)297,554 to the Company immediately prior to signature of this Agreement ("the Pre Agreement Payment"): (ii) confirmation from Lovell White Durrant that it is holding (pound sterling)350,000 in its client account to the order of the Company; (d) a copy of the Loan Note and of the Guarantee duly executed on behalf of the Guardian: and (e) each register, minute book and other book required to be kept by the Company and Wired Limited under the Companies Act made up to the date of Completion and each certificate of incorporation and certificate of incorporation on change of name for the Company and Wired Limited. 3.2 Wired Investments, Wired New York and the Company will deliver to the Guardian (pound sterling)50 in consideration for the Shares. 3.3 The Purchasers will countersign the appropriate Share Transfers as transferees. 3.4 The Company and/or Wired Ventures will deliver to the Guardian: (a) a copy of the Loan Note duly executed on behalf of the Company and Wired Ventures and a copy of the Guarantee duly executed on behalf of Wired Ventures: the consideration for the Loan Note and the Guarantee will be: (i) in respect of tranche A of the Loan Note and the respective part of the Guarantee, payment by the Guardian of (pound sterling) 350,000 under clause 3.1(c)(ii): (ii) in respect of tranche B of the Loan Note and the respective part of the Guarantee, the Pre Agreement Payment, the assumption of liabilities pursuant to clause 5 and the confirmation of debt position under clause 4; and (b) a copy of the duly executed Letter of Opinion; and (c) (pound sterling)10.000 in respect of the payment pursuant to clause 3.7 hereof. 2. 3 3.5 The Guardian and Wired Ventures will procure that:- (a) a shareholders meeting of the Company is held at short notice at Completion to pass the resolutions in the agreed form with their consent to any variation of class rights: (b) a board meeting of the Company is held at Completion at which the Share Transfers are both approved and (in the case of the transfers to Wired Investments and to Wired New York) registered and that the remaining one 'A' Share is cancelled. 3.6 The Company will promptly file with the registrar of companies the forms required by section 288 of the Companies Act 1985 in respect of the resignations referred to in clause 3.1(b). 3.7 Wired Investments will discontinue the High Court proceedings commenced by it against Wired UK and Guardian Investments under Action no. 1995 W No. 3839 including its application for interlocutory injunctive relief in those proceedings on terms that each party bears its own costs to date except that Wired Investments shall pay Guardian Investments (pound sterling) 10.000 on Completion in respect of its costs in respect of and incidental to Wired Investments' application for ex parte interlocutory relief against Wired UK on 26 June 1995. 3.8.1 Wired Investments and/or Wired Ventures will use its best endeavours to procure a release by Michael Schrage of any claim he might have against the Company in relation to the publication of the article "Revolutionary Evolutionist" in the July/August 1995 UK edition of Wired ("the Publication"). 3.8.2 An authors fee of (pound sterling)1,500 payable by the Company to Michael Schrage in respect of the Publication will be deemed to be a liability arising by mason of an act or omission by or on behalf of the Company before Completion for which the Guardian is liable under clause 5.1: the Guardian will pay the Company (pound sterling)1,500 within 30 days of Completion in respect thereof and the Company will pay that mount to Michael Schrage as his authors fee. 3.8.3 Any judgement for damages arising out of any claim by Michael Schrage in respect of the Publication (and any settlement of any such claim), together with the costs of defending any such claim, will be for the sole account of the Company (notwithstanding any other provisions in this letter, particularly clause 5.1), and the Guardian will not have any liability, nor any liability to reimburse the Company, in respect thereof (except as provided in clause 3.8.2 above). For the avoidance of doubt, this clause 3.8.3 is in substitution for the indemnity contained in its undertaking given on 26 June 1995 (and recorded in the Order made by Blackburne J on that day in Action No. 1995 W No. 3839) in relation to the Publication. 3. 4 3.9 Guardian Investments will procure that the necessary authorized signatories to the Company's bank account(s) sign the necessary documentation to change the authorized signatories in such manner as Wired Investments may request. 4. GUARDIAN DEBTS 4.1 The Guardian covenants to Wired Investments that the only sums due from the Company to any members of the Guardian Group (whether or not yet due and payable) ("the Guardian Debts") are accurately set out below: AMOUNT BASIS OF DEBT (pound sterling)497.554 capital loan due to Guardian Investments (including in respect of the Pre Agreement Payment) (pound sterling)327,601 sum due to the Guardian in respect of intercompany loan accounts 4.2 The Guardian Debts will in future be owed on the terms of the Loan Note. The Guardian (on behalf of all members of the Guardian Group) confirms that with effect from Completion there are no sums due from the Company to any members of the Guardian Group (whether or not yet due and payable) or any obligations to the Guardian Group on the part of the Company other than (i) (pound sterling)1.000,000 pursuant to the Loan Note or (ii) pursuant to other clauses of this Agreement. 5. OTHER LIABILITIES 5.1 The Guardian shall be responsible for, and shall duly and promptly (and in any event within 30 days of the date of this letter or, in the case of a subsequent claim, 30 days of notice of the claim) pay and discharge, all debts (other than the Guardian Debts) or other amounts payable by the Company and claims by third parties outstanding against the Company as at Completion or arising by reason of any act or omission by or on behalf of the Company on or before Completion including all outgoings and expenses of the Company (including without limitation, wages, commissions, accrued holiday pay, bonuses and other outgoings in respect of employees and all accommodation charges in respect of the Premises) in respect of the period ending on Completion. 5.2 Without prejudice to clause 6.1(b). the Guardian shall indemnify the Company against all losses, liabilities and costs which the Company may incur arising out of, or as a consequence of, the ownership or operation of its business or any of its assets before Completion (including, without limitation, all losses, liabilities and costs incurred as a result of defending or settling any claim alleging any such liability). 4. 5 5.3.1 The Guardian shall have not have any liability under clauses 5.1 or 5.2 in respect of: (a) the Loan Note: (b) any management fees payable under the Shareholders Agreement: (c) any Excluded Matters; (d) any non-performance after Completion by the Company of any of the Contracts the terms of which are set out in Appendix 10.1 except to the extent that liability results from breach or non-performance by the Company before Completion. 5.3.2 The provisions of clause 5.5.12 will apply in relation to the Excluded Order (as defined in that clause). 5.4 Outgoings, losses, liabilities, costs and expenses of the Company will be apportioned on the basis set out in clauses 5.1, 5.2 and 5.3 above. For the avoidance of doubt, liabilities of the Company (other than those which are the responsibility of the Guardian or the subject of an indemnity from the Guardian under clauses 5.1 or 5.2) are to be apportioned to the Company for these purposes. If there is any dispute as to apportionment which is not resolved by the Guardian and the Company within 30 days of the matter arising, the question will be put to an independent accountant (the "Expert") of not less than five years' standing. The Expert will be either as agreed between the Guardian and the Company or, in the absence of agreement within 14 days of the first suggestion by either of them to the other, shall be appointed by the President of the Royal Institute of Chartered Accountants. The costs of the Expert shall be met equally by the Guardian and the Company. The Expert shall act as an expert and not as an arbitrator; his determination shall be final and binding. 5.5.1 The Pre Agreement Payment was calculated on the basis of the net current liability of the Company as shown by the Management Accounts and represents an estimate of the net current liability of the Company as at Completion. The following provisions of this clause 5.5 set out a mechanism for making adjusting payments where appropriate and are without prejudice to the generality of and do not limit clauses 5.1 to 5.4. 5.5.2 To the extent that the Company does not receive (pound sterling)45,683 in respect of the "Trade Debtor - advertising" asset shown in the Management Accounts within 30 days of Completion. The Guardian will promptly pay to the Company the difference. 5.5.3 To the extent that the Company does not receive (pound sterling)35,665 in respect of the "Trade Debtor" and "Trade Debtor - Newstrade" assets shown in the Management 5. 6 Accounts within 60 days of Completion, the Guardian will promptly pay to the Company the difference. 5.5.4 To the extent that the Company does not receive (pound sterling)72,087 in respect of the "VAT Repayable" asset shown in the Management Accounts within 60 days of Completion, the Guardian will promptly pay to the Company the difference. 5.5.5 To the extent that the Company's reconciled cash at bank at Completion (excluding for the avoidance of doubt the mounts payable to the Company under clause 3.1) are greater or less than (pound sterling)29,092 the Guardian will promptly pay to the Company the deficiency and the Company will promptly pay to the Guardian the excess. 5.5.6 Except to the extent to which the Company uses the newsprint represented by the Newsprint Stock asset in the Management Accounts in the September 1995 edition of Wired magazine (UK edition). The Guardian will promptly acquire such stock from the Company at the cost reflected in the Management Accounts (except to the extent that the Company wishes to retain such stock). 5.5.7 The Company will notify the Guardian of any creditors it becomes aware of as at Completion which are not reflected in the Management Accounts (other than in respect of the Guardian Debts) and the Guardian will promptly discharge such debts on behalf of the Company or, at the Guardian's option, put the Company in funds to discharge such debts (in each case without creating any debt from the Company to the Guardian). 5.5.8 To the extent the Guardian makes a payment to the Company under the provisions of this clause 5.5 in respect of a debt or VAT repayable, and the Company subsequently receives a payment or credit from a third party in respect of the debt or VAT repayable which was the subject of that payment by the Guardian, the Company will promptly reimburse the Guardian to the intent that the Company will not make a double recovery. 5.5.9 The Company will apply any amounts it receives under this clause 5.5 and the Pre Agreement Payment to pay liabilities of the Company without undue delay. 5.5.10 To the extent that the Company becomes aware of any debtors. VAT repayables or cash at bank as at Completion in excess of the amounts shown in the Management Accounts, or any creditors (other than in respect of the Guardian Debts) as at Completion being less than as shown in the Management Accounts, the Company will promptly pay such difference to the Guardian. It is not anticipated that any payments will be made for 30 days following Completion. 5.5.11 If there is any dispute as to the amounts payable under this clause 5.5 which is not resolved by the Guardian and the Company within 30 days of the matter 6. 7 arising, the question will be put to an independent accountant (the "Expert") of not less than five years' standing. The Expert will be either as greed between the Guardian and the Company or, in the absence of agreement within 14 days of the first suggestion by either of them to the other, shall be appointed by the President of the Royal Institute of Chartered Accountants. The costs of the Expert shall be met equally by the Guardian and the Company. The Expert shall act as an expert and not as an arbitrator; his determination shall be final and binding. 5.5.12 For the avoidance of doubt the newsprint subject to the order ref. 35159090 placed with McNaughton Publishing Papers Ltd. by Guardian Newspapers dated 3005/95 for 40,000 kgs Kymexcote Matt 80 gsm. ("Excluded Order") is not provided for, and is not intended to be provided for, in the Management Accounts. The Company will have no rights under the Excluded Order and the Guardian will indemnify the Company in respect of all liabilities, costs and expenses in relation to the Excluded Order (unless the Company agrees in writing after Completion with the Guardian that it wishes to purchase the Excluded Order for its own benefit). 6. SUBSCRIPTION AND SHAREHOLDERS AGREEMENT 6.1 (a) With effect from Completion and subject to clause 6.1(b), the Subscription and Shareholders Agreement dated 5 October 1994 between the parties hereto other than Wired New York ("the Shareholders Agreement") and the Facility Letter related thereto from GML to the Company cease to have effect and the parties thereto are released from all obligations thereunder (including without limitation all obligations thereunder (past. current or future) to pay management or other fees. For the avoidance of doubt, clause 20.2 of the Shareholders Agreement shall not have effect and is hereby terminated. (b) Notwithstanding any provision to the contrary herein, each of the parties to the Shareholders Agreement shall remain liable for any breach of that agreement to the extent only that such breach causes any liability of any of the other parties thereto to any third party. 6.2 Each of the parties confirms to each other that it is not aware of any claims or potential claims arising out of the Shareholders Agreement or the operations of the Company up to Completion other than the publication of material in the July/August 1995 of Wired magazine (UK edition) without due clearance of third party rights. 6.3 Subject as provided in clause 6.1(b). This Agreement releases all claims and extinguishes all causes of action which the parties may have against each other arising out of or in connection with the Shareholders Agreement or the Joint Venture. 7. 8 7. WIRED UK It is the intention of the Company and Wired Ventures that the Company will continue producing Wired magazine (UK edition); the Company and Wired Ventures guarantee to the Guardian that the Company will publish separate September, October and November 1995 editions of Wired magazine (UK edition). The sole remedy for breach of this clause 7 shall be the early repayment of the Loan Note under clause 2.2 of the Loan Note. 8. PREMISES 8.1 The Company's occupation of its current premises ("the Premises") will cease as soon as satisfactory alternative arrangements can be met (and in any case not more than 2 months from Completion), pending which the Guardian will procure that the Company may continue to occupy the Premises free of charge and may continue to use free of charge all equipment (including, without limitation, telephones, photocopiers and computers) and facilities routinely needed to operate that equipment provided in the past by the Guardian Group to the Company: however the Company will meet the cost to the Guardian of providing such equipment and consumables including the cost of all telephone calls made by the Company after Completion. 8.2 The Company hereby surrenders any existing tenancy, license or other rights in respect of the Premises in consideration of the Guardian Group allowing the Company to remain in occupation as licensee only of the Premises free of accommodation charges until 22 September 1995 at the latest when the Company will vacate the Premises at its own cost. During such occupation, and during its move from the Premises, the Company will not cause any damage to the Premises or any assets of the members of the Guardian Group on the Premises. The Company will consult with the Guardian in advance of taking any action which might reasonably be expected adversely to affect the Guardian's electrical, computer or other systems. 9. ASSETS 9.1 The Guardian covenants to Wired Investments that:- (a) the Management Accounts as at 17 July 1995 in the agreed form show a reasonable view of the assets and liabilities of the Company as at 17 July 1995 and of the losses of the Company for the period ended on that date: (b) since 17 July 1995 the business of the Company has been carried on in the ordinary and usual course without interruption, in the same manner as before and so as to maintain the business of the Company as a going concern: 8. 9 (c) since 17 July 1995 there has been no material adverse change in the financial or trading position of the Company; (d) since 17 July 1995 there has been no material change in the assets and liabilities shown in the said Management Accounts including (in particular but without limitation) work in progress, trade debts and customer prepayments: (e) the assets of the Company include those listed on Appendix 9.1 except for the items in paragraph 1 of that Appendix which belong as otherwise indicated. 10. CONTRACTS 10.1 The Guardian covenants to the Company and Wired Investments that (so far as it is aware): (a) true, complete and accurate details of each Contract are set out in Appendix 10.1 including, without limitation, the full terms of each material oral Contract: (b) there are no material contracts, undertakings, arrangements or engagements for the benefit of the Company which are not in the name of the Company except as set out in Appendix 10.1 and the arrangements for the Premises. 10.2 "Contracts" means all contracts, undertakings. arrangements and engagements of the Company which are wholly or partly unperformed at the date of Completion including, without limitation, supply and distribution agreements, customer and supplier contracts, lease, hire and hire purchase agreements but excluding contracts of employment with any employees (any one of these being a "Contract"). 11. INTER GROUP TRANSACTIONS 11.1 The Guardian covenants to Wired Investments that the full terms of all contracts. arrangements and transactions between the Company and members of the Guardian Group which are wholly or partially unperformed at the date hereof or were in force within the period of one month preceding today's date are set out in Appendix 11.1. 12. PERSONNEL 12.1 The Guardian covenants to the Company and Wired Investments that Appendix 12.1 contains an accurate list of all employees, secondees and consultants to the 9. 10 Company immediately prior to Completion ("Company personnel") and in the case of the Requested Personnel of the terms of their employment, secondment or consultancy as the case may be including without limitation any commission arrangements and any agreements relating to the provision of cars. 12.2 The Company, the Guardian and Wired Investments will each use all reasonable efforts to procure the transfer to the Guardian Group of the employment, secondment or consultancy of all Company personnel other than the Requested Personnel on and with effect from Completion. In the event that any such Company personnel do not agree to such transfer, the Company may, after notifying the Guardian, terminate any such employment, secondment or consultancy and the Guardian will indemnify the Company in respect of all costs, claims, expenses, damages, any tribunal or court awards and any redundancy payments ("Termination Costs") arising from any such termination. Notwithstanding the provisions of clause 5, the Guardian will be responsible for and will indemnify the Company in respect of all the costs of the employment. secondment and/or consultancy of all Company personnel (other than the Requested Personnel) in respect of the period after Completion. 12.3 The Company, the Guardian and Wired Investments will each use all reasonable efforts to procure that the Requested Personnel agree to continue to work for the Company on substantially the same terms as currently Provided that, in the case of Ola Osomo and Denis Cassidy, the Guardian will have no obligation to use all reasonable efforts as aforesaid, but will not obstruct this process. The Guardian will employ, re-employ, hire or rehire as appropriate any Requested Personnel who by the earlier of the date on which the Company vacates the Premises or 31 August 1995 have, if they are employees of the Company, stated in writing to the Company that they are not willing to continue to work for the Company or, if they are not employees of the Company, have not stated in writing to the Company that they agree to work for the Company ("the Rejecting Employees"). If the employment of any Requested Personnel (other than a Rejecting Employee) terminates subsequent to the Cut Off Date, the Company will indemnify the Guardian Group in respect of all Termination Costs resulting from such employment (in respect of the period from the date of Completion) or its termination. The "Cut-Off Date" is: (a) in the case of employees of the Company, the earlier of the date on which the Company vacates the Premises or 31 August 1995 (the "Initial Date"); (b) in the case of non-employees of the Company, the date on which the relevant person states in writing to the Company that he or she agrees to work for the Company or the Initial Date, whichever is the earlier. 10. 11 12.4 The "Requested Personnel" are Dave Green, Denis Cassidy, Alexis Harvey, Craig Wilkie, Ian Soffe, Michelle Long, Ola Osomo, Matthew Gee. 13. THE MARKS 13.1 The Guardian on behalf of each member of the Guardian Group confirms that immediately following Completion no member of the Guardian Group will have has any interest whatsoever in the Marks, the Eire Mark and Other Marks (if any) or any right to use the name "Wired" except as permitted pursuant to clause 16 hereof. Terms defined in the Shareholders Agreement have the same meanings in this Clause 13. 14. OPERATIONAL CONTROL 14.1 For the avoidance of doubt it is hereby declared that, with effect from Completion, Wired Investments will obtain full, immediate, exclusive and irrevocable operational control of the Company which shall be entitled to do business with Wired Ventures and its related entities as it wishes. The Guardian will (and will procure that the other members of the Guardian Group will) promptly pass on to the Company any enquiries relating to the Company or its business. The Guardian will not (and will procure that its employees and officers and those of the other members of the Guardian Group will not) misrepresent its association with the Company. The Company and Wired Ventures will not (and will procure that their employees and officers will not) misrepresent their association with the Guardian Group. 15. CONFIDENTIALITY 15.1 Following the execution of this Agreement each of the parties shall: 15.1.1 keep the Relevant Confidential Information confidential; 15.1.2 not disclose the Relevant Confidential Information to any other person other than with the prior written consent of the Guardian (in the case of proposed disclosure by the Company, Wired Investments, Wired Ventures and Wired New York) or of Wired Ventures (in the case of proposed disclosure by members of the Guardian Group): 15.1.3 not use the Relevant Confidential Information for any purpose. 15.2 The obligations contained in Clause 15.1 shall not apply to any Relevant Confidential Information which: 11. 12 15.2.1 at the date of this Agreement or at any time after the date of this Agreement comes into the public domain other than through breach of this Agreement by the Receiving Party: 15.2.2 can be shown by the Receiving Party to the reasonable satisfaction of the Disclosing Party to have been known to the Receiving Party prior to it being disclosed by the Disclosing Party to the Receiving Party; or 15.2.3 subsequently comes lawfully into the possession of the Receiving Party from a third party. 15.3 Disclosure of any Relevant Confidential Information to any professional adviser is permitted for the purpose of advising the Receiving Party on terms that this clause 15 shall apply to any use or disclosure by the professional adviser. 15.4 For the purposes of this clause: (i) "Relevant Confidential Information" in relation to the obligation of the Guardian Group under this clause 15 means all information not at present in the public domain used in or otherwise relating to the business or customers or financial or other affairs of the Company, Wired Investments, Wired Ventures, and/or Wired New York including, without limitation, the Wired Balance Sheet and all information relating to the structure of the "Wired" group. (ii) "Relevant Confidential Information" in relation to the obligations of the Company, Wired Investments, Wired Ventures and Wired New York under this clause 15 or clause 17 means all information not at present in the public domain used in or otherwise relating to the business or customers or financial or other affairs of the Guardian Group. (iii) The "Receiving Party" is the party under the obligation and the "Disclosing Party" is the party having the benefit of the obligation. For the purposes of this clause 15 and clause 16, there shall be deemed to be two parties one party shall consist of members of the Guardian Group; the other shall consist of the Company, Wired Investments, Wired Ventures and Wired New York. 16. ANNOUNCEMENTS 16.1 Subject to clause 16.2, neither party may make or send a public announcement, statement, communication or circular concerning the transactions referred to in this Agreement, the Joint Venture, the termination of the Joint Venture or any litigation or threatened litigation in relation thereto unless it has first obtained the 12. 13 other party's written consent, which may not be unreasonably withheld or delayed. 16.2 Clause 16.1 does not apply to a public announcement, statement, communication or circular:- (a) if it is required by law or applicable regulation provided that the party required to make or send it will, if practicable, first consult and take into account the reasonable requirements of the other party; or (b) if it is consistent with the facts and phrasing in the announcement or the questions and answers each in the agreed form. 17. FURTHER ASSURANCE 17.1 Each party shall (at its cost) do and execute, or arrange for the doing and executing of, each necessary act, document and thing reasonably within its power to implement this Agreement. 17.2 The Guardian shall procure that each member of the Guardian Group :- (a) promptly provides to the Company on request all information it has regarding the business and/or finances of the Company; and (b) promptly delivers to the Company all documents, records or other assets belonging to the Company including without limitation personnel records, contracts, editorial information, accounting records, original art acquired by the Company in print or electronic form and correspondence in relation to copyrights and trademarks. 17.3 The Company will promptly provide to the Guardian all information it has which the Guardian reasonably requires to comply with the Guardian's legal and regulatory obligations (including without limitation in respect of tax and accounting matters) and any information it requires to perform its obligations under clause 12 of this Agreement. 17.4 In particular, without limiting the provisions of clauses 17.1 and 17.2 above, the Guardian will procure that the relevant members of the Guardian Group make available to the Company free of charge on request by the Company: (a) access to any of the Company's existing accounting systems for the period during which the Company continues to occupy the Premises including detailed trial balances and all transactions records for each account; 13. 14 (b) the complete database in relation to advertising contacts and contracts of the Company; (c) full details of subscribers in relation to Wired magazine (UK edition) including all correspondence and current addresses; (d) copies of all electronic files of the Company to the extent known and identified in the future; and the Guardian will procure that all editorial information in respect of the Company in the possession of the Guardian is made available to the Company in its current form and will use all reasonable efforts to procure that all information currently (or during the week leading up to Completion) on computers used by the Company remains on such computers and available to the Company (other than Relevant Confidential Information relating to the Guardian Group or personal information belonging to employees and not to the Company or relating to its business). 18. GENERAL 18.1 This Agreement and any document referred to in this Agreement constitute the entire agreement, and supersede any previous agreements between the parties relating to the subject matter of this Agreement. No party hereto has relied upon any representation, warranty or covenant in entering into this Agreement save as expressly set out herein or in the Loan Note or in the Guarantee. 18.2 A variation of this Agreement is valid only if it is in writing and signed by or on behalf of each party. 18.3 Except to the extent that they have been performed the covenants and obligations contained in this Agreement remain in force after Completion. 18.4 A party may not assign or transfer or purport to assign or transfer a right or obligation under this Agreement without having first obtained the other relevant parties' written consent, which may not be unreasonably withheld or delayed. 18.5 The parties hereby waive all pre-emption rights in relation to the Share Transfers whether arising out of the Articles of Association of the Company, the Shareholders Agreement or otherwise. 18.6 Except where this Agreement provides otherwise. each party shall pay its own costs relating to the negotiation, preparation, execution and performance by it of this Agreement and of each document referred to in it. 14. 15 18.7 The Guardian covenants to Wired Investments and the Company that: (a) Since its incorporation, Wired Limited has not traded or incurred any liability or entered into any contract, arrangement or commitment and no shareholders or directors resolutions have been passed other than as set out in Appendix 18.7. (b) The issued share capital of Wired Limited is (pound sterling)2, comprising 2 Ordinary Shares of (pound sterling)1 registered in the name of and beneficially owned by the Company free from any Encumbrance. (c) The particulars of the directors, secretary and registered office of Wired Limited in Appendix 18.7 are true, complete and accurate. 18.8.1 The Guardian shall be under no liability whatsoever in respect of any breach or non-fulfillment of any of the Guardian Covenants unless one or both of the Purchasers has served on the Guardian a written notice on or before the date being one year from the date hereof giving reasonable details of the breach or non-fulfillment including if practicable an estimate of the amount of the liability of the Guardian in respect thereof and has issued and served proceedings in respect of each such breach or non-fulfillment within six months of the date of such written notice. 18.8.2 The Guardian shall not be liable in respect of any individual claim for breach of the Guardian Covenants unless such claim individually exceeds (pound sterling)100. 18.8.3 The Guardian shall not be liable in respect of a breach of a Guardian Covenant unless and until the amount that would otherwise be recoverable from the Guardian (but for this paragraph 18.8.3) in respect of that breach, when aggregated with any other amount or amounts recoverable in respect of other breach of a Guardian Covenant, exceeds (pound sterling) 25,000 in which event the Guardian will be liable for the excess over (pound sterling)12.500. 18.8.4 The aggregate amount of the liability of the Guardian in respect of any breach or breaches of the Guardian Covenants shall be limited to and in no event exceed (pound sterling) 100,000. 18.8.5 The Guardian shall have no liability in respect of breach of any Guardian Covenant to the extent that such breach arises from an Excluded Matter. 18.9 Wired Ventures covenants to the Guardian that: (a) the Wired Balance Sheet shows a reasonable view of the assets and liabilities of Wired Ventures as at 31 December 1994 and of the deficit of Wired Ventures for the period ended on that date; 15. 16 (b) since 31 December 1994 the business of Wired Ventures has been carried on in the ordinary and usual course without interruption, in the same manner as before and so as to maintain the business of Wired Ventures as a going concern; (c) since 31 December 1994 there has been no material adverse change in the financial or trading position of Wired Ventures; (d) since 31 December 1994 there has been no material change in the assets and liabilities shown in the Wired Balance Sheet other than in the normal course of business and its projections of growth: (e) the Wired Corporate Structure is true and accurate and fairly reflects the relevant group structure: (f) there are no Excluded Matters. 18.10.1 Wired Ventures shall be under no liability whatsoever in respect of any breach or non-fulfillment of any of the Wired Covenants unless a member of the Guardian Group has served on Wired Ventures a written notice on or before the date being one year from the date hereof giving reasonable details of the breach or non-fulfillment including if practicable an estimate of the mount of the liability of Wired Ventures in respect thereof and has issued and served proceedings in respect of each such breach or non-fulfillment within six months of the date of such written notice. 18.10.2 Wired Ventures shall not be liable in respect of any individual claim for breach of the Wired Covenants unless such claim individually exceeds (pound sterling)100. 18.10.3 Wired Ventures is not liable in respect of a breach of a Wired Covenant unless and until the mount that would otherwise be recoverable from Wired Ventures (but for this paragraph 18.10.3) in respect of that breach, when aggregated with any other amount or amounts recoverable in respect of other breaches of a Wired Covenant, exceeds (pound sterling)25.000 in which event Wired Ventures will be liable for the excess over (pound sterling)12,500. 18.10.4 The aggregate amount of the liability of Wired Ventures in respect of any breach or breaches of the Wired Covenants shall be limited to and in no event exceed (pound sterling)100,000. 18.11 Wired Ventures will procure that the registered offices of the Company and of Wired Limited are changed from 119 Farringdon Road and 12 Masons Avenue respectively not later than the earlier of the expiry of two months from the date hereof or the date on which the Company moves from the Premises. 16. 17 18.12.1 It is the intention of Wired Ventures to create other editions of Wired Magazine in Continental Europe and to raise capital to do so, and to encourage the participation of the Guardian in such business ventures. 18.12.2 In the event that Wired Ventures establishes (an "Establishment") a material publishing interest in Continental Europe with local partners of the relevant country in Wired Magazine through any entity other than an entity incorporated or resident in the United States of America ("Wired Europe"), then Wired Ventures will promptly notify the Guardian, and Wired Ventures will seek an investment from the Guardian in Wired Europe on terms and in an amount acceptable to Wired Ventures. Wired Europe shall not offer an investment opportunity to a UK newspaper publisher without offering the Guardian the opportunity to invest on the same terms. If any investment of the type described in this clause 18.12.2 is made, the aggregate amount of all such Investment will not exceed(pound sterling)l,000,000 (unless the Guardian and Wired Ventures agree otherwise). 18.12.3 In the event that Wired Ventures makes an Offer the Guardian may accept the Offer in full within 30 days of receipt thereof, failing which the Offer will be deemed rejected. 18.12.4 The provisions of this clause 18.12 shall have effect from Completion and shall terminate upon the earlier of 22 July 1998 and retirement of the Loan Note. 18.13 Wired Ventures agrees to indemnify Guardian Investments against any costs or liabilities including by way of taxation, wherever arising) Guardian Investments or any other member of the Guardian Group may incur as a result of it being the Company, rather than Wired Investments which acquires the Company Share from Guardian Investments. (The "Company Share" is the one Share acquired by the Company from Guardian Investments under the Agreement). 18.14 The Company and Wired Investments agree that, should any member of the Guardian Group be able and wish in the future to submit a claim for group relief in respect of Guardian Investments' 50% investment in the Company (a "Claim"), the Company and Wired Investments will give all necessary co-operation to such member by way of provision of relevant information and signing of any requisite consent in respect of any such Claim in respect of the 50% investment Provided that: (a) the Guardian will procure that the relevant member of the Guardian Group withdraws any Claim to the extent that it has not been unconditionally greed by the Inland Revenue by 31 December 1996 and that the members of the Guardian Group will not make any Claims after that date: (b) the Guardian will promptly pay in cash to the Company 80% of the amount of any successful Claim net of reasonable third party expenses 17. 18 (whether the benefit of the Claim is provided to the Guardian in cash or by tax credit or otherwise). 19. DEFINITIONS 19.1 In the letter of agreement:- "AGREED FORM" means in the form initialled on behalf of Wired Investments and the Guardian; "ENCUMBRANCE" means a mortgage, charge, pledge, lien, option, restriction, right of first refusal. right of pre-emption (other than as contained in the articles of association of the Company or the Shareholders Agreement), third-party right or interest, other encumbrance or security interest of any kind, or another type of preferential arrangement (including, without limitation, a title transfer and retention arrangement) having similar effect; an "EXCLUDED MATTER" is any liability incurred by Louis Rossetto, Jane Metcalfe, Ian Stewart or John Plunkett or any other Wired US Person on behalf of the Company without the knowledge of either the Guardian or Guardian Investments; "GUARANTEE" means the guarantee in the agreed form to be given by Wired Ventures in favor of the Guardian; the "GUARDIAN COVENANTS" means the covenants in clauses 4.1, 9, 10.1, 11, 12.1 and 18.7. the "GUARDIAN GROUP" means the Guardian and its group undertakings from time to time (as defined by section 259 of the Companies Act 1985) excluding for the avoidance of doubt the Company and Wired Limited; "INVESTORS OFFER" means an offer to local partners of the relevant country in Wired Europe in relation to the same Establishment as the relevant Offer which is accepted by some or all of the proposed local partners; "LETTER OF OPINION" means the letter of opinion to the Guardian in the agreed form to be given by Cooley Godward; "JOINT VENTURE" means the transactions contemplated by the Shareholders Agreement; "LOAN NOTE" means the (pound sterling)1,000,000 loan note to be issued by the Company in favor of the Guardian in the agreed form; "NON PARI PASSU OFFER" means an Offer other than a Pari Passu Offer; 18. 19 "OFFER" means an offer to the Guardian to purchase securities in relation to an Establishment; "PARI PASSU OFFER" means an Offer on terms which are pari passu in all material respects with an Investors Offer. For the avoidance of doubt, if different Investors Offers are made to local partners of the relevant country in relation to the same Establishment, "pari passu" for these purposes means pari passu with the most favorable such Investors Offer or, if there are acceptances of relevant Investors Offers in different amounts, pari passu with the Investors Offer the accepted amount of which is closest to the amount in respect of which the Offer is accepted unless the closest amount is less than (pound sterling)200.000 in which case it means pari passu with the closest amount above the amount in respect of which the Offer is accepted; "PURCHASERS" means Wired Investments, Wired New York and the Company; "SHARES" means the 50 "A" shares in the Company registered in the name of Guardian Investments; "WIRED BALANCE SHEET" means the balance sheet of Wired Ventures, notes in respect thereof and auditors report in respect thereof in the agreed form; "WIRED CORPORATE STRUCTURE" means the structure chart in the agreed form; the "WIRED COVENANTS" means the covenants in clause 18.9; "WIRED US PERSON" means any person who at the relevant time was an employee or officer of Wired Holdings, Inc., Wired USA Ltd., Wired Ventures, HotWired L.L.C., Wired New York or Wired Investments or any person acting on their instructions. 20. NOTICES 20.1 A notice under or in connection with this Agreement shall be in writing and shall be delivered personally of sent by fax or courier service to the party due to receive the notice, at its address set out in this Agreement or another address specified by that party by written notice to the others. 20.2 In the absence of evidence of earlier receipt, a notice or other communication is deemed given: 20.2.1 if delivered personally, when left at the address referred to below; 20.2.2 if sent by courier service, two days after dispatch; 20.2.3 if sent by fax, at 9.30 am (local time of the recipient) on the next business day (in the location of the recipient) following completion of its transmission. 19. 20 21. GOVERNING LAW, JURISDICTION 21.1 This Agreement is governed by, and shall be construed in accordance with, English law. 21.2 The parties irrevocably submit to the non-exclusive jurisdiction of the courts of England to hear and decide any suit, action or proceedings, and to settle any disputes, which may arise out of or in connection with this Agreement (respectively, "Proceedings" and "Disputes"). 21.3 Process by which any Proceedings are begun in England may be served on Wired Ventures, Wired Investments and/or Wired New York by being delivered to the Company at the Premises while the Company is still in occupation of the Premises and thereafter at the registered office of the Company from time to time in each case marked for the attention of the chief executive in accordance with clause 20. Nothing contained in this clause 21.3 affects the right to serve process in another manner permitted by law. 22. COUNTERPARTS 22.1 This Agreement may be executed in any number of counterparts each of which when executed and delivered is an original, but all the counterparts together constitute the same document. /s/ JIM MARKWICK /s/ JANE METCALFE GUARDIAN MEDIA GROUP PLC WIRED VENTURES, LTD. (registered no. 00094531) ("Wired Ventures") ("the Guardian") a California limited partnership 164 Deansgate 520 Third Street Manchester San Francisco M60 2RR California England USA 94107-1427 fax: 0161 832 0155 fax: 415 222 6229 by Wired Holdings. Inc. its general partner 20. 21 /s/ PAUL J NAISMITH /s/ JANE METCALFE Karadean Limited Wired World L.L.C. (registered no. 2922019) ("Wired Investments") ("Guardian Investments") a Delaware limited liability 164 Deansgate company Manchester 520 Third Street M60 2RR San Francisco England California, USA 94107 fax: 0161 832 0155 fax: 415 222 6229 /s/ PAUL J NAISMITH /s/ JANE METCALFE, /s/ PAUL NAISMITH Guardian Magazines Limited Executed as a Deed by Wired UK (registered no. 02830739) (registered no. 2972399) ("GML") (the "Company") 164 Deansgate 520 Third Street Manchester San Francisco M60 2RR California, USA England 94107 fax: 0171 837 0651 fax: 415 222 6229 /s/ PAUL J NAISMITH /s/ JANE METCALFE Guardian Newspapers Limited Wired New York (registered no. 00908396) ("Wired New York") ("GNL") 520 Third Street 164 Deansgate San Francisco Manchester California, USA M60 2RR 94107 England fax: 0171 837 0651 fax: 415 222 6229 21. 22 CONFORMED COPY WIRED UK (Incorporated in England with unlimited liability registered number 2972399) Issue Date: 22 July 1995 Issue Price: Tranche A:(pound sterling)350,000 Repayment Date: 22 July 1998 Tranche B:(pound sterling)650.000 Total (pound sterling)1,000,000 1. For value received, Wired UK ("THE COMPANY") promises to pay Guardian Media Group plc (registered number 00094531) ("THE NOTEHOLDER") the sum of one million pounds sterling ((pound sterling)1,000,000) in accordance with this Loan Note. This Loan Note is issued in two tranches - Tranche A in the sum of (pound sterling)350,000 and Tranche B in the sum of (pound sterling)650,000, totaling (pound sterling)1,000,000. Both Tranche A and Tranche B rank pari passu in all respects and all rights or obligations in respect of this Loan Note will apply pro rata to the two tranches. 2.1 If any Principal Sum, is outstanding on the Repayment Date, the Company shall repay the Principal Sum on the Repayment Date, but no interest shall be payable. 2.2 (a) In the event that the Company fails to publish a separate September 1995 edition of the UK edition of Wired magazine ("the UK Magazine") by 8 September 1995, then the Company will within 5 business days of such date repay (pound sterling) 300,000 of the Principal Sum (without interest) and paragraphs (b) and (c) of this Clause 2.2 will not apply. (b) In the event that the Company fails to publish a separate October 1995 edition of the UK Magazine by 1 October 1995, the Company will within 5 business days of such date repay (pound sterling)200,000 of the Principal Sum (without interest) and paragraph (c) of this Clause 2.2 will not apply. (c) In the event that the Company fails to publish a separate November 1995 edition of the UK Magazine by 1 November 1995, the Company will within 5 business days of such date repay (pound sterling)100,000 of the Principal Sum (without interest). 2.3 The Company shall promptly repay the Principal Sum (without interest) in the event that the affairs of Wired Ventures are no longer conducted in accordance with the wishes of one or both of Jane Metcalfe or Louis Rossetto (each being an "Equity Partner"); or that the right to receive more than one half of the assets or one half of the income (rather than losses) of Wired Ventures vests in a person who is not an Equity Partner in Wired Ventures other than: (a) a company or other legal entity owned or controlled by one or both of Jane Metcalfe or Louis Rossetto; or 1. 23 (b) a trust of which Jane Metcalfe or Louis Rossetto is or may be within the contemplated class of beneficiaries or is the settlor. 2.4 In the event that, prior to the Repayment Date, the Noteholder purchases securities of Wired Europe (as defined in the letter of agreement described in clause 4 hereof) the Company shall simultaneously repay (without interest) the Principal Sum or such lesser amount as may equal the amount of such investment. The parties acknowledge that the Company will not be a party to or a participant in the negotiations regarding any such transaction. 2.5 In the event that, prior to the Repayment Date, Wired Ventures makes a Pari Passu Offer (as defined in the letter of agreement described in clause 4 hereof) which is rejected, the Company shall promptly repay the Principal Sum or such lesser amount as may equal the amount of investment offered pursuant to such Pari Passu Offer, together with interest payable in accordance with clause 2.7 hereof.. The parties acknowledge that any decision whether to make a Pari Passu Offer will be made by Wired Ventures in its sole discretion, and the Company will not participate in any way in any such decision. 2.6 In the event that, prior to the Repayment Date, Wired Ventures makes a Non Pari Passu Offer (as defined in the letter of agreement described in clause 4 hereof) which is rejected, the Company shall promptly repay the Principal Sum or such lesser amount as may equal the amount of investment offered pursuant to such Non Pari Passu Offer, together with interest payable in accordance with clause 2.7 hereof unless the Noteholder elects not to accept prepayment by notice in writing within 30 days of receipt of the Non Pari Passu Offer. The parties acknowledge that any decision whether to make a Non Pari Passu Offer will be made by Wired Ventures in its sole discretion, and the Company will not participate in any way in any such decision. 2.7 Interest payable under clauses 2.5 or 2.6 hereof shall accrue from (and including) the Issue Date to (and excluding) the date of repayment at the rate of 5% per annum (compounded with annual rests on each anniversary of the Issue Date) and shall be payable after deduction of tax (if applicable). 2.8 The "Principal Sum" means the principal amount (if any) owing from time to time under this Loan Note. 3.1 Wired Ventures irrevocably and unconditionally guarantees to the Noteholder the due and punctual payment by the Company of all principal and interest payable in respect of this Loan Note. If at any time the Company has failed to pay any sum due to the Noteholder in respect of the Loan Note, Wired Ventures shall pay such sum to the Noteholder on demand. Wired Venture's obligations under this clause 3.1 are primary obligations and not those of a surety. If an obligation of the Company is void, voidable or unenforceable for any reason, Wired Ventures' obligations under this clause 3.1 are unaffected and Wired Ventures shall perform the obligations of the Company as if it were primarily liable for such performance. 2. 24 3.2 Wired Ventures' obligations under clause 3. l hereof are continuing obligations and are not satisfied, discharged or affected by an intermediate partial payment or settlement of account by or a change in the constitution or control of, or the insolvency of, or bankruptcy, winding up or analogous proceedings relating to, the Company. 3.3 The liability of Wired Ventures under clause 3.1 hereof is not affected by an arrangement which the Noteholder may make with the Company or with another person which (but for this clause 3.3) might operate to diminish or discharge the liability of or otherwise provide a defence to a surety. 3.4 The Noteholder may at any time as it thinks fit without reference to Wired Ventures grant a later time for payment or grant another indulgence or agree to an amendment, variation, waiver or release in respect of an obligation of the Company under this Loan Note but nothing in this clause 3.4 affects the liability of Wired Ventures under clause 3.1 hereof which shall still pay in full. 3.5 So long as the Company remains under an actual or contingent obligation to pay any principal or interest in respect of the Loan Note, Wired Ventures shall not exercise a right which it may at any time have by reason of the performance of its obligations under clause 3.1 to be indemnified by the Company, or to take the benefit (in whole or in part and by way of subrogation or otherwise) of any of the Noteholder's rights under this Loan Note or in respect of the Loan Note. 3.6 The liability of Wired Ventures under clause 3.1 is not affected by the avoidance of any assurance or payment or any release, settlement or discharge which is given or made on the faith of any assurance or payment, in either case under an enactment relating to bankruptcy or insolvency of the Company or Wired Ventures. 3.7 The guarantee in this clause 3 operates in addition to the guaranty being given on today's date by Wired Ventures to the Noteholder in a document governed by the laws of the State of California Provided Always that the Noteholder may not recover twice in respect of the same liability nor shall Wired Ventures be obliged to pay in total more than the amount of all principal and interest payable in respect of this Loan Note. 4. The provisions of clauses 16, 18.2, 20, 21 and 22 of the letter of agreement of today's date between the Company, Wired Ventures, the Noteholder, Wired World L.L.C., Wired New York Ltd., Karadean Limited, Guardian Magazines Limited and Guardian Newspapers Limited apply to this Loan Note mutatis mutandis. 5. "Wired Ventures" means Wired Ventures Ltd, a California limited partnership. 6. Neither the Company nor Wired Ventures shall have any right to set off any liability or debt owed or alleged to be owed to either of them by the Noteholder against any liability to the Noteholder under this Loan Note. 3. 25 7. If the Company defaults in the payment of any sum due and payable under this Loan Note on the due date, the Company shall pay default interest on such sum (or, as the case may be, the amount thereof for the time being due and unpaid) to the Noteholder from the due date to (and including) the date of actual payment calculated at the rate per annum being the aggregate of 10% per annum and the base rate of National Westminster Bank plc from time to time. Such default interest will be paid after deduction of tax (if applicable). 8.1 The benefit of this Loan Note may be assigned from time to time to any member of the Guardian Group Provided that if a Noteholder ceases to be a member of the Guardian Group it shall promptly assign the benefit of this Loan Note to an entity which is a member of the Guardian Group pending which the rights of the Noteholder hereunder (other than this right of assignment) shall be suspended. For the avoidance of doubt, the `Noteholder' is deemed to mean the lawful holder of this Loan Note from time to time. 8.2 Subject as provided in clause 8.l hereof, a party may not assign or transfer or purport to assign or transfer a right or obligation under this Loan Note without first having obtained the consent of the other parties hereto, such consent not to be unreasonably withheld or delayed. Executed as a deed and delivered by the Company, Wired Ventures and the Noteholder on the Issue Date. 4. 26 Executed as a deed by ) WIRED UK ) /s/ JANE METCALFE Signature JANE METCALFE Name of director /s/ PAUL NAISMITH Signature of director PAUL NAISMITH Name of director/secretary Executed as a deed by ) WIRED VENTURES, LTD by ) WIRED HOLDINGS, INC. its ) general partner ) /s/ JANE METCALFE Signature JANE METCALFE Name Signed for and on behalf of ) GUARDIAN MEDIA GROUP PLC ) /s/ JIM MARKWICK Signature JAMES MARKWICK Name of director 5. 27 GUARANTY This continuing GUARANTY ("Guaranty") is entered into as of July 22, 1995, by WIRED VENTURES, LTD., a California limited partnership ("Guarantor"), in favor of GUARDIAN MEDIA GROUP PLC, an English company ("Note Holder"). RECITALS A. Concurrently herewith, Note Holder, Guarantor and WIRED UK, incorporated under the laws of England with unlimited liability ("Borrower"), are entering into that certain Loan Note dated July 22, 1995, (the "Loan Note"), pursuant to which Note Holder has agreed to extend certain financial accommodations to Borrower, subject to the terms and conditions set forth therein and that certain Letter of Agreement dated July 22, 1995 by and among Guarantor, Note Holder, Borrower, Guardian Magazines Limited, Karadean Limited, Guardian Newspapers Limited, Wired World L.L.C. and Wired New York (the "Letter Agreement"). B. In consideration of the agreement of Note Holder to enter into the Loan Note and provide the financial accommodations thereunder, Guarantor is willing to guarantee the full payment and performance by Borrower of all of its obligations thereunder, all as further set forth herein. C. Guarantor is or will be, whether directly or through one or more intermediary companies, the parent company of Borrower. D. Guarantor will obtain substantial direct and indirect benefit from the Loan Note. AGREEMENT NOW, THEREFORE, in order to induce Note Holder to execute the Loan Note, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Guarantor hereby represents, warrants, covenants and agrees as follows: SECTION 1. DEFINITIONS. All capitalized terms used but not defined herein shall have the meanings given to them in the Loan Note. SECTION 2. GUARANTY. 2.1 UNCONDITIONAL GUARANTEE OF PAYMENT. In consideration of the foregoing, Guarantor hereby irrevocably, absolutely and unconditionally guarantees to Note Holder the prompt and complete payment when due (whether at stated maturity, by acceleration or otherwise) of all indebtedness of Borrower to Note Holder created under the Loan Note (all such indebtedness being the "Liabilities"), together with the prompt payment of all expenses, 1. 28 including, without limitation, reasonable attorneys' fees, and costs incurred by Note Holder incidental to the collection of the Liabilities. The term "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether recovery upon such indebtedness may be or hereafter become unenforceable. (The Liabilities and all other obligations and covenants to be performed by Guarantor under this Guaranty shall hereinafter be collectively referred to as the "Guaranty Obligations.") 2.2 EXPENSES. Guarantor agrees to pay all expenses, including, without limitation, reasonable attorneys' fees, and costs incurred by Note Holder in connection with the enforcement of Note Holder's rights under this Guaranty. 2.3 JOINT AND SEVERAL LIABILITY. If any other person in addition to Guarantor shall guarantee the payment of all or any part of the Liabilities, all guarantors and their respective successors and assigns shall be jointly and severally bound by the terms of this Guaranty and any other guaranty of the Liabilities, notwithstanding any relationship or contract of co-obligation by or among such guarantors. Note Holder's enforcement of the Guaranty Obligations is not conditioned upon Note Holder's obtaining from any other person a guaranty of all or any part of the Liabilities. SECTION 3. PAYMENTS. All payments to be made by Guarantor to Note Holder hereunder shall be made in lawful money of England, in immediately available funds, addressed to Note Holder at 164 Deansgate, Manchester, M60 2RR England (or such other address as Note Holder may hereafter specify to the Guarantor), on the date due, and shall be accompanied by a notice from Guarantor stating that such payments are made under this Guaranty. SECTION 4. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and warrants to Note Holder that: (a) Guarantor (i) is a limited partnership duly organized, validly existing and in good standing under the laws of the State of California; (ii) is duly qualified to do business and is in good standing in every jurisdiction where the nature of its business requires it to be so qualified (except where the failure to so qualify would not have a material adverse effect on the Guarantor's condition, financial or otherwise, or on Guarantor's ability to pay or perform the Guaranty Obligations); and (iii) has all requisite power and authority to execute and deliver this Guaranty and each other document executed and delivered by Guarantor pursuant to the Loan Note or this Guaranty and to perform its obligations thereunder and hereunder. (b) The execution, delivery and performance by Guarantor of this Guaranty (i) are within Guarantor's powers and have been duly authorized by all necessary action; (ii) do not contravene Guarantor's partnership agreement or any law or any contractual restriction 2. 29 binding on or affecting Guarantor or by which Guarantor's property may be affected; (iii) do not require any authorization or approval or other action by, or any notice to or filing with, any governmental authority or any other person under any indenture, mortgage, deed of trust, lease, agreement or other instrument to which Guarantor is a party or by which Guarantor or any of its property is bound except such as have been obtained or made; and (iv) do not, except as contemplated by the Loan Note or this Guaranty, result in the imposition or creation of any lien upon the property of Guarantor. (c) This Guaranty constitutes the legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms, except as the enforceability thereof may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally. (d) There is no action, suit or proceeding affecting Guarantor pending or threatened before any court, arbitrator, or governmental authority, domestic or foreign, which may have a material adverse effect on the ability of Guarantor to perform its obligations under this Guaranty. (e) The Guaranty Obligations are not subject to any offset or defense against Note Holder or Borrower of any kind. (f) The incurrence of the Guarantor's obligations under this Guaranty will not cause the Guarantor to (i) become insolvent; (ii) be left with unreasonably small capital for any business or transaction in which Guarantor is presently engaged or plans to be engaged; or (iii) be unable to pay its debts as such debts mature. (g) Guarantor covenants, warrants, and represents to Note Holder that all representations and warranties contained in this Guaranty shall be true at the time of Guarantor's execution of this Guaranty, and shall continue to be true until the Guaranty Obligations have been paid and performed in full. Guarantor expressly agrees that any misrepresentation or breach of any warranty whatsoever contained in this Guaranty shall be deemed material. SECTION 5. ABSOLUTE GUARANTY. Guarantor agrees that the liability hereunder shall be the immediate, direct, and primary obligation of Guarantor and shall not be contingent upon Note Holder's exercise or enforcement of any remedy it may have against Borrower or any other person or against any security for the Guaranty Obligations. Without limiting the generality of the foregoing, the Guaranty Obligations shall remain in full force and effect without regard to and shall not be impaired or affected by, nor shall Guarantor be exonerated or discharged by, any of the following events: (a) Insolvency, bankruptcy, reorganization, arrangement, adjustment, composition, assignment for the benefit of creditors, death, liquidation, winding up or dissolution of Borrower, Guarantor or any other guarantor of the Liabilities; 3. 30 (b) Any limitation, discharge, or cessation of the liability of Borrower, Guarantor or any other guarantor for the Liabilities due to any statute, regulation or rule of law, or any invalidity or unenforceability in whole or in part of the documents evidencing the Liabilities or any other guaranty of the Liabilities; (c) Any merger, acquisition, consolidation or change in structure of Borrower, Guarantor or any other guarantor of the Liabilities or any sale, lease, transfer or other disposition of any or all of the assets or shares of Borrower, Guarantor or any other guarantor of the Liabilities; (d) Any assignment or other transfer, in whole or in part, of Note Holder's interests in and rights under this Guaranty or the Loan Note, including, without limitation, Note Holder's right to receive payment of the Liabilities or the Guaranty Obligations, as the case may be; (e) Any claim, defense, counterclaim or setoff, other than that of prior performance, that Borrower, Guarantor or any other guarantor of the Liabilities may have or assert, including, but not limited to, any defense of incapacity or lack of corporate or other authority to execute any documents relating to the Liabilities, the Guaranty Obligations or any collateral securing the Guaranty Obligations; (f) Note Holder's amendment, modification, renewal, extension, cancellation or surrender of any agreement, document or instrument relating to the Loan Note, the Liabilities or the Guaranty Obligations; (g) Note Holder's exercise or nonexercise of any power, right or remedy with respect to the Liabilities, the Guaranty Obligations, including, but not limited to, Note Holder's compromise, release, settlement or waiver with or of Borrower, Guarantor or any other person; (h) Note Holder's vote, claim, distribution, election, acceptance, action or inaction in any bankruptcy case related to the Liabilities or the Guaranty Obligations; and (i) Any impairment or invalidity of any collateral or any collateral securing the Guaranty Obligations or any failure to perfect any of Note Holder's Liens thereon or therein. SECTION 6. DUE DILIGENCE. Guarantor acknowledges that it has, independently of and without reliance on Note Holder, made its own credit analysis of Borrower, performed its own legal review of this Guaranty, the Loan Note and all related documents and is not relying on Note Holder with respect to any of the aforesaid items. Guarantor has established adequate means of obtaining from Borrower on a continuing basis financial and other information pertaining to Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor's risks hereunder, and Guarantor further agrees that Note Holder shall have no 4. 31 obligation to disclose to Guarantor information or material with respect to Borrower acquired in the course of Note Holder's relationship with Borrower. SECTION 7. TOLLING OF STATUTE OF LIMITATIONS. Guarantor agrees that any payment or performance of any of the Liabilities or other acts which tolls any statute of limitations applicable to the Liabilities shall also toll the statute of limitations applicable to Guarantor's liability under this Guaranty. SECTION 8. WAIVERS. 8.1 GENERAL WAIVERS. Guarantor hereby expressly waives (a) diligence, presentment, demand for payment, protest, benefit of any statute of limitations affecting Borrower's liability under the Loan Note or the enforcement of this Guaranty; (b) discharge due to any disability of Borrower; (c) any defenses of Borrower to obligations under the Loan Note not arising under the express terms of the Loan Note or from a material breach thereof by Note Holder which under applicable law has the effect of discharging Borrower from the Liabilities as to which this Guaranty is sought to be enforced; (d) the benefit of any act or omission by Note Holder which directly or indirectly results in or aids the discharge of Borrower from any of the Liabilities by operation of law or otherwise; (e) all notices whatsoever, including, without limitation, notice of acceptance of this Guaranty and the incurring of the Liabilities; and (f) any requirement that Note Holder exhaust any right, power or remedy or proceed against Borrower or any other security for, or any other guarantor of, or any other party liable for, any of the Liabilities, or any portion thereof. Guarantor specifically agrees that it shall not be necessary or required, and Guarantor shall not be entitled to require, that Note Holder (i) file suit or proceed to assert or obtain a claim for personal judgment against Borrower, for all or any part of the Liabilities; (ii) make any effort at collection or enforcement of all or any part of the Liabilities from the Borrower; (iii) foreclose against or seek to realize upon any security now or hereafter existing for all or any part of the Liabilities; (iv) file suit or proceed to obtain or assert a claim for personal judgment against Guarantor or any other guarantor or other party liable for all or any part of the Liabilities; (v) exercise or assert any other right or remedy to which Note Holder is or may be entitled in connection with the Liabilities or any security or guaranty relating thereto to assert; or (vi) file any claim against assets of Borrower before or as a condition of enforcing the liability of Guarantor under this Guaranty. Without limiting the generality of the foregoing, Guarantor expressly waives the benefit of California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899 and 1432. SECTION 9. CONTINUING GUARANTY. This Guaranty shall be a continuing guaranty and shall remain in effect until the Liabilities have been paid in full. Any other guarantors of all or any part of the Liabilities may be released without affecting the liability of Guarantor hereunder. SECTION 10. REINSTATEMENT. Notwithstanding any provision of the Loan Note to the contrary, the liability of Guarantor hereunder shall be reinstated and revived and the rights of Note Holder shall continue if and to the extent that for any reason any payment by or on behalf 5. 32 of Borrower is rescinded or must be otherwise restored by Note Holder, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. The determination as to whether any such payment must be rescinded or restored shall be made by Note Holder in its sole discretion; provided, however, that if Note Holder chooses to contest any such matter at the request of Guarantor, Guarantor agrees to indemnify and hold harmless Note Holder from all costs and expenses (including, without limitation, reasonable attorneys' fees) of such litigation. To the extent any payment is rescinded or restored, the Liabilities shall be revived in full force and effect without reduction or discharge for that payment. SECTION 11. EVENTS OF DEFAULT. 11.1 EVENT OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) The occurrence of a default under or as defined in the Loan Note; or (b) Any representation of warranty made by Guarantor to Note Holder in this Guaranty, or in any statement, report, financial statement or certificate delivered by Guarantor to Note Holder is not true and correct or is misleading, in any material respect, when made or delivered; or (c) The commencement by Guarantor of a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or similar law; or the consent by Guarantor to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator, agent or other similar official for Guarantor for any substantial part of its property; or the making by Guarantor of any assignment for the benefit of creditors; or any case or proceeding is commenced by Guarantor for its dissolution, liquidation or termination; or the taking of any action by or on behalf of Guarantor in furtherance of any of the foregoing; or (d) The filing of a petition with a court having jurisdiction over Guarantor to commence an involuntary case for Guarantor under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or similar law; or the appointment of a receiver, liquidator, assignee, custodian, trustee, agent, sequestrator or other similar official for Guarantor or for any substantial part of its property; or any substantial part of Guarantor's property is subject to any levy, execution, attachment, garnishment or temporary protective order; or the ordering of the dissolution, liquidation or winding up of Guarantor's affairs and the failure to obtain the dismissal of such petition or appointment or the continuance of such decree or order unstayed and in effect for or within a period of sixty (60) days from the date of such filing, appointment, or entry of such order or decree. 6. 33 11.2 ACCELERATION OF THE LIABILITIES. Upon and after an Event of Default hereunder, then all or any part of the Liabilities may, at the option of Note Holder and without demand, notice, or legal process of any kind, be declared, and immediately shall become, due and payable. SECTION 12. NO WAIVER; AMENDMENTS. No failure on the part of Note Holder to exercise, no delay in exercising and no course of dealing with respect to, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. This Guaranty may not be amended or modified except by written agreement between Guarantor and Note Holder, and no consent or waiver hereunder shall be valid unless in writing and signed by Note Holder. SECTION 13. COMPROMISE AND SETTLEMENT. No compromise, settlement, release, renewal, extension, indulgence, change in, waiver or modification of any of the Liabilities or the release of Guarantor or discharge of Borrower or Guarantor from the performance of any of the Liabilities shall release or discharge Guarantor from this Guaranty. SECTION 14. NOTICE. Note Holder shall provide Guarantor with a copy of any notice of default to Borrower as provided under the Loan Note; provided, however, that the failure of Note Holder to provide such notice to Guarantor will not exonerate Guarantor of any obligations under this Guaranty. Except as otherwise provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be delivered in person, with receipt acknowledged, or sent by telex, telecopy, computer transmission or by United States mail, registered or certified, return receipt requested, postage prepaid and addressed as follows: If to Guarantor: Wired Ventures, Ltd. 520 Third Street San Francisco, California 94107-1427 USA Attention: Jane Metcalfe Telephone: +1 415 222 6200 Facsimile: +1 415 222 6229 with copies to: Cooley Godward Castro Huddleson & Tatum One Maritime Plaza, 20th Floor San Francisco, California 94111 USA Attention: Kenneth L. Guernsey Telephone: +1 415 693 2000 Facsimile: +1 415 951 3699 7. 34 If to Note Holder: Guardian Media Group plc 164 Deansgate Manchester M60 2RR ENGLAND Telephone: +44 161 832 7200 Facsimile: +44 161 832 0155 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three (3) business days after the same shall have been deposited in the United States mail. SECTION 15. ENTIRE AGREEMENT. This Guaranty, the Loan Note and the Letter Agreement constitute and contain the entire agreement of the parties and supersede any and all prior and contemporaneous agreements, negotiations, correspondence, understandings and communications between Guarantor and Note Holder, whether written or oral, respecting the subject matter hereof. SECTION 16. SEVERABILITY. If any provision of this Guaranty is held to be unenforceable under applicable law for any reason, it shall be adjusted, if possible, rather than voided in order to achieve the intent of Guarantor and Note Holder to the extent possible. In any event, all other provisions of this Guaranty shall be deemed valid and enforceable to the full extent possible under applicable law. SECTION 17. SUBORDINATION OF INDEBTEDNESS. Any indebtedness or other obligation of Borrower now or hereafter held by or owing to Guarantor is hereby subordinated in time and right of payment to all obligations of Borrower to Note Holder, except as such indebtedness or other obligation is permitted to be paid under the Loan Note; and such indebtedness of Borrower to Guarantor is assigned to Note Holder as security for this Guaranty, and if Note Holder so requests shall be collected, enforced and received by Guarantor in trust for Note Holder and to be paid over to Note Holder on account of the Liabilities of Borrower to Note Holder, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any notes now or hereafter evidencing such indebtedness of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Note Holder. Guarantor shall, and Note Holder is hereby authorized to, in the name of Guarantor from time to time, execute and file financing statements and continuation statements and execute such other documents and take such other action as Note Holder deem necessary or appropriate to perfect, preserve and enforce its rights hereunder. SECTION 18. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default, Note Holder is hereby authorized at any time and from time to time, 8. 35 without notice to Guarantor (any such notice being expressly waived by Guarantor), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by Note Holder or any of its affiliates to or for the credit of the account of Guarantor against the Guaranty Obligations of Guarantor to Note Holder now or hereafter existing irrespective of whether or not Note Holder shall have made any demand under this Guaranty or the Loan Note and although such obligations may be unmatured. The rights of Note Holder under this Section 18 are in addition to all other rights and remedies (including, without limitation, other rights of set-off) which Note Holder may have. Guarantor grants to Note Holder a security interest in any and all such deposits as security for satisfaction of the foregoing obligations. SECTION 19. INDEMNITY. In addition to and without limiting or impairing in any manner whatsoever Guarantor's other obligations under this Guaranty, Guarantor agrees to indemnify the Note Holder from and against any and all claims, losses and liabilities growing out of or resulting from this Guaranty (including, without limitation, enforcement of this Guaranty), except claims, losses or liabilities resulting from such person's gross negligence or willful misconduct. SECTION 20. GOVERNING LAW. This Guaranty shall be binding upon and inure to the benefit of Guarantor and Note Holder and their respective successors and assigns, except that Guarantor shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Note Holder. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of California. SECTION 21. WAIVER OF SPECIFIC RIGHTS. GUARANTOR HEREBY IRREVOCABLY WAIVES AND RELEASES: (a) ANY AND ALL RIGHTS IT MAY HAVE AT ANY TIME (WHETHER ARISING DIRECTLY OR INDIRECTLY, BY OPERATION OF LAW, CONTRACT OR OTHERWISE) TO REQUIRE THE MARSHALING OF ANY ASSETS OF BORROWER, WHICH RIGHT OF MARSHALING MIGHT OTHERWISE ARISE FROM ANY SUCH PAYMENTS MADE OR OBLIGATIONS PERFORMED; (b) ANY AND ALL RIGHTS THAT WOULD RESULT IN GUARANTOR BEING DEEMED A "CREDITOR" UNDER THE UNITED STATES BANKRUPTCY CODE OF BORROWER OR ANY OTHER PERSON, ON ACCOUNT OF PAYMENTS MADE OR OBLIGATIONS PERFORMED BY GUARANTOR; AND (c) ANY CLAIM, RIGHT OR REMEDY WHICH GUARANTOR MAY NOW HAVE OR HEREAFTER ACQUIRE AGAINST BORROWER THAT ARISES HEREUNDER AND/OR FROM THE PERFORMANCE BY GUARANTOR HEREUNDER INCLUDING, WITHOUT LIMITATION, ANY CLAIM, REMEDY OR RIGHT OF SUBROGATION, REIMBURSEMENT, EXONERATION, CONTRIBUTION, INDEMNIFICATION, OR PARTICIPATION IN ANY CLAIM, RIGHT OR REMEDY OF 9. 36 NOTE HOLDER AGAINST BORROWER OR ANY COLLATERAL SECURITY WHICH THE NOTE HOLDER MAY NOW HAVE OR MAY HEREAFTER ACQUIRE, WHETHER OR NOT SUCH CLAIM, RIGHT OR REMEDY ARISES IN EQUITY, UNDER CONTRACT, BY STATUTE, UNDER COMMON LAW OR OTHERWISE. IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as of the date first written above. GUARANTOR: WIRED VENTURES, LTD., a California limited partnership By: Wired Holdings, Inc., its general partner By: /s/ JANE METCALFE ------------------------- Printed Name: Jane Metcalfe --------------- Title: President ---------------------- Accepted and Acknowledged by: GUARDIAN MEDIA GROUP PLC By: /s/ JIM MARKWICK ----------------------------- Printed Name: Jim Markwick ------------------- Title: Director -------------------------- 10. EX-10.5 10 LICENSE AGREEMENT 1 EXHIBIT 10.5 LICENSE AGREEMENT THIS AGREEMENT, made this 30th day of May 1994 ("Effective Date") between WIRED VENTURES, LTD., a California Limited Partnership, having its principal place of business at 544 Second Street, Third Floor, San Francisco, California, the United States of America 94107 ("Licensor") and DOHOSHA PUBLISHING CO., LTD., a corporation organized and existing under the laws of Japan, having its principal place of business at 2, Chudoji-Kagita-Cho, Shimogyo-ku, Kyoto-shi, Kyoto, Japan ("Licensee"). WITNESSETH: WHEREAS, WIRED USA, LTD. (an affiliate of Licensor) and Licensee executed a Letter Agreement dated November 12, 1993; and WHEREAS, Wired USA, Ltd. and WIRED HOLDINGS, INC. (an affiliate of Licensor) subsequently transferred their license and ownership rights respectively in the trademark "WIRED" to Licensor, including publication and ownership rights for the trademark in Japan; and WHEREAS, Licensor is engaged in the publication of a monthly magazine entitled "WIRED", throughout the United States and the rest of the world; WHEREAS, Licensee desires to be granted a license by Licensor to publish the Licensed Products, as hereinafter defined, throughout the Territory, as hereinafter defined, and Licensor is willing to grant the same to Licensee; and WHEREAS, Licensee desires to obtain the exclusive right as the licensee of such Licensed Mark to use the same in any paper-based publication containing editorial content and published and distributed in Japan and in any paper-based Japanese language publication published and distributed anywhere in the world and Licensor is willing to grant such right to Licensee provided such publications are Licensed Products. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto agree as follows: 1. DEFINITIONS. The following definitions shall be applicable throughout this Agreement: (a) "LICENSED PRODUCTS" shall mean (a) the Japanese Edition, as hereinafter defined, and (b) any Paper Products, as hereinafter defined, published and distributed in any language in Japan or Paper Products in the Japanese language published and distributed anywhere in the world, either of which have been added to the terms and conditions of this License Agreement 1 2 by a Licensed Product Appendix to be executed separately by the parties hereto substantially in the form attached hereto as Exhibit A ("Licensed Product Appendix"). (b) "LICENSED MARK" shall mean the trademarks and service marks listed on Exhibit B attached hereto. (c) "JAPANESE EDITION" shall mean the magazine published in paper format principally in the Japanese language, by Licensee in Japan, in which the Licensed Mark is used on the cover and the principal focus of which is the digital revolution and other technological, political and cultural issues relating to the digital age. (d) "PAPER PRODUCTS" shall mean any publication (other than the Japanese Edition) containing editorial content and published on paper media including, but not limited to, books, and magazines, in which the Licensed Mark is used and for which the parties have executed a Licensed Product Appendix. (e) "U.S. EDITION" shall mean WIRED Magazine as published by Licensor in the United States of America. (f) "MATERIAL(S)" shall mean all the editorial matters and materials which appear and will appear in the U.S. Edition which Licensor has the ability to make available to Licensee for use in the Licensed Products, including but not limited to articles, pictures, photographs, illustrations, and advertisements. (g) "LICENSED TERRITORY" shall mean Japan and its territories and possessions. (h) "LAUNCH DATE" shall mean the date on which the Japanese Edition is first made available for purchase by consumers in the Licensed Territory. (i) "TERM" shall mean the period commencing on the Effective Date, and ending on the last day of the initial or extended term of this Agreement, as set forth in Section 17 hereof. (j) "NET ADVERTISING REVENUES" shall mean the total amount obtained from the sale of advertising pages in the Japanese Edition at the rate set forth in the rate card for the Japanese Edition, as published from time to time by Licensee, with deductions for commissions paid by Licensee to advertising agencies and media buyers. (k) "CIRCULATION REVENUES" shall mean (a) the total gross subscription priced billed subscribers for all subscriptions to the Japanese Edition plus (b) the cover price times the net number of copies of the Japanese Edition sold other than by subscription. Returns of non-subscription copies shall be considered in the computation of Circulation Revenues for the year in which such returns were received by Licensee regardless of the year in which the returned copies were sold. 2. 3 2. GRANT. (a) Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee the exclusive right and license, during the Term, to publish the Japanese Edition anywhere in the Licensed Territory. This exclusive right includes the exclusive right during the Term to publish in the Japanese Edition such Material and translations of Material as agreed upon the parties in accordance with Section 4 below, and the right to include in the Japanese Edition such other editorial materials ("Japanese Material") as it deems appropriate and in accordance with Section 8. (b) It is hereby agreed that Licensee has the right to sell the Japanese Edition published in the Licensed Territory both inside and outside the Licensed Territory. (c) Licensor grants to Licensee the exclusive right and license, during the Term, to use the Licensed Mark in connection with the publication of the Japanese Edition, as provided for in Subsection 2 (a) above, and to use the Licensed Mark in advertising, promotional, and display material in connection with the sale thereof in accordance with Section 12. (d) Licensor further grants to Licensee the exclusive right and license, during the Term, to use the Licensed Mark in connection with any Paper Product for which the parties have executed a Licensed Product Appendix. If the parties are unable to agree to the specific terms of distribution for any Paper Product, such Paper Product will not be included in this Agreement. (e) Licensee shall not use the Licensed Mark for any purpose other than those provided in this Section 2 and shall not use any variation of the Licensed Mark or any other mark misleadingly similar to the Licensed Mark without a separate written agreement with Licensor. (f) Licensee shall not have the right to grant sublicenses of the rights granted in this Section 2 without the prior written consent of Licensor. 3. RIGHT OF FIRST REFUSAL. Licensee shall have the right of first refusal to license the use of the trademark "WIRED" for goods and services other than the Licensed Products, including conferences, optical disks, and television programming, in Japan and/or in the Japanese language. The terms of such right of first refusal shall be as follows: Licensor may, from time to time, send a written proposal to Licensee proposing that a specified product or service be distributed under the trademark "WIRED" in Japan and/or in the Japanese language, which shall include a summary, in reasonable detail, of the material terms and conditions for such proposed distribution. Unless otherwise agreed to in writing, Licensee shall have a one-time option to accept Licensor's proposal by notifying Licensor of such acceptance in writing within ninety days of receiving Licensor's proposal. If Licensee does not 3. 4 accept Licensor's proposal within such ninety (90) day period, Licensee's right to obtain such license will expire and Licensor may distribute such product or service itself or offer such license to another party on terms not materially more favorable to such third party than those offered to Licensee. Unless Licensee has accepted a proposal for such goods or services, Licensor shall remain free to distribute goods and services other than Licensed Products under the trademark "WIRED" in Japan or in the Japanese language. 4. MATERIALS CREATED OR ACQUIRED BY LICENSOR. (a) Subject to Licensor's ability to secure rights for Japan, Licensee may use in the Japanese Edition, at its discretion, any of the Materials in the U.S. Edition. (b) Licensee may use such Materials in the Japanese Edition on the following basis: (i) For Materials created directly by Licensor, such Materials may be used in the Japanese Edition by Licensee free of charge, with no time limit on such use and Licensee may alter the same to accommodate Japanese culture and tastes, if necessary; (ii) For Materials submitted to Licensor by independent contractors, Licensor agrees to permit Licensee to use such Materials in the Japanese Edition to the extent permitted by, and subject to the terms (including payment of additional fees, translation rights, and restrictions on reprints) of any applicable agreement between Licensor and the party submitting such Materials. Licensee understands that this would typically entail a one-year right of first refusal on Japanese publication in exchange for a payment by Licensee to Licensor of a fee equal to * of the fee paid by Licensor in its acquisition of rights to the Materials. Licensee may alter editorial Material to accommodate Japanese culture and tastes only to the extent that Licensor is able to grant any such right to modify the Material. Licensee agrees it shall have no right to alter advertisements and artwork supplied by Licensor. (iii) For material used in the U.S. Edition and obtained by Licensor on a "one-time" use basis, Licensor agrees, if requested, to negotiate on Licensee's behalf to obtain the right for Licensee to use such material in the Japanese Edition as Material. It is recognized, however, that for various reasons (including, but not limited to, inability to obtain translation rights), material to be published in the U.S. Edition will not always be made available for publication in the Japanese Edition. Licensee shall take all steps required to preserve Licensor's rights in Materials provided to Licensee, including, but not limited to, inclusion of a correct and complete copyright and trademark notices (in the manner designated or approved by Licensor as indicated in Exhibit C) in each issue in which the Materials are published and credits for authors, illustrators, photographers and other contributors. All Materials supplied by Licensor shall be considered the property of Licensor or its suppliers. Licensor reserves the right to refuse to provide Licensee with Materials, and to revoke the right to publish Materials provided by Licensor to Licensee or any transactions of such Materials, if Licensor is notified of a suit or claim relating to such Materials, and Licensee agrees not to - --------------- * Confidential Treatment Requested. 4. 5 publish such Materials or any transactions of such Materials after receipt of such notice from Licensor. (c) Licensee shall ensure that any translator of any Material agrees that he or she will not have the right to use, reproduce, publish or otherwise distribute translations of the Material without authorization from Licensor. 5. MATERIALS USE SCHEDULE; MANNER OF EDITING. (a) Licensor shall provide Licensee with a summary or outline, together with an index, of all editorial Materials, and the cover, of each issue of U.S. Edition upon completion of production of such Materials. Such summaries, outlines, indices and covers shall be electronically transmitted at no charge, or if electronic transmission is not possible, shall be sent by courier of Licensee's expense. (b) Within seven (7) days of receipt of such index of Materials, Licensee shall provide Licensor with a list of the Materials required for publication in the Japanese Edition. Licensee and Licensor shall negotiate publication rights in accordance with Section 4. (c) Licensor shall, at Licensee's expense, deliver to Licensee the Materials that are requested by Licensee pursuant to Subsection 5(b) above, including the lay-out of each of such Materials in the form of low resolution data, within two (2) weeks following the receipt of any such request. (d) The parties will also negotiate publication rights for any available images in accordance with Section 4. Licensor shall, at its License's expense, deliver to Licensee each of the Materials in the form of high resolution data on magneto optical disk once scanning is complete. (e) Licensor shall, at its expense, deliver ten (10) copies of each U.S. Edition to Licensee forthwith upon publication thereof. 6. MATERIAL CREATED OR ACQUIRED BY LICENSEE. Licensor shall have the reciprocal right to use and publish material published in the Japanese Edition on the same terms as are set forth in Sections 4 and 5 as applied to Licensee. Licensee agrees, to the extent permitted by any applicable agreement between Licensee and the party submitting such original material, to include in its agreements for acquisition of original material to be used in the Japanese Edition provisions that provide for the right of Licensor to publish such material in the U.S. Edition upon the payment of a fee of up to * of the fee paid by Licensee in its acquisition of rights to the material. - --------------- * Confidential Treatment Requested. 5. 6 7. COLLABORATION. Licensor and Licensee agree that the U.S. and Japanese Editions shall each reflect the global perspective of WIRED Magazine, and each party agrees to provide the other party with information regarding internal discussions of future story ideas and story development in order to further the goal of a global perspective for all versions of WIRED Magazine. 8. QUALITY CONTROL. (a) The parties agree that the intent of this Agreement is a high level of collaboration in the publication of both the U.S. and Japanese Editions. Licensor shall not have the right to determine which articles published in the U.S. Edition shall be reprinted in the Japanese Edition. However, Licensee acknowledges that Licensor has an interest in maintaining the worldwide goodwill and recognition of the Licensed Mark and in ensuring that the Japanese Edition shares a common vision with the U.S. Edition in quality, format and content. Licensor acknowledges that Licensee has an interest in producing a Japanese Edition that meets the needs of the relevant market. Licensee acknowledges the unique look of the U.S. Edition, including the unusual design and high quality of manufacture, and agrees that the Japanese Edition will reflect a like unique quality measured by Japanese standards. (b) In order to ensure a common vision and establish acceptable quality standards, Licensee shall consult with Licensor in advance on the final look of the Japanese Edition. Licensee will submit the first issue of the Japanese Edition to Licensor for Licensor's approval prior to publication, and agrees that it will not publish the first issue until it has received Licensor's approval. Thereafter, Licensee agrees that all subsequent issues of the Japanese Edition will be of the same quality as the first issue. Licensee, at its expense, shall provide ten (10) copies of each issue of the Japanese Edition promptly after publication for Licensor's review and comment. In addition, Licensee shall, at its expense, provide samples of any Licensed Products or other material or advertising bearing the Licensed Mark to Licensor upon Licensor's request. Licensee shall employ and maintain a staff adequate for publication of the Japanese Edition. (c) If at any time during the term of this Agreement, Licensor determines that any Licensed Product does not meet the quality standards required in this Section 8 or a Licensed Product Appendix, Licensor shall notify Licensee and shall specify the steps Licensee must take to correct the quality of the Licensed Product to Licensor's satisfaction. Licensee agrees to bring the quality of the Licensed Product up to the standards required in this Section 8 or a Licensed Product Appendix in the next issue of the Japanese Edition or the next publication or manufacture of any Licensed Product. 9. LICENSE FEES. In consideration of the rights and licenses, including but not limited to that of the use of the Materials and the Licensed Mark, granted to Licensee herein, Licensee shall pay to Licensor the following license fees: 6. 7 (a) ADVERTISING REVENUES. Licensee shall pay to Licensor the below-specified percentages of Net Advertising Revenues earned per issue of the Japanese Edition:
NET ADVERTISING REVENUE PER ISSUE ROYALTY RATE *
(b) CIRCULATION REVENUES. Licensee shall pay to Licensor the below-specified percentages of Circulation Revenues earned from the sale of Licensed Products per issue:
NUMBER OF COPIES SOLD PER ISSUE ROYALTY RATE *
10. ADVANCE PAYMENT. Licensee shall pay to Licensor * upon the execution of this Agreement and shall pay to Licensor an additional * six months after the Launch Date. Such payments shall constitute advances against royalties and shall be non-refundable. 11. MINIMUM ROYALTIES. Based on the royalties described in Sections 9 and 10 above, Licensee agrees to pay to Licensor guaranteed minimum annual royalties ("Minimum Royalties") as follows:
CALENDAR YEARS MINIMUM ANNUAL ROYALTIES *
Minimum Royalties for each year shall be paid within thirty (30) days of the end of each calendar year. If royalties at least equal to the Minimum Royalties are not paid when due during each of the * years ending with calendar year * , the License shall automatically terminate on January 31, * . Beginning with calendar year * , if royalties at least equal to the Minimum Royalties are not paid for any * consecutive calendar years, the License shall - --------------- * Confidential Treatment Requested. 7. 8 automatically terminate upon the due date for the payment of the Minimum Royalties for the * of such years. 12. PROMOTIONAL ITEMS. Licensee may use the Licensed Mark in connection with, and no royalty shall be due on, any of the following items which Licensee distributes free of charge solely for the promotion of Licensed Products: mugs, pens and stationery. The use of the Licensed Mark on or with any other promotional items must be approved in writing by Licensor. Royalties will be negotiated and due if Licensee desires to sell any promotional items. 13. REPORTS, RECORDS AND AUDIT RIGHTS. (a) Within ninety (90) days after the end of each calendar quarter, Licensee will provide Licensor with a statement showing for the previous quarter and for the calendar year-to-date, the value, expressed in local currency, of subscriptions billed, the net number and cover price of copies sold other than by subscriptions (showing gross non-subscription sales less returns) and Advertising Revenues billed (showing gross billings, commissions and discounts), accompanied by a copy of related print orders and distribution statements showing sales and returns and the amount of percentage royalties due and payable thereon. Receipt or acceptance by Licensor of any statement furnished pursuant hereto or any sums paid by Licensee hereunder shall not preclude Licensor from verifying the correctness thereof as provided below. (b) Licensee shall keep accurate books of accounts and records covering all transactions relating to this Agreement and Licensed Products and shall permit Licensor, directly or through its authorized agents or auditors, full access to and to inspect the same during reasonable business hours and upon prior written notice to enable Licensor and its authorized agents or auditors to conduct an examination of and to copy all such books and records. All books of account and records shall be kept available for at least two (2) calendar years after the expiration or termination of this Agreement, and in the event that there shall be an unresolved dispute with regard to the royalties payable hereunder at the end of such period of time, all such records shall be preserved by Licensee until such dispute shall have been resolved. (c) If any examination referred to in Section 13(b) above discloses an overpayment or underpayment of royalties, the appropriate amount shall be promptly paid or refunded to the party entitled thereto. If such examination reveals that for the period covered by such examination there is an underpayment of five percent (5%) or more in the royalty previously reported as being due from Licensee, all expenses involved in the conducting of such examination shall be borne by Licensee. In all other cases, such expenses shall be borne by Licensor. 14. PAYMENTS. (a) ROYALTY PAYMENTS. Each statement delivered pursuant to Section 13(a) above shall be accompanied by payment of all royalties due for the period covered by such statement. - --------------- * Confidential Treatment Requested. 8. 9 (b) CURRENCY. All payments hereunder shall be made in United States Dollars. In determining the payments due hereunder, it is agreed as follows: (i) Licensee shall calculate percentage royalties in Japanese Yen on a calendar quarterly basis (with each such quarter considered to be a separate accounting period for the purpose of computing royalties). (ii) Licensee shall compute a conversion of each such quarterly total into United States Dollars utilizing the then-current Currency Exchange Rate. The initial Currency Exchange Rate shall be the exchange rate of Japanese Yen for each United States Dollar published in the U.S. Edition of The Wall Street Journal on the Effective Date. The Currency Exchange Rate shall be adjusted as of the end of each calendar quarter to equal the average of (a) the initial Currency Exchange Rate set forth above and (b) the Yen/Dollar exchange rate published in the U.S. edition of The Wall Street Journal on the first business day after the last day of such calendar quarter, provided, however, that if the difference between the two rates to be averaged is less than five percent (5%), then the adjusted Currency Exchange Rate shall be equal to the initial Currency Exchange Rate set forth above. (c) TAXES. Licensee shall be responsible for paying all taxes (excluding Licensor's income taxes) that may arise out of the transactions contemplated by this Agreement, including, but not limited to, value added taxes. Licensee shall submit any returns required by any tax office having jurisdiction and pay the tax in the proper amount. Licensee shall provide Licensor with evidence that any such tax (including withholding tax) has been paid so that Licensor has documented proof of such payment. Licensee shall be entitled to deduct the amount of any withholding taxes paid on Licensor's behalf from any payments due Licensor hereunder. 15. WARRANTY. Licensor represents and warrants that Licensor has and shall continue to have the right to license or sublicense under this Agreement the use of all the Materials from the U.S. Edition, subject to the terms of any applicable agreement between Licensor and the party submitting such Materials. Unless Licensee has received prior notice from Licensor that such rights are not available, Licensee shall be free to use in the Japanese Edition all the Materials listed by Licensee in Section 5. 16. LICENSED MARK. (a) Licensee recognizes Licensor's ownership of the Licensed Mark and shall not at any time do or suffer to be done any act or thing which will in any way impair the rights of Licensor in and to the Licensed Mark. Licensee shall not acquire and shall not claim any right, title, or interest in the Licensed Mark adverse to Licensor by virtue of the license granted to Licensee herein or through Licensee's use of the Licensed Mark. 9. 10 (b) Licensee shall affix notices of the Licensed Mark, in accordance with the Guidelines attached hereto as Exhibit C, to all copies of the Licensed Products and to all advertising, promotional and display material used in connection with the sale thereof. (c) Licensee hereby acknowledges the following: (i) the great value of the goodwill associated with the Licensed Mark; (ii) the worldwide recognition of the same; (iii) that the proprietary rights therein and goodwill attached thereto are solely owned by and belong to Licensor; (iv) that the Licensed Mark have a secondary meaning that is firmly associated in the mind of the general public with Licensor, its publications and other activities; and (v) that any additional goodwill that becomes associated with the Licensed Mark through the use of the Licensed Mark by Licensee shall inure solely to the benefit of Licensor. During and after the term of the License, Licensee shall not: (i) attack or question the validity of the title or any rights of Licensor in and to the Licensed Mark or any other trademark or copyright of Licensor; (ii) file or prosecute trademark applications regarding the Licensed Mark or other trademarks owned or used by Licensor unless asked to do so in writing by Licensor. Licensee will cooperate with Licensor in connection with any such filings. 17. TERM AND TERMINATION. (a) This Agreement shall become effective on the Effective Date and shall continue in full force and effect during a period of seven (7) years commencing on the Effective Date, unless earlier terminated in accordance with terms of this Agreement. The parties agree to discuss the terms of a renewal of the Agreement within the six month period prior to the expiration of the Agreement. Notwithstanding any provision of this Section 17, Sections 16(c), 19(a) and 19(b) shall survive such term of termination and continue in full force and effect thereafter. (b) Notwithstanding Subsection 17(a) above, a party may terminate this Agreement by giving written notice to that effect to the other party if the other party becomes insolvent or makes an assignment for the benefit of creditors, or proceedings in voluntary or involuntary bankruptcy are instituted on behalf of or against the party. (c) Licensor may terminate this Agreement by written notice to that effect to Licensee prior to the expiration of the Term should Licensee either: (i) fail to make payment of any installment of the license fees when due, and such failure shall not have been cured within twenty (20) days after written notice thereof is given to Licensee; or 10. 11 (ii) fail to perform any other obligation required of it hereunder, and such failure shall not have been cured within thirty (30) days after written notice thereof is given to Licensee. (iii) fail to maintain quality standards for the use of the Licensed Mark agreed to hereunder or in any subsequent Licensed Product Appendix. (iv) merge with or become a subsidiary of any other company, or be purchased by a person, firm, company, corporation, or other organization. (d) Licensee may terminate this Agreement by written notice to Licensor prior to the expiration of the Term should Licensor fail to perform any obligation required of it hereunder, and such failure shall not have been cured within thirty (30) days after written notice thereof is given to Licensor. (e) During the period commencing on the first anniversary of the Effective Date of this Agreement and terminating six (6) months following the date of publication of the first Japanese Edition, Licensee may terminate this Agreement by written notice to Licensor prior to the expiration of the Term should Licensee determine in its good faith business judgment that the Japanese Edition is not a commercially viable business venture, and upon termination of this Agreement pursuant to this Subsection 17(e), Licensee shall not be obligated to pay any further fees or expenses except those fees set forth in Sections 9 and 10 and any amounts which have become due prior to a termination owing to Licensee's breach of this Agreement. (f) This Agreement and the licenses granted herein shall terminate automatically, and all rights granted hereunder shall revert to Licensor if Licensee has not commenced monthly publication and distribution of the Japanese Edition in the Licensed Territory by April 30, 1995. 18. RIGHTS UPON TERMINATION. (a) Upon the expiration or early termination of this Agreement, Licensee shall discontinue immediately all uses of the Licensed Mark, and all rights granted to Licensee herein shall automatically terminate and revert to Licensor. Upon the request of Licensor, Licensee, at Licensee's sole cost and expense, shall promptly return to Licensor all illustrations, photographs (black and white, and color), and drawings from the Materials and all copies thereof and all other Material in Licensee's possession hereunder. (b) Notwithstanding the terms of Subsection 18(a) immediately above, in the event that this Agreement terminates for reasons other than Licensee's breach hereof, Licensee shall have the right to sell, in the regular course of business, copies of the Japanese Edition on hand as of the date of termination, provided that Licensee shall pay to Licensor the license fees provided for hereinabove and that, within five (5) days after the date of termination, Licensee shall furnish to Licensor a written inventory of such copies. Notwithstanding the expiration or early termination of this Agreement, the Licensee shall remain fully liable to Licensor for (i) any 11. 12 license fees due and unpaid, and (ii) damages for any breach hereof, as well as for any unperformed portion hereof. 19. INDEMNITY. (a) Licensee shall indemnify, defend, save, and hold harmless Licensor against any and all liability, loss, damages, cost, and expense, including without limitation reasonable attorney's fees, arising by reason of, or with respect to, any claim of copyright infringement arising out of the publication of the Japanese Edition by Licensee or the publication or distribution of any Licensed Products hereunder or the modification of Material by Licensee or the use of the Japanese Material, and not caused by any violation or breach by Licensor of any of its covenants contained herein. The terms of this subsection shall survive the expiration or early termination of this Agreement. (b) Licensor shall indemnify, defend, save, and hold harmless Licensee against any and all liability, loss, damages, cost, and expense, including without limitation reasonable attorney's fees arising by reason of, or with respect to, any claim of copyright infringement arising out of the publication of the Material, and not caused by any violation or breach or modification of such Material by Licensee of any of its covenants contained herein. The terms of this subsection shall survive the expiration or early termination of this Agreement. (c) Each party's obligations hereunder as to any indemnification claim shall be conditioned on the other having given prompt notice to the indemnifying party; and the indemnifying party shall have the right to defend such claims using counsel of its choice, in which event the other party shall fully cooperate in the defense thereof. In no event may the indemnified party under this Section 19 make or settle any such suit or claim without the prior written approval of the indemnifying party. (d) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL DAMAGES THAT MAY RESULT FROM COPYRIGHT INFRINGEMENT. IN NO EVENT WILL LICENSOR BE LIABLE TO LICENSEE OR ANY THIRD PARTY FOR ANY LOST PROFITS, LOST SAVINGS OR OTHER INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES. 20. INFRINGEMENT ACTIONS. (a) Licensor shall use its best commercial efforts to ensure that the Materials in the form provided by Licensor under this Agreement shall not constitute infringement of the copyright of any third party. (b) Licensee shall promptly notify Licensor in writing of any uses which may constitute infringements by others of the Licensed Mark or any of the rights granted Licensee hereunder that may come to Licensee's attention. Licensor shall have the sole right to determine through consultation with Licensee whether any action shall be taken against any third party on account of any such infringements, and Licensee shall not institute any suit or take any action 12. 13 against any third party on account of any such infringements without first obtaining Licensor's written consent to do so. Licensor shall bear all expenses connected with any such suit or action; provided, however, that Licensee shall bear all expenses arising in connection with any suit or action initiated by Licensee to protect the interests of Licensee alone. Any recovery as a result of such action shall belong solely to Licensor, except to the extent that such recovery represents damages suffered by Licensee, in which event any specified recovery, net of all expenses paid by Licensee, including without limitation Licensee's attorneys' fees, if any, shall be payable to Licensee. If Licensor refuses to prosecute an infringement of Licensee's rights, Licensee may terminate this Agreement by written notice to Licensor, in which event the parties shall have no further rights or duties to each other under this Agreement, except for such obligations as are expressly stated to survive the termination of this Agreement. 21. INDEPENDENT CONTRACTORS. This Agreement does not constitute and shall not be construed as constituting a partnership, agency relationship, or joint venture between Licensee and Licensor. Neither party shall have the right to obligate or bind the other in any manner whatsoever, except as provided hereunder. 22. FORCE MAJEURE. Neither party hereto shall be liable for failure to perform its respective obligations (except for the obligation to make payments) under this Agreement if such failure is owing to earthquake, fire, flood, strike, labor disturbance, war (declared or undeclared), embargo, blockade, legal restriction, riot, insurrection or any other cause beyond the reasonable control of such party. 23. ENTIRE AGREEMENT; WAIVER; MODIFICATION. This Agreement constitutes the entire agreement between the parties hereto relating to the subject matter hereof. No change, waiver, or modification shall be valid or binding upon the parties unless said change, waiver, or modification shall be in writing and signed by both parties. The waiver of a breach of any term or condition herein shall not be deemed a waiver of any subsequent breach, whether of the same or similar nature, and shall not in any way affect the other terms and conditions hereof. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. If any term or section of this Agreement shall be determined to be unenforceable, such term or section shall be modified so that the unenforceable term or section shall be enforceable to the greatest extent possible. 24. CHOICE OF LAW; ARBITRATION. (a) This Agreement shall in all respects be interpreted, construed, and governed in accordance with the laws of the State of California, regardless of its place of execution or performance. Subject to Section 24(b) below, any dispute arising out of or in connection with 13. 14 this Agreement shall be finally settled by arbitration in the city of San Francisco, California in accordance with the Commercial Arbitration Rules of the American Arbitration Association, if such arbitration is initiated by Licensee, and in the city of Tokyo, Japan in accordance with the Commercial Arbitration Rules of the Japan Commercial Arbitration Association, if such arbitration is initiated by Licensor. (b) Licensee acknowledges that any breach by it of the provisions of this Agreement regarding the use of the Licensed Mark will result in irreparable harm to Licensor for which there is no adequate remedy at law and that Licensor shall be entitled to timely injunctive relief notwithstanding Section 24(a) above, without the necessity of posting bond, in addition to such other relief as any Arbitration Association or court of competent jurisdiction may deem just and proper. (c) In the event either party files any action against the other to enforce any of the provisions under this Agreement or to secure or protect such party's rights under this Agreement, such party shall be entitled to recover, in any judgment in its favor entered therein, the attorneys' fees and litigation and arbitration costs of such party, together with such court costs and damages as are provided by law. (d) THE OFFICIAL TEXT OF THIS AGREEMENT AND ANY EXHIBIT OR ANY NOTICE GIVEN OR ACCOUNTS OR STATEMENTS REQUIRED BY THIS AGREEMENT SHALL BE IN ENGLISH. THE RESOLUTION OF ANY DISPUTE WILL BE CONDUCTED IN ENGLISH. 25. ASSIGNMENT OR SUBLICENSE. (a) NO ASSIGNMENT OR SUBLICENSE BY LICENSEE. Licensor in entering into this Agreement is relying upon the skills, reputation and personnel, of Licensee. This Agreement and all rights and duties hereunder are personal to Licensee and shall not, without the prior express written consent of Licensor, be assigned or sublicensed by Licensee. Any attempt by Licensee to assign or sublicense or otherwise transfer this Agreement without the prior express written consent of Licensor shall constitute a material breach of this Agreement. (b) ASSIGNMENT BY LICENSOR. Licensor shall have the right to assign its rights under this Agreement. (c) BINDING ON SUCCESSORS. In the case of any authorized assignment of this Agreement, this Agreement shall be binding upon the representatives, successors and assigns of the parties. 26. NOTICES. All notices permitted or required under this Agreement shall be in writing and shall be delivered by personal delivery, facsimile transmission, courier, or by certified or registered mail, return receipt requested, and shall be deemed given upon personal delivery, fifteen days after deposit in the mail, four days after delivery to a courier service, or upon receipt of electronic 14. 15 transmission. Notices shall be sent to the addresses set forth below, or to such other addresses as may be specified by the parties in writing. (i) if to Licensee, at 428 Koyuidana-cho, Shinmachi- dori, Shijo-agaru Nakagyo-ku, Kyoto 604, Japan, Attention: Mr. Satoru Imada; (ii) if to Licensor, at 544 Second Street, Third Floor, San Francisco, California, 94107, U.S.A., Attention: Jane Metcalfe; or (iii) to such other address or the attention of such other person as either party may specify by written notice to the other. 27. GUARANTEE. In the event that Licensor discontinues publication of the U.S. Edition or sells the right to publish the U.S. Edition to any third party, Wired Holdings, Inc. guarantees that none of Licensee's rights as set forth in this Agreement, including the right to use the Licensed Mark, shall be impaired thereby. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written and an executed original hereof to have been delivered to each party hereto. WIRED VENTURES, LTD. By: /s/ LOUIS ROSSETTO --------------------------------- KABUSHIKI-KAISHA DOHOSHA SHUPPAN By: /s/ SATORU IMADA --------------------------------- 15. 16 EXHIBIT A FORM OF LICENSED PRODUCT APPENDIX Description of Paper Product: Terms of License that differ from Section 2: Royalties: Advance Against Royalties: a non-refundable fee of $_____ due on __________. Additional Terms: 17 EXHIBIT B LICENSED MARKS Trademark: WIRED Class 16 in Japan (English (block letters and stylized versions), katakana and hiragana versions) for printed matter. Service Mark: WIRED Class 41 in Japan (English, katakana and hiragana versions) for publication of magazines. Use of Licensed Mark on promotional items is authorized for the limited purpose of and in accordance with Section 12. 18 EXHIBIT C COPYRIGHT AND TRADEMARK PROTECTION GUIDELINES The following guidelines and procedures are based on Licensor's present understanding of copyright and trademark law and, therefore, these procedures will be revised if changes are necessary for complete copyright and trademark protection: 1. All copies of each issue of the Japanese Edition shall contain on the title page a copyright notice as follows: "Published and distributed by Dohosha Publishing Co., Ltd. by permission of Wired Ventures Ltd., San Francisco, U.S.A. All rights reserved (C) 199__ Wired Ventures Ltd. Original Japanese materials (C) 199__ by Dohosha Publishing Co., Ltd." 2. Only exact reproductions of Licensor's trademarks and service marks may be used. 3. All Licensed Products shall bear the following notice: ""WIRED" is a trademark of "Wired Ventures, Ltd." and other trademark notices as directed by Licensor. EX-10.6 11 LETTER OF INTENT 1 EXHIBIT 10.6 LETTER OF INTENT April 5, 1996 David A. Brewer President INKTOMI CORPORATION 2168 Shattuck Avenue, Suite 210 Berkeley, CA 94704 RE: SEARCH ENGINE SERVICE This Letter of Intent is intended to summarize the principal terms of a strategic relationship ("Strategic Partnership") between Inktomi Corporation ("Inktomi") and HotWired Ventures LLC ("HotWired"), pursuant to which the parties will develop, implement, market and maintain an Internet webcrawler/indexer search engine service, tentatively to be marketed as "HotSearch, powered by Inktomi" (the "Search Engine"). The principal terms of this Strategic Partnership are as follows: 1. INKTOMI'S DEVELOPMENT AND SUPPORT OBLIGATIONS. Inktomi, in consultation with HotWired, will complete development of and provide its web crawler/indexer search engine technology, consisting of Inktomi's proprietary and in-licensed systems architecture and software and will implement the same for the Search Engine (collectively, as implemented, the "Search Engine Technology"), and will provide the Search Engine in accordance with the Milestone Schedule set forth on Exhibit A attached hereto (the "Milestone Schedule"). The Search Engine will perform the minimum functions set forth on Exhibit B attached hereto, and Inktomi will develop and incorporate into the Search Engine additional features and functions as mutually agreed by the parties. During the term of the Strategic Partnership, Inktomi will provide adequate ongoing technical support, maintenance and upgrades of the Search Engine Technology, including second-line technical support to HotWired personnel and Search Engine users. In addition, Inktomi will provide all required data transmission capacity (bandwidth), disk storage and server capacity to host the Search Engine. The code and other proprietary technology that are developed or acquired by or on behalf of Inktomi and that comprise Inktomi's advertising server shall be included in the definition of Inktomi's "Search Engine Technology" hereunder. 2. HOTWIRED'S DEVELOPMENT AND SUPPORT OBLIGATIONS. HotWired, in consultation with Inktomi, will develop and provide all editorial, graphics and interface design for the Search Engine (collectively, the "Interface"), in accordance with the Milestone Schedule. The interface design of the Search Engine will be subject to the final approval of both parties. HotWired, in consultation with Inktomi, will develop all online revenue streams and implement all marketing and advertising sales for the Search Engine, in accordance with the Milestone Schedule and subject to the marketing budget to be approved in advance by the parties (the "Marketing Budget"). HotWired will commit the minimum dedicated marketing/advertising personnel to the 1. 2 Search Engine as set forth on Exhibit B. Inktomi will not take any marketing actions relating to the Search Engine (excluding customer relations activities) without prior notification to HotWired. HotWired will use its reasonable best efforts to obtain bartered advertising and other benefits for the Search Engine. In addition, HotWired will provide adequate first-line customer support services for the Search Engine. 3. MUTUAL EXCLUSIVITY. (a) During the term of the Strategic Partnership, unless Inktomi has an uncured breach of its performance obligations, without Inktomi's prior written consent, HotWired will not sell or resell advertising for or market, or enter into any arrangement to sell or resell advertising for or market, any third party's search engine service except for * and (iii) search engine services to be offered following the termination, if any, of the Strategic Partnership. (b) During the term of the Strategic Partnership, unless HotWired has an uncured breach of its performance obligations, without HotWired's prior written consent, Inktomi will not provide, sell or resell, or enter into any arrangement to provide, sell or resell, any search engine service except for * and (v) search engine services to be offered following the termination, if any, of the Strategic Partnership. (c) With respect to any search engine service described in Section 3(a)(i) or 3(b)(iii), HotWired or Inktomi, as applicable, will first notify and confer with the other party regarding such other party's potential participation in such service at least fifteen (15) days prior to entering into any binding arrangement with any third party regarding the same. 4. INTELLECTUAL PROPERTY AND ATTRIBUTION. (a) Inktomi and its licensors will retain all right, title and interest in and to the Search Engine Technology, including all modifications, fixes and upgrades thereto and derivative works thereof, even if ideas or suggestions made by HotWired are included into subsequent versions of the Search Engine Technology. HotWired will retain all right, title and - --------------- * Confidential Treatment Requested 2. 3 interest in and to the Interface, the code and other proprietary technology that are developed or acquired by or on behalf of HotWired and that comprise HotWired's advertising server (which is complementary to Inktomi's advertising server), the Search Engine's domain name registration and the trademarks, trade names, service marks and related logos (collectively, "Marks") used in connection with the Search Engine (excluding Inktomi's proprietary Marks). (b) Inktomi and HotWired will jointly own the usage/demographic data generated by the Search Engine (the "Data") excluding Web index data which will remain the sole property of Inktomi. Inktomi will provide HotWired with copies of the logs generated by the Search Engine upon request. (c) Each of Inktomi and HotWired will license to the other party on a royalty-free, non-exclusive basis the right to use applicable Marks for the purpose of fulfilling such party's obligations with respect to the Search Engine. (d) Both Inktomi and HotWired will receive equal credit and attribution for developing and delivering the Search Engine. Inktomi will receive specific attribution and copyright credit for the development of the Search Engine Technology. The Interface and Marks used in connection with the Search Engine will receive proper HotWired copyright credit or trademark attribution, as applicable. 5. CROSS-MARKETING OPPORTUNITIES. HotWired and Inktomi will participate in cross- marketing opportunities as appropriate. The goal of these arrangements will be for each party to provide comparable services to the other such that no direct compensation will be required. Such arrangements will include, without limitation, the following: (a) The Search Engine will include graphical links to the HotWired World Wide Web site(s) and vice versa. (b) The Search Engine will include graphical links to the Inktomi World Wide Web site and vice versa. 6. REVENUE AND COST SPLITTING. (a) HotWired will pay Inktomi royalties for the Search Engine Technology and related support services as follows: (i) for each of the first three months following the commercial Launch of the Search Engine (as defined in the Milestone Schedule), a royalty equal to * of the net revenues; and (ii) for each month thereafter, a royalty equal to * of the net revenues, provided, however, that if the total net revenues for any such month are equal to less than * , then Inktomi shall instead receive a royalty equal to the first * thereof (or such lesser amount, if the net revenues for such month are equal to less than * ) and HotWired shall retain the remainder for such month. "Net revenues" shall mean gross advertising and/or subscription revenues actually received, less agency discounts (typically 15%) and frequency discounts actually payable, but before any commissions payable to HotWired's advertising sales representatives. Revenues will include any - --------------- * Confidential Treatment Requested. 3. 4 nonmonetary revenues received from barter transactions. In such event, the corresponding royalties paid to Inktomi hereunder will be paid in kind. HotWired will pay Inktomi royalties in arrears on a monthly basis. (b) In the event that either party generates revenue from the direct sale, rental or repurposing of any of the jointly-owned Data generated by the Search Engine (e.g., a syndicated research study based in whole or in part on such Data), then the net revenues received by such party that are allocable to the contribution of the Search Engine Data to such endeavor will be shared between the parties as follows: * to Inktomi and * to HotWired. (c) Costs payable to third parties and which have been approved by the parties pursuant to the Marketing Budget or otherwise (which costs will exclude staff and overhead costs of the parties) will be paid directly by HotWired and split between the parties as follows: Upon receipt of any third party invoice, HotWired will invoice Inktomi for * of such costs, and Inktomi will remit such payment to HotWired not less than ten (10) business days prior to the stated third party due date on the invoice by check or wire transfer to HotWired. In the event that any such amount due from Inktomi is more than thirty (30) days past due, such amount will be deducted from royalties due and payable to Inktomi. (d) HotWired will keep complete and accurate records pertaining to the revenue streams generated by the Search Engine. Such records will be maintained for a two-year period following the year in which any payments pertaining to such revenue streams were due. Inktomi will have the right to examine HotWired's records from time to time but no more than once annually to determine the correctness of any payment made under the Strategic Partnership. Such examination shall be conducted at reasonable times during HotWired's normal business hours and upon at least ten (10) days' advance notice and in a manner so as not to interfere unreasonably with the conduct of HotWired's business. If any such examination indicates that HotWired has underpaid Inktomi by more than five percent (5%) of the aggregate payments due for the period subject to such examination, Hotwired will reimburse Inktomi for the cost of such examination. 7. TERM AND TERMINATION. (a) The Strategic Partnership will initially have a * term whose measurement will commence upon execution hereof, *. - --------------- * Confidential Treatment Requested. 4. 5 (b) Either party may terminate the Strategic Partnership for convenience (i.e. for any reason or no reason) during the term upon * prior written notice to the other party, subject to the provisions of Section 8 below. (c) Either party may terminate the Strategic Partnership upon the material breach by the other party (without limitation, failure to meet a milestone set forth on the Milestone Schedule will constitute a material breach), if such breach remains uncured for thirty (30) days following written notice to the breaching party. 8. POST-TERMINATION RIGHTS. (a) Following any termination of the Strategic Partnership by Inktomi for convenience subsequent to which Inktomi or its successor provides, sells or resells a search engine substantially similar (i.e. in targeted market and power/scope) to the Search Engine or following termination by either party or its successor in connection with any acquisition of Inktomi or the Search Engine Technology by an unaffiliated third party with a search engine business, Inktomi or its successor will pay to HotWired an amount equal to the greater of: (i) * of the Net Revenues generated by the Search Engine during its last month of regular operations prior to the effective date of termination; or (ii) * of the Net Revenues generated by such subsequent search engine service for each of the first three (3) months of operation following the effective date of termination. (b) Following any termination of the Strategic Partnership by HotWired for convenience or following termination by either party or its successor in connection with any acquisition of HotWired or HotWired's advertising business by an unaffiliated third party, subsequent to which HotWired or its successor sells or resells advertising for a search engine substantially similar (i.e. in targeted market and power/scope) to the Search Engine, HotWired or its successor will pay to Inktomi an amount equal to the greater of: (i) * of the Net Revenues generated by the Search Engine during its last month of regular operations prior to the effective date of termination; or (ii) * of the Net Revenues generated by such subsequent search engine service for each of the first three (3) months of operation following the effective date of termination. (c) Amounts payable by either party under this Section 8 will be payable in one lump sum within one hundred twenty (120) days following the effective date of termination. - --------------- * Confidential Treatment Requested 5. 6 9. ADDITIONAL TERMS. (a) Inktomi will provide to HotWired the information and Data necessary to generate weekly reports, or the actual weekly reports (format and content to be determined by the parties), for distribution to the Search Engine's sponsors on all user traffic to the Search Engine. Both parties agree to engage a third party auditor to verify the usage of the Search Engine and to state usage in audited terms for advertisers, if necessary. (b) HotWired and Inktomi currently have and will have no relationship as agent and principal under the Strategic Partnership, including without limitation in relation to advertising contracts. On all advertising contracts entered into in connection with the Search Engine, HotWired will reserve the right to terminate such contracts and pay back any sums on a pro rata basis with Inktomi's approval, which will not be unreasonably withheld. (i) "Confidential Information" of a party as used in this Letter of Intent and any definitive Strategic Partnership agreements based hereon shall mean any and all technical and non-technical information including patent, copyright, trade secret, and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processed, apparatus, equipment, algorithms, software programs, software source documents, and formula related to the current, future and proposed products and services of such party, and includes, without limitation, its respective information concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement requirements, purchasing manufacturing, customer and advertiser lists, business forecasts, sales and merchandising and marketing plans and information. "Confidential Information" also includes proprietary or confidential information of any third party that may disclose such information to a party in the course of such party's business. (ii) The parties agree that they will not make use of, disseminate or in any way disclose Confidential Information of the other party to any person, firm or business, except to the extent necessary to fulfill the purposes contemplated by this Letter of Intent and any definitive Strategic Partnership agreements based hereon and any purpose that other party may hereafter authorize in writing. The parties agree that they shall treat all Confidential Information of the other party with the same degree of care as they accord to their own Confidential Information and the parties represent that they exercise reasonable care to protect their own Confidential Information. Each party will immediately give notice to the other party of any unauthorized use or disclosure of such other party's Confidential Information. The parties agree to assist each other in remedying any such unauthorized use or disclosure of the other party's Confidential Information. (iii) A party's obligations under paragraph (ii) with respect to any portion of the other party's Confidential Information shall terminate when such party can document that: (A) it was in the public domain at or subsequent to the time it was communicated to the receiving party by the other party through no fault of the receiving party; (B) it was rightfully in the receiving party's possession free of any obligation of confidence at or subsequent to the time it was communicated to the receiving party by the other party; (C) it was 6. 7 developed by employees or agents of the receiving party independently of and without reference to any information communicated between the parties; or (D) the communication was in response to a valid order by a court or other governmental body, was otherwise required by law, or was necessary to establish the rights of either party under this Letter of Intent or under any definitive Strategic Partnership agreements based hereon. These confidentiality obligations will remain in effect for a period beginning upon execution hereof and ending three (3) years following any termination of the Strategic Partnership. (iv) The parties agree that all documents and other tangible objects containing or representing Confidential Information of a party and all copies thereof which are in the possession of the other party shall be and remain the property of the disclosing party and upon any termination of the Strategic Partnership between the parties shall be returned to such disclosing party, or destroyed, within thirty (30) days. (c) Neither party will be responsible for any delay or failure to perform obligations under the Strategic Partnership, other than the obligation to pay money, due to causes beyond the party's reasonable control, including but not limited to acts of God, strikes or other labor disputes, riots, acts of war, governmental regulations imposed after the fact, third party communication line failures, power failures, fires or other disasters. (d) Neither party will make any public disclosure of the specific terms of the Strategic Partnership, except with the prior approval of the other party, not to be unreasonably withheld. The parties will agree upon the text of a press release regarding this Letter of Intent and will not make any public disclosure of its existence before such press release becomes public. (e) This Letter of Intent and the definitive agreements based hereon will be governed by California law, without giving effect to conflicts of laws principles, and will not be assignable without the other party's written consent except to a party that acquires a majority of the equity securities or voting interests or substantially all of the assets of the assigning party. Subject to the foregoing, the terms of the Strategic Partnership will be fully binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. The definitive agreements will contain such additional terms and conditions, including but not limited to standard warranties and cross-indemnities, as the parties shall agree. It is the intention of Inktomi and HotWired to work expeditiously to enter into one or more definitive agreements based on the foregoing terms. Please sign and date this Letter of 7. 8 Intent in the space provided below to confirm Inktomi's intent to be bound by the mutual agreements set forth herein and return a signed copy to the undersigned. Very truly yours, HOTWIRED VENTURES LLC /s/ ANDREW L. ANKER - ----------------------------- By: Andrew L. Anker President ACKNOWLEDGED AND AGREED: INKTOMI CORPORATION By: /s/ DAVID A. BREWER -------------------------- David A. Brewer President 8. 9 EXHIBIT A MILESTONE SCHEDULE * - --------------- * Confidential Treatment Requested. 9. 10 EXHIBIT B MINIMUM FUNCTIONALITY AND COMMITMENTS * - --------------- * Confidential Treatment Requested. 10. EX-10.7 12 AGREEMENT 1 EXHIBIT 10.7 AGREEMENT AGREEMENT, entered into this 5th day of November 1992 between INTERNATIONAL CIRCULATION DISTRIBUTORS - THE HEARST CORPORATION, a Delaware corporation, having its principal office at 959 Eighth Avenue, New York, New York 10019 (hereinafter referred to as "ICD") and WIRED U.S.A., having its principal place of business at 544 Second Street, San Francisco, California 94107-1427 (hereinafter referred to as "PUBLISHER"). WITNESSETH In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: FIRST: DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "TERM" shall have the meanings set forth in item Third below. (b) "SPECIAL INTEREST PUBLICATION(S)" shall mean PUBLISHER'S magazines released less frequently than six times per year. (c) "PUBLICATION(S)" shall mean all publications, including Special Interest Publications, listed on the attached Schedule A; and all subsequent newsstand publications published by PUBLISHER. (d) "WHOLESALERS" are certain wholesale and/or retail dealers who distribute magazines and paperback books in certain defined market areas. (e) "ON-SALE DATE" shall mean the date each issue of the Publication(s) is placed for initial sale at retail outlets. 1. 2 (f) "OFF-SALE DATE" shall mean the date PUBLISHER and ICD agree for recall of issues of the Publication(s) from sale at retail outlets. (g) "TERRITORY" shall mean the United States, its territories and possessions and Canada, excluding non-Wholesaler or non-Eastern News Distributors, Inc. serviced computer store outlets. (h) "COVER PRICE" shall mean the suggested retail selling price of the Publication(s) specified on the cover of each copy thereof, as the same may be increased or decreased during the Term of this Agreement. (i) "ICD COMMISSION" shall mean * of the Cover Price per net copy sold, per each twelve (12) month period, until brokerage fees reach *. "ICD Commission" shall mean * of the Cover Price per net copy sold, above * in brokerage fees, per each twelve (12) month period. Should brokerage fees reach * in a given contract year, ICD Commissions shall be based on * of the Cover Price per net copy sold, above * in brokerage fees, per each twelve (12) month period. Brokerage rate will be based on * of the Cover Price, on all copies sold within each twelve (12) month period for the term of the contract. Once sales for the last issue in each twelve (12) month period have been finalized, adjustments will be made to determine monies due to PUBLISHER, if any, based upon * of Cover Price on any copies sold above * - ---------- * Confidential Treatment Requested 2. 3 * in brokerage fees accrued; and * of Cover Price on any copies sold above * in brokerage fees accrued. A minimum brokerage guarantee to ICD of * will be paid to ICD for the first contract year. Any difference below the minimum guarantee is payable at one hundred and twenty (120) days after the Off-Sale Date of the last issue of the first contract year. (j) "WHOLESALER DISCOUNT" shall mean the discount off the Cover Price at which PUBLISHER authorizes ICD to grant Wholesalers for copies of the Publication(s). (k) "SHIPPERS COMPLETION NOTICE" shall mean a written notice delivered to ICD and executed by the Shipper of the Publication(s), specifying both the number of copies of each issue of the Publication(s) shipped to Wholesalers in accordance with ICD and PUBLISHER'S instructions and the date of completion of such shipping. (l) "NET SALES" shall mean with respect to each issue of the Publication(s), the number of copies of the Publication(s) specified in each Shipper's Completion Notice (as such number may be modified by additional information furnished by the Shipper or PUBLISHER) less the number of copies of that issue of the Publication(s) returned to ICD or lost or damaged in shipment. (m) "FINAL BILLINGS" shall mean the Cover Price, less the Wholesaler Discount, less ICD's Commission, multiplied by the Net Sales. (n) "GROSS BILLINGS" shall mean the Cover Price, less the Wholesaler Discount, multiplied by the number of copies of the Publication(s) specified on the Shipper's Completion Notice. - --------------- * Confidential Treatment Requested 3. 4 SECOND: RIGHTS GRANTED. PUBLISHER hereby constitutes and appoints ICD as its Agent for the distribution and sale of all copies of the Publication(s) intended for resale through Wholesalers throughout the Territory for the Term of this Agreement. THIRD: TERM. The grant of rights by PUBLISHER to ICD shall be effective as of the date hereof and the Term of this Agreement shall continue for a period of three (3) years, commencing with the On-Sale Date of the February 1993 issue of the Publication(s) and concluding with the completion of distribution of the December 1995 issue of the Publication(s). The Term shall be automatically extended for successive periods of three (3) years upon the same terms and conditions. Either party may terminate this Agreement upon the expiration of the original Term or any renewal Term by written notice specifying the On-Sale Date of the last issue of the Publication(s) to be distributed hereunder, which notice shall be received not less than ninety (90) days prior to the expiration of the then-current Term. If, however, PUBLISHER should finally discontinue publishing or distribution on newsstand of said Publication(s), then PUBLISHER may terminate this Agreement by giving ICD sixty (60) days written notice of termination. PAYMENT WITHHELD. If PUBLISHER shall terminate this Agreement or suspend or discontinue publication, ICD shall be entitled to withhold any and all payments due hereunder to PUBLISHER on or after notice of termination hereof until the return of all unsold copies of the Publication(s) from Wholesalers. Such withholding shall not be for more than one hundred eighty (180) days after the Off-Sale Date of the last Publication(s) distributed hereunder in the U.S. and Canada. All monies withheld by ICD under this paragraph shall be in addition to whatever other monies are due to it under any other provision of this Agreement. 4. 5 FOURTH: PUBLISHER AGREEMENT. The PUBLISHER agrees that: (a) SHIPMENT. Upon receipt from ICD of the shipping labels or galley tapes of Wholesalers to whom copies of the Publication(s) are to be shipped and ICD's recommendation as to the number of copies to be shipped to each, such number being subject to reasonable consent of PUBLISHER, PUBLISHER shall ship such number directly to each listed Wholesaler. PUBLISHER shall ship copies of each issue, in good condition, far enough in advance of the respective On-Sale Dates to enable distribution to and by Wholesalers by the On-Sale Dates. PUBLISHER shall pay all transportation charges relating to the shipment of the Publication(s) to Wholesalers throughout the Territory, including import and other duties and reshipping expenses. (b) TITLE TO COPIES. Title to copies of the Publication(s) delivered hereunder shall remain in PUBLISHER until said copies reach their respective place or places of destination. Upon reaching such place or places of destination, title to said copies shall vest in the Wholesalers to whom said copies have been delivered. (c) RISK OF LOSS. ICD may deduct from payments due PUBLISHER, as provided in item TENTH hereof, amounts attributable to copies of the Publication(s) lost or damaged in shipment to Wholesalers. PUBLISHER shall bear the risk of loss for all copies of the Publication(s) until they are received by Wholesalers and during any time they are being returned or reshipped at PUBLISHER'S instructions. (d) PUBLICATION. PUBLISHER will regularly publish each issue of the Publication(s) covered by this Agreement, during the Term and any renewal Term in 5. 6 substantially the same size, quality of paper and reproduction, and similar editorial content and covers as previous issues. If PUBLISHER desires to change the frequency of publishing issues of any Publication(s) or to suspend or discontinue any one or more of the Publication(s), it shall notify ICD not less than sixty (60) days prior to the scheduled shipping date of such issue. If PUBLISHER fails to so notify ICD, PUBLISHER shall pay ICD all costs and expenses which ICD or Wholesalers may actually suffer or incur by reason thereof. (e) ICD CUSTOMER BILLING. Prices to be paid by Wholesalers shall be determined, in accordance with, among other things, industry and/or competitive considerations, by PUBLISHER. It is hereby agreed that the Wholesaler price(s) shall be collected by, and paid to ICD, exclusively. FIFTH: STATUS OF ICD. In no event shall ICD be obligated to segregate from any of its other funds any of the sums which may be paid to ICD by Wholesalers, nor shall ICD be considered a trustee, pledgeholder or fiduciary of PUBLISHER. PUBLISHER acknowledges that all monies paid by, or due and owing from Wholesalers for copies of the Publication(s) not returned to ICD are, and at all times shall be and remain, the sole property of ICD; it being mutually agreed that anything in this Agreement to the contrary notwithstanding, for the purposes of dealing with proceeds of distribution of the Publication, (i) the relationship between PUBLISHER and ICD is that of creditor and debtor and (ii) that ICD shall have the exclusive right to bill Wholesalers for such monies and to demand payment and institute legal proceedings for accounting for and the collection of such monies. SIXTH: RETAIL DISPLAY ALLOWANCES. ICD shall process applications for retail or checkout display allowance ("RDA") contracts and perform the work of receiving and collating 6. 7 information from retail magazine dealers and issuing payments to them on behalf of PUBLISHER for amounts due to them under PUBLISHER'S RDA programs in reference to the Publication(s) previously authorized by PUBLISHER in writing for each retail account. PUBLISHER shall designate which Publication(s) and for what time period such RDA shall apply. RDA payment to such dealers shall be charged to the PUBLISHER'S account. SEVENTH: STATUS OF WHOLESALERS. (a) CREDIT TO WHOLESALERS. ICD may extend such credit to Wholesalers and may take such collection measures, including stopping or holding up shipments as it may deem advisable with respect to delinquent accounts. ICD shall bear any losses from uncollectible accounts due ICD from Wholesalers and any legal fees or other costs or expenses incurred by ICD in respect of the Publication(s) for collection or attempted collection in the aggregate ("Uncollectible Sums"). If ICD notifies PUBLISHER at least fifteen (15) days prior to shipment to hold shipments to a specified wholesaler or other Wholesaler and PUBLISHER nevertheless permits such shipments, PUBLISHER shall bear all resulting losses of Uncollectible Sums. Such Uncollectible Sums shall be charged against the account of PUBLISHER or recovered by ICD pursuant to item TENTH and ICD shall not be required to institute any legal action to effect collection. (b) EVENTFUL DESTRUCTION OF COPIES. In the event of destruction of copies of the Publication(s) through force majeure after delivery to any Wholesaler(s), ICD may, in its sole discretion, settle the Net Sale of the Publication(s) with any Wholesaler(s) and PUBLISHER will accept the same for purposes of credit, payment and commission. (c) WHOLESALER'S BUSINESS TERMINATION. In the event that any Wholesaler's business: 7. 8 (a) is dissolved or terminated; (b) is adjudicated a bankruptcy after the filing of a petition for voluntary or involuntary bankruptcy; or (c) is reorganized or conducted by a composition of creditors under the Federal Bankruptcy Act; PUBLISHER shall be entitled to receive payment amounting to no more than an amount equal to that which PUBLISHER would have received pursuant to the provisions of Paragraph FOURTH hereof, as if the Publication(s) had been distributed and sold hereunder. In determining what "the PUBLISHER would have received pursuant to the provisions of Paragraph FOURTH hereof as if the Publication(s) had been distributed and sold hereunder", it is agreed that the average number of returns of unsold copies of the Publication(s) which ICD has experienced in respect of the Publication(s) during the term of this Agreement shall apply to the Publication(s) delivered and sold to said Wholesaler, which Publication(s) have not been paid for or returned by said Wholesaler. EIGHTH: AGREEMENTS. (a) TRAFFIC FUNCTIONS. ICD, if requested by PUBLISHER, will route, or assist PUBLISHER in routing, shipments of Publications to Wholesalers; prepare bills of lading, and assume the traffic function of PUBLISHER'S newsstand distribution, including handling of claims arising from shortages, rate overcharges, loss or damage of issues in transit. (b) SALE DATES. ICD will use reasonable efforts to insure that the Publication(s) are placed on sale and are taken off-sale on the dates respectively specified by PUBLISHER. 8. 9 (c) DISTRIBUTIONS AND ALLOTMENTS. Nothing contained in this Agreement shall curtail or otherwise affect the other activities of ICD. Subject to the right of ICD and Wholesalers to return unsold copies of the Publication(s) as provided in item NINTH hereof, ICD agrees to use reasonable efforts to effect the distribution and sale of copies of the Publication(s) from PUBLISHER to such Wholesalers as may be included from time to time during the term hereof. With respect to each of the Publication(s), ICD will assist PUBLISHER to obtain access to all draw and return figures on the Publication(s). (d) ACCOUNT EXECUTIVE. ICD will assign an account executive to the Publication(s) on a non-exclusive basis. (e) SALES PERFORMANCE STATEMENTS. ICD will render to PUBLISHER a sales performance statement for each issue of the Publication(s) setting forth in summary form: (i) the issue date; (ii) On-Sale; (iii) the number of copies distributed; (iv) the returns received; (v) Net Sales (in both numerical and percentage terms); (vi) the sales trend of the Publication(s) for which such statement is being rendered versus that of prior issues and the issue of one year previous; and (vii) other appropriate calculations pursuant to this Agreement. NINTH: RETURNS. (a) DEDUCTION OF RETURNS. In determining the sums payable to PUBLISHER, ICD shall be entitled to deduct returns of each issue of the Publication(s) shipped to ICD from Wholesalers located in the United States and Canada at any time within one hundred eighty (180) days of the Off-Sale Date of each such issue of the Publication(s). The aforesaid one hundred eighty (180) day period shall be subject to extension by reason of delay in mail delivery, "acts of God" or any other cause beyond the reasonable control of ICD. If ICD receives returns of any issue of the Publication(s) after final payment for such 9. 10 issue has been made, ICD may deduct such returns at the rate charged therefor from any remittance due PUBLISHER for any later issues (if any) of Publication(s), or, if after termination of the Agreement, then PUBLISHER shall make prompt payment to ICD upon receipt of ICD's statement regarding such returns. (b) EVIDENCE OF RETURNS. ICD shall be entitled to credit for returns of all unsold copies of the Publication(s) received by ICD from Wholesalers. In determining the amount of said credit, ICD will charge PUBLISHER, at the same rate ICD paid PUBLISHER under item TENTH hereof, for all unsold copies returned to ICD by Wholesalers in the form of whole copies, front covers, cover headings, or returns evidenced by an affidavit, for which ICD gives credit to Wholesalers. Whenever ICD, in its sole discretion, elects to accept an affidavit from a Wholesaler attesting to the number of unsold copies of the Publication(s) destroyed, then such affidavit shall be equivalent to, and shall have the same effect as the return of whole copies, front covers or cover headings of said unsold copies. (c) FULL COPY RETURNS. If PUBLISHER shall request, in writing, the return to it of the complete copies of unsold copies of the Publication(s), then ICD will call upon Wholesalers to return said complete copies, but the failure to return such copies shall not affect ICD's right to allowance and credit or reimbursement therefor hereunder. In addition to the foregoing when and if said complete copies are returned at the request of PUBLISHER, PUBLISHER shall reimburse ICD for the complete cost of transportation relating to said complete copies, together with any Wholesaler charges for the return of said copies. 10. 11 TENTH: TERMS OF PAYMENT. (a) ICD will pay PUBLISHER a net price for all copies of the Publication(s) delivered and sold hereunder at the Wholesaler price(s), less ICD's commission as set forth in item FIRST (i) herein, and less the credits and allowances provided for in item NINTH (b) hereof. ICD shall effect its reimbursement to PUBLISHER by deducting from any payments due or to become due PUBLISHER pursuant to the aforementioned item and item THIRD hereof, for: (i) credits for returns of all unsold copies of the Publication(s); (ii) Retail Display Allowance payments made by ICD on behalf of PUBLISHER with respect to the Publication(s); (iii) special fixture costs and promotional costs incurred by ICD on behalf of PUBLISHER, with prior PUBLISHER approval; (iv) any allowances hereinafter provided at the direction of the PUBLISHER and (v) any other costs incurred by ICD on behalf of PUBLISHER, with prior PUBLISHER approval. (b) After each delivery is made by it of the copies of the Publication(s) sold and delivered hereunder, PUBLISHER immediately will send a written notice to ICD confirming the delivery of the copies of the Publication(s) to Wholesalers in accordance with the provisions of item Fourth hereof. ICD will pay PUBLISHER for all copies of the Publication(s) delivered hereunder at the rate per copy as specified in item FIRST (m) hereof as follows: (1) First Payment -- With receipt by ICD of the shipper's written confirmation indicating the number of copies so shipped of a particular issue, * of the estimated Net Sale at ten (10) days from shipping for the first three (3) issues, and - --------------- * Confidential Treatment Requested 11. 12 * of the estimated Net Sale at ten (10) days from shipping on all issues thereafter. An estimate of * sale to be used for the first two (2) issues; (2) Final Payment -- Less all monies previously advanced, finalization payment one hundred-twenty (120) days after the Off-Sale Date. (3) ICD will credit returns to Wholesalers on a continuing basis even after such last mentioned payment and it shall have the right, as its election, (a) to continue to deduct the value of such returns after such payment from any future payments due PUBLISHER on any one or more issues of any one or more Publication(s), or (b) to be paid by PUBLISHER upon demand for such returns. (c) PUBLISHER agrees that whatever monies are due PUBLISHER hereunder shall be paid in United States dollars, and insofar as Canadian sales are concerned, ICD shall have the right to charge PUBLISHER for the cost of converting Canadian funds into United States dollars and PUBLISHER shall only be entitled to be paid on the net proceeds after such conversion. ELEVENTH: CROSS COLLATERALIZATION/OVERDRAFTS. The Final Billing of each issue of all Publications(s) distributed by ICD pursuant to this Agreement shall be treated as a unit, it being the intention hereof that if the total of the advance payments made by ICD with respect to any issue of the Publication(s) (not previously deducted from subsequent issues of the Publication(s)) shall exceed the Final Billings for the same issue of that Publication(s) (the "Overdraft"), the Overdraft may be deducted by ICD from any advance and/or payment of Final Billing which ICD may be required to make on any succeeding issue or issues of the same Publication(s) or any other Publication(s), or shall be refunded or paid by PUBLISHER immediately upon demand. - --------------- * Confidential Treatment Requested 12. 13 TWELFTH: PUBLISHER'S WARRANTIES; INDEMNITY. PUBLISHER represents, covenants and warrants to ICD that the rights herein granted to ICD have not been granted to any other person, firm or corporation; that it has the right and authority to enter into this Agreement and the ability to perform its obligations hereunder, including delivery to ICD without liens on or affecting the Publication(s), sufficient copies of each issue of the Publication(s) in salable condition to comply with the terms of this Agreement; and that nothing contained in any issue of the Publication(s) covered by this Agreement will be grounds for an action to prevent distribution or for damages because the material contained therein is libelous, an invasion of any right of privacy or publicity, a violation of any copyright or trademark, or of any other personal or property right, or for any other reason whatsoever. PUBLISHER shall indemnify and hold ICD and its officers, agents and representatives and Wholesalers harmless from and against any damages, costs, fines, expenses (including reasonable counsel fees and associated legal costs), judgements, settlements, penalties, liabilities, or losses of any kind or nature resulting from any claim, cause of action, suit or proceeding, arising with respect to issues of the Publication(s) in connection with claims of copyright infringement, libel, violations of right of privacy or publicity or other proprietary rights in the title, contents, or any printed matter of the Publication(s), including, but not limited to, advertisements, pictures, photographs, cartoons, caricatures, whether appearing on the covers or in the text thereof, or any promotional material furnished by the PUBLISHER, or arising out of the breach of any of the foregoing representations or warranties. Should any such event occur or reasonably be anticipated, ICD may retain a reasonable reserve from any monies payable to the PUBLISHER hereunder as security for the foregoing indemnity. PUBLISHER agrees to name ICD as an additional named insured under any PUBLISHER'S liability insurance carried by PUBLISHER, and 13. 14 will deliver a certificate of such insurance to ICD upon request therefor. ICD and PUBLISHER with all reasonable promptness shall each notify the other of any suit, proceeding, claim or demand brought or made on the basis of or in connection with the Publication(s) distributed or to be distributed by ICD. ICD and PUBLISHER agree that PUBLISHER shall have no right to compromise or settle any suit or claim in which ICD or a Wholesaler is named unless such settlement shall result in a full and final release of all claims against ICD and Wholesaler. Rights of ICD under item TWELFTH shall be in addition to, and not in lieu of, any rights or remedies to which it might be entitled. THIRTEENTH: ASSIGNMENT. PUBLISHER agrees not to assign this Agreement or any of its rights or duties hereunder without the prior written consent of ICD, which consent shall not be unreasonably withheld. ICD agrees that its consent is not required for PUBLISHER to sell its stock or assets. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and permitted assigns. PUBLISHER specifically acknowledges that this Agreement shall be binding for its Term upon any successor in interest of PUBLISHER who shall own or publish the Publication(s), it being the intent of the parties that notwithstanding any sale by PUBLISHER of its stock or assets (including the Publication(s)), this Agreement nevertheless shall remain in full force and effect. PUBLISHER my assign, for security or otherwise, any payment(s) due from ICD hereunder so long as any such transfer shall be effected only on ICD's "Notice of Assignment" form. FOURTEENTH: NOTICE. Any notice required or which may be given hereunder shall be sent by certified or registered mail, return receipt requested, or by telegram or facsimile 14. 15 addressed to the other party and given by addressing the same to the other as follows, unless written notice shall have been given as of the date mailed or telegram or facsimile sent: If to ICD, to: ICD/The Hearst Corporation 959 Eighth Avenue New York, NY 10019 Attention: President If to the PUBLISHER, to: WIRED U.S.A. 544 Second Street San Francisco, CA 94107-1427 Attention: Ms. Jane Metcalfe FIFTEENTH: WAIVER; MODIFICATION. No waiver, modification or cancellation of any term or condition of this Agreement shall be effective unless and until signed by authorized officers of the parties hereto. No written waiver shall excuse the performance of any act other than those specifically referred to therein. SIXTEENTH: CONSTRUCTION. The validity, interpretation and performance of this Agreement shall be governed by the laws of the State of New York. 15. 16 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed for and on their behalf by their duly authorized officers, the day and year first above written. INTERNATIONAL CIRCULATION DISTRIBUTORS WIRED USA THE HEARST CORPORATION Name: Victor J. Zustovich Name: Jane Metcalfe Signature: /S/ VICTOR J. ZUSTOVICH Signature: /S/ JANE METCALFE Title: Vice President Business Affairs Title: President Date: November 18, 1992 Date: November 5, 1992 16. 17 SCHEDULE A
FIRST ICD PUBLICATION(S) DIST. ISSUE ON-SALE DATE FREQUENCY COVER PRICE WIRED Premiere 1993 1/12/93 Bimonthly $4.95
18 [ICD LETTERHEAD] August 2, 1994 Ms. Jane Metcalfe WIRED U.S.A. 544 Second Street San Francisco, CA 94107-1427 Dear Jane: The purpose of this letter is to clarify and amend the Agreement between WIRED U.S.A. and ICD/The Hearst Corporation dated November 5, 1992 to reflect the change in frequency of Wired from bimonthly to monthly with regards to paragraph THIRD concerning Term. Currently our Agreement states the initial term commences with the On-Sale Date of the February 1993 issue (1/11/93) and continues for three (3) years concluding with the completion of distribution of the December 1995 issue. With the change in frequency to monthly, the last issue of the initial term should be January 1996 (reflecting the inclusion of all issues on-sale prior to 1/11/96). With your approval, the following will amend and be made part of the Agreement between WIRED U.S.A. and ICD/Hearst dated November 5, 1992: The first paragraph of paragraph THIRD will now read as follows: "Term. The grant of rights by PUBLISHER to ICD shall be effective as of the date hereof and the term of this Agreement shall continue for a period of three (3) years, commencing with the On-Sale Date of the February 1993 issue of the Publication(s) and concluding with the completion of distribution of the January 1996 issue of the Publication(s)." All of the remaining paragraphs under paragraph THIRD remain the same. All other terms and conditions not amended above remain as stated in the Agreement. If the above meets with your approval please sign two (2) copies of this amendment letter and return them to my attention. A ratified copy will be sent to you for your files. Jane, should you have any questions, please don't hesitate to give me a call. Best regards. /s/ Debra M. Delmar Debra M. Delmar 18. 19 Page 2 of 2 WIRED U.S.A. Amendment - August 2, 1994 ACCEPTED: ACCEPTED: WIRED U.S.A. INTERNATIONAL CIRCULATION DISTRIBUTORS/THE HEARST CORPORATION By: Jane Metcalfe By: Victor J. Zustovich Title: President Title: Vice President Business Affairs Signature: /S/ JANE METCALFE Signature: /S/ VICTOR J. ZUSTOVICH Date: August 25, 1994 Date: September 14, 1994 cc: G. Clark I. D'Aloia F. Herrera V. Zustovich DMD:pcp 19. 20 CONTRACT AMENDMENT 4/11/95 This amendment confirms the items agreed upon with regards to the distribution of Wired magazine through ICD/Hearst and includes the change in business address and company name for WIRED U.S.A., now Wired Ventures Ltd. The following will amend and be made part of the Agreement originally between WIRED U.S.A. and ICD/The Hearst Corporation, dated November 5, 1992 and the subsequent amendment of August 2, 1994, now between Wired Ventures Ltd. and ICD/The Hearst Corporation. 1. The first paragraph of the Agreement will now be changed to read as follows: "Agreement, entered into this 5th day of November 1992 and amended August 2, 1994, between INTERNATIONAL CIRCULATION DISTRIBUTORS - THE HEARST CORPORATION, a Delaware Corporation, having its principal office at 250 West 55th Street, New York, New York 10019 (hereinafter referred to as "ICD") and WIRED VENTURES LTD., having its principal place of business at 520 Third Street, 4th Floor, San Francisco, CA 94107-1427 (hereinafter referred to as "PUBLISHER")." 2. Paragraph FIRST (i) will now include the following: "(i) Effective with the February 1995 issue, "ICD Commission" shall mean * of the Cover Price per net copy sold, per each twelve (12) month period up to * copies sold; * of the Cover Price per net copy sold, per each twelve (12) month period, on all copies sold from * copies sold up to * copies sold; and * of the Cover Price per net copy sold per each twelve (12) month period, on all copies sold from * and above." 3. The first paragraph of Paragraph THIRD will now include the following: "THIRD: TERM. The grant of rights by Publisher to ICD and the Term of this Agreement shall be extended and renewed for an additional three (3) years, commencing with the On-Sale Date of the February 1996 issue of the Publication(s) and concluding with the completion of distribution of the January 1999 issue." All of the remaining paragraphs under Paragraph THIRD remain the same. - -------------- * Confidential Treatment Requested 20. 21 Page 2 of 2 Wired Ventures Ltd. Amendment - August 11, 1995 4. Paragraph TENTH (b)(i) will now be changed to read as follows: "(1) First Payment - With receipt by ICD of the shipper's written confirmation indicating the number of copies so shipped of a particular issue, * of the estimated Net Sale at On-Sale Date;" The remainder of Paragraph TENTH (b) and the remaining paragraphs under Paragraph TENTH remain the same. 5. Paragraph FOURTEENTH will now be changed to read as follows: FOURTEENTH: NOTICE. Any notice required or which may be given hereunder shall be sent by certified or registered mail, return receipt requested, or by telegram or facsimile addressed to the other party and given by addressing the same to the other as follows, unless written notice shall have been given as of the date mailed or telegram or facsimile sent: If to ICD, to: If to the PUBLISHER, to: ICD/The Hearst Corporation Wired Ventures Ltd. 250 West 55th Street 520 Third Street New York, NY 10019 San Francisco, CA 94107-1427 Attention: President Attention: President All other terms and conditions not amended above remain as stated in the Agreement. Please arrange for two (2) copies of this amendment letter to be signed below by Wired Ventures Ltd. and returned to the attention of Debra Delmar. Retroactive brokerage credit - -------------- * Confidential Treatment Requested 21. 22 (February-May 1995 issue) will be applied to the next Publisher statement after receipt from Publisher by ICD of this Amendment signed. ACCEPTED: ACCEPTED: WIRED VENTURES LTD. INTERNATIONAL CIRCULATION DISTRIBUTORS/THE HEARST CORPORATION By: Jane Metcalfe By: Frank E. Herrera Title: President Title: President Signature: /S/ JANE METCALFE Signature: /S/ FRANK E. HERRERA Date: April 17, 1995 Date: April 25, 1995 DMD:adl enclosures cc: J. D'Aloia D. Delmar V. Zustovich 22. 23 CONTRACT AMENDMENT 05/22/96 The following will amend and be part of the Agreement originally between Wired U.S.A. and ICD/The Hearst Corporation dated November 5, 1992 and subsequently assigned to Wired Ventures, Ltd. April 11, 1995, as amended thereto, now between Wired Magazine Group, Inc. and ICD/The Hearst Corporation, effective as of May 22, 1996. 1. The first paragraph of the Agreement will now be changed to read as follows: "Agreement, entered into this 5th day of November 1992 as amended thereto, between International Circulation Distributors - The Hearst Corporation, a Delaware Corporation, having its principal place of business at 250 West 55th Street, New York NY 10019-5288 (hereinafter referred to as "ICD") and Wired Magazine Group, Inc., a California Corporation, having its principal place of business at 520 Third Street - 4th Floor, San Francisco, CA 94107-1427 (hereinafter referred to as "PUBLISHER")." 2. Paragraph FOURTEENTH will now be changed to read as follows: "FOURTEENTH: NOTICE. Any notice required or which may be given hereunder shall be sent by certified or registered mail, return receipt requested, or by telegram or facsimile addressed to the other party and given by addressing the same to the other as follows, unless written notice shall have been given as of the date mailed or telegram or facsimile sent: If to ICD, to: If to the PUBLISHER, to: ICD/THE HEARST CORPORATION WIRED MAGAZINE GROUP, INC. 250 WEST 55TH STREET - 11TH FLOOR 520 THIRD STREET - 4TH FLOOR NEW YORK, NY 10019-5288 SAN FRANCISCO, CA 94107-1427 ATTENTION: PRESIDENT ATTENTION: PRESIDENT" 3. Paragraph SEVENTEENTH will now be added and read as follows: "SEVENTEENTH: CONTINUING OBLIGATIONS. PUBLISHER hereby agrees to assume any and all of the rights and obligations agreed to under the Agreement between Wired Ventures, Ltd. and ICD." All other terms and conditions of the Agreement remain the same. Please arrange for two (2) copies of the amendment to be signed by authorized representatives of Wired Magazine, Inc. and Wired Ventures, Ltd. and returned to ICD/The Hearst Corporation, as this amendment shall not be effective until executed by all parties hereto. 23. 24 CONTRACT AMENDMENT - WIRED May 22, 1996 Page 2 of 2 ACCEPTED: ACCEPTED: WIRED MAGAZINE GROUP, INC. INTERNATIONAL CIRCULATION DISTRIBUTORS/THE HEARST CORPORATION By: Jane Metcalfe By: Victor J. Zustovich Title: President Title: VP Business Affairs Signature: /S/ JANE METCALFE Signature: /S/ VICTOR J. ZUSTOVICH Date: May 20, 1996 Date: May 21, 1996 ACCEPTED: WIRED VENTURES, LTD. By: Jane Metcalfe Title: President Signature: /S/ JANE METCALFE Date: May 20, 1996 DD/as 24. EX-10.8 13 MASTER AGREEMENT FOR NEODATA SERVICES 1 EXHIBIT 10.8 THE NEODATA COMPANIES MASTER AGREEMENT FOR NEODATA SERVICES (DATED JUNE 20, 1994) BETWEEN NEODATA SERVICES, INC. (NEODATA COMPANY) AND WIRED VENTURES, LTD (CLIENT) 2 MASTER AGREEMENT FOR NEODATA SERVICES THIS MASTER AGREEMENT (the "AGREEMENT") is made as of the date indicated below by and between WIRED VENTURES, LTD, a California limited partnership ("CLIENT"), and NEODATA SERVICES, INC. ("NEODATA"). Client hereby requests that Neodata provide the marketing services described in APPENDIX A hereto (herein, the "SERVICES") and, upon acceptance by Neodata by execution by its authorized representative in the space provided below, this Agreement shall become a binding Agreement between Neodata and Client, pursuant to which Neodata agrees to provide the Services to Client upon the Terms and Conditions stated in this Agreement and in the Appendices attached to this Agreement, which shall be deemed to be a part hereof for all purposes. ACCEPTED AND AGREED TO: Client: Wired Ventures, LTD. Address: 544 Second Street San Francisco, CA 94107 Phone: (415) 904-0660 Fax: ( ) ------------------------ Contact Person: Catherine Huchting Direct Phone: (415) 904-6469 By: /S/ JANE METCALFE Jane Metcalfe (Authorized Signature) (Typed Name) Title: President Accepted by Neodata this 7th day of July, 1994. By: /S/ RICHARD L. ROSY Richard L. Rosy (Authorized Signature) (Typed Name) Title: Senior Vice President, Sales 1. 3 TERMS AND CONDITIONS A. DURATION AND TERMINATION OF SERVICES. 1. TERM. Except as provided in Section A-2 hereof, the term of the Agreement shall be as set forth in Appendix A hereto. 2. EARLY TERMINATION. If any of the following conditions shall occur, either party hereto may cause termination of Services hereunder by serving written notice specifying as a termination date either the end of the calendar month following the calendar month in which such notice shall have been served or the end of any subsequent calendar month: (a) BANKRUPTCY, ETC. If the other party shall file or be the subject of a bankruptcy petition, become insolvent, apply for or consent to the appointment of a receiver or trustee or make an assignment for the benefit of creditors or be unable to meet its obligations in the normal course of business as they fall due; (b) BREACH OF AGREEMENT. If the other party shall commit any material breach of this Agreement and shall fail to remedy same within thirty days following written notice thereof; or (c) CLAIMS. If the other party shall institute against it litigation arising out of or relating to this Agreement, except for action by Neodata to collect invoices in arrears. 3. SUSPENSION OF SERVICE. If any breach by Client of the provisions of Section C- 1(a) hereof shall not be remedied within ten (10) days following the serving by Neodata of written notice thereof, Neodata may, without limiting any other rights it may have, suspend any or all Services until such breach has been remedied. Notwithstanding the termination of this Agreement, Sections C and D-9 hereof shall remain in full force and effect. Neodata is authorized to apply any monies that are received by Neodata in Client's name against payment of delinquent Neodata invoices. B. SERVICES; PRICES. 1. BASE PRICES. Services specified on Appendix A or any other Appendix hereto will be priced pursuant to such Appendix and are subject to the adjustments specified in this Section B. 2. SALES TAX, ETC. All Charge to Client pursuant to this Agreement shall be increased to the extent of any tax (other than income tax) of any kind levied or collected hereafter, by any governmental authority, on any Service performed or material delivered hereunder. 2. 4 3. EXPENSES OF COLLECTION. Charges to Client shall be increased by any and all expenses of Neodata resulting from Client's failure to pay in accordance with Section C, including court costs and attorneys' fees. 4. ADJUSTMENT OF ERRONEOUS BILLINGS AND PAYMENTS. Upon discovery of any error in billing of or payment for Services hereunder, either party hereto may, within twelve months following the making of the said error (but not more than three months after the effective termination date of this Agreement), serve written notice on the other party, requesting adjustment, and any such claim found to be justified shall be settled promptly. 5. TELEMARKETING ADJUSTMENT. Neodata shall have the right to increase the rates quoted in any Appendix hereto for telemarketing Services to the extent of increases, if any, in tariff rates charged to Neodata by its carriers, upon giving Client thirty (30) days prior written notice. If the Services include inbound telemarketing services, Client's publication or dissemination by any means, directly or indirectly, of the toll-free or 1-900 telephone numbers used in the provision of such Services after receipt of any such notice shall constitute acceptance by Client of any such rate increase and Client's agreement to pay for Services at such increased rates. Should Neodata continue to receive and process calls subsequent to cancellation of this Agreement, Client agrees to pay for Services at the rates in effect on the dates Services were provided. C. TERMS OF PAYMENT. 1. GENERAL PAYMENT TERMS. (a) INVOICE PAYMENT. Client agrees to pay for the Services at the rates set forth on the Appendices hereto. Payment is due upon receipt of an invoice. If payment by Client is not received by Neodata within thirty (30) days of the date of any such invoice, the amount of such invoice shall be considered past due. All amounts past due will be subject to a late charge of one and one-half percent (1.5%) per month (or the highest rate allowed by applicable law, if lower). (b) REIMBURSALS. If the Services include mailing or purchasing items on behalf of Client ("REIMBURSABLE EXPENSES"), on the effective date of this Agreement, Client will pay to Neodata a cash deposit (the "REIMBURSABLE EXPENSE DEPOSIT") representing Neodata's good faith, reasonable estimate of the equivalent of two (2) months Reimbursable Expenses, based upon projected expenses to be incurred by Neodata on behalf Of Client such as mailing volumes and postal rates. The Reimbursable Expense Deposit shall be restored as depleted so that at all times Neodata shall have on deposit two (2) months Reimbursable Expenses. The amount of the Reimbursable Expense Deposit will be adjusted periodically as the volume of expenses fluctuate and Client shall advance funds by wire transfer as reasonably required by Neodata so that the Reimbursable Expense Deposit will at all times equal two (2) months postage expenses. 3. 5 (c) NO ABATEMENT. Client agrees that any sums payable to Neodata under this Agreement shall not be subject to any abatement, defense, set-off, counterclaim or recoupment. 2. INVOICES FOR REIMBURSABLE EXPENSES. Invoices for Reimbursable Expenses, if any, shall be payable upon presentation to Client by immediate wire transfer from Client to a bank account designated by Neodata. Failure to remit such payment immediately may result in delays in the provision of Services. D. GENERAL PROVISIONS. 1. NON-EXCLUSIVE SERVICE. Services provided hereunder are non-exclusive; therefore, Neodata is not restricted hereunder from furnishing any type of service to any person or entity. 2. NON-DIVULGENCE. All information that Neodata acquires from Client with respect to the Services shall be considered confidential and proprietary information of Client. Neodata agrees not to use such information except for the purpose of performing the Services and agrees not to disclose such information to others, except to those Neodata employees and agents who reasonably require such information in the performance of the Services. Neodata will use reasonable care in safeguarding such information and shall, upon written request of Client, return such information to Client upon the termination of this Agreement. Notwithstanding the other provisions of this paragraph, Neodata shall not be prevented from disclosing such information (i) which, at the time of disclosure, was in the public domain, (ii) which was lawfully disclosed to Neodata on a non-confidential basis by a third party who is not bound by a confidentiality agreement with Client, (iii) which is disclosed with Client's prior written approval or (iv) in response to valid legal process, whether issued by a court or administrative or regulatory body. 3. BANKING FACILITIES. If necessary for the provision of Services, Client shall establish a bank account in Boulder, CO in which Neodata shall deposit funds received for the account of Client. 4. PROPERTY RIGHTS OF CLIENT, ETC.: (a) OWNERSHIP OF CLIENT'S PROPERTY. Magnetic tapes containing names on Client's proprietary lists, microfilmed and other records, promotional letters and messages, stationery, Client's credit billing forms and other special material furnished to Neodata by Client or purchased from Neodata by Client are deemed to be the property of Client. (b) RETURN OF CLIENT'S PROPERTY. Upon termination of the Services or any portion thereof; Neodata, promptly upon receipt of a written request from Client, will return to Client any portion of its property (then in Neodata's possession or under its control and not required for the efficient completion of Services) specified in such request. The remainder of Client's property shall be returned to Client promptly following completion of Services. 4. 6 However, Neodata will retain all Client property until payment in full of all invoices and all estimated charges. (c) COMPLETION OF SERVICES. Following the return of any property as provided in Section D-4(b), Neodata shall complete the performance of all Services required hereunder. (d) EXTRA MAGNETIC TAPES. At any time when Client is not delinquent in payment of any Neodata invoices, Neodata, on written notice from Client, will furnish as promptly as practicable one complete set of magnetic tapes containing the names on Client's proprietary lists, such set to be in addition to those required by Neodata in providing Services. The price for the materials specified in this Section D-4(d) will be quoted to Client upon request. (e) OBLIGATIONS OF NEODATA. On completion of the Services and delivery to Client of the property specified in Section D-4(b), and any tapes ordered pursuant to Section D- 4(d), Neodata shall be deemed to have discharged all its obligations to Client under this Agreement. 5. COOPERATION BY THE CLIENT. Client agrees that in order to enable Neodata to meet the time schedule for each Service to be furnished under this Agreement, it will, sufficiently in advance of each applicable time schedule, furnish all necessary postage and any materials and information, and extend cooperation to Neodata, in order for Neodata to complete the Services. Neodata's obligation to comply with each such time schedule is contingent in each instance upon Client's compliance with the obligation specified in the preceding sentence. 6. NON-PERFORMANCE. If Neodata shall fail in any material respect for any reason to furnish any Service or deliver any material required under this Agreement, Neodata agrees either to re-perform such Service or to refund to the Client any amounts paid for such Service or material (or to credit such amounts against future invoices). 7. FORCE MAJEURE. Neodata shall have no liability for any failure to perform hereunder if such failure is due to causes beyond the control of Neodata, such as labor difficulties, acts of God, governmental action, embargoes, fire, flood, epidemic, explosion, lightning, pest damage, power surges or failures, the elements, civil disturbances, war, acts of the public enemy, transportation facilities, fuel or energy shortages, machinery breakdowns, delays of supplies or acts or omissions of any common carrier or its agents. 8. LIMITATION OF LIABILITY. Under no circumstances shall Neodata have liability for special, consequential or punitive damages. In no event shall Neodata's liability for breaches under this Agreement exceed net sums actually paid to Neodata by Client in any one-month period for the publication/program and service to which such breach is related. 9. INDEMNIFICATION. Client agrees at all times to indemnify, save harmless and defend Neodata and its affiliated companies and their officers, agents, directors and employees from and against any and all expenses, loss or claims, suits, complaints, actions or legal proceedings, including threatened proceedings, directly or indirectly related to or arising from 5. 7 or in connection with the provision of Services by Neodata, including without limitation any such claim, suit, complaint, action or legal proceeding, including threatened proceedings, arising out of or relating to Client's products, services, messages, offers, caller contacts, promotions or advertising, including libel or slander claims or claims for personal injury or property damage related thereto, or out of Client's failure to comply at all times with requirements of federal, state or local laws and regulations. Client agrees that it is solely responsible for determining the jurisdictions, if any, in which sales, use or similar taxes should be collected in respect of products or publications mailed into any such jurisdiction by Neodata on behalf of Client. Client's covenants contained in this section shall continue in full force and effect notwithstanding the termination of this Agreement. 10. REPRESENTATIONS AND WAIVER. This Agreement contains the sole understanding between the parties hereto and any oral or written agreement or representations which may have been made prior to entry into this Agreement shall be deemed to have been merged into this Agreement, and shall be of no force and effect except as reflected herein, and the obligations of Neodata and Client may not be modified except in a written amendment hereto signed by Neodata and Client. No waiver by either party of any breach of this Agreement by the other shall be deemed to be a waiver of any preceding or subsequent breach. 11. ASSIGNABILITY. (a) Client may not assign this Agreement except with the prior written consent of Neodata. (b) Neodata reserves the right to assign, transfer, set over or sell its rights in and to this Agreement to an affiliate of Neodata; any other assignment requires the written consent of Client. Upon the assumption of this Agreement by the assignee, the assignee shall be solely responsible for all obligations of Neodata hereunder. (c) Neodata must notify Client of any Sale of Neodata thirty (30) days prior to the effective date of such Sale. Upon the Sale of Neodata, Client shall have the right to terminate this Agreement by delivering to Neodata nine (9) months' prior written notice, such notice to be delivered not later than six (6) months after Client is notified of such sale. As used herein, "SALE" shall mean a sale of all or substantially all of Neodata's assets or capital stock having the right to elect directors generally to any entity that is not an Affiliate (as such term is defined in the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations promulgated thereunder) of Neodata; provided that in no event shall the issuance by Neodata of capital stock pursuant to an effective registration statement filed with the Securities and Exchange Commission pursuant to the Securities Act be deemed to be a "Sale". 12. NOTICE. Deposit of any notice required hereunder in the United States mails addressed, by certified mail, return receipt requested, to the Client at: 544 Second Street San Francisco, CA 94107 6. 8 or to Neodata at: P.O. Box 4586 Boulder, CO 80306 Attn: Chairman or personal delivery shall constitute serving notice. 13. ACCEPTANCE AND CONSTRUCTION. This Agreement is subject to acceptance by Neodata at any time following execution by Client and upon such acceptance it shall become effective. This Agreement shall be construed under the laws of the State of Colorado. For the purpose of any action or proceeding instituted with respect to any claim arising under this Agreement, both Client and Neodata hereby irrevocably consent to the jurisdiction of any court having subject matter jurisdiction in Boulder, Colorado. Client further irrevocably consents to the service of process out of said court by mailing a copy thereof, by registered mail, postage prepaid, to Client and agrees that such service, to the fullest extent permitted by law, (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall be taken and held to be valid personal service upon and personal delivery to it. In connection with any suit, action or proceeding instituted in any state or federal court located in Boulder, Colorado, Client hereby irrevocably waives, to the fullest extent permitted by law, any objection that it may have or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in such court has been brought in an inconvenient forum. Only Neodata's Chairman or Senior Vice President, Sales shall have the power to accept this Agreement or to execute any amendment hereof. 14. DUE AUTHORIZATION. The parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers. 15. NO WAIVERS. The failure of either party at any time to require performance by the other party of any provision of this Agreement shall in no way affect the right to require such performance at any time thereafter, nor shall the waiver by either party of a breach waive any succeeding breach of such provision or waive the enforcement of the provision itself. 16. INVALID PORTIONS. If any portion of this Agreement is found to be invalid or unenforceable, the parties agree that the remaining portions shall remain in full force and effect. 17. OFFICERS, DIRECTORS EXEMPT. Client shall have no recourse or right of action against any shareholder, officer or director, in his or her individual capacity as such, past, present or future, of Neodata or of any successor thereto, whether by virtue of any statute or rule of law or otherwise, all such liability being, by the acceptance hereof and as part of the consideration of the execution hereof by Neodata, expressly waived and released. 7. 9 APPENDIX "A" 1. COMMENCEMENT OF SERVICES. Services shall commence as follows: PUBLICATION ISSUE DATE (Listed in Section "A") Wired September 1994 2. DURATION AND TERMINATION OF SERVICE. Except as provided in Section A-2 of the Master Agreement, NCF Service hereunder shall continue until terminated, by either party hereto, on written notice specifying as a termination date the end of the twelfth (or any subsequent) calendar month following the calendar month in which such notice shall have been served but in no event shall such termination be effective prior to the expiration of twenty-four full calendar months following the date of acceptance of this Agreement by Neodata. Any added term and other amendments will be mutually agreed upon. 3. SERVICES, PRICES. a. PRINTING SERVICE. Neodata will advise Client in designing the promotion, subscription and other forms and materials required by Neodata for prompt and efficient performance of NCF Service, and Client will supply (or order) all such forms and materials that are compatible with Neodata's procedures. b. PROTECTIVE SERVICE: (1) LIABILITY FOR PROPERTY LOSS. In the event of loss of Client's property in Neodata's possession arising from casualty or from any other cause whatever, Neodata shall pay to Client, and Neodata's liability shall be limited to the respective prices specified in Appendix A-II-B for each reel of magnetic tape or other processing media or device and Client's out-of-pocket cost for replacement of promotional material and forms (not to exceed an average of $12.00 per thousand). In determining the foregoing payment, the number of reels of magnetic tape or quantity of other media or devices shall be determined by Neodata's invoices to Client and the quantity of promotional material and forms shall be determined by Neodata's latest inventory submitted to Client. (2) NCF INSURANCE COVERAGE. Neodata has secured and shall maintain insurance coverage with respect to its liability under Appendix A-3-b(1), and upon request, shall furnish to Client a certificate of insurance evidencing such insurance coverage. Appendix A-1 10 c. FEDERAL MINIMUM WAGE. In the case of any increase in the Federal Minimum Wage rate, over the rate in effect as of the date of this Agreement, the amount of price increase shall be 1.5 percent for each $.05 per hour increase (or pro rata thereof). The total percent of increase will apply to all NCF Service prices covered under this Agreement and said increase will become effective on the legal date of such increases in the Federal Minimum Wage rates. d. OTHER GOVERNMENT ACTIONS. All charges to Client pursuant to this Agreement shall be increased or decreased in the same proportion as Neodata's aggregate costs in providing NCF Services of the type furnished by this Agreement shall be increased or decreased as a result of any government law regulation or order (excepting those prescribing the Federal Minimum Wage) taking effect after date of this Agreement with respect to or affecting prices, working hours, wages, overtime wages, working conditions, employee benefits, procedures or production schedules or with respect to any tax other than income taxes and the taxes specified in Section B-2 of the Master Agreement. e. COST OF LIVING. Effective September 1, 1995 and annually thereafter, all charges shall be increased or decreased in proportion to such increase or decrease as shall occur in the Consumer Price Index for Urban Wage Earners and Clerical Workers, U.S. City Average, All Items 1982-84 (U.S. Department of Labor) up to a maximum of 5% per year. The base point of the CPI is the latest Index published as of 9/94 and is the 7/94 Index. The increase or decrease will be based on the change between the 7/94 Index and 7/95 Index. Annually thereafter, the increase or decrease will be based on the prior year July Index compared to the current year July Index; provided, however, in the event an increase is applicable under Appendix A-3c and/or Appendix A-3d, then only the excess, if any, of the increase provided in this Appendix A-3e over said increase provided in Appendix A-3c and/or Appendix A-3d shall be applicable. f. Prices will be reviewed prior to September 1995, and adjusted on that date if improved technology and systems warrant. 4. GENERAL PROVISIONS. a. TAPE FORMAT. Promptly following notice served by Client pursuant to Appendix A-2, or on delivery of any tapes furnished pursuant to Section D-4(d) of the Master Agreement, Neodata will deliver to Client a tape format which will enable Client to interpret the magnetic tapes (mentioned in Section D-4(a) of the Master Agreement) in converting to another circulation fulfillment system. b. RESPONSIBILITY FOR ERRORS. In the event of errors, inaccuracies or omissions by Neodata or its employees, Neodata shall attempt, at its sole expense to correct the error, inaccuracy or omission. Neodata shall have a reasonable period of time in which to correct such error, inaccuracy or omission. Appendix A-2 11 APPENDIX II FULFILLMENT SERVICE A. SCOPE OF BASIC SUBSCRIPTION FULFILLMENT SERVICE. 1. MAILROOM AND CASHIERING PROCESS. a. Receive mail daily, identified where possible by the use of coded business reply envelopes. b. Open mail daily and sort by category: - Cash Order - Credit Order - Agents Clearance - Payment - Cancellation - Change of Address - Correspondence - Qualification Form c. Validate and establish cash record daily. d. Deposit all money into Client's bank account daily and prepare deposit reports. 2. TRANSACTION ANALYSIS. a. Verify agency clearances. b. Data enter all transactions and wherever possible identify and correct rejected information during the initial data entry process. c. Provide quality control for all transactions. d. Credit card verification, deposit, and entry is available on a surcharge basis. 3. SUBSCRIBER ADJUSTMENTS AND CORRESPONDENCE. a. Search Client's Data Bases as required, using Neobiz's on-line system. b. Adjust subscriber records, following mutually agreed upon policies. Appendix II-1 12 APPENDIX II FULFILLMENT SERVICE c. Notify the subscriber with the appropriate response, following mutually agreed upon policy. d. Provide refund galleys based upon the unserved paid portion of each canceled subscriber record. e. Incoming telephone 800 number service utilizing on-line entry processing is available on a surcharge basis. Telephone customer service is provided twenty-four hours a day, seven days a week. 4. SUBSCRIPTION DATA BASE MAINTENANCE. a. Prepare from the subscriber data received, a complete record carrying the name, address, city, state, ZIP+4 code, and the pre-defined demographic data of each subscriber together with the coding information necessary to facilitate not only the fulfillment activity, but also any marketing and auditing activities. b. Enter orders. c. Apply payments, reinstatements and cancellations. d. Reenter orders due to late payments. e. Enter/Update demographic information per subscriber supplied data. f. Execute address changes. g. Adjust subscriber records, following mutually agreed upon policies. h. Automatically suspend unpaid credit service and mass cancel for non- payment seven (7) months after entry. i. Balance all Master File transactions. j. Maintain for a period of six (6) months expired subscription and change of address shadow records. Appendix II-2 13 APPENDIX II FULFILLMENT SERVICE 5. MAGAZINE MAILING LABEL PREPARATION. a. Furnish to Client's printers, active subscriber address labels in accordance with schedules mutually agreed upon sufficiently in advance of the required mailing date. b. Provide supplemental new business labels on a weekly basis for copies to be mailed between main issue runs. c. Sort main issue and new business supplemental labels to second class, level B -- five (5) digit requirements. d. Provide the necessary bag tags. e. Identify labels with end-of-ZIP and end-of-SCF markings. f. Prepare accompanying requisition reports for each label run. g. Special label breakouts and presort levels are available on a surcharge basis. 6. RENEWAL & REQUALIFICATION SERIES SELECTION AND ADDRESSING. a. Monthly, Neodata will select renewal/requalification promotions in accordance with mutually agreed upon schedules. b. Selections can be based upon expire, source and effort. c. Computer address (via impact printing) continuous forms up to a total of ten (10) efforts to any one expire group. d. Mail the selections within five (5) working days of the selection Master File date; add one (1) to three (3) days to mechanically presort 1st and 3rd Class, respectively, before mailing. 7. INVOICE SERIES SELECTION AND ADDRESSING. a. Neodata will select credit acknowledgements and statements in accordance with mutually agreed upon schedules. Appendix II-3 14 APPENDIX II FULFILLMENT SERVICE b. Computer address (via impact printing) credit acknowledgements and subsequent statements up to a total of five (5) efforts to any one billing group. c. Mail credit acknowledgements and statements within five (5) working days of the selection; add one (1) day to mechanically presort 1st Class before mailing. 8. MAGNETIC TAPE STORAGE. Neodata will store a complete Master File (grandfather file) in a location other than the computer facility. 9. POSTAGE. Client agrees to furnish its own Post Office boxes and to maintain its own business reply and permanent postage advance accounts. Client further agrees to maintain a permanent postage advance with Neodata of an amount equal to estimate postage for a two-month period that Neodata will advance for mailings that are mechanically presorted. 10. CLIENT SERVICE. Neodata will provide Client with an account management team, directed by an experienced Account Manager, who will be responsible to ensure that all processing is handled in a timely, efficient manner. On a daily basis the account team will be thoroughly involved in production processing, Master File updating, and the handling of all Master File results (outputs). 11. AUDITING. Neodata will hold orders, adjustments, and payments per ABC audit requirements. B. PRICE OF BASIC FULFILLMENT SERVICE. 1. DATA ENTRY CHARGES. Cash Orders $ * /each Credit Orders $ * /each Credit Cancellation $ * /each Key Enter E-Mail Address $ * /each
2. LABEL RATE. Based on an issue frequency of twelve (12) issues per year, Neodata will charge $ * per copy delivered or $ * per name per year. 3. DATA STORAGE CHARGER. Monthly maintenance $ * /month
- --------------- * Confidential Treatment Requested. Appendix II-4 15 APPENDIX II FULFILLMENT SERVICE 4. MINIMUM ANNUAL BILLING CHARGE. The minimum billing charge for basic fulfillment services each twelve (12) month period effective with the start of service will be * . This amount will be billed and payable on a monthly basis at * per month. 5. CHARGE FOR MAGNETIC TAPE. Magnetic tape used on behalf of, and the sole property of Client in performing the Basic Fulfillment Services, is invoiced every three (3) years (average life span for each magnetic tape). * magnetic tapes are necessary for each publication plus, one (1) tape per * active subscribers over the first * records. Magnetic tapes are invoiced at * per reel. - --------------- * Confidential Treatment Requested. Appendix II-5 16 APPENDIX III PAGE 1 OF 4 STATISTICAL SERVICE A. SCOPE OF STATISTICAL SERVICE Neodata will maintain the necessary records of Client's subscription information required to prepare and submit the reports listed below: STATISTICAL REPORTS
REPORTS FREQUENCY 1. SALES AND CIRCULATION REPORTS to accurately monitor and market Client's subscriptions. STARTING ISSUE REPORT (B002) New, Renewal and Agency reinstatement production are reported separately by start issue for print order control and rate base management. Weekly CUMULATIVE PROMOTION ANALYSIS (119/129) Complete production cycle reporting for each promotion key, pay-up, P/L information, various subtotals and Agent/Non-Agent summaries allows for promotion key tracking (new business, conversion renewal, and long term renewal), eliminates posting, projection record for final return and tracks budget vs. actual. Weekly ISSUE TO ISSUE RECONCILIATION Balances copies serviced from one issue to the next and provides print order estimate information. Each Issue 2. FINANCIAL REPORTS to balance the overall subscription process, and establish the necessary accounts to accomplish end of month and end of year accounting book entries. CASH DEPOSIT REPORT (210) Debits indicate the type of funds received (Foreign, Canadian, credit card, etc.); credits allocated funds by account (cash, accounts receivable, etc.) to describe the funds processed for and balanced to each deposit. Deposit
Appendix III-1 17 APPENDIX III PAGE 2 OF 4 STATISTICAL SERVICE
REPORTS FREQUENCY PRICE & TERM (B014) Reports production by term and by price. Direct mail returns are reported by cash and credit. Agents returns are reported by pay-in-advance and PDS. Weekly DIRECT MAIL CREDIT CANCELLATION (B024) Reports canceled direct mail credit subscriptions showing the dollar amounts and copies to be taken as bad debt and the amount to be deducted from accounts receivable. Weekly CASH CANCELLATION (B027) Reports canceled cash subscriptions. Information provided by source showing served and unserved copies and dollars. Weekly EARNED INCOME (B007) Summarizes by source copies served, gross dollars and agents net dollars the value of income earned for the labels produced. Weekly LIABILITY SUMMARY SUBSCRIBER liability spread by source for copies, net dollars, gross dollars and agent commission dollars that summarizes total deferred income. Monthly ACCOUNTS RECEIVABLE AGING ANALYSIS Complete current status credit order accounts receivable information for financial control and circulation collection effort response. Monthly SCHEDULE OF ACCOUNTS (B101) Reconciliation of publishers accounts by combining cash, accounts receivable and deferred liability on one page to post entries directly to the general ledger. Monthly SALES TAX REPORT (135) Weekly SALES TAX REPORT (136) Monthly 3. AUDIT REPORTS that satisfy the paragraphs necessary to file the ABC statement.
Appendix III-2 18 APPENDIX III PAGE 3 OF 4 STATISTICAL SERVICE
REPORTS FREQUENCY 4. LABEL REPORTS INVOICE INFORMATION REPORT (040) Each Mailing BOOK ISSUE REPORT (080) Each Mailing SUMMARY REPORT (300) Counts for each book (1st section) and pallet/sack Each Mailing information by issue (2nd section). DISPATCH REPORT (310) Summary and detail dispatch information for each Each Mailing commingle of a mailing job. MAILING STATEMENT INFORMATION REPORT (330) Counts for preparation of Each Mailing 2nd Class USPS mailing statements (forms 3541 or 3541-A). POSTAL VERIFICATION REPORT (340) Verifies to USPS publisher supplied Each Mailing mailing statements and mailer supplied finished pallets and sacks. 3-DIGIT ZIP CODE REPORT Each Mailing 5. MISCELLANEOUS REPORTS NON-ORDER MAIL REPORT (Inquiries/Requests) Monthly MAILING SERVICES MAILING REPORT Each Mailing STOCK RECEIVING REPORT Each Delivery POSTAGE METER USAGE REPORT Monthly MATERIAL INVENTORY REPORT Monthly 6. All reports will be produced within five (5) working days after final information is available.
Appendix III-3 19 APPENDIX III PAGE 4 OF 4 STATISTICAL SERVICE
REPORTS FREQUENCY B. PRICE OF STATISTICAL SERVICE 1. All reports listed under statistical service are furnished at no extra charge. SERVICE CHARGE 2. Noebiz PC Relational Database Monthly Refresh (3 $ * Standard Tables)
- --------------- * Confidential Treatment Requested. Appendix III-4 20 APPENDIX IV MAILING SERVICE A. SCOPE OF MAILING SERVICES 1. It is understood that Mailing Services for all regular renewals, requalifications, promotions, acknowledgements, statements, will be performed using Neodata's Mailing Services Department at the prices provided in Exhibit "A." 2. Neodata will finish warehouse storage space to house promotion, acknowledgement, statement and other similar forms for use by Neodata in Client's behalf pursuant to this agreement and in accordance with the warehouse storage charge outlined in Exhibit "A", attached. B. PRICE OF MAILING SERVICE The prices for Mailing Services are set forth in the "Neodata Mailing Service Operations and Price List." Mailing Services prices do not include outgoing postage, or the cost of materials which unless agreed otherwise in writing shall be supplied and paid for by Client. Appendix IV-1 21 APPENDIX IV - EXHIBIT A PAGE 1 OF 3 NEODATA SERVICES MAILING SERVICE OPERATIONS AND PRICE LIST
TYPE OF OPERATION SPECIFICATIONS PRICE PER JOB ----------------- -------------- ------------- 1. INSERTION Outer Envelope: Minimum Size Set-Up Per Job: $ * 3 1/3" x 6 1/2" Includes sort, tie, bag, and mail, Maximum Size 4 1/8" x 9 1/2" Per M Charges ------------- but does not include postage affixing. (#10 Envelope). 500 - 2,999 $ * 3,000 - 9,999 $ * 10,000 & Above $ * Outer Envelope: Per M Charges ------------- size 4 1/8" x 9 1/2" or larger. Additional 25% to the above prices Prices include up to 4 inserts, each additional insert $1.20/M. Minimum billable quantity is 2,000 pieces/job plus set-up fee. A job is defined as a key or group of keys using the same stock items. 2. METERING Envelopes up to 6" x 9 1/2" Minimum Charge: * pieces Price Per M $ * ----------- 3. STAMP AFFIXING Machine Affixing Minimum Charge: (Rolls Only) Price Per M 3,000 - 10,000 $ * 10,001 & Above *
- --------------- * Confidential Treatment Requested. Appendix IV-A-1 22 APPENDIX IV - EXHIBIT A PAGE 2 OF 3 NEODATA SERVICES MAILING SERVICE OPERATIONS AND PRICE LIST
TYPE OF OPERATION SPECIFICATIONS PRICE PER JOB ----------------- -------------- ------------- 4. PRESORT CHARGES A. First Class Standard Packages 1) Mechanical Presort a) 3/5 Presorted $ * /M - PLUS - (1) 5 Digit Barcode $ * /M - OR - (2) 3 Digit Barcode $ * /M - OR - (3) ZIP+4 $ * /M 2) Other a) Basic Rate ZIP+4 $ * /M B. Third Class 1) Mechanical Presort Standard Packages a) 3/5 Presorted - PLUS - (1) 5 Digit Barcode $ * /M - OR - (2) 3 Digit Barcode $ * /M - OR - (3) ZIP+4 $ * /M $ * /M 2) Other a) Basic Rate ZIP+4 $ * /M - OR - b) Basic Rate Barcode $ * /M
- --------------- * Confidential Treatment Requested. Appendix IV-A-2 23 APPENDIX IV - EXHIBIT A PAGE 3 OF 3 NEODATA SERVICES MAILING SERVICE OPERATIONS AND PRICE LIST
TYPE OF OPERATION SPECIFICATIONS PRICE PER JOB ----------------- -------------- ------------- 5. LASER PRINT CONTINUOUS FORMS Set-Up $ * Minimum Charge: * forms Price Per M $ * ----------- - One Up Forms Double the Above Price 6. THIRD CLASS BUNDLING/BAGGING Price Per M $ * ----------- Requirements 7. FOLDING Sheets 8 1/2" x 11" or less. Minimum Charge: * forms Price Per M $ * ----------- 8. BURSTING Minimum Charge: * forms Price Per M $ * ----------- 9. CHESHIRE LABEL AFFIXING Standard Cheshire Labels, Minimum Charge: * pieces 6" x 9" Card Stock Forms Price Per M ----------- 0 - 50,000 $ * 50,001 & Above * 10. WAREHOUSE STORAGE Monthly Charge: $ */ * pieces 11. GENERAL CLERICAL LABOR Minimum Charge: * hours $ * /hr 12. PRICES FOR OPERATIONS NOT INCLUDED ABOVE WILL BE QUOTED UPON REQUEST.
- --------------- * Confidential Treatment Requested. Appendix IV-A-3 24 PAGE 1 OF 1 APPENDIX V SPECIAL SERVICE A. SCOPE OF SPECIAL SERVICES Special services consist of the operations outlined in Exhibit "B" attached hereto. Additional special services will be furnished on written request. Neodata will determine if the service can be provided satisfactorily with the available equipment and personnel. Price will be a special quotation. B. PRICE OF SPECIAL SERVICES The prices for special services are set forth in Exhibit "B" attached. C. EXCLUSIVITY Client agrees to have all postal presort and selections from any files maintained at Neodata, performed at Neodata, assuming competitive pricing as provided by Client. Appendix V-1 25 Exhibit "B" Page 1 of 2 NEODATA SERVICES PRICE SCHEDULE FOR SPECIAL JOBS 1. SPECIAL JOB SELECTION (Minimum $*/Job) A. Cheshire Labels $ */M Magnetic Tape $ */M B. Selection Charges - In addition to (A) above. - Source Activity (Cold Mail, Renewal, Payment) $ */M - State/SCF $ */M - ZIP/Sex $ */M - Hotline, C/A $ */M - Keying (Maximum 4 Characters) $ */M C. Pressure Sensitive Labels Surcharge $ */M D. Tape/Cartridge Fee (Non-refundable) $*/Reel E. Upload/Download To Diskette $ */M plus $*/Diskette F. Mail File Galley Print Out (Minimum of * Names) $*/M 2. POSTAL SERVICES A. Level C requirements -- Carrier Route $ */M Records Coded B. Palletization $*/Issue 3. SPECIAL PROGRAMMING A. Programming (Minimum of 1 hour charge) $*/Hr. B. Computer Time (Minimum Charge of 3 minutes) - excluding day-to-day standard operations $*/Min 4. CLERICAL LABOR (Minimum Rate $ *) $*/Hr. 5. TELEPHONE ANSWERING SERVICE 1. Calls received on Neodata In-WATS Lines $ */Transaction
- -------------------- * Confidential Treatment Requested Exhibit B - 1 26 EXHIBIT "B" Page 2 of 2 2. Calls received from Canada on Neodata In-WATS 800# $ */Transaction 3. Calls received on Neodata Regular (non 800#) Line $ */Transaction 6. CREDIT CARD PROCESSING Orders processed via American Express, Master Card or Visa ($* monthly minimum billing). $ */Order 7. CUSTOM REPORTING $*/Hour 8. PREMIUM LABELS $ */Premium Label Select, balance and ship 4-Up Pressure Sensitive labels, handle inquiries and when necessary, produce replacement premium labels per subscribers correspondence (Minimum Charge $* per Selection). 9. MAGAZINE ROOM ISSUE MAILINGS $ * Each 10. GIFT CARD PROCESSING A. Hand Inscribe Gift Card - Client provides gift card and outer envelope, Neodata signs gift card, inserts, affixes postage and mails (postage not included). $ */Card B. Stock - Generic Gift Card and Outer Envelope $ * Each 11. DEMOGRAPHIC DATA ENTRY Key enter each character collected $ */Character Key enter telephone number $ */Number 12. OUT-CONVERSION Client will be billed at $*, plus $*/M records with standard system reports. 13. Other charges will be quoted upon request.
- -------------------- * Confidential Treatment Requested Exhibit B - 2 EX-10.9 14 LEASE 500 THIRD STREET 1 Exhibit 10.9 LEASE 500 THIRD STREET INTEREAL CORPORATION, AGENTS (415) 391-3100 THIS LEASE, made on May 20, 1994, between 500 THIRD STREET ASSOCIATES, herein called Lessor and WIRED VENTURES LTD., herein called Lessee. THIS LEASE is subject to the terms, covenants and conditions herein set forth and the Lessee covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of said performance. WITNESSETH: ARTICLE 1 PREMISES Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein a portion of that certain property situated in the City and County of San Francisco, State of California, commonly known as 500 Third Street Building, located at the Northeast corner of Third and Bryant Streets. Said portion is more particularly described as: 520 Third Street, Suite 400, as diagrammed on Exhibit "B" attached to and made a part of this lease. Said real property, including the land and the improvements therein or so much as Lessee is entitled to occupy or use under terms of this lease, is herein called "the Premises". ARTICLE 2 TERM Except as otherwise provided in this Lease, the term of this Lease shall be for a period of three (3) years, commencing on August 1, 1994 and ending on July 31, 1997 unless sooner terminated pursuant to any provision hereof. ARTICLE 3 POSSESSION Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession and reasonable occupancy by August 1, 1994, Lessee may, at 1. 2 Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. If Lessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth below. ARTICLE 4 BASE RENT Lessee shall pay to Lessor as base rent for the Premises, to commence August 1, 1994, in advance on or before the first day of each calendar month of the term of this Lease without deduction, offset, prior notice or demand, in lawful money of the United States, the sum of Six Thousand Five Hundred Twenty-one Dollars and Eighty-five One Hundredths ($6,521.85). Base rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment calculated on a 30-day month basis and payable in advance. August 1, 1994 - July 31, 1995 rent shall be $6,521.85 per month. August 1, 1995 - July 31, 1996 rent shall be $7,246.50 per month. August 1, 1996 - July 31, 1997 rent shall be $7,971.15 per month. ARTICLE 5 SECURITY DEPOSIT Lessee shall deposit with Lessor the sum of Seven Thousand Nine Hundred Seventy-one Dollars and Fifteen One Hundredths ($7,971.15). Said sum shall be held by Lessor as security for the faithful performance by Lessee of all the terms, covenants, and conditions of this Lease to be kept and performed by Lessee during the term hereof. If Lessee defaults with respect to any provision of this lease, including, but not limited to the provisions relating to the payment of rent, Lessor may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Lessor may spend or become obligated to spend by reason of Lessee's default, or to compensate Lessor for any other loss or damage which Lessor may suffer by reason of Lessee's default. If any portion of said deposit is so used or applied, Lessee shall within five (5) days after written demand therefor, deposit cash with Lessor in an amount sufficient to restore the security deposit to its original amount and Lessee's failure do so shall be a material breach of this Lease. Lessor shall not be required to keep this security deposit separate from its general funds, and Lessee shall not be entitled to interest on such deposit. If Lessee shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Lessee (or, at Lessor's option, to the last assignee of Lessee's interest hereunder) at the expiration of the Lease term. In the event of termination of Lessor's interest in this Lease, Lessor shall transfer said deposit to Lessor's successor in interest. 2. 3 ARTICLE 6 RENT ADJUSTMENTS Notwithstanding anything contained in this Article, the rental payable by Lessee shall in no event be less than the base rent specified in Article Four (4) herein above. For the purposes of this Article, the following terms are defined as follows: Base Year: The calendar year in which this Lease term commences (1994). Comparison Year: Each calendar year of the term after the Base Year. Direct Expenses: All direct costs of operation and maintenance, as determined by standard accounting practices, and shall include the following costs by way of illustration, but not be limited to: rent taxes, gross receipt taxes (whether assessed against the Lessor or assessed against the Lessee and collected by the Lessor, or both); water and sewer charges; insurance premiums (EXCEPT PREMIUMS FOR EARTHQUAKE INSURANCE); utilities, janitorial services; labor; costs incurred in the management of the Building; if any, air conditioning & heating; elevator maintenance; supplies; material; equipment; and tools; including maintenance, costs, and upkeep of all parking and common areas. ("Direct Expenses" shall not include depreciation on the Building of which the Premises are a part or equipment therein, loan payments, executive salaries or real estate brokers' commissions, or costs paid directly by Lessee.) (A) DIRECT EXPENSES. If the Direct Expenses paid or incurred by the Lessor for the Comparison Year on account of the operation or maintenance of the Building of which the Premises are a part are in excess of the Direct Expenses paid or incurred for the Base Year, then the Lessee shall pay 10.041% of the increase. This percentage is that portion of the total rentable area of the Building occupied by the Lessee hereunder. Lessor shall endeavor to give to Lessee on or before the first day of March of each year following the respective Comparison Year a statement of the increase in rent payable by Lessee hereunder, but failure by Lessor to give such statement by said date shall not constitute a waiver by Lessor of its right to require an increase in rent. Upon receipt of the statement for the first Comparison Year, Lessee shall pay in full the total amount of increase due for the first Comparison Year, and in addition for the then current year, the amount of any such increase shall be used as an estimate for said current year and this amount shall be divided into twelve (12) equal monthly installments and Lessee shall pay to Lessor, concurrently with the regular monthly rent payment next due following the receipt of such statement, an amount equal to one (1) monthly installment multiplied by the number of months from January in the calendar year in which said statement is submitted to the month of such payment, both months inclusive. Subsequent installments shall be payable concurrently with the regular monthly rent payments for the balance of that calendar year and shall continue until the next Comparison Year's statement is rendered. If the next or any succeeding Comparison Year results in a greater increase in Direct Expenses, then upon receipt of a statement from Lessor, Lessee shall pay a lump sum equal to such total increase in Direct Expenses over the Base Year, less the total of the monthly installments of estimated increases paid in the previous calendar year for which comparison is then being made to the Base Year; and the estimated monthly installments to be paid for the next year, following said Comparison 3. 4 Year, shall be adjusted to reflect such increase. If in any Comparison Year the Lessee's share of Direct Expenses be less than the preceding year, then upon receipt of Lessor's statement, any overpayment made by Lessee on the monthly installment basis provided above shall be credited towards the next monthly rent falling due and the estimated monthly installments of Direct Expenses to be paid shall be adjusted to reflect such lower Direct Expenses for the most recent Comparison Year. Even though the term has expired and Lessee has vacated the Premises, when the final determination is made of Lessee's share of Direct Expenses for the year in which this Lease terminates, Lessee shall immediately pay any increase due over the estimated expenses paid and conversely any overpayment made in the event said expenses decrease shall be immediately rebated by Lessor to Lessee. (B) C.P.I. In addition, on August 1, 1995 and each anniversary date thereafter, the base rent as set forth in Article Four (4) above shall be annually increased by the percentage of increase, if any, in the Consumer Price Index for revised urban wage earners and clerical workers -- San Francisco Oakland Area -- as published by the United States Department of Labor's Bureau of Labor Statistics. The base period, for purposes of such adjustment, shall be March, 1994, the base index for which is 443.4 and any adjustment in rent to be effective beginning August 1, 1995, and the comparison year shall be March, 1995. Should the aforementioned Index be discontinued the parties shall select another similar Index which reflects consumer prices and if the parties cannot agree on another Index it shall be selected by binding arbitration. (By way of illustration only, if the January figure in which this Lease is executed is 140 and the January 1986 figure is 160, then the monthly rent payable for the ensuing calendar year shall be increased by 14.29%.) (C) UTILITIES. Lessee shall pay prior to delinquency for all water, gas, heat, light, power, telephone, sewage, air conditioning and ventilating, scavenger, janitorial, landscaping and all other materials and utilities supplied to the Premises. If any such services are not separately metered to Lessee, Lessee shall pay a pro rata share of all charges which are jointly metered, the determination to be made by Lessor, and payment to be made by Lessee together with rent as estimated by Lessor. Pro rata share for purposes hereof shall be 10.041% and may be adjusted reasonably to reflect actual usage and cost. ARTICLE 7 PROPERTY TAXES Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 4. 5 ARTICLE 8 USE The Premises shall be used and occupied by Lessee for only the following purposes and for no other purposes whatsoever without obtaining the prior written consent of Lessor: general office. (A) Lessee shall not do or permit anything to be done in or about the Premises which will increase the rate of insurance beyond normal commercial use rates upon the Premises (unless Lessee shall pay any increased premium as a result of such use or acts) or cause the cancellation of any insurance policy covering said Premises or any building of which the Premises may be a part, nor shall Lessee sell or permit to be kept, used or sold in or about said Premises any articles which may be prohibited by a standard form policy of fire insurance. (B) Lessee shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other Lessees or occupants of any building of which the Premises may be a part or injure or annoy them or use or allow the Premises to be used for any unlawful or objectionable purpose, nor shall Lessee cause, maintain or permit any nuisance in, on or about the Premises. Lessee shall not commit or suffer to be committed any waste in or upon the Premises. (C) Lessee shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental rule or regulation or requirements or duly constituted public authorities now in force or which may hereafter be enacted or promulgated. Lessee shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Lessee in any action against Lessee, whether Lessor be a party thereto or not, that Lessee has violated any law, statute, ordinance or governmental rule, regulation or covenant, shall be conclusive of that fact as between Lessor and Lessee. (D) Lessee understands and acknowledges that using this premises as permanent lodging or residence is prohibited by this lease and by local zoning ordinances. Lessee further understands and acknowledges that Lessee may not "build out" or construct any Lessee improvements in this premises incident to use of this premises as a residence, including, but not limited to, a bedroom. Lessee certifies that the premises shall not be used as a residence. Further, Lessee expressly agrees to indemnify the Lessor and to hold the Lessor harmless in the event Lessor is subject to any liability, either civil or criminal, including, but not limited to, any expense, fines, levies, liens or other assessments, expenses or liabilities incurred as a result of any proceeding by any person or governmental entity, as a result of Lessee's violation of these terms. LESSEE MAY INSTALL A FULL-SERVICE KITCHEN SO LONG AS IT IS INSTALLED ACCORDING TO CODE AND OPERATED IN SUCH A MANNER SO AS NOT TO DISTURB OTHER TENANTS. 5. 6 ARTICLE 9 CONDITION OF PREMISES If the Premises are completed as of the date of execution hereof, then Lessee, by execution of this Lease, shall be deemed to have accepted the Premises in the condition existing as of the date of execution and in any event this Lease shall be subject to all applicable zoning ordinances and to any municipal, county and state laws and regulations governing and regulating the use of the Premises. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Lessee's business. ARTICLE 10 MAINTENANCE, REPAIR AND ALTERATION Lessee shall keep in good order, condition and repair the Premise and every part thereof, and nonstructural (whether or not such portion of the Premises requiring repair, or the means of repairing the same are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises) including, without limiting the generality of the foregoing, all plumbing, heating, ventilating, electrical, lighting facilities and equipment within the Premises, fixtures, walls (interior), ceilings, floors, windows, doors, plate glass and skylights located within the Premises. (A) Lessor's Rights. If Lessee fails to perform Lessee's obligations under this Article 10, or under any other paragraph of the Lease, Lessor may at its option (but shall not be required to) enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf and put the same in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate then allowable by law shall become due and payable as additional rental to Lessor together with Lessee's next rental installment. (B) LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under Article 9 (relating to Lessor's warranty), Article 14 (relating to destruction of the Premises) and under Article 15 (relating to condemnation of the Premises), it is intended by the parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises nor the building located thereon nor the equipment therein, whether structural or nonstructural, all of which obligations are intended to be that of the Lessee under Article 10 hereof. Lessee expressly waives the benefit of any statute now or hereinafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. (C) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, or Utility Installations in, on or about the Premises, except for nonstructural alterations not exceeding $2,500 in cumulative costs during the term of this Lease. In any event, whether or not in excess of $2,500 in cumulative cost, Lessee shall make no 6. 7 change or alteration to the exterior of the Premises nor the exterior of the building(s) on the Premises without Lessor's prior written consent. (1) As used in this Article 10(C) the term "Utility Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises to their prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations or improvements, additions or Utility Installations without the prior approval of Lessor, Lessor may require that Lessee remove any or all of the same. (2) Any alterations, improvements, additions or Utility Installations in, or about the Premises that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (3) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanics' lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premise, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. (4) Unless Lessor requires their removal, as set forth in Article 10(C), all alterations, improvement, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall become the property of the Lessor and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this Article 10(C), Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of Article 11. 7. 8 ARTICLE 11 SURRENDER OF PREMISES On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distributions systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the Premises in good operating condition. ARTICLE 12 LIABILITY INSURANCE Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Lessor and Lessee against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all area appurtenant thereto. The limit of said insurance shall not, however, limit the liability of the Lessee hereunder. Lessee may carry said insurance under a blanket policy, providing, however, said insurance by Lessee shall have a Lessor's protective liability endorsement attached thereto. If Lessee shall fail to procure and maintain said insurance, Lessor may, but shall not be required to, procure and maintain same, but at the expense of the Lessee. Insurance required hereunder shall be in companies rated A+ or better in "Best's Insurance Guide". Lessee shall deliver to Lessor prior to occupancy of the Premises copies of policies of liability insurance required herein or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Lessor. No policy shall be cancelable or subject to reduction of coverage except after ten (10) days' prior written notice to Lessor. ARTICLE 13 SUBROGATION As long as their respective insurers so permit, Lessor and Lessee hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties. Each party shall obtain any special endorsements, if required by their insurer to evidence compliance with the aforementioned waiver. ARTICLE 14 DAMAGE OR DESTRUCTION (A) PARTIAL DAMAGE - INSURED. In the event improvements on the Premises are damaged by any casualty which is covered under an insurance policy required to be maintained pursuant to Article 13, then Lessor shall repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. 8. 9 (B) PARTIAL DAMAGE - UNINSURED. In the event the improvements on the Premises are damaged, except by a negligent or willful act or omission of Lessee, by any casualty not covered under an insurance policy required to be maintained pursuant to Section 14.2, then Lessor may, at Lessor's option, either: (1) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (2) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of the damage. In the event Lessor elects to terminate this Lease pursuant to this Article 14(B), Lessee shall have the right within ten (10) days after receipt of the required notice to notify Lessor in writing of Lessee's intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within the ten (10) day period, this Lease shall be canceled and terminated as of the date of the occurrence of such damage. (C) TOTAL DESTRUCTION. If the Premises are totally destroyed during the term of this Lease from any cause whether or not covered by the insurance required under Article 13 (including any destruction required by any authorized public authority), this Lease shall automatically terminate as of the date of such total destruction. (D) DAMAGE NEAR END OF THE TERM. If the Premises are partially destroyed or damaged during the last six (6) months of the term of this Lease, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. (E) LESSOR'S OBLIGATIONS. The Lessor shall not be required to repair any injury or damage by fire or other cause, or to make any restoration or replacement of any panelings, decorations, office fixtures, partitions, railings, ceilings, floor covering, equipment, machinery or fixtures or any other improvements or property installed in the Premises by Lessee or at the direct or indirect expense of Lessee. Lessee shall be required to restore or replace same in the event of damage. (F) ABATEMENT OF RENT; LESSEE'S REMEDIES. (1) If the premises are partially destroyed or damaged and Lessor or Lessee repairs them pursuant to this Lease, the rent payable hereunder for the period during which such damage and repair continues shall be abated in proportion to the extent to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. 9. 10 (2) If Lessor shall be obligated to repair or restore the Premises under this Section 14 and shall not commence such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee at Lessee's option may cancel and terminate this Lease by written notice to Lessor at any time prior to the commencement of such repair or restoration. In such event Lease shall terminate as of the date of such notice. (G) TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Article 14, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. ARTICLE 15 CONDEMNATION (A) If the premises or any portion thereof are taken under the power of eminent domain, or sold by Lessor under the threat of the exercise of said power (all of which is herein referred to as "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever occurs first. If more than ten percent (10%) of the floor area of any buildings on the Premises, or more than twenty-five percent (25%) of the land area of the Premises not covered with buildings, is taken by condemnation, either Lessor or Lessee may terminate the Lease, as of the date the condemning authority takes possession, by notice in writing of such election within twenty (20) days after Lessor shall have notified Lessee of the taking, or in the absence of such notice then within twenty (20) days after the condemning authority shall have taken possession. (B) If this Lease is not terminated by either Lessor or Lessee, then it shall remain in full force and effect as to the portion of the Premises remaining, provided the rent shall be reduced in the proportion that the floor area of the buildings taken within the Premises bears to the total floor area of all buildings located on the Premises. In the event this Lease is not so terminated then Lessor agrees, at Lessor's sole cost, to restore the Premises to a complete unit of like quality and character as existed prior to the condemnation as soon as reasonably possible. All awards for the taking of any part of the Premises or any payment made under the threat of the exercise of compensation for diminution of value of a leasehold or for the taking of the fee or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such in connection with such condemnation, Lessor shall, to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 10. 11 ARTICLE 16 LIENS Lessee shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Lessee. Lessor may require, at Lessor's sole option, that Lessee shall provide to Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times any and all estimated cost of any improvements, additions, or alterations in the Premises, to insure Lessor against any liability for mechanics' and materialmen's liens and to insure completion of the work. ARTICLE 17 ASSIGNMENT AND SUBLETTING Lessee shall not mortgage, pledge, hypothecate or encumber this Lease or any interest therein. Lessee shall not assign this Lease or sublet, or suffer any other person (the agents and servants of Lessee excepted) to occupy or use, the Premises, or any part thereof, or any right or privilege appurtenant thereto without the prior written consent of Lessor first had and obtained, which consent shall not be unreasonably withheld. Lessor's consent to one assignment or subletting shall not be deemed to be a consent to any subsequent assignment or subletting, nor shall Lessor's consent release Lessee from any of its obligations under this Lease unless such consent expressly so provides. Any assignment, subletting, occupation or use without the consent of Lessor shall be void and, at the option of Lessor, shall terminate this Lease. (A) In the event at any time or times during the term of this Lease Lessee desires to sublet all or part of the Premises, Lessor reserves the prior right and option to: (1) sublet from Lessee any portion of the premises proposed by Lessee to be sublet for the term for which such portion is proposed to be sublet but at the same rent (including escalation as provided for in Article 6 hereof) as Lessee is required to pay to Lessor under this Lease for the same space, computed on a pro rata of square footage basis or (2) terminate this Lease as it pertains to the portion of the Premises so proposed by Lessee to be sublet. Lessee shall notify Lessor in writing if Lessee proposes to sublet all or any part of the Premises, designating the space proposed to be sublet and the terms of the proposed subletting. Lessor shall be allowed fifteen (15) days after Lessor's foregoing option. If Lessor fails to exercise its said option, all the provisions of Article 17 subparagraph (1) above, respecting subletting, nevertheless shall be in full force and effect and nothing contained in this subparagraph (2) shall be construed as a waiver by Lessor of any of its rights under said subparagraph (1). (B) Lessor's foregoing right and option shall continue throughout the entire term of this Lease. 11. 12 (C) In no event shall Lessee assign this Lease or sublet the Premises or any portion thereof to any then-existing lessee of the building. ARTICLE 18 HOLD HARMLESS Lessee shall indemnify and hold harmless Lessor against and from any and all claims arising from Lessee's use of the Premises for the conduct of its business or from any activity, work, or other thing done, permitted or suffered by the Lessee in or about the Premises, and shall further find and hold harmless Lessor against and from any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or negligence of the Lessee, or any officer, agent, employee, guest, or invitee of Lessee, and from all and against all cost, attorney's fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon, and, in any case, action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor. Lessee as a material part of the consideration to Lessor hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises, from any cause other than Lessor's negligence, and Lessee hereby waives all claims in respect thereof against Lessor. Lessor or its agents shall not be liable for any damage to property entrusted to employees of the Building, nor for loss or damage to any property by theft or otherwise, nor for any injury to or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place resulting from dampness or any other cause whatsoever, unless caused by or due to the negligence of Lessor, its agents, servants or employees. Lessor or its agents shall not be liable for interference with the light or other incorporeal hereditaments, loss of business by Lessee, nor shall Lessor be liable for any latent defect in the Premises or in the Building. Lessee shall give prompt notice to Lessor in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment. ARTICLE 19 RULES AND REGULATIONS Lessee shall faithfully observe and comply with the rules and regulations, indicated on Exhibit "A" attached hereto and hereby reference thereto made a part hereof, that Lessor shall from time to time promulgate. Lessor reserves the right from time to time to make all reasonable modifications to said rules. The additions and modifications to those rules shall be binding upon Lessee upon delivery of a copy of them to Lessee. Lessor shall not be responsible to Lessee for the nonperformance of any said rules by any other Lessees or occupants. 12. 13 ARTICLE 20 HOLDING OVER If Lessee remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month and a rental in the amount equal to 105% of the last monthly rental, plus all other charges payable hereunder, and upon all the terms hereof applicable to a month to month tenancy. ARTICLE 21 ENTRY BY LESSOR Lessor reserves and shall at any and all times have the right to enter the Premises, inspect the same, supply janitorial service and any other service to be provided by Lessor to Lessee hereunder, to submit said Premises to prospective purchasers or Lessees, to post notices of non-responsibility, and to alter, improve or repair the Premises and any portion of the Building of which the Premises are a part that Lessor may deem necessary or desirable, without abatement of rent and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be blocked thereby, and further providing that the business of the Lessee shall not be interfered with unreasonably. Lessee hereby waives any claim for damages or for any injury or inconvenience to or interference with Lessee's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the aforesaid purposes, Lessor shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Lessee's vaults, safes and files, and Lessor shall have the right to use any and all means which Lessor may deem proper to open said doors in an emergency, in order to obtain entry to the Premises without liability to Lessee except for any failure to exercise due care for Lessee's property. Any entry to the Premises obtained by Lessor by any of said means, or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Lessee from the Premises or any portion thereof. ARTICLE 22 ESTOPPEL Lessee shall at any time and from time to time upon not less than ten (10) days' prior written notice from lessor execute, acknowledge and deliver to Lessor a statement in writing, (A) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the mature of such modification and certifying that this Lease as so modified, is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and (B) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of the Lessor hereunder, or specifying such defaults if any are claimed. 13. 14 Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part. ARTICLE 23 RECONSTRUCTION In the event the Premises or the Building of which the Premises are a part are damaged by fire or other perils covered by extended coverage insurance, Lessor agrees to forthwith repair the same; and this Lease shall remain in full force and effect, except that Lessee shall be entitled to a proportionate reduction of the rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall materially interfere with the business carried on by the Lessee in the Premises. If the damage is due to the fault or neglect of Lessee or its employees, there shall be no abatement of rent. (A) In the event the Premises or the Building of which the Premises are a part are damaged as a result of any cause other than the perils covered by fire and extended coverage insurance, then Lessor shall forthwith repair the same, provided the extent of the destruction be less than ten (10%) per cent of the full replacement cost, then Lessor shall have the option; (1) to repair or restore such damage, this Lease continuing in full force and effect, but the rent to be proportionately reduced as herein above in this Article provided; or (2) give notice to Lessee at any time within sixty (60) days after such damage terminating this Lease as of the date specified in such notice, which date shall be no less than thirty (30) days and no more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall expire and all interest of the Lessee in the Premises shall terminate on the date so specified in such notice and the rent, reduced by a proportionate amount, based upon the extent, if any, to which such damage materially interfered with the business carried on by the Lessee in the Premises, shall be paid up to date of said such termination. (B) Notwithstanding anything to the contrary contained in this Article, Lessor shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Article occurs during the last twelve (12) months of the term of this Lease or any extension thereof. Lessor shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railings, floor covering, partitions, or any other property installed in the Premises by Lessee. (C) The Lessee shall not be entitled to any compensation or damages from Lessor for loss of the use of the whole or any part of the Premises, Lessee's personal property or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. 14. 15 ARTICLE 24 AUTHORITY OF PARTIES CORPORATE AUTHORITY. If Lessee is a corporation, each individual executing this lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the board of directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. LIMITED PARTNERSHIPS. If the Lessor herein is a limited partnership, it is understood and agreed that any claims by Lessee on Lessor shall be limited to the assets of the limited partnership, and furthermore, Lessee expressly waives any and all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. ARTICLE 25 DEFAULT The occurrence of any one or more of the following events shall constitute a default and breach of the Lease by Lessee. (A) The vacating or abandonment of the Premises by Lessee. (B) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof by Lessor to Lessee. (C) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Lessee, other than described in Article 25(B) above, where such failure shall continue for a period of thirty (30) days after written notice thereof by Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than thirty (30) days are reasonable required for its cure, then Lessee shall not be deemed to be in default if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (D) The making by Lessee of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt, or a petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged in thirty (30) days. 15. 16 ARTICLE 26 REMEDIES IN DEFAULT In the event of any such material default or breach by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of a right or remedy which Lessor may have by reason of such default or breach: (A) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fee, any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonable avoided; that portion of the leasing commission paid by Lessor and applicable to the unexpired term of this lease. Unpaid installments of rent or other sums shall bear interest from the date due at the rate of ten (10%) per cent per annum. In the event Lessee shall have abandoned the Premises, Lessor shall have the option of: (1) taking possession of the Premises and recovering from Lessee the amount specified in this paragraph, or (2) proceeding under the provision of the following Article 26(B). (B) Maintain Lessee's right to possession, in which case this Lease shall continue in effect whether or not Lessee shall have abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (C) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decision of the State in which the Premises are located. ARTICLE 27 GENERAL PROVISIONS (i) PLATS AND RIDERS. Clauses, plats and riders, if any, signed by the Lessor and the Lessee and endorsed on or affixed to this Lease are a part hereof. (ii) WAIVER. The waiver by Lessor of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition on any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant or condition of this Lease, other than the 16. 17 failure of the Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of the acceptance of such rent. (iii) NOTICES. All notices and demands which may or are to be required or permitted to be given by either party to the other hereunder shall be in writing. All notices and demands by the Lessee to the Lessor shall be sent by United States Mail, postage prepaid, addressed to the Lessor at the Office of the Building, or to such other person or place as the Lessor may from time to time designate in a notice to the Lessee. (iv) JOINT OBLIGATION. If there be more than one Lessee the obligations hereunder imposed upon Lessees shall be joint and several. (v) MARGINAL HEADINGS. The marginal headings and Article titles to the Articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (vi) TIME. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. (vii) SUCCESSORS AND ASSIGNS. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties thereto. (viii) RECORDATION. Neither Lessor nor Lessee shall record this Lease or a short form memorandum hereof without the prior written consent of the other party. (ix) QUIET POSSESSION. Upon Lessee paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease. (x) LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or of a sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after written notice that said amount is due, then Lessee shall pay to Lessor a late charge equal to ten (10%) per cent of such over due amount. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Lessor will incur by reason of the late payment by Lessee. Acceptance of such late charges by the Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 17. 18 (xi) PRIOR AGREEMENTS. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. (xii) INABILITY TO PERFORM. This Lease and the obligations of the Lessee hereunder shall not be affected or impaired because the Lessor is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of the Lessor. (xiii) ATTORNEYS' FEES. In the event of any action or proceeding brought by either party against the other under this Lease the prevailing party shall be entitled to recover all costs and expenses including the fees of its attorneys in such action or proceeding in such amount as the court may adjudge reasonable as attorneys' fees. (xiv) SALE OF PREMISES BY LESSOR. In the event of any sale of the Building, Lessor shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Lessor under this Lease. (xv) SUBORDINATION, ATTORNMENT. Upon request of the Lessor, Lessee will in writing subordinate its rights hereunder to the lien of any first mortgage, or first deed of trust to any bank, insurance company or other lending institution, now or hereafter in force against the land and Building of which the Premises are a part, and upon any buildings hereafter placed upon the land of which the Premises are a part, and to all advances made or hereafter to be made upon the security thereof. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed or trust made by the Lessor covering the Premises, the Lessee shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Lessor under this Lease. The provision of this Article to the contrary notwithstanding, and so long as Lessee is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof. (xvi) NAME. Lessee shall not use the name of the Building or of the development in which the Building is situated for any purpose other than as an address of the business to be conducted by the Lessee in the Premises. (xvii) SEPARABILITY. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. 18. 19 (xviii) CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. (xix) CHOICE OF LAW. This Lease shall be governed by the laws of the State in which the Premises are located. (xx) SIGNS AND AUCTIONS. Lessee shall not place any sign upon the Premises or Building or conduct any auction thereon without Lessor's prior written consent. ARTICLE 28 REMODELING OF BUILDING Lessee acknowledges that Lessor may perform work in the building center hallway in order to construct a new central core (including elevators, hallways, bathrooms and vertical shafts). Lessor agrees to take all reasonable steps so as not to disturb Lessee and any reasonable encroachment into Lessee's premises shall be compensated by a pro rata reduction in rent and/or providing alternate space elsewhere in the building. Such space shall be located as closely as possible to existing premises. Lessor shall give Lessee 120 days written notice of intent to engage in such work. ARTICLE 29 NON-DISCRIMINATION Lessee herein covenants by and for himself, his heirs, executors, administrators and assigns, and all persons claiming under or through him, and this Lease is made and accepted upon and subject to the following conditions: That there shall be no discrimination against or segregation of any person or group of persons on account of race, color, creed, national origin or ancestry, in the leasing, subleasing, transferring, use, occupancy, tenure or enjoyment of the premises herein leased, nor shall Lessee himself, or any persons claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of Lessees, Lessors, sublessors, sublessees or vendees in the premises herein leased. ARTICLE 30 LESSOR'S AGENTS It is understood and agreed that this Lease is executed by Bressie and Company solely in their capacity as Lessor's agents and said Bressie and Company shall not be obligated to perform any of the terms, conditions or covenants to be performed by Lessor herein, nor in any way be liable hereunder. 19. 20 ARTICLE 31 BROKERS Lessee warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease and it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. If this Lease has been filled in, it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the real estate broker or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this Lease or the transactions relating thereto. 20. 21 EXHIBIT "A" RULES AND REGULATIONS 1. No sign placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside or inside of the Building without the written consent of Lessor first had and obtained and Lessor shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Lessee. Lessee shall be allowed to install reasonable signage representative of a major tenant in the ground floor and fourth floor lobbies of the building. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Lessee. Lessee shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises; provided, however, that Lessor may furnish and install a Building standard window covering at all exterior windows. Lessee shall not without prior written consent of Lessor cause or otherwise sunscreen any window. 2. The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by any of the Lessees or used by them for any purpose other than for ingress and egress from their respective Premises. 3. Lessee shall not alter any lock or install any new or additional locks or any bolts on any doors or windows of the Premises. 4. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Lessee who, or whose employees or invites shall have caused it. 5. Lessee shall not overload the floor of the Premises or in any way deface the Premises or any part thereof. 6. No furniture, freight or equipment of any kind shall be brought into the Building without the prior notice to Lessor and all moving of the same into or out of the Building shall be done at such time and in such manner as Lessor shall designate. Lessor shall have the right to prescribe the weight, size and position of all safes and other heavy equipment brought into the building and also the times and manner of moving the same in and out of the Building. Safes or other heavy objects shall, if considered necessary by Lessor, stand on supports of such thickness as is necessary to properly distribute the weight. Lessor will not be responsible for loss of or damage to any such safe or property from 1. 22 any cause and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at the expense of the Lessee. 7. Lessee shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to the Lessor or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other Lessees or those having business therein, nor shall any animals or birds be brought in or kept in or about the Premises or the Building. 8. Nor shall the Premises be used for lodging or for any improper, objectionable or immoral purposes. Lessee shall be allowed reasonable use of the building laundry facilities. 9. Lessee shall not use or keep in the Premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied by Lessor, except for a mutually agreed upon evening/weekend heating system. 10. Lessor will direct electricians as to where and how telephone and telegraph wire are to be introduced. No boring or cutting for wires will be allowed without the consent of the Lessor. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the approval of the Lessor. 11. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. the following day, access to the Building, or to the halls, corridors, elevators or stairways in the Building, or to the Premises may be refused unless the person seeking access is known to the person or employee of the Building in charge and has a pass or is properly identified. The Lessor shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, the Lessor reserves the right to prevent access to the Building during the continuance of the same by closing of the doors or otherwise, for the safety of the Lessees and the protection of property in the Building and the Building. 12. Lessor reserves the right to exclude or expel from the Building any person who, in the judgment of Lessor, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 13. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the written consent of the Lessor. 14. Lessor shall have the right, exercisable without notice and without liability to Lessee, to change the name and street address of the Building of which the Premises are a part. 2. 23 15. Lessee shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate to prevent same. 16. Without the written consent of Lessor, Lessee shall not use the name of the Building in connection with or in promoting or advertising the business of Lessee except as Lessee's address. 17. Lessor shall have the right to control and operate the public portions of the Building, and the public facilities, and heating and air conditioning, as well as facilities furnished for the common use of the Lessees, in such manner as it deems best for the benefit of the Lessees generally. 18. All entrance doors in the Premises shall be left locked when the Premises are not in use, and all doors opening to public corridor shall be kept closed except for normal ingress and egress from the Premises. 3. 24 EXHIBIT "C" WORK LETTER The work to be performed and paid for by Lessor under this Lease shall consist of the following: 1. Patch walls, floors and ceiling. 2. Paint walls and ceiling with one (1) coat of paint (reasonable color chosen by Lessee). 3. Replace all broken/cracked windows. 4. Install steam-powered, forced-air, heating system to be tied to the existing heating system. Any after-hour heating requirements is the responsibility of Lessee. 5. Install overhead power grid for lighting, fans and other equipment (purchase and installation of lighting fixtures, fans and other equipment shall be paid for by Lessee). 6. Install two (2) fourplex outlets at the base of each column. 7. Upgrade existing restrooms by installing new vinyl flooring and ensuring fixtures are in operable condition. The work to be performed and paid for by Lessee under this Lease shall consist of the following: 1. Demolish interior walls (as detailed on Exhibit C-1). 2. Install shower. 3. Install kitchen. 4. Build out approximately eight private offices and 65 workstations. 5. All other improvements which Lessee deems necessary for their use and occupation of the Premises or which may be required by law. 1. 25 The parties hereto have executed this Lease at the place and on the date specified immediately adjacent to their respective signatures. "LESSOR" 500 THIRD STREET ASSOCIATES By: /s/ Elbert Bressie ------------------------------------ Title: General Partner Dated: 5/19/94 --------------------------------- -------------------------- "LESSEE" WIRED VENTURES LTD., a California Limited Partnership by Wired Holdings, Inc. general partner Note change, p.1 By: /s/ Jane Metcalfe ------------------------------------ Title: Authorized Officer Dated: 5/20/94 --------------------------------- -------------------------- By: /s/ Louis Rossetto ------------------------------------ Title: Authorized Officer Dated: 5/20/94 --------------------------------- -------------------------- 2. 26 CERTIFICATE (If Lessee is a Corporation) I, Jane Metcalfe, Secretary of Wired Ventures Ltd., Lessee, hereby certify that the officer(s) executing the foregoing Lease on behalf of Lessee was/were duly authorized to act in his/their capacities as Authorized Officer and Authorized Officer, and his/their action(s) are the action of Lessee. (Corporate Seal) /s/ JANE METCALFE ---------------------------------- Secretary EX-10.10 15 OFFICE LEASE 1 Exhibit 10.10 OFFICE LEASE FORM of the Building Owners and Managers Association of San Francisco PARTIES THIS LEASE, made this 15th day of November, 1995, between GORR PARTNERS, LLC, a California limited liability company, Landlord, and HOT WIRED VENTURES, LLC, a California limited liability company, Tenant. WITNESSETH: 1. PREMISES. Landlord hereby leases to Tenant and Tenant hereby hires from Landlord those certain premises (hereinafter called "premises") outlined in red on Exhibit A attached hereto and by this reference made a part hereof, said premises being situated on the 3rd & 4th floor(s) of that certain building (hereinafter called "building") known as 660 Third Street, San Francisco, California. Said letting and hiring is upon and subject to the terms, covenants and conditions herein set forth and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. 2. PURPOSE. The premises shall be used for general office purposes and for no other use or purpose without the prior written consent of Landlord. 3. TERM. The term of this Lease shall be for ten (10) years "Lease Term" unless earlier terminated or extended according to the terms of this Lease. See Addendum. 4. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver possession of the said premises to Tenant at the commencement of the term hereof, this Lease shall not be void or voidable except as set forth herein, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but in that event there shall be a proportionate reduction of rent covering the period between the commencement of said term and the time when Landlord can deliver possession. See Addendum. Should Landlord tender possession of the premises to Tenant prior to the date specified for the commencement of the term, and Tenant accepts such prior tender, such prior occupancy shall be subject to all terms, covenants, and conditions of this Lease, including the payment of rent. No delay in delivery of possession shall operate to extend the term hereof. Within 10 days after written request from Landlord, Tenant shall execute and return to Landlord an acknowledgment of the commencement date of the term of this lease. See Addendum. 1. 2 5. RENT. (a) On or before the first business day of each calendar month during the term hereof Tenant shall pay to Landlord, as minimum monthly rent for the premises, the sum specified in the Basic Lease Information. The minimum monthly rent for any partial month shall be prorated at the rate of 1/30 of the minimum monthly rent per day. Said rent shall be paid by Tenant to Landlord, in advance, without deduction or offset, in lawful money of the United States of America at 660 Third Street, San Francisco, CA 94104, or to such other person or at such other place as Landlord may from time to time designate in writing. (b) All charges and other amounts of any kind payable by Tenant to Landlord pursuant to this Lease shall be deemed additional rent. Landlord shall have the same remedies for default in the payment of additional rent as for default in the payment of basic rent. Basic rent and additional rent are collectively sometimes hereinafter referred to as rent. (c) All rent payable by Tenant to Landlord hereunder, if not received by Landlord when due, shall bear interest from the due date until paid at the publicly announced prime rate or reference rate charged on such due date by the San Francisco Main Office of Bank of America, N.T. & S.A. (or any successor bank) for short term, unsecured loans to its most creditworthy borrowers, plus four percent (4%) per annum, but in no event shall such interest exceed the maximum rate permitted by law. Landlord's acceptance of any interest payments shall not constitute a waiver of Tenant's default with respect to the overdue amount or prevent Landlord from exercising any of the rights and remedies available to Landlord under this Lease or by law. 6. RENTAL ADJUSTMENT. (a) In addition to the monthly rent provided for in Paragraph 5 hereof, Tenant shall pay to Landlord the sums set forth in the following subparagraphs. Tenant's percentage share as set forth below has been calculated by dividing the number of square feet of rentable area in the Premises by the number of square feet of rentable area in the building. In the event the rentable area of the building is changed, the Tenant's percentage share shall be appropriately adjusted. Rentable area shall be based upon the Building Owners and Managers Association International (BOMAI) standard method of floor measurement for office buildings. Tenant hereby approves and accepts Landlord's calculation of Tenant's current percentage share as set forth below. (b) TAX INCREASES AND ASSESSMENTS. Subject to the terms of the Addendum, Tenant shall pay to Landlord an amount equal to Tenant's percentage share as specified in the Basic Lease Information of any increase in real property taxes and assessments or other fees or charges of whatsoever kind or character imposed by a governmental agency which may be levied on the land and building of which the premises are a part and personal property taxes levied on personal property of Landlord used in the operation of said land and building above the amount 2. 3 of such taxes levied and assessed for the fiscal tax year ending June 30, 1996, either by way of increase in the rate or in the assessed valuation of said land and building or by imposition of any such charges by ordinance or statute of any authority having jurisdiction. For the purposes of the (a) real and personal property taxes shall include, without limitation, taxes of every kind and nature levied and assessed in lieu of or in substitution for existing or additional real or personal property taxes on said land and building as well as any form of assessment, license, fee, levy, penalty, or tax (other than inheritance or estate taxes), imposed by any authority having the direct or indirect power to tax, including any city, county, state, or federal government, or any school, agricultural, lighting, drainage, or other improvement district, as against any legal or equitable interest of Landlord in the premises or in the real property of which the premises are a part, or as against Landlord's right to rent or other income therefrom, or as against Landlord's business of leasing the premises. In addition, Tenant shall pay one hundred per cent (100%) of any increase in taxes or assessments of whatsoever kind and nature (including, without limitation, all personal property taxes) caused by improvements or installations made by Tenant to the premises at any time during the term hereof after the Lease Commencement Date. In the event said taxes or assessments are charged to or paid or payable by Landlord, Tenant forthwith upon demand therefore, shall reimburse Landlord for all amounts of such taxes or assessments chargeable against Tenant pursuant to this subparagraph (b) and paid by Landlord. See Addendum. (c) OPERATING EXPENSE INCREASES. Tenant shall pay to Landlord, at the times hereinafter set forth, an amount equal to Tenant's percentage share as specified in the Basic Lease Information of any increase in direct expenses paid or incurred by Landlord on account of the operation or maintenance of the building above such direct expenses paid or incurred by Landlord during the Base Year. "Base Year" as used in this subparagraph (b) shall mean the calendar year 1996. "Direct expenses" as used herein shall include all direct costs of operation and maintenance as determined by standard accounting practices as set forth in the Building Owners and Managers Association International (BOMAI) chart of accounts from time to time (excluding, however, any and all taxes of the nature set forth in subparagraph (b) above) and shall include the following by way of illustration but not limitation: the cost of contesting by appropriate proceeding the amount or the validity of any of the aforementioned taxes or fees; water and sewer charges; insurance premiums; license, permit and inspection fees; charges of heat, power and steam; janitorial services; labor; supplies; materials, equipment and tools; management expenses and the cost of capital improvements made by Landlord to the Building that are intended to reduce other Operating Expenses or that are required under any governmental law or regulation that is not applicable to the Building as of the date of Commencement of this Lease, such cost or allocable portion thereof to be amortized over such useful life of the improvement together with interest on the unamortized balance at the rate that was paid by landlord on funds borrowed for the purpose of constructing or installing such capital improvements, or, if landlord does not borrow such funds, would have been paid had the Landlord borrowed funds for such purpose but in no event shall such interest rate exceed the maximum rate permitted by law. "Direct expenses" as used herein shall not include depreciation on the building, real estate broker's commissions, tenant improvements, interest and capital items other than those referred to above. In the event the Building is not fully occupied during any Expense Year or in the event the entire Building is not provided with Building standard 3. 4 services during any Expense Year, an adjustment shall be made by Landlord in computing Operating Expenses for such Expense Year so that Operating Expenses shall be computed as though 95% of the entire Building had been occupied and 95% of the entire Building had been provided with Building standard services during such year (or such Operating Expenses shall be computed in accordance with actual occupancy or actual provision of Building standard services if such respective amounts shall exceed 95%); provided, however, that in no event shall the aggregate amount of Operating Expenses collected by Landlord from all Tenants in the Building exceed the actual Operating Expenses for said year. See Addendum. 7. SECURITY DEPOSIT. Simultaneously with the execution of this lease, Tenant shall deposit with Landlord the sum of $85,020.01, of which sum $36,310.63 shall be payment of the first month's rent and the balance thereof, namely, $48,709.38, shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this lease. Provided that at the end of the term Tenant shall have delivered up the Premises to Landlord, broom clean, and in the same condition as at the commencement date, reasonable wear excepted, said sum held as security shall be returned to Tenant. No interest shall be payable thereon and Landlord shall not be required to keep said sum in a separate account. If Tenant fails to pay any Rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may at its option apply or retain all or any portion of the deposit for the payment of any Rent or other charge in default or the payment of any other sum to which landlord may become obligated by Tenant's default, or to compensate Landlord for any loss damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the deposit, then within 10 days after demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the deposit to the full amount thereof, and Tenant's failure to do so shall be a material breach of this Lease. Landlord's application or retention of the deposit shall not constitute a waiver of Tenant's default to the extent that the deposit does not fully compensate Landlord for all losses or damages incurred by Landlord in connection with such default and shall not prejudice any other rights or remedies available to Landlord under this Lease or by law. Within thirty (30) days after termination of this Lease, Landlord shall return the unapplied portion of the security deposit to the Tenant. No security or guaranty which may now or hereafter be furnished Landlord for the payment of the rent herein reserved or for performance by Tenant of the other covenants or conditions of this Lease shall in any way be a bar or defense to any action in unlawful detainer, or for the recovery of the premises, or to any action which Landlord may at any time commence for a breach of any of the covenants or conditions of this Lease. 8. USES PROHIBITED. Tenant shall not do or permit anything to be done in or about the premises nor bring or keep anything therein which will in any way increase the rate of or affect any fire or other insurance upon the building or any of its contents or cause a cancellation of any insurance policy covering said building or contents. Tenant shall not do or permit anything to be done in or about the premises which will in any way unreasonably obstruct or interfere with the rights of other tenants or occupants of the building or injure or annoy them, or use or allow the premises to be used for any residential, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the premises. 4. 5 No loudspeakers or other similar device, system or apparatus which can be heard or experienced outside the premises shall, without the prior written approval of Landlord, be used in or at the premises. Tenant shall not commit or suffer to be committed any waste in or upon the premises. See Addendum. 9. COMPLIANCE WITH LAW. Tenant shall not use or permit anything to be done in or about the premises which will in any way conflict with any law, statute, ordinance or governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the Tenant's use of occupancy of the premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement shall be conclusive of that fact as between Landlord and Tenant. Further, Tenant shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations ("Hazardous Material Laws") relating to hygiene, environmental protection, or the presence, use generation, storage, transportation or disposal of any toxic or hazardous substances, as the same may be amended from time to time, including without limitation, obtaining any required permits or licenses, and Tenant shall handle, treat, manage and dispose of any and all toxic or hazardous substances in strict conformity with all manufacturers' instructions and prudent business practices. See Addendum. 10. ALTERATIONS. After the Commencement Date, Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the premises in excess of $1000 in cost or any part thereof without the written consent of Landlord first had and obtained which shall not be unreasonably withheld or delayed. Any alterations, additions, or improvements to or of said premises, including without limitation any partitions, movable or otherwise, and all carpeting, shall at once become a part of the realty and belong to Landlord. Movable furniture, equipment and trade fixtures shall remain the property of Tenant. If Landlord consents to the making of any alterations, additions or Improvements to the premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense and any contractor or person selected by Tenant to make the same must first be approved of in writing by Landlord. See Addendum. Tenant's obligation to remove any alterations, additions, improvements, fixtures and/or personal property and to repair any damage from such removal shall survive the termination of this Lease. Construction of the alterations, additions, or improvements shall be completed in accordance with drawings and specifications approved in advance in writing by Landlord, shall be carried out in a good and workmanlike manner, and shall comply with all applicable requirements of governmental authorities and such additional conditions as Landlord may reasonably impose. 5. 6 11. REPAIR. By entry hereunder upon the commencement of the term hereof, Tenant accepts the premises as being in good, sanitary order, condition and repair. Tenant, at Tenant's sole cost and expense, shall keep the premises and every part thereof in good condition and repair, damage thereto by fire, earthquake, act of God or the elements not caused by Tenant's negligent or willful act excepted, Tenant hereby waiving all rights to make repairs at the expense of the Landlord as provided by law, statute or ordinance now or hereafter in effect. Upon the expiration or sooner termination of the term hereof, Tenant shall surrender the premises to Landlord in the same condition as when received, ordinary wear and tear and damage by fire, earthquake, act of God or the elements excepted, unless caused by Tenant's negligent or willful act. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, repair, decorate or paint the premises or any part thereof and that no representations respecting the condition of the premises or the building have been made by Landlord to Tenant except as specifically set forth in Exhibit B attached hereto. There shall be no abatement of Rent and no liability to Landlord by reason of any injury or to interference with Tenant's business arising from the making of any repairs or performance of any maintenance obligations by the Landlord, except for any damages caused by Landlord's negligence or intentional acts but in no event any consequential damages. 12. ABANDONMENT. Tenant shall not vacate or abandon the premises at any time during the term hereof, and if Tenant shall abandon, vacate or surrender the premises or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the premises shall be deemed to be abandoned, at the option of Landlord. 13. LIENS. Tenant shall keep the premises and the building and the land upon which the building is situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Tenant shall in the event of the filing of any such lien, post any bond required to release the premises therefrom. Should Tenant fail to remove any such lien within five (5) business days after notice to do so from Landlord, Landlord may, in addition to any other remedies, record a bond pursuant to California Civil Code Section 3143 and all amounts incurred by Landlord in so doing shall become immediately due and payable by Tenant to Landlord as additional rent. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the Premises and the building from such liens. 14. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not mortgage, pledge, hypothecate or encumber this Lease or any interest therein. Tenant shall not assign this Lease or sublet or suffer any other person (the agents and servants of Tenant excepted) to occupy or use the Premises, or any part hereof, or sublet any right or privilege appurtenant thereto without the prior written consent of Landlord first had and obtained, which consent shall not be unreasonably withheld or delayed. Landlord's consent to one assignment, subleasing or occupancy shall not be deemed to be a consent to any subsequent assignment, subleasing or occupancy. See Addendum. 6. 7 (b) Provided further and notwithstanding anything herein before set forth: In the event that at any time or from time to time during the term of this Lease, Tenant desires to sublet all or any part of the Premises, Tenant shall notify the Landlord in writing (the "Sublet Notice") of the terms of the proposed subletting, and the area so proposed to be sublet and shall give Landlord the right to sublet from Tenant such space (the "Sublet Space") on the same terms as those contained in the Sublet Notice. See Addendum. If Landlord fails to exercise its option and Tenant desires to complete the proposed sublease, Tenant shall deliver an executed copy of such sublease to Landlord in order to obtain its consent as required in paragraph 14(a) above. See Addendum. If Landlord consents to a sublease, then such sublease shall be subject to and made upon the following terms: (i) any such sublease shall be subject to the terms of this Lease and the term thereof may not extend beyond the expiration of the term of this Lease; (ii) no subtenant shall have a right to further sublease its premises. If Landlord fails to exercise such option, and Tenant fails to consummate a sublease with a third party within 60 days after the expiration of Landlord's option period on the same terms and conditions contained in the Sublet Notice, Tenant shall be required to deliver a new Sublet Notice to Landlord and comply with the terms and conditions set forth above before any further subletting shall be permitted. (c) Regardless of Landlord's consent, no subletting nor assignment shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay rent and perform other obligations of Tenant under this lease. (d) In no event shall Tenant assign this Lease or sublet the premises or any portion thereof to any then existing or prospective tenant (with whom Landlord has negotiated in the last six months) of said building. (e) Tenant shall pay Landlord's reasonable costs not to exceed $1000 incurred in connection with Tenant's request to assign this lease or sublet the premises, regardless whether or not the Landlord consents to the proposed transfer. (f) If Tenant is a corporation or a partnership, the transfer (as a consequence of a single transaction or any number of separate transactions) of thirty-five percent (35%) or more of the beneficial ownership interest of the voting stock of Tenant issued and outstanding as of the date hereof or of the partnership interests in Tenant, as the case may be, shall constitute an assignment hereunder for which such consent is required. See Addendum. 15. INDEMNIFICATION OF LANDLORD. Tenant agrees to indemnify and defend Landlord against and save Landlord harmless from any and all loss, cost, liability, damage and expense, including without limitation penalties, fines and reasonable attorneys fees and costs, except as caused by the negligent or intentional acts of Landlord, its employees or agents, incurred in connection with or arising from (1) any default by Tenant in the observance of performance of 7. 8 any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, or (2) the use or occupancy or manner of the use or occupancy of the Premises by Tenant or any other person or entity claiming through or under Tenant, including without limitation, the presence, use, generation, storage, transportation or disposal of any toxic or hazardous substances, or (3) the condition of the Premises after the Commencement Date and during the term of the Lease or any occurrence or happening on the Premises from any cause whatsoever, or (4) any acts, omissions or negligence of Tenant or of Tenant's agents, contractors, employees, subtenants, licensees, invitees or visitors or any such person or entity, in, on or about the Premises or the Building, either prior to the commencement of, during, or after the expiration of the term, including without limitation any acts, omissions or negligence in the making or performing of any alterations. Tenant further agrees to indemnify, defend and save harmless Landlord and Landlord's agents from and against any and all loss, cost, liability, damage and expense, incurred in connection with or arising from any claims by any persons by reason of injury to persons or damage to property occasioned by any use, occupancy condition, occurrence, happening, act, omission or negligence referred to in the preceding sentence. In the event any action or proceeding is brought against Landlord for any claim against which Tenant is obligated to indemnify Landlord hereunder, Tenant upon notice from Landlord shall defend such action or proceedings at Tenant's sole expense by counsel approved by Landlord, which approval shall not be unreasonably withheld or delayed. The provisions of this Section 15 shall survive the expiration or earlier termination of this lease. 16. INSURANCE. Tenant agrees to keep in force during the term hereof, at Tenant's expense, public liability and property damage insurance with combined single limits in the amount of not less than $2,000,000. Said policy shall name Landlord as an additional insured, and shall insure Landlord's contingent liability as respects acts, or omissions of Tenant, shall be issued by an insurance company licensed to do business in the state where the premises are located; and shall provide that said insurance shall not be cancelled or amended unless thirty (30) days' prior written notice to Landlord is first given. Said policy or a certificate thereof shall be delivered to Landlord by Tenant prior to the commencement of the term and each renewal of such insurance. Tenant and Landlord hereby waives all rights of subrogation against each other to which any insurance carrier may at any time become entitled under any policy of insurance carried by such other party. 17. UTILITIES. Subject to the provisions of the Addendum, Landlord shall furnish to the premises, during reasonable hours of generally recognized business days, to be determined by Landlord, and subject to the rules and regulations of the building, water and electricity suitable for the use of the premises for general office purposes and heat required in Landlord's judgement for the comfortable use and occupation of the premises for such purposes, janitorial service, and elevator service. Landlord shall not be liable for, and Tenant shall not be entitled to any abatement or reduction of rent by reason of Landlord's failure to furnish any of the foregoing when such failure or delay is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor disputes of any character, or is caused directly or indirectly by the limitation, curtailment, rationing or restrictions on use of water, electricity, gas or any other form of energy serving the premises or the building, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall not be liable under any 8. 9 circumstances for loss of business or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Tenant shall pay and provide for all services and utilities not furnished by Landlord. Tenant will not, without the written consent of Landlord, use any apparatus or device in the premises which will in any way increase the amount of cooling capacity or water usually furnished or supplied for use of the premises for general office purposes or connect with or water pipes, any apparatus or device for the purpose of using water. If Tenant shall require water in excess of that customarily furnished or supplied to other tenants of the building for use of their premises for general office purposes, Tenant shall first procure the consent of Landlord, which Landlord may refuse, to the use thereof and Landlord may cause water meter to be installed in the premises so as to measure the amount of excess water consumed by Tenant. The cost of any such meter and of the installation, maintenance and repair thereof shall be paid by Tenant and Tenant agrees to pay to Landlord promptly upon demand therefor the cost of all such excess water consumed, as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the excess water so consumed. 18. PERSONAL PROPERTY AND OTHER TAXES. Tenant shall pay, before delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property located in the premises, including carpeting installed by Tenant even though said carpeting has become a part of the leased premises; and any and all taxes or increases therein levied or assessed on Landlord or Tenant by virtue of alterations, additions or improvements to the premises made by Tenant or Landlord at Tenant's request after the Lease Commencement Date. In the event said taxes are charged to or paid or payable by Landlord, Tenant, forthwith upon demand therefore, shall reimburse Landlord for all of such taxes paid by Landlord. 19. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the rules and regulations printed on or annexed to this Lease and all modifications of and additions thereto applicable to all tenants of the building from time to time put into effect by Landlord of which Tenant shall have notice. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the building of any of said rules and regulations. 20. HOLDING OVER. If Tenant holds possession of the premises after the term of this lease, Tenant shall, (at option of Landlord to be exercised by Landlord's giving written notice to Tenant and not otherwise) become a Tenant from month to month upon the terms and conditions herein specified, so far as applicable, at a monthly rental of 140% of the last month's rent payable in advance, in lawful money, and shall continue to be such Tenant until thirty (30) days after Tenant shall have given to Landlord or Landlord shall have given to Tenant a written notice of intent to terminate such monthly tenancy. Unless Landlord shall exercise the option hereby given him, Tenant shall be a Tenant at sufferance only, whether or not Landlord shall accept any rent from Tenant while Tenant is so holding over. 9. 10 21. SUBORDINATION. This Lease shall be subject and subordinate at all times to all ground or underlying leases which may now exist or hereafter be executed affecting the building and/or the land upon which the building is situated and to the lien of any mortgages or deeds of trust in any amount or amounts whatsoever now or hereafter placed on or against said building and/or land or on or against the Landlord's interest or estate therein or on or against any ground or underlying lease without the necessity of having further instruments on the part of Tenant to effectuate such subordination. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver, upon demand, such further instruments evidencing such subordination of this Lease to such ground or underlying leases and to the lien of any such mortgages or deeds of trust as may be required by Landlord. In the event of termination of any ground or underlying lease, or in the event of foreclosure or exercise of any power of sale under any mortgage or deed of trust superior to this Lease or to which this Lease is subject or subordinate, upon Tenant's attornment to the Lessor under such ground or underlying lease or to the purchaser at any foreclosure sale or sale pursuant to the exercise of any power of sale under any mortgage or deed of trust, this Lease shall not terminate and Tenant shall automatically be and become the Tenant of said Lessor under such ground or underlying lease or to said purchaser, whichever shall make demand therefore. See Addendum. 22. ENTRY BY LANDLORD. Landlord reserves and shall upon twenty-four hours prior notice, except for emergencies, have the right to enter the premises to inspect the same, to supply janitor service and any other service to be provided by Landlord to Tenant hereunder, to submit the premises to prospective purchasers or tenants, to post notices of nonresponsibility, and to alter, improve or repair the premises and any portion of the building without abatement of rent and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing the entrance to the premises shall not be blocked thereby and further providing that the business of Tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy of quiet enjoyment of the premises, and other loss occasioned by such entry unless caused by Landlord's negligence or intentional wrongful acts excluding consequential damages. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors, in, upon and about the premises excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the premises, and any entry to the premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the premises or an eviction of Tenant from the premises or any portion thereof. 23. INSOLVENCY OR BANKRUPTCY. Either (a) the appointment of a receiver to take possession of all or substantially all of the assets of Tenant, (b) an assignment by Tenant for the benefit of creditors, or (c) any action taken or suffered by Tenant under any insolvency, bankruptcy or reorganization act shall constitute a breach of this Lease by Tenant. Upon the happening of any such event this lease shall terminate five (5) days after written notice of termination from Landlord to Tenant. In no event shall this Lease be assigned or assignable by reason of any voluntary or involuntary bankruptcy proceeding nor shall any rights or privileges 10. 11 hereunder be an asset of Tenant in any bankruptcy, insolvency or reorganization proceedings. See Addendum. 24. DEFAULT. See Addendum. In the event of any breach or default of Lease by Tenant, then Landlord, besides any other rights and remedies of Landlord at law or equity, shall have the right either to terminate Tenant's right to possession of the premises and thereby terminate this Lease or have this Lease continue in full force and effect with Tenant at all times having the right to possession of the premises. Such property so removed may be stored in a public warehouse or elsewhere at the cost and for the account of Tenant. Upon such termination Landlord, in addition to any other rights and remedies (including rights and remedies under Subparagraphs (1), (2) and (4) of Subdivision (a) of Section 1951.2 of the California Civil Code of any amendment thereto), shall be entitled to recover from Tenant the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Tenant proves could be reasonably avoided. The worth at the time of award of the amount referred to in subparagraphs (1) and (2) of Subdivision (a) of Section 1951.2 of the California Civil Code shall be computed by allowing interest at the maximum rate allowed by law. The worth at the time of the award of the amount referred to in subparagraph (3) of Subdivision (a) of Section 1951.2 of the California Civil Code shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus 1%. Any proof by Tenant of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use of the premises and in the same geographic vicinity and such two real estate brokers shall select a third licensed real estate broker and the three licensed real estate brokers so selected shall determine the amount of rental loss that could be reasonably avoided for the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. Should Landlord, following any breach or default of this Lease by Tenant, elect to keep this Lease in full force and effect, with Tenant retaining the right to possession of the premises (notwithstanding the fact the Tenant may have abandoned the leased premises), then Landlord, besides the rights and remedies specified in Section 1951.4 of the California Civil Code "(lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations)" and all other rights and remedies Landlord may have at law or equity, shall have the right to enforce all of Landlord's rights and remedies under this Lease. Notwithstanding ant such election to have this Lease remain in full force and effect, Landlord may at any time thereafter elect to terminate Tenant's right to possession of said premises and thereby terminate this Lease for any previous breach or default which remains uncured, or for any subsequent breach or default. 11. 12 25. DESTRUCTION OR DAMAGE. (a) In the event the Premises or a portion of the Building is damaged by fire or other insured casualty, Landlord shall diligently repair the same to the extent possible with the insurance proceeds received by Landlord, subject to the provisions of this Section hereinafter set forth, if such repairs can in Landlord's reasonable opinion be completed within 120 days after issuance of a building permit therefor under the laws and regulations of federal, state and local governmental authorities having jurisdiction thereof. In such event this Lease shall remain in full force and effect except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, contractors, employees, subtenants, licensees, invitees or visitors, an abatement of basic rent shall be allowed Tenant for such part of the Premises as shall be rendered unusable or inaccessible by Tenant in the conduct of its business during the time such part is so unusable. Notwithstanding the foregoing, if such damage shall occur during the final year of the term of this Lease, Landlord shall not be obligated to repair such damage, but may instead elect to terminate this Lease upon written notice given to Tenant within 30 days after the date of such fire or other casualty, in which event this Lease shall terminate as of the termination date specified in Landlord's notice. (b) See Addendum. (c) A total destruction of the Building automatically shall terminate this lease. Landlord and Tenant acknowledge that this Lease constitutes the entire agreement of the parties regarding events of damage or destruction, and Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4) and any similar statute nor or hereafter in force. (d) If the Premises are to be repaired under this Section, Landlord shall repair at its cost any injury or damage to the building itself, and the initial improvements made by landlord pursuant to Exhibit B, Tenant shall pay the cost of repairing or replacing all other improvements in the Premises and Tenant's trade fixtures, furnishings, equipment and other personal property. 26. EMINENT DOMAIN. If all or any part of the premises shall be taken or appropriated by any public or quasipublic authority under the power of eminent domain, and such taking will substantially impair Tenant's use of the premises for more than 90 days, either party hereto shall have the right, at its option, to terminate this Lease. If all of the building of which the premises are a party shall be taken or appropriated by any public or quasi-public authority under any power of eminent domain, Landlord may terminate this Lease. In either of such events, Landlord shall be entitled to and Tenant upon demand of Landlord shall assign to Landlord any rights of Tenant to any and all income, rent, award, or any interest therein whatsoever excluding any award compensating Tenant for relocation costs of personal property or equipment of Tenant which may be paid or made in connection with such public or quasi-public use or purpose, and Tenant shall have no claim against Landlord or the condemnor for the value of any unexpired term of this Lease. If a part of the premises shall be so taken or appropriated and neither party hereto shall elect to terminate this lease, and rent thereafter to be paid shall be equitably reduced. 12. 13 27. PLATS AND RIDERS. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this lease are a part hereof, and in the event of variation or discrepancy the duplicate original hereof, including such clauses, plats and riders, if any, held by Landlord shall control. 28. SALE BY LANDLORD. See Addendum. In the event the original Landlord hereunder, or any successor owner of the building, shall sell or convey the Building, including an involuntary transfer and the owner shall expressly assume Landlord's obligations under the Lease, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease, accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such new owner. If any security be given by Tenant to secure the faithful performance of all or any of the covenants of this Lease on the part of Tenant, Landlord shall transfer and/or deliver the security, to the successor in interest of Landlord, and thereupon Landlord shall be discharged from any further liability in reference thereto. Except as set forth in this Paragraph 28, this Lease shall not be affected by any such sale or conveyance. 29. ESTOPPEL CERTIFICATES. At any time and from time to time, upon not more than ten (10) days prior request by Landlord, Tenant or Landlord shall execute, acknowledge and deliver to the other party a statement certifying the date of commencement of this Lease, stating that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and the date and nature of such modifications) and the dates to which the rent has been paid, and setting forth such other matters as may reasonably be requested by Landlord or Tenant. Landlord and Tenant intend that any such statement delivered pursuant to this paragraph may be relied upon by any mortgagee or the beneficiary of any Deed of Trust or by any purchaser or prospective purchaser of the building. 30. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be kept and performed by Tenant under any of the terms of this Lease shall be performed by Tenant and Tenant's sole cost and expense and without any abatement of rent except as otherwise provided herein. If Tenant shall fail to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for ten (10) business days after notice thereof by Landlord, Landlord may, but shall not be obligated to, and without waiving any default of Tenant or releasing Tenant from any obligations of Tenant hereunder, make any such payment or perform any such other act on Tenant's part to be made or performed as in this lease provided. All sums so paid by the Landlord and all necessary incidental costs, together with interest thereon at the rate of ten percent (10%) per annum from the date of such payment by the Landlord, shall be paid to landlord forthwith on demand, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment thereof by Tenant as in the case of default by Tenant in payment of rent. 31. ATTORNEY FEES. If as a result of any breach or default on the part of Tenant under this Lease, Landlord uses the services of any attorney in order to secure compliance with this Lease, Tenant shall reimburse Landlord upon demand as additional rent for any and all 13. 14 attorneys' fees and expenses incurred by Landlord, whether or not formal legal proceedings are instituted. Should either party being action against the other party, by reason or of alleging the failure of the other party to comply with any or all of its obligations hereunder, whether for declaratory or other relief, then the party which prevails in such action shall be entitled to its reasonable attorneys' fees and expenses related to such action, in addition to all other recovery or relief. A party shall be deemed to have prevailed in any such action (without limiting the generality of the foregoing) if such action is dismissed upon the payment by the other party of the sums allegedly due or the performance of obligations allegedly not complied with, or if such party obtains substantially the relief sought by it in the action, irrespective of whether such action is prosecuted to judgment. In addition, if either party to this Lease becomes a party to or is involved in any way in any action concerning this Lease or the Premises by reason in whole or in part of any act, neglect, fault or omission of any duty by the other party, its employees or contractors, the party subjected to said involvement shall be entitled to reimbursement for any and all reasonable attorneys' fees and costs. 32. SURRENDER OF PREMISES. The voluntary or other surrender of this Lease by Tenant or mutual cancellation thereof shall not work a merger and, at the option of Landlord, shall terminate all or any existing subleases or subtenancies, or at the option of Landlord, may operate as an assignment to Landlord of any or all such subleases or subtenancies. 33. WAIVER. The waiver by Landlord or Tenant of performance of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 34. NOTICES. All notices and demands which may or are required to be given by either party to the other hereunder shall be in writing. All notices and demands by Landlord to Tenant shall be delivered personally or sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the premises, or at such other place as Tenant may from time to time by like notice designate. All notices and demands by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at 660 Third Street, San Francisco, California or at such other place as Landlord may from time to time by like notice designate. 35. NOTICE OF SURRENDER. At least sixty (60) days before the last day of the term hereof, Tenant shall give to Landlord a written notice of intention to surrender the premises on that date, but nothing contained herein or any failure to give such notice shall be construed as an extension of the term hereof or as consent of Landlord to any holding over by tenant. 36. DEFINED TERMS AND MARGINAL HEADINGS. The words "Landlord" and "Tenant," as used herein shall include the feminine and neuter. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. The marginal headings 14. 15 and titles to the paragraphs of the Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 37. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and each and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the premises are located. 38. SUCCESSORS. Subject to the provisions of Paragraph 14 hereof, the covenants and conditions herein contained shall be binding upon and inure to the benefits of the heirs, successors, executors, administrators and assigns of the parties hereto. 39. ENTIRE AGREEMENT. This Lease constitutes the entire agreement between Landlord and Tenant and no promises or representations, express or implied, either written or oral, not herein set forth shall be binding upon or inure to the benefit of Landlord or Tenant. This Lease shall not be modified by any oral agreement, either express or implied, and all modifications hereof shall be in writing and signed by both Landlord and Tenant. 40. LATE CHARGE. In the event Tenant shall fail to pay any rents or sums due hereunder within five (5) days of the due date herein provided, then and in that event the amount so due and unpaid shall bear a late charge equal to five percent (5%) of the amount due together with interest accruing from the date due at the maximum interest rate permitted by law, which late charge and interest shall be payable forthwith upon demand. (The foregoing shall be in addition to any other right or remedy of Landlord.) 41. NO DISCRIMINATION. Tenant agrees for Tenant and Tenant's heirs, executors, successors and assigns and all persons claiming under or through Tenant, and this Lease is made and accepted upon the following conditions; that there shall be no discrimination against or segregation of any person or group of persons on account of race, color, creed, sex, religion, marital status, ancestry or national origin (whether in the use, occupancy, subleasing, transferring, tenure or enjoyment of the Premises or otherwise) nor shall Tenant or any person claiming through or under Tenant establish or permit any such practice or practices of discrimination or segregation with reference to or arising out of the use or occupancy of the Premises by Tenant or any person claiming through or under Tenant. 15. 16 42. ADDITIONAL PROVISIONS. The exhibits and addenda listed below are incorporated by reference in this lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and year first above written. LANDLORD: TENANT: GORR PARTNERS, a California HOT WIRED VENTURES, LLC, a California limited liability company limited liability company By: /s/ [illegible] By: /s/ Andrew Anker ------------------------ ---------------------------------- Its: Member Its: ----------------------- --------------------------------- Dated: November 17, 1995 Dated: November 15, 1995 --------------------- ------------------------------- SEE YOUR ATTORNEY This Lease should be given to your attorney for review and approval before you sign it. BOMA makes no representation or recommendation concerning the legal effect, legal sufficiency, or tax consequences of this Lease. These are questions for your attorney. 16. 17 OFFICE LEASE BASIC LEASE INFORMATION This Basic Lease Information shall be completed and signed when all applicable information has been set forth below. DATE OF LEASE: As of November 15, 1995 BUILDING: 660 Third Street San Francisco, California LANDLORD: GORR PARTNERS, LLC a California limited liability company TENANT: HOT WIRED VENTURES, LLC a California limited liability company RENTABLE AREA OF PREMISES (ESTIMATED): 42,510 +/- square feet RENTABLE AREA OF BUILDING (ESTIMATED): 85,020 +/- square feet TENANT'S PERCENTAGE SHARE: 50% LEASE COMMENCEMENT DATE: March 1, 1996 (estimated) LEASE EXPIRATION DATE: Ten (10) years after the Lease Commencement Date OPTIONS: One (1) five year option, as described in Paragraph 3 of the Addendum. i. 18
MINIMUM MONTHLY RENT: Lease Years Minimum Monthly Rent ----------- -------------------- 1-2 $ 36,310.63 3 $ 42,332.88 4-5 $ 46,583.88 6-10 $ 48,709.38
SECURITY DEPOSIT: $48,709.38, as provided in Paragraph 7 hereof. ii. 19 EXHIBITS Exhibit A Floor Plan of Premises Exhibit B Work Letter Exhibit C Memorandum of Lease Term Dates Exhibit D Rules and Regulations Exhibit E Commission Agreement ADDENDA Addendum 1 Addendum to Lease TENANT: HOT WIRED VENTURES, LLC, a California limited liability company By: ------------------------------------------------------ Andrew L. Anker, President and Chief Executive Officer Dated: , 199 -------------------------- ---- Address: 520 Third Street, Fourth Floor San Francisco, California 94107 Telephone: (415) 222-6333 Facsimile: (415) 222-6369 iii. 20 LANDLORD: GORR PARTNERS, LLC a California limited liability company By: ----------------------------------- Name: --------------------------------- Its: ---------------------------------- Dated: , 199 ------------------------- ---- Address: 660 Third Street San Francisco, CA 94104 Telephone: (415) ----------------- Facsimile: (415) ----------------- iv. 21 ADDENDUM TO OFFICE LEASE This Addendum is attached to and made a part of the Office Lease dated November 15, 1995 (the "Lease), by and between GORR PARTNERS, LLC, a California limited liability company ("Landlord") and HOT WIRED VENTURES, LLC, a California limited liability company ("Tenant"), and the terms and conditions of this Addendum are incorporated into the Lease. 1. DEFINITIONS. All defined terms used in this Addendum whether capitalized or in lower case shall have the same meaning as defined in the Lease. 2. LEASE COMMENCEMENT DATE. (a) LEASE COMMENCEMENT DATE. The Lease Term shall commence on the earlier of (i) the date Tenant opens for business in the premises, or (ii) ten (10) days after substantial completion of the tenant improvements as specified in Exhibit B attached hereto or (iii) April 30, 1996 provided Landlord has substantially completed the tenant improvements as specified in Exhibit B (the "Lease Commencement Date"). The premises shall be deemed substantially completed and possession delivered when Landlord has substantially completed these improvements and has delivered written notice of such substantial completion to Tenant. Tenant agrees to accept the same upon delivery of such notice from Landlord. No later than ten (10) days after the delivery of possession of the premises to Tenant, a representative of Landlord and Tenant shall walk through the premises and compile a "punch list" of items for the premises that must be completed or repaired by Landlord in order for Landlord to fulfill all of its construction obligations under the Work Letter. The punch list items shall not expand Landlord's construction obligations beyond those contained in the Work Letter. Once the punch list is compiled, Landlord will work diligently to complete or repair such items within fifteen (15) days unless longer is necessary to complete said items. Landlord and Tenant agree to cooperate in good faith so that Landlord can complete its punch list work and Tenant can complete its fixturization work in the premises with minimum interference to the other. Tenant agrees that within ten (10) days after the Lease Commencement Date has been determined, Tenant will execute and deliver to Landlord a written addendum to this Lease in the form of Exhibit C attached hereto stating the Lease Commencement Date, the Lease Expiration Date, and accepting possession of the premises and acknowledging compliance by Landlord with all of the obligations to construct and deliver possession of the premises. Notwithstanding anything in this paragraph to the contrary, Tenant shall have a period of ten (10) days upon substantial completion of the tenant improvements but prior to the Lease Commencement Date ("Early Entry") during which Tenant shall have access to the Premises on the terms and conditions set forth in this Lease except for rent for purposes of installing and assembling Tenant's fixtures, telecommunications and computers. Tenant shall have no obligation to pay rent during this Early Entry period. (b) DELAY IN COMMENCEMENT. Except for delays caused by reasons beyond Landlord's control including delays caused by Tenant, delays caused by governmental authorities 1. 22 or other Force Majeure causes ("Excused Delays"), if the Commencement Date has not occurred on or before June 30, 1996, Tenant shall have the right to terminate this Lease upon written notice to Landlord and Landlord and Tenant shall have no further obligations hereunder. Any delays caused by Tenant's failure to comply with the requirements of the Work Letter shall not extend the Lease Commencement Date and Tenant's obligations to pay rent and other charges hereunder shall commence on April 30, 1996. 3. OPTION TO EXTEND LEASE TERM. (a) OPTION TO EXTEND. Tenant shall have one (1) one-time option ("Option to Extend") to extend the initial Lease Term ("Initial Term") on the same terms and conditions as set forth in this Lease, except for the minimum monthly rent ("Minimum Rent") and the Base Year, for a period of five (5) years ("Extended Term"). Tenant may exercise the Option to Extend by delivering written notice of exercise ("Option Notice") to Landlord at least eight (8) months but not more than twelve (12) months before the expiration of the Initial Term. In the event Tenant fails to exercise the Option to Extend in strict accordance with the foregoing, the Option to Extend shall expire and be of no further force or effect. If, on the date Tenant gives the Option Notice, a default under the Lease has occurred and is continuing, then the Option Notice shall be of no force and effect. If the time period during which Tenant may exercise the Option to Extend has not expired, Tenant may cure the default and re-submit the Option Notice (if such resubmission is timely made). Additionally, (i) if a default has occurred and is continuing on the expiration of the Initial Term or, (ii) there have occurred more than three (3) material defaults during the twenty-four (24) months immediately preceding the expiration of the Initial Term, then, notwithstanding a valid exercise by Tenant of the Option Notice, Landlord may, in its sole discretion, elect to have this Lease expire at the end of the Initial Term. The Minimum Rent for the Extended Term shall be determined pursuant to paragraph (b) below. In no event, however, shall the Minimum Rent for the Extended Term be less than the Minimum Rent payable in the last Lease Year of the Initial Term. The Base Year for the Extended Term shall be 2006. For purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve month period during the term of this Lease ending on December 31, provided that the first Lease Year shall commence upon the Lease Commencement Date and shall end on the next succeeding December 31, and the last Lease Year shall end upon the Lease Expiration Date. (b) MINIMUM RENT FOR EXTENDED TERM. Minimum Rent for the Extended Term shall be the Ninety Five Percent (95%) of the Fair Market Rental of the premises as determined below. (i) DEFINITION. "Fair Market Rental" means the fair market rental per month on similar terms and conditions contained in this Lease for the specific space that constitutes the premises for the five (5) year period constituting the Extended Term, as determined herein. The Fair Market Rental shall take into account only the following factors: (1) such periodic increases as may be part of the fair market rental for the Extended Term, (2) the length of the Extended Term, and (3) the contract rental rate then being charged by other landlords for 2. 23 similar space in comparable buildings in the area in which the premises are located. (ii) DETERMINING FAIR MARKET RENTAL FOR RENEWAL TERM--INITIAL 20-DAY PERIOD FOR NEGOTIATION. After Tenant delivers the Option Notice to Landlord, Landlord and Tenant will commence negotiation, on that date that is six months prior to the expiration of the Initial Term to determine the Fair Market Rental. If Landlord and Tenant have not agreed on the Fair Market Rental within twenty (20) days after such date, then Tenant may elect to have the Fair Market Rental determined by arbitration. (iii) ARBITRATION. The arbitration shall be conducted and determined in the City and County of San Francisco in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes except to the extent that the procedures mandated by said rules shall be modified as follows: (A) Tenant shall make demand for arbitration in writing within ten (10) days of the expiration of the initial twenty (20) day period provided for the determination by Tenant and Landlord of the Fair Market Rental [described in subsection (b)(ii) above], specifying therein the name and address of the person to act as the arbitrator on its behalf. The arbitrator shall be qualified as a real estate appraiser familiar with the Fair Market Rental of first-class commercial office space in the downtown San Francisco area who would qualify as an expert witness over objection to give opinion testimony addressed to the issue in a court of competent jurisdiction. Failure on the part of Tenant to make a proper demand in a timely manner for such arbitration shall constitute a waiver of the right thereto and acceptance of Landlord's determination of Fair Market Rental. Within fifteen (15) days after the service of the demand for arbitration, Landlord shall give notice to Tenant, specifying the name and address of the person designated by Landlord to act as arbitrator on its behalf who shall be similarly qualified. If Landlord fails to notify Tenant of the appointment of its arbitrator, within or by the time above specified, then the arbitrator appointed by Tenant shall be the arbitrator to determine the issue. (B) In the event that two arbitrators are chosen pursuant to paragraph b(iii)(A) above, the arbitrators so chosen shall, within fifteen (15) days after the second arbitrator is appointed determine the Fair Market Rental. If the two arbitrators shall be unable to agree upon a determination of Fair Market Rental within such 15-day period, they, themselves, shall appoint a third arbitrator, who shall be a competent and impartial person with qualifications similar to those required of the first two arbitrators pursuant to paragraph b(iii)(A). In the event they are 3. 24 unable to agree upon such appointment within seven (7) days after expiration of said 15-day period, the third arbitrator shall be selected by the parties themselves, if they can agree thereon, within a further period of fifteen (15) days. If the parties do not so agree, then either party, on behalf of both, may request appointment of such a qualified person by the then Chief Judge of the United States District Court having jurisdiction over the City and County of San Francisco, acting in his private and not in his official capacity, and the other party shall not raise any question as to such Judge's full power and jurisdiction to entertain the application for and make the appointment. The three arbitrators shall decide the dispute if it has not previously been resolved by following the procedure set forth below. (C) Where an issue cannot be resolved by an agreement between the two arbitrators selected by Landlord and Tenant or settlement between the parties during the course of arbitrations, the issue shall be resolved by the three arbitrators within fifteen (15) days of the appointment of the third arbitrator in accordance with the following procedure. The arbitrator selected by each of the parties shall state in writing his determination of the Fair Market Rental supported by the reasons therefor with counterpart copies to each party. The arbitrators shall arrange for a simultaneous exchange of such proposed resolutions. The role of the third arbitrator shall be to select which of the two proposed resolutions most closely approximates his determination of Fair Market Rental. The third arbitrator shall have no right to propose a middle ground or any modification of either of the two proposed resolutions. The resolution he chooses as most closely approximating his determination shall constitute the decision of the arbitrators and be final and binding upon the parties. (D) In the event of a failure, refusal or inability of any arbitrator to act, his successor shall be appointed by him, but in the case of the third arbitrator, his successor shall be appointed in the same manner as provided for appointment of the third arbitrator. The arbitrators shall decide the issue within fifteen (15) days after the appointment of the third arbitrator. The decision of the arbitrators shall be binding and conclusive upon the parties. Each party shall pay the fee and expenses of its respective arbitrator and both shall share the fee and expenses of the third arbitrator, if any, and the attorneys' fees and expenses of counsel for the respective parties and of witnesses shall be paid by the respective party engaging such counsel or calling such witnesses. (E) The arbitrators shall have the right to consult experts and competent authorities to obtain factual information or evidence pertaining to a determination of Fair Market Rental, but any such consultation shall 4. 25 be made in the presence of both parties with full right on their part to cross-examine. The arbitrators shall render their decision and award in writing with counterpart copies to each party. The arbitrators shall have no power to modify the provisions of this Lease. 4. TAX INCREASES AND ASSESSMENTS. (a) CHANGE IN OWNERSHIP DURING INITIAL TERM. Notwithstanding anything contained in Paragraph 6(b) of the Lease, during the Initial Term Tenant shall have no obligation to pay any increases in real property taxes which are attributable to any transaction by Landlord which results in a reassessment of the building other than transactions requested by Tenant after the Lease Commencement Date. (b) PAYMENTS. Tenant shall pay to Landlord monthly as additional rent during each Lease Year a sum equal to one-twelfth (1/12th) of Tenant's percentage share of the amount of any increase in real property taxes and assessments as described in Paragraph 6 (b) of the Lease, payable on or before the first day of each month during such Lease Year, in advance, in an amount reasonably estimated by Landlord and billed by Landlord to Tenant, and Landlord shall have the right initially to determine monthly estimates and to revise such estimates from time to time. After Landlord has received the bills for the property taxes and assessments for any year, Landlord shall furnish Tenant with a statement ("Landlord's Tax Statement") setting forth the amount of the Tenant's percentage share of the increase in taxes for such year, which may include any legal fees or expenses incurred by Landlord in seeking the reduction of such taxes. Such statement shall credit Tenant with its proportionate share of any refund of taxes received by the Landlord in the Lease Year and not credited to Tenant and shall be accompanied by a copy of the tax bill, the refund statement and the bill for legal services, if any, received by Landlord. If the actual Tenant's Percentage Share of increases in taxes, including any refund and legal fees, for such year exceeds the estimated amounts paid by Tenant for such year, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual increase in taxes payable by Tenant within thirty (30) days after Landlord's Tax Statement has been given to Tenant, and if the total amount paid by Tenant for such year exceeds the actual increase in taxes payable by Tenant for such year, such excess shall be credited against installments of increase in taxes due from Tenant to Landlord until Tenant has fully recouped such excess payment; or, if such excess payment is made during the last Lease Year of the Lease Term, such excess shall be refunded to Tenant, within thirty (30) days after Landlord's delivery of tax statement to Tenant. 5. OPERATING EXPENSE INCREASES. (a) DEFINITION OF "DIRECT EXPENSES". Notwithstanding anything contained in Paragraph 6(c) of the Lease, Direct expenses shall also include: (1) salaries, wages and payroll burden, (2) premiums and other charges incurred by Landlord with respect to fire, other casualty, rent and liability insurance, and, after the Base Year, costs of repairing an insured casualty to the extent of the deductible amount under the applicable insurance policy; (3) telephone, postage, stationery supplies and other reasonable expenses directly incurred in 5. 26 connection with the operation, maintenance or repair of the building; (4) repairs to and physical maintenance of the building, including building systems and appurtenances thereto and normal repair and replacement of worn-out equipment, facilities and installations, but excluding the replacement of major building systems (except as otherwise provided in Paragraph 6(c) of the Lease; (5) rubbish removal, window cleaning, security, plumbing, service contracts for elevator, electrical, telecommunications, cabling, mechanical and other building equipment and systems or as may otherwise be necessary or proper for the operation or maintenance of the building; (6) supplies, tools and equipment used in connection with the operation, maintenance or repair of the building; (7) accounting, legal and other professional fees and expenses; and (8) painting the exterior or the common areas of the building and maintaining the sidewalks and landscaping and public areas of the building. (b) OPERATING COST EXCLUSIONS. Notwithstanding the provisions of paragraph (a) above, the following shall not be included within Operating Expenses: (1) Leasing commissions, attorneys' fees, costs, disbursements, and other expenses incurred in connection with negotiations or disputes with tenants, or in connection with leasing, renovating, or improving space for tenants or other occupants or prospective tenants or other occupants of the building. (2) The cost of any service sold to any tenant (including Tenant) or other occupant for which Landlord is entitled to be reimbursed as an additional charge or rental over and above the basic rent and escalations payable under the lease with that tenant. (3) any depreciation on the building or property. (4) Except as otherwise permitted in the Lease, costs of a capital nature, including but not limited to capital improvements and alterations, capital repairs, capital equipment, and capital tools as determined in accordance with generally accepted accounting principles. (5) Expenses in connection with services or other benefits of a type that are not provided to Tenant but which are provided another tenant or occupant of the building or property. (6) Costs incurred due to Landlord's violation of any terms or conditions of this Lease or any other lease relating to the building or property. (7) Overhead profit increments paid to Landlord's subsidiaries or affiliates for management or other services on or to the building or for supplies or other materials to the extent that the cost of the services, supplies, or materials exceeds the cost that would have been paid had the services, supplies, or materials been provided by unaffiliated parties on a competitive basis. 6. 27 (8) All interest, loan fees, and other carrying costs related to any mortgage or deed of trust or related to any capital item, which is an excluded operating cost under the Lease, and all rental and other payable due under any ground or underlying lease, or any lease for any equipment ordinarily considered to be of a capital nature (except janitorial equipment which is not affixed to the building). (9) Any compensation paid to clerks, attendants, or other persons in commercial concessions operated by Landlord. (10) Advertising and promotional expenditures. (11) Costs of repairs and other work occasioned by fire, windstorm, or other casualty of an insurable nature to the extent Landlord receives insurance proceeds to cover such costs. (12) Any costs, fines, or penalties incurred due to violations by Landlord of any governmental rule or authority, this Lease or any other lease in the property, or due to Landlord's negligence or willful misconduct. (13) Management costs to the extent they exceed management costs charged for similar facilities in the area and in any event, to the extent they exceed six percent (6%) of all other Operating Expenses. (14) Costs for sculpture, paintings, or other objects of art (nor insurance thereon or extraordinary security in connection therewith). (15) Wages, salaries, or other compensation paid to any executive employees above the grade of building manager. (16) The cost of correcting any building code or other violations which were violations prior to the Commencement Date. (17) the cost of containing, removing, or otherwise remediating any contamination of the property (including the underlying land and ground water) by any toxic or hazardous materials (including, without limitation, asbestos and "PCB's") where such contamination was not caused by Tenant or any employee, agent or invitee of Tenant. (18) Any other expense that under generally accepted accounting principles and practice consistently applied would not be considered a normal maintenance or operating expense. (c) PAYMENT OF INCREASES IN DIRECT EXPENSES. Tenant shall pay to Landlord monthly as additional rent during each Lease Year a sum equal to one-twelfth (1/12th) of 7. 28 Tenant's percentage share of increases in Direct expenses for such Lease Year, payable on or before the first day of each month of such Lease Year, in advance, in an amount reasonably estimated by Landlord and billed by Landlord to Tenant, and Landlord shall have the right initially to determine monthly estimates and to revise such estimates from time to time. Within ninety (90) days after the end of each Lease Year, Landlord shall furnish Tenant with a statement ("Landlord's Expense Statement"), setting forth in reasonable detail the Direct expenses for such Lease Year, and Tenant's Percentage Share of increases in Direct expenses over the Base Year. If the actual increase in Direct expenses for said Lease Year exceed the estimated increase in Direct expenses paid by Tenant for such year, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual increase in Direct expenses within thirty (30) days after Landlord's Expense Statement has been given to Tenant, and if the total amount paid by Tenant for any such year exceeds the actual increase in Direct expenses for such year, such excess shall be credited against installments of the estimated increase in Direct expenses due from Tenant to Landlord hereunder until Tenant has fully recouped such excess payment; or, if such excess payment is made during the last Lease Year of the Initial Term, such excess shall be refunded to Tenant within thirty (30) days after Landlord's delivery of Operating Expense Statement to Tenant. Tenant shall have no obligation to pay any amounts hereunder if Landlord's Expense Statement is not delivered within three (3) years after the end of such Lease Year. A Landlord's Expense Statement for any Lease Year shall be conclusively deemed to be correct if not objected to by Tenant, Landlord or Landlord's successor within three years following the expiration of such Lease Year. Tenant hereby waives the benefit of any statute of limitations that would extend Tenant's right to challenge the propriety of any Direct expenses contained in any Landlord's Expense Statement beyond the three year period agreed to in the preceding sentence. (d) TENANT'S AUDIT RIGHTS. Within ninety (90) days after receipt of Landlord's statement setting forth actual Operating Expenses and Direct Expenses (the "Statement"), Tenant shall have the right to audit at Landlord's local offices, at Tenant's expense, Landlord's accounts and records relating to Operating Expenses and Direct Expenses. Such audit shall be conducted by a certified public accountant approved by Landlord, which approval shall not be unreasonably withheld. If such audit reveals that Landlord has overcharged Tenant, the amount overcharged shall be paid to Tenant within thirty (30) days after the audit is concluded. If the Statement exceeds the actual Operating Expenses and Direct Expenses which should have been charged to Tenant by more than seven percent (7%), the cost of the audit shall be paid by Landlord. 6. USES. Notwithstanding anything contained in Paragraph 8 of the Lease, if permitted by applicable law and ordinances, and subject to obtaining a permit (if required by law), Tenant shall be permitted to operate a commercial kitchen in the premises. 7. COMPLIANCE WITH COVENANTS. Landlord warrants to Tenant that on the Lease Commencement Date, the premises and all improvements thereon (a) shall be free from material structural defects and (b) shall comply with all applicable covenants and restrictions of record, statutes, ordinances, codes, rules, regulations, orders, and requirements, including, without limitation, Title 24 of the California Administrative Code and the Americans with Disabilities 8. 29 Act. In the event of a breach of any of the foregoing warranties, Landlord shall rectify such breach at its sole cost and expense. Nothing contained herein shall constitute a warranty by Landlord of the plans and specifications for the premises as prepared by Tenant's architect pursuant to the Work Letter. 8. COMPLIANCE WITH LAWS. (a) TENANT'S USE OF HAZARDOUS SUBSTANCES. In addition to the provisions of Paragraph 9 of the Lease, Tenant shall not use, store, dispose, release, discharge, transport or generate (collectively "Use of Hazardous Substances") any Hazardous Substances (as defined below), in, on, to, under, from or about the premises or the building without Landlord's prior written consent, which consent may be granted on conditions or withheld in Landlord's sole and absolute discretion. Tenant warrants and agrees that if Landlord grants its consent to Tenant's Use of Hazardous Substances, such Use of Hazardous Substances shall be conducted in strict accordance with all Environmental Laws (as defined below) and prudent business practices. Any consent or approval by Landlord of Tenant's Use of Hazardous Substances shall not constitute an assumption of risk respecting the same nor a warranty or certification by Landlord that Tenant's proposed Use of Hazardous Substances is safe or reasonable or in compliance with Environmental Laws. Tenant shall maintain current all permits required for its operations, including, without limitation, those for the Use of Hazardous Substances. Tenant shall keep and maintain the premises in compliance with all, and shall not cause or permit the premises and the activities conducted thereon by Tenant to be in violation of any, Environmental Laws. Tenant shall not undertake any remedial action with respect to any release of Hazardous Substances or to comply with any violation of any Environmental Law without obtaining the prior written consent of Landlord which shall not be unreasonably withheld or delayed unless any delay in undertaking any such remedial action may expose Tenant to any liability. If Tenant's use of Hazardous Substances results in an increase in the premiums of any insurance that Landlord is required to maintain under this Lease, then Tenant shall pay the amount of such increased premiums. Additionally, Landlord may require that Tenant procure, at Tenant's sole cost and expense, additional insurance that specifically covers loss or damage to persons or property that may result from Tenant's use of such Hazardous Substances. (b) DEFINITIONS. As used in this Lease, the term "Hazardous Substances" shall mean any substances or materials which at such time are classified or are considered to be hazardous or toxic under any Environmental Law, including, without limitation, petroleum products, asbestos and PCBs. As used in this Lease, the term "Environmental Laws" shall mean any and all present and future federal, state and local laws (whether under common law, statute, rule, regulation or otherwise), requirements under permits issued with respect thereto, and other requirements of governmental authorities relating to the environment or to any Hazardous Substance (including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as heretofore or hereafter amended from time to time. (c) LANDLORD'S ENVIRONMENTAL INDEMNITY. Landlord warrants to Tenant that on the commencement of the term hereof, the premises comply with Environmental laws. In the event of a breach of the foregoing warranty, Landlord shall take all reasonable steps to 9. 30 remedy such breach. Landlord shall protect, indemnify, defend, and hold Tenant harmless from and against any and all liability, loss, suits, claims, actions, costs, and expense (including, without limitation, attorneys' fees) arising from (a) any breach of the foregoing warranty and (b) any contamination of the premises by any Hazardous Substances where such contamination was caused by Landlord. The provisions of this paragraph shall survive the termination of this Lease. 9. RESTORATION OF PREMISES. Upon the expiration or sooner termination of the Term, upon demand by Landlord, at Tenant's sole cost and expense, Tenant shall with all due diligence: (a) remove any initial Tenant Improvements that were constructed by Landlord to accommodate Tenant's use of two floors of the building to the extent that the cost of removing such items does not exceed $50,000; (b) remove any subsequent alterations, additions or improvements made by Tenant and designated for removal by Landlord at the time Landlord approves such alterations; and (c) repair any damage to the premises caused by any such removal pursuant to subparagraph (a) or (b) above. 10. ASSIGNMENT AND SUBLETTING. (a) For purposes of Paragraph 14(a) of the Lease, it shall not be unreasonable for Landlord to consider the following, among others: (a) reputation and character of the proposed assignee or sublessee; (b) the financial worth of the proposed assignee or sublessee; (c) the business experience of the proposed assignee or sublessee; (d) the number of separate uses of the premises and (e) other similar matters. In no event shall it be considered unreasonable for Landlord to withhold its consent to a proposed assignment or sublease if such proposed assignment or sublease would cause Landlord to be in default of a lease with another tenant or occupant of the building. If Landlord approves such assignment or subletting, Tenant shall proceed with such assignment or subletting and such transfer shall be upon and subject to the terms of this Lease and Tenant shall pay Landlord a sum equal to fifty percent (50%) of any rent or other consideration paid to Tenant by any assignee or sublessee which is in excess of the rent then being paid to Landlord by Tenant pursuant to the terms of this Lease net of: (a) leasing commissions; (b) tenant improvements payable by Tenant; and (c) other transaction costs not to exceed $6,000 in the aggregate including but not limited to attorneys' fees and the Landlord's approval fee. (b) If Tenant delivers a Sublet Notice to Landlord, the Sublet Notice shall be accompanied by a proposed draft of the assignment or sublease ("Draft"). Landlord shall have fifteen (15) business days after delivery of such Draft to grant its consent or to notify Tenant, in writing, of its intent to withhold consent. If Landlord does not withhold its consent, Tenant shall thereafter deliver a copy of the executed sublease or assignment to Landlord and Landlord 10. 31 shall have five (5) business days thereafter to grant its consent or to notify Tenant in writing, of its intent to withhold consent; provided, however, Landlord shall have no right to withhold its consent if the executed sublease or assignment is substantially the same as the proposed Draft previously approved by Landlord on the same economic terms and conditions as approved by Landlord. (c) Notwithstanding anything contained in Paragraph 14(f) of the Lease, Tenant may assign or sublease this Lease to an affiliate or subsidiary without Landlord's consent. 11. UTILITIES AND SERVICES. (a) GENERAL. So long as Tenant is not in material default in the performance of its obligations under this Lease, Landlord shall: (1) Operate or cause the operation in season of the heating, ventilating and air-conditioning ("HVAC") system presently serving the premises, at such temperatures and in such amounts as Landlord determines are reasonably required for the comfortable occupancy of the premises or as may be permitted or controlled by applicable laws, ordinances, rules and regulations. Any HVAC provided by Landlord to Tenant shall be at Tenant's sole cost and expense, which shall be an amount equal to Landlord's cost of supplying HVAC to the HVAC zone of which the premises are a part. Tenant shall also be responsible for and shall pay Landlord any additional costs (including, without limitation, the costs of installation of additional HVAC equipment) incurred because of the failure of the HVAC system to perform its function due to arrangement of partitioning in the premises after the initial tenant improvements or changes or alterations thereto, from any use of heat-generating machinery or equipment, from occupancy of the premises exceeding one person per one hundred twenty (120) square feet of rentable area, or for failure of Tenant to keep all HVAC vents within the premises free of obstruction. (2) Provide access to water in the lavatories on each floor and to the kitchen in the premises and make customary arrangements with public utilities and/or public agencies to furnish electric current to the premises as specified in Paragraph (G) of the Work Letter. The cost of all electricity serving the Premises shall be paid for by Tenant directly to the utility company. Landlord shall, at its sole cost and expense, install a separate electrical meter in the premises. (3) Operate, maintain, clean, light, heat, ventilate and air-condition the common areas of the building and provide such security as may be reasonably necessary during business hours only. Landlord shall not be liable to Tenant for losses due to theft or burglary, or for damages or injury done by unauthorized 11. 32 persons in the building. Landlord shall provide elevator service in the building on a 24 hours per day, seven days per week basis. (4) Provide janitorial service to the building at a standard provided to other comparable office buildings in San Francisco on each weekday, exclusive of Saturday, Sunday and holidays, subject to access being granted to the person or persons employed or retained by Landlord to perform such work at such time as prescribed by Landlord. (5) Notify Tenant in writing at least forty-eight (48) hours before any intentional shut-down of electrical power or HVAC serving the premises, except in the case of an emergency. Notwithstanding the terms of this Lease to the contrary, if any building service is interrupted for a period of five (5) consecutive business days due to the gross negligence or willful acts of Landlord, its agents, servants, employees, contractors or subcontractors, or ten (10) consecutive business days for any other reason and such failure adversely effects Tenant's use of the premises for Tenant's normal business operations, then there shall be an abatement of Base Rent from and after said fifth (5th) or tenth (10th) day, until such services are restored. However, if such failure lasts for one hundred twenty (120) consecutive days, Tenant shall have the option, upon written notice to Landlord, to terminate this Lease. Landlord agrees to use its best efforts to restore such services as soon as possible. If Landlord has not diligently commenced efforts to restore such services within three (3) days of such interruption, Tenant may make any necessary repairs and may deduct the actual cost of such repairs from the next installment or installments of rent due hereunder. (b) SUPPLEMENTARY SERVICES. Tenant shall pay Landlord, at the charges established by Landlord from time to time, for all supplementary services requested by Tenant, which charges shall be payable by Tenant upon demand by Landlord. Such supplementary services shall include, without limitation, maintenance, repair, janitorial, cleaning and other services provided during hours other than ordinary business hours and/or in amounts not considered by Landlord as standard. (c) INTERRUPTION OF ACCESS, USE OR SERVICES. Landlord shall not be liable for any failure to provide access to or use of the premises, or to furnish any services or utilities when such failure is caused by nature occurrences, riots, civil disturbances, insurrection, war, court order, public enemy, accidents, breakage, repairs, strikes, lockouts, other labor disputes, the making of repairs, alterations or improvements to the premises or the building, the inability to obtain an adequate supply of fuel, gas, steam, water, electricity, labor or other supplies or by any other condition beyond Landlords' reasonable control, and Tenant shall not be entitled to any damages resulting from such failure,nor shall such failure relieve Tenant of the obligation to pay all sums due hereunder or constitute or be construed as a constructive or other eviction of Tenant. If any governmental entity promulgates or revises any statute, ordinance or building, fire or other code, or imposes mandatory or voluntary controls or guidelines on Landlord or the building or any part thereof, relating to the use or conservation of energy, water, gas, steam, 12. 33 light or electricity or the provision of any other utility or service provided with respect to this Lease, or if Landlord is required or elects to make alterations to the building in order to comply with such mandatory or voluntary controls or guidelines, or make such alterations to the building, neither such compliance nor the making of such alterations shall in any event entitle Tenant to any damages, relieve Tenant of the obligation to pay any of the sums due hereunder, or constitute or be construed as a constructive or other eviction of Tenant. 12. SUBORDINATION AGREEMENT. Landlord specifically agrees that (i) Tenant may conclusively rely upon any written notice Tenant receives from the beneficiary of any mortgage or deed of trust ("Lender"), encumbering the building and/or the land upon which the building is situated, notwithstanding any claim by Landlord contesting the validity of any term or condition of such notice, including, but not limited to, any default claimed by Lender and (ii) that Landlord shall not make any claim of any kind against Tenant or Tenant's leasehold interest with respect to amounts paid to Lender by Tenant or any acts performed by Tenant pursuant to such written notice. As a condition to Tenant's execution of this Lease, Landlord hereby covenants and agrees to deliver to Tenant, prior to the Lease Commencement Date, a Subordination, Non-Disturbance and Attornment Agreement executed by Wells Fargo Bank, National Association, in a form reasonably acceptable to Tenant (the "Wells Fargo Non-Disturbance"). In the event that Landlord does not deliver the Wells Fargo Non-Disturbance to Tenant prior to the Lease Commencement Date, this Lease shall terminate and be of no further force and effect, Landlord shall immediately return to Tenant the Security Deposit and any and all other funds theretofore delivered by Tenant to Landlord, and neither Tenant nor Landlord shall have any further liability under this Lease. Notwithstanding anything in this Lease to the contrary, as a condition to Tenant's subordination to any future mortgages, deeds of trust, or ground or underlying leases affecting the premises,, Tenant shall receive a non-disturbance agreement in a form reasonably acceptable to Landlord and Tenant. 13. TENANT'S DEFAULT. Tenant shall be deemed to be in default under this Lease upon the occurrence of any of the following events ("Event of Default"): (a) Tenant shall fail to pay any Rent within five (5) days after the same becomes due and payable; (b) Tenant shall fail to pay any other sum when and as the same becomes due and payable and such failure shall continue for more than five (5) business days after written notice that such payment was not received when due; (c) Tenant shall fail to observe, keep or perform any of the other terms, covenants, agreements or conditions contained in this Lease or in the rules and regulations described in Paragraph 6 above and on the part of Tenant to be observed or performed and such default continues for a period of thirty (30) days after written notice by Landlord and Tenant shall not within said period commence with due diligence the curing of such default or, having so commenced, shall thereafter fail or neglect with due diligence to complete the curing of such default or shall not, in all events, complete the curing of such default within ninety (90) days after the original default notice to Tenant; (d) Tenant shall file a petition for bankruptcy or become insolvent or make a transfer in fraud of creditors, or make an assignment for the benefit of creditors, or commence or there is commenced against Tenant any proceedings of any kind under any provision of the United States Bankruptcy Code or under any other insolvency, bankruptcy or reorganization act and, in the event any such proceedings are involuntary, Tenant is not discharged from the same within ninety (90) days thereafter; (e) a receiver is appointed 13. 34 for a substantial part of the assets of Tenant and is not dismissed or discharged within ninety (90) days; (f) Tenant shall abandon the premises; or (g) this Lease or any estate of Tenant hereunder shall be levied upon by any attachment or execution which is not discharged or bonded against within thirty (30) days. 14. BANKRUPTCY OF TENANT. To the extent permitted under then-applicable law, if a petition is filed by or against Tenant for relief under Title 11 of the United States Code, as amended (the "Bankruptcy Code"), and Tenant (including for purposes of this paragraph Tenant's successor in bankruptcy, whether a trustee or Tenant as debtor in possession) assumes and proposes to assign, or proposes to assume and assign, this Lease pursuant to the provisions of the Bankruptcy Code to any person or entity who has made a bona fide offer to accept any assignment of this Lease on the terms acceptable to Tenant, then notice of the proposed assignment setting forth (a) the name and address of the proposed assignee, (b) all of the terms and conditions of the offer and proposed assignment, and (c) the adequate assurance to be furnished by the proposed assignee of its future performance under the Lease, shall be given to Landlord by Tenant no later than twenty (20) days after the Tenant has made or received such offer, but in no event later than ten (10) days prior to the date on which Tenant applies to a court of competent jurisdiction for authority and approval to enter into the proposed assignment. Landlord shall have the prior right and option, to be exercised by notice to Tenant given at any time prior the date on which the court order authorizing such assignment becomes final and non-appealable, to receive an assignment of this Lease upon the same terms and conditions, and for the same consideration, if any, as the proposed assignee, less any brokerage commissions which may otherwise be payable out of the consideration to be paid by the proposed assignee for the assignment of this Lease. If this Lease is assigned pursuant to the provisions of the Bankruptcy Code, Landlord: (i) may require from the assignee a deposit or other security for the performance of its obligations under the Lease in an amount substantially the same as would have been required by Landlord upon the initial leasing to a tenant similar to the assignee; and (ii) shall receive, as additional rent, the sums and economic consideration described in Paragraph 7 of this Addendum. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or documentation, to have assumed all of the Tenant's obligations arising under this Lease on and after the date of such assignment. No provision of this Lease shall be deemed a waiver of Landlord's rights or remedies under the Bankruptcy Code to oppose any assumption and/or assignment of this Lease, to require a timely performance of Tenant's obligations under this Lease, or to regain possession of the premises if this Lease has neither been assumed nor rejected within sixty (60) days after the date of the order for relief or within such additional time as a court of competent jurisdiction may have fixed. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purposes of Section 502(b)(6) of the Bankruptcy Code. 15. DAMAGE AND DESTRUCTION. This paragraph shall be in replacement of Paragraph 25(b) of the Lease: "Landlord shall notify Tenant within thirty (30) days of the date of a casualty, and such notice shall specify Landlord's architect's or engineer's reasonable estimate as to the time required to rebuild or restore the Premises. If such repairs cannot in Landlord's reasonable opinion be completed within one hundred twenty (120) days after issuance of a 14. 35 building permit therefor or if such damage is uninsured, either Landlord or Tenant may elect to terminate this Lease by giving written notice thereof within sixty (60) days after the date of such fire or casualty. If either Landlord or Tenant elects to terminate this Lease, the Lease shall terminate as of the termination date specified in either party's notice. If neither party elects to terminate the Lease, Landlord shall commence restoration of the premises. If Landlord fails to restore the premises within a period which is thirty (30) days longer than the period Landlord estimates as the rebuilding period, Tenant may within ten (10) days thereafter terminate this Lease by delivering written notice to Landlord of such termination, in which event this Lease shall terminate as of the date of the giving of such notice. If the damage or destruction to the Premises is of such a nature that Tenant reasonably determines that such damage or destruction will materially interfere with the conduct of Tenant's business, and Landlord is obligated to restore the Premises under this section, and Landlord fails to restore the Premises (including reasonable means of access thereto) within said one hundred twenty (120) days, Tenant, at any time thereafter until such restoration is completed, may terminate this Lease by delivering written notice to Landlord of such termination, in which event this Lease shall terminate as of the date of the giving of such notice. 16. LIMITATION OF RECOVERY AGAINST LANDLORD. Tenant acknowledges and agrees that the liability of Landlord (which for purposes of this Paragraph shall include all partners, both general and limited, of any partnership and the officers, directors and shareholders of any corporation) under this Lease shall be limited to its interest in the building, and any judgments rendered against Landlord shall be satisfied solely out of the proceeds of sale of its interest in the building. No officer or partner of Landlord shall be named as a party in any suit or action (except as may be necessary to secure jurisdiction over Landlord) and no personal judgment shall lie against Landlord. Tenant agrees that the foregoing covenants and limitations shall be applicable to any obligation or liability of Landlord, whether expressly contained in this Lease or imposed by statute or at common law. The foregoing provisions are not intended to relieve Landlord from the performance of any of Landlord's obligations under this Lease, but only to limit the personal liability of Landlord in case of recovery of a judgment against Landlord. 17. AUTHORITY. Each of the persons executing this Lease on behalf of the Tenant does hereby covenant and warrant that Tenant is duly organized and validly existing, that Tenant has and is qualified to do business in California, that Tenant has full right and authority to enter into this Lease and to carry out the transactions contemplated herein, and that each person signing on behalf of Tenant is authorized to do so. 18. BASIC LEASE INFORMATION. At such time as all the Lease terms called for in the Basic Lease Information attached hereto have been finally determined in accordance with the provisions of this Lease, the Basic Lease Information shall be completed and signed by the parties and shall thereafter be a final and binding agreement of the parties as to the terms and conditions set forth therein. 15. 36 19. NO CONSTRUCTION AGAINST PREPARER. This Lease has been prepared by Landlord and its professional advisors and reviewed by Tenant and its professional advisors. Landlord, Tenant, and their separate advisors believe that this Lease is the product of all of their efforts, that it expresses their agreement, and that it should not be interpreted in favor of either Landlord or Tenant or against either Landlord or Tenant merely because of their efforts in preparing it. 20. FORCE MAJEURE. In addition to specific provisions of this Lease, the time within which a party is to perform an obligation under this Lease shall be extended on a day for day basis to the extent such performance is delayed as a result of labor or supply difficulties, inclement weather, acts of God, government regulation, additions, modifications or withdrawals of, or delays in obtaining, governmental consents or approvals, building moratoria or restrictions, requirements to prepare further environmental impact documents or to conduct further environmental impact studies, or any similar cause beyond the reasonable control or without the fault of the party invoking such extension. Nothing contained in the foregoing sentence, however, shall excuse Tenant from its obligation to timely pay Rent or any other monetary amounts owing under this Lease. Any party invoking an extension under this Paragraph shall immediately notify the other party in writing of the occurrence and nature of the force majeure event and the anticipated delay resulting therefrom. 21. SIGNAGE. Tenant may, at Tenant's sole cost and expense, install on the exterior facade of the building as well as on the lobby directory and at the entrance to the premises on both the third and fourth floors, and on a flag pole on the roof such signs subject to Landlord's approval which shall not be unreasonably withheld or delayed, and otherwise in accordance with the ordinances of the City of San Francisco. 22. PARKING. During the Lease Term and Extended Term Tenant shall have the right to lease up to fourteen (14) parking spaces in the building's north parking lot ("North Spaces") at an initial monthly rental rate of $85 per space ("Parking Rate") on the terms and conditions established by Landlord from time to time for the use of such parking spaces ("Parking Terms"). In addition, as long as Landlord has the right to use the building's south parking lot, Landlord will make available to Tenant up to thirteen (13) additional parking spaces in the south parking lot on a month-to-month basis, at the Parking Rate and on the Parking Terms. Landlord may, at is option, move Tenant's right to the North Spaces to spaces located in the south parking lot provided Landlord can guaranty Tenant access to such spaces during the entire term of this Lease and any Extended Term. After the first Lease Year, the Parking Rate for all spaces leased by Tenant shall be subject to increase as a result of an increase in the Consumers Price Index ("CPI"), effective on the first day of such Lease Year computed as follows: the then monthly Parking Rate shall be multiplied by a fraction, the numerator of which shall be equal to the index (defined below) available immediately prior to the expiration of the prior Lease Year and the denominator of which shall be equal to the Index available immediately prior to the commencement of the Prior Lease Year. The basis for computing each CPI increase shall be the CPI for All Urban Consumers, San Francisco-Oakland-San Jose area, All Items (1982-84=100), as published by the United States Department of Labor, Bureau of Labor Statistics ("Index"). If publication of the Index by any governmental or private agency is discontinued or if it so modified that it does not accurately reflect the changes in consumer 16. 37 prices from one Lease Year to another then the Landlord and Tenant shall use such other index as is then generally recognized and accepted for similar determination of changes in consumer prices. If the Index is revised, it shall be converted in accordance with the conversion factor published by the Bureau of Labor Statistics or any other governmental agency then publishing same. 23. BROKERAGE COMMISSION. The parties hereto acknowledge that Stubbs, Collenette and Associates, Inc. ("Stubbs") is the exclusive broker for the building and that Colliers Damner Pike is the exclusive broker for Tenant. Landlord shall pay the broker's commission to Stubbs in connection with this Lease pursuant to a separate written agreement with Stubbs. Landlord shall pay the broker's commission to Colliers pursuant to a separate written agreement between Colliers and Landlord attached hereto as Exhibit E. If a broker or finder (other than the parties identified in this Paragraph) claims that it represented Landlord or Tenant in connection with this Lease and that it is entitled to a commission or finder's fee, then the party whom such broker or finder claims to represent (whether Landlord or Tenant) shall indemnify, protect and defend the other from all loss, claim, expense and liability arising out of such claim, including reasonable attorneys' fees. 24. SECURITY. At the time of the execution of this Lease, there is no provision for continuous manned security during either standard or non-standard operating hours at the building. 25. EXPANSION SPACE - RIGHT OF FIRST REFUSAL. Subject to the terms and conditions of this Paragraph, Tenant shall have the right of first refusal throughout the Initial Term to lease all or a portion of the second floor of the building (the "Expansion Space"), which right may be exercised only by strict compliance with the terms of this Paragraph. Landlord shall not enter into a binding lease with any third party tenant for all or any portion of the Expansion Space without first offering such Expansion Space to Tenant as follows: (a) Landlord shall provide Tenant with its right of first refusal hereunder by notifying Tenant in writing that it has received a bona fide offer from a third party tenant to lease the Expansion Space, or any portion thereof, and offering to lease such premises to Tenant (the "Offer") on all the same terms and conditions as this Lease, except as follows: (i) the term of any lease for the Expansion Space shall be co-terminus with this Lease, including any renewal options; and (ii) Landlord shall have no obligation to perform or pay for any Base Building Work (as defined in the Work Letter attached hereto) except for demolition, HVAC, code required upgrades, and electrical work required to enable Tenant to occupy the Expansion Space ("Expansion Base Building Work"), and Landlord's obligation to perform or pay for such Expansion Base Building Work and for any Tenant Improvements (as defined in the Work Letter) shall be reduced proportionately as follows: (1) the total cost to Landlord for Tenant Improvements relating to the Expansion Space shall not exceed the product of (x) $17.75 per rentable square foot of the Expansion Space, multiplied by (y) a fraction (the "Remaining Term Fraction"), the numerator of which is the number of full calendar months 17. 38 remaining in the Initial Term following Tenant's scheduled occupancy date in the Expansion Space, and the denominator of which is 120 months; and (2) the total cost to Landlord for the Expansion Base Building Work relating to the Expansion Space shall not exceed the product of (x) the cost of all such work required for the Expansion Space multiplied by (y) the Remaining Term Fraction; provided, however, that no such limitation or proration of Landlord's cost shall apply if either of the following conditions is satisfied: (A) the Remaining Term Fraction (expressed as a percentage) is more than sixty percent (60%); or (B) concurrently with accepting the Offer in accordance with subparagraph (c) below Tenant also validly and irrevocably exercises the Option to Extend pursuant to Paragraph 3 of this Addendum (which concurrent exercise of the Option to Extend shall be permitted notwithstanding the 12-month time limitation contained in the second sentence of said Paragraph 3). (b) In addition, any new lease for the Expansion Space, or any portion thereof, executed pursuant to this right of first refusal (an "Expansion Lease") shall contain provisions that provide for the following: (i) Any default under this Lease shall constitute a default under the Expansion Lease, and it is agreed that any default under any Expansion Lease shall constitute a default under this Lease. (ii) Neither the Option to Extend provided under Section 3 above nor any renewal or extension option contained in any Expansion Lease may be exercised by Tenant singly, but both must be exercised, if at all, concurrently with each other. Any attempted or purported exercise in violation of this provision shall be void and of no force or effect for any purpose. (c) The Expansion Lease shall take the form of an amendment to this Lease in form mutually acceptable to Landlord and Tenant and in compliance with this Paragraph to be executed within five (5) business days after Tenant's acceptance of the Offer. (d) If Tenant fails to deliver its written acceptance of the Offer in the manner required above within such five (5) business day period, or if an Expansion Lease for the Expansion Space consistent with the Offer is not signed by Tenant within the time required by subparagraph (c) above, then Landlord shall have the right to lease all or any portion of the Expansion Space covered by the Offer to any other person on any terms or conditions whatsoever, regardless whether such terms and conditions are more or less favorable than those offered to Tenant. (e) Tenant shall have no right to exercise any right of first refusal hereunder if, at the time Landlord desires to enter into a lease with another tenant for all or any portion the Expansion Space, an Event of Default has occurred and is continuing. 18. 39 26. RIGHT OF FIRST REFUSAL TO PURCHASE BUILDING. Before consummating a voluntary sale of the building at any time during the Initial Term or the Extended Term of this Lease, and so long as no breach or default by Tenant has occurred and is continuing under this Lease, Landlord will notify Tenant of the purchase price and other terms (collectively "Sale Terms") upon which it would be willing to sell the building to Tenant, which Sale Terms shall include an allocation of closing costs in accordance with then prevailing custom in the City and County of San Francisco. Tenant shall notify Landlord in writing within five (5) business days after Landlord's notice whether Tenant is interested in purchasing the building on the Sale Terms ("Tenant's Interest Notice"). If, within twenty-five (25) business days after Tenant's Interest Notice, Tenant unconditionally agrees in writing to purchase the building on the Sale Terms, Tenant shall execute a formal agreement prepared by Landlord for the purchase and sale of the building consistent with the Sale Terms within five (5) days thereafter; provided, however, if the notice of Sale Terms was delivered by Landlord in the form of a proposed contract of sale, then Tenant shall indicate its acceptance of the Sale Terms by signing such proposed contract and the sale shall close within fifteen (15) business days thereafter. If Tenant does not deliver the Tenant's Interest Notice within the five (5) business day period, or its written agreement to purchase the building on the Sale Terms offered in Landlord's notice within such twenty-five day period, or if Landlord and Tenant do not enter into a fully executed agreement for the purchase and sale of the building within such five-day period (if applicable), Landlord shall thereafter have the right to offer and sell the building to any third party on the Sale Terms or any other terms and conditions, so long as the gross purchase price for the building is at least ninety-five (95%) of the purchase price contained in the Sale Terms and the terms of any seller financing, if any, are not substantially less favorable to the purchaser than any such terms contained in the Sale Terms offered to Tenant; provided, however, Landlord may elect to transfer or sell the building to a nonprofit or charitable organization for a lesser amount which amount is ninety-five percent (95%) of the purchase price contained in the Sales Terms adjusted to reflect the economic value of the transaction to Landlord including the tax consequences of such transaction. The right of first refusal shall lapse upon such sale to a third party. Notwithstanding the foregoing, Tenant's right of first refusal to purchase the building under this Paragraph shall not apply to any involuntary sale or disposition of the building, such as by foreclosure, deed-in-lieu of foreclosure, condemnation or sale under threat of condemnation or any change in the percentage ownership among the parties constituting Landlord or any change in the legal entity constituting Landlord. 27. LANDLORD'S WARRANTY. Landlord hereby warrants it is the fee owner of the premises, that it has authority to enter into this Lease, and that it shall take all actions necessary, at its expense, to defend Tenant's quiet enjoyment of the premises. 28. LANDLORD'S INDEMNITY. Landlord hereby indemnifies Tenant and its agents, employees and successors and assignees against the following unless caused by the negligence or intentional actions of Tenant, its employees, shareholders, partners, agents, contractors or invitees: (i) any damages and claims arising from Landlord's or Landlord's agents' breach of this Lease; (ii) the negligence or willful misconduct of Landlord or its agents in the building or the premises; and (iii) any causes of action solely related to the building arising prior to the 19. 40 Commencement Date. The foregoing indemnity shall exclude consequential damages unless any damages are caused by the gross negligence or intentional misconduct of Landlord. 20. EX-11.1 16 COMPUTATION OF EARNINGS 1 EXHIBIT 11.1 WIRED VENTURES, INC. STATEMENT RE: COMPUTATION OF PRO FORMA NET LOSS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ----------------- ------------------ (UNAUDITED) Pro forma net loss..................................... $(6,505) $ (3,361) ======= ======= Weighted average number of preferred shares outstanding(1)....................................... 28,623 27,881 Shares and options issued subject to SAB No. 83: Preferred stock issuances(1)......................... 3,893 3,893 Stock option grants(2)............................... 1,846 1,846 ------- ------- 5,739 5,739 ------- ------- Shares used in computing pro forma net loss per share................................................ 34,362 33,620 ======= ======= Pro forma net loss per share........................... $ (0.19) $ (0.10) ======= =======
- --------------- (1) Using if-converted method. (2) Using treasury-stock method. EX-16.1 17 COOPERS AND LYBRAND CONSENT 1 Exhibit 16.1 May 28, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: We have read the statements made by Wired Ventures, Inc. under "Change In Accountants" (copy attached), which we understand will be filed with the Commission, pursuant to Item 601(b)(16) of Regulation S-K, as part of the Company's Registration Statement on Form S-1. We agree with the statements concerning our firm contained in the third, fourth and fifth sentences under "Change in Accountants," in such Form S-1. We cannot comment as to : (1) the date when the Company's Board of Directors ratified and approved the decision to change independent accountants, and (2) whether the Company had not consulted with KPMG Peat Marwick LLP regarding accounting principles prior to retaining them as independent accountants. Sincerely, /s/ COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. EX-21.1 18 SUBSIDIARIES 1 Exhibit 21.1 Subsidiaries Wired Magazine Group, Inc., a California corporation HotWired, Inc., a Delaware corporation HardWired, Inc., a Delaware corporation Wired New York, a California corporation Wired World LLC, a Delaware limited liability company Wired UK, a United Kingdom unlimited company EX-23.1 19 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 REPORT ON FINANCIAL STATEMENT SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS The Board of Directors Wired Ventures, Inc. The audits referred to in our report dated May 24, 1996 included the related financial statement schedule for each of the years in the three-year period ended December 31, 1995, included in the Registration Statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the references to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the Prospectus. KPMG PEAT MARWICK LLP San Francisco, California May 30, 1996 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEE ATTACHED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 7,234 2,604 0 0 3,071 2,920 2,564 3,617 0 0 10,806 6,187 2,768 3,440 552 695 13,218 9,154 12,050 11,982 1,185 1,216 0 0 28 28 0 0 (1,535) (5,062) 13,218 9,154 25,255 7,621 25,255 7,621 16,751 5,554 16,751 5,554 0 0 0 0 (156) 11 (6,496) (3,352) 9 9 (6,505) (3,361) 0 0 0 0 0 0 (6,505) (3,361) (.19) (.10) 0 0 Includes minority interest of 1,366 and 867 respectively.
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