-----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, Kxc0OhQYsgIDKGcoqQe+cwa05M8Z+O7I3qPRuArLESdM1UzbNRlyrGInw7GZpxPN KGhpP4l6rU4H3zDGbUBFIg== 0001092388-00-000145.txt : 20000421 0001092388-00-000145.hdr.sgml : 20000421 ACCESSION NUMBER: 0001092388-00-000145 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 30 FILED AS OF DATE: 20000420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDEALAB CENTRAL INDEX KEY: 0001045647 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954569774 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-35260 FILM NUMBER: 605835 BUSINESS ADDRESS: STREET 1: 130 W UNION STREET STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91103 BUSINESS PHONE: 6265856900 MAIL ADDRESS: STREET 1: 130 W UNION ST CITY: PASADENA STATE: CA ZIP: 91103 FORMER COMPANY: FORMER CONFORMED NAME: BILL GROSS IDEALAB DATE OF NAME CHANGE: 20000121 S-1 1 FORM S-1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 2000 REGISTRATION NO. 333- ==================================================================================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- IDEALAB! (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------------------- NEVADA 7389 95-4569774 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) 130 W. UNION STREET PASADENA, CA 91103 (626) 585-6900 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------------------- BILL GROSS CHIEF EXECUTIVE OFFICER AND CHAIRMAN 130 W. UNION STREET PASADENA, CA 91103 (626) 585-6900 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------------------- COPIES TO: LARRY W. SONSINI, ESQ. WILLIAM H. HINMAN, JR., ESQ. BRIAN C. ERB, ESQ. SHEARMAN & STERLING WILSON SONSINI GOODRICH & ROSATI 1550 EL CAMINO REAL PROFESSIONAL CORPORATION MENLO PARK, CA 94025 650 PAGE MILL ROAD (650) 330-2200 PALO ALTO, CA 94304 (650) 493-9300 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. 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, 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, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE ============================================= =========================================== ========================================== TITLE OF EACH CLASS PROPOSED MAXIMUM OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) AMOUNT OF REGISTRATION FEE - --------------------------------------------- ------------------------------------------- ------------------------------------------ Common stock, $0.001 par value per share..... $ 300,000,000 $ 79,200 ============================================= =========================================== ========================================== (1)Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) 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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ====================================================================================================================================
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. ******************************************************************************** SUBJECT TO COMPLETION. DATED APRIL 20, 2000. Shares [LOGO APPEARS HERE] Common Stock ------------------------- This is an initial public offering of shares of common stock of idealab!. All of the shares of common stock are being sold by idealab!. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $ _______ and $ ____________ . Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "ILAB". SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------
PER SHARE TOTAL -------------- ------------ Initial public offering price................................................. $ $ Underwriting discount......................................................... $ $ Proceeds, before expenses, to idealab!........................................ $ $
To the extent that the underwriters sell more than _______ shares of common stock, the underwriters have the option to purchase up to an additional _______ shares from idealab! at the initial public offering price less the underwriting discount. ------------------------- The underwriters expect to deliver the shares against payment in New York, New York on ______ , 2000. GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. ROBERTSON STEPHENS THOMAS WEISEL PARTNERS LLC ------------------------- Prospectus dated , 2000. [Set forth on the inside front cover is a visual representation and description of three business forces that create market opportunities for idealab! network companies, three ways in which idealab! addresses these opportunities through its structure and ten features of the idealab! method of creating, building and operating companies.] [Set forth on the inside front cover gate fold below the caption "The idealab! network companies: Many agile private and public companies with extreme focus and adaptability ... high reward for employees and synergy in the company network" are the logos of several idealab! network companies along with brief descriptions of their businesses.] PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING US AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, AND WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS: (1) DOES NOT TAKE INTO ACCOUNT THE POSSIBLE ISSUANCE OF UP TO __________ ADDITIONAL SHARES OF OUR COMMON STOCK UPON THE EXERCISE OF THE UNDERWRITERS' RIGHT TO PURCHASE SUCH SHARES; (2) REFLECTS THE AUTOMATIC CONVERSION OF ALL 23,686,010 SHARES OF OUR PREFERRED STOCK OUTSTANDING AS OF JANUARY 31, 2000 INTO 236,860,100 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; (3) REFLECTS OUR REINCORPORATION IN NEVADA PRIOR TO THE CLOSING OF THIS OFFERING; AND (4) REFLECTS THE AMENDMENT OF OUR CHARTER TO PROVIDE FOR THE AUTHORIZATION OF 10,000,000,000 SHARES OF COMMON STOCK AND 100,000,000 SHARES OF PREFERRED STOCK EFFECTIVE UPON CLOSING OF THIS OFFERING. IDEALAB! idealab! is a new form of enterprise that creates, builds and operates businesses that use the power of real-time interactive communications, including the Internet, telephony, cable and wireless, to satisfy unmet market needs. Most of our companies are based on ideas we generate internally, although from time to time we may consider ideas brought to us by other entrepreneurs or acquire interests in existing Internet companies that are strategically important to our network. Each business in our integrated, collaborative network is established as a separate company rather than as a division of idealab!. We believe that the resulting balance of decentralization and centralization enables each business to retain the adaptability and entrepreneurialism of a small company while benefiting from the economies of scale, information sharing and other synergies associated with inclusion in our network. Moreover, we believe that our companies are able to compete more effectively and grow more rapidly than many of their stand-alone competitors because we enable the entrepreneurs managing our businesses to concentrate primarily on the rapid execution of their business plans. The idealab! business method consists of idea generation, selection and analysis, company building and operational support, and strategic guidance and direction. Our experience in creating, building and operating Internet businesses enables us to quickly and efficiently bring innovative new companies to market and to build our existing companies into market leaders. o IDEA GENERATION, SELECTION AND ANALYSIS. We create network companies by continually generating ideas for innovative business models. We measure each idea against several criteria, including whether it addresses an unmet market need, its potential to benefit the idealab! network and its ability to generate increasing efficiencies as the business grows. Before creating or acquiring a company, we perform thorough qualitative and quantitative analyses, create prototypes and conduct extensive consumer testing. o COMPANY BUILDING AND OPERATIONAL SUPPORT. We provide our companies with operational assistance from our various in-house departments and third party service providers, access to our business relationships both inside and outside the idealab! network and financial support. We initially house most of our companies at our open-plan facilities, which are designed to foster a collaborative process and a sharing of best practices among the companies in these locations. Our managing directors, entrepreneurs-in-residence and operational vice presidents provide strategic guidance as well as assistance in sales, marketing and brand management, executive recruiting, web development and information technology, and legal, finance, accounting and human resources to our network companies. o STRATEGIC GUIDANCE AND DIRECTION. We actively develop the business models, strategies, operations and management teams of all our companies throughout their lifecycles to ensure that each company benefits fully from our collective experiences. Our senior executives serve on the boards of directors of our network companies and participate in consultation and informal communications that allow us to take an 3 active, hands-on role in the ongoing oversight and strategic management of our companies. Our operating methods are designed to promote commercial relationships among our network companies, which we believe enhance the value of our overall network. Our objective is to increase the value of our network by continually creating new business ideas and acquiring existing businesses in markets involving real-time interactive communications that complement our existing companies. We believe that we can enhance stockholder value by engaging in business through an integrated network of companies in which we own significant stakes over the long term. We intend to continue establishing additional facilities around the world where we can match our best ideas with talented people to create new companies. In each new location we intend to duplicate the organization of our functional teams to promote the consistent execution of the idealab! method. We have grown rapidly since our inception in 1996. The idealab! network currently includes the following seven public and 28 private companies: PUBLIC COMPANIES Centra Software NetZero eMachines Ticketmaster Online - CitySearch eToys Tickets.com GoTo.com PRIVATE COMPANIES CarsDirect.com jobs.com Cooking.com MyHome.com dotTV OpenSales.com EntryPoint PayMyBills.com eve.com PeopleLink eLease PETsMART.com eVoice Sameday.com FirstLook.com scan.com FreeMusic Scout HomePage.com shopMarket ice.com Swap.com iExchange.com Utility.com Intranets.com WeddingChannel.com Jackpot.com z.com We currently have 198 employees. In addition to our headquarters in Pasadena, California, we maintain offices in the Silicon Valley, New York, Boston and London. 4 THE OFFERING Common stock offered................................. shares Common stock to be outstanding shares after the offering................................. Use of proceeds...................................... To create, build and operate, acquire, or increase our interests in interactive communications businesses, and for general corporate purposes. Proposed Nasdaq National Market symbol............... ILAB
The table above is based on shares outstanding as of January 31, 2000. The number of shares of common stock to be outstanding after the offering excludes: o 200,013,550 shares of common stock subject to outstanding options with a weighted-average exercise price of $1.22 per share as of January 31, 2000; o 64,085,700 shares of common stock available for issuance under our stock option plans as of January 31, 2000; o 21,850,350 shares underlying options granted between February 1, 2000 and March 15, 2000 at a weighted-average exercise price of $1.94; o 2,220,081 shares of common stock issued between February 1, 2000 and March 31, 2000; and o 14,880,750 shares of common stock issuable upon the conversion of Series D preferred stock issued between February 1, 2000 and March 31, 2000. The table above includes 107,575,000 shares of common stock subject to a right of repurchase by us. ------------------ WE INTEND TO REINCORPORATE IN NEVADA AND CHANGE OUR CORPORATE NAME TO "IDEALAB!" CONCURRENTLY WITH THIS OFFERING. WE WERE INCORPORATED IN CALIFORNIA IN MARCH 1996 UNDER THE NAME BILL GROSS' IDEALAB!. THE TERMS "IDEALAB!", "OUR" AND "WE", AS USED IN THIS PROSPECTUS, REFER TO IDEALAB! AND ITS WHOLLY-OWNED SUBSIDIARY, IDEALAB! HOLDINGS, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY, EXCEPT WHERE IT IS CLEAR THAT THE TERM REFERS ONLY TO IDEALAB!. WE REFER TO THE INTERNET COMPANIES THAT WE HAVE CREATED OR INVESTED IN AND THAT PARTICIPATE IN OUR COLLABORATIVE NETWORK AS "OUR COMPANIES" OR "OUR NETWORK COMPANIES". WE DO NOT ACT AS AN AGENT OR LEGAL REPRESENTATIVE FOR ANY OF THESE COMPANIES AND WE DO NOT HAVE THE POWER OR AUTHORITY TO LEGALLY BIND ANY OF THESE COMPANIES. 5 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary historical and pro forma consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The Pro Forma column included in the Consolidated Statement of Operations Data for the year ended January 31, 2000, reflects the effects of certain fiscal 2000 acquisitions and dispositions as if they had occurred on February 1, 1999. The Pro Forma per share data assumes the conversion of all series of our outstanding convertible preferred stock on February 1, 1999 or original issue date if later. See Note 5 of Notes to our Consolidated Financial Statements and Unaudited Pro Forma Condensed Combined Financial Information included elsewhere in this prospectus. The Pro Forma column included in the Consolidated Balance Sheet Data as of January 31, 2000 reflects the automatic conversion of all shares of our convertible preferred stock into 236,860,100 shares of common stock upon completion of this offering. The Pro Forma, As Adjusted column reflects the sale of shares of common stock that we are offering after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
MARCH 14, 1996 YEAR ENDED JANUARY 31, (INCEPTION) TO --------------------------------------------------- JANUARY 31, 1998 1999 2000 2000 1997 ACTUAL ACTUAL ACTUAL PRO FORMA --------------- ---------- ---------- ------------ ------------- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................. $ -- $ 154 $ 805 $ 21,158 $ 134,303 Operating expenses, excluding stock-based compensation............................ 2,275 11,330 8,387 153,194 277,316 Stock-based compensation.................. 135 233 3,910 109,150 109,299 --------------- ---------- ---------- ------------ ------------- Operating income (loss)................... (2,410) (11,409) (11,492) (241,186) (252,312) --------------- ---------- ---------- ------------ ------------- Other income (expense), net............... 71 74 7,628 322,311 320,287 Income (loss) before income taxes, minority interest and equity in the income (loss) of affiliates............. (2,339) (11,335) (3,864) 81,125 67,975 Income tax benefit (expense).............. (3) 3,528 2,358 (86,245) (73,214) Minority interest......................... 116 1,022 572 95,537 138,334 Equity in the income (loss) of affiliates, net of tax.................. (144) (271) 51 28,067 (23,337) --------------- ---------- ---------- ------------ ------------- Net income (loss)......................... (2,370) (7,056) (883) 118,484 109,758 Deduction for beneficial conversion feature................................. -- -- -- (9,724) (9,724) Repurchase of convertible preferred stock. -- -- -- (3,777) (3,777) --------------- ---------- ---------- ------------ ------------- Net income (loss) applicable to common shareholders..................... $ (2,370) $ (7,056) $ (883) $ 104,983 $ 96,257 =============== ========== ========== ============ ============= Net income (loss) per share applicable to common shareholders--diluted............. $ (0.01) $ (0.02) $ -- $ 0.15 -- Shares used to calculate net income (loss) per share applicable to common shareholdres--diluted.................... 322,232 334,760 352,083 695,312 -- Pro Forma net income (loss) per share applicable to common shareholders-diluted -- -- -- -- $ 0.14 Pro Forma shares used to calculate net income (loss) per share applicable to common shareholders--diluted.................... -- -- -- -- 697,839
AS OF JANUARY 31, 2000 --------------------------------------------------- PRO FORMA, ACTUAL PRO FORMA AS ADJUSTED ---------------- ---------------- --------------- (UNAUDITED) (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 601,474 $ 601,474 $ Working capital............................................. 562,024 562,024 Total assets................................................ 1,674,383 1,674,383 Convertible preferred stock ................................ 892,782 -- -- Total shareholders' equity.................................. 337,784 1,230,566
6 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IF ANY OF THE EVENTS DESCRIBED BELOW ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED. IN THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. RISKS PARTICULAR TO US WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR PROSPECTS. We were founded in March 1996 and have a limited operating history upon which you may evaluate our business and prospects. An investor in our common stock must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets. We and our companies are in early stages of development, and are among many that have entered the emerging Internet market. Specific risks to our business include our: o ability to generate and successfully commercialize new ideas and to acquire interests in promising companies; o dependence upon the performance of our companies, which are individually subject both to risks common to all Internet companies and risks particular to their businesses and related Internet industry segments; o need to manage our expanding operations and network of companies; o continuing need to raise additional capital; o dependence upon and need to hire key personnel; and o need to increase spending to enhance the idealab! brand and the strength of our network companies' brands on an ongoing basis. If we fail to adequately address any of these risks, our consolidated financial position, results of operations and cash flows may be materially and adversely affected and our stock price may decline. OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT BE AS SUCCESSFUL AS WE ANTICIPATE. Our strategy is based upon an unproven business model involving creating, building and operating businesses in markets involving real-time interactive communications. Our business model depends on our ability to continue to generate new and successful business concepts and to successfully integrate them into our collaborative network. As competition intensifies in the evolving Internet market, the creation and commercialization of new business concepts may prove more difficult, which could harm our business. In addition, because our strategy involves the continued participation in the operation of our network companies and in the long-term appreciation in value of these companies, we may forego short-term gains that we could otherwise realize by selling interests in our network companies. FLUCTUATIONS IN THE STOCK PRICES OF OUR PUBLIC NETWORK COMPANIES COULD AFFECT OUR STOCK PRICE. Our network companies operate in various segments of the Internet industry. The stock prices of Internet companies have been highly volatile, particularly over the last year. The stock prices of eToys and GoTo.com, two publicly-traded companies in which we have significant ownership stakes, have been highly volatile. In May 1999, eToys completed its initial public offering and has since traded as high as $86.00 per share and as low as $6.00 per share. In June 1999, GoTo.com completed its initial public offering and has since traded as high as $114.50 per share and as low as $15.00 per share. We 7 anticipate that the following factors, among others, will contribute to the stock price volatility of companies in our network: o fluctuations in their operating results, which are likely to be below the expectations of investors and securities analysts in some future periods as further described under "--Risks affecting our network companies--The future operating results of the companies in our network are unpredictable and could fluctuate from quarter to quarter, causing their stock prices to fall"; o conditions or trends in the Internet industry and in the segments of the Internet industry in which a significant number of our network companies operate; o changes in the financial estimates or investment considerations of securities analysts regarding our network companies; and o changes in the market valuations of any of our network companies and other Internet companies. The market value of our holdings in our public network companies will change significantly in parallel with fluctuations in their stock prices, which could cause our stock price to fall. BECAUSE OUR ASSETS ARE CONCENTRATED IN A FEW NETWORK COMPANIES, IF THE VALUE OF THESE COMPANIES DECREASES, OUR STOCK PRICE MAY FALL. The market value of our interests in the public companies in our network, including eMachines, eToys, GoTo.com, NetZero and Tickets.com, accounts for a substantial portion of the fair market value of our assets. Although it is more difficult to value our interests in the private companies in our network, investors and securities analysts may also attribute significant value to these interests, including our interest in CarsDirect.com. We believe that the fair market value of our interests in network companies often far exceeds the value at which they are recorded on our balance sheet. A decline in the value of one or more of the public or significant private companies in our network would likely cause our stock price to fall. FLUCTUATIONS IN OUR QUARTERLY RESULTS ARE LIKELY AND COULD CAUSE OUR STOCK PRICE TO DECLINE. Our results have varied widely in the past, and we expect that they will continue to vary significantly from quarter to quarter due to a number of factors, including: o fluctuations in the operating results of the companies in our network; o income, loss or amortization of goodwill resulting from our acquisition or divestiture of interests in our network companies or from acquisitions by our network companies, which will fluctuate as a result of the timing of any of these transactions; o changes in our methods of accounting for interests in our network companies, which may result from changes in our ownership percentages of these companies; o gain or loss resulting under applicable accounting rules from initial public offerings, other financings, mergers or other changes in the capitalization of any of our network companies; o increases in taxation resulting from our disposition of network company interests or from other extraordinary events; o costs related to the continued geographic expansion of our facilities; o cash charges relating to the exercise of stock options; and o costs related to the introduction of new companies to our network. It is likely that in some future quarter our results may be below the expectations of securities analysts and investors and, as a result, the price of our common stock may fall. 8 OUR OPERATING RESULTS MAY FLUCTUATE BECAUSE OUR REVENUES AND EXPENSES ARE LESS CORRELATED THAN THOSE OF OTHER COMPANIES. We generate limited revenues from our direct operating activities. Our revenues are comprised primarily of the revenues of those of our network companies that we consolidate into our own financial results. Our expenses will include the expenses of those of our companies that we consolidate into our own financial results and expenses related to the potential effect of goodwill amortization and other charges resulting from completed and future acquisitions. Our expenses will also include our own direct expenses, which will increase as we build an infrastructure to implement our business model. For example, we expect to hire additional employees, expand information technology systems and lease or purchase more space for our corporate offices. In addition, we plan to significantly increase our operating expenses to: o broaden our company support capabilities; o explore acquisition opportunities and alliances with other companies; o open and staff additional facilities in locations; and o facilitate business arrangements among our companies. Because we recognize revenue, expenses and other income from our network companies, each with a different cost structure and revenue model, and because we also generate expenses independent of our network companies, our total revenues, expenses and other income may be correlated to a lesser extent than those of other companies. This may render our operating results difficult for investors and securities analysts to interpret and could cause our stock price to fall. IF OUR RELATIONSHIPS WITH OUR NETWORK COMPANIES DETERIORATE, OUR VALUE MAY DECREASE. Our success depends substantially on the performance of our network companies and our ability to develop and sustain close relationships with them. If we are unable to develop and maintain good relationships with new and successful companies in the future, or to maintain and enhance our relationships with our existing companies, our business will be damaged and our value may decrease. In addition, competition or disagreement with or between our network companies and/or their personnel could make it more difficult for us to facilitate collaboration among our companies, result in negative publicity, cause us to become involved in costly and time-consuming litigation or impair the value of our interests in our companies. Moreover, our network companies could make business decisions that are not in our best interests, which could impair the value of our network. While we generally seek to maintain significant equity interest and participation in the management of our network companies, we may not be able to control significant business decisions they make. Some of these decisions may cause the dilution of our interest and potentially our loss of control over these network companies. Any dilution or loss of control could subject us to regulation under the Investment Company Act of 1940. WE MAY BE UNABLE TO EFFECTIVELY MANAGE THE GROWTH OF OUR NETWORK COMPANIES AND OF OUR NETWORK AS A WHOLE. In the future, continued growth of our network companies and our network may place significantly greater strain on our resources and our ability to manage the network. This growth subjects us to a number of risks including, but not limited to, the following: o the potential that the addition of new network companies may cause a disruption in our ongoing support of our existing companies, distract our management and other personnel and make it difficult to maintain our standards, controls and procedures; o potential deterioration of our ability to influence our companies' day-to-day operations; o the potential failure of our companies to adopt our ideas for effectively and successfully managing their growth, which could interfere with our strategy of increasing the value of our network; and 9 o our entry into a market or acquisition of interests in a company or companies in which we have little experience, which could strain and distract our management and other resources. AS THE INTERNET MARKET MATURES AND COMPETITION INCREASES, WE MAY NOT BE ABLE TO CONTINUE TO SUCCESSFULLY GENERATE PROMISING OPPORTUNITIES, AND WE MAY NOT FIND OPPORTUNITIES TO ACQUIRE INTERESTS IN PROMISING COMPANIES. Due to a variety of factors outside of our control, we may be unable to identify promising business opportunities in the future, or to acquire promising companies that complement our business strategy. These factors include: o competition in bringing new ideas and unique business models to the marketplace for Internet and other interactive communications businesses; o market saturation as the number of new entrants into the Internet marketplace grows, potentially to the point where new market participants have difficulty establishing a viable commercial presence; o competition from other potential acquirers and partners of and investors in interactive communications businesses; o in specific cases, failure to agree on the terms of a potential acquisition, such as the amount or price of our acquired interest, or incompatibility between us and management of the company we wish to acquire; and o the possibility that we may lack sufficient capital to develop promising opportunities or to acquire interests in complementary companies. If we cannot continue to develop new and successful interactive communications business concepts or to acquire interests in complementary companies, our growth strategy will be impaired. OUR KEY PERSONNEL MAY LEAVE, WHICH COULD DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS. Our future success depends upon the continued service of our executive officers and other key personnel. None of our officers or key employees is bound by an employment agreement for any specific term. If we lost the services of one or more of our key employees, or if one or more of our executive officers or employees decided to join a competitor or otherwise compete directly or indirectly with us, our business could be harmed. We cannot assure you that we will be able to successfully retain our key personnel or, in the event we were to lose the services of any key personnel, to replace these personnel. In particular, our success is highly dependent on the individual contributions of Bill Gross and other memebers of our management team. If one or more members of our management team were unable or unwilling to continue in their present positions, our operations could be disrupted and our business could be harmed. OUR GROWTH COULD BE IMPAIRED IF IT BECOMES MORE DIFFICULT FOR INTERNET-RELATED COMPANIES TO RAISE CAPITAL. Many of our network companies are in early stages of development and can benefit from our assistance in gaining access to capital markets. We and our network companies are dependent on the interest of investors in Internet-related and other interactive communications companies in general and the supply of private and public capital to these companies in particular. If the market for the securities of Internet-related and other interactive communications companies were to weaken for an extended period of time, or at a time when one or more of our network companies were required to raise capital, our and our network companies' business and financial condition could be seriously harmed. WE MAY BE UNABLE TO OBTAIN MAXIMUM VALUE FOR OUR NETWORK COMPANY INTERESTS. We have significant equity positions in our network companies. Although we generally do not anticipate selling our interests in our network companies, if we were to divest all or part of them, we might 10 not receive maximum value for these positions. For companies with publicly-traded stock, we may be unable to sell our interests at then-quoted market prices, and, for public companies with thinly-traded stock, we may have to sell our interests gradually over time rather than in one or more large transactions. For those companies that do not have publicly-traded stock, the realizable value of our interests may ultimately prove to be lower than the carrying value currently reflected in our consolidated financial statements. Legal and other restrictions may also prevent us from disposing of interests in network companies when we would otherwise choose to do so. WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE TO OUR BUSINESS STRATEGY TO AVOID REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940. The Investment Company Act of 1940 requires registration for companies that are engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. A company may be deemed to be an investment company if it owns "investment securities" with a value exceeding 40% of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. Securities issued by companies other than majority-owned subsidiaries are generally counted as investment securities for purposes of the Investment Company Act. Excluding government securities and cash items, substantially all of our assets on an unconsolidated basis currently consist of equity interests in majority-owned subsidiaries and equity interests in other companies. Our equity interests in companies that are not majority-owned subsidiaries could be counted as investment securities. At January 28, 2000, more than 40% of the value of our total assets on an unconsolidated basis consist of securities issued by companies that are not majority-owned subsidiaries. Therefore, we could be considered an investment company unless we obtain an exemption or qualify for a safe harbor. On January 28, 2000, we filed an application with the Securities and Exchange Commission requesting a permanent order declaring that we are primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. On March 28, 2000, the Commission granted a temporary order exempting us from all provisions of the Investment Company Act for a 120-day period that ends on July 26, 2000 while it considers our request for a permanent order. The Commission has significant discretion in determining whether to grant the permanent order and there can be no assurance that the permanent order will be granted. In addition, if the permanent order is granted, we will need to ensure that a particular percentage of our assets and revenues are derived from companies that we control. As a result, fluctuations in the value of, or the income and revenues attributable to us from our ownership of, interests in companies we do not control could cause us to be deemed an investment company. Registration as an investment company would subject us to restrictions that are inconsistent with our fundamental business strategy of equity growth through creating, building and operating interactive communications companies. We may have to take actions, including buying, refraining from buying, selling or refraining from selling securities, when we would otherwise not choose to in order to continue to avoid registration under the Investment Company Act. For example, we may have to ensure that we retain controlling ownership interests in our network companies after their initial public offerings, which would require us to expend significant amounts of capital that we might otherwise use to create or acquire other companies. WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MIGHT NOT BE AVAILABLE OR COULD RESULT IN DILUTION OF THE OWNERSHIP INTERESTS OF OUR STOCKHOLDERS. We require substantial capital to fund our business and maintain control of our network companies as they issue additional equity. In all periods, we have experienced negative cash flow from operations and expect to experience significant negative cash flow in the future. Because our strategy involves holding interests in our network companies over the long term, we do not expect to generate cash by selling these interests. Moreover, because of the provisions of the Investment Company Act of 1940, we may not be able to sell securities of our network companies to raise capital were we to so choose. We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. However, we may need to raise additional funds prior to the expiration of this period or at 11 a later date in order to create or acquire new companies or to maintain or expand our control of existing network companies. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. Our ability to issue debt securities or to service any debt we do issue may also be limited by our ability to generate cash flow. In addition, we may raise additional funds through the issuance of securities with rights, preferences or privileges senior to those of the rights of our common stock. If we issue equity or securities convertible into equity, the ownership percentages of our stockholders will be diluted. IN MAKING STRATEGIC ACQUISITIONS, WE WILL FACE COMPETITION FROM OTHER POTENTIAL INVESTORS IN AND ACQUIRORS OF INTERNET AND OTHER INTERACTIVE COMMUNICATIONS COMPANIES. Although we create most of our network companies ourselves, from time to time we acquire interests in companies complementary to our network that were created by other entrepreneurs. In pursuing opportunities for these acquisitions, we face competition from other capital providers, including publicly-traded Internet companies, venture capital companies, large corporations and other companies providing services similar to ours. Many of these competitors have greater financial resources than we do. This competition may limit our opportunities to acquire interests in companies that could enhance our network. If we cannot acquire interests in attractive companies, our growth strategy may be inhibited or may not succeed. WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN RECENT PERIODS, AND OUR INABILITY TO MANAGE THIS GROWTH COULD DISRUPT OUR OPERATIONS. Our ability to identify, create, build and operate interactive communications businesses that successfully offer products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We have increased, and plan to continue increasing, the scope of our operations domestically and internationally. Between January 1999 and April 2000, we grew from 18 employees in one office to 198 in five offices. Integrating such a large number of new employees and training them in the idealab! method and culture may prove difficult, and we may not be able to do so successfully or in a timely fashion. If we do not manage growth properly, it could materially and adversely affect our business. In addition, our expansion efforts will be expensive, and could put a strain on our management. The expansion of our infrastructure and our geographic expansion will entail hiring key employees in such areas as senior management, finance, marketing, legal, recruiting and technology development. Hiring these employees has historically been difficult, and we cannot assure you that we will be able to successfully attract and retain a sufficient number of qualified personnel. This may limit our ability to open facilities in some locations. WE MAY NOT MANAGE OUR EXPECTED GEOGRAPHIC EXPANSION SUCCESSFULLY, WHICH COULD IMPAIR OUR GROWTH. Part of our strategy for growth is to replicate our business method in multiple locations by opening new idealab! facilities in those locations. We must apply the method and culture of our Pasadena facility in each new facility so that all of our facilities operate in a complementary fashion. We must also hire and integrate talented people to staff each new facility. Because each new facility will be geographically distant from Pasadena and will employ people who have never worked at our Pasadena facility, it may be difficult and time consuming for us to replicate the culture and operating methods of our Pasadena facility, and this effort may cause our management to divert their attention from other aspects of our business. If our new facilities are not as successful as we anticipate, our growth will be impaired. WE MAY BE UNABLE TO PROTECT OUR INTERNET DOMAIN NAMES OR OUR OTHER PROPRIETARY RIGHTS, WHICH COULD CAUSE US TO LOSE COMPETITIVE ADVANTAGES. The Internet domain names we use, along with those we register or acquire for future use, are extremely important parts of our business. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. In the future, governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in 12 all countries in which we conduct business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We also regard our copyrights, trade secrets, patentable inventions and similar intellectual property as critical to our success, and we rely on copyright law, trade secret protection, patent law and confidentiality and/or license agreements with our employees, companies, partners and others to protect our proprietary rights. We have not, however, received any patents covering our proprietary information. Moreover, the laws of some foreign countries may not provide protection of our intellectual property rights to the same extent as those of the United States. Despite our precautions, unauthorized third parties might copy or reverse engineer and use information or technology that we regard as proprietary. If our proprietary information were misappropriated, we might have to litigate to protect it. Intellectual property litigation is expensive and time-consuming. The outcome of any such litigation will be uncertain, and the litigation could divert our management's attention away from running our business. WE WILL BE SUBJECT TO THE SIGNIFICANT INFLUENCE OF OUR CURRENT STOCKHOLDERS AFTER THIS OFFERING, AND THEIR INTERESTS MAY NOT ALWAYS COINCIDE WITH THOSE OF OUR OTHER STOCKHOLDERS. Bill Gross, Karen Gross, idealab Capital Management I, L.L.C., idealab Capital Management II, L.L.C., and entities affiliated with them will, in the aggregate, beneficially own approximately ___________ % of our outstanding common stock following the completion of this offering. These stockholders will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. Because their interests may not always coincide with those of our other stockholders, these stockholders may influence or cause us to take actions with which our other stockholders disagree. OUR ARTICLES OF INCORPORATION AND BYLAWS AND NEVADA LAW CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN OUR CONTROL AND COULD ALSO LIMIT THE MARKET PRICE OF OUR STOCK. Our articles of incorporation and bylaws will contain provisions that could delay or prevent a change in our control. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some of these provisions: o authorize the issuance of preferred stock that can be created and issued by the board of directors without prior stockholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of common stock; o prohibit stockholder action by written consent; and o establish advance notice requirements for submitting nominations for election our board of directors and for proposing other matters that can be acted upon by stockholders at a meeting. In addition, some provisions of Nevada law make it more difficult for a third party to acquire us. Some of these provisions: o establish a supermajority stockholder voting requirement to approve an acquisition by a third party of a controlling interest in us; and o impose time restrictions and/or require additional approvals for an acquisition of us by an interested stockholder. THERE MAY BE CONFLICTS OF INTEREST AMONG OUR NETWORK COMPANIES, OUR OFFICERS, DIRECTORS AND STOCKHOLDERS AND US. Some of our officers and directors also serve as officers or directors of or have ownership interests in one or more of our network companies. As a result we, our executive officers and directors, their affiliates and our network companies may face potential conflicts of interest with each other and with our stockholders. Specifically, our officers and directors may be presented with situations in their capacity as 13 officers or directors of one of our network companies that conflict with their ownership interests in or their obligations as officers or directors of our company or of another network company. In addition, our executive officers and directors and their affiliates may engage in activities and have interests in other entities on their own behalf or on behalf of other persons. We will not have any rights in these ventures or to their income or profits, whether or not these ventures are involved with businesses that are similar to our business or to the businesses of our network companies, or are businesses in which we own or will acquire interests. Other interests that may give rise to conflicts include: o our executive officers' or directors' or their affiliates' interests in entities that provide products or services to us for our internal use, or to our network companies; and o the personal interests of one of our executive officers in the venture capital funds we currently manage, and any similar interests our executive officers or directors may have in any venture capital funds with which we establish relationships in the future. In any of these or other cases in which similar conflicts arise: o our interests may conflict with the personal financial and other interests of our executive officers or directors in another entity; or o our executive officers or directors may have conflicting fiduciary duties to us and the other entity. For specific information regarding transactions between us and parties related to us, see "Related Party Transactions". RISKS AFFECTING OUR NETWORK COMPANIES THE VALUE OF OUR ASSETS DEPENDS ON THE PERFORMANCE OF THE COMPANIES IN OUR NETWORK. THE FACTORS BELOW DESCRIBE MATERIAL RISKS AFFECTING OUR NETWORK COMPANIES. IF ANY OF THE EVENTS DESCRIBED IN THESE FACTORS ACTUALLY OCCURS, THE BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS OF ONE OR MORE OF OUR NETWORK COMPANIES COULD SUFFER, WHICH WOULD LIKELY IMPAIR OUR ASSET VALUE AND HARM OUR BUSINESS AND OPERATING RESULTS. THE FUTURE OPERATING RESULTS OF THE COMPANIES IN OUR NETWORK ARE UNPREDICTABLE AND COULD FLUCTUATE FROM QUARTER TO QUARTER, CAUSING THEIR STOCK PRICES TO FALL. Fluctuations in the operating results of public companies in our network could cause their stock prices to decline. Our network companies' operating results have varied widely in the past, and we expect that they will continue to vary significantly from quarter to quarter due to a number of factors, including: o their ability to develop large bases of users of their Web sites who possess demographic characteristics attractive to advertisers, their ability to generate significant e-commerce transaction revenues or their ability to develop products and services that are attractive to businesses and consumers using the Internet; o the views of investors and securities analysts on the prospects of companies in particular segments of the Internet industry, particularly those segments in which a substantial number of our companies operate; o intense competition from both online and traditional providers of similar goods and services; o the amount and timing of expenses related to their brand-building activities and their ability to develop brand awareness; o changes in the growth rate of Internet usage and acceptance by consumers of electronic commerce, including the pace of development or a decline in growth of the e-commerce market generally; o the effect of recent and future accounting policies on their ability to recognize revenue; o their ability to effectively manage their growth during the growth of the Internet market; 14 o technical difficulties, system failures or Internet downtime; and o the amount and timing of costs related to acquisitions of businesses or technology by them. VARIOUS IDEALAB! NETWORK COMPANIES MAY FAIL IF COMPETITORS PROVIDE SUPERIOR INTERNET-RELATED OFFERINGS. Competition for Internet products and services is intense. As markets for interactive products and services and e-commerce grow, we expect that competition will continue to intensify. Barriers to entry are generally low, and competitors can frequently offer products and services at a relatively low cost. Furthermore, the majority of our network companies provide products or services directly to consumers, which is an increasingly crowded and competitive market segment. Several companies offer solutions that compete with those offered by one or more of our network companies. We expect that additional companies will offer competing solutions on a stand-alone or combined basis in the future. Our network companies' competitors may develop Internet products or services that are superior to, or have greater market acceptance than the solutions offered by our network companies. Our network companies generally compete with comparable Internet companies as well as traditional brick-and-mortar companies that offer similar products and services offline. In addition, our network companies at times compete with each other. The number of companies selling Internet-based business and consumer services has recently increased substantially. Many of our network companies' competitors have greater brand recognition and greater financial, marketing and other resources than do our network companies. This may place our network companies at a disadvantage in responding to their competitors' pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. If our network companies are unable to compete successfully against their competitors, they may fail. ONE OF OUR NETWORK COMPANIES FROM WHICH WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES IS SUBJECT TO RISKS AND UNCERTAINTIES RELATED TO ITS BUSINESS. We have derived a substantial portion of our historical revenues from CarsDirect.com, an online resource for researching, financing and purchasing new cars and related services, and we believe that the value of our interest in CarsDirect.com contributes significantly to the value of our assets. CarsDirect.com has a limited operating history and limited management experience in the Internet-based automotive sales industry. Accordingly, CarsDirect.com will be faced with risks and difficulties encountered by early-stage companies in new and rapidly evolving markets. In addition, CarsDirect.com is subject to additional risks and uncertainties, including its: o need to develop its unproven business model; o reliance on the Internet for commerce and the growth and acceptance of automobile transactions over the Internet; o ability to increase its customer base; o ability to maintain its dealer relationships; o need to broaden its service offerings; and o need to manage expanding operations, including its recent implementation of new financial and accounting systems. In addition, all states comprehensively regulate vehicle sales, including strict licensure requirements for brokers and dealers. Generally, these laws and regulations were drafted prior to the emergence of online automotive buying services and therefore are principally intended to address only traditional vehicle sales by local vehicle brokers and vehicle dealers. Nevertheless, these laws and regulations are broadly drafted and may be interpreted by the courts or regulatory agencies to apply to the business activities of CarsDirect.com. If CarsDirect.com is found to be subject to any laws and regulations in one or more states where it is conducting business or is found not to be in compliance with the applicable laws or 15 regulations in one or more such states because it has failed to obtain the appropriate license or for any other reason: o it could be subject to civil or criminal penalties; o it could be required to make costly changes in the way it does business in order to obtain a vehicle broker, dealer or other appropriate license; and/or o it could be prohibited from engaging in its business in that state. Moreover, legislation addressing online vehicle sales has been introduced in various states during the past year, and other states are considering such laws. We cannot predict whether any of these proposed bills, or any other potentially adverse legislation that might be initiated by state legislatures in the future, will be enacted. If adverse state legislation is enacted in one or more states or if unfavorable pre-emptive federal legislation is passed, it may harm CarsDirect.com's business and could have a material adverse effect on our consolidated financial position, results of operations or cash flows. IF OUR NETWORK COMPANIES ARE UNABLE TO HIRE AND INTEGRATE QUALITY PERSONNEL, THEIR GROWTH COULD BE LIMITED. The success of our network companies depends on their employing highly skilled management, technical and marketing personnel. Our companies will need to continue to hire and integrate additional personnel as their businesses grow. Shortages in the number of trained management, technical and marketing personnel could limit their ability to increase sales of their existing products and services and launch new product and service offerings. THE SUCCESS OF OUR NETWORK COMPANIES DEPENDS ON THE CONTINUED GROWTH AND ACCEPTANCE OF THE INTERNET, WHICH IS UNCERTAIN. All of our companies rely on the Internet for the success of their businesses. If widespread commercial use of the Internet does not continue to develop, or if the Internet does not continue to develop as an effective medium for commerce, advertising and information retrieval, our companies may not succeed. A number of factors could prevent the Internet's widespread acceptance as a commercial medium, including: o the potential unwillingness of businesses to shift from traditional processes to online processes; o any delay in the development of the network infrastructure necessary to support substantial growth in volume of e-commerce; o the rate of development and acceptance of evolving interactive communications technologies, including Internet telephony and wireless devices; o any significant outages or delays on the Internet; o increased government regulation or taxation that adversely affects the viability of e-commerce; o concern and adverse publicity about the security and privacy of e-commerce transactions that negatively affect Internet usage; and o uncertainty regarding intellectual property ownership. CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT BY THIRD PARTIES AGAINST OUR NETWORK COMPANIES COULD CAUSE THEM TO INCUR EXPENSES OR BECOME INVOLVED IN LITIGATION. Our network companies operate in part by making content available to users through the Internet. This creates the potential for claims to be made against our companies, either directly or through contractual indemnification provisions with other companies. These claims might, for example, be made for defamation, negligence, patent, copyright or trademark infringement, personal injury, invasion of privacy or other legal theories based on the nature, content or copying of these materials. Providers of Internet products and services have been sued in the past, sometimes successfully, based on the content 16 available through their websites or use of trademarks or copyrighted material owned by third parties. Some of the content provided by our network companies on their websites is drawn from data compiled by other parties, including governmental and commercial sources, and this data may contain errors. If any of our network companies' website content is improperly used, if any of them supply incorrect information or publish allegedly infringing material, they could be subjected to liability. Moreover, any of our companies that incur this type of liability may not have insurance to cover the claims, or their insurance may not provide sufficient coverage. If our network companies incur substantial costs because of this type of liability, their expenses will increase and their profits, if any, will decrease. Moreover, these types of claims could result in costly litigation and be time-consuming to defend, divert our network companies' managements' attention and resources, cause delays in their release or upgrade of services or products, and could require them to enter into royalty or licensing agreements. Litigation regarding intellectual property rights is common in the Internet and software industries. We expect that Internet content, technologies and software products may be increasingly subject to third-party infringement claims as the number of competitors in our network companies' industry segments grow and the functionality of products in different industry segments overlaps. We cannot assure you that our network companies' products and services do not infringe on the intellectual property rights of third parties. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of infringement against any of our network companies, and their failure or inability to license the infringed or similar technology could adversely affect their, and thus our, business. In addition, our network companies generally hold various domain names relating to their brands. These domain names are frequently critical to the success of their businesses. However, for various reasons our companies may not be able to prevent third parties from acquiring domain names that are confusingly similar to their websites, which could adversely affect the use of their websites. The acquisition, registration and maintenance of domain names is generally regulated by governmental agencies or other entities. In the future, these authorities may modify the regulations governing use of domain names. As a result, our network companies may be unable to acquire, maintain or renew relevant domain names in all countries in which they conduct business. In 1999, Congress enacted anti-cybersquatting legislation to address the practice of domain name piracy. The legislation is designed to limit the practice of registering an Internet address of an established trademark with the intent to sell the Internet address to the affected company. The legislation also includes a prohibition on the registration of a domain name that is the name of another living person, or a name that is confusingly similar to that name. The scope of this legislation has not been precisely defined. We, or our network companies, may be subject to liability based on our or their use of domain names or trademarks that allegedly infringe the rights of third parties. OUR NETWORK COMPANIES MAY SUFFER WEBSITE OUTAGES AND OTHER TECHNICAL DIFFICULTIES, OR BE UNABLE TO UPGRADE THEIR SYSTEMS TO MEET INCREASED DEMAND, WHICH COULD REDUCE THEIR ATTRACTIVENESS TO USERS AND THIRD PARTY CONTENT PROVIDERS. Many of our network companies' businesses depend on the efficient and uninterrupted operation of their computer and communications systems. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events. Any system interruptions that cause our companies' websites to be unavailable to Web browsers may reduce the attractiveness of their websites to direct users and to third party content providers including advertisers. If either direct users or third party content providers are unwilling to use our network companies' websites, their business, financial condition and operating results could be adversely affected. In addition, our network companies' businesses may be disrupted if they are unable to upgrade their systems to meet increased demand. Capacity limits on some of our companies' technology, transaction processing systems and network hardware and software, as well as the rate of increase in use of their websites, may be difficult to predict, and they may not be able to expand and upgrade their systems to meet increased use. If they are unable to appropriately upgrade their systems and network hardware and software, their operations and processes may be disrupted. 17 OUR INTERNET COMMERCE AND CONTENT COMPANIES MAY NOT BE ABLE TO ATTRACT LOYAL USERS TO THEIR WEBSITES, WHICH WOULD IMPAIR THEIR ABILITY TO GENERATE REVENUE. Our success depends upon the ability of our Internet commerce and content companies to deliver compelling content, commercial opportunities or services to their respective target users. If our network companies are unable to develop content, commercial opportunities or services that attract loyal users, their revenues and profitability could be impaired. Internet users can freely navigate and instantly switch among a large number of websites. Many of these websites offer original content. Thus, our network companies may have difficulty distinguishing the content on their websites to attract a loyal base of users. RISKS RELATING TO THE INDUSTRIES IN WHICH OUR NETWORK COMPANIES OPERATE CONCERNS REGARDING THE SECURITY OF ONLINE TRANSACTIONS MAY HAVE AN ADVERSE IMPACT ON THE MARKET FOR OUR NETWORK COMPANIES' PRODUCTS AND SERVICES. Concerns regarding the security of transactions and confidential information on the Internet may have an adverse impact on our business. We believe that concern regarding the security of confidential information transmitted over the Internet prevents many potential customers from engaging in online transactions. As online usage becomes more widespread, our network companies' customers may become more concerned about security. Despite the measures some of our network companies have taken, the infrastructure of all Internet companies is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If a person circumvents the security measures imposed by any of our network companies, he or she could misappropriate their proprietary information or cause interruption in their operations. Security breaches that result in access to confidential information could damage our reputation as well as that of our network companies and expose any affected company to a risk of loss or liability. Some of our network companies may be required to make significant investments and efforts to protect against or remedy security breaches. OUR NETWORK COMPANIES ARE SUBJECT TO RISKS RELATED TO RAPID TECHNOLOGICAL CHANGE THAT COULD INCREASE COST AND UNCERTAINTY. Rapid technological changes make it difficult for Internet companies to remain current with their technical resources in order to maintain competitive product and service offerings. The markets in which our network companies operate are characterized by rapid technological change, frequent new product and service introductions and evolving industry standards. Significant technological changes could render existing website technology or other products and services rapidly obsolete. The Internet's growth and intense competition exacerbate these conditions. If we or our network companies do not successfully respond to continuing technological developments or do not respond in a cost-effective way, our business, financial condition and operating results will be adversely affected. To be successful, we and our network companies must adapt to the rapidly changing markets by continually improving the responsiveness, services and features of our network companies' various products and services and by developing new features to meet customer needs. OUR NETWORK COMPANIES COULD BE REQUIRED TO COLLECT ADDITIONAL TAXES ON INTERNET SALES, WHICH WOULD INCREASE THEIR COSTS OF DOING BUSINESS. Our network companies do not currently collect sales or other similar taxes for shipments of goods into states within the U.S. other than the states where each is located, or on shipments of goods into other countries. However, one or more additional states or countries into which our network companies' products are sold may seek to impose sales tax collection obligations on products sold over the Internet. If one or more of these states or countries successfully assert that our network companies should collect sales or other taxes on the sale of merchandise, their cost of doing business would increase and the products they sell would become more expensive and thus less attractive to customers. 18 ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE THE COSTS OF DOING BUSINESS FOR OUR NETWORK COMPANIES AND US. Government regulations and legal uncertainties may place financial burdens on our business and the businesses of our network companies. Because of the Internet's popularity and increasing use, new laws and regulations may be adopted. These laws and regulations may cover issues such as the collection and use of data from website visitors and related privacy issues, pricing, content, copyrights, trademarks, online gambling, distribution and quality of goods and services. Currently, the law governing Internet transactions remains largely unsettled, even in areas in which there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel, sexually explicit material and taxation apply to the Internet. The adoption or modification of laws or regulations relating to the Internet could adversely affect our business and the business of our network companies by increasing our and their costs and administrative burdens. In addition, privacy-related regulation of the Internet could interfere with the strategies of our network companies that collect and use personal information as part of their marketing efforts or businesses. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The United States Congress has recently enacted Internet laws regarding children's privacy, copyrights, taxation and the transmission of sexually explicit material. The European Union has enacted its own data protection and privacy directive, which required all 15 European Union Member States to implement laws relating to the processing and transmission of personal data. We and our network companies must comply with these new regulations in both Europe and the United States, as well as any other regulations adopted by other countries where we or they may do business. In addition, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. Compliance with any newly adopted laws may prove difficult for us and may negatively affect our business. RISKS RELATING TO THIS OFFERING FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE. If our stockholders sell a substantial number of our shares in the public market during a short period of time, our stock price could decline significantly. After this offering, a total of ____________________ shares of our common stock will be outstanding. All the shares sold in this offering will be freely tradable. As a result of contractual lock-up restrictions, the remaining _________________ shares of our common stock outstanding after this offering will become available for public sale as follows:
PERCENTAGE OF SHARES DATE OF AVAILABILITY FOR SALE NUMBER OF SHARES OUTSTANDING AFTER OFFERING - -------------------------------------- --------------------------------------- ------------------------------ Immediately after the date of this % prospectus............................ 90 days after the date of this prospectus, if our stock trades at predetermined levels.................. 120 days after the date of this prospectus, if our stock trades at predetermined levels.................. At various times after 180 days from the date of this offering, assuming the availability for sale of all the shares discussed above and subject, in some cases, to volume limitations..........
19 Shares acquired upon the exercise of options can generally be publicly sold immediately, subject to contractual restrictions that expire 180 days after this offering. As of January 31, 2000, 6,958,000 shares of our common stock were subject to vested stock options, 193,055,550 were subject to unvested stock options and 64,085,700 remained available for grant under our stock plans. If a large number of these shares are sold as they become tradable our stock price could decline. WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS, AND WE MAY NOT USE THESE PROCEEDS IN A WAY WITH WHICH OUR STOCKHOLDERS AGREE. The net proceeds of this offering are not allocated for specific uses other than to generally further our business of creating, building and operating businesses in markets involving interactive communications, and to acquire or increase our interests in these businesses, along with other general corporate purposes. Our management can spend most of the proceeds from this offering in ways with which our stockholders may not agree. OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS A RESULT OF MARKET FACTORS. The market price for our stock is likely to be highly volatile because the stock market in general, and the market for Internet-related stocks in particular, has been highly volatile. The trading prices of many technology and Internet-related company stocks have reached historical highs within the last year and have reflected valuations substantially above historical levels. During the same period, the stocks of these companies have been highly volatile and have recorded lows well below their historical highs. Our stock may not trade at the same levels as other Internet stocks, and Internet stocks in general may not sustain their current market prices. We anticipate the following factors, among others, will contribute to our stock price's volatility: o changes in the financial estimates or investment considerations of securities analysts regarding us; and o fluctuations in stock market prices and volumes. These factors are beyond our control and may decrease the market price of our stock regardless of our operating performance. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE BASED ON OUR CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS BUT ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES. This prospectus contains forward-looking statements. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", and "estimates", and variations of these words and similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this prospectus. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this prospectus. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. 20 USE OF PROCEEDS The net proceeds to us from the sale of the _________________ shares of common stock offered by us are estimated to be $ _____________ , or $ _____________ if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $________ per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering to create, build and operate, or to acquire and increase our interests in, businesses in markets involving interactive communications. In addition, we intend to use a portion of the net proceeds for general corporate purposes. Pending use of the net proceeds for the above purposes, we intend to invest the funds in direct or guaranteed obligations of the United States. DIVIDEND POLICY We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 21 CAPITALIZATION The following table sets forth the following information: o our actual capitalization as of January 31, 2000, o our pro forma capitalization after giving effect to the conversion of all 23,686,010 outstanding shares of our convertible preferred stock into 236,860,100 shares of common stock upon the closing of this offering, and the authorization of 10,000,000,000 shares of $0.001 par value common stock and 100,000,000 shares of undesignated $0.001 par value preferred stock, and o our pro forma as adjusted capitalization giving effect to the pro forma adjustments and the sale of _________ shares of common stock in this offering at an assumed initial public offering price of $_______ per share, less underwriting discounts and commissions and estimated offering expenses payable by us.
JANUARY 31, 2000 --------------------------------------- PRO FORMA, ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Capital lease obligations, less current portion........................... $ 30,439 $ 30,439 $ Convertible preferred stock, no par value; actual - 28,452 ----------- ----------- -------------- shares authorized, 23,686 shares issued and outstanding; pro forma and pro forma as adjusted - none authorized, issued or outstanding......... 892,782 -- -- SHAREHOLDER'S EQUITY: Undesignated preferred stock, actual - no par value, 9,548 shares authorized, none issued or outstanding; pro forma and pro forma as adjusted - $0.001 par value, 100,000 shares authorized, none issued or outstanding................................. -- -- Common stock; actual - no par value; 1,100,000 shares authorized, 551,476 shares issued and outstanding; pro forma - $0.001 par value 10,000,000 shares authorized, 788,336 shares issued and outstanding; pro forma as adjusted - shares issued and outstanding................................................. 387,689 788 Additional paid-in capital................................................ -- 1,279,683 Notes receivable from shareholders........................................ (38,304) (38,304) Deferred stock compensation............................................... (239,892) (239,892) Accumulated other comprehensive income.................................... 144,816 144,816 Retained earnings......................................................... 83,475 83,475 ----------- ----------- -------------- Total shareholders' equity................................................ 337,784 1,230,566 ----------- ----------- -------------- Total capitalization...................................................... $1,261,005 $1,261,005 $ =========== =========== ==============
This table excludes the following shares: o 200,013,550 shares of common stock subject to outstanding options with a weighted-average exercise price of $1.22 per share as of January 31, 2000; o 64,085,700 shares of common stock available for issuance under our stock option plans as of January 31, 2000; o 21,850,350 shares underlying options granted between February 1, 2000 and March 15, 2000 at a weighted-average exercise price of $1.94; o 2,220,081 shares of common stock issued between February 1, 2000 and March 31, 2000; and o 14,880,750 shares of common stock issuable upon the conversion of Series D preferred stock issued between February 1, 2000 and March 31, 2000. The table above includes 107,575,000 shares of common stock subject to a right of repurchase by us as of January 31, 2000. See "Management--Stock Plans", "Description of Capital Stock" and Notes 13 and 14 of Notes to Consolidated Financial Statements. 22 DILUTION The net tangible book value of our common stock on January 31, 2000 was $736,258,000, or approximately $0.93 per share. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of capital stock outstanding, both of which are calculated after assuming the conversion of all 23,686,010 shares of our convertible preferred stock outstanding as of January 31, 2000 into 236,860,100 shares of common stock upon completion of this offering. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value would have been $ , or approximately $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors. Assumed initial public offering price per share......................... $ Net tangible book value per share as of January 31, 2000............. $0.93 Increase per share attributable to new investors..................... As adjusted net tangible book value per share after the offering........ Dilution in net tangible book value per share to new investors.......... $
The following table sets forth, as of January 31, 2000, the differences between the number of shares of common stock purchased from us, the total price and average price per share paid by existing stockholders and by new investors in this offering, before deducting expenses payable by us, using the assumed initial public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------------ ------------------------------ PRICE PER NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE -------------- -------------- --------------- ------------- ------------- Existing stockholders... % % $ New investors........... -------------- -------------- --------------- ------------- Total................. 100% $ 100% $ ============== ============== =============== =============
If the underwriters' option to purchase additional shares is exercised in full, the number of shares held by new investors will be increased to , or approximately % of the total number of shares of our common stock outstanding after this offering. The tables above exclude the following shares: - 200,013,550 shares of common stock subject to outstanding options with a weighted-average exercise price of $1.22 per share as of January 31, 2000; - 64,085,700 shares of common stock available for issuance under our stock option plans as of January 31, 2000; - 21,850,350 shares underlying options granted between February 1, 2000 and March 15, 2000 at a weighted-average exercise price of $1.94; - 2,220,081 shares of common stock issued between February 1, 2000 and March 31, 2000; and - 14,880,750 shares of common stock issuable upon the conversion of Series D preferred stock issued between February 1, 2000 and March 31, 2000. The tables above include 107,575,000 shares of common stock subject to a right of repurchase by us as of January 31, 2000. See "Management--Stock Plans", "Description of Capital Stock" and Notes 13 and 14 of Notes to Financial Statements. 23 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. The consolidated statement of operations data set forth below for each of the fiscal years ended January 31, 1998, 1999 and 2000, and the consolidated balance sheet data at January 31, 1999 and 2000 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data set forth below for the period from March 14, 1996 (inception) through January 31, 1997 and the consolidated balance sheet data at January 31, 1997 and 1998 are derived from our unaudited consolidated financial statements not included in this prospectus. Our historical consolidated results of operations are not necessarily indicative of results to be expected for any future period.
FOR THE PERIOD FROM MARCH 14, 1996 (INCEPTION) THROUGH YEARS ENDED JANUARY 31, JANUARY 31, ---------------------------------------------------- 1997 1998 1999 2000 ---------------- ----------------- --------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................. $ -- $ 154 $ 805 $ 21,158 ---------------- ----------------- --------------- ---------------- Operating Expenses: Cost of revenues (1)................... 303 172 82 28,380 Sales and marketing (2)................ 386 2,002 1,940 70,129 Product development (3)................ 615 3,484 1,554 10,798 General and administrative (4)......... 971 5,623 4,732 36,738 Stock-based compensation............... 135 233 3,910 109,150 Amortization of goodwill and other intangibles.......................... -- 49 79 7,149 ---------------- ----------------- --------------- ---------------- Total operating expenses.................. 2,410 11,563 12,297 262,344 ---------------- ----------------- --------------- ---------------- Operating income (loss)................... (2,410) (11,409) (11,492) (241,186) Realized gains on sales of marketable securities............................. -- -- 2,250 201,959 Gain on stock issuance by a network company................................ -- -- -- 22,658 Other income, net......................... 3 216 5,307 92,003 Interest income (expense), net............ 68 (142) 71 5,691 ---------------- ----------------- --------------- ---------------- Income (loss) before income taxes, minority interest and equity in the income (loss) of affiliates............ (2,339) (11,335) (3,864) 81,125 Income tax benefit (expense).............. (3) 3,528 2,358 (86,245) Minority interest......................... 116 1,022 572 95,537 Equity in the income (loss) of affiliates, net of tax................. (144) (271) 51 28,067 ---------------- ----------------- --------------- ---------------- Net income (loss)......................... (2,370) (7,056) (883) 118,484 Deduction for beneficial conversion feature................................ -- -- -- (9,724) Repurchase of convertible preferred stock. -- -- -- (3,777) ---------------- ----------------- --------------- ---------------- Net income (loss) applicable to common shareholders........................... $ (2,370) $ (7,056) $ (883) $ 104,983 ================ ================= =============== ================ Net income (loss) per share applicable to common shareholders: Basic................................ $ (0.01) $ (0.02) $ -- $ 0.25 Diluted.............................. $ (0.01) $ (0.02) $ -- $ 0.15 Shares used to calculate net income (loss) per share applicable to common shareholders: Basic................................ 322,232 334,760 352,083 423,525 Diluted.............................. 322,232 334,760 352,083 695,312 Unaudited pro forma net income per share applicable to common shareholders: Basic................................ $ 0.18 Diluted.............................. $ 0.15 Shares used to calculate unaudited pro forma net income per share applicable to common shareholders: Basic................................ 571,215 Diluted.............................. 695,312
24
AT JANUARY 31, ---------------------------------------------------------------------- 1997 1998 1999 2000 ---------------- ----------------- --------------- ---------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................. $ 1,084 $ 3,826 $ 6,339 $ 601,474 Working capital........................... 329 (2,653) 1,106 562,024 Total assets.............................. 2,461 16,666 47,552 1,674,383 Convertible preferred stock............... 3,450 12,154 13,652 892,782 Total shareholders' equity................ $ 1,480 $ 9,257 $ 17,668 $ 337,784 - ------------------ (1) Excludes $0, $0 and $169 of stock based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively. (2) Excludes $0, $0 and $1,066 of stock based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively. (3) Excludes $0, $27 and $6,165 of stock based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively. (4) Excludes $233, $3,883 and $101,750 of stock based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively.
25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH INVOLVES RISKS AND UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES", "BELIEVES", "PLANS", "EXPECTS", "FUTURE", "INTENDS" AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING THE RISKS FACED BY IDEALAB! DESCRIBED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW idealab! is a new form of enterprise that creates, builds and operates businesses that use the power of real-time interactive communications, including the Internet, telephony, cable and wireless, to satisfy what we believe are unmet market needs. We generate ideas for new Internet-related businesses. Each idea is tested and modeled and, if the results of the testing suggest that the idea will form the basis for a successful business, we form and capitalize a new entity, recruit a management team, provide space in our open plan facilities, and provide on-going strategic guidance, creative design, web development, accounting, legal and administrative services to the newly formed network company. We operate each business as a separate company rather than as a division. In some cases, due to various circumstances, we may acquire equity interests in companies started by others. We intend to continue establishing additional facilities around the world where we can match our best ideas with talented people to create new companies. In each new location we intend to duplicate the organization of our functional teams to promote the consistent execution of the idealab! method. Most of our network companies that are in an early stage of development incurred substantial losses in fiscal 1999 and fiscal 2000 and are expected to continue to incur losses for the foreseeable future. None of our network companies has paid cash dividends during our period of ownership and we do not expect them to pay dividends in the foreseeable future. We have experienced operating losses in each of fiscal 1998, 1999 and 2000 and expect to report operating losses for the foreseeable future. We have, however, reported net income in fiscal year 2000 and have experienced significant earnings volatility from period to period due to one-time transactions and other events incidental to our ownership interests in our network companies. These transactions and events are described in more detail under "Realized gains on sales of marketable securities", "Gain on stock issuance by a network company" and "Other income, net" and include dispositions of, and changes to, our network company ownership interests and dispositions of our holdings of marketable securities. We do not know, however, whether we will report net income in any future periods. Certain items that gave rise to net income in fiscal 2000, including realized gains on sales of marketable securities, are unlikely to generate significant net income in future periods because we view ourselves as long-term holders of equity interests in our network companies, and because we intend to avoid registration under the Investment Company Act of 1940. For a more detailed discussion, see "Risk Factors--Risks particular to us--Fluctuations in our quarterly results are likely and could cause our stock price to decline" and "--We may have to take actions that are disruptive to our business strategy to avoid registration under the Investment Company Act of 1940". We evaluate the carrying value of our ownership interests in each of our network companies on a continual basis for possible impairment based on progress toward the achievement of business plan objectives and milestones, the value of our ownership interest in each network company relative to our carrying value, the financial condition and prospects of the network company, and other relevant factors. The business plan objectives and milestones that we will consider typically include, among others, those related to financial performance, such as achievement of planned financial results and completion of capital raising activities, and those that are not primarily financial in nature, such as the launching of a website, the hiring of key employees, the number of people who have registered to be part of the network company's web community and the number of visitors to the network company's website per month. The fair value of our ownership interests in privately held network companies will generally be determined by reference to the prices paid by third parties for ownership interests in the network company, to the extent 26 third party ownership interests exist, or on the achievement of business plan objectives and the milestones described above. To date, we have not experienced any significant impairment writedowns. Because a number of our network companies are not majority-owned subsidiaries, changes in the value of our interests in them and the income (loss) and revenue attributable to them could require us to register as an investment company under the Investment Company Act of 1940 unless we take action to avoid being required to register or receive an exemption from registration. For a more detailed discussion of some of the actions we may be required to take and that could result in gains or losses upon the disposition of certain ownership interests see "Risk Factors--Risks particular to us--We may have to take actions that are disruptive to our business strategy to avoid registration under the Investment Company Act of 1940". The presentation and content of our consolidated financial statements are largely a function of the presentation and content of the financial statements of our network companies. We are responsible for the presentation and content of our consolidated financial statements, and each of our network companies is responsible for the presentation and content of its financial statements. To the extent any of our network companies changes the presentation or content of its financial statements due to changes in accounting standards or otherwise, the presentation and content of our consolidated financial statements may also change. The reporting periods of our network companies generally coincide with the calendar year. We account for our ownership interests in our network companies utilizing the quarterly and annual financial information as reported by network companies pursuant to their fiscal year-ends. Accoringly, the financial results of network companies included in our consolidated financial statements generally reflect a reporting lag period of one-month. Organizations responsible for promulgating accounting standards are currently reviewing the classification of, and accounting for, various financial statement items by a number of e-commerce companies. The review by these organizations could result in new standards or additional authoritative guidance that could require changes in the presentation and content of the financial statements of our network companies and, therefore, of our company. We and our network companies will adjust our accounting and classification methods if required. MANAGEMENT FEES We receive management fees from the general partners of certain venture capital funds. We are a managing member of idealab! Capital Management I, L.L.C. ("ICM I"), the sole general partner of idealab! Capital Partners I-A, L.P. and idealab! Capital Partners I-B, L.P. (the "ICM I Funds"), which was formed in March 1998. In return for providing our services as a managing member of ICM I, we are entitled to receive an annual management fee of $400,000, subject to a significant decrease after March 2003. idealab! Capital Management II, L.L.C. ("ICM II") was formed in August 1999 and serves as the general partner of three venture capital funds: idealab! Capital Partners II-A, L.P., idealab! Capital Partners II-B, L.P. and idealab! Capital Principals Fund, L.P. (the "ICM II Funds"). idealab! Capital Management Services, L.L.C. was formed to provide various administrative and other services to ICM II and the ICM II Funds. We are a managing member of ICM II and idealab! Capital Management Services, L.L.C. In return for providing our service as a managing member of these entities, we are entitled to receive an annual management fee of $4.1 million, payable quarterly in advance, subject to a significant decrease after August 2004. EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR RESULTS OF OPERATIONS The various interests that we acquire in our network companies are accounted for under one of three methods: consolidation method, equity method and cost method. The applicable accounting method is determined on a case by case basis and is generally based upon our ownership percentage of voting securities in each network company, as well as our degree of influence over each network company. The accounting method used to account for our ownership interests in network companies could change in any quarter as a result of our acquisitions or dispositions of ownership interests or third party investments in our network companies. 27 CONSOLIDATION METHOD Network companies which we effectively control are accounted for under the consolidation method of accounting. Effective control is generally determined based on an ownership interest of greater than 50% of the network company's outstanding voting securities and the ability to control the network company's Board of Directors. Under this method, a network company's results of operations are reflected within our Consolidated Statements of Operations and its financial position is reflected in our Consolidated Balance Sheets. All significant intercompany accounts and transactions are eliminated. Participation of other network company shareholders in the net assets and earnings or losses of a consolidated network company is presented as "Minority interest" on our Consolidated Balance Sheets and our Consolidated Statements of Operations. Minority interest adjusts our consolidated results of operations to reflect only our share of the earnings or losses of consolidated network companies. At January 31, 1999 and 2000, our network companies accounted for under the consolidation method included the following:
VOTING OWNERSHIP JANUARY 31, -------------------------------------- COMPANY IN NETWORK SINCE 1999 2000 -------------------------- ------------------------- ------------------ ------------------ CarsDirect.com........... October 1998 77% 66% dotTV.................... October 1999 -- 50 EntryPoint............... July 1998 74 55 FreeMusic.com............ September 1999 -- 88 HomePage.com............. April 1999 -- 56 Jackpot.com.............. October 1999 -- 81 MyHome.com............... June 1999 -- 70 z.com.................... October 1999 -- 51
We have also created several companies that have not yet been launched or are in very early stages of development. We have omitted these companies from the table above because their financial results are not material to ours. In January 2000, we sold our ownership interest in Free-PC to eMachines, Inc. in exchange for 12,265,514 shares of eMachines, Inc. common and preferred stock and warrants to purchase 5,256,651 shares of eMachines, Inc. common stock. Prior to this sale we owned more than 50% of the outstanding voting securities of Free-PC, and therefore we consolidated the results of operations of Free-PC with our own results of operations for the period from the inception of Free-PC in January 1999 through the date of the sale. Subsequent to the date of the sale, our interest in eMachines has been accounted for under the cost method. Generally, our economic and voting ownership percentages in our network companies are approximately equal. However, at January 31, 2000, our economic ownership of CarsDirect.com was 44%, which included 100% of the outstanding shares of the CarsDirect.com Class B common stock. Each share of Class B common stock entitles us to 20 votes and is voted together as a single class with the shares of CarsDirect.com Class A common stock, each share of which entitles its holder to one vote. EQUITY METHOD Network companies whose results we do not consolidate, but over whom we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to a network company depends on an evaluation of several factors including, among others, representation on the network company's board of directors and an ownership interest which is generally 20% to 50% of the outstanding voting securities of the network company. Under the equity method of accounting, a network company's results of operations are not reflected within our Consolidated Statements of Operations; however, our share of the earnings or losses of the network company, which is generally limited to the carrying value of our ownership interest in the network company, is presented as "Equity in the income (loss) of affiliates, net of tax" on our Statements of Operations. For those network companies accounted for using the equity method in which our ownership interest includes preferred stock or other securities which have priority in liquidation to other junior securities, we determine our share of the network company's losses based on the change in 28 our claim on the network company's net assets, in accordance with "Emerging Issues Task Force Issue ("EITF") No. 99-10 "Percentage used to Determine the Amount of Equity Method Losses". At January 31, 1999 and 2000, our network companies accounted for under the equity method included:
VOTING OWNERSHIP JANUARY 31, ----------------------------- COMPANY IN NETWORK SINCE 1999 2000 ------------------------- ------------------------- -------------- -------------- eVoice................... December 1999 --% 31% FirstLook.com............ May 1998 96 44 GoTo.com................. September 1997 28 27 iExchange.com............ February 1999 -- 44 Intranets.com............ January 1997 15 33 OpenSales.com............ February 1998 70 46 PayMyBills.com........... June 1999 -- 50 PETsMART.com............. March 1999 -- 21 Sameday.com.............. May 1999 -- 46 Swap.com................. April 1997 33 44 Utility.com.............. November 1998 44 34
We have representation on the boards of directors of each of the above network companies. In addition to ownership of voting equity securities, we also periodically make advances to our network companies in the form of promissory notes or convertible notes. Advances outstanding to equity method network companies at January 31, 2000 were $12.1 million. The results of operations of FirstLook.com and OpenSales.com were consolidated with our results of operations for the three month period ended April 30, 1999. During the second quarter of fiscal 2000 our ownership interest in each of these companies was reduced below 50% due to third party investment. Effective May 1, 1999, we have accounted for our ownership interests in each of these network companies using the equity method. At January 31, 2000, we also had ownership interests in ICM I, ICM II, idealab! Capital Principals Fund, L.L.P. and eHatchery, LLC, each of which is accounted for using the equity method. As described above, ICM I and ICM II are general partners in several venture capital funds which generally invest in Internet-related businesses and have made investments in certain of our network companies and in our convertible preferred stock. Our equity in the income or loss of ICM I and ICM II reflects our share of the net profits or losses of ICM I and ICM II, which includes ICM I and ICM II's proportionate share of the unrealized appreciation or depreciation of certain investment holdings of the ICM I Funds and the ICM II Funds. We eliminate profits and losses attributable to the funds' investment holdings in network companies that we account for using the consolidation or equity method. Any profits and losses on the funds' investment holdings in these network companies are recognized when realized in the form of a sale of the underlying shares by the funds or by us. Additionally, we eliminate the portion of ICM I's equity in the income of the ICM I Funds which is attributable to the appreciation or depreciation on holdings by the ICM I Funds in our convertible preferred stock. For a more detailed discussion of our relationship with ICM I and ICM II see "Related Party Transactions--Venture Capital Affiliations". COST METHOD Our ownership interest in network companies not accounted for under the consolidation or equity methods of accounting are accounted for under the cost method of accounting. Under the cost method, we do not include our share of the network company's earnings or losses in our Consolidated Statements of Operations. Our ownership interest is included in our Consolidated Balance Sheets at our original acquisition cost, and charges are recognized in our Consolidated Statements of Operations if events or circumstances indicate that an other than temporary impairment of the carrying value has occurred. Our ownership interests in network companies accounted for under the cost method that have readily determinable fair values based on quoted market prices and that are not restricted as to sale for a period of one year beyond the balance sheet date are accounted for in accordance with Statement of 29 Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". At January 31, 1999 and 2000, our network companies accounted for under the cost method included:
VOTING OWNERSHIP JANUARY 31, --------------------------------------- COMPANY IN NETWORK SINCE 1999 2000 ---------------------------- ------------------- ------------------- ------------------- Centra Software............ June 1996 less than 1% 1ess than 1% Cooking.com................ April 1998 28 6 eMachines.................. January 2000 -- 10 eToys.com.................. June 1997 21 12 eve.com.................... October 1998 33 17 jobs.com................... July 1999 -- 2 NetZero.................... March 1999 -- 5 PeopleLink................. May 1996 16 11 Ticketmaster Online-CitySearch....... June 1996 1 1 Tickets.com................ January 1997 37 5 WeddingChannel.com......... March 1997 14 7
As of January 31, 2000, we owned voting stock in all companies accounted for under the cost method. In addition to our investments in voting equity securities, we also periodically make advances to our network companies in the form of promissory notes. Advances outstanding to cost method network companies at January 31, 2000 were $611,000. As of January 31, 2000, we also had an investment in Dynafund, L.P., which makes investments in Internet companies, accounted for using the cost method. FISCAL 2000 COMPARED TO FISCAL 1999 During fiscal 2000, our operating loss was primarily affected by the growth of our operations, primarily reflecting an increase in headcount, management fees earned for providing management services to ICM I and ICM II, and by the operating results of the following network companies which represented the substantial majority of our revenues and expenses for the year: o CarsDirect.com -- CarsDirect.com was formed in October 1998 and began offering vehicles directly to online consumers in December 1998 and officially launched its enhanced site in May 1999. More than half of the transactions completed by CarsDirect.com through December 31, 1999 occurred during the three months ended December 31, 1999. During fiscal 2000, CarsDirect.com acquired AutoData Marketing Systems, a company which is primarily focused on licensing decision-making support tools and content to the automotive and related industries in North America, and Potamkin Auto Center, Ltd., that is engaged in the sale and lease of new and used automobiles and light trucks at traditional storefront locations. o Free-PC -- Free-PC was formed in January 1999 and in June 1999 began providing consumers with free computers while offering online advertisers a means to reach those consumers. We sold our interest in Free-PC to eMachines in January, 2000. The results of Free-PC's operations are consolidated with our results of operations for the period from inception through the sale. o EntryPoint -- We created EntryPoint in July 1998. In May 1999 EntryPoint acquired PointCast Inc., an existing business that had launched its Internet news and information service in February 1996. EntryPoint primarily generates revenues from the sale of advertising on its free toolbar that delivers timely personalized news and information to the desktop. 30 o HomePage.com -- HomePage.com commenced operations in May 1999 and is a leading provider of outsourced homepage solutions to corporate clients including: AOL's ICQ, About.com, Qwest, Discovery.com, PETsMART.com and other e-businesses. Several other network companies accounted for using the consolidation method of accounting were created during the third and fourth quarter of fiscal 2000 and had limited operations during fiscal 2000. A significant portion of the costs of such network companies was attributable to sales and marketing and general and administrative costs incurred primarily to develop organizational infrastructure and fund early stage promotional and advertising costs. During fiscal 1999, our operating loss was primarily attributable to the growth of our operations and the creation and growth of EntryPoint. Other majority-owned network companies were in the early stages of their business cycle and therefore were incurring significant promotional and advertising costs and therefore were generating operating losses. REVENUES Revenues are primarily comprised of trade revenues generated by our consolidated network companies and management fees for serving as a managing member of ICM I and ICM II. Our consolidated network companies generally derive revenue from the sale of tangible products and the sale of advertising on the respective network companies' websites or services. CarsDirect.com recognizes as revenues the price its customer pays it for a vehicle following the delivery of the vehicle to the customer, provided that collection of the resulting receivable is probable. CarsDirect.com believes that presentation, as its revenues, of the price its customer pays for a vehicle appropriately reflects the risks, and rewards, of its business model. In addition, CarsDirect.com believes such presentation appropriately reflects the substance of the transaction and its legal rights and obligations. Upon receipt of a customer order, CarsDirect.com enters into a legally enforceable commitment to acquire a specific vehicle from a new car dealer to fulfill that customer order. Such commitment obligates CarsDirect.com to pay the dealer for the specific car regardless of whether the customer pays CarsDirect.com. The customer has the right to cancel an order anytime prior to accepting delivery of the specific car. CarsDirect.com sets the price of the vehicle to the customer, and the price is not based on a formula related to the price CarsDirect.com pays for the vehicle. Customers conduct their business directly with CarsDirect.com and have no influence over which supplier CarsDirect.com uses. CarsDirect.com's cost and payment terms are fixed, and are independent of the price and terms customers pay it for vehicles. Prior to delivery of the vehicle to the customer, CarsDirect.com bears the inventory risk for the vehicles it commits to acquire; CarDirect.com has the sole legal right to direct the disposition of the vehicles it commits to acquire; CarsDirect.com has an insurable interest as beneficial owner in the vehicles it commits to acquire; and CarsDirect.com is responsible for taxes that may be assessed on a vehicle it commits to acquire. CarsDirect.com bears the risk of return of the vehicle if a customer defaults on the sale or if the customer returns the vehicle in accordance with applicable law. CarsDirect.com does not have the right to return the vehicle to its supplier in those instances and CarsDirect.com establishes a reserve for estimated customer returns. Upon delivery of the vehicle to the customer, CarsDirect.com bears credit and other risks related to the customer's payment obligation. In transactions with its customers that do not include the foregoing characteristics, CarsDirect.com recognizes as net revenues the difference between the amount its customer pays and the cost of the vehicle. In fiscal 2000, our total revenues were $21.2 million, consisting of $18.7 million of trade revenue and $2.5 million of management fees from ICM I and ICM II. CarsDirect.com revenues were $15.2 million during fiscal 2000, consisting of gross revenues from vehicle transactions of $17.9 million, net revenues from vehicle transactions of $(4.3) million and other revenues of $1.6 million. During the period from the inception of CarsDirect.com to December 31, 1999, CarsDirect.com primarily recorded transactions with online vehicle customers on a net basis. Accordingly, CarsDirect.com's reported revenues do not reflect the total value of its vehicle transactions. Revenues generated in fiscal 2000 by EntryPoint ($2.1 million) and Free-PC ($1.2 million) were generally derived from the sale of advertising including the sale of banner advertisements, referral of users to other websites and a start page agreement. The increase in 31 management fees during fiscal 2000 was attributable to management fees earned from ICM II which was formed in August 1999. During fiscal 1999, our revenues of $805,000 were primarily comprised of management fees of $346,000 from ICM I, which was formed in March 1998, and $134,000 of advertising revenues generated by Guide.com, a consolidated network company which provided an online guide to restaurants and other Internet content. Guide.com was merged into Free-PC in March 1999. OPERATING EXPENSES COST OF REVENUES. Our cost of revenues consist primarily of the cost of revenues of our consolidated network companies. Our cost of revenues for fiscal 2000 was $28.4 million comprised primarily of the cost of revenue of CarsDirect.com ($17.5 million), EntryPoint ($5.2 million) and Free-PC ($3.3 million). Cost of revenues for CarsDirect.com consists primarily of obligations to franchise dealers for vehicles and other direct costs related to licensing arrangements. Cost of revenues for EntryPoint primarily includes costs associated with the operation of the EntryPoint network, which consists of payroll and related expenses and expenses for facilities and equipment, content costs and costs associated with the production of advertisements. Free-PC's cost of revenues consists primarily of Internet service provider costs to support Free-PC's users. SALES AND MARKETING. Sales and marketing expenses consist primarily of advertising and marketing costs, promotional costs and the compensation and benefits paid to personnel engaged in marketing, customer service and sales functions, in each case incurred by our consolidated network companies, and to a lesser extent, incurred by us. Our sales and marketing expenses were $70.1 million during fiscal 2000, the majority of which were sales and marketing expenses of CarsDirect.com ($33.4 million), Free-PC ($20.1 million), EntryPoint ($4.0 million) and HomePage.com ($4.1 million). These companies made significant investments in sales and marketing costs in order to build positive brand awareness, build user base, attract and retain new customers and to build the operating infrastructure to support their anticipated growth. Also included in sales and marketing expenses were customer acquisition costs incurred by Free-PC commencing in June 1999. Free-PC's business model included distributing free personal computers and free Internet access to its users. As a result, during fiscal year 2000, $18.1 million was recorded by Free-PC as sales and marketing expenses representing the cost of the computers distributed to users. We sold our interest in Free-PC in January 2000. Therefore such costs will not recur. Several of our other consolidated network companies incurred advertising costs primarily for online advertising to build brand awareness, the majority of which was incurred during the holiday season. As existing network companies continue to introduce new products and expand sales, we expect to incur significant promotional expenses, as well as expenses related to the hiring of additional sales and marketing personnel and increased advertising expenses. We anticipate that these costs will continue to increase substantially in future periods. Sales and marketing expenses were $1.9 million during fiscal 1999, primarily attributable to EntryPoint ($1.1 million) and the sales and marketing costs of several newer consolidated network companies in the start-up phase. PRODUCT DEVELOPMENT. Product development expenses are comprised primarily of payroll and related expenses incurred by our network companies to develop new or improved technologies designed to improve the performance and reliability of their websites and services. During fiscal 2000, product development expenses of $10.8 million were incurred primarily by EntryPoint ($3.9 million), CarsDirect.com ($2.1 million) and Free-PC ($2.1 million). EntryPoint's product development expenses were primarily related to the integration of PointCast's network information service with the various technologies in development at EntryPoint. Product development expenses incurred by CarsDirect.com relate primarily to contracted services for early stage website development, content and the automation of transaction and fulfillment processing. We anticipate that our network companies will continue to devote substantial resources to product development and that these expenses may substantially increase in future periods. 32 Fiscal 1999 product development expenses of $1.6 million were primarily attributable to the payroll and overhead costs associated with our employees who are engaged in product development activities not performed for any particular network company. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of payroll and related expenses for executive, finance, legal, business development and administrative personnel; facilities; professional services, including legal, accounting and consulting; travel and other general corporate expenses, in each case incurred by our network companies and, to a lesser extent, incurred by us. General and administrative costs were $36.7 million in fiscal 2000 and were primarily incurred by CarsDirect.com ($22.8 million), Free-PC ($3.5 million), EntryPoint ($2.4 million) and HomePage.com ($1.3 million). These network companies required significant general and administrative expenditures to develop their management and operational infrastructure. During fiscal 2000, we incurred $8.5 million in general and administrative expenses, reflecting the growth of our operations. We anticipate that our consolidated general and administrative expenses will continue to increase significantly as we expand our operations and create new network companies and as existing network companies continue to grow and expand their administrative staffs and infrastructures. General and administrative expenses were $4.7 million during fiscal 1999 and were primarily incurred by us, and included settlement and legal costs associated with certain disputes. STOCK-BASED COMPENSATION. In fiscal 2000, stock-based compensation expenses were $109.2 million, compared to $3.9 million in fiscal 1999 representing the amortization of deferred stock compensation. This increase was primarily due to significant grants of stock options and sales of restricted common stock during fiscal 2000 at prices less than the deemed fair value of our common stock for accounting purposes. Certain sales to employees of common stock that is subject to repurchase and grants of stock options to employees have been considered compensatory for financial accounting purposes. We recorded an aggregate of $259.5 million of deferred stock-based compensation in fiscal 2000 in connection with sales and grants to employees. This deferred compensation represents the difference between the deemed fair value of our common stock for accounting purposes and the sales price of the common stock that is subject to repurchase or the exercise price of the stock options, both determined on the date of the sale or the grant. Deferred stock compensation is being amortized over the applicable vesting periods of the common stock that is subject to repurchase or stock options, generally four years. Stock-based compensation expense was $49.1 million during fiscal 2000 in connection with these sales and grants. We anticipate significant stock-based compensation expenses in future periods as the deferred compensation is amortized over the vesting periods. Annual amortization of deferred stock compensation for options granted and common stock sold to employees that is subject to repurchase, as of January 31, 2000, is currently estimated to be $125.4 million in fiscal 2001, $51.8 million in fiscal 2002, $26.3 million in fiscal 2003 and $6.9 million in fiscal 2004. We also recorded deferred stock compensation of $63.9 million during fiscal 2000 in connection with stock options granted to non-employees. The determination of the fair value of such options was made using the Black-Scholes option pricing model and the deemed fair value of our common stock for accounting purposes. Deferred stock compensation for such option grants is being amortized over the applicable vesting periods and is adjusted each reporting period based on the deemed fair value of our common stock. Stock-based compensation expenses were $40.8 million during fiscal 2000 in connection with these stock option grants to non employees. We anticipate significant stock-based compensation charges related to stock option grants to non-employees in future periods as the deferred compensation is amortized over the vesting periods. We may also be subject to significant increases or decreases in the level of stock-based compensation based on changes in the fair value of our common stock. Stock-based compensation for fiscal 2000 also includes stock-based compensation expenses of network companies, comprised primarily of CarsDirect.com ($14.3 million). Certain of the stock option grants made by CarsDirect.com provide for accelerated vesting in the event of an initial public offering of CarsDirect.com or a change of control of CarsDirect.com. We are subject to employer payroll taxes on employee exercises of non-qualified stock options. Assuming the fair market value of our common stock were equal to an assumed initial public offering 33 price of $ ____________ at the time all outstanding vested non-qualified stock options were exercised, employer payroll taxes on unrealized gains related to these options would be approximately $ million. These taxes would be recorded as a charge to operations in the period such options are exercised based on actual gains realized by employees. Net proceeds that we would receive upon the exercise of such options would approximate $ ____________ million. We may receive tax deductions for gains realized by employees on the exercise of such stock options. Our quarterly results of operations and cash flows could vary significantly depending on the actual period in which these stock options are exercised. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles increased to $7.1 million in fiscal 2000 from $79,000 in fiscal 1999. Goodwill includes the excess of the purchase price of ownership interests in consolidated network companies over our proportionate share of the underlying net assets of network companies which are accounted for using the consolidation method and goodwill resulting from purchase business combinations. During fiscal 2000, we recorded $85.0 million of goodwill and $3.0 million of amortization expense related to purchase business combinations, primarily CarsDirect.com's acquisitions of AutoData Marketing Systems and Potamkin Auto Center, Ltd., and increased ownership interest in Potamkin Auto Center, Ltd and CD1Financial.com and EntryPoint's acquisition of PointCast. We also recorded $29.4 million of goodwill and $1.8 million of amortization expense related to the excess of the purchase price of ownership interests in consolidated network companies over our proportionate share of the underlying net assets. We currently expect goodwill amortization to be $35.3 million in fiscal 2001 without giving effect to additional purchase business combinations or acquisitions of ownership interests. OTHER INCOME REALIZED GAINS ON SALES OF MARKETABLE SECURITIES. Realized gains on sales of marketable securities increased to $202.0 million for fiscal 2000 from $2.3 million for fiscal 1999. During fiscal 2000, we sold 3,815,000 shares of eToys common stock realizing a gain of $193.0 million. We also sold our remaining ownership interest in Shopping.com as a result of a tender offer and realized a gain of $9.0 million. During fiscal 1999, we sold 251,000 common shares of Shopping.com and 118,000 common shares of Ticketmaster Online-CitySearch, Inc. resulting in realized gains of $2.3 million. Since our inception in March 1996, we have sold interests in six companies. It is not part of our business strategy to generate income by selling interests in our network companies. We do not expect to realize significant gains on sales of marketable securities in future periods. GAIN ON STOCK ISSUANCE BY A NETWORK COMPANY. Gain on stock issuance by a network company was $22.7 million for fiscal 2000 representing the net increase in our proportionate share of the dollar amount of GoTo.com's equity resulting from stock issued by GoTo.com in connection with its initial public offering. There was no gain on stock issuance by a network company during fiscal 1999. In fiscal 2000 GoTo.com raised approximately $94.8 million of net proceeds by issuing 6.9 million shares at $15.00 per share. As a result of the GoTo.com initial public offering, our percentage interest in the outstanding voting securities of GoTo.com was reduced from 25% to 20%. We recorded a provision for $9.2 million of deferred income taxes as a result of the gain. We believe there is a substantial likelihood that transactions, in which a network company we account for under the consolidation or equity method of accounting issues shares of its common stock to the public, will occur in the future, and we expect to record gains or losses related to such transactions. OTHER INCOME, NET. Other income, net increased to $92.0 million for fiscal 2000 compared to $5.3 million for fiscal 1999 primarily as a result of our sale of Free-PC to eMachines in fiscal 2000. Other income, net consists of income related to transactions and other events that affect our ownership interests in network companies but are incidental to our operations in general. Other income, net may include, among other items, gains or losses on the sales of all or a portion of our ownership interests and impairment charges related to our ownership interests in network companies. During fiscal 2000, we sold our interest in Free-PC in exchange for common and convertible preferred securities of eMachines and warrants to purchase eMachines common stock. The fair market value of the eMachines shares and warrants was used in determining a gain of $90.8 million. Other income, net of $5.3 million for fiscal 1999 resulted primarily from the deconsolidation of Intranets.com.and GoTo.com. 34 INTEREST INCOME. Interest income increased to $8.4 million for fiscal 2000 from $120,000 for fiscal 1999, reflecting an increase in average cash and cash equivalent balances. INTEREST EXPENSE. Interest expense increased to $2.7 million for fiscal 2000 from $49,000 for fiscal 1999, primarily due to an increase in average borrowings during fiscal 2000. Fiscal 2000 interest expense includes interest on debt and capital leases incurred by EntryPoint ($396,000) and dotTV ($414,000). INCOME TAXES Our income tax expense was $86.2 million in fiscal 2000. Our effective tax rate differs from the federal statuatory tax rate primarily as result of the provision for state taxes, the effects of nondeductible stock-based compensation charges, outside basis differences attributable to network companies which are not consolidated for tax purposes, and net operating losses attributable to consolidated network companies which have been written-off or which have not been benefited. Our income tax benefit was $2.4 million in fiscal 1999, reflecting an effective tax rate of 61%. Our effective tax rate in fiscal 1999 differs from the federal statuatory tax rate for the same reasons stated above and due to adjustments to valuation allowance necessary to reflect deferred tax items. MINORITY INTEREST Minority interest reflects minority shareholders' proportionate interest in the earnings or losses of the network companies that we consolidate. Minority interest increased to $95.5 million for fiscal 2000 from $572,000 for fiscal 1999, primarily reflecting minority shareholders interest in the losses of CarsDirect.com ($46.6 million), Free-PC ($27.6 million), EntryPoint ($11.6 million), HomePage.com ($6.8 million) and MyHome.com ($1.8 million), all of which experienced losses during fiscal 2000 due to the continued investment by these companies in the development of their products and services. EQUITY IN THE INCOME (LOSS) OF AFFILIATES, NET OF TAX Equity in the income (loss) of affiliates, net of tax results from our significant minority ownership interest in network companies and investment funds that are accounted for under the equity method. Under the equity method of accounting, our proportionate share of each affiliate's income or loss and the amortization of the excess of our investment over our proportionate share of each network company's net assets is included in equity in the income (loss) of affiliates. Equity in the income of affiliates, net of tax for fiscal 2000 of $28.1 million was primarily comprised of our proportionate share of the net income of ICM I ($41.2 million), offset by our proportional share of the losses of PETsMART.com ($4.2 million), GoTo.com ($2.4 million), PayMyBills.com ($1.6 million) and Sameday.com ($1.4 million) and includes the amortization of goodwill related to our interests in these companies. As the general partner of two venture capital funds, ICM I's net income includes equity in the income of the ICM I Funds, the results of which include unrealized appreciation or depreciation in the fair value of certain equity securities held by the ICM I Funds. ICM I's net income is primarily the result of the unrealized appreciation of the equity securities held by the ICP funds, several of which completed initial public offerings during fiscal 2000. We expect that network companies accounted for under the equity method will continue to invest in the development of their products and services and to recognize operating losses, which will result in future charges recorded by us to reflect our proportionate share of such losses. Additionally, we recorded $347.7 million during fiscal 2000 of goodwill representing the excess of the purchase price of our ownership interests over our proportionate share of the net assets of equity method network companies. We currently expect goodwill amortization to be approximately $71.6 million in fiscal 2001 without giving effect to additional acquisitions of significant minority interests in network companies which are accounted for using the equity method which may occur subsequent to January 31, 2000. Equity in income (loss) of affiliates, net of tax of $51,000 for fiscal 1999 was primarily comprised of our proportionate share in the net income of ICM I ($314,000), offset by the losses of GoTo.com ($59,000), cooking.com ($62,000) and eve.com ($44,000). 35 FISCAL 1999 COMPARED TO FISCAL 1998 Results of operations during fiscal 1999 were primarily attributable to our core operations, management fees earned from providing management services to ICM I which began operations in March 1998, the results of EntryPoint, which began operations in August of 1998, and several other consolidated network companies which were in the start-up phase. Our results of operations were also impacted by the deconsolidation of Intranets.com which for the period prior to deconsolidation was a licensor of software to end-users and resellers which was accounted for using the consolidation method during periods prior to fiscal 1999. During the first quarter of fiscal 1999, Intranets.com issued convertible preferred stock and, as a result, our ownership interest in the outstanding voting securities of Intranets.com was reduced from 59% to 19%. On February 1, 1998, we began accounting for our ownership interest in Intranets.com using the cost method of accounting. Our consolidated operating results for fiscal 1998 include net revenue of $70,000 and operating losses of $5.3 million from Intranets.com. Revenues Consolidated revenues increased to $805,000 for fiscal 1999 from $154,000 for fiscal 1998. The increase was primarily attributable to management fees of $346,000 earned from ICM I, which commenced operations in March 1998, and $134,000 of revenue from Guide.com, a consolidated network company which generated advertising revenue from its online guide to restaurants and other various Internet content. Fiscal 1998 revenues were primarily generated by Intranets.com. Operating Expenses COST OF REVENUES. Cost of revenues decreased to $82,000 for fiscal 1999 from $172,000 for fiscal 1998 as a result of the deconsolidation of Intranets.com. SALES AND MARKETING. Fiscal 1999 sales and marketing expenses of $1.9 million primarily related to the early stage promotional and advertising costs of $1.1 million associated with the launch of EntryPoint. Fiscal 1998 expenses of $2.0 million included $832,000 of sales and marketing expenses of Intranets.com with no comparable amount in fiscal 1999 due to the deconsolidation discussed above. Sales and marketing expenses of our internal staff, which relate primarily to public relations and promotional efforts, decreased to $282,000 for fiscal 1999 from $393,000 for fiscal 1998 due to a reduction in advertising expenditures. PRODUCT DEVELOPMENT. Fiscal 1999 product development expenses of $1.6 million were primarily attributable to the payroll and overhead costs associated with our employees who are engaged in product development activities not performed for any particular network company. Product development expenses for fiscal 1998 of $3.5 million were primarily comprised of $2.1 million in costs associated with the development of Intranets.com packaged intranet software products. No comparable costs for Intranets.com are reflected in our fiscal 1999 results of operations due to the deconsolidation of Intranets.com. GENERAL AND ADMINISTRATIVE. Fiscal 1999 of $4.7 million general and administrative expenses were primarily comprised of $2.1 million in payroll and other overhead costs incurred at the corporate level and includes $915,000 related to the settlement of certain employment related lawsuits. Fiscal 1998 expenses of $5.6 million primarily consisted of general and administrative expenses of Intranets.com of $2.4 million and $1.9 million of expenses incurred by us. STOCK-BASED COMPENSATION. Stock-based compensation was $3.9 million during fiscal 1999 compared to $233,000 for 1998 representing the amortization of deferred stock compensation for stock options granted to employees and non-employees. The increase was primarily attributable to additional grants of stock options and an increase in the deemed fair value of our common stock for accounting purposes. AMORTIZATION OF GOODWILL AND INTANGIBLES. Amortization expense increased to $79,000 for fiscal 1999 from $49,000 for fiscal 1998. The increase related to amortization resulting from our acquisitions of domain names during fiscal 1999. 36 OTHER INCOME REALIZED GAINS ON SALES OF MARKETABLE SECURITIES. During fiscal 1999, we sold 251,000 common shares of Shopping.com and 118,000 common shares of Ticketmaster Online-CitySearch, Inc. resulting in realized gains of $2.3 million. Since our inception in March 1996, we have sold interests in six companies. It is not part of our business strategy to generate income by selling interests in our network companies. We do not expect to realize significant gains on marketable securities in future periods. OTHER INCOME, NET. During fiscal 1999, we recorded a gain in connection with the deconsolidation of Intranets.com in the amount of $5.3 million representing our share of the losses of Intranets.com recorded during the period that Intranets.com was accounted for using the consolidation method, in excess of our ownership interest in Intranets.com. During fiscal 1999, our percentage ownership of the outstanding voting securities of GoTo.com, a consolidated network company, was diluted from 80% to 45% as a result of the issuance of 8,312,000 shares of convertible preferred stock by GoTo.com. As a result, we began accounting for our ownership interest in GoTo.com using the equity method of accounting rather than the consolidation method. We recorded a gain of $243,000 representing our share of the losses of GoTo.com recorded during the period that GoTo.com was accounted for using the consolidation method, in excess of our ownership interest in GoTo.com. During fiscal 1998, our percentage ownership of the outstanding voting securities of eToys, a consolidated network company, was diluted from 61% to 37% as a result of the issuance of 6,318,000 shares of preferred stock by eToys. As a result, we began accounting for our ownership interest eToys using the equity method of accounting rather than the consolidation method. We recorded a gain of $124,000 which represents our share of the losses in excess of our ownership interest in eToys, recorded during the period that eToys was consolidated. INTEREST INCOME. Interest income increased to $120,000 for fiscal 1999 from $36,000 for fiscal 1998 primarily reflecting increased income associated with higher average corporate cash and cash equivalent balances in fiscal 1999 as compared to the prior year. INTEREST EXPENSE. Interest expense decreased to $49,000 for fiscal 1999 from $178,000 for fiscal 1998. Fiscal 1998 interest expense included $151,000 of interest on convertible notes payable and demand notes payable of Intranets.com. No comparable costs for Intranets.com are reflected in our fiscal 1999 results of operations due to the deconsolidation of Intranets.com. INCOME TAXES Our income tax benefit was $2.4 million in fiscal 1999 as compared to $3.5 million in fiscal 1998. We established a valuation allowance for deferred tax assets attributable to net operating losses generated in fiscal 1998 due primarily to our limited operating history. During fiscal 1999, we reduced the valuation allowance to reflect net deferred tax items and operating results. MINORITY INTEREST Minority interest decreased to $572,000 for fiscal 1999 from $1.0 million for fiscal 1998. Minority interest for fiscal 1999 was primarily comprised of minority shareholders interest in the losses of EntryPoint and Guide.com. Minority interest for fiscal 1998 was comprised of minority shareholders interest in the losses of several network companies including Intranets.com, EntertainNet and Tickets.com. EQUITY IN THE INCOME (LOSS) OF AFFILIATES, NET OF TAX Equity in the income (loss) of affiliates, net of tax for fiscal 1999 of $51,000 was primarily comprised of equity in the income of ICM I of $314,000, which had equity in the income of the ICP Funds due to unrealized appreciation on certain of the ICP Funds investment holdings, offset by equity in the losses of GoTo.com ($59,000), Cooking.com ($62,000), eve.com ($44,000) and other network companies in the early stages of development. Equity in losses of affiliates, net of tax of $271,000 for fiscal 1998 was 37 primarily comprised of equity in the losses of Shopping.com and the WeddingChannel.com, both of which were in the early stages of development. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations with a combination of proceeds from equity issuances, proceeds from the sales of ownership interests in network companies and borrowings under credit facilities. As of January 31, 2000, we had cash and cash equivalents of approximately $601.5 million consisting almost entirely of funds raised in private placements of securities. This amount represented an increase of $595.2 million from $6.3 million as of January 31, 1999. As of January 31, 2000, we have committed capital of $21.0 million to our affiliated venture capital funds. In addition, our obligations under our office leases in New York and Boston are collateralized by letters of credit totaling $4.4 million issued by Wells Fargo Bank, N.A. We have entered into an agreement to purchase for $4.1 million, the property currently under lease in Pasadena, which houses our corporate facility. There were no material capital asset purchase commitments as of January 31, 2000. Cash used in investing activities primarily reflects the acquisition of ownership interests in and advances to new or existing network companies, offset in fiscal 2000 by the proceeds of $202.7 million from the sales of a portion of our marketable securities. During fiscal 2000, we used $204.4 million to acquire interests in new or existing network companies, excluding cash used by our consolidated network companies to acquire businesses. We expect this amount to increase significantly in fiscal 2001. From February 1, 2000 through March 31, 2000, we have paid a total of approximately $51.7 and have committed to pay a total of an additional $150 million to acquire interests in new and existing network companies. The amount and timing of our expenditures to acquire interests in network companies may vary significantly due to factors, such as each company's development of its business plans and objectives and its progress toward achievement of its performance goals, as well as additional funding available to it from third-party sources. We believe the proceeds from this offering and our available cash will enable us to acquire interests in and establish a significant number of new network companies during the 12-month period following this offering. However, during this period, we may seek additional capital in the private or public equity or debt markets to enable us to further expand our acquisitions of ownership interests and to create, build and operate network companies. On a longer-term basis, we expect to periodically access the capital markets to obtain the funds we need to support our operations and the continued growth and operations of our network companies. If additional funds are raised through the issuance of equity securities, or if our equity securities are issued to acquire new network companies, our existing shareholders may experience significant dilution. For the foreseeable future, we expect to incur increasing losses, we do not expect to receive cash distributions from our network companies and we do not plan to sell our network company interests. Moreover, because of the provisions of the Investment Company Act of 1940, we may not be able to sell securities of our network companies to raise capital were we to so choose. Our long-term capital requirements will depend in large part on the number of network companies that we create and in which we acquire interests, the amounts we pay for interests and the timing of these payments. Management's plans and the related capital requirements will depend on various factors, such as developments in our markets and the availability of acquisition and entrepreneurial opportunities. We may not be able to obtain financing when we need it on acceptable terms, or at all. If we require, but are unable to obtain, additional financing in the future on acceptable terms, our ability to execute our business strategy, respond to changing business or economic conditions, withstand adverse operating results and compete effectively will be impaired. SELF TENDER OFFER In August 1999, we offered to repurchase shares of our stock from all of our shareholders, at a price per share of $1.50. We repurchased 10.4 million shares of our common stock, including convertible preferred stock on an as-converted basis, from our shareholders, for an aggregate of approximately $15.6 million. The repurchase gave these shareholders the opportunity to obtain liquidity for their shares, which would otherwise not have been available unless and until our common stock became publicly traded and 38 their shares were no longer subject to any applicable lock-up agreements restricting their sale. None of our officers or directors tendered shares into the offer. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging. In July 1999, Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of Financial Accounting Standards Board Statement No. 133" (SFAS No. 137), was issued. SFAS No. 137 deferred the effective date of SFAS No. 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Because we do not currently hold any derivative instruments and do not engage in hedging activities, the impact of adoption of SFAS No. 133 is not currently expected to have a material impact on our financial position, results of operations or cash flows. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides additional guidance related to applying generally accepted accounting principles in financial statements. In March 2000, the SEC issued Staff Accounting Bulleting 101A, which requires implementation of SAB 101 no later than June 30, 2000. The adoption of SAB 101 is not expected to have a significant impact on our financial position, results of operations or cash flow. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not hold any derivative instruments and do not engage in hedging activities. Also, we do not hold any variable interest rate debt or lines of credit and thus have minimal exposure to interest rate fluctuations. We are exposed to equity price risks on the equity securities of our publicly traded network companies. Our public holdings at January 31, 2000 include equity positions in companies in the Internet industry sector, including eToys, GoTo.com, Ticketmaster Online-CitySearch, NetZero and Tickets.com. All of these companies have experienced significant historical volatility in their stock prices. We typically do not attempt to reduce or eliminate our market exposure on these securities. A 20% adverse change in equity prices, based on a sensitivity analysis of our public holdings as of January 31, 2000, would result in an approximate $288 million decrease in the fair value of our interests in publicly traded network companies. A significant portion of the value of the potential decrease in equity securities, or $244 million, consisted of our holdings in GoTo.com and eToys. The carrying values of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of the short maturity of these instruments. We have historically had very low exposure to changes in foreign currency exchange rates, and as such, have not used derivative financial instruments to manage foreign currency fluctuation risk. As we expand globally, the risk of foreign currency exchange rate fluctuation may dramatically increase. Therefore, in the future, we may consider utilizing derivative instruments to mitigate such risks. 39 BUSINESS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO THIRD-PARTY ESTIMATES OF THE GROWTH OF THE INTERNET, INTERNET ADVERTISING AND ONLINE COMMERCE MARKETS AND SPENDING. PROSPECTIVE INVESTORS SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS PROSPECTUS. IDEALAB! OVERVIEW idealab! is a new form of enterprise that creates, builds and operates companies that use the power of real-time interactive communications to satisfy often previously unidentified market needs. Our unique organizational structure is designed to enable each company in our network to achieve focus and strength in its market as an independent entity, but also allows it to benefit from our network of companies and the strengths of the centralized services we provide. We believe that this structure creates a balance of centralization and decentralization that enables each network company to execute its business plan with greater speed and focus. Most of our companies are based on ideas we generate internally, although from time to time we may consider ideas brought to us by other entrepreneurs or acquire interests in existing Internet companies that are strategically important to our network. We provide our network companies with strategic expertise, operational assistance from our various in-house departments and third-party service providers, access to our business relationships both inside and outside the idealab! network and financial support. By providing these services, we enable the entrepreneurs managing the idealab! businesses to concentrate primarily on the rapid execution of their business plans. In addition, our operating methods are designed to promote commercial relationships and the exchange of information and best practices among our network companies. We plan to continue using our collective knowledge and resources to create new business ideas and to actively develop the business models, strategies, operations and management teams of all our network companies. We initially house most of our companies in one of our open-plan facilities, currently located in Pasadena, Silicon Valley, New York, Boston and London. These facilities are designed to foster a collaborative process among the companies housed in each location. The idealab! network currently includes seven public companies and 28 private companies, including interactive communications infrastructure and services companies such as GoTo.com, HomePage.com and PayMyBills.com, and Internet commerce and content companies such as CarsDirect.com, eToys and FirstLook.com. INDUSTRY OVERVIEW GROWTH AND COMMERCIALIZATION OF THE INTERNET AND INTERACTIVE COMMUNICATIONS The Internet has emerged as a global medium, enabling millions of people worldwide to share information, communicate and conduct business electronically. International Data Corporation estimates that the number of Internet users will grow from approximately 256 million worldwide at the end of 2000 to approximately 502 million by the end of 2003. As a result of this dramatic increase in the number of Internet users, the dollar volume of commerce conducted over the Internet is expected to continue growing, as is the need for infrastructure and services to effectively serve this growing population of Internet users. Forrester Research estimates that the total value of goods and services purchased on the Internet by businesses and consumers will increase from approximately $406 billion in 2000 to approximately $2.7 trillion in 2004, and International Data Corporation estimates that Internet business infrastructure spending will increase from approximately $190 billion in 1999 to $917 billion in 2003. At the same time, the proliferation of other real- time interactive communications technologies such as Internet telephony, cable and wireless devices has created new opportunities to satisfy unmet market needs. OPPORTUNITIES FOR EMERGING INTERNET AND INTERACTIVE COMMUNICATIONS COMPANIES The Internet's growth into a mass medium has created tremendous opportunities for new companies that can take advantage of the efficiencies it provides in order to meet market demands. Online and traditional businesses can use real-time interactive communications to obtain accurate, 40 real-time information, create more efficient markets and add a dynamic and collaborative dimension to their relationships with customers, suppliers and trading partners. Individuals are also increasingly using the Internet to streamline various household functions and to reduce their costs for consumer goods and other expenditures. We believe that there are significant opportunities for companies that can empower businesses and consumers to realize the efficiencies made possible by the Internet. CHALLENGES FACING EMERGING INTERNET AND INTERACTIVE COMMUNICATIONS COMPANIES Emerging companies face many challenges in their pursuit of success. For the reasons described below, we believe that many of these challenges are greatly intensified for Internet-related businesses: DEVELOPING A SUCCESSFUL BUSINESS MODEL. Companies must develop business models that capitalize on the Internet's unique and rapidly evolving capabilities to provide solutions demanded by consumers and businesses. This requires the relevant Internet experience and strategic vision to evaluate the viability of a given business model, the flexibility to adapt business models to address emerging opportunities and the ability to quickly establish relationships with potential suppliers, customers and strategic partners. BUILDING CORPORATE INFRASTRUCTURE. To support rapid growth and achieve a competitive advantage, emerging Internet companies must quickly develop systems and procedures in a wide range of functional areas, including sales and marketing, operations, information technology, accounting, legal, business development, executive recruiting and human resources. This typically requires key personnel to assume responsibility for many of these functional areas simultaneously until sufficient expertise can be brought in-house or suitable service providers identified. FINDING GREAT PEOPLE. Internet companies require management and technical personnel with expertise in each functional area, a deep understanding of the opportunities presented by the Internet, the ability to manage rapid growth and the flexibility to adapt to the changing Internet marketplace. Competition for people with the skills required in the Internet marketplace is intense, and the best employees demand compensation commensurate with their skills. ADAPTING TO RAPIDLY CHANGING MARKETS. Intense competition, low barriers to entry and the continual creation of new technologies and business models characterized the evolution of the Internet. Individual companies must navigate these risks on their own, often committing to business models or technology platforms without adequate information, or without the strategic relationships that would enable them to rapidly adapt their businesses to changing market conditions. THE IDEALAB! METHOD idealab! is a new form of enterprise designed to focus exclusively on market growth in the Internet industry and other interactive communications markets. We operate each business in our network as a separate company rather than as a division of idealab!. As a result, each business retains the adaptability and entrepreneurialism of a small company while benefiting from the economies of scale, information sharing and other synergies associated with inclusion in our network. In addition, each network company has its own pool of equity to provide a compelling incentive to recruit and retain top talent. We believe that we provide our companies with all of the necessary resources to meet the challenges faced by emerging Internet companies in their formation, development and growth. Our experience in creating, building and operating businesses enables us to quickly and efficiently bring innovative new companies to market and to build our existing companies into market leaders. The idealab! method consists of: - idea generation, selection and analysis; - company building and operational support; and - strategic guidance and direction. 41 IDEA GENERATION We create most of our ideas for companies internally through frequent brainstorming sessions. For several reasons, including the following, we believe that we are in a unique position to create superior ideas internally: - the creativity of our idea team; - our people have accumulated operating experience throughout their careers by helping to develop ideas into mature companies; - the vibrant environment in our open-plan facilities, which encourages our people to discuss ideas and share lessons learned; - our idea selection process, which both filters and improves ideas by refining the business model of each network company; and - our continuous process of prototyping and developing new business concepts. Examples of companies created through our idea generation process include CarsDirect.com, FirstLook.com and GoTo.com. We also gather ideas externally from individuals and teams that come to us with passion and industry experience in a particular field. We believe we are in a strong position to attract high-quality external ideas because of the entrepreneur-friendly environment we have created. Furthermore, we believe that the mentoring and services that we provide are very attractive to people and teams with passion for creating, building and operating world-class companies. Our services and infrastructure provide an environment that can substantially improve a company's time-to-market and potential for success. In considering Internet business ideas brought to us by others and evaluating investments in and acquisitions of Internet companies, we apply the same strict criteria we would apply to our own ideas, and we consider whether we could add value to the development of the business by redefining its business model to create previously unexploited growth opportunities. Examples of companies we have started in collaboration with others include PayMyBills.com and eLease.com. IDEA SELECTION AND ANALYSIS We apply a number of criteria in choosing whether to create or acquire a business. We apply these criteria during our idea selection process, where each idea is analyzed and weighed against other ideas for prioritization in advance of company building. Our analysis includes an evaluation of the following criteria: - Does the business address a large, previously unidentified market need, or does it have a significantly better solution for an already identified market need? - Does the business satisfy the need in a unique way, with a business model that we believe is superior to the other solutions? - Is the business model scalable, with increasing operating efficiencies as the business grows? - Are there sufficient barriers to entry, and can the business grow fast enough to benefit from a first-mover advantage? - Will the business's customers have an incentive to refer new customers to the business's offerings? - Does the business have a sustainable competitive advantage, such as network effects that make the business' offering increasingly valuable as more customers use it? - Can the business provide an attractive value proposition to potential strategic partners? If an idea or business ranks highly with respect to these criteria, we evaluate whether the business would contribute to the overall strength of the idealab! network. One example of a single idealab! company that has created a variety of synergies in our network is OpenSales. OpenSales has provided software and 42 related consulting and customization services to a variety of network companies, including FirstLook.com, MyHome.com and Sameday.com. In some cases, we use our internal prototyping staff to test ideas in real-world scenarios. We use the feedback from this testing to evaluate and refine the ideas. For example, when EntryPoint was preparing to launch its electronic payment service, our prototyping group was able to create and test the effectiveness of various branding strategies through the simultaneous launch of different banner ad campaigns. Based on the click-through rates achieved by each campaign, we decided to launch EntryPoint's service with a focus on user convenience rather than security, discounts or merchant acceptance. COMPANY BUILDING AND OPERATIONAL SUPPORT At all stages of a network company's growth, our internal management team continually communicates the best practices we have learned by providing management mentoring, market intelligence and operational support. While our company building and operational support process is broadly supported by our entire organization, it is primarily driven by the Presidents of the five idealab! facilities, who are also members of our Executive Committee. The Presidents are closely supported in this effort by our Managing Directors, our Entrepreneurs-in-Residence and our operational Vice Presidents in the finance, legal, development, marketing, design, public relations, recruiting and operations areas. The Managing Directors serve as management mentors and occasionally as interim senior executives of our network companies. The Entrepreneurs-in-Residence serve as founding executives and management leaders of network companies in early stages of development. The Vice Presidents each run service organizations that assist our network companies in the areas of their respective disciplines. Our organizational goal is to achieve an optimal balance between centralization and decentralization. We believe that synergy among our companies is achieved at many levels. As the corporate network hub, we are able to observe and encourage relationships between our companies. We enable our entrepreneurs to concentrate primarily on the rapid execution of their business plans by providing them with operational support and access to idealab!'s collective resources. We believe that the support we provide to our companies reduces the rate at which they consume capital, slowing the need for additional dilutive investments. We supply operational support to our companies in several areas, including: SHARED IDEALAB! FACILITIES. Our facilities in Pasadena, Silicon Valley, New York, Boston and London are designed to foster an open, collaborative process among all the companies in each facility. The proximity of the companies encourages the formal and informal sharing of knowledge and best practices and allows us to provide our network services conveniently and effectively. SHARING OF RESOURCES AND BEST PRACTICES AMONG NETWORK COMPANIES. Our network provides an environment for informal and formal collaboration among our companies. Early stage companies in particular benefit from the collective experience of the professionals at idealab! and the other companies who have addressed issues similar to those facing them. The CEOs and other department heads of our network companies gather regularly to share knowledge and discuss issues of common interest. Personnel from various functional areas, including marketing, sales, human resources, and technology, also meet regularly to exchange ideas and leverage their combined experience. All our network companies have access to our intranet, which contains valuable information about web development and management information systems, accounting and human resources procedures and network-wide marketing and business development arrangements. Our companies also collaborate formally with one another. Several of our network companies advertise on and distribute their products and services through other network company websites. SALES, MARKETING AND BRAND MANAGEMENT. We believe that the marketing expertise and assistance we offer our network companies enables them to establish their brands and draw traffic to their websites more quickly than many stand-alone competitors. We provide guidance to our companies' sales, marketing, product positioning and advertising efforts through regular meetings attended by the appropriate staff from each of our network companies. We employ a marketing staff to coordinate marketing resources for all our companies. We also provide our network companies with a centralized 43 clearinghouse for marketing-related information, access to market research, advertising services, public relations functions, including promotion of our companies as members of the idealab! network, and logo design and related branding services. EXECUTIVE RECRUITING. As an idea advances beyond the prototype stage, we recruit a team to launch and develop the project. Our internal recruiting department and referral system identify and place talent in each new network company. Because highly skilled people are a significant factor in each company's success, we believe that our recruiting function provides us a strategic advantage in launching new companies and enhancing the success of our existing network companies. After developing a new business idea and capitalizing a new idealab! company, we typically reserve a significant portion of the company's equity for distribution to the entrepreneurs and other employees. We employ experienced recruiters who coordinate the hiring needs of our companies and act as a central resource for employment. In calendar 1999, our recruiters placed more than 200 employees in our network. We also draw qualified candidates from a range of other sources, including the extensive contacts of our management team and candidates referred from our other network companies. In addition, we sometimes hire executives at idealab! who, after being mentored in the idealab! method and culture, then take positions in our network companies. For example, Jeffrey Brewer served as a member of idealab!'s entrepreneur-in-residence program and subsequently became the Chief Executive Officer of GoTo.com. We believe that this flow of experienced executives allows us to operate our network companies with consistent vision and culture and promotes communication across our network. WEB DEVELOPMENT AND INFORMATION TECHNOLOGY. We maintain a large, highly experienced technology team of professionals dedicated to helping our companies with all facets of their initial and continuing web development process and information systems strategies. Many of our network companies share software tools initially developed by the idealab! technology team, freely exchanging improvements with other network companies. We also offer our companies access to common information technology systems that enable them to cost-effectively manage their electronic mail hosting, website hosting and other functions. Due in part to the web-related resources we offer to newly formed idealab! companies, we believe that our companies are often able to substantially reduce the costs associated with launching their websites and substantially shorten their times to launch. LEGAL, FINANCE, ACCOUNTING AND HUMAN RESOURCES. We employ more than 25 seasoned legal, finance and accounting professionals who provide guidance to our companies in areas such as intellectual property protection, contracts, domain name negotiations, licensing, deal structuring and negotiating, corporate finance, accounting, treasury functions and financial reporting. We also provide significant administrative and human resources assistance to our companies, including advice and support on tax preparation, payroll, benefits, hiring, human resource compliance, orientation and termination. We host seminars on topics such as recent accounting pronouncements affecting Internet companies, trademark and domain name protection, employment law issues and stock option administration for all the relevant employees of our companies. In addition, as a result of the economies of scale provided by the idealab! network, we enable our network companies to obtain favorable rates on insurance, health benefits and other services. We also enable our companies to gain access to resources and discounted rates with professional service providers including accounting firms, law firms and public relations agencies. FINANCIAL SUPPORT. We help our companies raise capital from third parties by introducing them to appropriate investors. Through our affiliated venture capital funds and the relationships our management team maintains with a broad range of current and potential investors, we are able to match providers of capital with appropriate business opportunities in our network. We also provide direct financial support in the form of early-stage investments and participation in later financing rounds. STRATEGIC GUIDANCE AND DIRECTION At inception and throughout their lifecycles, we provide our network companies with the collective knowledge and expertise of our senior management and the combined power of our network. We believe that the strategic guidance and direction we provide to our companies enhances their ability to formulate viable business models, manage rapid growth and adapt quickly to the changing marketplace. 44 We supply strategic guidance and direction to companies in the following areas: BUSINESS MODEL ANALYSIS AND STRATEGY. We provide strategic direction and market intelligence to our network companies concerning topics such as market positioning and competitive trends. We do this at several levels within our organization. Our senior executives participate in frequent formal and informal communications with executives at the companies. When a large competitor of Intranets.com launched a product that competed directly with Intranets.com's previous product, we organized a series of meetings with senior executives of Intranets.com to reposition the company. Our involvement was instrumental in the relaunch of Intranets.com's website within 60 days. Similarly, Tim Gray, the former chief executive officer of WeddingChannel.com and now a Managing Director of idealab!, recently stepped in as acting chief executive officer of MyHome.com in order to adapt the company's business model in light of customer feedback and competitive conditions. We also provide experienced consulting through our entrepreneurs-in-residence and other experienced idealab! professionals. For example, prior to joining CarsDirect.com as chief operating officer, Christine Bucklin, one of our former entrepreneurs-in-residence, worked closely with the company to improve sales efficiencies, evaluate and negotiate alliances and identify management priorities. We also employ experienced financial analysts who are available to help particular companies model their businesses and identify the key drivers of their financial results. In addition, our internal prototyping staff is available to help later-stage businesses evaluate alternative business solutions by testing new ideas in real-world scenarios. Network companies can use the data generated by these tests to evaluate the viability of innovative approaches. ACTIVE INVOLVEMENT WITH NETWORK COMPANIES' OPERATIONS. Our senior executives serve on the boards of a substantial majority of the companies in our network, and in many cases more than one of our executives serves on a company's board. Through board representation and ongoing consultation with our network companies, we take an active role in the ongoing oversight and strategic management of our network companies. For example, Bob Kavner, one of our Vice Chairmen, served as chairman of the board of GoTo.com until January 2000. Mr. Kavner continues to serve on GoTo.com's board of directors, and participates in regular one-on-one meetings with GoTo.com's chief executive officer to discuss strategic and operational issues facing the company. COLLABORATION AMONG NETWORK COMPANIES. We strongly encourage cooperation and collaboration among our network companies and the sharing of information through both formal and informal communications. Because we operate companies that address different market needs, our companies frequently look to other companies within the network to provide necessary goods or services. For example, Jackpot.com operates an online slot machine where users can win advertiser-related prizes in exchange for viewing advertising. Jackpot.com negotiated favorable rates with several idealab! companies for placement on the slot machine in connection with its launch, lending credibility to the launch and providing the network companies with a cost-effective tool for customer acquisition. BUSINESS DEVELOPMENT. idealab!'s environment and culture promote the sharing of knowledge, relationships and business opportunities among our network companies. Several of our executives were involved in Internet business development roles before joining idealab!. We assist our companies in evaluating, structuring and negotiating joint ventures, strategic alliances, joint marketing agreements, acquisitions and other transactions. For example, Lawrence Gross, one of our Vice Chairmen, assisted EntryPoint in its acquisition of PointCast by negotiating the transaction with EntryPoint's chief executive officer and managing the integration of the companies. Business development staff from all of our companies share information via network-wide electronic mail lists and through periodic meetings hosted by idealab!. STRATEGY Our objective is to enhance the value of the idealab! network by continually creating new business ideas and actively developing the strategies, operations and management teams of our network companies throughout their lifecycles. Key elements of our strategy to achieve this objective include: CONTINUE TO CREATE AND ACQUIRE NEW IDEALAB! COMPANIES. We intend to continue creating and building new Internet businesses and evaluating potential strategic acquisitions to increase the overall 45 value of the idealab! network. Before any new business idea becomes an idealab! network company, or before we pursue any strategic acquisition, our internal strategy teams must first demonstrate that the idea or business has the potential to become a market leader. Any strategic acquisition or new business idea must add value to the idealab! network. In addition to creating and acquiring Internet businesses, we intend to pursue opportunities in other growing markets that involve real-time interactive communications. ENHANCE EXISTING NETWORK VALUE. As the idealab! network grows and matures, we intend to expand the breadth and effectiveness of our existing network efficiencies and increase cooperation and intra-network commercial arrangements. As the Internet matures and competition among Internet companies increases, we anticipate that our shared resources and intra-network collaboration will offer our network companies even more compelling advantages over companies operating independently. MAINTAIN LONG-TERM INTERESTS IN OUR NETWORK COMPANIES. We believe that we can enhance stockholder value by engaging in business through an integrated network of companies in which we own significant stakes over the long term. We intend to generate revenues and income primarily from the operation of our network companies. On a limited number of occasions, we have sold interests in our companies when we no longer had the ability to significantly influence their operations, and we may be faced with circumstances in the future that make it appropriate to sell part or all of our interest in a particular company. CAPITALIZE ON THE STRENGTH OF OUR MANAGEMENT TEAM. idealab! has an integrated management team with diverse experience and skills as its core strength. Our management team includes people who have created, built, operated and advised companies across a broad range of sizes and industries. We recruit and motivate our team by providing a challenging, intense, collaborative, rewarding and open atmosphere. The continual creation of new companies and evolution of existing companies in our network provides ongoing challenge. The pace of change provides intensity. At every level, we promote sharing of knowledge across our network. Our shared incentives, physical architecture and philosophy foster an open atmosphere that we believe is attractive to talented people. Our management team is composed of six senior executive officers, nine corporate and regional officers, 18 managing directors, 14 operational vice presidents and six entrepreneurs-in-residence, as described under "Management". We intend to continue to expand our management team by attracting top talent, and to capitalize on its diverse strengths to create, build and operate companies that enhance the value of our network. ESTABLISH IDEALAB! FACILITIES IN STRATEGIC LOCATIONS. We intend to replicate our business method in multiple locations. We will consider opening idealab! facilities in areas where we can attract people with creative, technical and business talent to create and work with our network companies. In new idealab! facilities, we intend to create an open floor plan environment similar to that of idealab! Pasadena in order to promote a similar collaborative environment. We also intend to staff these idealab! facilities with key people from idealab! Pasadena to ensure the propagation of our method and culture. We have opened facilities in Silicon Valley, New York, Boston and London to take advantage of opportunities in these locations. EXPAND BRAND AWARENESS. We believe that our method, including our collective knowledge and resources, significantly differentiates our companies from their competitors. To ensure longer-term success, we must continue to invest in branding the idealab! method, our network companies and the value of our overall network. We believe that the idealab! brand currently enjoys significant public recognition. We intend to enhance public awareness of our brand by increasing our existing marketing efforts and continuing to develop successful network companies. 46 THE IDEALAB! NETWORK Our network companies' products and services generally fall into two categories: Internet commerce and content and interactive communications infrastructure and services. The following table summarizes, as of January 31, 2000, our network of companies and our ownership of each. Our ownership percentages are calculated based on the outstanding common stock of each network company, treating preferred stock and other convertible securities on an as-converted basis, but excluding the effect of options and warrants.
OUR IDEALAB! OWNERSHIP COMPANY CATEGORY AND NAME DESCRIPTION OF BUSINESS PERCENTAGE SINCE ----------------------------------------------------------------------------------------------------------------- INTERNET COMMERCE AND CONTENT CarsDirect.com.......................... Resource for researching, financing 44% 1998 WWW.CARSDIRECT.COM and purchasing new cars and related services. Cooking.com............................. Resource and retailer for cooking 6% 1998 WWW.COOKING.COM enthusiasts. eToys................................... Superstore for children's toys, books, 12% 1997 WWW.ETOYS.COM music and games. eve.com................................. Retailer for prestige beauty and 17% 1998 WWW.EVE.COM personal care products. FirstLook.com........................... Resource that provides video and 44% 1998 WWW.FIRSTLOOK.COM music distributors with highly targeted audiences. FreeMusic.com........................... Resource for music enthusiasts and 88% 1999 WWW.FREEMUSIC.COM recording artists incorporating music and related content distribution and advertising. iExchange.com........................... A marketplace for trading 44% 1999 WWW.IEXCHANGE.COM financial opinions. Jackpot.com............................. Online slot machine exchanging 81% 1999 WWW.JACKPOT.COM prizes for viewed advertising. jobs.com................................ Resource for recruitment and 2% 1999 WWW.JOBS.COM employment opportunities. MyHome.com.............................. Superstore for furniture and fixtures. 70% 1999 WWW.MYHOME.COM PETsMART.com............................ Superstore for pet supplies. 21% 1999 WWW.PETSMART.COM Swap.com................................ An online merchandise trading site for 44% 1997 WWW.SWAP.COM people under eighteen.
47 Ticketmaster Online-CitySearch.......... Guide to local content and services 1% 1996 WWW.TICKETMASTER.COM including live event ticketing, local WWW.CITYSEARCH.COM auctions and online personals. Tickets.com............................. Retailer of event and travel tickets. 5% 1997 WWW.TICKETS.COM Utility.com............................. Service that provides small business 34% 1998 WWW.UTILITY.COM and residential customers with the opportunity to reduce their electricity bills. WeddingChannel.com...................... Resource for wedding content and 7% 1997 WWW.WEDDINGCHANNEL.COM bridal registry services. z.com ................................ Online original programming entertainment 51% 1999 company. WWW.Z.COM INTERACTIVE COMMUNICATIONS INFRASTRUCTURE AND SERVICES Centra Software......................... Provides live collaboration less than 1996 WWW.CENTRA.COM solutions for businesses. 1% dotTV ................................ Provides Internet domain name 50% 1999 WWW.DOT.TV registration services; exclusive registry and registrar for second level domain names with the ".tv" top-level domain. eMachines............................... Personal computer manufacturer 10% 2000 WWW.EMACHINES.COM offering embedded Internet advertising. EntryPoint.............................. Offers free tool-bar that delivers timely 55% 1998 WWW.ENTRYPOINT.COM personalized information to the desktop. eVoice ................................ Provider of Internet-enhanced 31% 1999 WWW.EVOICE.COM telecommunications solutions for businesses and consumers. GoTo.com................................ Operates an online marketplace that 27% 1997 WWW.GOTO.COM introduces consumers and businesses to advertisers. HomePage.com............................ Delivers home page solutions to 56% 1999 WWW.HOMEPAGE.COM ebusinesses and consumers. Intranets.com........................... Offers free, secure intranet sites to 33% 1997 WWW.INTRANETS.COM small businesses for private communication, scheduling, collaboration and purchasing. NetZero Offers free full-service Internet 5% 1999 WWW.NETZERO.COM access while delivering high-value, always-on advertising content. 48
OpenSales............................... Provides open-source e-commerce 46% 1998 WWW.OPENSALES.COM software with proprietary enhancements. PayMyBills.com.......................... Enables consumers to manage 50% 1999 WWW.PAYMYBILLS.COM and pay bills, collect auction payments and send money via email. PeopleLink.............................. Provides outsourced community 11% 1996 WWW.PEOPLELINK.COM services, such as instant messaging, chat, message boards and mailing lists, for large websites. Sameday.com............................. Connects consumers with same-day 46% 1999 WWW.SAMEDAY.COM delivery purchasing options and provides fulfillment and delivery services for Internet retailers and their customers.
Because we own super-voting stock in CarsDirect.com, we controlled 66% of the voting power of CarsDirect.com as of January 31, 2000 although our percentage ownership was 44% as of that date. We also own minority interests in several other Internet companies, including Dynafund, eCall, eHatchery, The Learning Network, NetShepherd and Smart Games, and we have formed several additional network companies that are in very early stages of development. Set forth below are brief descriptions of selected idealab! interactive communications infrastructure and services and Internet commerce and content companies that exemplify the idealab! method of creating, building and operating network companies. INTERNET COMMERCE AND CONTENT COMPANIES CARSDIRECT.COM. CarsDirect.com provides many of the products and services traditionally involved in the acquisition of a new car, including research, financing, vehicle purchase and, in certain markets, delivery. CarsDirect.com is an online resource that addresses the automobile purchasing process from start to finish, so that a car buyer can research and configure all desired automobile options, receive a competitive up-front price, submit a purchase request online and in certain markets, have the selected vehicle delivered to any location. After a time-consuming and frustrating attempt to buy a new automobile at a dealership, Bill Gross generated the idea for CarsDirect.com. Mr. Gross' fundamental concept for CarsDirect.com was to be a trusted advisor and intermediary for the automobile purchaser and to ensure that every step of the process was conducted in a manner that involved the lowest level of anxiety and the greatest degree of enjoyment. We launched CarsDirect.com in October 1998. CarsDirect.com began offering vehicles directly to online consumers in December 1998 and has been ranked the number one online car buying site by Gomez Advisors for three consecutive quarters. Lawrence Gross, one of our Vice Chairmen, served as CarsDirect.com's acting chief operating officer for several months until that position was filled by Christine Bucklin. We have also been closely involved in the raising of more than $336 million in capital for CarsDirect.com and helped to recruit the company's new chief executive officer. Howard Morgan, one of our Vice Chairmen and the chairman of the board of directors of CarsDirect.com, played a significant role in its acquisition of an all-makes showroom based in the New York City area. ETOYS. eToys is a leading online superstore focused exclusively on products for children and babies, including toys, video games, software, videos, music, clothes and baby-related products. By combining an expertise in products for children and babies, a commitment to excellent customer service and the benefits of Internet retailing, eToys is able to deliver a unique shopping experience to consumers. eToys offers an extensive selection of competitively-priced children's products, with over 100,000 items representing more than 750 brands. eToys' website features detailed product information, helpful shopping services and innovative merchandising delivered through easy-to-use web pages. In addition, 49 eToys offers customers the convenience and flexibility of shopping 24 hours a day, seven days a week, with reliable product delivery and a focus on customer service. eToys was created and launched at the idealab! Pasadena facility in 1997. Several of eToys' early employees were employees of idealab! who were focusing on creating, building and operating the company in its early stages. eToys was one of the first retail concepts that we launched and has served as a model for how other online retailers can successfully compete against larger, more recognized bricks-and-mortar retailers. In May 1999, eToys completed an initial public offering. Our percentage interest in eToys decreased over the course of 1999 and our representation on the eToys board ended late in 1998. However, these particular aspects of our relationship with eToys are not typical of our application of the idealab! method. FIRSTLOOK.COM. FirstLook.com provides consumers with a convenient destination for discovering and previewing new music and other entertainment products, while providing advertisers--e-tailers, record labels and home video distributors--with an efficient, performance-based way to reach consumers. FirstLook.com has created a new business model involving its Preview Marketing Network. In addition to being able to browse and sample music and movies at the FirstLook.com website, consumers can do the same at FirstLook.com affiliate sites where FirstLook's proprietary "charts" are featured. FirstLook.com has a patent application pending for its unique business processes. The FirstLook.com website went "live" in September 1999, with available previews of over 800 new songs from CDs released by both major and independent record labels. In March 2000, FirstLook.com began previewing home video products, including movies and television programming in the DVD and VHS formats. In its first six months of activity, FirstLook.com enrolled more than 200,000 members and enrolled more than 40 individual advertisers. FirstLook.com was conceived in March 1999 when Bill Gross and Rand Bleimeister, FirstLook.com's founder and chief executive officer, decided to create a digital marketplace around music and other entertainment products. The idealab! organization has assisted FirstLook.com with recruiting services. We also assisted FirstLook.com with its site design through our in-house design management team. Through our marketing department, we have facilitated considerable cost savings for FirstLook.com in purchasing goods and services. In addition, FirstLook.com achieves cost savings by purchasing online advertising through idealab!-negotiated reduced "block" pricing. INTERACTIVE COMMUNICATIONS INFRASTRUCTURE AND SERVICES COMPANIES GOTO.COM. GoTo.com operates an online marketplace that introduces consumers and businesses who search the Internet for advertisers who provide those products, services and information. Advertisers participating in its marketplace include retail merchants, wholesale and service businesses and manufacturers. GoTo.com facilitates these introductions through its search service, which enables advertisers to bid in an ongoing auction for priority placement in its search results. Advertisers pay GoTo.com for each click-through, so advertisers bid only on keywords relevant to the products, services or information that they offer. Because each advertiser chooses the bid amount and advertisement placement that is optimal for its business, GoTo.com believes its marketplace provides advertisers with a cost-effective way to target consumers. Consumers access the GoTo.com search service both at its website and through its affiliates, a network of websites that have integrated the GoTo.com search service into their sites or that direct consumer traffic to GoTo.com's site. With the acquisitions of a comparison shopping engine and a comprehensive auction service, we believe GoTo.com now operates a comprehensive and relevant way for consumers to find products and services and advertisers to economically reach targeted self qualified leads. Frustrated with the slow, cumbersome, inaccurate search returns generated by other search engines, we devised a way to allow users to obtain relevant search returns quickly and easily by allowing content providers and advertisers to bid for keywords in their relevant categories. This model also created a dynamic, continuous bidding system by which businesses could monitor and increase their bids for keywords to maintain prominent positions. We created and launched GoTo.com during 1998 and placed Jeffrey Brewer, a former idealab! executive, as GoTo.com's chief executive officer. In addition, we developed the original GoTo.com search technology, launched an innovative branding campaign and 50 aggressively promoted GoTo.com on the websites of our other network companies. In June 1999, GoTo.com completed an initial public offering. HOMEPAGE.COM. HomePage.com is a leading application service provider, or ASP, of personalized web page solutions for ebusinesses. HomePage.com's flexible and proprietary "Powered by HomePage.com" system uses a combination of FreeBSD and Linux operating systems to create a high-performance, easy-to-use and reliable personal publishing experience. HomePage's corporate clients include About.com, ArtistDirect.com, Discovery Channel Online, AOL.com's ICQ and PETsMART.com. We initially created HomePage.com in April 1999 to satisfy an unmet market demand stemming from the growing numbers of Internet neophytes who wanted a personal presence on the web but did not know how to build a homepage. A few months into HomePage's operation, working closely with idealab!'s senior management, HomePage refocused its business strategy to emphasize the provision of outsourced home page services to client businesses seeking to build customer retention, traffic and loyalty. HomePage.com now works closely with corporate clients to customize a home page offering for their users. HomePage.com continues to provide direct person home page client services, but such activity largely serves as a test bed for further development of HomePage's utilities and services. Bill Gross acted as the initial chief executive officer of HomePage.com, and all of the early technology development and marketing efforts were conducted by idealab! prior to the recruitment of professionals into HomePage.com. PAYMYBILLS.COM. PayMyBills.com is a leading online personal bill management service that enables consumers to automate bill paying processes by providing them with secure viewing and payment of all of their bills. PayMyBills.com is a complete solution, offering consumers a simple, fast and paperless experience. We were first introduced to PayMyBills.com through one of our Vice Chairmen, Howard Morgan. We helped PayMyBills.com formulate their business plan and provided initial capital to form the company. We relocated the company's two initial employees from Philadelphia to our Pasadena facility, where we provided them with the administrative, legal, financial and accounting support we provide all companies within our facilities. We also provided extensive strategic guidance and worked to build the company's operating model and help management drive down customer acquisition costs using our marketing techniques. We launched PayMyBills.com in July 1999. Due to our combined efforts, within three months the company was actively serving customers nationwide and had paid more than $3.7 million in active bill balances. VENTURE CAPITAL AFFILIATIONS In addition to our Internet-related network companies, we are affiliated with five venture funds that invest primarily in Internet companies, including some companies in the idealab! network. The venture funds are: idealab! Capital Partners I-A, L.P., idealab! Capital Partners I-B, L.P., idealab! Principals Fund, L.P., idealab! Capital Partners II-A, L.P., and idealab! Capital Partners II-B, L.P. We have a 50% voting interest in idealab! Capital Management I, L.L.C. and idealab! Capital Management II, L.L.C., the companies that manage these venture funds. An independent professional venture capital fund manager holds the other 50% voting interest in the two management companies. The five affiliated venture funds, which are housed in our Pasadena headquarters, provide a potential funding source for companies in the idealab! network. In addition, even if we elect not to acquire an interest in a company, we can often establish a relationship with it by referring it to our affiliated venture funds as a candidate for investment. COMPETITION FACING US We face competition from service and capital providers including publicly-traded Internet companies, venture capital companies, large corporations and Internet holding companies. Many of these competitors have greater financial resources and brand name recognition than we do. Although we believe our method and our brand differentiate us from our competitors, competition from these companies may limit our opportunity to hire quality entrepreneurs and other personnel to launch and 51 support companies, or to acquire interests in attractive companies brought to our attention by others. If we are unable to hire quality entrepreneurs and other personnel to launch and work at our companies, or to acquire interests in attractive companies, we may not be able to meet our objective of expanding the idealab! network. COMPETITION FACING OUR NETWORK COMPANIES Competition for Internet products, services and personnel is intense. As the markets for Internet infrastructure, services, commerce and content grow, we expect that competition will intensify. Barriers to entry are generally low, and competitors may be able to offer products and services at a relatively low cost. In addition, our network companies compete with other Internet companies, including our other network companies, to attract and retain talented employees with relevant experience, and some of them also compete to attract and retain a critical mass of buyers and sellers. Several companies offer solutions that compete with those offered by one or more or our network companies, and we expect that additional companies will offer competing solutions on a stand-alone or combined basis in the future. Although we intend to launch and acquire new businesses that are complementary to the companies in our network, on occasion competition among our companies has arisen as a result of business combinations or other developments. For a more detailed discussion of the competition facing our companies, see "Risk Factors--Risks facing our network companies--Various idealab! companies may fail if competitors provide superior Internet-related offerings". INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES We have developed various software applications for use within our network. Our trademarks, patent applications and Internet domain names are an extremely important part of our business. Likewise, the trademarks, patentable inventions and domain names used by our network companies are important parts of their businesses. From time to time, we also register or acquire domain names that we believe may be useful to us or our network companies in the future. Risks regarding our intellectual property rights and those of our network companies are described in more detail under "Risk Factors--Risks facing our network companies--Claims of intellectual property infringement by third parties against our network companies could cause them to incur expenses or become involved in litigation". GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES There are currently few laws or regulations directed specifically at Internet businesses. However, because of the Internet's popularity and increasing use, new laws and regulations may be adopted. These laws and regulations may cover issues such as the collection and use of data from website visitors and related privacy issues, pricing, content, copyrights, trademarks, online gambling, distribution, taxation and the quality of goods and services. The enactment of any additional laws or regulations may impede the growth of the Internet and Internet businesses, which could decrease the revenue of our network companies and place additional financial burdens on them. Laws and regulations directly applicable to electronic commerce and Internet communications are becoming more prevalent. For example, Congress recently enacted laws regarding online copyright infringement and the protection of information collected online from children. Although these laws may not have a direct adverse effect on our business or those of our network companies, they add to the legal and regulatory burden faced by Internet commerce and content companies. Other specific areas of legislative activity are: o TAXES. Congress enacted a three-year moratorium, ending on October 21, 2001, on the application of "discriminatory" or "special" taxes by the states on Internet access or on products and services delivered over the Internet. Congress further declared that there will be no federal taxes on electronic commence until the end of the moratorium. However, this moratorium does not prevent states from taxing activities or goods and services that the states would otherwise have the power to tax. Furthermore, the moratorium does not apply to certain state taxes that were in place before the moratorium was enacted. 52 o ONLINE PRIVACY. Both Congress and the Federal Trade Commission are considering regulating the extent to which companies should be able to use and disclose information they obtain online from consumers. If any regulations are enacted, Internet companies may find some marketing activities restricted. Also, the European Union has directed its member nations to enact much more stringent privacy protection laws than are generally found in the United States and has threatened to prohibit the export of some personal data to United States companies if similar measures are not adopted. Such a prohibition could limit the growth of foreign markets for United States Internet companies. The Department of Commerce is negotiating with the Federal Trade Commission to provide exemptions from the European Union regulations, but the outcome of these negotiations is uncertain. o REGULATION OF COMMUNICATIONS FACILITIES. To some extent, the rapid growth of the Internet in the United States has been due to the relative lack of government intervention in the marketplace for Internet access, which may not continue in the future. For example, several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the Federal Communications Commission in the same manner as other telecommunications services. Additionally, local telephone carriers have petitioned the Federal Communications Commission to regulate Internet service providers in a manner similar to long distance telephone carriers and to impose access fees on these providers. Some Internet service providers are seeking to have broadband Internet access over cable systems regulated in much the same manner as telephone services, which could slow the deployment of broadband Internet access services. Because of these proceedings or others, new laws or regulations could be enacted which could burden Internet infrastructure and services companies and slow the rapid expansion of the Internet and its availability to new users. o INVESTMENT COMPANY ACT OF 1940. The Investment Company Act of 1940 provides a set of regulations for companies engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. A company may become subject to regulation under the Investment Company Act if it owns "investment securities" with a value exceeding 40% of the value of its total assets. Although we are in the business of creating, building and operating new Internet companies, we could become subject to regulation under the Investment Company Act if enough of our interests in network companies are considered investment securities under the Investment Company Act. Regulations applicable to investment companies are inconsistent with our fundamental business strategy of promoting collaboration among our network companies. In order to avoid these regulations, we may have to take actions that we would not otherwise choose to take. For a more detailed discussion of some of the actions we might have to take, see "Risk Factors--Risks Particular to Us--We may have to take actions that are disruptive to our business strategy to avoid registration under the Investment Company Act of 1940". o CYBERSQUATTING. In 1999, Congress enacted anti-cybersquatting legislation to address the practice of domain name piracy. The legislation is designed to limit the practice of registering an Internet address of an established trademark with the hopes of selling the Internet address to the affected company. The legislation also includes a prohibition on the registration of a domain name that is the name of another living person, or a name that is confusingly similar to that name. The scope of this legislation has not been precisely defined. We, or our network companies, may be subject to liability based on our or their use of domain names or trademarks that allegedly infringe the rights of third parties. o OTHER REGULATIONS. The growth of the Internet and electronic commerce may lead to the enactment of more stringent consumer protection laws. The Federal Trade Commission may use its existing jurisdiction to police electronic commerce activities, and it is possible that the Federal Trade Commission will seek authority from Congress to regulate certain online activities. The Federal Trade Commission has already issued for public comment proposed regulations governing the collection of information online from children. 53 Generally applicable laws may affect us and our network companies. The exact applicability of many of these laws to Internet infrastructure and services companies and Internet commerce and content companies, however, is uncertain. EMPLOYEES As of March 31, 2000, we had 198 full-time employees. Our future success depends, in part, on our and our network companies' continuing ability to attract, train and retain highly qualified management, technical and marketing personnel. Competition for such personnel is intense, and there can be no assurance that we or our network companies will be able to recruit and retain sufficient numbers of qualified personnel. None of our employees is represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be good. EXECUTIVE OFFICES AND WEBSITE Our principal executive office is located at 130 W. Union Street, Pasadena, California, 91103, and our telephone number is (626) 585-6900. We maintain a website at www.idealab.com. The information on our website is not part of this prospectus. LEGAL PROCEEDINGS The former Chief Operating Officer of CarsDirect.com filed a complaint on September 30, 1999 in Los Angeles County Superior Court, naming CarsDirect.com, CD1Financial, a subsidiary of CarsDirect.com, Bank One and us as defendants. The complaint alleged a single cause of action for breach of contract against CD1Financial, and claims for intentional and negligent interference with contract against us, CarsDirect.com, and Bank One. The plaintiff, Gregory Brogger, claimed in the suit that CD1Financial, at the urging of the other defendants, breached a purported employment agreement with CD1Financial by terminating him without cause. As a result, Mr. Brogger claimed he is entitled to a 5.75% ownership interest in CD1Financial, an amount he estimated to be worth $33 million. In addition, he sought general and compensatory damages, punitive damages and his costs of suit. Following the filing of the complaint, we and the other defendants agreed to mediate and arbitrate Mr. Brogger's claims. Mr. Brogger dismissed his action on January 14, 2000 without prejudice. The parties have unsuccessfully mediated the case, and they are now proceeding to a binding arbitration of Mr. Brogger's claims in June 2000. We have denied that we are liable to Mr. Brogger in any amount, and we intend to vigorously defend against Mr. Brogger's allegations. On October 22, 1999, Trilogy Software and Carorder.com filed an action in the United States District Court for the Western District of Texas asserting claims against CarsDirect.com and AutoData Marketing Systems Incorporated, a subsidiary of CarsDirect.com. In the complaint, Trilogy alleges that CarsDirect.com and AutoData have infringed Trilogy's U.S. patent entitled "Method and Apparatus for Maintaining and Configuring Systems," and that such infringement is wilful. Trilogy and Carorder.com also allege that CarsDirect.com and AutoData tortiously interfered with a license agreement between Trilogy and Intellichoice relating to automobile industry data. Trilogy seeks, among other things, triple damages in an unspecified amount, preliminary and permanent injunctive relief and attorneys' fees and costs. CarsDirect.com and AutoData have filed an answer to the complaint denying the material allegations and asserting defenses including, among others, that the Trilogy patent is invalid, unenforceable and not infringed. CarsDirect.com intends to vigorously defend itself against the allegations. FACILITIES We lease approximately 161,000 square feet of space in Pasadena, California, approximately 22,000 square feet of space in Silicon Valley, California, approximately 50,000 square feet of space in New York City, approximately 22,000 square feet of space in Boston and the surrounding area and approximately 5,000 square feet of space in London. We believe that our facilities are currently adequate, but may be inadequate to sustain our anticipated growth and that of the idealab! network companies housed in our facilities through the 2002 fiscal year. We believe that we will be able to obtain adequate space to support our anticipated operating needs on commercially reasonable terms. 54 MANAGEMENT IDEALAB! MANAGEMENT TEAM idealab!'s management team is comprised of people with diverse experience and skills who have created, built, operated and advised companies across a broad range of sizes and industries. We recruit and motivate our management team by providing a challenging, intense, collaborative, rewarding and open atmosphere. Our shared incentives, physical architecture and philosophy foster an open atmosphere that we believe is attractive to talented people. The following table sets forth information with respect to our officers, directors and key employees as of April 7, 2000. Executives listed as Managing Directors include both Managing Directors and Associate Managing Directors.
NAME AGE POSITION/LOCATION - ----------------------------------------- ----- --------------------------------------------------------------- SENIOR EXECUTIVE OFFICERS AND DIRECTORS Bill Gross............................... 41 Chief Executive Officer and Chairman of the Board of Directors Marcia Goodstein......................... 35 President, Chief Operating Officer, President, idealab! Pasadena and Director Lawrence Gross........................... 38 Vice Chairman, President, idealab! Europe and Director Bruce Johnston........................... 40 President, idealab! Boston Robert Kavner............................ 56 Vice Chairman, President, idealab! Silicon Valley and Director Howard Morgan............................ 54 Vice Chairman, President, idealab! New York and Director Benjamin M. Rosen........................ 66 Director John F. Welch, Jr. ...................... 64 Director CORPORATE AND REGIONAL OFFICERS Tom Hughes............................... 49 Chief Design Officer David Ishaq.............................. 41 Chief Operating Officer, idealab! Europe Douglas McPherson........................ 38 Vice President, Secretary and General Counsel Bradley Ramberg.......................... 36 Vice President and Chief Financial Officer Hugh Shytle.............................. 37 Chief Operating Officer, idealab! Boston Brian Steel.............................. 40 Chief Operating Officer, idealab! Silicon Valley Stephanie Streeter....................... 42 Chief Operating Officer, idealab! Pasadena Jim Winget............................... 44 Chief Technology Officer Andy Zimmerman........................... 45 Chief Operating Officer, idealab! New York MANAGING DIRECTORS Jonathan Axelrad......................... 37 idealab! Silicon Valley David Bohigian........................... 30 idealab! New York David Cohen.............................. 38 idealab! Pasadena Craig Frances............................ 33 idealab! Pasadena Tim Gray................................. 32 idealab! Pasadena David Hernand............................ 33 idealab! Pasadena Joel Hyatt............................... 43 idealab! Silicon Valley Paul Jen................................. 33 idealab! Pasadena Edward Lambert........................... 39 idealab! Pasadena Josh Leibowitz........................... 29 idealab! New York Belden Menkus............................ 44 idealab! Europe Lars Perkins............................. 40 idealab! Boston Gregg Rotenberg.......................... 33 idealab! Pasadena Heath Schiesser.......................... 32 idealab! Pasadena Thomas Shull............................. 48 idealab! Pasadena Andrew Stern............................. 28 idealab! New York Bill Trenchard........................... 25 idealab! Silicon Valley Caroline Whitfield....................... 35 idealab! Europe
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NAME AGE POSITION/LOCATION - ----------------------------------------- ----- --------------------------------------------------------------- VICE PRESIDENTS Scott Banister........................... 24 Vice President Ideas Teresa Bridwell.......................... 32 Vice President Corporate Communications Kristen Ding............................. 31 Vice President Design Jeremy Eskenazi.......................... 37 Vice President Talent Acquisition Joseph Essas............................. 28 Vice President Company Development Rich Fagen............................... 42 Vice President Administrative Services John Fessenden........................... 29 Senior Vice President Technology Jon Gonzales............................. 34 General Counsel, Operating Companies and Vice President Legal Gary Horwitz............................. 39 Vice President Real Estate Julie Mazman............................. 36 Vice President Marketing Greg Murphy.............................. 29 Vice President Company Development Lizette Perez............................ 34 Vice President Legal Rick Powell.............................. 32 Vice President Administration Reed Sturtevant.......................... 43 Vice President Technology ENTREPRENEURS-IN-RESIDENCE Mark Kingdon............................. 37 idealab! New York Christina Ohly........................... 31 idealab! Boston John Rigos............................... 32 idealab! New York Andrew Skarupa........................... 34 idealab! Pasadena Nalini Sri-Kumar......................... 42 idealab! Pasadena Scott Weiss.............................. 34 idealab! Silicon Valley
SENIOR EXECUTIVE OFFICERS AND DIRECTORS BILL GROSS founded idealab! in March 1996 and has served as our Chairman of the Board and Chief Executive Officer and as a director since that time. Mr. Gross served as our President from March 1996 to March 2000. Since March 1998, he has served as a managing director of idealab! Capital Management I, LLC. Prior to idealab! he started a number of companies. In high school, Mr. Gross started Solar Devices, a firm which sold plans and kits for solar energy products. In college at the California Institute of Technology, he patented a new loudspeaker design and formed GNP Loudspeakers Inc. After graduating from California Institute of Technology, Mr. Gross and his brother Lawrence started GNP Development Inc., which made a natural language product for Lotus 1-2-3 called HAL. In 1995, Lotus Development Corporation acquired GNP. From February 1986 to March 1991, he was a software entrepreneur at Lotus Development. In 1991, Mr. Gross started Knowledge Adventure, an educational software publisher that was eventually sold to Havas. Mr. Gross serves on the boards of directors of approximately 20 of our public and private network companies, including GoTo.com, NetZero and Ticketmaster Online-CitySearch. He is also a member of the board of trustees of the California Institute of Technology. Mr. Gross received his B.S. in Mechanical Engineering from the California Institute of Technology. MARCIA GOODSTEIN founded idealab! with Bill Gross in March 1996 and has been our Chief Operating Officer since May 1998, a director since May 1999 and our President and the President, idealab! Pasadena since March 2000. Prior to joining idealab!, Ms. Goodstein worked in business development and marketing from July 1994 to June 1995 for Enfish Corporation, a software development company. From February 1991 to July 1994, she worked for Gemstar Development Corporation, where she was responsible for media licensing for North America and licensing, marketing and distribution in South America. Prior to that, Ms. Goodstein worked from July 1986 to February 1991 at a California Institute of Technology research facility. She is a graduate of Pomona College. LAWRENCE GROSS has served as President, idealab! Europe since March 2000, and as one of our Vice Chairmen and as a director since April 1999. Prior to joining idealab!, Mr. Gross was the president & 56 chief executive officer of Knowledge Adventure, a company he founded with his brother Bill Gross in 1991. Following the acquisition of Knowledge Adventure, Mr. Gross served as senior vice president of Cendant Software and president of Davidson & Associates from 1997 to 1999. He worked as a software engineer and development manager at the Lotus Development Company from 1986 to 1991. Mr. Gross holds a B.S. in computer science from the California Institute of Technology and is a graduate of the Executive Program for Growing Companies at the Stanford Graduate School of Business. BRUCE JOHNSTON has served as President, idealab! Boston since March 2000, and served as one of our Managing Directors from September 1999 to March 2000. Prior to joining idealab!, Mr. Johnston worked for TA Associates, a leading late-stage, technology-oriented private equity firm, where he served as a vice president from July 1992 to January 1996 and as a principal from January 1996 through August 1999. From June 1988 to June 1992, Mr. Johnston worked at Lotus where he was most recently a general manager. He received his B.S. in Electrical Engineering from Duke University and received an M.B.A. in Finance and Marketing from Pennsylvania State University. ROBERT KAVNER has served as President, idealab! Silicon Valley since March 2000 and as one of our Vice Chairmen and a director since January 1999. From September 1996 to December 1998, he served as president and chief executive officer of On Command Corporation, a public company with $240 million in annual sales. From September 1995 to August 1996, Mr. Kavner provided consulting services in new media markets. From June 1994 to September 1995, Mr. Kavner served as an advisor to Creative Artists Agency. From May 1984 to May 1994, he served as an Executive Vice President of AT&T, where he acted as Chief Executive Officer of Multimedia Products and Services. Mr. Kavner currently serves on the board of directors of the following public companies: Fleet Financial Group, Ticketmaster Online-CitySearch, GoTo.com and Jupiter Communications. Mr. Kavner received his B.B.A. in Business Management from Adelphi University and attended the Advanced Management Program at Dartmouth University. HOWARD MORGAN, PH.D. has served as President, idealab! New York since March 2000 and as a director since February 1999. He served as one of our Vice Chairmen on a consulting basis from January 1997 to March 2000, and has continued this role as an employee since March 2000. Since 1989, Dr. Morgan has served as President of Arca Group, Inc., a consulting and investment management firm specializing in the areas of computers and communications technologies. Dr. Morgan was a professor of decision sciences at the Wharton School of the University of Pennsylvania and a professor of computer science at the Moore School of the University of Pennsylvania from 1972 through 1986. He serves as a director for a number of public companies, including Cylink Corporation, Franklin Electronic Publishers, Inc., Infonautics Corporation, Inc., MyPoints.com, Segue Software Corporation, Tickets.com and Unitronix Corporation. Dr. Morgan received his Ph.D. in operations research from Cornell University and his B.S. in Physics from the City University of New York. BENJAMIN M. ROSEN has served as a Director of idealab! since April 2000. Mr. Rosen co-founded Compaq Computer Corporation in 1982, and has served as Chairman of the Board and in executive capacities at Compaq since 1983. Mr. Rosen also serves as Vice Chairman of the Board of Trustees of California Institute of Technology, and on several other public company and nonprofit organization boards. JOHN F. WELCH, JR. has served as a director of idealab! since March 2000. Since 1981, Mr. Welch has served as the chairman and chief executive officer of General Electric Company. From 1960 to 1981, he held various positions at General Electric. Mr. Welch received his B.S. degree in chemical engineering from the University of Massachusetts and his M.S. and Ph.D. degrees in chemical engineering from the University of Illinois. CORPORATE AND REGIONAL OFFICERS TOM HUGHES founded idealab! with Bill Gross in March 1996 and has served as our Chief Design Officer since that time, and as a director until March 2000. Prior to joining idealab!, Mr. Hughes was retained by IBM from September 1992 to March 1996 as a design consultant. From October 1985 to August 1992, he served as director of creative development for Lotus. From December 1982 to October 1985, Mr. Hughes served as worldwide creative director for business products, including Macintosh, creating the award-winning and internationally acclaimed identity for Macintosh and the graphical and 57 type elements which the Apple corporate identity later adopted and still employs. Mr. Hughes was senior art director at Polaroid from April 1978 to December 1982 and served as art director at The Boston Herald newspaper from April 1977 to April 1978. He attended University of Massachusetts, The Museum School at Boston, and Northeastern University, where he studied English, Painting and Architecture. DAVID ISHAQ has served as Chief Operating Officer idealab! Europe since March 2000 and served as Managing Director with specific responsibility for European expansion from July 1999 through February 2000. Prior to joining idealab!, Mr. Ishaq was a partner at the private equity fund Knowledge Universe from 1997 to 1999. From 1993 to 1996, Mr. Ishaq served variously as chief operating officer and chief financial officer of Capella Films, Inc., a feature film development, production, sales and distribution company. Mr. Ishaq was involved in an advisory capacity with a wide range of companies in the media, real estate and retail industries from 1989 to 1993. In 1984, he was a principal in the leveraged buyout of Sabre International, Gillette's surgical instruments division, which he co-led until its sale in 1988. Mr. Ishaq holds an L.L.B. degree from the London School of Economics and a M.B.A. from Harvard Business School. DOUGLAS MCPHERSON has served as our Vice President and General Counsel since May 1999 and as our Secretary since March 2000. Prior to joining idealab!, he served as chief legal officer and vice president, business development for Ticketmaster Online-CitySearch and its predecessor company, CitySearch, from July 1996 until June 1999. From November 1992 to July 1996, Mr. McPherson was with the law firm of Heller Ehrman White & McAuliffe. From September 1991 to September 1992, he served as a law clerk for a federal district judge. Mr. McPherson holds a B.A. from the University of North Carolina at Chapel Hill, an M.A. from the University of California, Berkeley and a J.D. from Stanford Law School. BRADLEY RAMBERG has served as our Vice President and Chief Financial Officer since April 1999. Prior to joining idealab!, Mr. Ramberg served as chief financial officer and vice president of finance and administration for Ticketmaster Online-CitySearch and its predecessor company, CitySearch from April 1996 to May 1999. From January 1994 to April 1996, he was vice president of finance and operations for the Fresh Gourmet Company, a joint venture between CPC International, Inc. and Prepco. Mr. Ramberg holds an A.B. from Brown University and an M.B.A. from Harvard Business School. HUGH SHYTLE has served as Chief Operating Officer, idealab! Boston since February 2000. Prior to joining idealab!, Mr. Shytle served as a general partner at Tribeca Partners, a private equity investment company where he worked from May 1999 to February 2000. From January 1993 to May 1999, Mr. Shytle was a managing director at SG Cowen Securities where, as a research analyst, he covered technology services companies. From May 1989 to January 1993, he served as chief operating officer of Restrac, an enterprise software company. Mr. Shytle holds a B.S. in Computer Science from Virginia Polytechnic Institute and an S.M. in Management from the Sloan School of Management at the Massachusetts Institute of Technology. BRIAN STEEL has served as Chief Operating Officer, idealab! Silicon Valley since August 1999. Prior to joining idealab!, Mr. Steel was with On Command Corporation, serving as president and chief operating officer from December 1998 to August 1999, as chief operating officer and chief financial officer from September 1996 to December 1998, and as a director for all three years of his tenure. From January 1993 to August 1996, Mr. Steel was with Pacific Telesis Group and several affiliated companies, most recently TELE-TV as its executive vice president and chief financial officer. From June 1986 to December 1992, Mr. Steel worked for Shearson Lehman Brothers, where he co-managed the real estate merchant banking group. Mr. Steel received his B.A. in economics from Duke University. STEPHANIE STREETER has served as Chief Operating Officer, idealab! Pasadena since January 2000. Prior to joining idealab!, Ms. Streeter worked for Avery Dennison beginning in June 1985. Most recently, she served as vice president office products worldwide from June 1996 to January 2000 and as vice president/general manager from 1991 to 1996. She served as director of marketing from 1990 to 1991 and worked in business and product management from 1985 to 1990. From 1983 to 1985, Ms. Streeter served as a product manager for Decision Data Computer Corporation. From 1980 to 1983, she worked for Xerox. Ms. Streeter received her B.A. in Political Science from Stanford University. JIM WINGET has served as our Chief Technology Officer since August 1999. Prior to joining idealab!, he worked for Silicon Graphics Inc. from October 1986 to August 1999, serving most recently as 58 vice president and chief scientist in corporate research and development. From May 1985 to October 1986, Dr. Winget was a consultant in the division of radiation oncology and a research assistant professor in biomedical engineering at Duke University. From June 1983 to October 1986, he was a consultant at Sutherland, Sproull, and Associates, Inc. Dr. Winget received his B.S. in Engineering from the University of Cincinnati, and his M.S. and Ph.D., both in Applied Mechanics, from the California Institute of Technology. ANDY ZIMMERMAN has served as Chief Operating Officer, idealab! New York since February 2000. Prior to joining idealab!, Mr. Zimmerman served as the global leader of eBusiness consulting services for PricewaterhouseCoopers and as a member of the global consulting executive committee from July 1998 to January 2000. From July 1998 to June 1999, Mr. Zimmerman was the Americas leader and a managing partner for information, communications and entertainment practice for PricewaterhouseCoopers, and from January 1995 to July 1998 served as the global leader for the telecommunications and media consulting practice at PricewaterhouseCoopers. He received his B.A. from Haverford College and his M.S. from New York University's Stern Business School. MANAGING DIRECTORS JONATHAN AXELRAD has served as a Managing Director for idealab! Silicon Valley since January 2000. Prior to joining idealab!, Mr. Axelrad worked at the law firm Wilson Sonsini Goodrich & Rosati, which he joined as an associate in June 1990. He was admitted as a member in January 1995 and served in that role through January 2000. Mr. Axelrad was named co-chair of the firm's venture/investment fund group in September 1999. He received his B.A. from Wesleyan University and his J.D. from Yale Law School. DAVID BOHIGIAN has served as a Managing Director for idealab! New York since January 2000. Prior to joining idealab!, Mr. Bohigian was a managing director of the Washington, D.C.-based Internet incubator, VenCatalyst, where he worked from August 1999 to December 1999. From October 1995 to June 1999, Mr. Bohigian served as a director of Jefferson Partners, L.L.C., a Washington, D.C.-based venture capital firm where he helped found Global Network Architects, now Consortio. Mr. Bohigian received his B.A. from Washington & Lee University and his J.D. from Washington University. DAVID COHEN has served as a Managing Director for idealab! Pasadena since January 2000. Prior to joining idealab!, Mr. Cohen was president of Camelot Fund from February 1999 through December 1999. From March 1981 through December 1998, he worked for Pacific Holding Co., serving most recently as chief investment officer. During this time, he also served as senior vice president in charge of acquisitions and investments for Dole Food Company. From August 1986 to October 1989, Mr. Cohen was an associate at the investment banking firm of Lazard Freres and Co. He holds a B.S. in electrical engineering from Boston University and a M.Phil. from Cambridge University. CRAIG FRANCES has served as a Managing Director for idealab! Pasadena since January 2000. Prior to joining idealab!, Dr. Frances was co-founder and vice president health partnerships of yourPharmacy.com from August 1998 to October 1999. In July 1997, he co-founded Expert Consensus Guidelines, LLC, a company that surveys expert physicians across the country about "best practices" to create diagnostic and therapeutic algorithms, where he worked through December 1999. From July 1996 to June 1997, Dr. Frances was the chief medical resident at University of California, San Francisco where he designed and implemented hospital administration programs. From July 1995 to June 1996, he created a series of books, the Saint-Frances Guides, with Williams & Wilkins. Dr. Frances received his B.A. from Cornell University and his M.D. from Cornell Medical School. TIM GRAY has served as a Managing Director for idealab! Pasadena since December 1999. Prior to joining idealab!, Mr. Gray co-founded WeddingChannel.com and served as its chief executive officer from October 1996 to October 1999. From December 1995 to October 1996, Mr. Gray practiced law with the Los Angeles law firm of Riordan & McKinzie. Mr. Gray received his B.A. in Political Science from the University of California at Irvine and his J.D. from the Georgetown University Law Center. DAVID HERNAND has served as a Managing Director for idealab! Pasadena since April 2000. Prior to joining idealab!, Mr. Hernand was with the law firm of Latham and Watkins from October 1994 to April 2000. Mr. Hernand was a Partner in Latham's corporate department specializing in mergers and acquisitions and corporate securities transactions, and served as Co-Chair of the firm's Venture & 59 Technology Group. Mr. Hernand holds a B.A. from the University of California at Los Angeles and a J.D. from Georgetown University Law Center. JOEL HYATT has served as a Managing Director for idealab! Silicon Valley since January 2000. Mr. Hyatt has been a lecturer in entrepreneurship at Stanford University's Graduate School of Business since September 1998. He is the founder and former chairman of Hyatt Legal Plans and served as its chief executive officer from June 1990 to April 1997. From November 1977 to August 1997, Mr. Hyatt was a senior partner of Hyatt Legal Services, a company which he co-founded. He received his A.B. from Dartmouth College and his J.D. from Yale Law School. PAUL JEN has served as a Managing Director for idealab! Pasadena since January 2000. He has served as vice president of Meridian Ventures, a provider of advice and interim senior management to leading companies including Barney's New York, Federated Department Stores and LVMH, since September 1991. Mr. Jen holds a B.A. from the University of California at Berkeley and an M.B.A. from Columbia University. EDWARD LAMBERT has served as a Managing Director for idealab! Pasadena since January 2000. He has served as chief financial officer of Meridian Ventures, a provider of advice and interim senior management to leading companies including Barney's New York, Federated Department Stores and LVMH, since September 1991. Mr. Lambert holds a B.S. from the California Institute of Technology and an M.B.A. from Harvard Business School. JOSH LEIBOWITZ has served as a Managing Director for idealab! New York since December 1999. Prior to joining idealab!, Mr. Leibowitz worked for McKinsey & Co. from October 1997 to December 1999 where he was a member of the New York e-commerce and e-marketing leadership team. Mr. Leibowitz received his A.B. in Economics from the University of Chicago and holds an M.B.A. from Harvard Business School. BELDEN MENKUS has served as a Managing Director for idealab! Europe since February 2000. Prior to joining idealab!, Mr. Menkus founded Aim Bridge in December 1998, where he served as managing director through February 2000. The company delivered "launch pad services," helping large corporations launch innovative new Internet concepts. From June 1997 to September 1998, Mr. Menkus served as vice president, business development Europe for Nextera, an international professional services firm. From September 1991 to February 1997, he worked for CSC Index, a Business Reengineering consulting firm in its US, London and Japan offices, most recently as a vice president. From September 1984 to March 1991, Mr. Menkus worked for McKinsey & Company in the U.S. and London, where he focused on strategy development and implementation. Mr. Menkus holds a A.B. from Brown University and an M.S.M. from the Sloan School of Management at the Massachusetts Institute of Technology. LARS PERKINS has served as a Managing Director of idealab! since December 1999. Prior to joining idealab!, Mr. Perkins co-founded Webhire in 1982 with $200,000 of seed capital, served as its chief executive officer from 1986 to 1998, and has served as its chairman since 1986. Webhire completed an initial public offering in 1996. GREGG ROTENBERG has served as a Managing Director for idealab!, Pasadena since January 2000. Prior to joining idealab!, Mr. Rotenberg founded yourPharmacy.com and served as its president from March 1998 to October 1999. From July 1996 to March 1998, he was managing director of ESI VisionCare, Inc. . From November 1991 to May 1994, Mr. Rotenberg created and managed a virtual reality division of Edison Brothers Stores, a Fortune 500 company. Mr. Rotenberg received his B.S. from the Wharton School of the University of Pennsylvania and his M.M. from the Northwestern University's J. L. Kellogg Graduate School of Management. HEATH SCHIESSER has served as a Managing Director for idealab! Pasadena since January 2000. Prior to joining idealab!, Mr. Schiesser worked as vice president of business development and co-founder of yourPharmacy.com from August 1998 to October 1999. From August 1993 to August 1998, he was with McKinsey & Co. as an engagement manager. Mr. Schiesser worked for Alamo Group, a manufacturing concern, from June 1989 to July 1991 as assistant to the president. He received his B.A. from Trinity University and his M.B.A. from Harvard Business School. 60 THOMAS SHULL has served as a Managing Director for idealab! Pasadena since January 2000. He has served as chief executive officer of Meridian Ventures, a provider of advice and interim senior management to leading companies including Barney's New York, Federated Department Stores and LVMH, since December 1990. Mr. Shull holds a B.S. from the United States Military Academy and an M.B.A. from Harvard Business School. ANDREW STERN has served as a Managing Director for idealab! New York since January 2000. Prior to joining idealab!, he was a managing director and principal of VenCatalyst, the Washington, D.C.-based Internet incubator, where he worked from August 1999 to December 1999. From February 1999 to July 1999, Mr. Stern was vice president of marketing for AppNet, Inc., a global provider of e-commerce solutions. In February 1997, Mr. Stern founded LOGEX International, LLC, an e-commerce solutions provider where he served as president until April 1998 when the company was acquired by AppNet. From January 1996 to February 1997, Mr. Stern served as vice president of operations and member of the senior management committee for The Olympus Group and held various positions with Burson-Marsteller and The Advisory Board Company. From January 1995 until January 1996, he acted as a regional manager for the Advisory Board Company. Mr. Stern received his B.A. in Political Science from Vanderbilt University. BILL TRENCHARD has served as a Managing Director for idealab! Silicon Valley since October 1999. Prior to joining idealab!, Mr. Trenchard was a lead program manager at Microsoft from April 1999 to October 1999. He served as CEO of Jump Networks, Inc. from February 1998 until its acquisition in April 1999 by Microsoft. From January 1996 to February 1998, Mr. Trenchard was president of The Gateways Group, LLC, an Internet consulting firm. He served as president of Gateways.com, an Internet local destination site from January 1995 to January 1996. Mr. Trenchard received his B.A. from Cornell University. CAROLINE WHITFIELD has served as a Managing Director for idealab! Europe since February 2000. Prior to joining idealab!, Ms. Whitfield was chief executive officer of London-based Internet incubator silliconwharf.com from June 1999 to February 2000. From January 1997 to May 1999, she served as european business head of Hasbro, Inc. launching a combination of U.S.-sourced and locally based opportunities. From January 1992 to December 1996, Ms. Whitfield worked in South America, the Netherlands and the U.K. in global marketing for Unilever PLC. She spent several years in international strategy consulting in the U.K. France and U.S. first for Braxton Associates from June 1986 to August 1988, and then for the International Strategy Group of PricewaterhouseCoopers from September 1988 to December 1990. Ms. Whitfield holds an M.A. in Law from Christ Church, Oxford University and an M.B.A. from INSEAD, France. VICE PRESIDENTS SCOTT BANISTER has served as our Vice President Ideas since August 1999. Prior to joining idealab!, Mr. Banister was a full-time Internet startup advisor and investor following the acquisition of LinkExchange by Microsoft in November 1998. From February 1995 to December 1998, Mr. Banister served as vice president of technology for Submit It!/ListBot, a company he founded in February 1995. In June 1998, the company was acquired by LinkExchange, which was subsequently acquired by Microsoft in November 1998. In July 1997, Mr. Banister co-founded Impulse Buy Network, which was acquired by Inktomi in April 1999. He studied Computer Science at the University of Illinois, Urbana-Champaign before leaving to pursue his passion for Internet ideas and business models. TERESA BRIDWELL has served as our Vice President Corporate Communications since March 2000, joining us in November 1999 as Director of Corporate Communications. Prior to joining us, Ms. Bridwell was vice president of corporate communications for MetaCreations Corporation from May 1996 through November 1999. From December 1993 through May 1996, she was manager of marketing communications for State Street Global Advisors in Boston. Ms. Bridwell began her public relations career in New York in 1992 with Connors Communications, a public relations agency specializing in high technologies. From September 1990 through September 1992, she was an editor for Glamour and Omni magazines. Ms. Bridwell received her B.S. in journalism from the University of Kansas. 61 KRISTEN DING has been with idealab! since February 1998, serving as a designer, then as creative director of Free-PC and most recently, as our Vice President Design. Prior to joining idealab!, she served as vice president of design of CitySearch from October 1995 to December 1997. From December 1994 to October 1995, Ms. Ding served as senior art director of AND Interactive Communications. She received her B.A. in Psychology and Design from Stanford University and her B.F.A. in Graphic Design and Packaging from Art Center College of Design. JEREMY ESKENAZI has served as our Vice President Talent Acquisition since April 2000. Prior to joining idealab!, he served as director of strategic growth and talent acquisition for Amazon.com Holdings, Inc. from September 1999 to February 2000. From July 1994 to September 1999, Mr. Eskenazi worked for Universal Studios, Inc., serving most recently as corporate director for workforce planning and strategic staffing beginning in June 1997. From July 1994 to June 1997, as director of professional staffing, he developed and implemented global executive staffing strategies for Universal Studios' diverse entities. Mr. Eskenazi holds a B.S. from California State Polytechnic University, Pomona. JOSEPH ESSAS has served as our Vice President Company Development for idealab! Pasadena since November 1999. Prior to joining idealab!, Mr. Essas served as vice president of web development and technology for Tickets.com from January 1998 to November 1999. From May 1995 to January 1998, Mr. Essas served as director of Web Technology for Interwise Inc., a developer of Web-based distance learning software and services. Mr. Essas served as a developer and project manager on tank simulation projects for the Israeli Defense Force from August 1991 to April 1995. He attended Jerusalem College of Technology. RICH FAGEN has served as our Vice President Administrative Services since November 1999. Prior to joining idealab!, Mr. Fagen worked for the California Institute of Technology from November 1984 through October 1999, serving as director of information technology services from April 1990 through October 1999. From June 1979 to November 1984, Mr. Fagen worked at the Jet Propulsion Laboratory where he served in various capacities including member of the technical staff and manager of user services. He holds a B.A. in Economics from the University of California, Los Angeles. JOHN FESSENDEN has been with idealab! since January 1997, serving as our Senior Vice President Technology since January 1999 and as Director of Technology from January 1997 to January 1999. Prior to joining idealab!, Mr. Fessenden worked as a developer from January 1995 to January 1997 at Underground Networks, which was acquired by Boxtop Entertainment during his tenure. JON GONZALES has served as our General Counsel, Operating Companies and Vice President Legal for idealab! Pasadena since May 1999. From September 1996 until May 1999, he was with the law firm of Wilson Sonsini Goodrich & Rosati. From December 1995 until August 1996, Mr. Gonzales was with the law firm of Testa Hurwitz & Thibeault, LLP. From June 1992 until December 1995, he was with the law firm of Bingham Dana LLP. Mr. Gonzales is a Certified Public Accountant and holds a B.B.A. in accounting and an M.P.A. (Taxation) from the University of Texas at Austin, and a J.D. from Stanford Law School. GARY HORWITZ has served as our Vice President Real Estate since March 2000. Prior to joining idealab!, Mr. Horwitz worked for Mattel, Inc. from February 1989 through March 2000. As vice president of real estate from May 1999 to March 2000, Mr. Horwitz was responsible for the management of Mattel's global real estate portfolio. From June 1996 through April 1999, he served as managing director of real estate at Mattel, and from February 1993 through May 1996, he was Mattel's director of real estate. From January 1991 through January 1993, Mr. Horwitz was assistant general counsel and from February 1989 to December 1990, he was senior attorney for Mattel. From September 1987 to January 1989, Mr. Horwitz was an attorney with the law firm of Weissburg & Aronson. He holds a B.A. from the University of California, Los Angeles and a J.D. from the University of Southern California. JULIE MAZMAN has served as our Vice President Marketing since March 2000. Prior to joining us, she was vice president of strategy at eCompanies LLC from September 1999 to January 2000. From August 1991 through November 1997 and from September 1998 through March 1999, Ms. Mazman worked for the Sara Lee Corporation, most recently as a brand strategist for its Champion Authentic Athletic Approval division in Italy. From January 1998 to August 1998, she worked for the Eastpak Corporation as the director of consumer marketing. She received her B.A. in Economics from Dartmouth 62 College and her M.M. in Finance and Marketing from Northwestern University's J.L. Kellogg School of Management. GREG MURPHY joined idealab! as an Entrepreneur-in-Residence in December 1999 and has served as our Vice President Company Development for idealab! Silicon Valley since March 2000. Prior to joining us, Mr. Murphy worked for On Command Corporation from October 1993 to December 1999, serving most recently as vice president of regional operations. From November 1997 to December 1998 he served as vice president of product management, and from February 1995 to October 1997, he held director roles in video programming and operations. Mr. Murphy started his career with On Command as assistant to the chairman. Mr. Murphy received his B.A. from Amherst College and his M.A. from Stanford University. LIZETTE PEREZ has served as our Vice President Legal for idealab! Boston since March 2000. Prior to joining idealab!, Ms. Perez served as general counsel of JuniorNet Corporation from September 1999 to March 2000. From September 1993 until September 1999, she was an associate in the corporate department and then a partner-elect at the law firm Goodwin, Procter & Hoar, LLP. Ms. Perez holds a B.A. in Political Science from the University of Rochester and a J.D. from Boston University School of Law. RICK POWELL has served as our Vice President Administration for idealab! New York since January 2000. Prior to joining idealab!, he was a managing director and principal of VenCatalyst, the Washington, D.C.-based Internet incubator, where he worked from August 1999 to December 1999. From January 1992 to August 1999, Mr. Powell worked for Burson-Marsteller, a communications consulting firm where he was appointed to the role of chief knowledge officer worldwide in June 1998. Mr. Powell received his B.A. in Political Science and a B.B.A. in Business/Finance from Southern Methodist University. REED STURTEVANT has served as our Vice President Technology for idealab! Boston since March 2000. Prior to joining idealab!, Mr. Sturtevant was chief technology officer and co-founder of Radio Active Media Partners, Inc. from June 1999 to February 2000. From September 1995 to May 1999, he was chief technology officer of Radnet, Inc. a company he also co-founded. Mr. Sturtevant worked for Lotus Development Corporation from April 1986 to September 1995, serving most recently as director of product management for InterNotes. From June 1992 to October 1994, he was a consulting engineer and from May 1986 to June 1992, he worked in the graphics products group at Lotus. Mr. Sturtevant began his career as a software engineer, working at the Strategic Planning Institute from September 1978 to June 1981, and then as an architect for Graphic Communications, Inc. from July 1981 to April 1986. He attended the Massachusetts Institute of Technology. ENTREPRENEURS-IN-RESIDENCE MARK KINGDON has served as an Entrepreneur-in-Residence for idealab! New York since April 2000. Prior to joining idealab!, Mr. Kingdon was a partner at PricewaterhouseCoopers, where he worked since September 1988. During his time at PricewaterhouseCoopers, Mr. Kingdon served as retail consulting leader for the Americas beginning in September 1996 and then as global e-business leader responsible for strategy and planning, marketing, public relations, knowledge management and communications from May 1999 to March 2000. Mr. Kingdon was also a member of the ten person global executive team in PricewaterhouseCoopers' $5 billion management consulting services division. He holds a B.A. in Economics from the University Of California, Los Angeles and a M.B.A. from the Wharton School at the University of Pennsylvania. CHRISTINA OHLY has served as an Entrepreneur-in-Residence for idealab! Boston since February 2000. Prior to joining idealab!, she was vice president, creative development for Oxygen Media from October 1998 to February 2000. From September 1995 to October 1998, Ms. Ohly served as vice president creative director, advertising and sponsored content for iVillage. She holds a B.A. from Williams College. JOHN RIGOS has served as an Entrepreneur-in-Residence for idealab! New York since March 2000. Prior to joining idealab!, Mr. Rigos was founder, president and chief executive officer of Cductive.com from June 1997 to February 2000. From January 1991 to November 1995, he served as vice president of 63 Jesup & Lamont Capital Partners. From June 1989 to December 1990, he was a financial analyst with Prudential Bache Capital Funding. Mr. Rigos holds a B.A. in Economics from the University of Pennsylvania and an M.B.A. from INSEAD, France. ANDREW SKARUPA has served as an Entrepreneur-in-Residence for idealab! Pasadena since April 2000. Prior to this position, from April 1999 to March 2000, Mr. Skarupa served as vice president of finance for Free-PC, an idealab! network company that was acquired by eMachines in January 2000. From November 1998 to March 1999, he served as vice president of finance for us. From November 1992 to October 1998, Mr. Skarupa worked for MiniMed, Inc., first as controller and then as general manager and director of pharmacy. Mr. Skarupa is a Certified Public Accountant and holds a B.S. in Mathematics/Applied Science from the University of California at Los Angeles and an M.B.A. from UCLA's Anderson School of Business. NALINI SRI-KUMAR has served as an Entrepreneur-in-Residence for idealab! since March 2000. Prior to joining idealab!, she was a partner from March 1997 to March 2000 at Siena Partners. From September 1982 to March 1997, Ms. Sri-Kamur worked for McKinsey & Co., where she served as a partner from June 1988 to March 1997. At McKinsey, she focused on new product/business development and business turnaround. Ms. Sri-Kamur received her B.A. in Economics from Barnard College and her M.B.A. from Columbia University. SCOTT WEISS has served as an Entrepreneur-in-Residence for idealab! Silicon Valley since March 2000. Prior to joining idealab!, from April 1999 to January 2000, Mr. Weiss served as chief executive officer of Projectgreen.com, an e-commerce company in the fresh produce marketplace. From October 1996 to September 1999, Mr. Weiss served as director of business development for Hotmail/Microsoft. From August 1995 to July 1996, he was a consultant for McKinsey & Co., where he focused on high technology engagements. From August 1983 to May 1988, Mr. Weiss served as manager of finance and business development for Electronic Data Systems. He holds a B.S.B.A. in Finance from the University of Florida and an M.B.A. from Harvard Business School. Bill Gross and Lawrence Gross are brothers. No other family relationships exist among our directors and executive officers. BOARD OF DIRECTORS Our bylaws provide for a board of directors consisting of between four and seven members. We currently have seven directors, and we intend to expand the size of our board and add one non-employee director within 90 days following this offering. Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. BOARD COMMITTEES We intend to establish an audit committee and a compensation committee of our board of directors within 90 days following the offering. The audit committee will review our internal accounting procedures and consult with and review the services provided by our independent accountants. Our audit committee will be composed of at least three directors who are not our employees. The compensation committee will review and recommend to our board of directors the compensation and benefits of our executive officers and other employees. A majority of our compensation committee will be directors who are not our employees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Until the establishment of the compensation committee, our board of directors as a whole will continue to perform the functions to be delegated to the compensation committee. During fiscal 2000, the following members of our executive officers served in interim positions in other companies: Lawrence Gross served as acting chief operating officer of CarsDirect.com, acting chief executive officer of Entrypoint and MyHome.com and acting President of Swap.com; and Robert Kavner served as acting chief executive officer of Entrypoint. No other executive officer of idealab! serves as a member of the 64 board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors. DIRECTOR COMPENSATION Directors currently do not receive any cash compensation from us for their service as members of our board of directors. We granted John F. Welch, Jr. an option to purchase 1,000,000 shares of our common stock at an exercise price of $1.87 per share in March 2000 in connection with his election as a director. We granted Benjamin M. Rosen an option to purchase 1,000,000 shares of our common stock at an exercise price of $5.10 per share in April 2000 in connection with his election as a director. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The table below summarizes for fiscal 2000 the compensation earned for services rendered to us in all capacities by our Chief Executive Officer and our three other executive officers whose total compensation exceeded $100,000 in fiscal 2000. These officers are referred to in this prospectus as the "named executive officers". No individual who would otherwise have been includable in such table on the basis of total compensation earned during fiscal 2000 has resigned or otherwise terminated his or her employment during fiscal 2000.
LONG-TERM COMPENSATION AWARDS ---------------- ANNUAL COMPENSATION SECURITIES -------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS COMPENSATION(3) - ------------------------------------------------- ------------- ----------- ---------------- ----------------- Bill Gross Chief Executive Officer and Chairman of the Board of Directors.......................... $ 250,000 $ -- 150,000,000 $ 94,280 Marcia Goodstein President, Chief Operating Officer and President, idealab! Pasadena(1)............. 189,867 -- 5,850,000 93,355 Lawrence Gross(2) Vice Chairman and President, idealab! Europe.. 208,333 -- -- 21,086 Robert Kavner Vice Chairman and President, idealab! Silicon Valley...................................... 250,000 -- 2,100,000 35,550
- ------------ (1) Ms. Goodstein's annual salary became $250,000 effective in August 1999. (2) Mr. Gross began his employment with us in April 1999, and his annual salary is $250,000. (3) Represents our incremental costs associated with the named executive officers' personal usage of aircraft leased by us. 65 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information with respect to stock options granted to each of the Named Executive Officers in fiscal 2000, including the potential realizable value over the ten-year term of the options, based on assumed rates of stock appreciation of 5% and 10% over the exercise price, compounded annually. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimates of our future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock. All options were granted under our 1999 Executive Stock Plan. All options are exercisable pursuant to vesting schedules with a maximum vesting term of four years. Vesting of options is generally contingent upon the optionee's continued employment with us.
POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF SECURITIES GRANTED TO EXERCISE STOCK PRICE APPRECIATION UNDERLYING EMPLOYEES PRICE FOR OPTION TERM OPTIONS IN PER EXPIRATION --------------------------------- NAME GRANTED FISCAL YEAR SHARE DATE 5% 10% - ----------------------------- ---------------- ------------ ----------- ----------- ---------------- ---------------- Bill Gross................... 150,000,000 69.3% $ 1.275 7/29/09 $ 120,276,097 $ 304,803,245 Marcia Goodstein............. 5,850,000 2.7 1.275 7/29/09 4,690,768 11,887,327 Lawrence Gross............... -- -- -- -- -- -- Robert Kavner................ 2,100,000 1.0 1.275 7/29/09 1,683,865 4,267,245
AGGREGATE OPTION EXERCISES DURING THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to exercisable and unexercisable options held as of January 31, 2000 by the Named Executive Officers. The amounts under "Value of Unexercised In-the-Money Options at January 31, 2000" were calculated by determining the difference between $2.20 per share, the fair market value of our common stock as of January 31, 2000 as determined by our board of directors, and the per share exercise price.
NUMBER OF SECURITIES SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED ON VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT EXERCISE REALIZED JANUARY 31, 2000 JANUARY 31, 2000 ------------- -------------- ----------------------------- -------------------------------- EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------ --------------- --------------- ---------------- Bill Gross............... -- $ -- 150,000,000 -- $ 138,750,000 $ -- Marcia Goodstein ........ -- -- 5,850,000 -- 5,411,250 -- Lawrence Gross........... -- -- -- -- -- -- Robert Kavner............ -- -- 2,100,000 -- 1,942,500 --
- ------------------------- (1) Includes options that are unvested but which may be exercised early. Any shares issued upon such exercise would be subject to our right of repurchase at the original purchase price to the extent that the shares remained unvested at the time of exercise. RESTRICTED STOCK PURCHASES In fiscal 2000, Bill Gross and Lawrence Gross purchased 20,000,000 and 22,100,000 shares of our common stock for $0.035 per share, in each case subject to our right to repurchase the shares upon the termination of the executive's employment with us. Our right to repurchase the shares lapses, with respect to Bill Gross as to 20% of the underlying shares on the date of purchase and as to an additional 20% on each succeeding anniversary of the date of purchase, and with respect to Lawrence Gross, as to 20% on the date of purchase and as to an additional 5% on the last day of each fiscal quarter thereafter. Bill Gross and Lawrence Gross paid the purchase price for these shares by delivering to us full recourse notes in the principal amounts of $700,000 and $773,500, respectively. Each of these notes bears interest at 7% per annum compounded semi-annually and is secured by the purchased shares. Each note has a term of four years, but is due immediately upon payment of dividends to the executive in an amount greater than the principal and interest then owed. In addition, in fiscal 2000, two corporate and regional officers and one vice president purchased an aggregate of 11,500,000 shares of common stock subject to similar rights of repurchase at a weighted average price of $0.035 per share. 66 EMPLOYMENT ARRANGEMENTS All of our executive officers are "at-will" employees, and their employment may be terminated at any time at the discretion of our board of directors. We have entered into severance agreements with Robert Kavner, Howard Morgan and Lawrence Gross. These agreements provide that in the event their employment with us is terminated without cause, these officers will be entitled to accelerated vesting under their respective option agreements and/or restricted stock purchase agreements such that, to the extent their options have not then vested and/or their restricted stock then remains subject to our repurchase right as to a total of 10 million shares, their options and/or restricted stock will become immediately vested as to an aggregate of 10 million shares immediately upon such termination. LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION Our articles of incorporation and bylaws provide that our directors, officers and other employees may be indemnified to the fullest extent authorized by Nevada law. We believe that these provisions will assist us in attracting or retaining qualified individuals to serve as directors or officers. The Nevada Revised Statutes, or the NRS, empowers a corporation to indemnify 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, including an action by or in the right of the corporation, by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation. We can indemnify against expenses reasonably incurred by such person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests. In the case of an action by or in the right of our company, no indemnification may be made in respect of any claim as to which such person is found by a court to be liable to us or for amounts paid in settlement to us, except to the extent that the court determines that such person is fairly and reasonably entitled to indemnity for such expenses. The NRS further provides that, to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding, he or she shall be indemnified against expenses reasonably incurred by him or her in his or her defense. Indemnification provided for under Nevada law is not exclusive of any other rights to which the indemnified party may be entitled and the scope of indemnification continues as to directors, officers, employees or agents who have ceased to hold such positions. Finally, Nevada law empowers us to purchase and maintain insurance or make other financial arrangements on behalf of a director, officer, employee or agent against any liability asserted against or incurred by him or her in any such capacity whether or not we would have the authority to indemnify him or her against such liabilities and expenses. Our bylaws authorize us to purchase and maintain insurance or make other financial arrangements on behalf of our directors, officers, employees and agents. We have entered into agreements with our directors and executive officers pursuant to which we have agreed, among other things, to indemnify them against liabilities they incur by reason of their status as our directors and executive officers to the fullest extent permitted under Nevada law. STOCK PLANS 1996 STOCK PLAN Our 1996 Stock Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for the granting to employees, directors and consultants of nonstatutory stock options and stock purchase rights ("SPRs"). The amended and restated 1996 Stock Plan was approved by our board of directors and stockholders in April 1999. Unless terminated sooner, the 1996 Stock Plan will terminate automatically in 2006. A total of 150,000,000 shares of common stock were reserved for issuance under the 1996 Stock Plan. As of January 31, 2000, options to purchase 13,643,400 shares were outstanding under the 1996 Stock Plan with a weighted exercise price of $0.245. 67 Rights granted under the 1996 Stock Plan are generally not transferable by a participant other than by will or the laws of descent and distribution. The 1996 Stock Plan provides that, in the event of our merger with or into another corporation or a sale of substantially all of our assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation does not assume or substitute for the outstanding options, each option will become fully vested and exercisable, for a period of fifteen (15) days, after which the option will terminate. Our board of directors has the authority to amend or terminate the 1996 Stock Plan, except that no such action may adversely affect any outstanding rights to purchase stock under the 1996 Stock Plan. 1999 EMPLOYEE STOCK PLAN Our 1999 Employee Stock Plan was adopted by our board of directors and stockholders in July 1999. The 1999 Employee Stock Plan's purpose and material terms are substantially identical to the 1996 Stock Plan with the exception that the 1999 Employee Stock Plan allows for nonstatutory option grants at exercise prices equal to at least 85% of the fair market value of the common stock as determined in good faith by our board of directors. The 1999 Employee Stock Plan was adopted by our board of directors and stockholders in July 1999 and is intended to replace the 1996 Stock Plan for options granted to employees after June 1999. A total of 90,000,000 shares of common stock were reserved for issuance under the 1999 Employee Stock Plan. In addition, the number of shares authorized for issuance under the 1999 Employee Stock Plan will increase annually on the first day of each fiscal year, beginning with our fiscal year 2001, by an amount equal to the lesser of ____ % of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year, or ______ shares. As of January 31, 2000, options to purchase 24,751,150 shares were outstanding under the 1999 Employee Stock Plan with a weighted average exercise price of $1.402. The 1999 Employee Stock Plan may be administered by the Board of Directors or a committee of the Board, which committee shall, in the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. The Administrator has the power to determine the terms of the options granted, including the exercise price, the number of shares subject to each option, the exercisability thereof and the form of consideration payable upon such exercise. The 1999 Employee Stock Plan will terminate in 2009. The Board has the authority to amend, suspend or terminate the 1999 Employee Stock Plan, provided that no such action may affect any share of common stock previously issued and sold or any option previously granted under the 1999 Employee Stock Plan. Options granted under the 1999 Employee Stock Plan generally must be exercised by three months after the optionee's separation from us or, if the optionee's separation occurs without cause prior to our initial public offering, within the earlier of twelve months after separation or the effective date of the registration statement for our initial public offering, but in no event later than the expiration of the option's ten-year term. The exercise price of all incentive stock options granted under the 1999 Employee Stock Plan must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of nonstatutory stock options granted under the 1999 Employee Stock Plan is determined by the administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price must at least be equal to the fair market value of the common stock on the date of grant. For any participant who owns stock with more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option granted must be at least 110% of the fair market value of our common stock on the date of grant, and the term of any incentive stock option must not exceed five years. The terms of all other options granted under the 1999 Employee Stock Plan may not exceed ten years. 1999 EXECUTIVE STOCK PLAN Our 1999 Executive Stock Plan was adopted by our board of directors and stockholders in July 1999. The 1999 Executive Plan is substantially identical in its material terms to the 1996 Plan and the 1999 Employee Plan, with the exception that the 1999 Executive Plan allows for nonstatutory option grants, including grants to 5% or greater holders at exercise prices equal to at least 85% of the fair 68 market value of the underlying common stock as determined in good faith by the Board of Directors. The 1999 Executive Plan was adopted by our board of directors and stockholders in July 1999. The 1999 Executive Plan was adopted to provide a separate vehicle for certain executive bonus/compensatory grants issued after June 1999. A total of 175,000,000 shares of common stock were reserved for issuance under the 1999 Executive Plan. As of January 31, 2000, options to purchase 161,619,000 shares were outstanding under the 1999 Executive Plan with a weighted average exercise price of $1.275. EMPLOYEE STOCK PURCHASE PLAN Concurrently with this offering, we intend to adopt an employee stock purchase plan that provides eligible employees the opportunity to purchase shares of our common stock at a discount through payroll deductions. 69 RELATED PARTY TRANSACTIONS INVESTMENTS IN IDEALAB! AND NETWORK COMPANIES The following table summarizes the material terms of private placement transactions since the beginning of fiscal 2000 other than stock option exercises, in which our directors, executive officers and major stockholders and related persons purchased shares of our stock or the stock of our majority-owned subsidiaries for more than $60,000. In each preferred stock transaction, the director, executive officer, major stockholder or related person purchased stock at the same price and on the same terms as independent third-party investors purchasing stock at the same time. Preferred stock is shown on an as-converted basis in the table below.
NUMBER OF AGGREGATE ISSUER CLASS OF STOCK SHARES PURCHASE PRICE --------------------------- ------------------------- --------------- ---------------- BILL GROSS idealab! Common (1) 20,000,000 $ 700,000 Series C Preferred 40,000,000 12,000,000 Series D Preferred 3,000,000 30,000,000 Homepage.com Series B Preferred 125,000 250,000 MyHome.com Series B Preferred 125,000 187,500 MyLife.com Series B Preferred 125,000 125,000 PayMyBills.com Series B Preferred 125,000 187,500 Sameday.com Series A Preferred 125,000 187,500 LAWRENCE GROSS idealab! Common (1) 22,100,000 773,500 Sameday.com Series A Preferred (2) 50,000 75,000 ROBERT KAVNER PETsMART.com Series C Preferred 38,400 64,128 HOWARD MORGAN idealab! Common 30,000 66,000 idealab! Series D Preferred 250,000 2,500,000 BRADLEY RAMBERG idealab! Common (1) 5,000,000 175,000 Series D Preferred (3) 75,000 750,000 Series D Preferred (4) 50,000 500,000 BENJAMIN ROSEN Homepage.com Series B Preferred 50,000 100,000 MyHome.com Series B Preferred 66,666 100,000 MyLife.com Series B Preferred 100,000 100,000 PayMyBills.com Series B Preferred 66,666 100,000 Sameday.com Series A Preferred 66,667 100,000 IDEALAB! CAPITAL MANAGEMENT FUNDS idealab! Series D Preferred (5) 1,500,000 15,000,000
- ------------- (1) Shares subject to repurchase by us at the original purchase price upon termination of the executive's employment to the extent not vested at the time of termination. (2) Shares purchased by Barry Volpert, Mr. Gross' brother-in-law. (3) Shares purchased by a trust of which Mr. Ramberg's parents are trustees. (4) Shares purchased by Coldwater Investments L.L.C., of which Mr. Ramberg and his parents and siblings are members. 70 (5) Includes 1,317,750 shares purchased by idealab! Capital Partners II-A, L.P., 45,000 shares purchased by idealab! Capital Partners II-B, L.P., and 137,250 shares purchased by idealab! Capital Principals Fund, L.P. PURCHASES OF STOCK FROM DIRECTORS, EXECUTIVE OFFICERS AND MAJOR STOCKHOLDERS The following table summarizes the material terms of transactions since the beginning of fiscal 2000 in which we purchased shares of our stock or the stock of our network companies from our directors, executive officers, major stockholders and related persons for more than $60,000.
CLASS OF NUMBER OF AGGREGATE ISSUER STOCK SHARES PURCHASE PRICE ----------------- -------------- ---------------- ----------------- ROBERT KAVNER.......... GoTo.Com Common 375,871 $30,069,680 HOWARD MORGAN.......... GoTo.Com Common 66,667 5,333,360 (1) FirstLook Common 100,000 66,000 (2)
- ---------------- (1) Includes $2,833,360 and 25,000 shares of our Series D preferred stock, which are convertible into 250,000 shares of our common stock and were valued at $100.00 per share in third-party sales at the same time as the transaction. (2) Represents 30,000 shares of our common stock, which had a fair market value of $2.20 per share at the time of the transaction as determined by our board of directors. VENTURE CAPITAL AFFILIATIONS We are affiliated with two families of venture capital funds that have an aggregate amount of capital commitments payable during the term of such funds equal to $469.0 million. As of January 31, 2000, these funds had received capital contributions equal to $152.2 million. INTERESTS IN ICP I FUNDS. We are a managing member of idealab! Capital Management I, L.L.C. ("ICM I"), the sole general partner of idealab! Capital Partners I-A, L.P. and idealab! Capital Partners I-B, L.P. (the "ICP I Funds"). ICM I and the ICP I Funds were formed in March 1998. The ICP I Funds have an aggregate capitalization of $105.0 million. Of this amount, we have committed $505,000 indirectly through our capital commitment to ICM I, and Bill Gross has committed $10,000 indirectly through his capital commitment to ICM I. In addition, Bill Gross has committed $1.0 million directly as a limited partner of idealab! Capital Partners I-A and Benjamin Rosen, along with two trusts of which his children are beneficiaries, have committed an aggregate of $2.0 million directly as limited partners of idealab! Capital Partners I-B. $46,000 of our capital commitment to ICM I was satisfied through a capital contribution to ICM I of 27,018 shares of our Series B preferred stock. $290,000 of Bill Gross' capital commitment to idealab! Capital Partners I-A was satisfied through capital contributions to idealab! Capital Partners I-A of 170,588 shares of our Series B preferred stock owned by him. $416,000 of our capital commitment and $9,000 of Bill Gross' capital commitment to ICM I, $870,000 of Bill Gross' capital commitment to idealab! Capital Partners I-A and $1.1 million of the capital commitments of Benjamin Rosen and his children's trusts to idealab! Capital Partners I-B had been satisfied as of January 31, 2000. INTERESTS IN ICP II FUNDS. We are a managing member of idealab! Capital Management II, L.L.C. ("ICM II"), the sole general partner of idealab! Capital Partners II-A, L.P., idealab! Capital Partners II-B, L.P., and idealab! Capital Principals Fund, L.P. (the "ICP II Funds"). ICM II and the ICP II Funds were formed in August 1999. The ICP II Funds have an aggregate capitalization equal to $364.0 million, of which we have committed $25.5 million, including $470,000 indirectly through our capital commitment to ICM II and $25.0 million directly through our capital commitment as limited partners of idealab! Capital Principals Fund. Barry Volpert, the brother-in-law of Lawrence Gross, has committed $1.0 million and Benjamin Rosen, along with two trusts of which his children are beneficiaries, have committed an aggregate of $2.0 million, directly as limited partners of idealab! Capital Partners II-A. Our, Barry Volpert's, Benjamin Rosen's and his children's trusts' commitments are payable in cash. $97,000 of our capital commitment to ICM II, $4.25 million of our capital commitment to idealab! Capital Principals Fund, $180,000 of Barry Volpert's capital commitment to idealab! Capital Partners II-A and $360,000 of the capital commitments of Benjamin Rosen and his children's trusts to idealab! Capital Partners II-A had been satisfied as of January 31, 2000. 71 MANAGEMENT OF ICP FUNDS. The ICP I Funds and the ICP II Funds (collectively, the "ICP Funds") were formed primarily to make venture capital investments in emerging growth companies. The investment activities of the ICP I Funds and the ICP II Funds are controlled exclusively by ICM I and ICM II, respectively. We and Bill Gross together hold 50% of the total managing member voting rights of each of ICM I and ICM II. As a result, the ICP Funds generally can neither acquire nor dispose of investment assets without our and Bill Gross' consent. Bill Gross has agreed to vote his managing member interests in the same manner as we vote ours so long as he continues to control us. Subject to limitations set forth in the governing documents of the ICP Funds: (1) we are indirectly subject to fiduciary duties to the ICP Funds in the exercise of our managing member voting rights; and (2) subject to our own prior right to participate in financings conducted by our network companies, we are required to use our reasonable best efforts to cause our network companies to offer the ICP Funds the opportunity to participate in these financings. Under some circumstances, an ICP Fund may not invest in a network company without the approval of an independent advisory committee or the fund's limited partners. The ICP Funds do not limit their investments to network companies. CARRIED INTEREST IN ICP I FUNDS. ICM I holds a carried interest in the ICP I Funds, that, on a blended basis, represents the right to receive 17.4% of the net profits generated by the ICP I Funds over their entire term. Our interest in ICM I entitles us to receive 43.5% of ICM I's carried interest profits, and Bill Gross' interest in ICM I entitles him to receive 0.9% of ICM I's carried interest profits. Accordingly, through our and Bill Gross' interest in ICM I, we hold a carried interest which represents the right to receive 7.6% of the net profits of th ICP I Funds on a blended basis, and Bill Gross holds a carried interest which represents the right to receive 0.2% of the net profits of the ICP I Funds on a blended basis. These blended figures are based on the assumption that the two ICP Funds, which have made differing investments, will achieve identical returns. Accordingly, the actual return realized by ICM I will be based on the actual separate investment returns of the two ICP I Funds. In addition, our and Bill Gross' indirect capital commitment to the ICP I Funds through ICM I entitles us and Bill Gross to a share of the ICP I Funds' profits and losses in proportion to the amount of our respective indirect capital commitments in the same manner as other investors. Bill Gross' direct capital commitment as a limited partner of idealab! Capital Partners I-A and the direct capital commitments of Benjamin Rosen and his children's trusts as limited partners of idealab! Capital Partners I-B also entitle them to shares of the profits and losses of those funds in proportion to the amounts of their direct capital commitments in the same manner as other investors. MANAGEMENT FEES FROM ICP I FUNDS. ICM I is entitled to receive an annual management fee from the ICP I Funds equal to 2.39% of their total committed capital, subject to a significant decrease in the annual management fee rate following the fifth year of each fund's term. ICM I is required to apply its management fee income to pay the day-to-day operating expenses of the ICP I Funds and pay certain fees and salaries to its members, including an annual fee of $400,000 to us. In the event that ICM I has an excess management fee income after paying such fees, salaries and expenses, we are entitled to 43.12% of the excess and Bill Gross is entitled to 0.88% of the excess. CARRIED INTEREST IN ICP II FUNDS. ICM II holds a carried interest in idealab! Capital Partners II-A and idealab! Capital Partners II-B that, on a blended basis, represents the right to receive 19.4% of the net profits generated by such funds over their entire term. This 19.4% amount will retroactively increase to 29.1% if the internal rate of return to the funds' investors reaches 25.0%. The 19.4% and 29.1% amounts are based on the assumption that idealab! Capital Partners II-A and idealab! Capital Partners II-B, which have made differing investments, will achieve identical returns. Accordingly, the actual return realized by ICM II will be based on the actual separate investment returns of idealab! Capital Partners II-A and idealab! Capital Partners II-B. ICM II holds a carried interest in idealab! Capital Principals Fund that represents a right to receive 10.0% of the net profits generated by the Principals Fund over its entire term. This 10.0% figure will retroactively increase to 15.0% if the internal rate of return to the Principals Fund's investors reaches 25.0%. It is not currently clear whether the internal rate of return to investors in any of the ICP II Funds will meet the 25.0% rate needed to trigger ICM II's higher carried interest rate. Our interest in ICM II entitles us to receive 47.5% of ICM II's carried interest profits. Accordingly, through our interest in ICM II we hold a carried interest which represents the right to receive approximately 9.3% to 13.9% of the net profits of idealab! Capital Partners II-A and idealab! Capital Partners II-B on a blended basis, and approximately 4.8% to 7.2% of the net profits of idealab! Capital 72 Principals Fund, depending in each case on whether these funds' internal rates of return exceed 25.0%. The 9.3% to 13.9% blended range is based on the assumption that idealab! Capital Partners II-A and idealab! Capital Partners II-B, which have made differing investments, achieve identical returns. Our actual share of the returns of the ICP II funds will be based on the separate investment returns of idealab! Capital Partners II-A and idealab! Capital Partners II-B. In addition, our indirect capital commitment to the ICP II Funds, our direct capital commitment as a limited partner of idealab! Capital Principals Fund, and Barry Volpert's, Benjamin Rosen's and his children's trusts' direct capital commitments as limited partners of idealab! Capital Partners II-A entitle us, Barry Volpert, Benjamin Rosen and his children's trusts to shares of these funds' profits and losses proportionate to the amount of our and their respective capital commitments in the same manner as any other investor. MANAGEMENT FEES FROM ICP II FUNDS. We are also a managing member of idealab! Capital Management Services, L.L.C. (ICMS), an entity which provides back-office and similar services to ICM II and the ICP II Funds. In this capacity, we are entitled to receive 47.5% of all management fees paid by the ICP II Funds. The ICP II Funds, other than idealab! Capital Principals Fund, pay ICMS an annual management fee equal to 2.5% of the funds' total committed capital, subject to a significant decline in the annual management fee rate following the fifth year of each fund's term. The annual management fee for idealab! Capital Principals Fund is 1.25% of its total committed capital, subject to a significant decline following the fifth year of its term. We have no capital commitment to ICMS and have no other interest in its profits or losses. Limited partner interests in the ICP Funds other than idealab! Capital Principals Fund are held primarily by institutional investors, some of whom also hold our stock. Interests in ICM I, ICM II and idealab! Capital Principals Fund not held by us or Bill Gross are held by investment professionals actively involved in the management and operation of the ICP Funds, or by entities affiliated with these professionals. ICM I and ICM II, together with the ICP funds, will hold between 4% and 5% of our outstanding stock immediately following this offering. We have not yet determined whether we will participate in the formation or management of additional venture capital funds. INDEBTEDNESS The following table summarizes the material terms and payment status of the loans made by us to our directors, executive officers and affiliates since the beginning of fiscal 2000. Each of these loans is or was full recourse and bears, or, if paid in full, bore interest at a rate of 7% per annum, compounded annually, and is or was secured by collateral at least equal in fair market value to the principal amount of the loan on the date the loan was made. Each loan is or was due upon the earlier of four years from the date it was made or, if the loan was made in connection with the exercise of options or the purchase of restricted stock, upon the payment of cash dividends to the stockholder in an amount greater than the principal and interest then owed. All loans not listed as having been paid remain outstanding in full, and unless otherwise indicated all loans listed as having been paid were paid in full on the date indicated.
LARGEST PRINCIPAL PRINCIPAL AMOUNT AMOUNT OUTSTANDING OUTSTANDING AS OF NAME SINCE FEBRUARY 1, 1999 MARCH 31, 2000 ------- ------------------------- ----------------------- BILL GROSS....................... $30,700,000 $30,700,000 MARCIA GOODSTEIN................. 292,500 250,000 LAWRENCE GROSS................... 618,800 618,800 TOM HUGHES....................... 300,000 300,000 BRUCE JOHNSTON................... 2,550,000 2,550,000 ROBERT KAVNER.................... 430,000 430,000 HOWARD MORGAN.................... 420,000 410,000 BRADLEY RAMBERG.................. 175,000 140,000
All remaining principal amounts outstanding as of March 31, 2000 are for loans made in connection with early exercises of stock options or in connection with purchases of our common or preferred stock. We believe that all of these transactions were on terms as favorable to us as we would have received from unaffiliated third parties. Any future transactions between us and our officers, directors and principal shareholders and their affiliates will be approved by a majority of the board of directors, including a majority of the independent and non-interested directors. 73 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of January 31, 2000, and as adjusted to reflect our sale of shares in this offering, by the following individuals or groups: o each person or entity known by us to own beneficially more than 5% of our outstanding stock; o each of our executive officers; o each of our directors; and o all of our directors and executive officers as a group. The address for each stockholder listed in the following table is c/o idealab!, 130 West Union Street, Pasadena, California 91103. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them. Applicable percentage ownership in the following table is based on 788,335,687 shares of common stock outstanding as of January 31, 2000, as adjusted to reflect the automatic conversion of all outstanding shares of our preferred stock into 236,860,100 shares of common stock upon the closing of this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of January 31, 2000 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. In computing the number of shares beneficially owned by a person, shares of common stock that are subject to our right of repurchase at the original exercise price paid per share, or such shares that are subject to exercisable but unvested options, are included. Unvested options are immediately exercisable upon grant, provided that upon the optionee's cessation of service, any unvested shares are subject to repurchase by us at the original exercise price paid per share.
PERCENT BENEFICIALLY OWNED ------------------------------ SHARES BENEFICIALLY BEFORE AFTER NAME OWNED OFFERING OFFERING ----------- ---------------- ------------- -------------- 5% STOCKHOLDERS Bill Gross(1) ......................................... 390,140,900 41.58% % Karen Gross(2) ........................................ 151,808,400 19.26 DIRECTORS AND EXECUTIVE OFFICERS Marcia Goodstein(3) ................................... 32,363,000 4.07 Howard Morgan(4) ...................................... 31,380,000 3.97 Robert Kavner(5) ...................................... 25,966,000 3.29 Lawrence Gross(6) ..................................... 24,012,000 3.05 Thomas Hughes(7)....................................... 20,000,000 2.54 Benjamin Rosen......................................... 7,941,180 1.01 Bradley Ramberg(8)..................................... 5,036,500 * All directors and executive officers as a group (7 people)(9) ......................................... 536,839,580 79.39
- -------------------- * Less than 1% of the outstanding shares of common stock. (1) Includes 16,000,000 shares subject to our right of repurchase as of 60 days after January 31, 2000, 150,000,000 shares underlying an exercisable but unvested option as of 60 days after January 31, 2000 and 209,000 shares held in trust for certain family members of Mr. Gross. Also includes 74 38,976,010 shares held by the ICP I Funds and ICP II Funds. Mr. Gross is a managing member of entities that control these Funds. Mr. Gross disclaims beneficial ownership of the shares owned by the ICP I Funds and ICP II Funds except to the extent of his pecuniary interest in the Funds. (2) Includes 104,500 shares held in trust for certain family members of Ms. Gross. (3) Includes 7,000,000 shares subject to our right of repurchase as of 60 days after January 31, 2000, 5,850,000 shares underlying exercisable but unvested options as of 60 days after January 31, 2000, 900,000 held in trust for certain family members of Ms. Goodstein's, and 10,000,000 shares held by a private foundation of which Ms. Goodstein is trustee. (4) Includes 11,000,000 shares subject to our right of repurchase as of 60 days after January 31, 2000 and 2,100,000 shares underlying an exercisable but unvested option as of 60 days after January 31, 2000. (5) Includes 11,000,000 shares subject to our right of repurchase as of 60 days after January 31, 2000, 2,100,000 shares underlying an exercisable but unvested option as of 60 days after January 31, 2000 and 100,000 shares owned by Mr. Kavner's spouse of which 60,000 shares are subject to our right of repurchase as of 60 days after January 31, 2000. (6) Includes 13,260,000 shares subject to our right of repurchase as of 60 days after January 31, 2000. (7) Includes 6,000,000 shares subject to our right of repurchase as of 60 days after January 31, 2000. (8) Includes 3,000,000 shares subject to our right of repurchase as of 60 days after January 31, 2000 and 50,000 shares owned by Coldwater Investments, L.L.C., of which Mr. Ramberg is a managing member. Mr. Ramberg disclaims beneficial ownership of the shares owned by Coldwater Investments, L.L.C. except to the extent of his pecuniary interest in Coldwater Investments, L.L.C. (9) Includes an aggregate of 67,260,000 shares subject to our right of repurchase as of 60 days after January 31, 2000. 75 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of this offering, we will be authorized to issue 10,000,000,000 shares of common stock, $0.001 par value per share, and 100,000,000 shares of undesignated preferred stock, $0.001 par value per share. Set forth below is a description of the common stock and preferred stock that may be issued under our articles of incorporation to be effective upon consummation of this offering. COMMON STOCK The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy". In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock then outstanding, if any. The holders of our common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. PREFERRED STOCK Upon consummation of this offering, all 3,450,000 shares of our Series A preferred stock, 5,717,135 shares of our Series B preferred stock, 6,000,000 shares of our Series C preferred stock and 8,518,875 shares of our Series D preferred stock outstanding as of January 31, 2000 will be automatically converted into common stock on a 10-for-1 basis. Immediately following the offering, our board of directors will have the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things: o restricting dividends on the common stock; o diluting the voting power of the common stock; o impairing the liquidation rights of the common stock; or o delaying or preventing a change in control of our company without further action by the stockholders. Upon the completion of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Under an investor rights agreement, the holders of 84,605,200 shares of common stock issuable upon conversion of our preferred stock outstanding as of January 31, 2000 have the following rights with respect to registration of all of their shares under the Securities Act. Because these shares can be registered under the rights agreement, we call them registrable securities. Under these registration rights, beginning 180 days from the effective date of an initial public offering of common stock, and for the twelve month period thereafter, in the event that we elect to register any of our shares of common stock for purposes of effecting any public offering, the holders of registrable securities are entitled to include their shares of common stock in the registration, subject to the right of the managing underwriter to reduce the number of shares proposed to be registered in view of market conditions. Additionally, beginning on the date when we become eligible to register shares for public resale on Form S-3, and for the twelve month period thereafter, holders of a majority of the then outstanding registrable securities may require us to 76 register their shares for public resale on Form S-3, provided that we are not obligated to effect more than one such registration in any twelve month period and provided further that the anticipated aggregate offering price of the securities to be registered is at least $50.0 million (net of underwriting discounts and commissions). We will be responsible for all expenses in connection with the first two registrations on Form S-3 (other than underwriting discounts and commissions). If not terminated earlier, all such registration rights will terminate at such time as the holder is entitled to sell all registrable securities held by it in a three month period pursuant to Rule 144(k) of the Securities Act. NEVADA LAW AND ARTICLES OF INCORPORATION AND BYLAWS PROVISIONS AFFECTING STOCKHOLDERS Our articles of incorporation, bylaws and the laws of the State of Nevada governing corporations may have the effect, either alone or in combination with each other, of making more difficult or discouraging a tender offer, change in control or takeover attempt that is opposed by our board of directors. ADVANCE NOTICE REQUIREMENT. Our bylaws provide advance notice requirements for stockholders to submit nominations for the election of directors or other proposals to be voted on by our stockholders. These requirements include providing information about the proposed nominee or proposal and the giving of notice to our secretary 120 days prior to the distribution of a proxy statement to our stockholders in connection with the meeting at which the nominee or proposal is to be voted upon. The advance notice requirements for nominations of directors and stockholder proposals will have the effect of making it more difficult for stockholders to change the composition of our board of directors. These provisions could also have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of us. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Our articles of incorporation require that all stockholder action be taken at a stockholders' meeting. Our bylaws provide for annual meetings and special meetings of stockholders. Special meetings of stockholders may be called by (1) the board of directors, (2) the chairman of the board or (3) the chief executive officer and president. These provisions of our articles of incorporation and bylaws are intended to: o reduce our vulnerability to an unsolicited acquisition proposal; o discourage certain types of transactions that may involve an actual or threatened change of our control; and o discourage some tactics that may be used in proxy fights. These provisions, however, could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. CONTROL SHARE ACQUISITIONS. Sections 78.378 through 78.3793 of the Nevada Revised Statutes (the NRS) provide that an acquiring person who acquires a controlling interest in an issuing corporation may only exercise voting rights on any control shares if they are conferred by a majority vote of the issuing corporation's disinterested stockholders at a special meeting of stockholders held upon the request and at the expense of the acquiring person. In addition, our articles of incorporation require that any transaction or series of related transactions that result in the transfer of 50% or more of our outstanding voting power be approved by two-thirds of our outstanding shares entitled to vote. In the event that the acquiring person is accorded full voting rights and acquires control shares with at least a majority of our voting power, any of our stockholders who did not vote in favor of authorizing voting rights for the control shares, is entitled to payment for the fair value of his or her shares. For purposes of the above provisions, acquiring person generally means any person who, individually or in association with others, acquires or offers to acquire, directly or indirectly, a controlling interest in an issuing corporation. Controlling interest means the ownership of outstanding voting shares of an issuing corporation sufficient, but for the provisions of NRS 78.378 through 78.3793, to enable the 77 acquiring person, individually or in association with others, directly or indirectly, to exercise at least one-fifth of the voting power of the issuing corporation in the election of directors. Control shares means those outstanding voting shares of an issuing corporation which an acquiring person and those persons acting in association with an acquiring person acquires or offers to acquire in an acquisition and those shares that are acquired within 90 days immediately preceding the date when the acquiring person became an acquiring person. Issuing corporation means a corporation that is organized in Nevada, has 200 or more stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and does business in Nevada directly or through an affiliated corporation. If the articles of incorporation or bylaws of the corporation provide that the above provisions do not apply, then the above provisions are not applicable. Our articles of incorporation and bylaws, however, currently do not exclude us from the restrictions imposed by these provisions. BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS. Sections 78.411 through 78.444 of the NRS restrict the ability of a Nevada corporation with more than 200 stockholders to engage in any combination with an interested stockholder for three years from when the interested stockholder acquires shares that cause such stockholder to become an interested stockholder, unless the combination or the purchase of shares by the interested stockholder was approved by the board of directors before such stockholder became an interested stockholder. If the combination was not previously approved, the interested stockholder may only effect a combination after the three-year period if such stockholder receives approval from a majority of the disinterested shares or the offer meets fair price criteria under the NRS. Interested stockholder means any person, other than the resident domestic corporation or its subsidiaries, who is (1) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or (2) an affiliate or associate of the resident domestic corporation and (3) was, at any time within three years before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the resident domestic corporation. The above provisions do not apply to any combination of a corporation whose current articles of incorporation expressly state that the corporation is not to be governed by these provisions. Our articles of incorporation currently do not exclude us from these restrictions. APPLICABILITY OF CALIFORNIA LAW. We are currently subject to Section 2115 of the California General Corporation Law. Section 2115 provides that, regardless of a company's legal domicile, some provisions of California corporate law will apply to that company if more than 50% of its outstanding voting securities are held of record by persons having addresses in California and the majority of the company's operations occur in California. For example, while we are subject to Section 2115, stockholders may cumulate votes in electing directors. This means that each stockholder may vote a number of votes equal to the number of candidates, multiplied by the number of votes to which the stockholder's shares are normally entitled, in favor of one candidate. The ability to cumulate votes potentially enables minority stockholders to elect some members of the board of directors. When we are no longer subject to Section 2115, cumulative voting will not be allowed and a holder or holders of 50% or more of our voting stock will be able to control the election of all directors. In addition, Section 2115 has the following effects: o it allows the removal of directors with or without cause with majority stockholder approval; o it places limitations on our distribution of dividends; o it extends additional rights to dissenting stockholders in any reorganization, including a merger, sale of assets or exchange of shares; and o it provides for stockholder information rights and required filings in the event we effect a sale of assets or complete a merger. We anticipate that after this offering our common stock will be listed on The Nasdaq National Market, and that we will have at least 800 stockholders of record by the record date for our annual meeting of stockholders in 2000. Assuming that these two assumptions prove true, we will cease to be subject to Section 2115 as of the record date for our 2000 annual meeting of stockholders. 78 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is . LISTING We have applied for listing of our shares on the Nasdaq National Market under the symbol "ILAB". 79 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock and there can be no assurance that a significant public market for the common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market following this offering could adversely affect market prices prevailing from time to time and could impair idealab!'s ability to raise capital through sale of its equity securities. As described below, the resale of ___________ of our currently outstanding shares will be contractually restricted for a period following this offering. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding ____________ shares of common stock based upon shares outstanding as of January 31, 2000, assuming no exercise of the underwriters' option to purchase additional shares and no exercise of outstanding options or warrants prior to completion of this offering. Of these shares, the ___________ shares sold in this offering will be freely tradable without restriction under the Securities Act except for any shares purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 788,335,687 shares of common stock held by existing stockholders as of January 31, 2000 are "restricted shares" as that term is defined in Rule 144. Of these restricted shares are subject to lock-up agreements providing that, with limited exceptions, the stockholder will not offer, sell, contract to sell or otherwise dispose of any common stock or any securities that are convertible into common stock for a period of 180 days after the date of this prospectus without the prior written consent of Goldman, Sachs & Co. As a result of these lock-up agreements, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of these shares will be resellable until 181 days after the date of this prospectus. However, with respect to our directors, officers and holders of a majority of our shares, this restriction shall terminate as to 15% of the shares after 90 days and an additional 20% of the shares after 120 days after the date of this prospectus, subject to delays as a result of the timing of our earnings releases and compliance with insider trading policies, in the event that, at such dates, the reported last sale price of our common stock on The Nasdaq National Market is at least twice the initial public offering price for a period of time ending on such dates. If these early releases occur, approximately _____________ and ____________ of the shares originally covered by lock-up agreements will become available for sale on the 90th and the 120th days following the date of this prospectus, subject to the restrictions described above. Beginning 181 days after the date of this prospectus, approximately _________________ restricted shares will be eligible for sale in the public market, all of which are subject to volume limitations under Rule 144, except ________ shares eligible for sale under Rule 144(k) and _______ shares eligible for sale under Rule 701. Of those restricted shares not eligible for sale beginning 181 days after the date of this prospectus, ______________ restricted shares will be eligible for sale on or prior to July 31, 2000, and ____________ restricted shares will be eligible for sale on or prior to January 31, 2001, all of which are subject to volume limitations under Rule 144. In addition, as of January 31, 2000, there were outstanding options to purchase 200,013,550 shares of common stock, some of which may be exercised prior to this offering. All such options and warrants are subject to lock-up agreements. Goldman, Sachs & Co. may, in their 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, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year including the holding period of any prior owner except an affiliate would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: o 1% of the number of shares of common stock then outstanding, which will equal approximately _____________ shares immediately after this offering; or o the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. 80 Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years including the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with restrictions, including the holding period requirement, of Rule 144. Any employee, officer or director of or consultant to us who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such shares. However, Rule 701 shares are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the lock-up agreements or no sooner than 90 days after the offering upon obtaining the prior written consent of Goldman, Sachs & Co. Following the effectiveness of this offering, we will file a registration statement on Form S-8 registering shares of common stock subject to outstanding options or reserved for future issuance under our stock plans. As of January 31, 2000, options to purchase a total of 200,013,550 shares were outstanding and 64,085,700 shares were reserved for future issuance under our stock plans. Common stock issued upon exercise of outstanding vested options or issued under our purchase plan, other than common stock issued to our affiliate, is available for immediate resale in the open market. Also beginning six months after the date of this offering, holders of 84,605,200 restricted shares outstanding as of January 31, 2000 will be entitled to certain registration rights for sale in the public market. See "Description of Capital Stock Registration Rights". Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of such registration. 81 UNDERWRITING idealab! and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, FleetBoston Robertson Stephens Inc. and Thomas Weisel Partners LLC are the representatives of the underwriters. UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Goldman, Sachs & Co.................................... Donaldson, Lufkin & Jenrette Securities Corporation.... Merrill Lynch, Pierce, Fenner & Smith.................. Incorporated........................ FleetBoston Robertson Stephens Inc..................... Thomas Weisel Partners LLC............................. ---------------- Total............................................. ================ If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional shares from idealab! to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by idealab!. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares. PAID BY IDEALAB! ---------------- NO EXERCISE FULL EXERCISE ----------- ------------- Per Share.............................. $ $ Total.................................. $ $ Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and the other selling terms. idealab!, its directors, officers and holders of a majority of our shares have agreed with the Underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives; provided, however, that this restriction shall terminate as to 15% of the shares after 90 days and an additional 20% of the shares after 120 days after the date of this prospectus, subject to delays as a result of the timing of idealab!'s earnings releases and compliance with insider trading policies, in the event that, at such dates, the reported last sale price of idealab!'s common stock on the Nasdaq National Market is at least twice the initial public offering price specified in this prospectus for a certain period of time ending on such dates. This agreement does not apply to any existing employee benefit plans. See "Shares Eligible for Future Sale" for a discussion of certain transfer restrictions. Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among idealab! and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be idealab!'s historical performance, estimates of the business potential and earnings prospects of idealab!, an assessment of idealab!'s management and the consideration of the above factors in relation to market valuation of companies in related businesses. 82 Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "ILAB". In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares then they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. At the request of idealab!, the underwriters have reserved for sale, at the initial public offering price, up to shares of common stock for certain directors, stockholders, employees and associates of idealab! There can be no assurance that any of the reserved shares will be so purchased. The number of shares available for sale to the general public in the offering will be reduced by the number of reserved shares sold. Any reserved shares not so purchased will be offered to the general public on the same basis as the other shares offered hereby. The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. The following disclosure is included because Thomas Weisel Partners LLC was organized within the past three years. Since December 1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 153 filed public offerings of equity securities, of which 109 have been completed, and has acted as a syndicate member in an additional 88 public offerings of equity securities. Thomas Weisel Partners LLC does not have any material relationship with idealab! or any of its officers, directors or controlling persons, except with respect to its contractual relationship with idealab! pursuant to the underwriting agreement entered into in connection with this offering. idealab! estimates that its share of the total expenses at the offering, excluding underwriting discounts and commissions, will be approximately $ million. idealab! has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act. 83 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for idealab! by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters will be passed upon for the Underwriters by Shearman & Sterling, Menlo Park, California. As of the date of this prospectus, an investment partnership composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as well as certain individual attorneys of this firm, beneficially own an aggregate of 2,007,750 shares of idealab!'s common stock. EXPERTS The consolidated financial statements of idealab! and its subsidiaries as of January 31, 1999 and 2000 and for each of the three years in the period ended January 31, 2000 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of eVoice, Inc. as of December 31, 1998 and September 30, 1999 and for the periods from December 7, 1998 (inception) to December 31, 1998 and the nine months ended September 30, 1999 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Intranets.com, Inc. as of December 31, 1997 and 1998 and for each of the two years in the period ended December 31, 1998 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Perga Capital Incorporated as of April 30, 1998 and 1999 and for each of the two years in the period ended April 30, 1999 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of AutoData Marketing Systems Incorporated and its subsidiaries as of April 30, 1998 and 1999 and for each of the two years in the period ended April 30, 1999 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of PointCast Incorporated as of December 31, 1997 and 1998 and for each of the two years in the period ended December 31, 1998 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Potamkin Auto Center, Ltd. as of December 31, 1998 and September 30, 1999 and for the year ended December 31, 1998 and the nine months ended September 30, 1999 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of GoTo.com, Inc. at December 31, 1998 and 1999 and for each of the two years in the period ended December 31, 1999 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of idealab! Capital Management I, LLC at December 31, 1998 and 1999 and for the period from March 20, 1998 (inception) to December 31, 1998 and the year ended December 31, 1999 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. 84 ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information with respect to us and our common stock, see the registration statement and the exhibits and schedules thereto. Any document we file with the Commission may be read and copied at the Commission's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further information about the public reference rooms. Our filings with the Commission are also available to the public from the Commission's Web site at http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act and, accordingly, we will file periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the Commission's public reference rooms, and the World Wide Web site of the Commission referred to above. 85 INDEX TO FINANCIAL STATEMENTS IDEALAB!
PAGE Report of Independent Accountants........................................................................ F-3 Consolidated Balance Sheets.............................................................................. F-4 Consolidated Statements of Operations.................................................................... F-5 Consolidated Statements of Shareholders' Equity (Deficit)................................................ F-6 Consolidated Statements of Comprehensive Income (Loss)................................................... F-7 Consolidated Statements of Cash Flows.................................................................... F-8 Notes to Consolidated Financial Statements............................................................... F-9 Unaudited Pro Forma Financial Information - Basis of Presentation........................................ F-37 Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations.............................. F-39 Notes to Unaudited Pro Forma Condensed Combined Financial Information.................................... F-40 EVOICE, INC. PAGE Report of Independent Accountants........................................................................ F-42 Balance Sheets........................................................................................... F-43 Statements of Operations................................................................................. F-44 Statements of Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit).................. F-45 Statements of Cash Flows................................................................................. F-46 Notes to Financial Statements............................................................................ F-47 GOTO.COM, INC. PAGE Report of Independent Auditors........................................................................... F-57 Balance Sheets........................................................................................... F-58 Statements of Operations................................................................................. F-59 Statements of Stockholders' Equity....................................................................... F-60 Statements of Cash Flows................................................................................. F-61 Notes to Financial Statements............................................................................ F-62 IDEALAB! CAPITAL MANAGEMENT I, LLC PAGE Report of Independent Auditors........................................................................... F-73 Balance Sheets........................................................................................... F-74 Statements of Operations................................................................................. F-75 Statements of Changes in Members' Equity................................................................. F-76 Statements of Cash Flows................................................................................. F-77 Notes to Financial Statements............................................................................ F-78
F-1 INTRANETS.COM, INC.
PAGE Report of Independent Accountants........................................................................ F-82 Balance Sheets........................................................................................... F-83 Statements of Operations................................................................................. F-84 Statements of Cash Flows ................................................................................ F-85 Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit........................... F-86 Notes to Financial Statements............................................................................ F-87 PERGA CAPITAL INCORPORATED PAGE Auditors' Report......................................................................................... F-95 Balance Sheets........................................................................................... F-96 Statements of Operations and Deficit..................................................................... F-97 Statements of Cash Flows................................................................................. F-98 Notes to Financial Statements............................................................................ F-99 AUTODATA MARKETING SYSTEMS INCORPORATED Auditors' Report........................................................................................ F-105 Consolidated Balance Sheets............................................................................. F-106 Consolidated Statements of Earnings and Deficit......................................................... F-107 Consolidated Statements of Cash Flows................................................................... F-108 Notes to Consolidated Financial Statements.............................................................. F-109 POINTCAST INCORPORATED PAGE Report of Independent Accountants........................................................................ F-119 Balance Sheets........................................................................................... F-120 Statements of Operations................................................................................. F-121 Statements of Shareholders' Deficit...................................................................... F-122 Statements of Cash Flows................................................................................. F-123 Notes to Financial Statements............................................................................ F-124 POTAMKIN AUTO CENTER, LTD. PAGE Report of Independent Accountants........................................................................ F-137 Balance Sheets........................................................................................... F-138 Statements of Operations................................................................................. F-139 Statements of Shareholders' Equity....................................................................... F-140 Statements of Cash Flows................................................................................. F-141 Notes to Financial Statements............................................................................ F-142
F-2 The following report is in the form that will be signed upon (i) the completion of the Company's reincorporation in the State of Nevada as described in Note 23 of the Notes to the Consolidated Financial Statements and (ii) a determination that the Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), as described in Note 21 of the Notes to the Consolidated Financial Statements. /s/ PricewaterhouseCoopers LLP Woodland Hills, California April 10, 2000 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of idealab!: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity, comprehensive income (loss) and cash flows present fairly, in all material respects, the financial position of idealab! and its subsidiaries (the "Company") at January 31, 1999 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2000 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Woodland Hills, California April 10, 2000, except for the information in paragraph 2 of Note 23, as to which the date is _______________ , 2000 and paragraph 6 of Note 21, as to which the date is ________________ , 2000. F-3 IDEALAB! CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA SHAREHOLDERS' JANUARY 31, EQUITY ------------------------- JANUARY 31, 1999 2000 2000 ----------- ------------ --------------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents......................................... $ 6,339 $ 601,474 Accounts receivable, net.......................................... 77 14,760 Short-term marketable securities.................................. -- 70,526 Inventory......................................................... -- 12,080 Prepaid expenses and other current assets......................... 161 7,399 ----------- ------------ Total current assets............................................ 6,577 706,239 Fixed assets, net.................................................... 2,313 18,569 Ownership interests in network companies............................. 2,286 614,292 Marketable securities................................................ 35,832 179,239 Goodwill, net........................................................ -- 109,587 Other assets......................................................... 544 46,457 ----------- ------------ TOTAL ASSETS.................................................... $ 47,552 $ 1,674,383 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................. $ 1,286 $ 26,285 Income taxes payable.............................................. -- 87,249 Accrued expenses.................................................. 3,818 26,105 Short term borrowings............................................. -- 1,061 Note payable to a related party................................... 300 -- Current portion of capital lease obligations...................... 67 3,515 ----------- ------------ Total current liabilities....................................... 5,471 144,215 Capital lease obligations, less current portion...................... 39 30,439 Deferred income taxes................................................ 9,692 116,413 Minority interest.................................................... 1,030 152,750 Convertible preferred stock, no par value; 28,452 shares authorized at January 31, 2000, 9,451 and 23,686 shares issued and outstanding at January 31, 1999 and 2000, respectively; liquidation preference and redemption value of $13,652 and $883,058 at January 31, 1999 and 2000, respectively; pro forma--none authorized, issued or outstanding................. 13,652 892,782 $ -- Commitments and contingencies (Note 21).............................. SHAREHOLDERS' EQUITY Preferred stock, no par value; 9,548 shares authorized at January 31, 2000, no shares issued or outstanding; pro forma-$0.001 par value; 100,000 shares authorized, none issued or outstanding............. -- -- -- Common stock, no par value; 1,100,000 shares authorized at January 31, 2000; 448,654 and 551,476 shares issued and outstanding at January 31, 1999 and 2000, respectively; pro forma --$0.001 par value; 10,000,000 shares authorized; 788,336 shares issued and outstanding................................................... 15,366 387,689 788 Additional paid-in capital........................................... -- -- 1,279,683 Notes receivable from shareholders................................... (1,665) (38,304) (38,304) Deferred stock compensation.......................................... (6,387) (239,892) (239,892) Accumulated other comprehensive income............................... 20,663 144,816 144,816 Retained earnings (deficit).......................................... (10,309) 83,475 83,475 ----------- ------------ --------------- Total shareholders' equity........................................ 17,668 337,784 $ 1,230,566 ----------- ------------ =============== TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY...................... $ 47,552 $ 1,674,383 =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 IDEALAB! CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JANUARY 31, --------------------------------------------------- 1998 1999 2000 ---------------- --------------- ---------------- REVENUES Trade revenues................................................ $ 154 $ 459 $ 18,643 Management fees from related parties.......................... -- 346 2,515 ---------------- --------------- ---------------- Total revenues.............................................. 154 805 21,158 ---------------- --------------- ---------------- OPERATING EXPENSES Cost of revenues (excluding $0, $0 and $169 of stock-based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively)................................ 172 82 28,380 Sales and marketing (excluding $0, $0 and $1,066 of stock- based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively).......................... 2,002 1,940 70,129 Product development (excluding $0, $27 and $6,165 of stock- based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively).......................... 3,484 1,554 10,798 General and administrative (excluding $233, $3,883 and $101,750 of stock-based compensation charges for the years ended January 31, 1998, 1999 and 2000, respectively)............................................. 5,623 4,732 36,738 Stock-based compensation...................................... 233 3,910 109,150 Amortization of goodwill and other intangibles................ 49 79 7,149 ---------------- --------------- ---------------- Total operating expenses.................................... 11,563 12,297 262,344 ---------------- --------------- ---------------- Operating income (loss)..................................... (11,409) (11,492) (241,186) ---------------- --------------- ---------------- OTHER INCOME (EXPENSE) Realized gains on sales of marketable securities.............. -- 2,250 201,959 Gain on stock issuance by a network company................... -- -- 22,658 Other income, net............................................. 216 5,307 92,003 Interest income............................................... 36 120 8,386 Interest expense.............................................. (178) (49) (2,695) ---------------- --------------- ---------------- 74 7,628 322,311 ---------------- --------------- ---------------- Income (loss) before income taxes, minority interest and equity in the income (loss) of affiliates............................. (11,335) (3,864) 81,125 Income tax benefit (expense).................................. 3,528 2,358 (86,245) Minority interest............................................. 1,022 572 95,537 Equity in the income (loss) of affiliates, net of tax......... (271) 51 28,067 ---------------- --------------- ---------------- Net income (loss)................................................ (7,056) (883) 118,484 Deduction for beneficial conversion feature...................... -- -- (9,724) Repurchase of convertible preferred stock........................ -- -- (3,777) ---------------- --------------- ---------------- Net income (loss) applicable to common shareholders.............. $ (7,056) $ (883) $ 104,983 ================ =============== ================ Net income (loss) per share applicable to common shareholders: Basic......................................................... $ (0.02) $ -- $ 0.25 Diluted....................................................... $ (0.02) $ -- $ 0.15 Shares used to calculate net income (loss) per share applicable to common shareholders: Basic......................................................... 334,760 352,083 423,525 Diluted....................................................... 334,760 352,083 695,312 Unaudited pro forma net income per share applicable to common shareholders: Basic......................................................... $ 0.18 Diluted....................................................... $ 0.15 Shares used to calculate unaudited pro forma net income per share applicable to common shareholders: Basic......................................................... 571,215 Diluted....................................................... 695,312
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 IDEALAB! CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
NOTES ACCUMULATED TOTAL COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED OTHER RETAINED SHAREHOLDERS' ----------------- PAID IN FROM STOCK COMPREHENSIVE EARNINGS EQUITY SHARES AMOUNT CAPITAL SHAREHOLDERS COMPENSATION INCOME (DEFICIT) (DEFICIT) ------- --------- ---------- ------------ ------------ ------------- --------- ------------- BALANCE AT JANUARY 31, 1997........... 326,500 $ 465 $ $ $ (65) $ $ (2,370) $ (1,970) Issuance of common stock for cash and services.............................. 24,434 483 483 Deferred stock compensation........... 407 (407) -- Amortization of deferred stock compensation.......................... 233 233 Net unrealized appreciation of marketable securities.............. 4,474 4,474 Effect of network companies' equity transactions.......................... 937 937 Net loss.............................. (7,056) (7,056) ------- --------- ---------- ------------ ------------ ------------- --------- ------------ BALANCE AT JANUARY 31, 1998........... 350,934 2,292 (239) 4,474 (9,426) (2,899) Issuance of common stock for services. 1,470 30 30 Deferred stock compensation........... 10,058 (10,058) -- Amortization of deferred stock compensation.......................... 3,910 3,910 Exercise of stock options............. 96,250 1,665 (1,665) -- Net unrealized appreciation of marketable securities.............. 16,189 16,189 Effect of network companies' equity transactions.......................... 1,321 1,321 Net loss.............................. (883) (883) ------- --------- ---------- ------------ ------------ ------------- --------- ------------- BALANCE AT JANUARY 31, 1999........... 448,654 15,366 (1,665) (6,387) 20,663 (10,309) 17,668 Issuance of common stock.............. 664 5,311 5,311 Exercise of stock options and warrants 59,400 35,757 (35,208) 549 Tax benefit of stock option exercises. 715 715 Issuance of common stock subject to repurchase......................... 53,600 1,876 (1,876) -- Payments on notes receivable from shareholders....................... 375 375 Deferred stock compensation........... 323,471 (323,471) -- Amortization of deferred stock compensation.......................... 89,966 89,966 Repurchase and retirement of stock... (10,842) (261) 70 (14,976) (15,167) Net unrealized appreciation of marketable securities.............. 124,153 124,153 Effect of network companies' equity transactions....................... 5,454 5,454 Deduction for beneficial conversion feature............................ (9,724) (9,724) Net income............................ 118,484 118,484 ------- --------- ---------- ------------ ------------ ------------- --------- ------------- BALANCE AT JANUARY 31, 2000........... 551,476 387,689 (38,304) (239,892) 144,816 83,475 337,784 Assumed conversion of convertible preferred stock (unaudited)........ 236,860 892,782 892,782 Reincorporation in State of Nevada and change in par value of common stock (unaudited)........... (1,279,683) 1,279,683 -- ------- --------- ---------- ------------ ------------ ------------- --------- ------------- BALANCE AT JANUARY 31, 2000, PRO FORMA (UNAUDITED)........................ 788,336 $ 788 $1,279,683 $ (38,304)$ (239,892) $ 144,816 $ 83,475 $ 1,230,566 ======= ========= ========== ============ ============ ============= ========= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 IDEALAB! CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
FISCAL YEAR ENDED JANUARY 31, ------------------------------------- 1998 1999 2000 ----------- ----------- ------------ NET INCOME (LOSS)....................................................... $ (7,056) $ (883) $ 118,484 ----------- ----------- ------------ OTHER COMPREHENSIVE INCOME BEFORE TAX Unrealized holding gain on marketable securities..................... 7,550 29,539 411,396 Realized gains....................................................... -- (2,250) (201,959) TAX RELATED TO OTHER COMPREHENSIVE INCOME Unrealized holding gain on marketable securities..................... (3,076) (12,016) (167,438) Realized gains....................................................... -- 916 82,154 ----------- ----------- ------------ Other comprehensive income, net of tax............................. 4,474 16,189 124,153 ----------- ----------- ------------ COMPREHENSIVE INCOME (LOSS)............................................. $ (2,582) $ 15,306 $ 242,637 =========== =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 IDEALAB! CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEAR ENDED JANUARY 31, ------------------------------- 1998 1999 2000 --------- --------- --------- OPERATING ACTIVITIES: Net income (loss)......................................................... $ (7,056) $ (883) $118,484 Adjustments to reconcile net income (loss) to net cash used in operating activities: Stock-based compensation................................................ 233 3,910 109,150 Depreciation and amortization........................................... 250 585 10,344 Gain on stock issuance by a network company............................. -- -- (22,658) Realized gains on sale of marketable securities......................... -- (2,250) (201,959) Other income, net....................................................... (216) (5,307) (92,003) Equity in the (income) loss of affiliates, net of tax................... 271 (51) (28,067) Minority interest....................................................... (1,022) (572) (95,537) Deferred income taxes................................................... (3,536) (2,366) (4,578) Changes in assets and liabilities, net of effect of acquisitions and deconsolidations of network companies: Accounts receivable..................................................... (79) (51) (13,338) Inventory............................................................... -- -- (12,080) Accounts payable........................................................ 2,154 512 24,247 Accrued expenses........................................................ (233) 3,703 22,438 Income taxes payable.................................................... -- -- 87,249 Other assets and liabilities............................................ (296) (420) (35,247) --------- --------- --------- Net cash used in operating activities............................... (9,530) (3,190) (133,555) --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures...................................................... (1,368) (1,785) (16,916) Purchase of ownership interests in network companies, net of cash acquired (920) (1,100) (238,704) Proceeds from sales of marketable securities.............................. -- 3,402 202,715 Reduction in cash due to deconsolidation of network companies............. (29) (2,770) (16,939) --------- --------- --------- Net cash used in investing activities............................... (2,317) (2,253) (69,844) --------- --------- --------- FINANCING ACTIVITIES: Issuance of notes payable................................................. 3,872 -- -- Repayments of capital lease obligations................................... (36) (91) (1,734) Issuance of common stock.................................................. 483 30 549 Issuance of convertible preferred stock................................... 8,704 1,452 636,253 Repurchase of common and convertible preferred stock...................... -- -- (15,650) Borrowings................................................................ -- 2,510 9,381 Issuance of note payable to a related party............................... -- 300 -- Repayment of note payable to a related party.............................. -- -- (300) Note receivable from a related party...................................... -- -- (9,283) Repayment of note receivable from a related party......................... -- -- 9,283 Payments on shareholder notes............................................. -- -- 375 Issuance of stock by consolidated network companies....................... 1,566 3,755 169,660 --------- --------- --------- Net cash provided by financing activities........................... 14,589 7,956 798,534 --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS...................................... 2,742 2,513 595,135 Cash and cash equivalents at beginning of year................................. 1,084 3,826 6,339 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR....................................... $ 3,826 $ 6,339 $601,474 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES Cash paid during the year for: Interest ................................................................. $ 178 $ 49 $ 2,842 Income taxes.............................................................. 8 8 8
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. DESCRIPTION OF THE COMPANY Bill Gross' idealab! ("idealab!" or the "Company"), a California corporation, was incorporated on March 14, 1996. The Company is primarily engaged in the process of creating, building and operating interactive communications businesses and identifying Internet business opportunities. In addition to internally developed businesses, the Company has acquired ownership interests in existing businesses which are strategically important to idealab!'s overall network of companies. As of January 31, 2000, the Company had ownership interests in more than 35 companies ("network companies") engaged in various interactive communications businesses. The Company also has ownership interests in entities that serve as the general partner of venture capital funds that invest in emerging growth companies. As described in Note 23, the Company will change its name to idealab! and reincorporate in the State of Nevada prior to the closing of the planned initial public offering of its common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and certain controlled entities. All significant intercompany accounts and transactions have been eliminated in consolidation. The reporting periods of the Company's network companies generally coincide with the calendar year. The Company accounts for its ownership interests in such network companies utilizing the quarterly and annual financial information as reported by network companies pursuant to their fiscal year-ends. Accordingly, the financial results of network companies included in the Company's consolidated financial statements generally reflect a reporting lag period of one-month. ACCOUNTING FOR OWNERSHIP INTERESTS IN NETWORK COMPANIES The Company's ownership interests in network companies are accounted for under one of three methods: consolidation, equity or cost. The applicable accounting method is generally determined based on several factors including the Company's ownership interest in the outstanding voting securities of the network company, representation on the network company's Board of Directors and the extent of the Company's involvement in the management of the network company. CONSOLIDATION. Network companies which the Company effectively controls are accounted for under the consolidation method of accounting. Effective control is generally determined based on an ownership interest of greater than 50% of the network company's outstanding voting securities and the ability to control the network company's Board of Directors. Under this method, a network company's results of operations are reflected within the Company's Consolidated Statements of Operations and its financial position is reflected in the Company's Consolidated Balance Sheets. Participation of other network company shareholders in the net assets and earnings or losses of a consolidated network company is reflected in "minority interest" in the Company's Consolidated Balance Sheets and Statements of Operations. The amount by which the Company's carrying value exceeds its share of the underlying net assets of network companies accounted for under the consolidation method is recorded as goodwill in the accompanying Consolidated Balance Sheets and is amortized on a straight-line basis over the useful life of the underlying assets. The related amortization expense is reflected in the Company's operating expenses on a consolidated basis. EQUITY METHOD. Network companies that are not accounted for under the consolidation method, but over which the Company exercises significant influence, are accounted for under the equity method. Whether or not the Company exercises significant influence with respect to a network company depends on F-9 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) an evaluation of several factors including, among others, representation on the network company's Board of Directors and an ownership interest which is generally between 20% to 50% of the outstanding voting securities of the network company. Under the equity method, a network company's results of operations are not reflected within the Company's Consolidated Statements of Operations; however, the Company's share of the earnings or losses of the network company, which in the case of losses is generally limited to the carrying value of the Company's ownership interest in the network company, is reflected in the caption "Equity in the income (loss) of affiliates, net of tax" in the Company's Consolidated Statements of Operations. For those network companies accounted for using the equity method in which the Company's ownership interest includes preferred stock or other securities which have priority in liquidation to other junior securities, the Company determines its share of the network company's earnings or losses based on the change in the Company's claim on the network company's net assets, in accordance with Emerging Issues Task Force Issue ("EITF") No. 99-10 "Percentage used to Determine the Amount of Equity Method Losses". The amount by which the Company's carrying value exceeds its share of the underlying net assets of network companies accounted for under the equity method is amortized on a straight-line basis over the useful life of the underlying assets, generally three to five years. Amortization expense is reflected as an adjustment to the Company's share of the network companies' earnings or losses. COST METHOD. Network companies not accounted for under the consolidation or equity method are accounted for under the cost method. Under this method, the Company's share of the earnings or losses of the network company is not included in the Consolidated Statement of Operations. However, charges are recognized in the Consolidated Statement of Operations if events or circumstances indicate a permanent impairment of the carrying value. The Company's ownership interests in network companies accounted for under the cost method which have readily determinable fair values based on quoted market prices and which are not restricted as to sale for a period of one year beyond the Company's balance sheet date are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". These ownership interests are classified as Marketable Securities in the accompanying Consolidated Balance Sheets. Ownership interests in network companies accounted for under the cost method which do not have readily determinable fair values or which are restricted as to sale for a period of one year beyond the balance sheet date are stated at the lower of cost or net realizable value. The Company continually evaluates the carrying values of its ownership interests for indications of impairment based on several factors including the fair value of the ownership interest relative to its cost and the financial condition and near-term prospects of the underlying network company. CASH AND CASH EQUIVALENTS The Company considers all highly liquid instruments with an original maturity of 90 days or less to be cash equivalents. MARKETABLE SECURITIES Marketable securities consists of equity securities that have a readily determinable fair value and are not restricted as to sale within one year beyond the Company's balance sheet date. In accordance with its stated objectives, the Company generally intends to be a long term owner of these securities and therefore such securities have been categorized as available-for-sale, as defined by SFAS No. 115, for each of the periods presented. Marketable securities are carried at fair value, based on quoted market prices, with net unrealized gains or losses, net of tax, reported as a component of accumulated other comprehensive F-10 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) income in shareholders' equity. The cost of marketable securities sold is based on the specific identification method. INVENTORY Inventory is comprised primarily of inventory of CarsDirect.com, Inc., one of the Company's consolidated network companies, and consists primarily of new vehicles that are valued at the lower of cost or market. Cost is determined using the specific identification method. FIXED ASSETS Fixed assets are carried at cost less accumulated depreciation and amortization, computed on a straight line basis over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are depreciated using the shorter of the estimated useful life of the related asset or the lease term. Costs of maintenance and repairs are charged to expense as incurred. GOODWILL Goodwill represents the excess cost over the fair value of the net assets of companies acquired and the amount by which the Company's ownership interests in network companies accounted for under the consolidation method exceeds its share of the underlying net assets of such network companies. Goodwill is amortized on a straight-line basis over the periods expected to be benefited ranging from three to ten years. OTHER INTANGIBLE ASSETS The Company and its consolidated network companies have acquired the rights to certain identifiable intangible assets, including domain names, which are carried at the lower of amortized cost or fair value. Such assets, which are included in other assets in the accompanying Consolidated Balance Sheets, are amortized on a straight-line basis over the estimated useful life of the underlying asset, generally three years. REVENUE RECOGNITION CarsDirect.com recognizes as revenues the price its customer pays it for a vehicle following the delivery of the vehicle to the customer, provided that collection of the resulting receivable is probable. CarsDirect.com believes that presentation, as its revenues, of the price its customer pays for a vehicle appropriately reflects the risks, and rewards, of its business model. In addition, CarsDirect.com believes such presentation appropriately reflects the substance of the transaction and its legal rights and obligations. Upon receipt of a customer order, CarsDirect.com enters into a legally enforceable commitment to acquire a specific vehicle from a new car dealer to fulfill that customer order. Such commitment obligates CarsDirect.com to pay the dealer for the specific car regardless of whether the customer pays CarsDirect.com. The customer has the right to cancel an order anytime prior to accepting delivery of the specific car. CarsDirect.com sets the price of the vehicle to the customer, and the price is not based on a formula related to the price CarsDirect.com pays for the vehicle. Customers conduct their business directly with CarsDirect.com and have no influence over which supplier CarsDirect.com uses. CarsDirect.com's cost and payment terms are fixed, and are independent of the price and terms customers pay it for vehicles. Prior to delivery of the vehicle to the customer, CarsDirect.com bears the inventory risk for the vehicles it commits to acquire; CarsDirect.com has the sole legal right to direct the disposition of the vehicles it commits to acquire; CarsDirect.com has an insurable interest as beneficial owner in the vehicles it commits to acquire; and CarsDirect.com is responsible for taxes that may be assessed on a vehicle it commits to F-11 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) acquire. CarsDirect.com bears the risk of return of the vehicle if a customer defaults on the sale or if the customer returns the vehicle in accordance with applicable law. CarsDirect.com does not have the right to return the vehicle to its supplier in those instances and CarsDirect.com establishes a reserve for estimated customer returns. Upon delivery of the vehicle to the customer, CarsDirect.com bears credit and other risks related to the customer's payment obligation. In automobile transactions with its customers that do not include the foregoing characteristics, CarsDirect.com recognizes as net revenues the difference between the amount its customer pays and the cost of the vehicle. CarsDirect.com revenues also include licensing revenue, extended warranty commissions and finance fee income related to automobile sales. Licensing revenues are recognized on a pro rata basis over the license period, generally ranging from three to twelve months. Depending upon the nature of extended warranty contracts sold, commissions on extended warranties are either recognized as revenue ratably over the lives of the underlying contracts or when our obligations to refund any portion of the commissions upon customer termination expires. Finance fees are recognized as revenue upon acceptance of the customer's credit by the financing institution. The Company also derives a significant portion of revenue from EntryPoint, Inc. formerly Launchpad Technologies, Inc. ("EntryPoint"), and Free-PC, Inc. ("Free-PC" -- see Note 15 which describes the sale of our ownership interest in Free-PC), two of the Company's majority-owned network companies. These companies derive revenue principally from the sale of advertising, including the sale of banner advertisements and referrals of users to other websites. These network companies obligations typically include the guarantee of a minimum number of impressions or the satisfaction of other performance criteria. Advertising revenue is recognized as the impressions are displayed or as click-throughs occur, depending on the contract terms, provided that no significant company obligations remain and collection of the related receivable is probable. To the extent minimum guaranteed impressions or other performance criteria are not met, recognition of the corresponding revenues is deferred until the remaining guaranteed impressions or other performance criteria are met. Referral revenues are recognized as referrals are made to other websites, provided that no significant company obligations remain and collection of the related receivable is probable. The Company provides services to certain affiliated companies which are general partners in various venture capital funds (see Note 6). Management fees for providing such services are recorded as earned. SALES AND MARKETING COSTS The Company expenses advertising media costs as incurred and advertising production costs upon first airing or printing of the underlying advertisement. Advertising expense was $423,000, $329,000 and $34,576,000 for the years ended January 31, 1998, 1999 and 2000, respectively, and is included in sales and marketing expenses in the accompanying Consolidated Statements of Operations. Included in sales and marketing expenses has been the cost of personal computers given away to users by FreePC, Inc., a consolidated network company, in exchange for a 30-month user agreement. The Company considers the cost of the computers as the cost of procuring users and recognizes the expense upon delivery of the computer to the user. For the year ended January 31, 2000, the Company recorded approximately $18,100,000 of such costs. No such costs were incurred during the year ended January 31, 1999. PRODUCT DEVELOPMENT COSTS Product development costs are costs incurred to develop, enhance, manage, monitor and operate the Company's web sites and related technologies. Such costs are expensed as incurred unless certain criteria F-12 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) for capitalization are met. To date, costs subject to capitalization have not been significant and, therefore, have not been capitalized. GAIN OR LOSS ON ISSUANCES OF STOCK BY NETWORK COMPANIES Pursuant to the Securities Exchange Commission's Staff Accounting Bulletin No. 84, at the time a network company accounted for under the consolidation or equity method of accounting sells its stock to a third party at a price per share which is different than the Company's carrying value per share, the Company's share of the network company's net equity changes. If, at that time, the network company is not a newly-formed, non-operating entity, nor a research and development, start-up or development stage company, nor is there question as to the network company's ability to continue in existence, the Company records the change in its share of the network company's net equity as a non-operating gain or loss in its Consolidated Statements of Operations. Gains and losses on the issuance of stock by network companies which are not included in the Consolidated Statements of Operations are recorded in Shareholders' Equity, net of tax. INCOME TAXES Income taxes are accounted for using the asset and liability method whereby deferred tax assets and liabilities are recognized based on the differences between the financial statement reporting and tax bases of the Company's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to their expected realizable amount. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing the net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding excluding the unvested portion of common stock which is subject to repurchase. Diluted net income (loss) per share is computed by dividing the net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding plus the dilutive effect, if any, of options, convertible preferred stock and common stock subject to repurchase. Common share equivalents are included in the computation of diluted net income (loss) per share only when the effect of their inclusion would be dilutive. PRO FORMA SHAREHOLDERS' EQUITY AND NET INCOME (LOSS) PER SHARE (UNAUDITED) Unaudited pro forma shareholders' equity at January 31, 2000 reflects the automatic conversion of the Company's convertible preferred stock outstanding and the change in the par value of the Company's common stock in connection with the reincorporation in the State of Nevada (See Note 23) at January 31, 2000 as if each had occurred as of that date. Unaudited pro forma basic net income per share for the year ended January 31, 2000 is computed by dividing the net income applicable to common shareholders by the weighted average number of common shares outstanding excluding the unvested portion of common stock which is subject to purchase, including the pro forma effects of the automatic conversion of the Company's convertible preferred stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred on February 1, 1999 or at the date of issuance if later. CONCENTRATION OF RISK The Company is potentially subject to credit risk with respect to its cash and cash equivalents and accounts receivable balances. The Company deposits cash and cash equivalents in financial institutions F-13 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) and, at times, such balances may be in excess of the federal deposit insurance limits. The Company generally does not require collateral from its customers. As of January 31, 2000, 15% of the Company's accounts receivable balance is due from one party. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable, accounts payable and short term borrowings approximate their fair value due to the short maturity of these instruments. ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company records an impairment loss on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. If the Company determines that an asset is impaired, an impairment loss is recorded to reduce the carrying value of the asset to its estimated fair value, which is generally based on undiscounted cash flows. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation expense is recognized over the vesting period of the related instrument based on the difference, if any, between the deemed fair value for accounting purposes of the Company's common stock and the exercise price on the date of grant. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF Issue No. 96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". COMPREHENSIVE INCOME Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Excluding net income, the Company's source of comprehensive income is derived from net unrealized changes in the value of its marketable securities. Reclassification adjustments result from the recognition in net income of realized gains or losses that were included in comprehensive income in prior periods. SEGMENT INFORMATION SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", mandates the use of the management approach in the determination of reportable segments. The management approach designates the internal organization that is used by management for allocating resources and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The Company currently operates in one industry segment. ACCOUNTING 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 F-14 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) liabilities and disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging. In July 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of Financial Accounting Standards Board Statement No. 133", was issued. SFAS No. 137 deferred the effective date of SFAS No. 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Because the Company does not currently hold any derivative instruments and does not engage in hedging activities, the impact of adoption of SFAS No. 133 is not currently expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides additional guidance related to applying generally accepted accounting principles in financial statements. In March 2000, the SEC issued Staff Accounting Bulletin No. 101A, which requires implementation of SAB 101 no later than June 30, 2000. Management does not believe that adoption of SAB 101 will have a significant impact on the Company's consolidated financial position, results of operations or cash flows. 3. OWNERSHIP INTERESTS IN NETWORK COMPANIES The following table summarizes the Company's ownership interests in network companies accounted for under the equity method or cost method of accounting, classified according to applicable accounting methods at January 31, 1999 and 2000. The cost basis column represents the Company's original acquisition basis of the underlying ownership interests less any impairment charges.
JANUARY 31, 1999 JANUARY 31, 2000 --------------------------------------- --------------------------------------- CARRYING VALUE COST BASIS CARRYING VALUE COST BASIS ------------------- ------------------ ------------------- ------------------ Equity Method........ $ 1,056 $ 1,578 $ 488,047 $ 435,035 Cost Method.......... 1,230 1,484 126,245 126,846 ------------------- ------------------ ------------------- ------------------ $ 2,286 $ 3,062 $ 614,292 $ 561,881 =================== ================== =================== ==================
At January 31, 2000, the Company's carrying value of its ownership interests in network companies accounted for under the equity method exceeded its share of the underlying equity in the net assets of such companies by $346,420,000, net of accumulated amortization. Amortization expense of $1,274,000 related to this difference is included in "Equity in the income (loss) of affiliates, net of tax" in the accompanying Consolidated Statements of Operations for the year ended January 31, 2000. The Company's carrying value of its ownership interests in network companies accounted for under the equity method did not exceed its share of the underlying equity in the net assets of such companies at January 31, 1999. The Company includes advances to network companies accounted for under the equity method and cost method in the carrying value of its ownership interests. Such amounts are comprised of receivables for services provided, cash advances in the form of short term loans to fund certain costs of the network companies and convertible notes. Advances to network companies generally do not bear interest and are payable on demand. As of January 31, 1999, the Company had $108,000 and $126,000 in advances to network companies accounted for under the equity method and cost method, respectively. As of January 31, 2000, the Company had $12,072,000 and $611,000 in advances to network companies accounted for under the equity method and cost method, respectively. F-15 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) At January 31, 2000, the Company's ownership interest in GoTo.com, Inc. ("GoTo.com"), the only network company accounted for using the equity method which is publicly traded, was approximately $1,000,854,000 based on quoted market prices. The following summarized financial information for network companies and other affiliates accounted for under the equity method of accounting at January 31, 1999 and 2000 has been compiled from the financial statements of the respective network companies and other affiliates: BALANCE SHEETS:
JANUARY 31, --------------------------------------- 1999 2000 ------------------- ------------------- Current assets........................................$ 52,602 $ 279,389 Non-current assets.................................... 7,948 184,360 ------------------- ------------------- Total assets.....................................$ 60,550 $ 463,749 =================== =================== Current liabilities...................................$ 12,418 $ 82,618 Non-current liabilities............................... 673 4,717 Convertible preferred stock........................... 66,719 220,045 Shareholders' equity (deficit)........................ (19,260) 156,369 ------------------- ------------------- Total liabilities and shareholders' equity.......$ 60,550 $ 463,749 =================== ===================
RESULTS OF OPERATIONS:
YEAR ENDED JANUARY 31, ----------------------------------------------------------- 1998 1999 2000 ------------------- ------------------- ------------------ Revenues.................... $ 588 $ 27,086 $ 43,741 =================== =================== ================== Net income (loss)........... $ (2,075) $ (36,535) $ 79,328 =================== =================== ==================
4. MARKETABLE SECURITIES Marketable securities consist of equity securities and are carried at fair value based on quoted market prices. The Company did not have any realized losses on any sales of marketable securities. The following tables provide certain additional information related to the Company's marketable securities:
JANUARY 31, --------------------------------------- 1999 2000 ------------------- ------------------ Adjusted cost basis............................. $ 993 $ 5,334 =================== ================== Fair value...................................... $ 35,832 $ 249,765 =================== ==================
YEAR ENDED JANUARY 31, ----------------------------------------------------------- 1998 1999 2000 ------------------- ------------------- ------------------ Gross unrealized: Gains.................... $ 7,550 $ 29,840 $ 424,037 =================== =================== ================== Losses................... $ -- $ 301 $ 12,641 =================== =================== ==================
5. BUSINESS COMBINATIONS In May, 1999, EntryPoint completed its acquisition of PointCast Incorporated ("PointCast") pursuant to an agreement and plan of reorganization. PointCast offers current news and information services to viewers F-16 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) and corporations using the Internet and corporate intranets. As consideration for the purchase, EntryPoint issued shares of its convertible preferred stock (valued at approximately $6,000,000) to the stockholders of PointCast and paid them $1,000,000 in cash. In July 1999, CarsDirect.com acquired AutoData Marketing Systems Incorporated ("AutoData") through the purchase of all of the outstanding shares of its parent, Perga Capital Incorporated. AutoData has designed and populated an automotive information data warehouse that serves as the basis for licensing vehicle content to various customers. The aggregate purchase price of $8,765,000 was comprised of $6,820,000 in cash, $265,000 in acquisition costs and 210,000 shares of CarsDirect.com Class A common stock with an estimated fair value for accounting purposes of $1,680,000. Additional cash consideration may be paid by CarsDirect.com based on the level of AutoData's net income during periods subsequent to the acquisition. The contingent consideration, if any, will be recorded as an increase to the purchase price at the time that the contingency is resolved. In connection with the purchase, CarsDirect.com issued 390,000 shares of restricted Class A common stock valued at $3,120,000 to two former owners of AutoData, which vest over 4 years, subject to continued employment of these individuals, and subject to acceleration in the event of an IPO by CarsDirect.com or a change of control transaction, as defined. Such restricted Class A common stock has been accounted for by CarsDirect.com as stock-based compensation, which will be amortized over each employees' service period. During the year ended December 31, 1999, CarsDirect.com recorded $325,000 of stock-based compensation charges related to the amortization of deferred stock compensation by CarsDirect.com. In October 1999, CarsDirect.com acquired certain assets of Potamkin Auto Center Ltd. ("Potamkin"). Potamkin is engaged in the sale and lease of new and used automobiles and also offers extended warranties and financing arrangements. The aggregate purchase price of $14,145,000 was comprised of 1,250,000 shares of CarsDirect.com's Class A common stock with an estimated fair value for accounting purposes of $13,750,000 and $395,000 in acquisition costs. In conjunction with the acquisition, CarsDirect.com issued 400,000 shares of restricted Class A common stock with an estimated fair value for accounting purposes of $4,400,000 to the sellers, including a key employee of Potamkin. The shares will be distributed in quarterly increments commencing on December 31, 1999 and ending on September 30, 2002, subject to continued employment by the current employee on the dates specified; accordingly, such stock has been accounted for by CarsDirect.com as stock-based compensation, which will be amortized over the employee's service period. During the year ended December 31, 1999, CarsDirect.com recorded $251,000 of stock-based compensation charges related to the amortization of deferred stock compensation by CarsDirect.com. During 1999, CarsDirect.com entered into an agreement to form and operate CD1Financial.com LLC ("CD1Financial"), a joint venture formed to provide automotive related financial products to customers of CarsDirect.com. In connection with this agreement, CarsDirect.com issued to the minority member of the joint venture a warrant to purchase an amount of shares of CarsDirect.com Class A common stock to be determined based upon the combined value of CD1Financial and CarsDirect.com at the time of the occurrence of certain events. In December 1999, CarsDirect.com acquired the minority member's 49% interest in CD1Financial and terminated the master and operating agreement which governed CD1Financial for $32,875,000 in cash. The terms of the warrant were also modified to make the warrant non-forfeitable and immediately exercisable into 2,085,970 shares of CarsDirect.com Class A common stock with an exercise price of $0.01 per share. The estimated fair value of the warrant for accounting purposes was approximately $29,579,000 and has been accounted for as part of the purchase price of the additional interest in CD1Financial and included in goodwill. These acquisitions have been accounted for using the purchase method, and, accordingly, the purchase prices have been allocated to the assets purchased and liabilities assumed based upon their fair values at the dates of acquisition. The portion of the purchase price allocated to goodwill will be amortized F-17 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) on a straight line basis over three years for PointCast, AutoData and CD1Financial and over ten years for Potamkin. The fair value of the identifiable intangible assets acquired from AutoData, CD1Financial and Potamkin will be amortized on a straight-line basis over the estimated useful lives, ranging from six months to ten years. The purchase prices of these acquisitions were allocated as follows:
POINTCAST AUTODATA POTAMKIN CD1 FINANCIAL -------------- --------------- -------------- -------------- -------------- Tangible assets............................$ 8,329 $ 1,268 $ 71 $ 1,706 Liabilities assumed........................ (6,204) (1,048) -- -- Identifiable intangibles................... -- 1,095 2,390 71 Goodwill................................... 4,875 7,450 11,684 60,677 -------------- --------------- -------------- -------------- Purchase price.............................$ 7,000 $ 8,765 $ 14,145 $ 62,454 ============== =============== ============== ==============
The Company's consolidated results of operations incorporate the results of operations of PointCast, AutoData, Potamkin and CD1Financial commencing on the dates of acquisition. The following unaudited pro forma combined information presents the combined results of operations of the Company as if these acquisitions had occurred on the first day of each respective period. The unaudited pro forma combined information does not necessarily reflect the results of operations that would have occurred had the Company, PointCast, AutoData, CD1Financial and Potamkin constituted a single entity during such periods.
YEAR ENDED JANUARY 31, ---------------------------- 1999 2000 -------------- ------------- (UNAUDITED) (UNAUDITED) Revenues................................................................$ 55,516 $ 135,504 ============== ============= Net income (loss) before extraordinary item.............................$ (10,404) $ 90,371 ============== ============= Net income (loss) applicable to common shareholders.....................$ (10,404) $ 94,508 ============== ============= Net income (loss) per share applicable to common shareholders: Basic................................................................$ (0.03) $ 0.22 Diluted..............................................................$ (0.03) $ 0.14
6. INVESTMENT IN CERTAIN INVESTMENT ADVISORY FIRMS idealab! Capital Management I, L.L.C. ("ICM I") was formed in March 1998 to serve as the general partner of two venture capital funds: idealab! Capital Partners I-A, L.P. ("ICP Fund I-A") and idealab! Capital Partners I-B, L.P. ("ICP Fund I-B") (collectively the "ICM I Funds"). The ICM I Funds have received aggregate capital commitments of $105,051,000. ICM I has a 1% capital commitment in each of the ICM I Funds and is entitled to 18.2% of the net profits, as defined, of the ICM I Funds on a blended basis. The ICM I Funds are managed by ICM I and are bound by the terms of a limited partnership agreement which describes the ICM I Fund's investment policy. The ICM I Funds invest in idealab! network companies and entities that are not affiliates of the Company in accordance with the terms of the investment policy. In certain situations, the ICM I Funds' investment in a network company is subject to approval from an independent advisory committee of the respective ICM I Fund's limited partners. ICM I is managed, controlled and operated exclusively by its managing members with any action or decision for, in respect of or on behalf of ICM I requiring the approval of a majority in interest of its managing members. The Company, together with its CEO, control 50% of the managing member interest in ICM I. The Company is entitled to 43.5% of the profits and losses of ICM I. As consideration for providing management services, the Company is also entitled to an annual management fee equal to 0.5% of the aggregate capital committed to the Funds not to exceed $400,000. F-18 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) idealab! Capital Management II, L.L.C. ("ICM II") was formed in August 1999 to serve as the general partner of idealab! Capital Partners II-A, L.P. ("ICP Fund II-A"), idealab! Capital Partners II-B, L.P. ("ICP Fund II-B"), and the idealab! Capital Principals Fund, L.P. ("Principals Fund") (collectively the "ICM II Funds"). The ICM II Funds have received aggregate capital commitments of $363,940,000. ICM II has a 0.15%, 1% and 1% capital commitment in ICP Fund II-A, ICP Fund II-B and the Principals Fund, respectively. ICM II is entitled to receive 19.4% of the net profits, as defined, of ICP Fund II-A and ICP Fund II-B, on a blended basis, which is subject to retroactive adjustment to 29.1% if the Funds achieve a specified internal rate of return. ICM II is also entitled to receive 10% of the net profits, as defined, of the Principals Fund which is subject to retroactive adjustment to 15% if the Principals Fund achieves a specified internal rate of return. The investment policies of the ICM II Funds are generally similar to those of the ICM I Funds. ICM II is managed, controlled and operated exclusively by its managing members with any action or decision for, in respect of or on behalf of ICM II requiring the approval of a majority in interest of its managing members. The Company controls 50% of the managing member interest in ICM II, has a 50% capital commitment and is entitled to 50% of the profits and losses of ICM II. As consideration for providing management services, the Company is also entitled to an annual management fee, payable quarterly in advance, equal to 50% of the management fee earned by ICM II pursuant to the limited partnership agreements of the ICM II Funds. The ICM II Funds pay management fees to ICM II based on a percentage of the aggregate capital commitment to the ICM II Funds. The Company accounts for its ownership interest in each of ICM I and ICM II under the equity method. The Company's equity in the income or loss of ICM I and ICM II reflects the participation in the net profits of ICM I and ICM II, which includes ICM I and ICM II's proportionate share of the unrealized appreciation or depreciation of certain investment holdings of the ICM I Funds and the ICM II Funds. The Company eliminates profits and losses attributable to the Funds' investment holdings in network companies which the Company accounts for using the consolidation or equity method. These profits and losses will only be recognized upon realization in the form of a sale of the underlying shares by the Funds or by the Company. Additionally, the Company eliminates the portion of ICM I's equity in the income of the ICM I Funds which is attributable to the appreciation or depreciation on holdings by the ICM I Funds in the Company's convertible preferred stock. The Company also has a limited partnership interest in the Principals Fund and has made a capital commitment of $25,000,000 of the aggregate committed capital of $33,333,000, of which the Company has paid $4,250,000 as of January 31, 2000. The Company is entitled to 64% of the Principal Fund's profit and losses, unless a target internal rate of return is not achieved, at which time idealab!'s entitlement will retroactively adjust to 67.5%. The Company's equity in the net income of ICM I was $314,000 and $41,231,000 during the years ended January 31, 1999 and 2000. The carrying value of the Company's equity interest in ICM I was $738,000 and $47,408,000 at January 31, 1999 and January 31, 2000. The Company's equity in the net loss of ICM II was $551,000 during the year ended January 31, 2000. The carrying value of the Company's equity interest in ICM II was $(455,000) at January 31, 2000. During the year ended January 31, 2000 the Company received a distribution from ICM I comprised of $2,000,000 in cash and equity securities with a value of $20,909,000 on the date of the distribution. 7. DECONSOLIDATION OF NETWORK COMPANIES During the three years in the period ended January 31, 2000, the Company has experienced reductions in the ownership interests in certain of its consolidated network companies to below 50%, primarily due to the issuance of additional voting securities by the network companies, generally with priority F-19 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) in liquidation preference to the securities owned by the Company. During periods prior to the reduction in the Company's ownership interest to below 50%, the Company consolidated the operating results and assets and liabilities of the network company. At the date of deconsolidation, the Company has recorded gains equal to the amount, if any, by which the cumulative losses of the network company recorded by idealab! exceeded the cost of the Company's ownership interest in the network company. Gains recorded in connection with the deconsolidation of network companies are included in Other Income in the Consolidated Statements of Operations. During the quarter ended January 31, 1998, the Company's ownership interest in the common stock of eToys, Inc. ("eToys") was reduced from 61% to 37% as a result of the issuance of shares of convertible preferred stock by eToys. The Company's Consolidated Statement of Operations for the year ended January 31, 1998 includes eToys net revenue of $0 and operating losses of $381,000. As a result of the deconsolidation of eToys, during the year ended January 31, 1998, the Company recorded a gain of $124,000. During March 1998, Intranets.com, Inc. ("Intranets"), formerly IntraNetics, Inc., issued shares of its convertible preferred stock for total cash proceeds of approximately $5,452,000 and the conversion of $2,831,000 of convertible notes payable, plus accrued interest. As a result of these transactions the Company's ownership interest in the common stock of Intranets was reduced from 59% to 19%. The Company's Consolidated Statement of Operations for the year ended January 31, 1998 includes Intranets net revenue of $70,000 and operating losses of $5,357,000. As a result of the deconsolidation of Intranets, during the year ended January 31, 1999, the Company recorded a gain of $5,259,000. During the quarter ended July 31, 1998, the Company's ownership interest in GoTo.com was reduced from 80% to 45% as a result of the issuance of shares of convertible preferred stock by GoTo.com. The Company's Consolidated Statement of Operations for the year ended January 31, 1998 includes GoTo.com net revenue of $22,000 and operating losses of $119,000. As a result of the deconsolidation of GoTo.com, the Company recorded a gain of $243,000. During the quarter ended July 31, 1999, the Company's ownership interest in FirstLook, Inc. ("FirstLook"), formerly MusicNow, Inc., was reduced from 96% to 45% as a result of the issuance of shares of common stock by FirstLook. The Company's Consolidated Statement of Operations for the year ended January 31, 1999 includes FirstLook net revenue of $0 and operating losses of $254,000. As a result of the deconsolidation of FirstLook, during the year ended January 31, 2000 the Company recorded a gain of $332,000. 8. GAIN ON STOCK ISSUANCE BY A NETWORK COMPANY During the year ended January 31, 2000, the Company recorded a pre-tax gain of $22,658,000 representing the net increase in the Company's proportionate share of the dollar amount of GoTo.com's equity resulting from stock issued by GoTo.com in connection with it's initial public offering ("IPO"). GoTo.com, an online marketplace where advertisers bid for introductions to consumers seeking information, services and products, raised $94,800,000 of net proceeds by issuing 6,900,000 shares of common stock at $15.00 per share. As a result of the IPO the Company's percentage interest in the outstanding voting securities of GoTo.com decreased from 25% to 20%. The Company recorded $9,222,000 of deferred income taxes as a result of the gain. 9. EFFECT OF NETWORK COMPANIES' EQUITY TRANSACTIONS During the three years in the period ended January 31, 2000, several of idealab's network companies issued common and preferred stock to third parties at a price per share that was greater than the Company's average carrying value per share on the date of the financing. Due to the fact that the F-20 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) underlying network companies did not have significant operating histories or revenues at the time of the financings, or other factors as described in Note 2, the increase in the Company's proportionate share of the dollar amount of the underlying network company's equity has been recorded, net of tax, as an equity transaction under the heading "Effect of network companies' equity transactions". During the year ended January 31, 1998, these gains resulted primarily from the initial public offering of 1,300,000 shares of Shopping.com common stock which raised net proceeds of $10,289,000 and reduced the Company's ownership interest from 22% to 15%. At the time of the transaction Shopping.com's ability to continue as a going concern was in question. The Company recorded a gain of $770,000, net of tax of $530,000. During the year ended January 31, 1999 these gains resulted primarily from several issuances of securities by our network companies, each of which was not significant. During the year ended January 31, 2000 these gains resulted primarily from the following transactions: o The Company's ownership interest in CarsDirect.com was impacted by the issuances by CarsDirect.com of Class A common stock and warrants in connection with the acquisitions of AutoData, Potamkin and CD1Financial which are described in Note 5. The Company recorded an aggregate gain of $2,131,000, net of tax of $1,462,000, as a result of these transactions based on the deemed fair value for accounting purposes of the CarsDirect.com Class A common stock and warrants issued in connection with these acquisitions. These issuances of stock and warrants by CarsDirect.com decreased the Company's ownership interest in the outstanding voting securities of CarsDirect.com by approximately three percentage points. o PetsMart.com issued shares of convertible preferred stock for net proceeds of $55,406,000 which reduced the Company's ownership interest from 28% to 22%. The Company recorded a gain of $757,000, net of tax of $519,000. 10. BALANCE SHEET AMOUNTS
JANUARY 31, --------------------------- 1999 2000 ------------- ------------- Accounts receivable, net: Accounts receivable..........................................................$ 92 $ 15,268 Allowance for doubtful accounts.............................................. (15) (508) ------------- ------------- $ 77 $ 14,760 ============= ============= Fixed assets, net: Computer equipment and software..............................................$ 1,028 $ 12,543 Office equipment and furniture............................................... 334 2,954 Vehicles..................................................................... -- 1,453 Leasehold improvements....................................................... 1,668 5,200 ------------- ------------- 3,030 22,150 Less: accumulated depreciation and amortization................................. (717) (3,581) ============= ============= $ 2,313 $ 18,569 ============= =============
Total depreciation and amortization expense on fixed assets was $201,000, $506,000 and $3,195,000 for the years ended January 31, 1998, 1999 and 2000, respectively. Fixed assets include $204,000 and $4,863,000 of computer equipment acquired under capital leases at January 31, 1999 and 2000, respectively, and $88,000 and $1,038,000 of accumulated depreciation on such assets. F-21 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) Allowance for doubtful accounts increased for additional reserves of $0, $15,000 and $674,000 for the years ended January 31, 1998, 1999 and 2000, respectively, and decreased for write-offs of $0, $0 and $181,000 for the years ended January 31, 1998, 1999 and 2000, respectively. JANUARY 31, --------------------------- 1999 2000 Goodwill, net: ------------- ------------- Goodwill.....................................................................$ -- $ 114,370 Less: accumulated amortization............................................... -- (4,783) ------------- ------------- $ -- $ 109,587 ============= =============
Accrued Expenses: Book overdrafts..............................................................$ -- $ 12,016 Liability under an inventory supply agreement................................ -- 5,638 Deferred revenue............................................................. 58 2,504 Deposit for convertible preferred stock...................................... 2,500 -- Payroll expenses............................................................. 78 1,268 Deferred rent................................................................ 144 624 Accrued legal settlement..................................................... 790 -- Other accrued expenses....................................................... 248 4,055 ------------- ------------- $ 3,818 $ 26,105 ============= =============
11. SHORT TERM BORROWINGS LINE OF CREDIT ARRANGEMENTS In July 1999, the Company entered into an $8 million revolving promissory note (the "Promissory Note") with a financial institution. The Promissory Note is collateralized by certain marketable securities owned by the Company and expires on May 21, 2000, if not renewed. Borrowings under the Promissory Note accrue interest at the Eurodollar Rate, as defined, plus one percent (7.125% at January 31, 2000) and interest payments are due monthly. The Promissory Note does not have any restrictive covenants, however, the Company must maintain adequate collateral, as defined in a separate Pledge Agreement, in relation to the outstanding borrowings. At January 31, 2000, no amounts were outstanding under the Promissory Note. BORROWINGS EntryPoint has a note payable to an insurance company which bears interest at the rate of 9.7% per annum and is collateralized by EntryPoint's property and equipment; at January 31, 2000, $992,000 was outstanding. Principal and interest payments of $107,000 are due monthly through October 2000. 12. MINORITY INTEREST In October 1999, CarsDirect.com, a consolidated network company, issued convertible preferred stock, some of which was purchased by the Company. The preferred stock is convertible on a one-to-one basis, subject to antidilution, into shares of CarsDirect.com Class A common stock at the option of the holder at any time. Any shares which have not been converted will automatically convert upon the effective date of a qualifying initial public offering of CarsDirect.com Class A common stock, as defined, which raises at least $20 million at a per share offering price of at least $7.00. The preferred shareholders are entitled to vote based on the number of Class A common shares into which the preferred shares are convertible. The holders of the preferred shares are entitled to receive noncumulative dividends in an amount equal to $1.26 per share per annum when and if declared by the Board of Directors of CarsDirect.com. The preferred F-22 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) shares are redeemable by CarsDirect.com upon the sale of all or substantially all of its assets or the acquisition of CarsDirect.com by another entity by means of merger or consolidation resulting from the transfer of 50% or more of CarsDirect.com's voting power. Additionally, as described in Note 5, CarsDirect.com issued Class A common stock and a warrant to purchase Class A common stock in connection with certain business acquisitions. At January 31, 2000, the minority interest balance attributable to CarsDirect.com, net of the minority shareholders' share of CarsDirect.com's losses, was $141,591,000. In October 1999, HomePage.com, a consolidated network company, issued convertible preferred stock to third parties. The preferred stock is convertible on a one-to-one basis, subject to antidilution, into shares of HomePage.com common stock at the option of the holder at any time. Any shares of preferred stock which have not been converted will automatically convert upon the effective date of a qualifying initial public offering of HomePage.com common stock, as defined, which raises at least $15,000,000. The preferred shareholders are entitled to vote based on the number of common shares into which the preferred shares are convertible. The holders of the preferred shares are entitled to receive noncumulative dividends in an amount equal to $0.16 per share per annum when and if declared by the Board of Directors of HomePage.com. The preferred shares are redeemable by HomePage.com upon the sale of all or substantially all of its assets or the acquisition of HomePage.com by another entity by means of merger or consolidation resulting from the transfer of 50% or more of HomePage.com's voting power. At January 31, 2000, the minority interest balances attributable to HomePage.com, net of the minority shareholders' share of HomePage.com's losses, was $8,915,000. 13. CAPITALIZATION As of January 31, 2000, the Company was authorized to issue 1,138,000,000 shares of stock, comprised of 1,100,000,000 shares of common stock, no par value, and 38,000,000 shares of preferred stock, no par value. The authorized shares of preferred stock may be offered in one or more series. The Company's Board of Directors is authorized to determine the rights of each offering of preferred stock including, among other terms, dividend rights, voting rights, conversion rights, redemption prices and liquidation preferences, if any. COMMON STOCK In December 1999, the Company's Board of Directors declared a stock split of ten shares for every one share of common stock effective for common shareholders of record as of December 30, 1999. Accordingly, the accompanying financial statements and footnotes have been restated for all periods presented to reflect the stock split. During the years ended January 31, 1999 and 2000, the Company issued 96,250,000 and 25,777,000 shares, respectively, of common stock to certain employees and directors upon the early exercise of stock options in exchange for the issuance of full recourse promissory notes. Under the terms of the related common stock agreements, the Company has the right to repurchase any unvested shares at the exercise price in the event the employee or director ceases to be an employee or director of the Company. The repurchase option lapses in the same amounts and on the same dates that the options would have vested had they not been exercised early. During the year ended January 31, 2000, the Company sold 53,600,000 shares of common stock to certain executive employees in exchange for the issuance of full recourse promissory notes. Under the terms of the restricted common stock purchase agreements, the Company has the right to repurchase any unvested shares at the original issue price in the event the employee ceases to be an employee of the Company. The repurchase option lapses at the rate of 20% of the common shares immediately, subject to certain adjustments, with the remainder vesting over a four year period. The Company has accounted for F-23 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) the difference between the deemed fair value of the Company's common stock for accounting purposes and the purchase price of the common stock on the date of issuance as compensation, and accordingly has recorded $15,003,000 as deferred stock compensation in the accompanying Consolidated Balance Sheet which is being amortized over the vesting period. During the year ended January 31, 2000, stock-based compensation included amortization of $7,891,000 of such deferred stock compensation. The holders of these common shares have all the rights of a common shareholder including the right to vote the shares held and receive any dividends declared thereon. During the year ended January 31, 2000, the Company repurchased and retired 3,249,000 shares of common stock pursuant to its repurchase option. The shares were repurchased at their original issue price. At January 31, 2000, 107,575,000 shares of common stock were subject to repurchase. CONVERTIBLE PREFERRED STOCK The following table summarizes the Series A, Series B, Series C and Series D activity for each of the three years in the period ended January 31, 2000:
SERIES A SERIES B SERIES C SERIES D -------------------- --------------------- -------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- --------- ---------- ---------- --------- ---------- ---------- ---------- Balance at January 31, 1997. 3,450 $ 3,450 Issuance of Series B........ 5,120 $ 8,704 ---------- --------- ---------- ---------- Balance at January 31, 1998. 3,450 3,450 5,120 8,704 Issuance of Series B........ 881 1,498 ---------- --------- ---------- ---------- Balance at January 31, 1999. 3,450 3,450 6,001 10,202 Issuance of Series C........ 6,000 $ 18,000 Issuance of Series D........ 8,519 $ 851,889 Beneficial conversion feature.................. 9,724 Repurchase of Series B...... (284) (483) ---------- --------- ---------- ---------- --------- ---------- ---------- ---------- Balance at January 31, 2000. 3,450 $ 3,450 5,717 $ 9,719 6,000 $ 27,724 8,519 $ 851,889 ========== ========= ========== ========== ========= ========== ========== ==========
Redeemable convertible preferred stock consists of the following at January 31, 2000:
LIQUIDATION SHARES AND ------------------------------- REDEMPTION AUTHORIZED OUTSTANDING VALUE ------------- -------------- -------------- Series A convertible.............................. 3,450 3,450 $ 3,450 Series B convertible.............................. 6,002 5,717 9,719 Series C convertible.............................. 6,000 6,000 18,000 Series D convertible.............................. 13,000 8,519 851,889 Undesignated...................................... 9,548 -- -- ------------- -------------- -------------- 38,000 23,686 $ 883,058 ============= ============== ==============
Each share of preferred stock is convertible, at the holder's option, into such number of fully paid and nonassessable shares of common stock as is determined by dividing $1.00, in the case of Series A, $1.70, in the case of Series B, $3.00, in the case of Series C, and $100.00, in the case of Series D, by the conversion price, as defined. At January 31, 2000, the conversion price of the Series A, Series B, Series C, and Series D Preferred Stock was $0.10, $0.17, $0.30, and $10.00, respectively, such that each share of convertible preferred stock is convertible into ten shares of common stock. In December 1999, the Company amended its Articles of Incorporation such that in the event of the issuance of additional shares of common stock, subject to certain exclusions, at a price per share less than the conversion price for any series of convertible preferred stock in effect on the date of such issuance, the conversion price for such F-24 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) series of convertible preferred stock shall be reduced, concurrently with such issuance, to the price per share of the common stock issued. The conversion price is also subject to adjustment based on certain other anti-dilution provisions. Each share of preferred stock shall automatically convert into shares of common stock at its then effective conversion rate immediately upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, the aggregate proceeds of which exceed $100,000,000 to the Company. As of January 31, 2000, the Company was required to reserve and keep available, out of its authorized but unissued shares of common stock, 236,860,000 shares for conversion of preferred stock. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A, Series B, Series C and Series D preferred stock are entitled to receive, on parity with each other and prior and in preference to any distribution of any assets or surplus funds to the holders of the common stock, an amount per share equal to $1.00, $1.70, $3.00 and $100.00 per share, respectively, plus an amount equal to any dividends declared but unpaid on such shares. Liquidation is also deemed to include the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or consolidation resulting from the transfer of 50% or more of the Company's voting power. The holders of common stock are entitled to the remaining assets, if any, on a pro rata basis. The Series A, Series B, Series C and Series D preferred shareholders are entitled to one vote for each share of common stock into which such preferred stock can be converted. The preferred stock generally votes together with the common stock and not as a separate class. The Company's Amended and Restated Certificate of Incorporation includes certain provisions which require a majority vote of the holders of the Series D preferred shareholders, voting separately as a class, with respect to certain actions of the Board of Directors including: (1) changing the rights, preferences and privileges of the Series D preferred stock; (2) authorizing, creating or issuing any shares of any class or series of stock having any preference or priority superior as to dividends, liquidation or conversion over Series D preferred stock; or (3) approving a consolidation or merger of the corporation with or into any other corporation, or the sale of all or substantially all of the assets of the corporation, or a series of related transactions in which more than 50% of the voting power of the corporation is disposed of, without consideration or for a consideration per share less than the Conversion Price for the Series D preferred stock in effect on the date of and immediately prior to such approval. The Company's Amended and Restated Certificate of Incorporation also includes certain provisions which require the approval of more than 50% of the holders of the Series A, Series B and Series C preferred shareholders, voting separately as a class, with respect to certain actions of the Board of Directors including changing the rights, preferences and privileges of the Series A, B and C preferred shareholders. The holders of each series of preferred stock are entitled to receive noncumulative dividends when and if declared by the Board of Directors. In all cases, if dividends are declared and paid to preferred shareholders they must have at least the same terms as dividends declared and paid to common shareholders. No dividends have been declared by the Board of Directors during the period from March 14, 1996 (inception) to January 31, 2000. The Company recorded a deduction for the beneficial conversion feature associated with the Series C convertible preferred stock, based on the deemed fair value of the Company's common stock on the issuance date of the Series C convertible preferred stock. The Series C preferred stock was convertible at the date of issuance and therefore the full amount of the beneficial conversion feature was accreted in the year ended January 31, 2000. F-25 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) WARRANT In August 1998, the Company issued a warrant to purchase 1,000,000 shares of common stock at $0.095 per share to a non-employee. The warrant was fully vested on the date of grant and was exercised in March 1999. The fair value of the warrant was determined using the Black-Scholes option pricing model. NOTES RECEIVABLE FROM SHAREHOLDERS Notes receivable from shareholders of $1,665,000 and $38,304,000 at January 31, 1999 and 2000, respectively, represent interest bearing notes receivable from certain employees in connection with their purchase of shares of the Company's common stock, as described above. The notes bear interest at the annual rate of 7.00% compounded semi-annually with accrued interest due annually. The notes issued generally have a four year term, however, are payable immediately if cash dividends in excess of the principal and interest owed are paid to the shareholder. SHARES REPURCHASED In September 1999, the Company purchased and retired 7,593,500 shares of common stock and 284,000 shares of Series B convertible preferred stock from investors at per share prices of $1.50 and $15.00, respectively, for a total of $15,650,000. 14. STOCK OPTION PLANS The Company currently has three stock option plans in effect: the 1996 Employee Stock Plan (the "1996 Plan"), the 1999 Employee Stock Plan (the "1999 Plan" and, collectively the "Employee Plans") and the 1999 Executive Stock Plan (the "1999 Executive Plan" and, together with the Employee Plans, the "Plans"). The Plans provide for the grant of nonstatutory stock options to the Company's or its subsidiaries' employees or consultants and the grant of incentive stock options to employees of the Company or its subsidiaries. Stock purchase rights may also be granted under the terms of the Plans. The Company's Board of Directors administer the Plans, select the individuals to whom options will be granted, determine the number of options to be granted and the term and exercise price of each option. Incentive stock options granted pursuant to the terms of the Plans cannot be granted with an exercise price of less than 100% of the fair market value on the date of grant (110% if the award is issued to a 10% or more shareholder). Nonstatutory stock options granted pursuant to the terms of the Plans cannot be granted with an exercise price of less than 85% of the fair market value on the date of grant (110% for awards granted pursuant to the terms of the Employee Plans issued to a 10% or more shareholder). The term of the options granted under the Plans cannot be greater than 10 years; 5 years for certain optionees who have an ownership interest in the Company or one of its subsidiaries. Options granted generally vest 20% immediately or upon 6 month anniversary, subject to certain adjustments, with the remaining balance vesting evenly on each of the next four anniversary dates of the date of grant. Options are immediately exercisable for common stock, with the unvested portion of the common stock subject to repurchase by the Company at the exercise price until the option vesting period is complete (see Note 13). An aggregate of 150,000,000, 90,000,000 and 175,000,000 shares of common stock have been reserved for issuance under the 1996 Plan, the 1999 Plan and the 1999 Executive Plan, respectively. As of January 31, 2000, stock purchase rights have not been granted under the terms of the Plans. F-26 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) The following table summarizes the activity of the Company's stock option plans during each of the three years in the period ended January 31, 2000:
1998 1999 2000 --------------------- ---------------------- ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ----------- --------- ------------ --------- ------------- ---------- Options outstanding, beginning of the year 55,790 $ 0.010 73,837 $ 0.012 44,430 $ 0.014 Granted................................... 27,104 0.016 71,063 0.020 216,587 1.289 Exercised................................. -- -- (96,250) 0.017 (57,900) 0.616 Canceled / forfeited...................... (9,057) 0.010 (4,220) 0.013 (3,103) 0.036 ------------ ----------- ------------- Options outstanding, end of the year, all of which are exercisable............... 73,837 0.012 44,430 0.014 200,014 1.221 ============ =========== ============= Options available for grant, end of year.. 76,163 9,320 64,086 ============ =========== =============
The following table summarizes information about stock options outstanding, all of which are exercisable, at January 31, 2000:
OPTIONS OUTSTANDING ------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER OF CONTRACTUAL LIFE EXERCISE RANGE OF EXERCISE PRICES SHARES (NOT IN THOUSANDS) PRICE ---------------------------------- -------------- -------------------- -------------- $ 0.01 - $ 0.04................ 9,644 7.25 $ 0.02 $ 0.80......................... 4,000 9.38 $ 0.80 $ 1.28 - $ 1.87................ 186,370 9.53 $ 1.29
Options granted to employees during the years ended January 31, 1999 and 2000 resulted in total deferred stock compensation of $7,795,000 and $244,537,000, respectively which has been included in shareholders' equity. This deferred compensation represents the difference between the deemed fair value of the Company's common stock for accounting purposes and the exercise price of these options at the date of grant. The deferred stock compensation will be recognized as stock-based compensation over the vesting period of the related options. During the years ended January 31, 1999 and 2000, such stock-based compensation was $1,967,000 and $41,234,000, respectively. During the years ended January 31, 1998, 1999 and 2000, the Company granted 8,753,420, 2,862,940, and 2,885,460 options, respectively, to non-employees. The fair value of these options is being re-measured over the vesting periods and $407,000, $2,263,000 and $63,931,000 during each of the years ended January 31, 1998, 1999 and 2000, respectively, has been recorded as deferred stock compensation. The fair value was determined and remeasured using the Black-Scholes option pricing model assuming a volatility of 80%, an option life of 10 years (adjusted as applicable), a dividend yield of 0% and varying risk free interest rates which approximated 6%. The amortization, which is included in stock-based compensation in the accompanying Consolidated Statement of Operations, is being charged to operations over the vesting period of the related option grant, generally four years. Such amortization was $233,000, $1,943,000, and $40,841,000 for the years ended January 31, 1998, 1999 and 2000, respectively. The Company's consolidated network companies typically maintain separate stock option plans. During the years ended January 31, 1998, 1999 and 2000, the Company's stock-based compensation expense included $0, $0 and $19,184,000, respectively, of stock-based compensation recorded by consolidated network companies. F-27 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) The Company applies APB No. 25 and related interpretations to account for stock options granted to employees and directors. Had compensation cost been recognized pursuant to the fair value approach of SFAS No. 123, the Company's pro forma net income (loss) and net income (loss) per share applicable to common shareholders would have been as follows:
YEAR ENDED JANUARY 31, -------------------------------------- 1998 1999 2000 ------------ ------------- ----------- Net income (loss) applicable to common shareholders: As reported............................................... $ (7,056) $ (883) $ 104,983 SFAS 123 pro forma........................................ $ (7,132) $ (963) $ 88,263 Net income (loss) per share applicable to common shareholders: As reported: Basic................................................. $ (0.02) $ -- $ 0.25 Diluted............................................... $ (0.02) $ -- $ 0.15 SFAS 123 pro forma: Basic................................................. $ (0.02) $ -- $ 0.21 Diluted............................................... $ (0.02) $ -- $ 0.13
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The per share weighted-average fair value of options issued by the Company to employees where the exercise price equaled the deemed fair value of the Company's common stock on the grant date during the year ended January 31, 1998 was approximately $0.01. During the years ended January 31, 1999 and 2000 the per share weighted average fair value of options issued by the Company to employees where the exercise price was below the deemed fair value of the Company's common stock for accounting purposes was approximately $0.12 and $1.64. The minimum fair value of each stock option grant has been estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:
YEAR ENDED JANUARY 31, -------------------------------------- 1998 1999 2000 ------------ ------------ ------------ Risk-free interest rate...................................... 6.2% 4.8% 5.9% Expected life (in years)..................................... 8 8 8 Dividend yield............................................... -- -- -- Expected volatility.......................................... -- -- --
F-28 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) 15. OTHER INCOME, NET Other income, net consists of the following for the years ended January 31:
1998 1999 2000 --------------- ---------------- --------------- Deconsolidation of eToys, Inc.............. $ 124 $ -- $ -- Deconsolidation of Intranets.com........... -- 5,259 -- Deconsolidation of GoTo.com................ -- 243 -- Deconsolidation of FirstLook............... -- -- 332 Sale of ownership interest in Free-PC, Inc............................ -- -- 90,783 Other, net................................. 92 (195) 888 --------------- ---------------- --------------- $ 216 $ 5,307 $ 92,003 =============== ================ ===============
See Note 7 for a description of the gains resulting from deconsolidations. In January 2000, eMachines, Inc. ("eMachines") completed a transaction whereby one of its wholly-owned subsidiaries was merged with and into Free-PC. In connection with the acquisition, eMachines issued 21,630,000 shares of common and convertible preferred stock and warrants to purchase 9,270,000 shares of eMachines common stock in exchange for all of the outstanding common and convertible preferred stock of Free-PC. In connection with this transaction, the Company's 57% interest in Free-PC was converted into common and convertible preferred shares of eMachines and a warrant to purchase shares of eMachines common stock. The eMachines stock and warrants were valued at $97,391,000 on the date of the exchange resulting in a gain of $90,783,000. The Company's ownership interest in eMachines is accounted for using the cost method. 16. INCOME TAXES The income tax benefit (expense) for the years ended January 31, 1998, 1999 and 2000, consists of the following:
CURRENT DEFERRED TOTAL -------------- -------------- -------------- January 31, 1998: Federal................. $ -- $ 3,037 $ 3,037 State................... (8) 499 491 -------------- -------------- -------------- $ (8) $ 3,536 $ 3,528 ============== ============== ============== January 31, 1999: Federal................. $ -- $ 2,032 $ 2,032 State................... (8) 334 326 -------------- -------------- -------------- $ (8) $ 2,366 $ 2,358 ============== ============== ============== January 31, 2000: Federal................. $ (72,330) $ (1,627) $ (73,957) State................... (18,493) 6,205 (12,288) -------------- -------------- -------------- $ (90,823) $ 4,578 $ (86,245) ============== ============== ==============
F-29 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) Deferred tax assets and liabilities, all of which are classified as non-current, are comprised of the following:
JANUARY 31, --------------------------------- 1999 2000 ---------------- ---------------- Deferred tax assets: Tax basis in excess of financial reporting basis of investments in network companies..................... $ 1,064 $ 19,630 Stock-based compensation................. 1,138 21,356 State taxes.............................. -- 6,472 Net operating loss carryforward.......... 7,513 19,594 ---------------- ---------------- Total gross deferred tax assets....... 9,715 67,052 Less: valuation allowance................ (4,497) (19,594) ---------------- ---------------- Net deferred tax assets............... 5,218 47,458 ---------------- ---------------- Deferred tax liabilities: Financial reporting basis in excess of tax basis of investments in network companies............................. (734) (64,411) Financial reporting basis in excess of tax basis of available-for-sale securities............................ (14,176) (99,460) ---------------- ---------------- Total gross deferred tax liabilities..... (14,910) (163,871) ---------------- ---------------- Net deferred tax liability............... $ (9,692) $ (116,413) ================ ================
The provision for income taxes differs from the amount of income taxes determined by applying the applicable U.S. statutory federal income tax rate to pretax income from continuing operations as a result of the following differences:
YEAR ENDED JANUARY 31, ------------------------------------ 1998 1999 2000 ---------- ---------- ------------ Income tax benefit (expense) at federal statutory rates............................... $ 3,967 $ 1,352 $ (28,394) Difference in income tax benefit (expense) resulting from: State taxes, net of federal...................... 1,059 321 (4,669) Stock-based compensation......................... -- (520) (12,126) Valuation allowance, consolidated network company losses not benefited.......................... (2,946) (1,367) (15,096) Write off, consolidated subsidiary losses not benefited..................................... (416) (233) (38,928) Basis difference in subsidiaries not consolidated for tax purposes................. 2,531 1,174 12,968 Valuation allowance.............................. (667) 1,631 -- ---------- ---------- ------------ Actual income tax benefit (expense).............. $ 3,528 $ 2,358 $ (86,245) ========== ========== ============
The Company files its income tax return on a calendar year basis. The Company does not include its less than 80% owned subsidiaries in its consolidated income tax return. As a result, taxable income and losses of less than 80% owned subsidiaries do not offset each other or that of the Company. Accordingly, the Company has recorded a valuation allowance against net operating losses for its proportionate share of F-30 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) its less than 80% owned network companies due to uncertainty surrounding the timing of the realization of such losses by those network companies. The net increase (decrease) in the valuation allowance for deferred tax assets is $3,613,000, $(264,000), and $15,096,000 for the years ended January 31, 1998, 1999, and 2000, respectively. The increases primarily relate to additional reserves for the net operating loss carryforwards of the Company's less than 80% owned subsidiary companies which are not consolidated for tax purposes (as discussed above). Net operating loss carryforwards of the Company and its share of its less than 80% owned subsidiaries totaled approximately $18,438,000 and $48,087,000 at January 31, 1999 and January 31, 2000, respectively. Their use is limited to future taxable earnings of the Company and the subsidiaries. The net operating losses have 20 and 8 year carryforward periods for federal and state income tax purposes, respectively. If certain substantial changes occur with respect to the ownership of the Company or its less than 80% owned subsidiary companies, there could be an annual limitation on the amount of the net operating loss carryforward which can be utilized. Excluded from the tax benefit and tax provision but included in deferred tax liabilities is the effect of network companies' equity transactions of approximately $644,000, $908,000, and $3,750,000 for the years ended January 31, 1998, 1999, and 2000, respectively. Also excluded from the tax benefit and tax provision but included in deferred tax liabilities is the unrealized holding gains from the increase in market value of the Company's marketable securities of approximately $3,076,000, $11,100,000, and $85,284,000 for the years ended January 31, 1998, 1999, and 2000, respectively. 17. RELATED PARTY TRANSACTIONS Trade revenues for the year ended January 31, 1999 and 2000 included $49,000 and $83,000 of revenue generated from transactions with network companies which are accounted for using the equity method. Revenues for the year ended January 31, 1998 did not include any revenue generated from Network Companies which are accounted for using the equity method. The Company provides facilities and various services, including executive recruiting, web development, information technology, legal, finance, accounting and human resources, to certain of its network companies. The Company charges each of these network companies a monthly fee at rates which approximate the cost of providing such facilities and services. During the years ended January 31, 1998, 1999 and 2000, the Company charged certain of its equity method network companies aggregate fees of $42,000, $453,000 and $1,541,000, respectively, for these facilities and other services. See also Note 3 which describes amounts due from network companies which are accounted for using the equity method at January 31, 1999 and 2000. In February 1999, the Company entered into a sublease agreement with one of its network companies which is accounted for using the equity method. In December 1999, both parties agreed to terminate this agreement and enter into a separate sublease agreement commencing in January 2000 and expiring in October 2004. Total remaining minimum sublease income due pursuant to the terms of the sublease is approximately $6,100,000. During the year ended January 31, 2000, the Company recorded $364,000 of sublease income from this Network Company. In October 1999, the Company issued an equity method network company which is accounted for using the equity method a promissory note in the amount of $1,962,007 which accrued interest at the rate of 7% per annum. The note financed the Company's purchase of an additional interest in the network company and was collateralized by the underlying convertible preferred stock. The note, including accrued F-31 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) interest, was paid in full prior to January 31, 2000. The Company recorded interest expense of $33,000 on this note during the year ended January 31, 2000. During the year ended January 31, 2000, the Company issued promissory notes to its Chairman and Chief Executive Officer with total principal amounting to $9,283,000. Each of the promissory notes accrued interest at the rate of 7% per annum compounded semi-annually and was payable on the earlier of demand by the Company or December 31, 1999. During December 1999, all of the notes, including accrued interest, were paid in full. The Company recorded interest income of $231,000 on such notes during the year ended January 31, 2000. In December 1998, the Company entered into a promissory note with its Chairman and Chief Executive Officer under which the Company borrowed $300,000 which was payable on demand. The note did not bear interest and was paid in full by the Company in February 1999. See Note 13 for a description of notes receivable from shareholders, including employees, officers and directors, issued upon the early exercise of stock options, or the sale of common stock subject to repurchase. 18. SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES The Company acquired $314,000 of fixed assets under capital leases during the year ended January 31, 1998. The following describes the Company's non-cash financing and investing activities during the year ended January 31, 1999: o The Company acquired $66,000 of fixed assets under capital leases. o The Company issued notes receivable to shareholders for $1,665,000 in connection with the exercise of stock options. The following describes the Company's non-cash financing and investing activities during the year ended January 31, 2000: o The Company acquired $31,568,000 of fixed assets and other intangible assets under capital leases. o The Company issued notes receivable to shareholders for $37,084,000 in connection with the exercise of stock options and the sale of common stock subject to repurchase. o The Company issued 2,331,000 shares of Series D convertible preferred stock valued at $233,136,000 to acquire ownership interests in network companies. o The Company issued 664,000 shares of common stock valued at $5,311,000 to acquire an ownership interest in a network company. o The Company issued 5,000 shares of Series D convertible preferred stock valued at $500,000 to acquire the rights to a domain name. o The Company cancelled $70,000 in notes receivable from shareholders and exercised its right to repurchase restricted common stock. o EntryPoint, a consolidated network company, issued shares of convertible preferred stock valued at $6,000,000 and paid $1,000,000 in cash to acquire PointCast. F-32 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) o CarsDirect.com, a consolidated network company, issued shares of Class A common stock valued at $1,680,000 and paid $7,085,000 in cash and acquisition costs to acquire Perga Capital Incorporated, the parent company of AutoData. o CarsDirect.com, a consolidated network company, issued shares of Class A common stock valued at $13,750,000 and paid $395,000 in acquisition costs to acquire certain net assets of Potamkin. o CarsDirect.com, a consolidated network company, acquired an additional 49% interest in CD1Financial and terminated the master and operating agreement which governed CD1Financial for $32,875,000 in cash and a warrant valued at $29,579,000. 19. DEFINED CONTRIBUTION PLAN In 1997, the Company established a defined contribution plan that covers all of its eligible employees. Participants may contribute 1% to 15% of their eligible pre-tax compensation, as defined. The Company may make discretionary contributions to the plan. During each of the three years in the period ended January 31, 2000, the Company has not made any contributions to the plan. F-33 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) 20. NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS The following table sets forth the computation of basic and diluted net income (loss) per share applicable to common shareholders:
Year ended January 31, --------------------------------------------------- 1998 1999 2000 ---------------- ---------------- ---------------- Numerator: Net income (loss)............................. $ (7,056) $ (833) $ 118,484 Deduction for beneficial conversion feature... -- -- (9,724) Repurchase of convertible preferred stock....................................... -- -- (3,777) ---------------- ---------------- ---------------- Numerator for both basic and diluted net income (loss) per share applicable to common shareholders................................ $ (7,056) $ (833) $ 104,983 ================ ================ ================ Denominator: Denominator for basic net income (loss) per share--weighted-average shares of common stock outstanding.................... 334,760 352,083 423,525 Effect of dilutive securities: Stock options and warrants.................. -- -- 44,088 Convertible preferred stock--Series A....... -- -- 34,500 Convertible preferred stock--Series B....... -- -- 59,062 Convertible preferred stock--Series C....... -- -- 48,032 Convertible preferred stock--Series D....... -- -- 6,095 Common stock subject to repurchase.......... -- -- 80,010 ---------------- ---------------- ---------------- Dilutive potential common shares.............. -- -- 271,787 ---------------- ---------------- ---------------- Denominator for dilutive net income (loss) per share--adjusted weighted-average shares and assumed conversions............ 334,760 352,083 695,312 ================ ================ ================ Basic net income (loss) per share applicable to common stockholders....................... $ (0.02) $ -- $ 0.25 Diluted net income (loss) per share applicable to common stockholders....................... $ (0.02) $ -- $ 0.15
The per share computations for the years ended January 31, 1998 and 1999 exclude convertible preferred stock, stock options and the unvested portion of common stock subject to repurchase, because their effects were anti-dilutive. The numbers of shares of convertible preferred stock, stock options and the unvested portion of common stock subject to repurchase excluded from the diluted net loss per share computation were 85,700,000, 73,837,000, and 0, respectively, for the year ended January 31, 1998 and 94,511,000, 44,430,000 and 6,071,000, respectively, for the year ended January 31, 1999. F-34 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) 21. COMMITMENTS AND CONTINGENCIES The Company leases facilities under noncancelable operating leases which expire on various dates through May 2015. The Company leases certain computer equipment, office furniture and other assets under noncancelable leases accounted for as capital leases. These leases expire on various dates through January 2012. Future minimum lease payments as of January 31, 2000 under the leases are as follows:
OPERATING CAPITAL LEASES LEASES ------------- ------------- 2001....................... $ 10,771 $ 6,276 2002....................... 12,098 6,057 2003....................... 10,203 4,411 2004....................... 8,487 4,121 2005....................... 7,229 4,100 Thereafter................. 26,959 29,000 Less: imputed interest..... -- (20,011) ------------- ------------- $ 75,747 33,954 ============= Less: current portion...... (3,515) ------------- $ 30,439 =============
Rent expense under the noncancelable operating leases was approximately $493,000, $591,000 and $4,223,000 for the years ended January 31, 1998, 1999 and 2000, respectively. From time to time, the Company guarantees certain trade payables of its network companies. As of January 31, 2000, no such guarantees were outstanding. In August 1999 idealab! Capital Principals Fund, L.P. ("Principals Fund") was created for the purpose of making co-investments in securities along with certain other venture capital funds which are managed by idealab Capital Management II, L.L.C. (see also Note 6). The Company is a limited partner in the Principals Fund and has made a capital commitment of $25,000,000, of which $4,250,000 has been paid as of January 31, 2000. The Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management and based on the advice of Counsel, the amount of the ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company and its subsidiaries. The Investment Company Act of 1940 requires registration for companies that are engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities. A company may be deemed to be an investment company if it owns "investment securities" with a value exceeding 40% of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. Securities issued by companies other than majority-owned subsidiaries are generally considered investment securities for purposes of the Investment Company Act. At January 31, 2000, substantially all of the Company's assets on an unconsolidated basis, excluding government securities and cash items, consisted of equity interests in majority-owned subsidiaries and equity interests in other companies. The Company's equity interests in companies that are not majority-owned subsidiaries could be counted as investment securities. At January 31, 2000, more than 40% of the value of the Company's total assets on an unconsolidated basis consisted of securities issued by companies that are not majority-owned subsidiaries. Therefore, the Company could be considered an investment company unless the Securities and Exchange Commission issues an order declaring that the Company is primarily engaged in a business or businesses other than that of investing, reinvesting, owning, holding or is trading in securities or (ii) the Company does not fall within the definition of investment F-35 IDEALAB! NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)--(CONTINUED) company in Section 3(a) of the Investment Company Act. On January 28, 2000, the Company filed an application with the Securities and Exchange Commission requesting a permanent order declaring that the Company is primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. On March 28, 2000, the Commission granted a temporary order exempting the Company from all provisions of the Investment Company Act for a 120-day period that ends on July 26, 2000 while it considers the Company's request for a permanent order. Registration as an investment company would subject the Company to restrictions that are inconsistent with its fundamental business strategy of equity growth through creating, building and operating interactive communications companies. The Company may have to take actions, including buying, refraining from buying, selling or refraining from selling securities, when it would otherwise not choose to in order to continue to avoid registration under the Investment Company Act. For example, the Company may have to ensure that it retain controlling ownership interests in its network companies after their initial public offerings, which would require the Company to expend significant amounts of capital that the Company might otherwise use to create or acquire other companies. 22. NETWORK COMPANY INTERVENING EVENTS--UNAUDITED On January 31, 2000, GoTo.com, Inc., a network company accounted for under equity method, acquired Cadabra, Inc. for cash, GoTo.com, Inc. common stock and other acquisition related costs. The increase in the Company's share of the net assets of GoTo.com resulting from the Cadabra, Inc. acquisition was approximately $66,000,000 and will be recorded as a gain on stock issuance by network companies during the first quarter of fiscal year 2001. 23. SUBSEQUENT EVENTS--UNAUDITED On April 12, 2000, the Company's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission ("SEC") that would permit the Company to sell shares of the Company's common stock in connection with a proposed initial public offering ("IPO"). If the IPO is consummated under the terms presently anticipated, upon the closing of the proposed IPO, all of the then outstanding shares of the Company's convertible preferred stock will automatically convert into shares of common stock on a ten-for-one basis, subject to anti dilution provisions. On April ____ , 2000, the Company's Board of Directors approved the reincorporation of the Company in the State of Nevada, the change of the Company's name to idealab!, the authorization of 10,000,000,000 shares of $0.001 par value common stock and 100,000,000 shares of $0.001 par value preferred stock, all of which will occur prior to the closing of the IPO. On March 15, 2000, the Company sold 1,488,000 shares of Series D convertible preferred stock in exchange for cash and other proceeds totaling of $118,807,000 and a note receivable of $30,000,000. F-36 IDEALAB! UNAUDITED PRO FORMA FINANCIAL INFORMATION BASIS OF PRESENTATION The unaudited pro forma condensed combined consolidated statement of operations for the year ended January 31, 2000 gives effect to each of the transactions described below as if they had occurred on February 1, 1999. The pro forma financial information has been prepared on the basis of the assumptions described in the notes to the unaudited pro forma combined financial information. An unaudited condensed consolidated pro forma balance sheet at January 31, 2000 has not been presented as all of the transactions described above occurred before January 31, 2000 and are reflected in the Company's historical financial statements. In May 1999, EntryPoint, a consolidated network company, acquired all of the outstanding stock of PointCast Incorporated ("PointCast") for $1,000,000 in cash and shares of EntryPoint convertible preferred stock with an estimated fair value of $6,000,000. The acquisition has been accounted for as a purchase. The acquisition cost has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. The excess of purchase consideration over the net tangible assets acquired of $4,875,000 has been allocated to goodwill and is being amortized on a straight line basis over three years. In July 1999, CarsDirect.com, a consolidated network company, acquired all of the outstanding stock of Perga Capital Incorporated, the parent of AutoData Marketing Systems Incorporated ("AutoData"). The purchase price of $8,765,000 was comprised of $7,085,000 in cash, other acquisition related expenses and issuance of CarsDirect.com Class A common stock with an estimated fair value of $1,680,000. In connection with the acquisition, CarsDirect.com issued additional shares of its Class A common stock to two individuals which will vest over four years, subject to the continuing employment of these individuals and subject to acceleration in the event of an initial public offering or change in control transaction of CarsDirect.com. These shares were valued at $3,120,000 and will be recorded as stock based compensation over the vesting period of the employees. The acquisition has been accounted for as a purchase. The acquisition cost has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. The excess of purchase consideration over the net tangible assets acquired of $8,545,000 has been allocated to identifiable intangibles ($1,095,000) and goodwill ($7,450,000) all of which are being amortized on a straight line basis over three years. In October 1999, CarsDirect.com acquired certain assets and liabilities of Potamkin Auto Center, Ltd. ("Potamkin") for an aggregate purchase price of $14,145,000. The purchase price was comprised of CarsDirect.com Class A common stock with a fair value of $13,750,000 and $395,000 in acquisition related expenses. In conjunction with the acquisition, CarsDirect.com issued shares of its Class A common stock valued at $4,400,000 to certain individuals which will vest equally in quarterly increments commencing on December 31, 1999 and continuing through September 30, 2002, subject to their continuing employment. The value of these shares will be recorded as stock based compensation over the vesting periods. The acquisition has been accounted for as a purchase. The acquisition cost has been allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. The excess of purchase consideration over net tangible assets acquired of $14,074,000 has been allocated to identifiable intangibles ($2,390,000) and goodwill ($11,684,000) which are being amortized on a straight line basis over periods ranging from six months to ten years. In May 1999 CarsDirect.com entered into an agreement to form and operate CD1Financial.com, L.L.C. ("CD1Financial"), a joint venture formed to provide automotive related financial products to customers of CarsDirect.com. In connection with this agreement, CarsDirect.com issued to the minority member of the joint venture a warrant to purchase an amount of shares of CarsDirect.com Class A common stock to be determined based upon the combined value of CD1Financial and CarsDirect.com at the time of the occurrence of certain events. In December 1999, CarsDirect.com acquired the minority member's 49% interest in CD1Financial and terminated the master and operating agreement which governed CD1Financial for $32,875,000 in cash. The terms of the warrant were also modified to make the warrant non-forfeitable and immediately exercisable into shares of CarsDirect.com Class A common stock with an exercise price of F-37 IDEALAB! UNAUDITED PRO FORMA FINANCIAL INFORMATION BASIS OF PRESENTATION--(CONTINUED) $0.01 per share. The estimated fair value of the warrant for accounting purposes was approximately $29,579,000 and has been accounted for as part of the purchase price of the additional interest in CD1Financial and included in goodwill. This acquisition was accounted for using the purchase method. The purchase price was allocated to the estimated fair value of tangible and identifiable intangible net assets acquired. The estimated fair value of the tangible and intangible net assets acquired approximated their historical cost basis. The excess of the purchase price over the net assets acquired of approximately $60,677,000 was allocated to goodwill and is being amortized on straight-line basis over an estimated life of three years. In August 1999, the Company increased its minority interest in Intranets.com, Inc. purchasing convertible preferred stock of Intranets.com, Inc. for $2,000,000 in cash. The excess of the purchase price over the Company's share of the underlying net assets acquired, was $1,659,000 and is being amortized on a straight line basis over three years. In October and December 1999, the Company acquired shares of CarsDirect.com Class B common stock and Series D convertible preferred stock for $218,422,000 in cash. The excess of the purchase price over the Company's share of the underlying net assets acquired was $21,850,000 and is being amortized on a straight line basis over three years. In December 1999, the Company acquired a minority interest in eVoice, Inc. for $30,000,000 in cash. The excess of the purchase price over the Company's share of the underlying net assets acquired was $5,960,000 and is being amortized on a straight line basis over three years. In January 2000, the Company increased its minority interest in GoTo.com, Inc. through the purchase of shares of GoTo.com, Inc. common stock. The aggregate purchase price of $340,256,000 was comprised of $112,456,000 in cash and 2,278,000 shares of idealab! Series D convertible preferred stock with an estimated fair value of $227,800,000. The excess of the purchase price over the Company's share of the underlying net assets acquired was $329,950,000 and is being amortized on a straight line basis over five years. In January 2000, the Company sold its ownership interest in Free-PC to eMachines, Inc. for approximately 12,265,000 shares of eMachines, Inc. common and convertible preferred stock and a warrant to purchase approximately 5,256,000 shares of eMachines, Inc. common stock. Prior to the date of the sale, the Company had a controlling interest in Free-PC and therefore consolidated the results of Free-PC for the period from January 1999 (Free-PC's inception) to January 2000. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred had these transactions been in effect as of the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position. The audited historical financial statements of the Company, eVoice, Inc., GoTo.com, Inc., Intranets.com, Inc., Perga Capital Incorporated, AutoData, PointCast and Potamkin are included elsewhere in this Prospectus and the unaudited pro forma financial information presented herein should be read in conjunction with those financial statements and related notes. F-38
IDEALAB! UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PERGA AUTO DATA POTAMKIN CONSOLIDATED POINTCAST CAPITAL MARKETING AUTO DISPOSITION OF IDEALAB! INCORPORATED INCORPORATED INCORPORATED CENTER, LTD. FREE-PC INC. (HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) --------- ------------ ----------- ------------ ------------ ----------- Revenues............................... $ 21,158 $ 3,836 $ -- $ 1,729 $ 108,781 $ (1,201) --------- ----------- ----------- ------------- ------------ ----------- Operating expenses: Cost of revenues.................... 28,380 4,657 58 98,835 (3,320) Sales and marketing................. 70,129 3,943 272 4,913 (20,147) Product development................. 10,798 3,815 -- -- (2,059) General and administrative.......... 36,738 2,437 1,284 5,490 (4,422) Stock-based compensation............ 109,150 435 -- -- (1,902) Amortization of goodwill and other intangibles....................... 7,149 -- -- --------- ----------- ----------- ------------ ------------ ----------- Total operating expenses........... 262,344 15,287 1,614 109,238 (31,850) --------- ----------- ----------- ------------ ------------ ----------- Operating income (loss)............ (241,186) (11,451) 115 (457) 30,649 --------- ----------- ----------- ------------ ------------ ----------- Other income, net....................... 316,620 2,249 -- -- 39 Interest income (expense)............... 5,691 (1,073) (17) (350) (902) --------- ----------- ----------- ------------ ------------ ----------- Income (loss) before income taxes, minority interest and equity in the income (loss) of affiliates......... 81,125 (10,275) 98 (807) 29,786 Income tax expense..................... (86,245) (5) (65) 1 Minority interest...................... 95,537 Equity in the income (loss) of affiliates, net of tax.............. 28,067 12 --------- ------------ ----------- ------------ ------------ ----------- Net income (loss)...................... 118,484 (10,280) 12 33 (807) 29,787 Deduction for beneficial conversion feature............................. (9,724) -- -- -- -- -- Repurchase of convertible preferred stock. (3,777) -- -- -- -- -- --------- ------------ ----------- ------------ ----------- ----------- Net income (loss) applicable to common shareholders............................. $ 104,983 $ (10,280) $ 12 $ 33 $ (807) $ 29,787 ========= ============ =========== ============ =========== =========== Net income (loss) per share Basic................................ $ 0.25 Diluted.............................. $ 0.15 Weighted average shares outstanding Basic.................................. 423,525 Diluted................................ 695,312 PRO FORMA PRO FORMA ADUSTMENTS COMBINED ------------ ----------- Revenues............................... $ -- $ 134,303 ------------ ------------ Operating expenses: Cost of revenues.................... 128,610 Sales and marketing................. 191 (1) 59,301 Product development................. 12,554 General and administrative.......... 1,059 (2)(3) 42,586 Stock-based compensation............ 1,616 (4) 109,299 Amortization of goodwill and other intangibles....................... 27,116 (5) 34,265 ------------ ------------ Total operating expenses........... 29,982 386,615 ------------ ------------ Operating income (loss)............ (29,982) (252,312) ------------ ------------ Other income, net....................... 318,908 Interest income (expense)............... (1,970)(6) 1,379 ------------ ------------ Income (loss) before income taxes, minority interest and equity in the income (loss) of affiliates......... (31,952) 67,975 Income tax expense..................... 13,100 (7) (73,214) Minority interest...................... 42,797 (8) 138,334 Equity in the income (loss) of affiliates, net of tax.............. (51,416)(9) (23,337) ------------ ------------ Net income (Loss)...................... (27,471) 109,758 Deduction for beneficial conversion feature............................. -- (9,724) Repurchase of convertible preferred stock -- (3,777) ------------ ------------ Net income (loss) applicable to common shareholders.............................$ (27,471) $ 96,257 ============ ============ Net income (loss) per share Basic................................ $ 0.17 Diluted.............................. $ 0.14 Weighted average shares outstanding Basic................................. 573,743(10) Diluted............................... 697,839(10)
F-39 IDEALAB! NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (IN THOUSANDS EXCEPT PER SHARE DATA) Pro forma adjustments reflect the following in the unaudited pro forma condensed combined consolidated statement of operations, giving effect to the acquisitions as if they had occurred on February 1, 1999: (1) Additional sales compensation of $191 due to employment agreements signed in connection with the Potamkin acquisition. (2) Additional rent expense of $1,139 due to new lease agreements signed in connection with the Potamkin acquisition. (3) Net adjustment of $80 to reduce depreciation expense for assets not acquired in connection with the Potamkin acquisition. (4) Stock-based compensation expense related to the issuance and subsequent vesting of the shares of CarsDirect.com Class A common stock issued in connection with the AutoData and Potamkin acquisitions, respectively as follows: AutoData.............................................. $ 455 Potamkin.............................................. 1,161 ------- $ 1,616 ======= (5) Additional amortization expense related to the intangible assets acquired in connection with the acquisitions of AutoData, PointCast, Potamkin and CD1Financial and the purchase of additional ownership interests in CarsDirect.com by the Company and elimination of amortization expense recognized in connection with the disposition of the Company's ownership interest in Free-PC, as follows: PointCast............................................. $ 677 AutoData.............................................. 1,662 Potamkin............................................. 1,804 CarsDirect............................................ 3,756 CD1Financial.......................................... 19,383 Free-PC............................................... (166) -------- $ 27,116 ======== (6) Reduction of interest income by $1,970 related to the cash paid in the acquisitions of AutoData, CD1Financial and PointCast. (7) Income tax expense has been adjusted to reflect the tax effect of the pro forma adjustments. (8) Additional minority interest to reflect the minority shareholders interest in the effects of the adjustments described in notes (1) through (6) above and the pre-acquisition results of operations of PointCast, AutoData and Potamkin. Also reflects the reduction in minority interest due to the disposition of the Company's ownership interest Free-PC. (9) Additional equity income (loss) and amortization expense as a component thereof related to the purchase of additional ownership interests in eVoice Inc., GoTo.com, Inc. and Intranets. F-40 IDEALAB! NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(CONTINUED) (IN THOUSANDS) (10) Additional weighted average shares used in the calculation of pro forma basic and diluted net income per share applicable to common shareholders to reflect the issuance of: o 22,780 shares of common stock assuming the conversion of 2,278 shares of Series D convertible preferred stock issued in exchange for additional ownership interests in GoTo.com as though such shares were issued on February 1, 1999, o an aggregate of 14,246 shares of common stock assuming the conversion of 1,425 shares of Series D preferred stock, the proceeds from the sale of which were used to finance the acquisition of additional ownership interests in GoTo.com for $112,460 and in eVoice Inc. for $30,000, as though the shares were issued on February 1, 1999, o the automatic conversion of the Company's convertible preferred stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred on February 1, 1999 or at the date of issuance if later (see Note 2 of Notes to idealab! Consolidated Financial Statements). F-41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of eVoice, Inc. (a development stage company) In our opinion, the accompanying balance sheets and the related statements of operations, of redeemable convertible preferred stock and shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of eVoice, Inc. (a development stage company) at December 31, 1998 and at September 30, 1999, and the results of its operations and its cash flows for the period from December 7, 1998 (date of inception) to December 31, 1998, the nine month period ended September 30, 1999 and for the cumulative period from December 7, 1998 (date of inception) through September 30, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP San Jose, California February 28, 2000 F-42 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30, 1998 1999 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents................................................... $ 10 $ 3,415 Prepaid expenses and other current assets................................... 18 364 ---------------- ---------------- Total current assets...................................................... 28 3,779 Property and equipment, net.................................................... -- 3,455 Internal-use software development costs........................................ -- 148 Other assets................................................................... -- 230 ---------------- ---------------- Total assets.............................................................. $ 28 $ 7,612 ================ ================ LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable, current...................................................... $ 290 $ -- Accounts payable............................................................ 121 1,168 Accrued liabilities......................................................... -- 286 Capital lease obligations, current portion.................................. -- 220 ---------------- ---------------- Total current liabilities................................................. 411 1,674 Capital lease obligations, long-term portion................................... -- 598 ---------------- ---------------- 411 2,272 ---------------- ---------------- Commitments (Note 6) Redeemable Convertible Preferred Stock (Note 7)................................ -- 12,162 Shareholders' equity (deficit):................................................ Common Stock: $0.0001 par value; 50,000 shares authorized; 11,640 and 13,075 shares issued and outstanding at December 31, 1998 and September 30, 1999................... 1 1 Additional paid-in capital..................................................... 10 1,570 Notes receivable from shareholders............................................. (1) (116) Deferred stock-based compensation.............................................. -- (1,089) Deficit accumulated during the development stage............................... (393) (7,188) ---------------- ---------------- Total shareholders' equity (deficit)...................................... (383) (6,822) ---------------- ---------------- Total liabilities, redeemable Convertible Preferred Stock and shareholders' equity (deficit).......................................... $ 28 $ 7,612 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-43 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS PERIOD ENDED DECEMBER 31, 1998 AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM DECEMBER 7, 1998 (DATE OF NINE MONTH INCEPTION) PERIOD ENDED PERIOD ENDED THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1999 --------------- --------------- --------------- OPERATING EXPENSES: Research and development (excluding amortization of deferred stock-based compensation of $193 in 1999).... $ 393 $ 3,242 $ 3,635 Sales and marketing (excluding amortization of deferred stock-based compensation of $73 in 1999).............. -- 1,507 1,507 General and administrative (excluding amortization of deferred stock-based compensation of $90 in 1999)..... -- 1,670 1,670 Amortization of stock-based compensation................ -- 356 356 --------------- --------------- --------------- Total operating expenses.............................. 393 6,775 7,168 --------------- --------------- --------------- Loss from operations....................................... 393 6,775 7,168 Interest income............................................ -- 104 104 Interest expense........................................... -- (124) (124) Other income (expense), net................................ -- (20) (20) --------------- --------------- --------------- Net loss................................................... $ 393 $ 6,795 $ 7,188 =============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-44 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) PERIOD ENDED DECEMBER 31, 1998 AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
REDEEMABLE CONVERTIBLE PREFERRED STOCK NOTES (NOTE 7) COMMON STOCK ADDITIONAL RECEIVABLE -------------------- ----------------------- PAID-IN FROM SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS -------- ---------- ---------- ----------- ----------- ------------ Issuance of Common Stock to founders .... -- $ -- 10,840 $ 1 $ 9 $ (1) Issuance of Series A Convertible Preferred Stock, Common Stock and Common Stock warrants in connection with acquisition of assets ........... 122 -- 800 -- 1 -- Net loss ................................ -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1998 ............ 122 -- 11,640 1 10 (1) Issuance of Series A Convertible Preferred Stock, net of issuance costs of $648 .............................. 970 230 -- -- -- -- Issuance of Series A Convertible Preferred Stock warrants ............. -- 121 -- -- -- -- Issuance of Series B Convertible Preferred Stock, net of issuance costs of $8 ................................ 17,696 11,392 -- -- -- -- Issuance of Series B Convertible Preferred Stock warrants ............. -- 419 -- -- -- -- Stock-based compensation for services rendered ............................. -- -- -- -- 13 -- Repurchase of stock ..................... -- -- (365) -- (14) -- Exercise of Stock Purchase Rights ....... -- -- 1,800 -- 116 (116) Repayment of notes receivable ........... -- -- -- -- -- 1 Deferred stock-based compensation ...... -- -- -- -- 1,445 -- Amortization of deferred stock-based compensation ......................... -- -- -- -- -- -- Net loss ................................ -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- BALANCE AT SEPTEMBER 30, 1999 ........... 18,788 $12,162 13,075 $ 1 $ 1,570 $ (116) ======= ======= ======= ======= ======= ======= TOTAL DEFERRED SHAREHOLDERS STOCK-BASED ACCUMULATED EQUITY COMPENSATION DEFICIT (DEFICIT) ------------ ------------ ------------- Issuance of Common Stock to founders .... $ -- $ -- $ 9 Issuance of Series A Convertible Preferred Stock, Common Stock and Common Stock warrants in connection with acquisition of assets ........... -- -- 1 Net loss ................................ -- (393) (393) ------- ------- ------- BALANCE AT DECEMBER 31, 1998 ............ -- (393) (383) Issuance of Series A Convertible Preferred Stock, net of issuance costs of $648 .............................. -- -- -- Issuance of Series A Convertible Preferred Stock warrants ............. -- -- 121 Issuance of Series B Convertible Preferred Stock, net of issuance costs of $8 ................................ -- -- -- Issuance of Series B Convertible Preferred Stock warrants ............. -- -- 419 Stock-based compensation for services rendered ............................. -- -- 13 Repurchase of stock ..................... -- -- (14) Exercise of Stock Purchase Rights ....... -- -- -- Repayment of notes receivable ........... -- -- 1 Deferred stock-based compensation ...... (1,445) -- -- Amortization of deferred stock-based compensation ......................... 356 -- 356 Net loss ................................ -- (6,795) (6,795) ------- ------- ------- BALANCE AT SEPTEMBER 30, 1999 ........... $(1,089) $(7,188) $(6,282) ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-45 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS PERIOD ENDED DECEMBER 31, 1998 AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 (IN THOUSANDS)
PERIOD FROM DECEMBER 7, 1998 (DATE OF PERIOD NINE MONTH INCEPTION) ENDED PERIOD ENDED THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1999 ------------ ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (393) $ (6,795) $ (7,188) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... -- 80 80 Amortization of stock-based compensation expense....... -- 356 356 Other non-cash expense................................. 272 102 374 Changes in current assets and liabilities: Prepaid expenses and other current assets............ -- (262) (262) Accounts payable..................................... 121 1,047 1,168 Accrued liabilities.................................. -- 286 286 ------------ ------------- ------------ Net cash used in operating activities.............. -- (5,186) (5,186) ------------ ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment......................... -- (3,535) (3,535) Capitalized software development costs..................... -- (148) (148) Acquisition of other assets................................ -- (230) (230) ------------ ------------- ------------ Net cash used in investing activities.............. -- (3,913) (3,913) ------------ ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs............................. -- 674 674 Proceeds from issuance of Series B Convertible Preferred Stock, net of issuance costs............................. -- 11,192 11,192 Proceeds from issuance of Series A Convertible Preferred Stock warrants........................................... -- 83 83 Proceeds from issuance of Common Stock..................... 10 -- 10 Repurchase of Common Stock................................. -- (13) (13) Proceeds from capital lease................................ -- 865 865 Principal payments on capital lease obligations............ -- (47) (47) Proceeds from note payable................................. -- 100 100 Repayment of notes payable................................. -- (350) (350) ------------ ------------- ------------ Net cash provided by financing activities.......... 10 12,504 12,514 ------------ ------------- ------------ Net increase in cash and cash equivalents..................... 10 3,405 3,415 Cash and cash equivalents at beginning of period.............. -- 10 -- ------------ ------------- ------------ Cash and cash equivalents at end of period.................... $ 10 $ 3,415 $ 3,415 ============ ============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-46 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS PERIOD ENDED DECEMBER 31, 1998 AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY eVoice, Inc. (the "Company") was incorporated in Nevada on December 7, 1998 under the name of Talkstar.com, Inc. In April 1999, the Company reincorporated in the state of Delaware. In December 1999 the Company changed its name to eVoice, Inc. The Company was incorporated to provide advertising and voice mail services through Internet and telecommunication networks. eVoice is in the development stage. The Company has not commenced its principal operations and has had no revenues since inception. The Company has devoted substantially all of its efforts since inception to acquiring and installing equipment, recruiting and training employees and establishing its organizational structure. The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in new and rapidly evolving markets. These risks include the failure to build a sufficient base of active users of voice mail services necessary to attract advertisers, the rejection of the Company's products by customers, vendors and/or advertisers, as well as other risks and uncertainties. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1998 and September 30, 1999, cash and cash equivalents consist of bank deposits, amounts in money market accounts and petty cash. The Company places its cash with major domestic financial institutions. INTERNAL-USE SOFTWARE DEVELOPMENT COSTS Under the provisions of SOP 98-1, "Software for internal use," the Company capitalizes costs associated with software developed or obtained for internal-use when both the preliminary project stage is completed and the Company's management has authorized further funding for the project which it deems probable will be completed and used to perform the function intended. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use software project, and (3) interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. Internal-use software development costs are amortized using the straight-line method over two years, but not exceeding the expected life of the software. F-47 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) The carrying value of software development costs is regularly reviewed by the Company, and a loss is recognized when the value of estimated undiscounted cash flow benefit related to the asset falls below the unamorized cost. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the shorter of estimated useful lives of the assets, generally three years, or the lease term of the respective assets. LONG-LIVED ASSETS The Company periodically evaluates the recoverability of its long-lived assets based upon expected undiscounted cash flows and recognizes impairment from the carrying value of long-lived assets, if any, based on the fair value of such assets. INCOME TAXES The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax base of the Company's assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A valuation allowance is provided against deferred tax assets when it is more likely than not that they will not be realized. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. STOCK-BASED COMPENSATION The Company accounts for employee stock-based compensation arrangements in accordance with provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, stock-based compensation is based on the difference, if any, on the date of grant, between the estimated fair value of the Company's common stock and the exercise price. Deferred stock-based compensation is amortized in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 28. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services." COMPREHENSIVE INCOME Comprehensive income, as defined by SFAS No. 130 "Reporting Comprehensive Income," includes all changes in equity (net assets) during a period from nonowner sources. To date, the Company has not had any transactions that are required to be reported in comprehensive income (loss) as compared to its reported net loss, and accordingly net loss is equal to comprehensive net loss for all periods presented. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the F-48 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 during year ending December 31, 2001. To date, the Company has not engaged in derivative or hedging activities. 2. SUPPLEMENTAL CASH FLOW INFORMATION SUPPLEMENTAL CASH FLOW INFORMATION:
PERIOD FROM DECEMBER 7, 1998 (DATE OF NINE MONTH INCEPTION) PERIOD ENDED PERIOD ENDED THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1999 --------------- --------------- --------------- Cash paid for interest...................................... -- 23 23
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITY:
PERIOD FROM DECEMBER 7, 1998 (DATE OF NINE MONTH INCEPTION) PERIOD ENDED PERIOD ENDED THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1999 --------------- ---------------- --------------- Issuance of note payable for Common Stock................... 1 -- 1 Issuance of note payable for exercised Stock Purchase Rights -- 116 116 Issuance of Common Stock in connection with assets acquired. 1 -- 1 Issuance of options for services............................ -- 13 13 Payment of note payable and interest with Series A Convertible Preferred Stock.............................. -- 90 90 Issuance of Series A Convertible Preferred Stock warrants in connection with notes payable......................... -- 38 38 Issuance of Series B Convertible Preferred Stock for services in connection with sale of Series A Convertible Preferred Stock.............................. -- 198 198 Issuance of Series B Convertible Preferred Stock warrants for services in connection with sale of Series A Convertible Preferred Stock.............................. -- 336 336 Issuance of Series B Convertible Preferred Stock warrants in connection with lease agreement....................... -- 83 83 Deferred stock-based compensation........................... -- 1,445 1,445
F-49 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 3. BALANCE SHEET COMPONENTS
DECEMBER 31, SEPTEMBER 30, 1998 1999 --------------- ---------------- PROPERTY AND EQUIPMENT, NET: Computer equipment........................................................... $ -- $ 617 Furniture and fixtures....................................................... -- 27 Construction in progress..................................................... -- 2,891 --------------- ---------------- -- 3,535 Less: Accumulated depreciation and amortization.............................. -- (80) --------------- ---------------- $ -- $ 3,455 =============== ================
Property and equipment includes $0 and $896 of computer equipment under capital leases at December 31, 1998 and September 30, 1999, respectively. Accumulated amortization of assets under capital leases totaled $0 and $13 at December 31, 1998 and September 30, 1999, respectively.
DECEMBER 31, SEPTEMBER 30, 1998 1999 -------------- --------------- INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, NET: Internal-use software development costs................................... $ -- $ 148 Less: Accumulated amortization............................................ -- -- -------------- --------------- $ -- $ 148 -------------- --------------- ACCRUED LIABILITIES: Payroll and related expenses.............................................. $ -- $ 168 Other..................................................................... -- 118 -------------- --------------- $ -- $ 286 ============== ===============
4. ASSET ACQUISITION In December 1998 the Company acquired certain assets and assumed certain liabilities from Talkstar, Inc, a Nevada Corporation ("Talkstar Nevada"), previously and subsequently named Manhattan Beach Properties in exchange for 800 shares of Common Stock, 122 shares of Series A Convertible Preferred Stock and warrants to purchase 44 shares of Common Stock of the Company. Talkstar Nevada was not related to the Company. The transaction was accounted for as a purchase. The fair value of the consideration paid of $1 exceeded the fair value of assets acquired and liabilities assumed by $272 and was charged to research and development expense in the period ended December 31, 1998. The Company estimated the value of the acquired assets and believes that substantially all of the excess of the purchase price over the fair value of liabilities assumed is attributable to incomplete technology that had not reached technological feasibility and for which there is no alternative use and that does not have identifiable positive cash flow stream. Accordingly due to the Company's assessment of the stage of completion and lack of alternative future use the excess purchase price was charged to expense in the period of acquisition. F-50 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 5. INCOME TAXES DEFERRED TAX ASSETS AND LIABILITIES CONSIST OF THE FOLLOWING:
DECEMBER 31, SEPTEMBER 30, 1998 1999 --------------- --------------- DEFERRED TAX ASSETS: Net operating loss carryforwards.......................................... $ -- 2,500 Accruals and reserves..................................................... -- 40 Research credits.......................................................... -- -- --------------- --------------- -- 2,540 --------------- --------------- DEFERRED TAX LIABILITIES: Internal-use software development costs................................... $ -- $ -- --------------- --------------- Net deferred tax assets................................................... -- 2,540 Valuation allowance....................................................... -- (2,540) --------------- --------------- $ -- $ -- =============== ===============
For financial reporting purposes, the Company has incurred a loss in each period since inception. Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets at December 31, 1998 and September 30, 1999. At September 30, 1999, the Company had approximately $6,400 of federal and $6,400 of state net operating loss carryforwards available to offset future taxable income which expire in varying amounts from 2006 to 2019. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. 6. COMMITMENTS LEASES The Company leases office space and equipment under noncancelable operating and capital leases with various expiry dates through 2004. Rent expense for the period ended December 31, 1998 and nine month period ended September 30, 1999 was $0 and $269, respectively. The terms of the facility lease provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. F-51 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FUTURE MINIMUM LEASE PAYMENTS UNDER NONCANCELABLE OPERATING AND CAPITAL LEASES ARE AS FOLLOWS:
CAPITAL PERATING YEAR ENDED SEPTEMBER 30, LEASES LEASES - ------------------------- --------- ----------- 2000............................................................................. $ 347 $ 399 2001............................................................................. 347 441 2002............................................................................. 366 458 2003............................................................................. -- 475 2004............................................................................. -- 122 --------- ----------- Total minimum lease payments and sublease income...................................... 1,060 $ 1,895 =========== Less: Amount representing interest................................................... (242) --------- Present value of capital lease obligations............................................ 818 Less: Current portion................................................................ (220) --------- Long-term portion of capital lease obligations..................................... $ 598 =========
The effective interest rate on the Company's capital leases at September 30, 1999 was 19%. In June 1999 the Company entered into a two-year agreement with a telecommunication services provider for telecommunication services and space for Company equipment. In February 2000 the agreement was terminated by the Company due to the failure of the service provider to comply with certain terms of the agreement. Monthly rent expense amounted to $53. In July 1999 the Company entered into an agreement with an Internet services provider for the lease of space for Company equipment. The term of the lease is not defined. Rent is charged monthly based on the usage of space. In September 1999 monthly rent expense amounted to $11 including utilities costs. In September 1999 the Company entered into three-year capital lease agreement providing for the lease of equipment for up to $3,000. There were no transactions associated with this agreement before October 1, 1999. 7. REDEEMABLE CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK AT SEPTEMBER 30, 1999 CONSISTS OF THE FOLLOWING:
SHARES --------------------------- PROCEEDS NET LIQUIDATION OF ISSUANCE SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS ------ ------------ ------------- -------------- -------------- A ............................................ 1,409 1,092 $ 1,092 $ 230 B ............................................ 19,010 17,696 11,398 11,392 ------------ ------------- --------------- --------------- 20,419 18,788 $ 12,490 $ 11,622 ============ ============= =============== ===============
The holders of Preferred Stock have various rights and preferences as follows: VOTING Each share of Series A and B has voting rights equal to an equivalent number of shares of Common Stock into which it is convertible and votes together as one class with the Common Stock. F-52 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) As long as at least 25% shares of Convertible Preferred Stock remain outstanding and 25% of Series B Convertible Preferred Stock remain outstanding, the Company must obtain approval from a majority of the holders of Convertible Preferred Stock and a majority of holders of Series B Convertible Preferred Stock voting separately as a class in order to amend the Articles of Incorporation as related to Convertible Preferred Stock; authorize or issue shares of any class or Series of stock having any preference or priority as to dividends, liquidation rights or assets superior to or on parity with any such preference or priority of the Series A and B Convertible Preferred Stock; declare or pay any dividend or other distribution on the Common Stock, effect a merger, consolidation or sale of assets where the existing shareholders retain less than 50% of the voting stock of the surviving entity. In addition, as long as at least 25% shares of Series B Convertible Preferred Stock remain outstanding, the Company must obtain approval from a majority of the holders of Series B Convertible Preferred Stock in order to repurchase any shares of Common Stock other than shares subject to the right of repurchase by the Company, change the total number of authorized shares of Series B Convertible Preferred Stock or change the authorized number of directors of the Company. DIVIDENDS Holders of Series A and B Convertible Preferred Stock are entitled to receive noncumulative dividends at the per annum rate of $0.08 and $0.0515 per share, respectively, when and if declared by the Board of Directors. Holders of Series B Convertible Preferred Stock have preference and priority to any payment of any dividend on Series A Convertible Preferred Stock. The holders of Series A and B Convertible Preferred Stock will also be entitled to participate in dividends on Common Stock, when and if declared by the Board of Directors, based on the number of shares of Common Stock held on an as-if converted basis. No dividends on Convertible Preferred Stock or Common Stock have been declared by the Board from inception through September 30, 1999. LIQUIDATION In the event of any liquidation, dissolution or winding up of the Company, including merger, acquisition or sale of assets where the beneficial owners of the Company's Common Stock and Convertible Preferred Stock own 50% or less of the resulting voting power of the surviving entity, the holders of Convertible Preferred Stock are entitled to the following: (1) Holders of Series B Convertible Preferred Stock are entitled to receive an amount of $0.6441 per share plus any declared but unpaid dividends prior to and in preference to any distribution to the holders of Series A Convertible Preferred Stock and Common Stock. If the assets and funds distributed to the holders of Series B Convertible Preferred Stock are insufficient to permit payment to such holders, then the entire assets or property of the Company legally available for distribution shall be distributed ratably to the holders of Series B Convertible Preferred Stock. (2) After payments has been made to the holders of Series B Convertible Preferred Stock, holders of Series A Convertible Preferred Stock are entitled to receive an amount of $1.00 per share plus any declared but unpaid dividends prior to and in preference to any distribution to the holders of Common Stock. If the assets and funds distributed to the holders of Series A Convertible Preferred Stock are insufficient to permit payment to such holders, then the entire assets or property of the Company legally available for distribution shall be distributed ratably to the holders of Series A Convertible Preferred Stock. (3) After payment has been made to the holders of Series A and B Convertible Preferred Stock of the preferential amounts, the remaining assets and funds of the Company legally available for distribution, are distributed ratably to the holders of Common Stock and Series A and B Convertible Preferred Stock on an as-converted basis; provided, however that holders of Series B Convertible Preferred Stock are not entitled to receive more than $1.2882 (including Series B Convertible Preferred Stock Liquidation Preference) per share; and provided further, that the F-53 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) holders of Series A Convertible Preferred Stock are not entitled to receive more than $2.00 (including Series A Convertible Preferred Stock Liquidation Preference) per share. CONVERSION Each share of Series A and B Convertible Preferred Stock is convertible, at the option of the holder, according to a conversion ratio, subject to adjustment for dilution. Each share of Series A and B Convertible Preferred Stock automatically converts into the number of shares of Common Stock into which such shares are convertible at the then effective conversion ratio upon: either the closing of a public offering of Common Stock at a per share price of at least $2.58 per share with gross proceeds of at least $15,000 upon the consent of the holders of the majority of each Series of Convertible Preferred Stock. At September 30, 1999, the Company reserved 20,732 shares of Common Stock for the conversion of Convertible Preferred Stock. WARRANTS TO PURCHASE CONVERTIBLE PREFERRED STOCK
SHARES OF OUTSTANDING AND CONVERTIBLE EXERCISABLE AT PREFERRED SEPTEMBER 30, DATE OF ISSUANCE EXERCISE PRICE STOCK 1999 ------------------ --------------- -------------- ----------------- Warrants to purchase Series A Convertible Preferred Stock Series A........................... March 1999 $ 1.00 217 217 Series A........................... March 1999 1.00 100 100 -------------- ----------------- Total............................ 317 317 -------------- ----------------- Warrants to purchase Series B Convertible Preferred Stock Series B........................... May 1999 $ 0.6441 754 754 Series B........................... May 1999 0.6441 186 186 -------------- ----------------- Total............................ 940 940 ============== =================
In connection with issuance of Series A Convertible Preferred Stock, the Company issued to investors warrants to purchase 217 shares of Series A Convertible Preferred Stock for $1.00 per share in March 1999. Such warrants are outstanding at September 30, 1999 and expire in 2009. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants were $83 at the date of grant. In connection with a note payable that was issued and repaid in the period ended September 30, 1999, the Company issued warrants to purchase 100 shares of Series A Convertible Preferred Stock for $1.00 per share in March 1999. Such warrants are outstanding at September 30, 1999 and expire in 2009. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants were $38 at the date of grant. Accordingly, the Company recorded $38 in interest expense in the nine month period ended September 30, 1999 associated with these warrants. In connection with issuance of the Series A Convertible Preferred Stock issuance, the Company issued warrants to purchase 754 shares of Series B Convertible Preferred Stock for $0.6441 per share in May 1999. Such warrants are outstanding at September 30, 1999 and expire in 2009. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants were $336 at the date of grant. Accordingly, the Company netted $336 against the proceeds from the issuance of Series A Convertible Preferred Stock. F-54 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) In connection with entering into equipment lease agreement, the Company issued warrants to purchase 186 shares of Series B Convertible Preferred Stock for $0.6441 per share in May 1999. Such warrants are outstanding at September 30, 1999 and expire in 2009. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants were $83 at the date of grant. Accordingly, the Company recorded $83 as deferred financing costs which will be amortized as interest expense over period of the lease. 8. COMMON STOCK The Company's Articles of Incorporation, as amended, authorize the Company to issue 50,000 shares of $0.0001 par value Common Stock. A portion of the shares sold are subject to a right of repurchase by the Company subject to vesting, which is generally over a four year period from the earlier of grant date or employee hire date, as applicable, until vesting is complete. At September 30, 1999, there were 6,709 shares subject to repurchase. WARRANTS FOR COMMON STOCK In connection with purchase of assets, the Company issued warrants to purchase 294 shares of Common Stock for $1.00 per share in December 1998. Such warrants are outstanding at September 30, 1999 and expire in 2008. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants was nil at the date due to the fact that the warrants were substantially out-of-the-money at the date of issue of grant. Accordingly, the Company did not record expense associated with these warrants. 9. STOCK OPTION PLANS In February 1999, the Company adopted the 1999 Stock Option Plan. Following the reincorporation in the State of Delaware in April 1999, the Company adopted a new 1999 Stock Option Plan. The terms of the Plans are similar. The Plans provide for the granting of stock options to employees and consultants of the Company. Options granted under the Plans may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may be granted only to Company employees (including officers and directors who are also employees). Nonqualified stock options ("NSO") may be granted to Company employees and consultants. The Company has reserved 9,086 shares of Common Stock for issuance under the Plans. Under the Plans the Company may grant stock options or stock purchase rights which may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. Stock purchase rights are exercisable immediately and are subject to repurchase rights held by the Company which lapse over a maximum period of four years at such times and under such conditions as determined by the Board of Directors. To date, options granted generally vest over four years. During the nine month period ended September 30, 1999, the Company recorded $1,445 of deferred stock based compensation for the excess of the deemed fair market value over the exercise price at the date of grant related to certain options granted in 1999. The compensation expense is being recognized over the option vesting period of four years. F-55 EVOICE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
OPTIONS OUTSTANDING ----------------------------------------------------------------------------- WEIGHTED SHARES AVERAGE AVAILABLE NUMBER OF AGGREGATE EXERCISE FOR GRANT SHARES EXERCISE PRICE PRICE PRICE ------------- ------------- --------------- -------------- ------------- Shares reserved at Plans inception...... 9,086 -- $ -- $ -- $ -- Options granted......................... (7,383) 7,383 0.065-0.10 493 0.0668 Options exercised....................... -- (1,800) 0.065 (117) 0.0650 Options cancelled....................... 498 (498) 0.065-0.10 (33) 0.0663 ------------- ------------- --------------- -------------- ------------- September 30, 1999..................... 2,201 5,085 $ 0.065-0.10 $ 343 $ 0.0675 ------------- ------------- --------------- -------------- -------------
OPTIONS EXERCISABLE AT OPTIONS OUTSTANDING AT SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 ------------------------------------------------------------ ----------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE - ------------------ ------------------- -------------------- ----------------- ------------------ ---------------- $ 0.065 4,741 9.86 $ 0.065 2,740 $ 0.065 $ 0.100 344 9.27 $ 0.100 -- -- ------------------- -------------------- ----------------- ------------------ ---------------- 5,085 9.82 0.0675 2,740 0.065 =================== ==================== ================= ================== ================
FAIR VALUE DISCLOSURES Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
PERIOD FROM DECEMBER 7, 1998 (DATE OF NINE MONTHS INCEPTION) PERIOD ENDED ENDED THROUGH DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1999 ---------------- ---------------- ---------------- Net loss: As reported............................. $ 393 $ 6,795 $ 7,188 ---------------- ---------------- ---------------- Pro forma............................... $ 393 $ 6,810 $ 7,203 ---------------- ---------------- ----------------
The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%; weighted average expected option term of four years; volatility of 0%; risk free interest rate of 5.30% to 6.27% for the nine months period ended September 30, 1999. The weighted average fair value of options granted during the nine months of 1999 was $0.204. 10. SUBSEQUENT EVENTS In December 1999 the Company issued 4,872 shares of series C and 18,271 shares of series C1 Convertible Preferred Stock and raised $37,978 net of issuance costs. F-56 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders GoTo.com, Inc. We have audited the accompanying balance sheets of GoTo.com, Inc. as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1999 and 1998 and for the period from September 15, 1997 (inception) through December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GoTo.com, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999 and 1998 and for the period from September 15, 1997 (inception) through December 31, 1997, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Los Angeles, California February 8, 2000 F-57 GOTO.COM, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF DECEMBER 31, -------------------------------- ASSETS 1999 1998 ---------------- -------------- CURRENT ASSETS: Cash and cash equivalents.................................................. $ 11,914 $ 16,357 Short-term investments..................................................... 93,409 -- Accounts receivable, net of allowance of $250 and $86 for 1999 and 1998, respectively............................................................. 2,927 356 Prepaid expenses and other................................................. 851 150 Prepaid marketing expenses................................................. 2,034 1,741 ---------------- -------------- Total current assets........................................................... 111,135 18,604 Property and equipment: Furniture and fixtures..................................................... 1,923 17 Computer hardware.......................................................... 9,036 1,302 Computer software.......................................................... 4,234 292 ---------------- -------------- 15,193 1,611 Accumulated depreciation and amortization.................................. (2,490) (275) ---------------- -------------- 12,703 1,336 Long-term investments.......................................................... 4,932 -- Other assets................................................................... 742 29 ---------------- -------------- Total assets................................................................... $ 129,512 $ 19,969 ================ ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................................... $ 10,465 $ 2,816 Accrued expenses........................................................... 2,562 282 Deferred revenue........................................................... 2,058 181 Current portion of debt.................................................... 131 -- Current portion of capital lease obligations............................... 754 110 ---------------- -------------- Total current liabilities...................................................... 15,970 3,389 Long-term capital lease obligations............................................ 768 183 Commitments and contingencies STOCKHOLDERS' EQUITY: Convertible Preferred Stock; $0.0001 par value, 10,000 and 20,187 shares authorized as of December 31, 1999 and 1998, respectively Series A Preferred Stock; Shares issued and outstanding--none and 471 as of December 31, 1999 and 1998, respectively............................................ -- 212 Series B and C Preferred Stock; Shares issued and outstanding--none and 19,022 as of December 31, 1999 and 1998, respectively............................................ -- 28,433 Common Stock, $0.0001 par value, 200,000 and 45,000 shares authorized as of December 31, 1999 and 1998, respectively....................................................... Shares issued and outstanding--45,519 and 10,444 as of December 31, 1999 and 1998, respectively............................................................. 5 1 Additional paid-in capital on Common Stock................................. 158,799 3,212 Deferred compensation, net................................................. (2,584) (1,318) Accumulated deficit........................................................ (43,405) (14,143) Unrealized losses on short-term and long-term investments.............................................................. (41) -- ---------------- -------------- Total stockholders' equity..................................................... 112,774 16,397 ---------------- -------------- Total liabilities and stockholders' equity..................................... $ 129,512 $ 19,969 ================ ==============
F-58 GOTO.COM, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM YEAR ENDED SEPTEMBER 15, 1997 ------------------------------------------- (INCEPTION) THROUGH DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------- --------------------- ------------------- Revenue................................... $ 26,809 $ 822 $ 22 Cost of revenue........................... 6,213 1,429 6 -------------------- --------------------- ------------------- Gross profit (loss)....................... 20,596 (607) 16 Operating expenses: Marketing, sales and service........... 34,459 9,645 65 General and administrative............. 12,467 1,655 24 Product development.................... 3,689 1,232 46 Amortization of deferred compensation.......................... 3,585 1,199 -- -------------------- --------------------- ------------------- 54,200 13,731 135 -------------------- --------------------- ------------------- Loss from operations...................... (33,604) (14,338) (119) Other income: Interest income........................ 3,777 316 -- Other income........................... 566 -- -- -------------------- --------------------- ------------------- Loss before provision for income taxes.... (29,261) (14,022) (119) Provision for income taxes................ 1 1 1 -------------------- --------------------- ------------------- Net loss.................................. $ (29,262) $ (14,023) $ (120) ==================== ===================== =================== Pro forma net loss per share.............. $ (0.77) $ (0.75) Historical basic and diluted net loss per share..................................... $ (1.04) $ (1.36) $ (0.01) Weighted average shares used to compute pro forma net loss per share........... 38,219 18,714 Weighted average shares used to compute historical basic and diluted net loss per share.............................. 28,207 10,296 9,869
SEE ACCOMPANYING NOTES. F-59 GOTO.COM, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
SERIES A SERIES B AND C SERIES D CONVERTIBLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ------------------ ------------------ ------------------ ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- --------- -------- --------- -------- --------- ------- ---------- Issuance of Common Stock.... -- $ -- -- $ -- -- $ -- 10,017 $ 1 Issuance of Series A Convertible Preferred Stock.................... -- -- -- -- -- -- -- -- Net loss.................... -- -- -- -- -- -- -- -- -------- --------- -------- --------- -------- --------- -------- ---------- BALANCE AT DECEMBER 31, 1997 -- -- -- -- -- -- 10,017 1 Issuance of Common Stock for cash and services........ -- -- -- -- -- -- 427 -- Issuance of Series A Convertible Preferred Stock.................... 471 212 -- -- -- -- -- -- Issuance of Series B Convertible Preferred Stock and capital contribution............. -- -- 8,312 6,281 -- -- -- -- Issuance of Series C Convertible Preferred Stock.................... -- -- 10,710 22,152 -- -- -- -- Issuance of warrants for services................. -- -- -- -- -- -- -- -- Stock option compensation... -- -- -- -- -- -- -- -- Amortization of deferred compensation............. -- -- -- -- -- -- -- -- Net loss.................... -- -- -- -- -- -- -- -- -------- --------- -------- --------- -------- --------- -------- ---------- BALANCE AT DECEMBER 31, 1998 471 212 19,022 28,433 -- -- 10,444 1 Issuance of Common Stock, net of issuance costs of $8,655................... -- -- -- -- -- -- 6,900 1 Issuance of Series D Convertible Preferred Stock.................... -- -- -- -- 3,628 24,969 -- -- Conversion of Preferred Stock to Common Stock.... (471) (212) (19,022) (28,433) (3,628) (24,969) 23,121 2 Exercise of common stock options and warrants, net of repurchases........... -- -- -- -- 5,054 1 Issuance of warrants and options for services..... -- -- -- -- -- -- -- Stock option compensation... -- -- -- -- -- -- -- -- Amortization of deferred compensation............. -- -- -- -- -- -- -- -- Unrealized losses on short-term and long-term investments.............. -- -- -- -- -- -- -- -- Net loss.................... -- -- -- -- -- -- -- -- -------- --------- -------- --------- -------- --------- -------- ---------- BALANCE AT DECEMBER 31, 1999 -- $ -- -- $ -- -- $ -- 45,519 $ 5 ======== ========= ======== ========= ======== ========= ======== ========== UNREALIZED ADDITIONAL LOSSES ON PAID-IN SHORT-TERM CAPITAL ON AND COMMON DEFERRED LONG-TERM ACCUMULATED STOCK COMPENSATION INVESTMENTS DEFICIT TOTAL ------------ --------------- -------------- -------------- --------- Issuance of Common Stock.... $ 242 $ $ $ $ 243 Issuance of Series A Convertible Preferred Stock.................... -- -- -- -- -- Net loss.................... -- -- -- (120) (120) ------------ --------------- -------------- -------------- --------- BALANCE AT DECEMBER 31, 1997 242 -- -- (120) 123 Issuance of Common Stock for cash and services........ 286 -- -- -- 286 Issuance of Series A Convertible Preferred Stock.................... -- -- -- -- 212 Issuance of Series B Convertible Preferred Stock and capital contribution............. 77 -- -- -- 6,358 Issuance of Series C Convertible Preferred Stock.................... -- -- -- -- 22,152 Issuance of warrants for services................. 90 -- -- -- 90 Stock option compensation... 2,517 (2,517) -- -- -- Amortization of deferred compensation............. -- 1,199 -- -- 1,199 Net loss.................... -- -- -- (14,023) (14,023) ------------ --------------- -------------- --------------- --------- BALANCE AT DECEMBER 31, 1998 3,212 (1,318) -- (14,143) 16,397 Issuance of Common Stock, net of issuance costs of $8,655................... 94,834 -- -- -- 94,835 Issuance of Series D Convertible Preferred Stock.................... -- -- -- -- 24,969 Conversion of Preferred Stock to Common Stock.... 53,612 -- -- -- -- Exercise of common stock options and warrants, net of repurchases........... 2,044 -- -- -- 2,045 Issuance of warrants and options for services..... 246 -- -- -- 246 Stock option compensation... 4,851 (4,851) -- -- -- Amortization of deferred compensation............. -- 3,585 -- -- 3,585 Unrealized losses on short-term and long-term investments.............. -- -- (41) -- (41) Net loss.................... -- -- -- (29,262) (29,262) ------------ --------------- -------------- --------------- --------- BALANCE AT DECEMBER 31, 1999 $ 158,799 $ (2,584) $ (41) $ (43,405) $ 112,774 ============ =============== ============== =============== =========
SEE ACCOMPANYING NOTES. F-60 GOTO.COM, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM SEPTEMBER 15, 1997 YEAR ENDED (INCEPTION) ----------------------------------- THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ---------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................... $ (29,262) $ (14,023) $ (120) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation.. 3,585 1,199 -- Accretion of discounts from the purchase of short-term and long-term investments.......................... (1,990) -- -- Other common stock and warrants expense 246 370 -- Depreciation and amortization.......... 2,247 294 5 Changes in operating assets and liabilities: Accounts receivable.................. (2,571) (334) (22) Prepaid expenses and other........... (701) (150) -- Prepaid marketing expenses........... (293) (1,741) -- Accounts payable and accrued expenses 9,929 3,007 91 Deferred revenues...................... 1,877 181 -- ---------------- ----------------- ----------------- Net cash used in operating activities.. (16,933) (11,197) (46) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term and long-term investments, net..................... (96,392) (1,554) (57) Capital expenditures for property and equipment............................ (12,820) -- -- Other assets........................... (745) -- (53) ---------------- ----------------- ----------------- Net cash used in investing activities.. (109,957) (1,554) (110) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of Common Stock, net........................... 96,880 6 243 Proceeds from the issuance of Preferred Stock...................... 24,969 28,722 -- Proceeds from lease line............... 1,203 330 -- Repayments under lease line............ (499) (37) -- Repayment of debt...................... (106) -- -- ---------------- ----------------- ----------------- Net cash provided by financing activities........................... 122,447 29,021 243 Net increase (decrease) in cash and cash equivalents..................... (4,443) 16,270 87 Cash and cash equivalents at beginning of period............................ 16,357 87 -- ---------------- ----------------- ----------------- Cash and cash equivalents at end of period............................... $ 11,914 $ 16,357 $ 87 ================ ================= ================= Supplemental disclosures: Income taxes paid...................... $ 1 $ 2 $ -- Interest paid.......................... $ 214 $ 11 $ --
Non-Cash Investing and Financing Activities: During 1999, the Company acquired approximately $525,000 of equipment under capital leasing arrangements and approximately $237,000 of equipment under a debt arrangement. SEE ACCOMPANYING NOTES. F-61 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES GENERAL GoTo.com operates an online marketplace that introduces consumers and businesses who search the Internet to advertisers, who provide products, services and information. Advertisers participating in our marketplace include retail merchants, wholesale and service businesses and manufacturers. We facilitate these introductions through our search service, which enables advertisers to bid in an ongoing auction for priority placement in our search results. Priority placement means that the search results appear on the page ranked in descending order of bid price, with the highest bidder's listing appearing first. Each advertiser pays GoTo.com the amount of its bid whenever a consumer clicks on the advertiser's listing in our search results. Advertisers pay GoTo.com for each click-through, so advertisers bid only on keywords relevant to the products, services or information that they offer. Because each advertiser chooses the bid amount and advertisement placement that is optimal for its business, we believe the GoTo.com marketplace provides advertisers with a cost-effective way to target consumers. Consumers access the GoTo.com search service both at our Web site and through our affiliates, a network of Web sites that have integrated the GoTo.com search service into their sites or that direct consumer traffic to our site. On January 31, 2000, GoTo.com acquired Cadabra Inc. (Cadabra), an online comparison shopping service that we now call "GoTo Shopping." We believe GoTo Shopping further facilitates introductions between consumers and advertisers. GoTo Shopping simplifies the consumers' process of finding desired products by automating product comparison across multiple attributes. By enabling consumers to search at the product level, GoTo Shopping creates more targeted, and therefore highly valuable, advertising opportunities for our advertisers. As with Web search, we will offer GoTo Shopping at our Web site as well as through our affiliate network, providing consumers with multiple points of access to, and advertisers with, multiple points of distribution for the advertisers' products. The Company operates in one reportable business segment. GoTo.com, Inc. (the Company or GoTo.com) was incorporated on September 15, 1997 in the state of Delaware and officially launched its service on June 1, 1998. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ materially from those estimates. REVENUE RECOGNITION Revenue consists of search listing advertisements and banner advertisements. Banner advertising arrangements are short-term in duration and have no minimum guarantees. The Company has had no barter transactions. Search listing advertising enables the advertisers to determine their placement within the GoTo.com search term results by placing a bid (the price they will pay when a user clicks through to their site) for each keyword search item that they select. The amount of the bid determines the placement of the advertiser's site within the search results. Search listing advertisement revenue is determined by multiplying the number of click-throughs on paid search results by the price bid for the particular keyword listing at the time of the click-through. Search listing advertising revenues are earned and recognized as actual click-throughs occur to the extent the customer has deposited sufficient funds with the Company or provided that the collection of any resulting receivable is probable. Banner advertisement arrangements provide for the Company to receive specified amounts each time a customer's banner advertisement is made visible to a user (an impression) and/or each time a user clicks-through to the advertiser's Web site. Banner advertisement revenue is recognized when earned F-62 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS-(CONTINUED) under the terms of the contractual arrangement with the advertiser or agency, provided that collection of the resulting receivable is probable. Under the terms of these arrangements, revenues are generally earned when the banner advertisement is displayed or when the click-through occurs. For the year ended December 31, 1999, banner advertisement revenue constituted less than 10 percent of our revenue. COMPREHENSIVE INCOME (LOSS) The Company accounts for comprehensive income (loss) using Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined therein, refers to revenues, expenses, gains and losses that are not included in net income (loss) but rather are recorded directly in shareholders' equity. Total comprehensive loss for 1999 approximated net loss. COST OF REVENUE Cost of revenue consists primarily of fees paid to outside resources that provide and manage unpaid listings and costs associated with maintaining our Web site. Cost associated with serving the Web site includes salaries, depreciation of Web site equipment, co-location charges for equipment, and software licensing fees. AFFILIATES The Company enters into short-term agreements with other Internet companies (affiliates) whereby the Company provides search services within the affiliates' Web sites or the affiliates provide a link to the Company's site. In some cases, the Company pays the affiliates fees based on the term of the agreement and the amount of traffic the Company receives from the Web sites. Some of these fees are paid at the beginning of the contract resulting in prepaid distribution affiliate fees and some of the fees are billed during the term of the contracts resulting in accrued affiliate fees. The fees are charged to marketing and sales expense ratably over the contract or based on actual traffic received under the terms of the agreements. A significant portion of the Company's traffic has been generated from a small number of the Company's larger affiliates, such as Microsoft through its Internet Explorer browser, and Netscape. The traffic from these affiliates converts to revenue when consumers click on paid listings. Therefore, a large portion of the Company's revenue is reliant on these few affiliates. The Company expenses advertising media costs as incurred and production cost upon first airing or printing. For the years ended December 31, 1999 and 1998 and the period from inception through December 31, 1997, the Company incurred advertising costs, including affiliate fees, of approximately $30.2 million, $8.8 million and $29,000, respectively. PRODUCT DEVELOPMENT Product development expenses consist of expenses incurred by the Company in the development, creation and enhancement of its Internet site and service. Product development expenses include compensation and related expenses, costs of computer hardware and software, and costs incurred in developing features and functionality of the service. Product development costs are expensed as incurred or capitalized in accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP-98-1). SOP 98-1 requires that cost incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. CASH, CASH EQUIVALENTS AND SHORT-TERM AND LONG-TERM INVESTMENTS The Company considers those investments that are highly liquid, readily convertible to cash and which mature within three months from the original date of purchase to be cash equivalents. All of the F-63 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS-(CONTINUED) Company's cash equivalents, short-term and long-term investments, consisting of commercial paper and certificate of deposits, are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses included in "unrealized losses on short-term and long-term investments" as a separate component of stockholders' equity net of applicable income taxes. As of December 31, 1999, the fair value of these securities approximated cost and the unrealized holding losses was approximately $41,000. The realized gains and losses on sales of available-for-sale investments for the year ended December 31, 1999 were not significant. All available-for-sale investments generally mature within one year or less, except for one investment with a fair value of approximately $4.9 million and original maturity of 28 months. The estimated fair value of cash, cash equivalents and short-term and long-term investments, which approximates the carrying costs as of December 31, 1999, are as follows (in thousands):
CASH AND CASH SHORT TERM LONG-TERM EQUIVALENT INVESTMENTS INVESTMENTS ------------------- ---------------- ----------------- Cash......................... $ 2,289 $ -- $ -- Commercial Paper............. 9,625 65,751 4,932 Certificates of deposit...... -- 27,658 -- ------------------- ---------------- ----------------- $ 11,914 $ 93,409 $ 4,932 =================== ================ =================
ACCOUNTS RECEIVABLE The allowance for doubtful account activity for the periods indicated are as follows (in thousands):
ADDITIONS BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT END PERIOD EXPENSES OF PERIOD ------------------- --------------- ------------------ Allowance for doubtful accounts: December 31, 1997.................... $ -- $ -- $ -- December 31, 1998.................... $ -- $ 86 $ 86 December 31, 1999.................... $ 86 $ 164 $ 250
CONCENTRATION OF CREDIT RISK Accounts receivable are typically unsecured and are due from customers primarily located in the United States. Credit losses have generally been within management's expectations. At December 31, 1999, no customer represented more than ten percent of total accounts receivable. At December 31, 1998, one customer represented 13% of total accounts receivable. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Property and equipment consists of computer hardware, computer software, which includes costs incurred in the application development stage for computer software developed for internal use, and furniture and fixtures. Depreciation is provided using the straight-line method based upon estimated useful lives of the assets, which range from 18 months to five years. Equipment under capital leases and leasehold improvements are recorded at cost. Amortization is provided using the straight-line method over the shorter of the term of the related lease or estimated useful lives of the assets. LONG-LIVED ASSETS The Company evaluates the recoverability of its long-lived assets in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company assesses the impairment of long-lived assets and certain identifiable intangibles whenever F-64 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS-(CONTINUED) events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. No such impairment losses have been identified by the Company. DEFERRED REVENUE Deferred revenue represents all payments received from customers in excess of revenue earned based on line-item click-through activity and will be recognized as actual click-throughs occur. INCOME TAXES Income taxes are accounted for under SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation reserves against deferred tax assets are provided as necessary. ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock awards granted subsequent to January 1, 1995 be recognized as compensation expense based on their fair value at the date of grant. Alternatively, a company may account for granted stock awards under Accounting Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued to Employees," and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation expense under APB No. 25 and make the required pro forma disclosures for compensation expense (see Note 4). EARNINGS (LOSS) PER SHARE COMPUTATION Historical basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding excluding the unvested portion of stock issued in connection with the exercise of such options subject to repurchase. The effect of outstanding stock options, convertible preferred stock and unvested stock are excluded from the calculation of historical diluted net loss per share for the periods presented as their inclusion would be antidilutive. Pro forma basic and diluted net loss per share is computed using the historical weighted average number of shares of common stock outstanding plus the weighted average number of shares resulting from the assumed conversion of all outstanding convertible preferred stock as though such conversion occurred at the beginning of the period or original date of issuance, if later. The effect of outstanding stock options and unvested stock are excluded from the calculation of pro forma diluted net loss per share for the periods presented as their inclusion would be antidilutive. Options to purchase approximately 2.8 million and 5.0 million shares of common stock were outstanding as of December 31, 1999 and 1998, respectively. In addition, as of December 31, 1999, there were approximately 2.2 million shares of unvested common stock outstanding that were issued in connection with the exercise of options and are subject to repurchase. F-65 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table sets forth the computation of historical basic and diluted net loss per share and pro forma basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
PERIOD FROM SEPTEMBER 15 YEAR ENDED 1997 (inception) ------------------------------ THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 -------------- -------------- ---------------- Numerator: Net loss................................................ $ (29,262) $ (14,023) $ (120) ============== ============== ================ Denominator: Denominator for historical basic and diluted calculation--weighted average share................... 28,207 10,296 9,869 Weighted average effect of pro forma securities: Series A Convertible Preferred Stock................... 226 360 Series B Convertible Preferred Stock................... 3,994 5,403 Series C Convertible Preferred Stock................... 5,147 2,655 Series D Convertible Preferred Stock................... 645 - -------------- -------------- ---------------- Denominator for pro forma calculation.................. 38,219 18,714 ============== ============== ================ Net loss per share: Pro forma basic and diluted net loss per share......... $ (0.77) $ (0.75) $ -- Historical basic and diluted net loss per share........ $ (1.04) $ (1.36) $ (0.0)
RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to current year presentation. 2. INCOME TAXES As a result of the net operating losses incurred since inception, no income tax provision has been recorded except for state minimum taxes of approximately $1,000 for 1999, 1998 and 1997. The following is a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate:
SEPTEMBER 15, 1997 (INCEPTION) YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 -------------- --------------- ---------------- Statutory federal rate................................... (34)% (34)% (34)% State income taxes (net of federal benefit)...................................... (6) (5) (5) Valuation allowance...................................... 36 37 41 Nondeductible stock compensation......................... 4 3 -- Other.................................................... -- (1) (2) -------------- --------------- ---------------- -- % -- % -- % ============== =============== ================
F-66 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The components of the deferred tax assets and related valuation allowance at December 31, 1999 and 1998 are as follows:
DECEMBER 31 ------------------------------ 1999 1998 ---------------- ------------ (IN THOUSANDS) Net operating loss carryforwards......................... $ 16,739 $ 4,955 Other.................................................... 350 167 -------------- -------------- Deferred tax assets...................................... 17,089 5,122 Valuation allowance...................................... (17,089) (5,122) -------------- -------------- $ -- $ -- ============== ==============
Due to the uncertainty surrounding the timing of realizing the benefits of its deferred tax assets in future tax returns, the Company has recorded a valuation allowance against its deferred tax assets. At December 31, 1999, the Company had net operating loss carryforwards of approximately $42.0 million available to reduce future federal and state taxable income, which expire beginning in the years 2017 through 2019 for federal and in 2005 for state. Under Section 382 of the Internal Revenue Code, the utilization of the net operating loss carryforwards can be limited based on changes in the percentage of ownership of the Company. 3. STOCKHOLDERS' EQUITY COMMON AND PREFERRED STOCK GoTo.com issued shares of its preferred stock as described below: o In March 1998, GoTo.com issued a total of 471,111 shares of Series A Preferred Stock to various investors at a purchase price of $0.45 per share. o In May 1998, GoTo.com issued a total of 8,311,688 shares of Series B Preferred Stock to various investors at a purchase price of $0.77 per share. o In July 1998, November 1998 and December 1998, GoTo.com issued a total of 10,710,348 shares of Series C Preferred Stock to various investors at a purchase price of $2.076 per share. o In April 1999, GoTo.com issued a total of 3,628,447 shares of Series D Preferred Stock to various investors at a purchase price of $6.89 per share. As part of the Series B Preferred Stock financing, Bill Gross, the Company's founder, paid a consultant 111,111 shares of the Company's Common Stock owned by him for services provided in connection with the Series B Preferred Stock financing. The exchange of the founder's shares was recorded at the fair market value of the Common Stock, on the date of the exchange, as a contribution to capital and cost of the Series B Preferred financing. In June 1999, the Company completed its initial public offering and issued 6,900,000 shares of its common stock at a price to the public of $15.00 per share. The Company received approximately $94.8 million in cash, net of underwriting discounts, commissions and other offering costs. Simultaneously with the closing of the initial public offering, each outstanding share of Series A, B, C and D Preferred Stock was automatically converted into one share of common stock. Upon completion of the Company's initial public offering the number of common and undesignated preferred shares authorized for issuance changed to 200,000,000 and 10,000,000, respectively. WARRANTS In September and November of 1998, the Company issued warrants in exchange for certain consulting services to purchase an aggregate of 63,272 shares of the Company's Common Stock at F-67 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) exercise prices ranging from $0.77 to $2.076 per share. In February 1999, the Company issued additional warrants in exchange for certain consulting and other services to purchase 41,699 shares of the Company's Common Stock at exercise prices ranging from $2.076 to $5.00 per share. The warrants were fully exercisable upon issuance and those warrants not exercised by the warrant holders for Common Stock prior to our initial public offering on June 18, 1999 were terminated. The deemed fair value of warrants issued in 1999 and 1998 was $180,000 and $90,000, respectively; these amounts were recorded in general and administrative expenses in the respective periods. DEFERRED STOCK OPTION COMPENSATION The excess of the deemed fair value of the Company's Common Stock over the exercise price of options granted during the year ended December 31, 1999 and 1998 at the date of grant, adjusted for the return of unvested options or repurchase of restricted stock resulting from employee terminations, amounted to an aggregate of $4,851,000 and $2,517,000, respectively. The deemed fair value of the Common Stock was determined by the Company based on the selling prices of contemporaneous sales of each series of Preferred Stock considering the relative rights and privileges of each security, the stages of development of the Company's business and the inherent risks and perceived future potential of the Company at the time of grant or issuance. The typical vesting period of the options is 20%, 10% or zero immediately upon grant with the remaining balance vesting evenly either annually or quarterly over the following four years. The amortization of deferred compensation is charged to operations on a graded methodology basis over the vesting period of the options. During the year ended December 31, 1999 and 1998, deferred compensation amortization of $3,585,000 and $1,199,000, respectively, was recorded. At December 31, 1999 and 1998, deferred compensation of $2,584,000 and $1,318,000, respectively, was reflected as a reduction of stockholders' equity. The deferred compensation amortization relates only to stock options awarded to employees; the salaries and related benefits of these employees are included in the applicable cost of revenue or operating expense line item. OTHER STOCK COMPENSATION The Company sold or issued 427,195 shares of Common Stock to various consultants during 1998 at prices less than the deemed fair value of the Common Stock on the day it was sold. The excess of the deemed fair value of the Common Stock on the day it was sold aggregating $280,000 was recognized as consulting expense. 4. STOCK PLAN AND STOCK PURCHASE PLAN The Company's 1998 Stock Plan provides for the granting of options for the purchase of up to 8,500,000 shares of the Company's Common Stock, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2000 equal to the lesser of (i) 7,500,000 shares, (ii) 4% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. The increase for fiscal 2000 was determined to be approximately 1.8 million shares. Under terms of the plan, options may be granted to employees, nonemployee directors or consultants at prices not less than the fair value at the date of grant. Options granted to nonemployees are recorded at the value of negotiated services received. All options are immediately exercisable, however, shares issuable upon exercise of the option vest typically 20%, 10% or zero immediately upon grant of the option with the remaining balance vesting evenly either annually or quarterly over the following four years. The Company has the right to repurchase unvested shares issued upon exercise of the option. F-68 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Information relating to the outstanding stock options is as follows: WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------------- ---------------- (IN THOUSANDS) Outstanding at inception.................... -- $ -- Granted................................. 115 0.44 Exercised............................... -- -- Canceled................................ -- -- ---------------- Outstanding at December 31, 1997............ 115 0.44 Granted................................. 4,888 0.15 Exercised............................... -- -- Canceled................................ (3) 0.15 ---------------- Outstanding at December 31, 1998............ 5,000 0.16 Granted................................. 2,979 19.62 Exercised............................... (5,035) 0.37 Cancelled............................... (114) 11.58 ---------------- Outstanding at December 31, 1999............ 2,830 $ 19.87 ================ The following table summarizes information regarding options outstanding and options exercisable at December 31, 1999 (in thousands except per share data): OUTSTANDING AND EXERCISABLE -------------------------------------------- WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE NUMBER CONTRACTUAL EXERCISE RANGE OF EXERCISE PRICES OF SHARES LIFE PRICE - -------------------------------- ----------- -------------- ----------- $0.15--$0.30.................... 852 8.6 $ 0.20 =========== ============== =========== $0.75--$6.20.................... 609 9.3 $ 4.24 =========== ============== =========== $12.00.......................... 861 9.4 $ 12.00 =========== ============== =========== $39.38--$55.25.................. 200 9.7 $ 47.10 =========== ============== =========== $108.25......................... 308 9.9 $ 108.25 =========== ============== =========== Options available for future grant totaled 716,324 and 999,529 at December 31, 1999 and 1998, respectively. As of January 1, 2000 the Company added approximately 1.8 million options available for future grant in accordance with the Company's 1998 Stock Plan. The fair value of these options were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: PERIOD FROM SEPTEMBER 15, 1997 (INCEPTION) YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ -------------- Risk free interest rate....... 5.38% 5.14% 6.00% Expected lives (in years)..... 2.5 4 4 Dividend yield................ -- -- -- Expected volatility........... 0.80 -- -- For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Under SFAS No. 123, the Company would have incurred an additional compensation expense of approximately $2.4 million, $51,000 and zero for the years ended F-69 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) December 31, 1999 and 1998 and the period from inception through December 31, 1997, respectively. PERIOD FROM SEPTEMBER 15, 1997 (INCEPTION) YEAR ENDED YEAR ENDED THROUGH DECEMBER DECEMBER DECEMBER 31, 31, 1999 31, 1998 1997 ---------- ---------- ------------- Net loss, as reported............ $ (29,262) $ (14,023) $ (120) Pro forma net loss............... (31,656) (14,074) (120) Pro forma loss per share......... (0.83) (0.75) (0.01) Pro forma historical basic and diluted loss per share.... $ (1.12) $ (1.37) $ (0.01) Applying SFAS No. 123 in the pro forma disclosure may not be representative of the effects on pro forma net income (loss) for future years as options vest over several years and additional awards will likely be made each year. In April 1999, the Board of Directors also approved the establishment, upon the closing of the Company's initial public offering, of the 1999 Employee Stock Purchase Plan (1999 Purchase Plan). The 1999 Purchase Plan initially reserves 2,000,000 shares of Common Stock for future issuance which will increase annually by the lesser of 1,000,000 shares, 3% of the outstanding shares on such date, or a lesser amount determined by the Board. The 1999 Purchase Plan provides for successive six month offering periods and allows eligible employees to participate in the plan through payroll deductions that will be used to purchase Common Stock at the end of each six month period for the lesser of 85% of the price of the Common Stock at the beginning or the end of the six month offering period. 5. RELATED PARTY TRANSACTIONS During 1997 and 1998, GoTo.com shared facilities and received certain management services including certain accounting, payroll processing, access to shared local area computer communications network, and general business insurance from Bill Gross' idealab!, which, with its affiliate, idealab! Holdings, L.L.C., is a significant stockholder of GoTo.com. Bill Gross' idealab! charged a management fee for the use of its facilities and the services provided. During 1998 and through January 1999, Bill Gross' idealab! provided certain payroll processing services for GoTo.com and charged a fee for those services. On February 1, 1999, GoTo.com entered into a lease with Bill Gross' idealab! for office space. GoTo.com also uses a shared local area computer communications network. In 1999, GoTo.com entered into a lease agreement with Bill Gross' idealab! for additional office space. The term of the agreement is from August 1999 through January 2000. The total management and leasing fee associated with both facilities was approximately $364,000, $229,000 and $59,000 during the years ended December 31, 1999 and 1998 and the period from inception through December 31, 1997, respectively. From inception through March 1, 1998, Bill Gross, GoTo.com's founder and a principal of idealab! Holdings, L.L.C. and Bill Gross' idealab!, was the President and Chief Executive Officer of GoTo.com and received no compensation for his service. The value of these services was not material to the financial statements. During March 1998, certain stockholders provided temporary funding of $2.5 million to GoTo.com which carried no interest. In early May 1998 this funding was contributed to GoTo.com in return for Series B Preferred Stock. In December 1999, GoTo.com terminated both leases in effect during 1999 and entered into an arrangement with Bill Gross' idealab! for approximately 58,000 square feet of office space. The term of the lease commenced on January 15, 2000 and will terminate on October 31, 2004 with total lease payments of approximately $7.1 million. Management believes these amounts are materially representative of the fair value of services recorded. During 1999, GoTo.com recorded approximately $53,000 of search listing advertising revenue from Bill Gross' idealab!, which, with its affiliate, idealab! Holdings, L.L.C., is a significant stockholder of F-70 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) GoTo.com. During 1999, GoTo.com also recorded approximately $112,000 of search listing and banner revenue from Cadabra Inc. (Cadabra). Cadabra began listing on GoTo.com on December 17, 1999 and ceased advertising on GoTo.com on January 13, 2000. On January 31, 2000, GoTo.com acquired Cadabra (See Note 7). Management believes these amounts are materially representative of the fair value of advertising services provided. 6. COMMITMENTS AND CONTINGENCIES LEASES The Company leases office space under operating lease agreements expiring in October 2004. The future minimum lease payments under non-cancelable operating leases and present value of future minimum capital lease payments are as follows (in thousands): OPERATING CAPITAL LEASE LEASE -------------- --------------- 2000......................................... $ 1,542 $ 855 2001......................................... 1,524 807 2002......................................... 1,439 87 2003......................................... 1,439 -- 2004......................................... 1,200 -- -------------- --------------- Total minimum lease payments................. $ 7,144 1,749 ============== Less amount representing interest............ (227) --------------- $ 1,522 =============== Total rent expense was approximately $504,000, $116,000 and $2,000 during the years ended December 31, 1999 and 1998 and the period from inception through December 31, 1997, respectively. EQUIPMENT FINANCING ARRANGEMENT At December 31, 1999, the Company had a line of credit arrangement with a leasing institution that provides for a capital equipment lease line of up to a maximum of $1,500,000. The terms of the agreement include a requirement for the Company to keep an unrestricted cash balance of no less than $1.0 million at any time. The Company was in compliance as of December 31, 1999 and 1998. Under this agreement, $117,000 was available for future financing transactions at December 31, 1999. During 1999, the Company obtained an additional equipment financing line of credit with a lender in the amount of $1.0 million. During 1999, the Company did not use any of the available credit and accordingly $1.0 million was available for future financing transactions as of December 31, 1999. As of January 31, 2000, the Company did not use any of the available credit and did not renew the financing line of credit. OTHER DEBT During January 1999, the Company executed a licensing and consulting agreement with a software vendor for the implementation of a new financial reporting system. The cost has been financed by an affiliate of the vendor and will be repaid in quarterly installments of $34,000 through the end of fiscal 2000. Implementation of the system was completed during the third quarter of 1999. AFFILIATE COMMITMENTS The Company is obligated to make payments totaling $8.7 million and $5.0 million in 2000 and 2001, respectively, under contracts to provide search services to its affiliates. F-71 GOTO.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) LITIGATION We are engaged in litigation that will be expensive to pursue and will be distracting to our management and other employees. Any adverse developments resulting from this litigation could seriously harm our business. We believe that The Walt Disney Company and certain of its affiliates, including Infoseek Corporation, are infringing our GoTo.com logo. On February 18, 1999, we sued these companies and two affiliated companies in the United States District Court for the Central District of California alleging violation of federal trademark law and unfair competition. Our lawsuit is based on the use by these companies of a "GO" design mark to provide Internet services, including a search engine in connection with their "Go Network." We are seeking to prevent these companies from using this "GO" design mark as well as other remedies. We cannot assure you that the outcome of this litigation will be favorable to us. For example, we may not prevail and be able to stop these companies from causing confusion among consumers and advertisers through continued use of the "GO" design mark. The defendants have asserted counterclaims against GoTo.com. GoTo.com believes that the proposed counterclaims are without merit and will defend against them vigorously. An unfavorable result could affect the value of the Goto.com logo or even prevent us from using the GoTo.com logo. On November 12, 1999, the federal district court in Los Angeles preliminarily enjoined The Walt Disney Company, Infoseek and related companies from using their Go Network logo. On November 18, 1999, the Ninth Circuit Court of Appeals granted the defendants' motion for a stay of the preliminary injunction pending appeal, and the defendants were permitted to use the Go Network logo while the Ninth Circuit reviewed the district court's preliminary injunction order. GoTo.com and the defendants briefed the appeal during December, and the Ninth Circuit heard oral arguments on the matter on January 19, 2000. On January 27, 2000, the Ninth Circuit vacated the stay and reinstated the preliminary injunction. No trial date has been set, and despite the issuance of the preliminary injunction, we cannot assure you that we will ultimately prevail in this litigation. 7. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED) On January 31, 2000, GoTo.com acquired Cadabra, an online comparison shopping service. Pursuant to the Agreement and Plan of Reorganization, GoTo.com acquired all of the outstanding shares of capital stock and assumed all outstanding options to acquire shares of capital stock of Cadabra, for $8.0 million in cash and 3,283,672 shares of GoTo.com common stock, including 214,833 shares to be issued upon exercise of options assumed by GoTo.com. The acquisition was accounted for as a purchase. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values as determined by GoTo.com at the date of the acquisition. The total purchase price of the acquisition was approximately $263.1 million and consisted of cash of $8.0 million; GoTo.com common stock of $252.5 million valued at the closing price of GoTo.com's common stock on the date the acquisition exchange ratio was set, net of expected proceeds from the exercise of Cadabra stock options assumed by GoTo.com; and acquisition costs of $2.6 million, primarily for investment banking, legal and accounting costs. Of the purchase price, $7.6 million was assigned to in-process research and development to be expensed immediately following the consummation of the acquisition, $6.0 million was assigned to the value of purchased technology and other intangibles and will be amortized on a straight-line basis over three years and $4.4 million was allocated to the net tangible assets. F-72 REPORT OF INDEPENDENT AUDITORS The Members idealab! Capital Management I, LLC: We have audited the accompanying balance sheets of idealab! Capital Management I, LLC (a limited liability company) as of December 31, 1999 and 1998, and the related statements of operations, changes in members' equity, and cash flows for the year ended December 31, 1999 and the period March 20, 1998 (inception) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of idealab! Capital Management I, LLC at December 31, 1999 and 1998, and the results of its operations, cash flows, and changes in members' equity for the year ended December 31, 1999 and for the period March 20, 1998 (inception) through December 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP February 21, 2000 Los Angeles, California F-73 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) BALANCE SHEETS
DECEMBER 31 ------------------------------- 1999 1998 ---------------- ------------- ASSETS Investment in Funds, at fair value (cost: 1999--$827,040: 1998-- $328,311) (NOTE 2).......................................................... $ 142,995,842 $ 1,810,238 Cash and cash equivalents...................................................... 444,569 30,098 Accounts receivable from affiliate............................................. 21,718 364,363 Furniture, fixtures, and equipment, net........................................ 50,286 35,030 Other assets................................................................... 61,191 14,300 ---------------- ------------- Total assets................................................................... $ 143,573,606 $ 2,254,029 ================ ============= LIABILITIES AND MEMBERS' EQUITY Accounts payable and accrued liabilities....................................... $ 306,098 $ 31,526 ---------------- ------------- Total liabilities.............................................................. 306,098 31,526 Members' equity: Capital accounts............................................................ 1,098,706 740,576 Unrealized appreciation on investment in Funds.............................. 142,168,802 1,481,927 ---------------- ------------- Total members' equity.......................................................... 143,267,508 2,222,503 ---------------- ------------- Total liabilities and members' equity.......................................... $ 143,573,606 $ 2,254,029 ================ =============
SEE ACCOMPANYING NOTES. F-74 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF OPERATIONS
PERIOD MARCH 20, 1998 (INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ---------------- --------------- Income: Fair value of securities received......................................... $66,996,503 $ -- Realized loss on distribution of securities............................... (174,955) -- Realized loss on sale of securities....................................... (601,092) -- Management fees........................................................... 2,858,123 1,575,966 Interest.................................................................. 37,156 13,651 ---------------- --------------- Total income................................................................. 69,115,735 1,589,617 General and administrative expenses.......................................... 2,305,772 1,174,396 ---------------- --------------- Income from operations....................................................... 66,809,963 415,221 Increase in unrealized appreciation on investment in Funds................... 140,686,874 1,481,927 ---------------- --------------- Increase in net assets resulting from operations............................. $207,496,837 $1,897,148 ================ ===============
SEE ACCOMPANYING NOTES. F-75 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF CHANGES IN MEMBERS' EQUITY Balance at March 20, 1998 (inception)............... $ -- Capital contributions............................ 325,355 Increase in net assets resulting from operations....................................... 1,897,148 -------------- Balance at December 31, 1998........................ 2,222,503 Capital contributions............................ 571,990 Capital distributions............................ (67,023,822) Increase in net assets resulting from operations....................................... 207,496,837 -------------- Balance at December 31, 1999........................ $143,267,508 ============== SEE ACCOMPANYING NOTES. F-76 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF CASH FLOWS
PERIOD MARCH 20, 1998 (INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 --------------- --------------- OPERATING ACTIVITIES Income from operations........................................................ $ 66,809,963 $ 415,221 Adjustments to reconcile income from operations to net cash provided by operating activities: Fair value of securities received........................................ (66,996,503) -- Realized loss on distribution of securities.............................. 174,955 -- Depreciation and amortization............................................ 34,137 6,423 Accounts receivable from affiliate....................................... 342,645 (364,363) Other assets............................................................. (46,891) (14,300) Accounts payable......................................................... 274,572 31,526 --------------- --------------- Net cash provided by operating activities..................................... 592,878 74,507 INVESTING ACTIVITIES Investment in Funds........................................................... (538,355) (282,380) Cost of securities sold....................................................... 5,131,011 -- Purchase of furniture, fixtures, and equipment................................ (49,393) (41,453) --------------- --------------- Net cash (used in) provided by investing activities........................... 4,543,263 (323,833) FINANCING ACTIVITIES Capital contributions......................................................... 571,990 279,424 Capital distributions......................................................... (5,293,660) -- --------------- --------------- Net cash provided by (used in) financing activities........................... (4,721,670) 279,424 --------------- --------------- Net increase in cash and cash equivalents..................................... 414,471 30,098 Cash and cash equivalents at beginning of period.............................. 30,098 -- --------------- --------------- Cash and cash equivalents at end of period.................................... $ 444,569 $ 30,098 =============== =============== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES The following securities were contributed to the Company in exchange for membership interest and subsequently contributed to idealab! Capital Partners, I-A, L.P.: Bill Gross' idealab! Series B Preferred Stock.............................. $ -- $ 45,931 =============== =============== The following securities were distributed by the Company to its members: Distribution of eToys, Inc. Common Stock (916,532 shares)................ $ 46,800,360 $ -- =============== =============== Distribution of GoTo.Com, Inc. Common Stock (186,622 shares)............. $ 14,929,803 $ -- =============== ===============
SEE ACCOMPANYING NOTES. F-77 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENTS idealab! Capital Management I, LLC (the Company) was organized and commenced operations on March 20, 1998, as a limited liability company under the provisions of the Delaware Limited Liability Company Act. The Company was formed to serve as a constituent general partner of idealab! Capital Partners I-A, LP, a Delaware limited partnership, and idealab! Capital Partners I-B, LP, a Delaware limited partnership (collectively, the Funds). Investments are accounted for on a fair value basis to reflect the fair value of the Company's investment in the Funds. ALLOCATION OF PROFITS AND LOSSES Items of profit and loss of the Company are allocated among the members based either on each members' relative capital commitments or their respective carried interest percentages depending on the character of the item. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. TAXES BASED ON INCOME The operations of the Company will be included in the taxable income of the individual members and, accordingly, no provision or credit for taxes on the results of realized operations or net unrealized appreciation or depreciation of investments of the Company is recorded in the accompanying financial statements. MANAGEMENT FEE INCOME The Company provides management services to the Funds for an annual fee of 2.5% of the Funds' capital commitments, net of certain securities contributed by the Company to the Funds at inception. The management agreement provides for the management fee to be adjusted in future periods as defined in the agreement. STATEMENT OF CASH FLOWS The Company considers all highly liquid debt instruments with an original maturity of three months or less, which includes investments in U.S. government money market mutual funds, to be cash equivalents. 2. INVESTMENT IN FUNDS The Company is the general partner of the Funds in which it has a capital interest of 1%. The investment in Funds is reported at fair value consistent with the methodology applied in the Funds' financial statements and disclosed below. F-78 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Summary information on the Funds is as follows: COMBINED BALANCE SHEET INFORMATION
DECEMBER 31, DECEMBER 31, 1999 1998 ------------------ ---------------- Portfolio investments, at fair value (Cost: 1999--$82,727,153; 1998--$26,521,799).................................................... $1,015,342,917 $38,066,379 Cash and cash equivalents............................................... 5,647,305 5,267,109 Appropriated cash....................................................... 3,083,243 -- Receivables............................................................. 6,943 331,582 ------------------ ---------------- Total assets............................................................ $1,024,080,408 $43,665,070 ================== ================ Total liabilities....................................................... $ 9,325 $ 364,363 Total partners' equity, at fair value................................... 1,024,071,083 43,300,707 ------------------ ---------------- Total liabilities and partners' equity.................................. $1,024,080,408 $43,665,070 ================== ================
COMBINED STATEMENTS OF OPERATIONS INFORMATION
PERIOD MARCH 20, 1998 (INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------------ ---------------- Income: Realized gain on distribution of securities............................ $ 425,486,865 $ -- Realized gain on sale of securities.................................... 12,114,881 -- Interest income........................................................ 691,826 610,625 Dividend income........................................................ 76,087 -- ------------------ ---------------- Total income.............................................................. 438,369,659 610,625 Investment expenses: Management fees........................................................ 2,858,123 1,575,966 Other general and administrative....................................... 198,462 109,613 ------------------ ---------------- Total investment expenses................................................. 3,056,585 1,685,579 Income (loss) from investment operations.................................. 435,313,074 (1,074,954) Increase in unrealized appreciation of portfolio investments.............. 921,071,166 11,544,600 ------------------ ---------------- Increase in net assets resulting from operations.......................... $1,356,384,240 $10,469,646 ================== ================
VALUATION OF PORTFOLIO INVESTMENTS IN THE FUNDS Investments are stated at fair value as determined by the general partner of the Funds and unrealized appreciation or depreciation is included in partners' equity and reflected in the statements of operations. In establishing the fair value of nonpublicly traded securities (amounting to $349,190,347 and $38,066,379 at December 31, 1999 and 1998, respectively), the general partner takes into consideration the financial condition and operating results of the portfolio companies, the investment, the price of subsequent rounds of financing, and other factors the general partner deems appropriate. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been used had a ready market for nonpublicly traded securities existed, and these differences could be material. Included in the fair value of nonpublicly traded securities are Series B and F-79 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) C Preferred Stock of Bill Gross' idealab! Valued at $193,001,451 and $4,670,925 at December 31, 1999 and 1998 respectively. In establishing the fair value of publicly traded securities that are subject to trading restrictions (amounting to $666,152,570 and $-0- at December 31, 1999 and 1998, respectively), the general partner takes a 30% discount on the period end closing price from the appropriate stock exchange. Holdings of publicly traded securities that are not subject to trading restrictions are valued at the period end closing price from the appropriate stock exchange. Investments made by the Funds, by their nature, are generally considered to be long-term investments and are not intended to be liquidated on a short-term basis. In the absence of significant external valuation measures, fair value is determined by the price at which the investments could change hands, where neither party to the transaction is under any compulsion to buy or sell and both have reasonable knowledge of the salient facts. Valuations do not reflect taxes or other expenses which might be incurred upon disposition. Notes are valued in combination with any equity investments in the same portfolio company. 3. ACCOUNTS RECEIVABLE FROM AFFILIATE Accounts receivable from affiliate consists of expenses paid by the Company on behalf of the Funds. 4. REQUIRED CAPITAL DUE FROM MEMBERS The obligation of the members to pay the required capital in cash at the times specified is absolute, unqualified and unconditional and, without limitation, is not conditioned upon the need of the Company for funds or upon any other member making the cash contributions that they are obligated to make. 5. CONTRIBUTED SECURITIES At the inception, the following securities were contributed at their fair value in exchange for membership interests:
TYPE OF INTEREST NUMBER OF SHARES VALUE SECURITY - ---------------- ------------------ ------------------ ----------------------------------------- Bill Gross' idealab! Series B Preferred Non- Managing 27,018 $45,931 Stock
6. FAIR VALUE OF SECURITIES RECEIVED AND REALIZED LOSSES
FAIR VALUE OF NUMBER OF SECURITIES INVESTMENT SHARES BASIS FAIR VALUE RECEIVED - ------------------------------------------------------ ------------- ---------- -------------------------------- eToys, Inc. Common Stock............................. 1,009,717 $ 7,225 $51,931,371 $51,924,146 GoTo.com, Inc. Common Stock.......................... 186,622 32,401 15,104,758 15,072,357 ---------------- Total realized gain on securities received........... $66,996,503 ================
REALIZED LOSS ON NUMBER OF DISTRIBUTION OF INVESTMENT SHARES BASIS FAIR VALUE SECURITIES - ------------------------------------------- ------------- --------------- ---------------- ------------------- GoTo.com, Inc. Common Stock............... 186,622 $15,104,758 $14,929,803 $(174,955)
NUMBER OF REALIZED LOSS ON INVESTMENT SHARES BASIS FAIR VALUE SALE OF SECURITIES - ------------------------------------------- ------------- --------------- ---------------- ------------------- eToys, Inc. Common Stock.................. 93,185 $ 5,131,011 $ 4,529,919 $(601,092)
F-80 IDEALAB! CAPITAL MANAGEMENT I, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. RELATED PARTY TRANSACTIONS In accordance with the Company's operating agreement, an annual fee equal to 0.5 percent of the aggregate capital committed to the Funds (up to a maximum annual fee of $400,000) is payable to Bill Gross' idealab!, a member of the Company. For the year ended December 31, 1999 and for the period March 20, 1998 (inception) through December 31, 1998, the Company incurred fees of $400,000 and $317,000, respectively, which are reflected in general and administrative expenses. 8. 401(K) PLAN AND TRUST The ICM 401(k) Plan and Trust (the Plan) adopted in 1999 by the Company provides that eligible employees may defer up to 10% of their wages annually. An employee is eligible to contribute to the Plan on the first day of employment. In addition, the Company may elect annually to match all or a portion of the employees' contributions to the Plan. An employee is eligible to share in the discretionary employer contribution after one year of service and must be actively employed on the last day of the plan year. No employer contributions were made to the Plan during 1999. 9. IMPACT OF YEAR 2000 (UNAUDITED) The Company experienced no significant disruptions in its software and computer systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems or those of its investees. The Company will continue to monitor its software and computer systems and those of its investees throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. F-81 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Intranets.com, Inc. (formerly IntraNetics, Inc.): In our opinion, the accompanying balance sheets and the related statements of operations, redeemable convertible preferred stock and stockholders' deficit and cash flows present fairly, in all material respects, the financial position of Intranets.com, Inc. (formerly IntraNetics, Inc.) at December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts June 30, 1999, except for the information presented in Note 12 for which the dates are August 24, 1999 and November 18, 1999 F-82 INTRANETS.COM, INC. BALANCE SHEETS
DECEMBER 31, ------------------------------ JUNE 30, 1997 1998 1999 ------------- --------------- -------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................... $ 455,159 $ 2,030,315 $ 1,880,552 Accounts receivable, net of allowance for doubtful accounts of $399,000, $153,892 and $230,405 at December 31, 1997, December 31, 1998 and June 30, 1999 (unaudited), respectively.................................. 54,451 49,932 116,504 Prepaid expenses and other current assets.................... 82,448 34,348 31,116 ------------- --------------- -------------- Total current assets..................................... 592,058 2,114,595 2,028,172 Fixed assets, net............................................... 436,298 427,231 388,329 Other assets.................................................... -- 30,835 24,355 ------------- --------------- -------------- $ 1,028,356 $ 2,572,661 $ 2,440,856 ============= =============== ============== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Convertible notes payable.................................... $ 2,830,542 $ -- $ -- Demand notes payable......................................... 1,041,112 888,889 722,222 Promissory notes payable-- officer and stockholder........... 653,500 -- -- Current portion of capital lease obligations................. 71,814 81,921 51,928 Accounts payable............................................. 1,338,669 206,201 117,066 Accrued expenses............................................. 251,415 169,858 227,303 Deferred revenue............................................. -- 13,098 13,098 ------------- --------------- -------------- Total current liabilities................................ 6,187,052 1,359,967 1,131,617 Capital lease obligations....................................... 99,846 12,537 -- ------------- --------------- -------------- Total liabilities 6,286,898 1,372,504 1,131,617 ------------- --------------- -------------- Commitments (Note 9)............................................ Redeemable convertible preferred stock: Series B redeemable convertible preferred stock, $.0001 par value; 32,000,000 and 35,000,000 shares authorized at December 31, 1998 June 30, 1999 (unaudited), respectively; 24,863,994 and 28,818,909 shares issued and outstanding at December 31, 1998 and 30, 1999 (unaudited), respectively; at issuance price plus accretion net of issuance costs (liquidation preference of $13,261,467 and $15,788,964 at December 31, 1998 and June 30, 1999 (unaudited), respectively).............................................. -- 12,435,088 15,061,751 Stockholder's deficit: Series A convertible preferred stock, $.0001 par value; 4,000,000 shares authorized; 166,667 shares issued and outstanding at December 31, 1997........................... 250,000 -- -- Common stock, $.0001 par value; 50,000,000 and 52,000,000 shares authorized at December 31, 1998 and June 30, 1999 (unaudited),respectively; 10,000,000 shares issued and outstanding at December 31, 1997; 10,029,500 issued and 8,529,500 outstanding at December 31, 1998; 10,035,750 shares issued and 8,535,750 shares outstanding at June 30, 1999(unaudited).................... 1,000 1,003 1,004 Additional paid-in capital...................................... 249,000 -- -- Treasury stock, at cost, 1,500,000 shares at December 31, 1998 and June 30, 1999 (unaudited).............................. -- (37,500) (37,500) Accumulated deficit............................................. (5,758,542) (11,198,434) (13,716,016) ------------- --------------- -------------- Total stockholders' deficit.............................. (5,258,542) (11,234,931) (13,752,512) ------------- --------------- -------------- Total liabilities, redeemable convertible preferred stock and stockholders' deficit.............................. $ 1,028,356 $ 2,572,661 $ 2,440,856 ============= =============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-83 INTRANETS.COM, INC. STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------ ------------------------ 1997 1998 1998 1999 ----------- ----------- ----------- ----------- (UNAUDITED) Revenue........................... $ 69,936 $ 300,462 $ 224,256 $ 345,016 ----------- ----------- ----------- ----------- Costs and expenses: Costs of revenue............... 99,705 101,468 41,991 49,663 Research and development....... 2,088,787 1,545,164 819,549 635,391 Selling and marketing.......... 2,405,597 2,238,900 1,027,582 1,063,592 General and administrative..... 832,488 1,159,296 566,095 489,333 ----------- ----------- ----------- ----------- 5,426,577 5,044,828 2,455,217 2,237,979 ----------- ----------- ----------- ----------- Loss from operations.............. (5,356,641) (4,744,366) (2,230,961) (1,892,963) Interest expense, net............. (151,003) (92,977) (77,899) 1,732 ----------- ----------- ----------- ----------- Net loss.......................... (5,507,644) (4,837,343) (2,308,860) (1,891,231) ----------- ----------- ----------- ----------- Accretion of preferred stock dividends and issuance costs.......................... -- (853,021) (315,814) (626,663) ----------- ----------- ----------- ----------- Net loss attributable to common stockholders................... $(5,507,644) $(5,690,364) $(2,624,674) $(2,517,894) ----------- =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-84 INTRANETS.COM, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ------------------------------ ------------------------------ 1997 1998 1998 1999 -------------- -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) Net loss .................................... $(5,507,644) $(4,837,343) $(2,308,860) $(1,891,231) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............. 76,095 179,062 68,236 92,062 Loss on sale of fixed assets .............. -- 8,810 -- -- Changes in assets and liabilities: Accounts receivable ..................... (54,451) 4,519 (43,441) (66,572) Prepaid expenses and other current assets (70,346) 14,865 (14,562) 3,232 Accounts payable ........................ 1,325,930 (1,132,468) (990,521) (89,135) Accrued expenses ........................ 251,415 42,642 93,045 57,445 Deferred revenue ........................ -- 13,098 -- -- ----------- ----------- ----------- ----------- Net cash used in operating activities ..... (3,979,001) (5,706,815) (3,196,103) (1,894,199) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets ................... (438,324) (176,405) (95,327) (46,680) Proceeds from sale and leaseback of fixed assets .................................... 141,000 -- -- -- ----------- ----------- ----------- ----------- Net cash used in investing activities ..... (297,324) (176,405) (95,327) (46,680) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible notes payable ................................... 2,830,542 -- -- -- Proceeds from issuance of demand notes payable ................................... 1,041,112 1,000,000 50,000 -- Payments of demand notes payable ............ -- (1,152,223) -- (166,667) Proceeds from issuance of promissory notes payable--officer and stockholder .......... 370,000 -- -- -- Principal payments on promissory notes payable--officer and stockholder .......... -- (653,500) (653,500) -- Payments of capital lease obligations ....... (10,170) (77,202) (37,564) (42,530) Proceeds from issuance of Series A convertible preferred stock ............... 250,000 -- -- -- Proceeds from issuance of Series B redeemable convertible preferred stock, net of issuance costs ..................... -- 8,377,326 5,377,324 2,000,000 Proceeds from issuance of common stock ...... 250,000 1,475 1,400 313 Purchases of treasury stock ................. -- (37,500) (37,500) -- ----------- ----------- ----------- ----------- Net cash provided by financing activities ...... 4,731,484 7,458,376 4,700,160 1,791,116 ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents .................................... 455,159 1,575,156 1,408,730 (149,763) Cash and cash equivalents, beginning of year ... -- 455,159 455,159 2,030,315 ----------- ----------- ----------- ----------- Cash and cash equivalents, end of year ......... $ 455,159 $ 2,030,315 $ 1,863,889 $ 1,880,552 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest ...................... $ 25,515 $ 179,467 $ 122,565 $ 42,497 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Assets acquired under capital lease.......... $ 159,708 Issuance of Series B redeemable convertible preferred stock upon conversion of Series A convertible preferred stock.............. $ 250,000 $ 250,000 Issuance of Series B redeemable convertible preferred stock upon conversion of convertible notes payable (principal and accrued interest).......................... $ 2,954,741 $2,954,741 Conversion of accrued interest on convertible notes payable into shares of Series B redeemable convertible preferred stock...................................... $ 124,199 $ 124,199
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-85 INTRANETS.COM, INC. STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 13, 1997 AND 1998 AND THE SIX MONTHS ENDING JUNE 30,1999 (UNAUDITED)
SERIES B SERIES A REDEEMABLE CONVERTIBLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ---------------------- ---------------------- ---------------------- ADDITIONAL PAR PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES VALUE CAPITAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996........ Issuance of Series A convertible preferred stock.................. 166,667 $ 250,000 Issuance of common stock............ 10,000,000 $ 1,000 $ 249,000 Net loss............................ ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997........ 166,667 250,000 10,000,000 1,000 249,000 Issuance of Series B redeemable convertible preferred stock upon conversion of Series A convertible preferred stock...... 494,365 $ 250,000 (166,667) (250,000) Issuance of Series B redeemable convertible preferred stock upon conversion of convertible notes payable (principal and accrued interest)....................... 7,655,607 2,954,741 Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $74,953..... 16,714,022 8,377,326 Accretion of preferred stock redemption value................. 853,021 (250,472) Treasury stock purchased........... Issuance of common stock pursuant to exercise of stock options.......................... 29,500 3 1,472 Net loss............................ ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998........ 24,863,994 12,435,088 10,029,500 1,003 Issuance of series B redeemable convertible preferred stock...... 3,954,915 2,000,000 Accretion of preferred stock redemption value ................ 626,663 (312) Issuance of common stock pursuant to exercise of stock options.......................... 6,250 1 312 Net loss............................ ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at June 30, 1999 (unaudited)...................... 28,818,909 $15,061,751 -- $ -- 10,035,750 $ 1,004 $ -- ========== ========== ========== ========== ========== ========== ========== TREASURY STOCK ---------------------- TOTAL ACCUMULATED STOCKHOLDERS' SHARES COST DEFICIT DEFICIT ---------- ---------- ---------- ---------- Balance at December 31, 1996........ $ (250,898) $ 250,898) Issuance of Series A convertible preferred stock.................. 250,000 Issuance of common stock............ 250,000 Net loss............................ (5,507,644) (5,507,644) ---------- ---------- Balance at December 31, 1997........ (5,758,542) (5,258,542) Issuance of Series B redeemable convertible preferred stock upon conversion of Series A convertible preferred stock...... (250,000) Issuance of Series B redeemable convertible preferred stock upon conversion of convertible notes payable (principal and accrued interest)....................... Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $74,953..... Accretion of preferred stock redemption value................. (602,549) (853,021) Treasury stock purchased........... 1,500,000 $ (37,500) (37,500) Issuance of common stock pursuant to exercise of stock options.......................... 1,475 Net loss............................ (4,837,343) (4,837,343) ---------- ---------- ---------- ---------- Balance at December 31, 1998........ 1,500,000 (37,500) (11,198,434) 11,234,931) Issuance of series B redeemable convertible preferred stock...... Accretion of preferred stock redemption value ................ (626,351) (626,663) Issuance of common stock pursuant to exercise of stock options.......................... 313 Net loss............................ (1,891,231) (1,891,231) ---------- ---------- ---------- ---------- Balance at June 30, 1999 (unaudited)...................... 1,500,000 $ (37,500) $(13,716,016) $(13,752,512) ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-86 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION Intranets.com, Inc. (formerly IntraNetics, Inc.) (the "Company") was incorporated in Delaware in December 1996 to design and market a turnkey integrated suite of intranet business applications. The Company's principal markets are domestic and international business markets. In June 1999, the Company decided to discontinue further development and marketing of its packaged intranet software products and instead commenced the development of a free hosted intranet service over the internet. In connection with this change in product direction, the Company legally changed its name to Intranets.com, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying financial statements of the Company for the six months ended June 30, 1998 and 1999 are unaudited. In the opinion of management, the accompanying interim financial statements contain all adjustments necessary for a fair presentation of the Company's financial position, results of operations, and cash flows at the dates and for the periods indicated, which adjustments consist only of adjustments of a normal recurring nature. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company invests its excess cash primarily in money market accounts and commercial paper. Accordingly, these investments are subject to minimal credit and market risk. At December 31, 1998, cash equivalents included commercial paper and money market funds of $1,700,000 and $275,000, respectively. These investments are classified as available-for-sale and are recorded at amortized cost which approximates fair market value. REVENUE RECOGNITION The Company's revenue is derived from the sale of licenses to use the Company's software products primarily to end-users and resellers. Revenue from sales to end-users and resellers is recognized upon delivery provided that no uncertainties remain relating to the sale, and that collection of the related receivable is probable. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. Management believes its credit policies are prudent and reflect normal industry terms and business risk. The Company performs ongoing credit evaluations of customers' financial condition but does not require collateral. Credit losses have not been significant to date. FIXED ASSETS Fixed assets are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. Equipment held under capital leases is stated at the lower of the fair value of the equipment or the present value of the minimum lease payments at inception of the leases and is amortized on a straight-line basis over the lives of the related assets or the term of the leases. ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and identifiable intangibles held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or intangibles may F-87 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) exceed the undiscounted future net cash flow expected to be generated by such assets. If it is determined that impairment has occurred, the asset is written down to fair value as determined by market value or discounted cash flow RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS Costs incurred in the research and development of the Company's products are expensed as incurred, except for certain software development costs. Costs associated with the development of computer software are expensed until technological feasibility has been established (as defined by SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed") and are capitalized thereafter until the related product is available for general release. Costs subject to capitalization during the years ended December 31, 1997 and 1998 were not significant. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for stock-based compensation awards to employees and directors in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation expense is recorded for options issued to employees and directors in fixed amounts and with exercise prices equal to the fair market value of the Company's common stock at the date of grant. The Company has adopted the disclosure only (Note 7) provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123. INCOME TAXES Deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using currently enacted tax rates. A valuation allowance against deferred tax assets is recorded if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Components particularly subject to estimation include accrued expenses and the fair values of the Company's equity instruments. Actual amounts could differ from those estimates. 3. FIXED ASSETS Fixed assets consist of the following: JUNE 30, ESTIMATED DECEMBER 31, 1999 USEFUL -------------------------- ------------- LIFE (YEARS) 1997 1998 (UNAUDITED) ------------ ------------ ------------- Computer equipment...... 2-5 $ 336,329 $ 374,211 $ 420,891 Computer software....... 3 45,074 80,137 80,137 Furniture and fixtures.. 2-7 45,166 131,221 131,221 Office equipment........ 5 76,099 80,274 80,274 Leasehold improvements.. 3 9,725 10,369 10,369 ------------- ------------ ------------- 512,393 676,212 722,892 Less-- accumulated depreciation and amortization.......... (76,095) (248,981) (334,563) ------------- ------------ ------------- $ 436,298 $ 427,231 $ 388,329 ============= ============ ============= F-88 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1998 and June 30, 1999 (unaudited), computer equipment and furniture and fixtures under capital leases were $89,458 and $70,250, respectively. Accumulated amortization relating to such computer equipment and furniture and fixtures totaled $44,498, $79,854 and $139,745 for the years ended December 31, 1997, December 31, 1998 and June 30, 1999 (unaudited), respectively. During the year ended December 31, 1997, the Company sold and leased back certain computer equipment with a net book value of $141,000 from a third-party lessor for cash proceeds of $141,000. 4. DEBT CONVERTIBLE NOTES PAYABLE In December 1997, the Company entered into a bridge financing agreement with certain investors for an aggregate amount of $1,355,542. The bridge financing was interest bearing at an annual rate of 12%. In March 1998, the financing, together with accrued interest thereon, was converted into 2,746,663 shares of Series B Preferred Stock. (Note 5). In addition, the Company issued subordinated convertible notes payable of $1,475,000 to certain investors. These notes were interest bearing at an annual rate of 10%. In March 1998, these notes, together with accrued interest thereon, were converted into 4,908,944 shares of Series B Preferred Stock. DEMAND NOTES PAYABLE In November 1997, the Company entered into two demand notes payable agreements with a third-party lending institution totaling $1,041,112. In March 1998, the Company refinanced these demand notes into a single note payable due December 31, 1998 bearing interest at the institution's base lending rate (8.50%). Under the terms of the agreement, the note payable was collateralized by a certificate of deposit in the amount of $1,100,000. In September 1998, the entire note payable was repaid by the Company. In August 1998, the Company obtained a $1,000,000 term loan from another third-party lending institution. Borrowings outstanding under the term loan bear interest of 8.93% per annum. The term loan is collateralized by the assets of the Company. Under the terms of the term loan agreement, the Company is required to comply with certain covenant requirements and to maintain certain financial ratios. At December 31, 1998 and June 30, 1999 and during the year ended December 31, 1998 and the six months ended June 30, 1999, the Company was in violation of certain covenants related to the level of net income and other ratio covenants. As of June 30, 1999, $722,222 was outstanding under the term loan (Note 12). PROMISSORY NOTES PAYABLE -- OFFICER AND STOCKHOLDER During 1996 and 1997, the Company issued subordinated notes payable to one of its stockholders for advances made to the Company in the aggregate principal amount of $583,500. In March 1998, the outstanding balance plus accrued interest at a rate of 8% per annum was repaid by the Company. In addition, during 1997, the Company received an advance from an officer and stockholder of the Company totaling $70,000. The advance was short-term and bore no interest. In March 1998, the advance was repaid by the Company. EQUIPMENT LINE OF CREDIT At December 31, 1998, the Company has an equipment line of credit arrangement with a lender under which the Company may borrow up to $500,000 to finance fixed asset purchases through June 2002. Borrowings outstanding under the line of credit bear interest at the bank's prime rate plus 0.5%. All F-89 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) borrowings under the fixed asset line are collateralized by the assets of the Company. At December 31, 1998 and June 30, 1999, no balance was outstanding under this line. 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK In March 1998, the Company granted the holders of Series A convertible preferred stock (the "Series A Preferred Stock") the option to convert their shares into Series B redeemable convertible preferred stock (the "Series B Preferred Stock") at a rate of one share of Series B Preferred Stock for every .3371 shares of Series A Preferred Stock. In March 1998, all Series A stockholders exercised this option and converted a total of 166,667 shares of Series A Preferred Stock into 494,365 shares of Series B Preferred Stock. In March and October 1998, the Company issued a total of 16,714,022 shares of Series B Preferred Stock for total proceeds of approximately $8,452,000. Of the shares issued in March 1998, 7,655,607 shares were issued in connection with the conversion of $2,830,542 of convertible notes payable plus accrued interest and 494,365 shares were issued in connection with the conversion of 166,667 shares of Series A Preferred Stock. The Series B Preferred Stock has the following characteristics: CONVERSION Each share of Series B Preferred Stock is convertible at any time, at the option of the holder, into shares of common stock based on the applicable conversion rate, currently one to one, subject to certain anti-dilution adjustments. All outstanding shares of Series B Preferred Stock will automatically convert to common stock upon the closing of a qualified public offering of the Company's common stock in which the per share price to the public is not less than 300% of the then applicable conversion value of the Series B Preferred Stock resulting in gross proceeds to the Company of at least $25,000,000. DIVIDENDS Holders of Series B Preferred Stock are entitled to receive, when and as declared by the Board of Directors, and in any event upon liquidation, dissolution or winding-up of the Company or the redemption of such shares, out of funds legally available, dividends at the rate of $.04 per share per annum. Cumulative dividends are payable in preference and priority to any payment of any dividend on any other class or series of capital stock. Through December 31, 1998, no dividends have been declared or paid by the Company. LIQUIDATION, DISSOLUTION OR WINDING-UP OF THE COMPANY In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock will be entitled to receive, in preference to the holders of the common stock, an amount per share equal to the sum of $0.5057 per share of the Series B Preferred Stock held, plus an amount equal to all accrued but unpaid dividends in respect of such share. If the assets of the Company are insufficient to pay the Series B stockholders the full amount to which they are entitled, they shall receive a distribution of the remaining assets in proportion to the respective total amounts they were entitled. Any assets remaining after the initial distribution to the holders of the Series B Preferred Stock shall be available for distribution ratably among the holders of shares of Series B Preferred Stock and the holders of shares of common stock. F-90 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) REDEMPTION At any time on or after March 2003, upon the consent of stockholders representing a majority of the then outstanding Series B Preferred Stock, such stockholders may redeem all or any portion of the shares of Series B Preferred Stock at a redemption price equal to the greater of $0.5057 per share or the fair market value per share. VOTING Each holder of the Series B Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which such holder's shares are convertible at the record date for such vote. WARRANTS In connection with the issuance of the Series A Preferred Stock, the Company entered into a warrant agreement with the holders which allows them to purchase 233,334 shares of the Company's common stock at an exercise price of $.15 per share. The warrant is currently exercisable in whole or in part, subject to certain limitations. The warrant shall expire on the earlier of December 31, 2006 or a sale of substantially all of the business or assets of the Company. Upon the conversion of Series A preferred stock into Series B Preferred Stock, the exercise price for this warrant was repriced to $.025 per common share and an additional warrant to purchase 327,698 shares of the Company's common stock at an exercise price of $.025 per share was granted. In connection with the issuance of convertible notes payable in 1997, the Company entered into a warrant agreement with the holders which allows them to purchase 686,664 shares of the Company's Series B Preferred Stock at an exercise price of $.51 per share. The warrant is currently exercisable and expires on December 31, 2008. The value ascribed to each of the above warrants was not material. 6. COMMON STOCK The Company formally issued its founding equity in January 1997. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders. Common stockholders are entitled to receive dividends only when and if declared by the Board of Directors, subject to the preferential dividend rights of the preferred stockholders. At December 31, 1998, the Company had reserved 4,205,176 shares of common stock for issuance upon the exercise of outstanding common stock options (Note 7), 1,247,696 shares of common stock for issuance upon the exercise of common stock warrants, and 24,863,994 shares of common stock for issuance upon the conversion of preferred stock. 7. STOCK OPTION PLAN During 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan provides for the granting of incentive and nonqualified stock options and common stock to directors, consultants and employees of the Company. On August 26, 1999, the Company's Board of Directors increased the maximum number of shares that may be issued under the 1997 Plan from 5,000,000 to 12,560,000. For stock options issued under the 1997 Plan, the exercise price of each stock option shall be specified by the Board of Directors at the time of grant. However, incentive stock options may not be granted at less than the fair value of the Company's common stock as determined by the Board of F-91 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Directors at the date of grant or for a term in excess of ten years. For holders of more than 10% of the Company's total combined voting power of all classes of stock, incentive stock options may not be granted at less than 110% of the fair value of the Company's common stock at the date of grant or for a term in excess of five years. All options granted through December 31, 1998 under the 1997 Plan were issued at or above fair value as determined by the Board of Directors, vest either immediately or over a five-year period for employees or over the service period for nonemployees, and expire ten years from the date of grant. During 1997, the Company granted 35,176 options of common stock to consultants at exercise prices of $0.15 and $0.51 per share in exchange for services rendered. The value ascribed to these shares was not material. No stock options were issued to consultants in 1998. A summary of the status of the Company's stock option plan as of December 31, 1997 and 1998 and changes during the years then ended is presented below:
1997 1998 -------------------------------- -------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE --------------- ---------------- ------------- --------------- Outstanding at beginning of year..................... -- $ -- 1,845,176 $ 0.15 Granted.............................................. 1,847,676 0.15 4,810,000 0.05 Exercised............................................ -- (29,500) 0.05 Canceled............................................. (2,500) 0.15 (2,420,500) 0.15 --------------- ---------- Outstanding at end of year........................... 1,845,176 0.15 4,205,176 0.05 =============== ========== Options exercisable at end of year................... 276,676 0.18 684,176 =============== ========== Options available for future grant................... 1,654,824 794,824 =============== ==========
The following table summarizes information about stock options outstanding at December 31, 1998: WEIGHTED- AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL LIFE NUMBER PRICE OUTSTANDING (IN YEARS) EXERCISABLE - ------------ ------------- ------------------ ------------ $ 0.05 4,180,000 9.3 659,000 0.51 25,176 8.9 25,176 ------------- ------------ 4,205,176 9.3 684,176 ============= ============ The fair value of each option grant was estimated on the date of grant using the minimum value method with the following assumptions used for grants in 1998 and 1997: dividend yield of zero, volatility of zero, risk-free interest rate of 5.0% and 5.9%, respectively, and weighted-average expected option term of 5 years. No compensation expense has been recognized for the Company's stock option plan under APB Opinion No. 25. Had compensation cost for these awards been determined based on the fair value at the date of grant consistent with the method prescribed by SFAS No. 123, the Company's net loss would not have differed materially from the amount reported. However, because additional option grants are expected to be made subsequent to December 31, 1998 and because options vest over several years, the pro forma effects of applying the fair value method may be material to reported net income or loss in future years. In June 1998, the Company elected to reprice all outstanding common stock options granted to employees and directors to $.05 which was not less than the fair market value of common stock as determined by the Company's Board of Directors. F-92 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. INCOME TAXES Deferred tax assets (liabilities) consist of the following:
DECEMBER 31, --------------------------------- 1997 1998 ---------------- --------------- Net operating loss carryforwards.............................. $ 2,324,000 $ 4,173,000 Research and development tax credit carryforwards............. 119,000 122,000 Fixed assets.................................................. (15,000) 82,000 ---------------- --------------- Net deferred tax assets....................................... 2,428,000 4,377,000 Deferred tax asset valuation allowance........................ (2,428,000) (4,377,000) ---------------- --------------- $ -- $ -- ================ ===============
The Company provided a valuation allowance for the full amount of the net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards cannot be sufficiently assured at December 31, 1998. At December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $10,300,000 available to reduce future taxable income and which expire at various dates through 2018. The Company also has federal and state research and development tax credit carryforwards of approximately $80,000 and $60,000, respectively, available to reduce future tax liabilities and which expire in the year 2018. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may limit the amount of net operating loss and tax credit carryforwards which could be utilized annually to offset future taxable income and taxes payable. The amount of this annual limitation is determined based upon the Company's value prior to an ownership change. 9. COMMITMENTS OPERATING LEASES The Company leases its facility under a noncancelable operating lease which expires in January 2000. Rent expense under this lease was $109,274 and $147,891 during the years ended December 31, 1997 and 1998, respectively. Future minimum payments under noncancelable operating and capital leases as of December 31, 1998 are as follows:
OPERATING CAPITAL LEASE LEASES -------------- -------------- YEAR ENDING DECEMBER 31, --------------------------- 1999............................................................ $ 135,586 $ 95,035 2000............................................................ 11,299 13,815 -------------- -------------- Total minimum lease payments.................................... $ 146,885 108,850 ============== Less amount representing interest............................... (14,392) -------------- Present value of minimum lease payments......................... $ 94,458 ==============
10. SAVINGS PLAN In January 1997, the Company adopted a retirement savings plan for its employees pursuant to Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Employees become eligible to participate under the 401(k) Plan upon completion of three months of service to the Company. Employees may contribute from 1% to 15% of their salary, up to a maximum annual statutory limit. The Company is not required to contribute to this plan and has made no contributions through December 31, 1998. F-93 INTRANETS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 11. GEOGRAPHIC INFORMATION The Company's revenue was derived from the following:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------------- ---------------------------- 1997 1998 1998 1999 ------------- ------------- (UNAUDITED) ------------- ------------- ------------- ------------- Domestic......................................... 66,311 245,169 175,918 312,368 International.................................... 3,625 55,293 48,338 32,648 ------------- ------------- ------------- ------------- Total......................................... 69,936 300,462 224,256 345,016 ============= ============= ============= =============
12. SUBSEQUENT EVENTS ISSUANCE OF SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK On August 24, 1999, the Company issued 25,716,179 shares of Series C Redeemable Convertible Preferred Stock ("Series C Preferred Stock") to one investor for proceeds to the Company of $2,000,000, prior to any fees or offering costs. The Series C Preferred Stock has substantially identical voting, dividend, redemption and conversion rights as the Series B Preferred Stock, except for the redemption amount per share of $0.0777. In the event of any dissolution or winding-up of the Company, the holders of Series C Preferred Stock rank equally with the holders of the Series B Preferred Stock and are entitled to receive $0.0777 per share prior to any distributions to holders of Common Stock. In conjunction with the issuance of Series C Preferred Stock, the investor received a warrant to purchase 15,383,090 shares of the Company's Series C Preferred Stock at an exercise price of $0.0777 per share. The warrant becomes exercisable if the Company issues equity securities on or before February 24, 2000 at a pre money company valuation of at least $45,000,000 and receives aggregate proceeds of at least $5,000,000. A value of $340,970 was ascribed to the warrant. ISSUANCE OF SERIES D REDEEMABLE CONVERTIBLE PREFERRED STOCK On November 18, 1999, the Company issued 35,473,572 shares of Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock") at a per share price of $0.56 for aggregate proceeds of $20,000,000, prior to any fees or offering costs. The Series D Preferred Stock has substantially identical voting, dividend, redemption and conversion rights as the Series B and Series C Preferred Stock except for the redemption amount per share of $0.5638. In the event of any dissolution or winding-up of the Company, the holders of Series D Preferred Stock rank equally with the holders of Series B and Series C Preferred Stock and are entitled to receive $0.5638 per share prior to any distributions to holders of Common Stock. DEBT REPAYMENT (UNAUDITED) On December 14, 1999, the Company repaid the remaining balance of approximately $550,000 outstanding under its term loan. WARRANT EXERCISE (UNAUDITED) Upon the closing of the Series D Preferred Stock financing the warrant for the Company's Series C Preferred Stock became exercisable. On February 8, 2000, the warrant was exercised and the Company received aggregate proceeds of $1,196,343. F-94 AUDITORS' REPORT October 27, 1999 To the Directors of Perga Capital Incorporated (formerly R. L. Perrier Investments Limited) We have audited the balance sheets of PERGA CAPITAL INCORPORATED as at April 30, 1998 and 1999, and the statements of operations and deficit, and cash flows for the years ended April 30, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at April 30, 1998 and 1999, and the results of its operations and its cash flow for the years ended April 30, 1998 and 1999 in accordance with Canadian generally accepted accounting principles. /s/ PricewaterhouseCoopers LLP Chartered Accountants London, Ontario, Canada F-95 PERGA CAPITAL INCORPORATED BALANCE SHEETS AS AT APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS) 1998 1999 -------- -------- ASSETS CURRENT ASSETS Cash...................................................... $ 3,524 $ 862 Accounts receivable....................................... 4,823 5,383 Income taxes recoverable (note 7)......................... -- 12,942 -------- -------- 8,347 19,187 ADVANCES TO SIGNIFICANTLY INFLUENCED COMPANY (note 3)..... 150,675 310,084 INVESTMENT IN SIGNIFICANTLY INFLUENCED COMPANY (note 4)... -- -- -------- -------- $159,022 $329,271 ======== ======== LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES Non-interest bearing advances from a shareholder.......... $223,508 $232,069 -------- -------- 223,508 232,069 -------- -------- SHAREHOLDERS' (DEFICIT) EQUITY Capital stock............................................. 205 205 Contributed surplus....................................... 221,583 221,583 Deficit................................................... (286,274)(124,586) -------- -------- (64,486) 97,202 -------- -------- $159,022 $329,271 ======== ======== SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS. F-96 PERGA CAPITAL INCORPORATED STATEMENTS OF OPERATIONS AND DEFICIT FOR THE YEARS ENDED APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS)
1998 1999 ------------ ------------- NET SALES REVENUE..................................................................... $ -- $ -- ------------ ------------- General and administrative expenses................................................... 10,876 8,000 Interest expense...................................................................... 652 2,663 Share of loss (income) in significantly influenced company............................ 12,623 (159,409) ------------ ------------- 24,151 (148,746) ------------ ------------- (LOSS) EARNINGS BEFORE INCOME TAXES................................................... (24,151) 148,746 RECOVERY OF INCOME TAXES (note 7)..................................................... (943) (12,942) ------------ ------------- NET (LOSS) EARNINGS FOR THE YEAR...................................................... (23,208) 161,688 DEFICIT--BEGINNING OF YEAR............................................................. (263,066) (286,274) ------------ ------------- DEFICIT--END OF YEAR................................................................... $ (286,274) $ (124,586) ============ =============
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS. F-97 PERGA CAPITAL INCORPORATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS)
1998 1999 ------------ ------------ OPERATING ACTIVITIES Net (loss) earnings for the year....................................... $ (23,208) $ 161,688 Items not affecting cash-- Share of loss (income) in significantly influenced company.......... 12,623 (159,409) ------------ ------------ (10,585) 2,279 Net change in non-cash working capital-- Increase in accounts receivable..................................... (4,823) (560) Increase in income taxes receivable................................. -- (12,942) Decrease in income taxes payable.................................... (26,742) -- ------------ ------------ (42,150) (11,223) ------------ ------------ FINANCING ACTIVITIES Non-interest bearing advances from a shareholder....................... 23,891 8,561 ------------ ------------ 23,891 8,561 ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS................................ (18,259) (2,662) CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR............................ 21,783 3,524 ------------ ------------ CASH AND CASH EQUIVALENTS--END OF YEAR.................................. $ 3,524 $ 862 ============ ============
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS. F-98 PERGA CAPITAL INCORPORATED NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS) 1. NATURE OF OPERATIONS Perga Capital Incorporated (the "Company") is a holding company without significant operations and owns 35.4% of the common shares of AutoData Marketing Systems Incorporated ("Autodata") which is located in London, Ontario, Canada. The significantly influenced company is focused primarily on licensing decision-making support tools and content to the automotive and related industries in North America. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENT The Company's 35.4% investment in Autodata is accounted for using the equity method. If an other than temporary decline in value occurs, the investment would be written down to its net realizable value. INCOME TAXES The Company follows the deferral method of income tax allocation. Under this method, timing differences between reported and taxable income result in provisions for taxes not currently payable. FOREIGN CURRENCY TRANSLATION All foreign currency denominated accounts of the Company are translated at the exchange rate at the balance sheet date. Transactions denominated in foreign currency occuring during the period are translated at the rate in effect at the date of the transaction. STATEMENT OF CASH FLOWS During the year, the Company retroactively implemented the new presentation and disclosure requirements regarding cash flow statements per the Canadian Institute of Chartered Accountants Handbook, section 1540. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS The Company's estimate of the fair value of its financial instruments, which include cash accounts receivable and borrowings, approximates their carrying value, due to the short-term nature of the instruments. USE OF ESTIMATES The preparation of these financial statements requires management to make estimates and assumptions that affect revenues and expenses during the reporting periods, in addition to the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates. F-99 PERGA CAPITAL INCORPORATED NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 3. ADVANCES TO SIGNIFICANTLY INFLUENCED COMPANY
1998 1999 --------- --------- Note receivable from Autodata bearing interest at the prime lending rate of the Royal Bank of Canada.............................................................. $ 100,000 $ 100,000 Note receivable from Autodata bearing interest at the prime lending rate of the Royal Bank of Canada.............................................................. 55,000 55,000 Note receivable from Autodata bearing interest at the prime lending rate of the Royal Bank of Canada.............................................................. 136,750 136,750 --------- --------- Note receivable from Autodata bearing interest at the prime lending rate of the Royal Bank of Canada.............................................................. 29,004 29,004 --------- --------- 320,754 320,754 Write-down of advances arising from share of loss in significantly influenced company in excess of the investment value (see note 4)............................ (170,079 (10,670) --------- --------- $ 150,675 $ 310,084 ========= =========
The Company has agreed to waive all interest receivable for 1995 through 1999. All notes are due on demand, however, as the Company has agreed not to demand payment within the next year, all notes are classified as long-term. The Company has been granted the right, at its sole option, subject to shareholders' approval, to convert the $100,000 and $55,000 notes to equity of Autodata at the rate of 500 Class "A" special shares, plus 1 common share for each $500 of notes receivable (see note 9). The Company has been granted the option to convert the $29,004 note to 29,000 Class "A" special shares and 372 common shares of Autodata with stated values of $29,000 and $4, respectively (see note 9). 4. INVESTMENT IN SIGNIFICANTLY INFLUENCED COMPANY OWNERSHIP 1998 1999 --------- --------- --------- Investment in Autodata: Shares....................................... 35.4% $ 130,000 $ 130,000 Equity in cumulative losses.................. (130,000) (130,000) --------- --------- $ -- $ -- ========= ========= The Company's investment in Autodata includes $383,378 attributable to goodwill which is being amortised on a straight-line basis over ten years. The accumulated amortization balance as at April 30, 1999 is $191,690. The investment balance is further offset by the cumulative share of losses in the significantly influenced company. As the Company accounts for its investment in Autodata on the equity basis, it records its share of the income or loss of Autodata against the value of its investment in Autodata. To the extent the cumulative share of the losses of Autodata exceed the value of the investment, at any time, the excess loss is then charged against any advances made to Autodata until the investment and advances balances are nil. F-100 PERGA CAPITAL INCORPORATED NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) The Company's share of Autodata's income has been calculated based on earnings for the years ended April 30, 1998 and 1999. The following summarized financial information is disclosed as at April 30, 1998 and 1999 and for the years then ended: 1998 1999 ----------- ----------- Current assets........................ $ 230,043 $ 980,803 Other assets.......................... 218,294 493,687 ----------- ----------- $ 448,337 $ 1,474,490 =========== =========== Current liabilities................... $ 873,752 $ 1,205,137 Long-term debt........................ 564,004 700,754 Redeemable special shares............. 429,000 429,000 ----------- ----------- 1,866,756 2,334,891 Shareholders' deficit................. (1,418,419) (860,401) ----------- ----------- $ 448,337 $ 1,474,490 =========== =========== Revenue............................... $ 1,903,335 $ 3,721,351 ----------- ----------- Expenses.............................. 1,830,770 3,163,333 ----------- ----------- Net earnings.......................... $ 72,565 $ 558,018 =========== =========== The Company has an irrevocable option to purchase a further 53.7% of the common shares of Autodata for a fixed price from another shareholder (see note 9). 5. RELATED PARTY TRANSACTIONS During a prior year, the Company entered into a management and consulting agreement with Autodata, whereby management and consulting fees were payable by Autodata at the rate of 10% of the first $1,000,000 of annual pre-tax income of Autodata and 8% of any excess. Management fees have been waived for all years up to and including 1999. 6. CAPITAL STOCK As at April 30, 1998 and 1999, the share capital of the Company is as follows: AUTHORIZED 10,000 8% non-cumulative, voting special shares of $.01 each, redeemable and retractable at $100 each. Unlimited common shares. ISSUED (see note 9) 1998 1999 ----- ----- 205 Common shares.............................................. $ 205 $ 205 ===== ===== 7. INCOME TAXES The recovery of income taxes relates to the recovery of previously provided taxes. F-101 PERGA CAPITAL INCORPORATED NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 9. SUBSEQUENT EVENTS Subsequent to the year-end, the Company acquired all of the common shares from the remaining shareholders of the significantly influenced company, Autodata. Following completion of the above transactions, the Company cancelled all remaining options to acquire shares and to convert notes receivable to shares so that no options remain outstanding. On May 13, 1999, the Company changed the 205 common shares which were issued and outstanding to 9,000 common shares. The Articles were also amended by creating an unlimited number of class "B" special shares and 10,000 class "C" voting shares. On July 27, 1999, the Company was acquired by CarsDirect.com Inc. Subsequent to the acquisition, the Company was amalgamated with its subsidiary companies and continued as Autodata Solutions Company. Subsequent to the acquisition, the Company repaid advances from a shareholder at face value with funds received from the ultimate parent company. 10. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The only significant difference between Canadian GAAP and U.S. generally accepted accounting principles ("U.S. GAAP") relates to the share of income of the investment in the significantly influenced company, Autodata, as there are differences in income as determined under Canadian GAAP versus U.S. GAAP for Autodata. The following adjustments would be required in order to present the results of operations of Autodata in accordance with U.S. GAAP. ACCOUNTING FOR INCOME TAXES UNDER U.S. GAAP For U.S. GAAP purposes, the benefits of the losses for income tax purposes and excess of amortization of capital assets over capital cost allowance must be recognized in the financial statements with an appropriate valuation allowance established for the portion of the benefits not likely to be utilized in the foreseeable future. F-102 PERGA CAPITAL INCORPORATED NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) Accordingly, under U.S. GAAP, the tax benefit of these losses and excess amortization of capital assets over capital cost allowance would be:
1998 1999 --------- --------- Tax benefit of losses............................................ $ 567,000 $ 317,600 Amortization in excess of capital cost allowance................. 61,450 97,500 --------- --------- 628,450 415,100 Valuation allowance.............................................. (628,450) -- --------- --------- Net tax benefit of losses and amortization in excess of capital cost allowance................................................ $ -- $ 415,100 ========= =========
A valuation allowance of 100% of the potential benefit of the losses and amortization of capital assets in excess of capital cost allowance was established in 1998 as at the year end 1998 it was not likely that Autodata would generate sufficient income in the future years before the losses would expire and Autodata had only generated marginal income before tax in each of the years 1997 and 1998. In 1999, Autodata generated increased pre-tax income from operations; Autodata had generated increasing pre-tax profit in each of the last three years, and the anticipated income in subsequent years was estimated to be sufficient to utilize the losses before their expiry dates in the carryforward periods. Accordingly, no valuation allowance was deemed necessary at April 30, 1999. ACCOUNTING FOR DEFERRED CHARGES Under U.S. GAAP, items recorded as deferred charges under Canadian GAAP, such as development costs and training costs, are expensed as incurred. Deferred charges on the Canadian GAAP balance sheet of Autodata in 1999 include costs related to the development of new products for the company and internally developed software. The costs in 1998 represent training costs relating to the proprietary processes of Autodata. Accordingly, under U.S. GAAP, the deferred charges relating to product development and training of $98,158 in 1998 and $73,040 in 1999, would have been expensed, resulting in a reversal of these expenses in the subsequent year for U.S. GAAP purposes, when the expense was recognized under Canadian GAAP. Costs of $34,000 relating to internally developed software would have been capitalized at April 30, 1999, to be amortized over the period of use of the software. ACCOUNTING FOR PREPAID LEGAL COSTS Under U.S. GAAP, costs relating to legal fees paid for assessment of contracts relating to the regular business activities of Autodata would be expensed as incurred. Prepaid expenses at April 30, 1998 and 1999 respectively, include legal costs of $6,344 and $19,679. Accordingly, under U.S. GAAP, these prepaid legal fees would have been expensed in the year incurred, resulting in a reversal of these expenses in the subsequent year for U.S. GAAP purposes, when the expense was recognized under Canadian GAAP. CASH FLOW STATEMENTS The cash flow statements have been prepared on a basis consistent with International Accounting Standards. F-103 PERGA CAPITAL INCORPORATED NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) The following summarizes the Company's balance sheets and statements of operations prepared in accordance with U.S. GAAP. BALANCE SHEETS
1998 1999 --------- --------- ASSETS Cash.................................................................. $ 3,524 $ 862 Accounts receivable................................................... 4,823 5,383 Advances to significantly influenced company.......................... 113,642 320,754 Income taxes recoverable.............................................. -- 12,942 Investment in significantly influenced company........................ -- 103,573 --------- --------- $ 121,989 $ 443,514 ========= ========= LIABILITIES Non-interest bearing advances from a shareholder...................... $ 223,508 $ 232,069 --------- --------- 223,508 232,069 --------- --------- SHAREHOLDERS' (DEFICIT) EQUITY Capital stock......................................................... 205 205 Contributed surplus................................................... 221,583 221,583 Deficit............................................................... (323,307) (10,343) --------- --------- (101,519) 211,445 --------- --------- $ 121,989 $ 443,514 ========= =========
STATEMENTS OF OPERATIONS
1998 1999 --------- --------- Net sales revenue......................................................... $ -- $ -- --------- --------- General and administrative expenses....................................... 10,876 8,000 Interest expense.......................................................... 652 2,663 Share of loss (income) in significantly influenced company................ 49,656 (310,685) --------- --------- 61,184 (300,022) --------- --------- (Loss) earnings before income taxes....................................... (61,184) 300,022 Recovery of income taxes.................................................. (943) (12,942) --------- --------- Net (loss) earnings for the year.......................................... $ (60,241) $ 312,964 ========= ========= RECONCILIATION OF SHAREHOLDERS' (DEFICIT) EQUITY Opening shareholders' deficit under Canadian GAAP and U.S. GAAP........... $ (41,278) Adjustments 1998: Net loss for the year.................................................. (60,241) ---------- Shareholders' deficit as at April 30, 1998................................ (101,519) Adjustments 1999: Net earnings for the year.............................................. 312,964 ---------- Shareholders' equity as at April 30, 1999................................. $ 211,445 ==========
F-104 AUDITORS' REPORT October 27, 1999 To the Directors of Autodata Marketing Systems Incorporated We have audited the consolidated balance sheets of AUTODATA MARKETING SYSTEMS INCORPORATED as at April 30, 1998 and 1999, and the consolidated statements of earnings and deficit, and cash flows for the years ended April 30, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at April 30, 1998 and 1999, and the results of its operations and its cash flow for the years ended April 30, 1998 and 1999 in accordance with Canadian generally accepted accounting principles. /s/ PricewaterhouseCoopers LLP Chartered Accountants London, Ontario, Canada F-105 AUTODATA MARKETING SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS AS AT APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS)
1998 1999 --------------- --------------- ASSETS CURRENT ASSETS Cash............................................................................ $ 20,055 $ 87,201 Term deposits................................................................... -- 200,000 Trade accounts receivable (net of allowance for doubtful accounts of $NIL and $21,000 at April 30, 1998 and 1999, respectively)............................ 175,936 567,424 Other accounts receivable....................................................... 9,235 64,405 Prepaid expenses................................................................ 24,817 61,773 --------------- --------------- 230,043 980,803 CAPITAL ASSETS (note 3)......................................................... 120,136 386,647 Deferred charges (net of accumulated amortization of $NIL and $98,158 at April 30, 1998 and 1999, respectively)............................................. 98,158 107,040 --------------- --------------- $ 448,337 $ 1,474,490 =============== =============== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued liabilities........................................ $ 236,412 $ 295,623 Deferred revenue................................................................ 500,590 909,514 --------------- --------------- 737,002 1,205,137 NOTES PAYABLE TO RELATED PARTIES (notes 4 and 14)............................... 700,754 700,754 REDEEMABLE SPECIAL SHARES (note 6).............................................. 429,000 429,000 --------------- --------------- 1,866,756 2,334,891 --------------- --------------- SHAREHOLDERS' DEFICIT Capital stock (notes 7 and 14).................................................. 90,717 90,717 Contributed surplus............................................................. 146,347 146,347 Deficit......................................................................... (1,655,483) (1,097,465) --------------- --------------- (1,418,419) (860,401) --------------- --------------- $ 448,337 $ 1,474,490 =============== ===============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F-106 AUTODATA MARKETING SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT FOR THE YEARS ENDED APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS)
1998 1999 -------------- -------------- NET SALES REVENUE................................................................ $ 1,903,335 $ 3,721,351 -------------- -------------- Cost of sales materials.......................................................... 112,010 257,519 Selling, general and administrative expenses..................................... 1,710,193 2,899,379 Interest expense................................................................. 8,567 6,435 -------------- -------------- 1,830,770 3,163,333 -------------- -------------- EARNINGS BEFORE INCOME TAXES..................................................... 72,565 558,018 PROVISION FOR INCOME TAXES (note 9).............................................. -- -- -------------- -------------- NET EARNINGS FOR THE YEAR........................................................ 72,565 558,018 DEFICIT - BEGINNING OF YEAR...................................................... (1,728,048) (1,655,483) -------------- -------------- DEFICIT - END OF YEAR............................................................ $ (1,655,483) $ (1,097,465) ============== ==============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F-107 AUTODATA MARKETING SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS)
1998 1999 ------------ ------------ OPERATING ACTIVITIES Net earnings for the year............................................................ $ 72,565 $ 558,018 Items not affecting cash-- Amortization of capital assets.................................................. 34,997 80,637 Amortization of deferred charges................................................ -- 98,158 Loss on disposal of capital assets.............................................. 2,834 -- ------------ ------------ 110,396 736,813 Net change in non-cash working capital (note 10)..................................... 138,951 (15,479) ------------ ------------ 249,347 721,334 ------------ ------------ FINANCING ACTIVITIES Decrease in bank indebtedness........................................................ (100,000) -- ------------ ------------ INVESTING ACTIVITIES Purchase of capital assets........................................................... (58,956) (347,148) Deferred charges incurred............................................................ (98,158) (107,040) ------------ ------------ (157,114) (454,188) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS.............................................. (7,767) 267,146 CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR......................................... 27,822 20,055 ------------ ------------ CASH AND CASH EQUIVALENTS--END OF YEAR............................................... $ 20,055 $ 287,201 ============ ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F-108 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999 (EXPRESSED IN CANADIAN DOLLARS) 1. NATURE OF OPERATIONS AutoData Marketing Systems Incorporated (the "Company") is located in London, Ontario, Canada. The Company is focused primarily on licensing decision-making support tools and content to the automotive and related industries in North America. Subsequent to the year end, the Company's parent, Perga Capital Incorporated, was acquired by CarsDirect.com, Inc., a U.S. company, and the Company name was changed to Autodata Solutions Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include those of the Company and its wholly-owned subsidiary, Paradigm Publishing Inc. REVENUE RECOGNITION Revenues from contract services are recorded evenly over the period of the contracts. Terms of the executed contracts, under which the price has been established and delivery of services has commenced, range from 3 months to 12 months. CAPITAL ASSETS Capital assets are recorded at cost. Amortization is provided annually at rates calculated to write-off the assets over their estimated useful lives as follows: Computer hardware..................................... 30% declining balance Computer software..................................... 30% declining balance Furniture and fixtures................................ 20% declining balance Leasehold improvements................................ 20% straight line DEFERRED CHARGES Deferred charges include direct salary costs relating to the development of new products and training costs associated with the Company's proprietary processes. These charges are recorded at cost and amortized against income in the period in which the related income is earned. INCOME TAXES The Company follows the deferral method of income tax allocation. Under this method, timing differences between reported and taxable income result in provisions for taxes not currently payable. FOREIGN CURRENCY TRANSLATION All foreign currency denominated accounts of the Company are translated at the exchange rate at the balance sheet date. Transactions denominated in foreign currency occurring during the period are translated at the rate in effect at the date of the transaction. F-109 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) STATEMENT OF CASH FLOWS During the year, the Company retroactively implemented the new presentation and disclosure requirements regarding cash flow statements per the Canadian Institute of Chartered Accountants Handbook, section 1540. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS The Company's estimate of the fair value of its financial instruments, which include cash and term deposits, accounts receivable, accounts payable, and borrowings approximates their carrying value. Notes payable to related parties are interest bearing, but such interest has been waived since 1995. Therefore, the carrying value is not necessarily representative of fair value. Subsequent to year-end, notes payable to related parties were repaid in full, at face value, which establishes the fair value of the debt. USE OF ESTIMATES The preparation of these financial statements requires management to make estimates and assumptions that affect revenues and expenses during the reporting periods, in addition to the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates. 3. CAPITAL ASSETS 1998 ----------------------------------------- ACCUMULATED COST AMORTIZATION NET ----------- -------------- ------------ Computer hardware................ $ 117,371 $ 59,823 $ 57,548 Computer software................ 70,022 38,848 31,174 Furniture and fixtures........... 34,102 13,697 20,405 Leasehold improvements........... 21,238 10,229 11,009 ----------- -------------- ------------ $ 242,733 $ 122,597 $ 120,136 =========== ============== ============ 1999 ----------------------------------------- ACCUMULATED COST AMORTIZATION NET ----------- -------------- ------------ Computer hardware................ $ 195,298 $ 88,776 $ 106,522 Computer software................ 76,405 49,157 27,248 Furniture and fixtures........... 48,450 19,213 29,237 Leasehold improvements........... 269,726 46,086 223,640 ----------- -------------- ------------ $ 589,879 $ 203,232 $ 386,647 =========== ============== ============ F-110 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 4. NOTES PAYABLE TO RELATED PARTIES As at April 30, the following amounts were due to shareholders of the Company:
LONG TERM 1998 1999 --------------------------------------------------------------------------- ------------ ------------ 8% note payable to a shareholder, secured by a general security agreement (maximum $400,000)........................................................ $ 350,000 $ 350,000 Note payable to a shareholder bearing interest at the prime lending rate of the Royal Bank of Canada (Note 14(i)).................................. 100,000 100,000 Note payable to a shareholder bearing interest at the prime lending rate of the Royal Bank of Canada............................................... 30,000 30,000 Note payable to shareholder bearing interest at the prime lending rate of the Royal Bank of Canada............................................... 55,000 55,000 Note payable to a shareholder bearing interest at the prime lending rate of the Royal Bank of Canada............................................... 136,750 136,750 Note payable to a shareholder bearing interest at the prime lending rate of the Royal Bank of Canada............................................... 29,004 29,004 ------------ ------------ $ 700,754 $ 700,754 ============ ============
The shareholders have agreed to waive all interest for 1995 through 1999. All notes are payable on demand, however as note holders have agreed not to demand payment within the next year, all notes are classified as long-term. The Company has granted the right to the holders of the first 4 long-term notes, as set out above, at their sole option, subject to shareholders' approval, to convert this debt to equity of the Company at the rate of 500 Class "A" special shares, plus 1 common share for each $500 of debt (see Note 14 (iv)). The Company has granted to the holder of the 6th note above, the option to convert this debt to 29,000 Class A Special shares and 372 common shares with stated values of $29,000 and $4, respectively (see Note 14 (iv)). 5. RELATED PARTY TRANSACTIONS REGULAR BUSINESS TRANSACTIONS The Company received services from a shareholder during the ordinary course of business, with a value of $7,600 (1998 - $11,400). An unpaid balance of $32,404 (1998 - $31,454) due to the shareholder is included in accounts payable and accrued liabilities. MANAGEMENT AGREEMENT During a prior year, the Company entered into a management and consulting agreement with shareholders, whereby management and consulting fees were payable to the shareholders at the rate of 13% of the first $1,000,000 of annual pre-tax income and 8% of any excess. Management fees have been waived for all years up to and including 1999. F-111 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 6. REDEEMABLE SPECIAL SHARES AUTHORIZED 426 5% cumulative, non-voting, convertible, redeemable, and retractable preference shares. Unlimited non-cumulative, non-participating, non-voting redeemable Class "A" special shares. ISSUED (SEE NOTE 14) 1998 1999 ---------- ---------- 429,000 Class "A" special shares............. $429,000 $429,000 ========== ========== 7. CAPITAL STOCK As at April 30, 1998 and 1999, the share capital of the Company is as follows: AUTHORIZED Unlimited common shares. ISSUED AND OUTSTANDING (SEE NOTE 14) 1998 1999 ---------- ---------- 1,109 Common shares.......................... $90,717 $90,717 ========== ========== 8. LINE OF CREDIT At April 30, 1999, the Company had an available bank line of credit of $100,000. As security for this line, a shareholder has guaranteed this amount and the shareholder has placed a term deposit receipt in the amount of $100,000 with the Company's banker. The balance of the line of credit at April 30, 1999 is Nil (1998 - Nil). Subsequent to the year end this line of credit was cancelled. 9. INCOME TAXES 1998 1999 ---------- ----------- Income tax provision at statutory rates...... $ 16,200 $ 124,450 Application of loss carryforwards............ (16,200) (124,450) ---------- ----------- $ -- $ -- ========== =========== Non-capital losses available for carryforward to future accounting periods which may be applied to reduce income taxes otherwise payable expire as follows: July 27, 1999.................................. $ 139,310 April 30, 2000................................. 231,923 April 30, 2001................................. 147,970 April 30, 2002................................. 192,235 ------------ $ 711,438 ============ The Company has also recorded amortization for accounting purposes in excess of capital cost allowance for tax purposes in the amount of $218,294 (1998 - $137,657). The Company estimates that non-refundable investment tax credits amounting to approximately $7,848 arising from the purchase of research and development assets are available for the reduction of income taxes payable in future years. F-112 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) The potential benefits relating to the available losses, additional capital cost allowances, and investment tax credits have not been recorded in the financial statements. Losses in the amount of approximately $558,000 (1998 - $73,000) have been utilized during the year to offset the tax provision that would be otherwise payable. 10. NET CHANGE IN NON-CASH WORKING CAPITAL
1998 1999 ----------- ------------- (Increase) decrease in-- Trade accounts receivable............................................. $ 147,918 $ (391,488) Other accounts receivable............................................. (9,235) (55,170) Prepaid expenses...................................................... (14,105) (36,956) Increase (decrease) in--.................................................... Accounts payable and accrued liabilities.............................. (73,918) 59,211 Deferred revenue...................................................... 88,291 408,924 ----------- ------------- $ 138,951 $ (15,479) =========== =============
11. CONTINGENCIES AND COMMITMENTS a) Under the terms of various leases for equipment and premises, the Company is committed to the following lease payments: $ ---------- Year ended April 30, 2000......................................... 132,840 2001......................................... 102,331 2002......................................... 47,634 2003......................................... 2,288 b) Contingency The Company, along with CarsDirect.com, Inc. ("CarsDirect.com"), was named in an action for patent infringement on October 22, 1999. The complaint alleges that CarsDirect.com and the Company have infringed, and are infringing, upon another company's patent. Specifically, the claim alleges that the method which defendants use to configure consumers' vehicles and vehicle options infringes upon their patent. The claimant seeks damages, preliminary and permanent injunctive relief, and attorney's fees and costs. CarsDirect.com and the Company will defend the lawsuit on two grounds: that the claimant's patent is invalid, and, in the alternative, the defendants have not infringed the patent. CarsDirect.com and the Company do not believe that this lawsuit will have a material averse effect on their respective companies and intend to vigorously defend themselves. 12. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. F-113 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 13. SEGMENTED INFORMATION The Company operates primarily in one industry segment, data collection and licensing. GEOGRAPHIC INFORMATION
1998 1999 -------------- ------------- REVENUES Canada................................................................ $ 818,434 $ 1,153,619 Europe................................................................ 38,067 223,281 United States......................................................... 1,046,834 2,344,451 ----------------------------- $ 1,903,335 $ 3,721,351 ============== =============
The Company derives revenues from a number of customers. One customer represents approximately $743,000 for 1999. Amounts receivable from this customer were approximately $191,000 at April 30, 1999. Amounts receivable from two different customers were approximately $40,000 and $147,000 at April 30, 1998 and April 30, 1999, respectively. 14. SUBSEQUENT EVENT Subsequent to year-end, the shareholders approved a reorganization of the Company's capitalization as follows: i) The $100,000 note payable as set out in note 4 above was converted to the following: o 45,000 Class "A" special shares with stated value of $45,000 o 90 common shares o Note payable to shareholder of $55,000 ii) One of the shareholders acquired all of the common shares from the remaining shareholders. iii) The Company redeemed 100% of its Class "A" shares, for consideration of $474,000 in the form of a new promissory note payable to its shareholder. iv) Following completion of the above transactions, the Company cancelled all remaining options to acquire shares and to convert debt to shares so that no options remain outstanding. Subsequent to the year-end the Company was amalgamated with its parent and subsidiary companies and continued as Autodata Solutions Company. Subsequent to the year-end the Company repaid its notes payable to related parties at their face value with funds received from the ultimate parent Company. 15. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The following adjustments would be required in order to present these financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). ACCOUNTING FOR INCOME TAXES UNDER U.S. GAAP For U.S. GAAP purposes, the benefits of the losses for income tax purposes and excess of amortization of capital assets over capital cost allowance must be recognized in the F-114 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) financial statements with an appropriate valuation allowance established for the portion of the benefits not likely to be utilized in the foreseeable future. Accordingly, under U.S. GAAP, the tax benefit of these losses and excess amortization of capital assets over capital cost allowance would be:
1998 1999 ----------- ------------ Tax benefit of losses................................................................ $ 567,000 $ 317,600 Amortization in excess of capital cost allowance..................................... 61,450 97,500 ----------- ------------ 628,450 415,100 Valuation allowance.................................................................. (628,450) -- ----------- ------------ Net tax benefit of losses and amortization in excess of capital cost allowance....... $ -- $ 415,100 =========== ============
A valuation allowance of 100% of the potential benefit of the losses and amortization of capital assets in excess of capital cost allowance was established in 1998 as at the year end 1998 it was not likely that the Company would generate sufficient income in the future years before the losses would expire and the Company had only generated marginal income before tax in each of the years 1997 and 1998. In 1999, the Company generated increased pre-tax income from operations; the Company had generated increasing pre-tax profit in each of the last three years and the anticipated income in subsequent years was estimated to be sufficient to utilize the losses before their expiry dates in the carryforward periods. Accordingly, no valuation allowance was deemed necessary at April 30, 1999. ACCOUNTING FOR DEFERRED CHARGES Under U.S. GAAP, items recorded as deferred charges under Canadian GAAP, such as development costs and training costs. are expensed as incurred. Deferred charges on the Canadian GAAP balance sheet in 1999 include costs related to the development of new products for the Company and internally developed software. The costs in 1998 represent training costs relating to the proprietary processes of the Company. Accordingly, under U.S. GAAP, items recorded as deferred charges relating to product development and training of $98,158 in 1998, and $73,040 in 1999, would have been expensed, resulting in a reversal of these expenses in the subsequent year for U.S. GAAP purposes when the expense was recognized under Canadian GAAP. Costs of $34,000 relating to internally developed software would have been capitalized at April 30, 1999, to be amortized over the period of use of the software. ACCOUNTING FOR PREPAID LEGAL COSTS Under U.S. GAAP, costs relating to legal fees paid for assessment of contracts relating to the regular business activities of the Company would be expensed as incurred. Prepaid expenses at April 30, 1998 and 1999 respectively, include legal costs of $6,344 and $19,679. Accordingly, under U.S. GAAP, these prepaid legal fees would have been expensed in the year incurred resulting in a reversal of these expenses in the subsequent year for U.S. GAAP purposes when the expense was recognized under Canadian GAAP. INTEREST WAIVED ON NOTES PAYABLE Under U.S. GAAP, interest on notes payable that is waived by the holder, who is a shareholder, is considered to be a capital contribution and recorded as an increase in contributed surplus. During the years 1995 to 1999, the shareholders waived all interest owing on the note payable (see note 4). The interest expense that was waived amounted to $43,000 (1995), $51,700 (1996), $46,600 (1997), $47,400 (1998), and $51,600 (1999). F-115 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) Accordingly, under U.S. GAAP, interest expense of $47,400 and $51,600 would have been recorded for the years 1998 and 1999, respectively. A corresponding increase in contributed surplus would have been recorded in each year. Additionally, contributed surplus would have been increased in prior years by $141,300 with a corresponding interest expense which would have increased the deficit balance at April 30, 1997 by $141,300. MANAGEMENT FEES Under U.S. GAAP, management fees that have been waived (see note 5) by shareholders would be treated as contributed surplus. For the years 1997, 1998, and 1999, the Company generated pre-tax income and, therefore, certain shareholders were entitled to receive management fees, which were waived (see note 5). Management fees waived amounted to $4,350 (1997), $9,433 (1998) and $72,542 (1999). Accordingly, under U.S. GAAP, management fees expense would have been $9,433 (1998) and $72,542 (1999) with a corresponding increase in contributed surplus. In addition, the management fee waived in 1997 would have increased contributed surplus and the deficit at April 30, 1997 by $4,350. ACCOUNTING FOR CONVERTIBLE NOTES PAYABLE Under U.S. GAAP, convertible debt with a non-detachable conversion feature that is considered, at the date of issue, to be a beneficial conversion feature requires financial statement recognition of the intrinsic value of such feature. All of the Company's notes payable, excluding the note payable of $136,750, were issued as convertible debt with a beneficial conversion feature in a prior year. The conversion feature for four of the notes payable totalling $535,000 allows for the debt holder to convert the debt into equity of the Company at the rate of 500 Class `A' special shares plus 1 common share for $500 of debt, or 1,070 common shares. The remaining convertible debt of $29,004 is convertible into $29,000 of Class `A' Special shares and 372 common shares. The value of the common shares, corresponding to the beneficial conversion feature amounts to $124,004 based on the fair value of the shares at the time the convertible debt was issued. As a result, under U.S. GAAP, the impact of the beneficial conversion feature would have resulted in the allocation of the proceeds received when the debt was issued between the debt and the beneficial conversion feature. The debt would initially have been recorded at a discounted value of $440,000 and the beneficial conversion feature would have been recorded at $124,004. As the option to convert the debt was exercisable upon issuance of the debt, U.S. GAAP would have required that the discount on the face value of the debt be recorded as interest expense upon issuance, with a corresponding increase in the face amount of the debt. CASH FLOW STATEMENTS The cash flow statements have been prepared on a basis consistent with International Accounting Standards. F-116 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) The following summarizes the Company's balance sheets and statements of operations in accordance with U.S. GAAP. BALANCE SHEETS
1998 1999 ------------- ------------- ASSETS Cash and term deposits............................................. $ 20,055 $ 287,201 Trade accounts receivable.......................................... 175,936 567,424 Other accounts receivable.......................................... 9,235 64,405 Prepaid expenses................................................... 18,473 42,094 Capital assets..................................................... 120,136 386,647 Intangible assets.................................................. -- 34,000 Deferred tax asset................................................. -- 415,100 Deferred charges................................................... -- -- ------------- ------------- $ 343,835 $ 1,796,871 ============= ============= LIABILITIES Accounts payable and accrued liabilities........................... $ 236,412 $ 295,623 Deferred revenue................................................... 500,590 909,514 Notes payable to related parties................................... 700,754 700,754 Redeemable special shares.......................................... 429,000 429,000 ------------- ------------- 1,866,756 2,334,891 ------------- ------------- SHAREHOLDERS' DEFICIT Capital stock...................................................... 90,717 90,717 Contributed surplus................................................ 348,830 472,972 Beneficial conversion feature...................................... 124,004 124,004 Deficit............................................................ (2,086,472) (1,225,713) ------------- ------------- (1,522,921) (538,020) ------------- ------------- $ 343,835 $ 1,796,871 ============= =============
STATEMENTS OF OPERATIONS
1998 1999 ------------- ------------- Net sales revenue......................................................... $ 1,903,335 $ 3,721,351 ------------- ------------- Cost of sales materials................................................... 112,010 257,519 Selling, general and administrative expenses.............................. 1,824,128 2,960,138 Interest expense.......................................................... 55,967 58,035 ------------- ------------- 1,992,105 3,275,692 ------------- ------------- (Loss) earnings before taxes.............................................. (88,770) 445,659 Recovery of income taxes.................................................. -- 415,100 ------------- ------------- Net (loss) earnings for the year.......................................... $ (88,770) $ 860,759 ============= =============
F-117 AUTODATA MARKETING SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 1998 AND 1999--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) RECONCILIATION OF SHAREHOLDERS' DEFICIT
Opening shareholders' deficit under Canadian GAAP and U.S. GAAP........... $ (1,490,984) Adjustments 1998: Net loss for the year.................................................. (88,770) Increase in contributed surplus Interest waived on notes payable to related parties.................. 47,400 Management fees waived............................................... 9,433 -------------- Shareholders' deficit as at April 30, 1998................................ (1,522,921) Adustments 1999: Net earnings for the year.............................................. 860,759 Increase in contributed surplus Interest waived on notes payable to related parties.................. 51,600 Management fees waived............................................... 72,542 -------------- Shareholders' deficit as at April 30, 1999................................ $ (538,020) ==============
F-118 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of PointCast Incorporated: In our opinion, the accompanying balance sheets and the related statements of operations, of shareholders' deficit and of cash flows present fairly, in all material respects, the financial position of PointCast Incorporated at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California March 26, 1999, except for Note 11 which is as of May 27, 1999 F-119 POINTCAST INCORPORATED BALANCE SHEETS
DECEMBER 31, MARCH 31, --------------------------------- 1999 1998 1997 --------------- --------------- ---------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents.............................. $ 3,883,000 $ 8,511,000 $ 7,767,000 Short-term investments................................. -- -- 12,438,000 Accounts receivable, net of allowance for doubtful accounts of $687,000 (unaudited), $957,000 and $604,000......................................... 787,000 1,516,000 4,362,000 Prepaid expenses and other current assets.............. 762,000 1,346,000 864,000 --------------- --------------- ---------------- Total current assets................................. 5,432,000 11,373,000 25,431,000 Property and equipment, net............................... 5,079,000 5,750,000 7,438,000 Investment in subsidiary.................................. -- 106,000 738,000 Notes receivable from shareholder......................... -- 2,000,000 2,000,000 Other assets.............................................. 137,000 283,000 131,000 --------------- --------------- ---------------- Total assets......................................... $ 10,648,000 $ 19,512,000 $ 35,738,000 =============== =============== ================ LIABILITIES, MANDATORILY REDEEMABLE SECURITIES AND SHAREHOLDERS' DEFICIT Current Liabilities: Notes payable and capital lease obligations, current... $ 1,367,000 $ 1,390,000 $ 1,450,000 Accounts payable....................................... 4,023,000 4,250,000 6,220,000 Accrued expenses....................................... 2,564,000 3,154,000 2,289,000 Deferred revenue....................................... 816,000 688,000 3,669,000 --------------- --------------- ---------------- Total current liabilities............................ 8,770,000 9,482,000 13,628,000 Notes payable and capital lease obligations, long-term.... 15,228,000 15,567,000 3,820,000 Other liabilities......................................... 825,000 553,000 715,000 --------------- --------------- ---------------- Total liabilities.................................... 24,823,000 25,602,000 18,163,000 --------------- --------------- ---------------- Mandatorily redeemable convertible preferred stock, no par value,19,500,000 shares designated, 17,413,316 (unaudited), 17,663,316 and 17,452,790 shares issued and outstanding........................................ 66,985,000 69,326,000 66,785,000 Mandatorily redeemable convertible preferred stock warrants......................................... 3,000,000 3,000,000 3,000,000 --------------- --------------- ---------------- 69,985,000 72,326,000 69,785,000 --------------- --------------- ---------------- Commitments and contingencies (Note 5) Shareholders' deficit: Preferred stock, 20,200,000 shares authorized, 19,500,000 shares designated as mandatorily redeemable convertible preferred stock............... -- -- -- Common stock, no par value 50,000,000 authorized; 9,313,331 (unaudited), 9,261,365 and 8,381,625 shares issued and outstanding........................ 2,725,000 4,190,000 2,310,000 Accumulated deficit.................................... (88,267,000) (79,755,000) (50,357,000) Deferred stock compensation............................ (846,000) (2,704,000) (3,963,000) Other.................................................. 2,228,000 (147,000) (200,000) --------------- --------------- ---------------- Total shareholders' deficit.......................... (84,160,000) (78,416,000) (52,210,000) --------------- --------------- ---------------- Total liabilities and shareholders' deficit........ $ 10,648,000 $ 19,512,000 $ 35,738,000 =============== =============== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-120 POINTCAST INCORPORATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------------------- -------------------------------- 1999 1998 1998 1997 --------------- --------------- --------------- --------------- (UNAUDITED) REVENUE: Advertising (includes related party revenue of $0 (unaudited), $648,000 (unaudited), $1,541,000 and $527,000; see Note 3).............................. $ 2,393,000 $ 4,742,000 $ 15,915,000 $ 15,015,000 Development, license and other fees (includes related party revenue of $40,000 (unaudited), $25,000 (unaudited), $469,000 and $457,000; see Note 3).................................. 56,000 197,000 1,157,000 2,303,000 --------------- --------------- --------------- --------------- Total revenue............................ 2,449,000 4,939,000 17,072,000 17,318,000 --------------- --------------- --------------- --------------- COST OF REVENUE: Advertising................................ 3,088,000 2,451,000 10,229,000 6,928,000 Development, license and other fees........ -- 21,000 177,000 413,000 --------------- --------------- --------------- --------------- Total cost of revenue.................... 3,088,000 2,472,000 10,406,000 7,341,000 --------------- --------------- --------------- --------------- Gross profit/(loss)........................... (639,000) 2,467,000 6,666,000 9,977,000 --------------- --------------- --------------- --------------- OPERATING EXPENSES: Sales and marketing........................ 2,487,000 4,271,000 17,178,000 20,636,000 Product development........................ 3,148,000 2,879,000 10,212,000 10,515,000 General and administrative................. 1,481,000 1,169,000 5,838,000 7,582,000 Amortization of stock-based compensation... 379,000 596,000 2,523,000 865,000 --------------- --------------- --------------- --------------- Total operating expenses................. 7,495,000 8,915,000 35,751,000 39,598,000 --------------- --------------- --------------- --------------- Loss from operations.......................... (8,134,000) (6,448,000) (29,085,000) (29,621,000) Interest and other income..................... 172,000 336,000 1,079,000 1,049,000 Interest expense.............................. (410,000) (110,000) (626,000) (277,000) Loss from investment in subsidiary............ (106,000) (173,000) (632,000) (262,000) --------------- --------------- --------------- --------------- Net loss...................................... $ (8,478,000) $ (6,395,000) $ (29,264,000) $ (29,111,000) =============== =============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-121 POINTCAST INCORPORATED STATEMENTS OF SHAREHOLDERS' DEFICIT
COMMON STOCK ------------------- ACCUMULATED DEFERRED STOCK SHARES AMOUNT DEFICIT COMPENSATION OTHER TOTAL --------- --------- ------------ --------------- ---------- ------------ BALANCE AT DECEMBER 31, 1996. 7,158,368 $ 441,000 $(21,113,000) $ -- $ -- $(20,672,000) Issuance of common stock in connection with the exercise of stock options in exchange for cash and notes receivable.......... 1,223,257 1,622,000 -- (1,018,000) (200,000) 404,000 Unearned stock compensation expense recorded in connection with Executive Agreement (Note 6)........ -- -- -- (3,563,000) (3,563,000) Stock compensation expense... -- 247,000 -- 618,000 865,000 Accretion of mandatorily redeemable convertible preferred stock redemption value.......... -- -- (133,000) -- (133,000) Net loss..................... -- -- (29,111,000) -- (29,111,000) --------- --------- ------------ --------------- ---------- ------------ BALANCE AT DECEMBER 31, 1997. 8,381,625 2,310,000 (50,357,000) (3,963,000) (200,000) (52,210,000) Issuance of common stock in connection with the exercise of stock options in exchange for cash and notes receivable.......... 1,181,759 921,000 -- (147,000) 774,000 Repurchase of unvested stock. (102,019) (105,000) -- -- (105,000) Cancellation of note receivable in exchange for repurchase of common stock.............. (200,000) (200,000) -- 200,000 -- Unearned stock compensation expense................... -- 1,264,000 -- (1,264,000) -- Stock compensation expense... -- -- -- 2,523,000 2,523,000 Accretion of mandatorily redeemable convertible preferred stock redemption value.......... -- -- (134,000) -- (134,000) Net loss..................... -- -- (29,264,000) -- (29,264,000) --------- --------- ------------ --------------- ---------- ------------ BALANCE AT DECEMBER 31, 1998. 9,261,365 4,190,000 (79,755,000) (2,704,000) (147,000) (78,416,000) Issuance of common stock in connection with the exercise of stock options in exchange for cash and note receivable (unaudited). 54,208 13,000 -- -- 13,000 Repurchase of unvested stock (unaudited)......... (2,242) -- -- -- -- Reversal of unearned stock compensation expense (unaudited)............... -- (1,478,000) -- 1,478,000 -- Unearned stock compensation expense (unaudited)....... -- -- -- -- -- Cancellation of unvested Series E mandatorily redeemable convertible preferred stock (unaudited)......... -- -- -- 2,375,000 2,375,000 Stock compensation expense (unaudited)....... -- -- -- 380,000 380,000 Accretion of mandatorily redeemable convertible preferred stock redemption value (unaudited)............... -- -- (34,000) -- (34,000) Net loss (unaudited)......... -- -- (8,478,000) -- (8,478,000) ---------- -------- ------------ --------------- ---------- ------------ BALANCE AT MARCH 31, 1999 (UNAUDITED)............... 9,313,331 $2,725,000 $(88,267,00O) $ (846,000) $2,228,000 $(84,160,000) ========= ========= ============ =============== ========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-122 POINTCAST INCORPORATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------------------- --------------------------------- 1999 1998 1998 1997 -------------- --------------- ---------------- --------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................... $ (8,478,000) $ (6,395,000) $ (29,264,000) $ (29,111,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............ 868,000 831,000 3,525,000 2,723,000 Loss from investment in subsidiary....... 106,000 173,000 632,000 262,000 Amortization of stock-based compensation. 379,000 596,000 2,523,000 865,000 Amortization of non-cash prepaid advertising expenses................... -- 100,000 400,000 2,276,000 Changes in current assets and liabilities: Accounts receivable.................... 729,000 1,155,000 2,846,000 (1,217,000) Prepaid expenses and other assets...... 727,000 (450,000) (558,000) 87,000 Accounts payable....................... (227,000) (226,000) (1,970,000) 3,135,000 Accrued expenses....................... (592,000) 698,000 865,000 1,186,000 Deferred revenue....................... 128,000 (1,458,000) (2,776,000) 2,010,000 Other liabilities...................... 276,000 (80,000) (367,000) 715,000 -------------- --------------- --------------- ---------------- Net cash used in operating activities (6,084,000) (5,056,000) (24,144,000) (17,069,000) -------------- --------------- --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments......... -- (2,511,000) (2,550,000) (21,090,000) Maturity of short-term investments......... -- 12,414,000 14,988,000 32,335,000 Investment in subsidiary................... -- -- -- (1,000,000) Purchase of property and equipment......... (197,000) (419,000) (1,837,000) (6,180,000) -------------- --------------- --------------- ---------------- Net cash (used in) provided by investing activities............... (197,000) 9,484,000 10,601,000 4,065,000 -------------- --------------- --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of issuance costs and repurchases.... 13,000 80,000 669,000 404,000 Proceeds from issuance of mandatorily redeemable convertible preferred stock, net of issuance costs.................... -- 2,000,000 1,986,000 15,791,000 Repayment of borrowings.................... (360,000) (331,000) (2,813,000) (1,669,000) Proceeds from issuance of notes payable.... -- -- 14,500,000 4,786,000 Repayment (issuance) of amounts due from shareholder.............................. 2,000,000 421,000 (55,000) (2,000,000) -------------- --------------- --------------- ---------------- Net cash provided by financing activities............... 1,653,000 2,170,000 14,287,000 17,312,000 -------------- --------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents........................... (4,628,000) 6,598,000 744,000 4,308,000 Cash and cash equivalents at beginning of year 8,511,000 7,767,000 7,767,000 3,459,000 -------------- --------------- --------------- ---------------- Cash and cash equivalents at end of year...... $ 3,883,000 $ 14,365,000 $ 8,511,000 $ 7,767,000 ============== =============== =============== ================ Supplemental cash flow information: Cash paid for interest..................... $ 56,000 $ 73,000 $ 500,000 $ 277,000 ============== =============== =============== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-123 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY PointCast Incorporated, (the "Company"), was incorporated in California in July 1992. In February 1996, the Company launched the PointCast Network offering current news and information services to viewers and corporations via the Internet and corporate intranets. The Company operates in one business segment. BASIS OF PRESENTATION The financial statements include the accounts of PointCast; its majority-owned subsidiary, PointCast Japan L.L.C. ("PointCast Japan") is not consolidated. During 1997, the Company and the minority shareholder established PointCast Japan, a joint venture to offer the Company's services in Japan. The Company contributed $1.0 million of cash and certain rights to technology and trademarks for use in Japan in consideration of its 60% ownership interest. The minority shareholder contributed $2.0 million in cash in exchange for its 40% ownership interest. No gain was recognized on the formation of the joint venture. The Company's investment in PointCast Japan is accounted for using the equity method as the provisions of the joint venture agreement provides the minority shareholder with certain participating and protective rights, which may impact the Company's ability to control the joint venture's operations. As the participating and protective rights of the minority shareholder lapse over the term of the agreement, the Company will continue to monitor this investment and the accounting method used. Under the terms of the joint venture agreement, the joint venture will pay to the minority shareholder a management fee equal to 47% of the joint venture's revenue over the two-year life of the administrative services and management agreement. For the years ended December 31, 1998 and 1997, such management fees were $400,000 and $0, respectively. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Advertising revenue is derived from the sale of advertising space on the PointCast Network. Advertising revenue is recognized in the period the advertisement is displayed, provided no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include guarantees of a minimum number of "billable deliveries," a measurement of the number of times an advertisement is downloaded to a unique user of the PointCast Network. To the extent minimum billable delivery guarantees are met, the Company recognizes revenue for the billable deliveries provided or, if an amount has been invoiced in the excess of the billable deliveries provided, the Company defers recognition of the corresponding revenue until the minimum billable delivery guarantees are satisfied. Deferred revenue primarily represents billings in excess of revenue recognized on advertising contracts. For the three months ended March 31, 1999 and 1998 and for the years ended F-124 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) December 31, 1998 and 1997, advertising revenue represented 98% (unaudited), 96% (unaudited), 93% and 87% of total revenue, respectively. Revenue from the sale of certain advertising space on the PointCast Network is shared with third parties under the terms of certain agreements. Where the Company shares collection risk and is not responsible for invoicing or collection of the receivable, the Company recognizes only its pro rata share of revenue from the contract. Development, license and other fees primarily consist of channel development fees from the Company's agreements with partners ("Industry Insider Agreements") and fees for the customization of versions of the PointCast Network Client. Fees for the development of industry specific channels and customization of the PointCast Network Client are recognized using the completed contract method. During 1997, the Company licensed software under noncancelable license agreements. Revenue from perpetual software license agreements was recognized upon shipment of the software if there were no significant post-delivery obligations, if collection was probable, and if payment was due within one year. Revenue from post-contract support services was recognized ratably over the term of the support period. The Company's PointCast Network Client is provided to users without charge and the Company does not expect revenue from the licensing of software or post-contract support to be a significant component of revenue in the future. COST OF ADVERTISING REVENUE Cost of advertising revenue is expensed as incurred and includes the costs to run the Company's Central Broadcasting Facility and the costs associated with licensed content. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid instruments with a maturity of three months or less from the purchase date to be cash equivalents. Those with original maturities greater than three months and current maturities less than twelve months from the balance sheet date are considered short-term investments, and those with maturities greater than twelve months from the balance sheet date are considered long-term investments. Short-term investments in marketable securities are classified as available-for-sale and consist primarily of high-grade commercial paper and debt instruments of U.S. Government agencies. The fair value of the investments approximates cost. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable. Substantially all of the Company's cash, cash equivalents and short-term investments are invested in high-grade commercial paper and debt instruments of U.S. Government agencies. The Company's accounts receivable have been derived primarily from revenue earned from customers located in the United States and are denominated in U.S. dollars. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. During the years ended December 31, 1998 and 1997, no single customer accounted for more than 10% of total revenues. At March 31, 1999 one customer accounts for 19% (unaudited) of total accounts receivable, while another customer accounts for 12% (unaudited) of total accounts receivable. At December 31, 1998, one customer accounts for 13% of total accounts receivable. At December 31, 1997, no single customer accounted for more than 10% of total accounts receivable. F-125 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) PRODUCT DEVELOPMENT COSTS Product development costs are expensed as incurred until achieving technological feasibility has been established. To date, the Company's software has been available for general release concurrent with the establishment of technological feasibility and, accordingly, no costs have been capitalized. PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years, or the shorter of the lease term or the estimated useful life of the respective assets, if applicable. IMPAIRMENT OF LONG-LIVED ASSETS The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. ADVERTISING EXPENSE Advertising is expensed as incurred. Advertising expense totaled $70,000 (unaudited), $476,000 (unaudited), $1,925,000 and $4,844,000 for the three months ended March 31, 1999 and 1998, and for the years ended December 31, 1998 and 1997, respectively. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123"). Under APB No. 25, compensation expense is recognized based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. The compensation expense is recognized over the option vesting period. OTHER COMPREHENSIVE INCOME (LOSS) Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income (loss) and its components in financial statements. Comprehensive income (loss) as defined, includes all changes in equity (net assets) during a period from nonowner sources. No items were included in other comprehensive income (loss) during the three months ended March 31, 1999 and 1998, and for the years ended December 31, 1998 and 1997. SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way companies report financial and descriptive information about their operating segments. The Company offers current news and F-126 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) information services to viewers and corporations via the Internet and corporate intranets and, accordingly operates in one reportable segment as defined in SFAS 131. NEW ACCOUNTING PRONOUNCEMENT In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which provides guidance on accounting for the cost of computer software developed or obtained for internal use. SOP No. 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Costs of computer software developed or obtained for internal use were not material for the three months ended March 31, 1999. 2. BALANCE SHEET COMPONENTS
DECEMBER 31, MARCH 31, ----------------------------- 1999 1998 1997 --------------- -------------- ------------- (UNAUDITED) PROPERTY AND EQUIPMENT, NET: Computer and equipment.................................... $ 9,303,000 $ 9,113,000 $ 8,314,000 Furniture and fixtures.................................... 2,529,000 2,529,000 1,549,000 Leasehold improvements.................................... 1,315,000 1,315,000 1,257,000 --------------- -------------- ------------- 13,147,000 12,957,000 11,120,000 Less: Accumulated depreciation........................... (8,068,000) (7,207,000) (3,682,000) --------------- -------------- ------------- $ 5,079,000 $ 5,750,000 $ 7,438,000 =============== ============== =============
Property and equipment included $698,000 of fixed assets under capital leases at March 31, 1999 (unaudited), December 31, 1998 and 1997, respectively. Accumulated amortization of such assets was $698,000 (unaudited), $519,000 and $286,043 at March 31, 1999, December 31, 1998 and 1997, respectively.
DECEMBER 31, MARCH 31, ----------------------------- 1999 1998 1997 ------------- -------------- -------------- (UNAUDITED) ACCRUED EXPENSES: Administrative expenses.................................. $ 728,000 $ 1,000,000 $ 750,000 Payroll and related expenses............................. 1,652,000 1,944,000 1,456,000 Other.................................................... 184,000 210,000 83,000 ------------- -------------- -------------- $ 2,564,000 $ 3,154,000 $ 2,289,000 ============= ============== ==============
3. RELATED PARTY TRANSACTIONS INDUSTRY INSIDER AGREEMENTS During 1998 and 1997, the Company entered into Industry Insider Agreements with certain shareholders of the Company's outstanding common stock at December 31, 1998. Management believes that the terms of these agreements were similar to those terms given to unaffiliated Industry Insider partners. For the three months ended March 31, 1999 and 1998 and during the years ended December 31, 1998 and 1997, the Company recognized $40,000 (unaudited), $25,000 (unaudited), $469,000 and $457,000, respectively, of revenue from Industry Insider Agreements with related parties. F-127 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ADVERTISING REVENUE For the three months ended March 31, 1999 and 1998 and for the years ended December 31, 1998 and 1997, the Company recognized advertising revenue from certain shareholders in the amount of $0 (unaudited), $648,000 (unaudited), $1,541,000 and $527,000, respectively, in exchange for cash. The Company believes that the terms of advertising contracts with related parties were similar to those given on orders of similar size to unaffiliated customers. MANAGEMENT FEES Under the terms of the joint venture agreement, the joint venture will pay to the Company a management fee; accordingly for the three months ended March 31, 1999 and 1998 and for the years ended December 31, 1998 and 1997, the Company recorded management fees totaling $125,000 (unaudited), $125,000 (unaudited), $500,000 and $125,000, respectively. NOTE RECEIVABLE DUE FROM SHAREHOLDER Under the terms of a 1997 employment agreement with the Company's Chief Executive Officer (the "CEO Agreement"), the Company in October 1997 entered into two full recourse notes receivable amounting to $2,000,000. The notes issued are further secured by approximately 375,000 shares of Series E mandatorily redeemable convertible preferred stock, bear interest at the rate of 6.01% compounded semi-annually and are due no later than 2002. The notes were classified as Notes receivable from shareholder in the accompanying balance sheet at December 31, 1998 and December 31, 1997. The note was repaid in full in March 1999. In 1997, a loan for $421,000 was made in connection with the purchase of Series E mandatorily redeemable convertible preferred stock by the Chief Executive Officer. The loan was recorded as a reduction of the carrying value of mandatorily redeemable convertible preferred stock at December 31, 1997 and was repaid in full in March 1998. In 1998, a further loan for $477,000, which bore interest at a rate of 4.21% compounded semi-annually was made to the Chief Executive Officer and was repaid in full in March 1999. 4. BORROWINGS At December 31, 1998, the Company had $14,500,000 payable pursuant to various notes payable due on March 31, 2000. The various notes payable bear interest at a variable rate based on a 90-days libor rate plus a 4.5% margin which increases by 0.5% on selected 90-days periods (9.75%-9.88% at December 31, 1998). The notes are secured by a general collateral on all of the assets of the Company. In addition, the Company will issue warrants to the lenders if the notes payable remain outstanding on selected future dates (see Note 8). At December 31, 1997, the Company had $1,439,000 payable under a line of credit with a financial institution. The line of credit was repaid in 1998. At March 31, 1999, December 31, 1998 and 1997, the Company had $1,780,000 (unaudited), $2,053,000 and $3,079,000, respectively, of borrowings outstanding under a note payable due to an insurance company. The note payable bears interest at an annual rate of 9.7% and is secured by the Company's property and equipment. The Company is required to make monthly payments of principal and interest of $107,000 through October 2000. At December 31, 1996, the Company had loans outstanding totaling $1,088,000 payable to a bank. The loans were repaid during 1997. F-128 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) At March 31, 1999, December 31, 1998 and 1997, the Company had $316,000 (unaudited), $404,000 and $752,000, respectively, for equipment leased with various expiration dates through 2001. The capital lease agreements charge interest at rates ranging up to eleven percent per annum. As of December 31, 1998, the maturities under the note payable and capital leases are as follows: YEARS ENDING DECEMBER 31, ---------------------------- 1999.................................... $ 1,390,000 2000.................................... 15,531,000 2001.................................... 36,000 ---------------- 16,957,000 Less: Current portion.................. 1,390,000 ---------------- Long-term portion....................... $ 15,567,000 ================ 5. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office space and equipment under noncancelable operating leases with various expiration dates through 2002. Rent expense for the three months ended March 31, 1999 and 1998, and for the years ended December 31, 1998 and 1997 was $420,000 (unaudited), $394,000 (unaudited), $2,136,000 and $1,751,000, respectively. The terms of a facility lease and certain equipment leases provide for rental payments that increase over the term of the lease. The Company recognizes the expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. Future minimum lease payments under noncancelable operating leases and future minimum sub-lease rental income under noncancelable operating leases are as follows: OPERATING SUB-LEASE YEARS ENDING DECEMBER 31, LEASES INCOME --------------------------- --------------- -------------- 1999................................. $ 3,028,000 $ (898,000) 2000................................. 2,546,000 (610,000) 2001................................. 2,577,000 -- 2002................................. 2,701,000 -- Thereafter........................... -- -- --------------- -------------- Total................................ $ 10,852,000 $ (1,508,000) =============== ============== LITIGATION From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims against the Company of alleged infringement of patents, trademarks and other intellectual property rights and challenges to the validity or enforceability of certain intellectual property rights held by the Company. The Company has received inquiries from patent holders alleging that elements of The PointCast Network infringe their rights and offering to license such patents to the Company. Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are evolving. Accordingly, the ultimate outcome of intellectual property claims against the Company and the ability of the Company to defend against such claims are difficult to predict. However, the Company is not currently aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse impact on the Company's financial condition, results of operations or cash flows. F-129 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK Mandatorily redeemable convertible preferred stock at March 31, 1999 (unaudited) consists of the following series:
SHARES ----------------------------------- LIQUIDATION SERIES AUTHORIZED OUTSTANDING AMOUNT - ------------------------------------------ ----------------- ---------------- ---------------- A......................................... 6,500,000 6,421,385 $ 4,025,000 B......................................... 4,000,000 3,674,446 5,170,000 C......................................... 1,500,000 1,456,554 2,913,000 D......................................... 5,300,000 3,810,527 36,200,000 E......................................... 2,900,000 2,050,404 19,479,000 ----------------- ---------------- ---------------- 20,200,000 17,413,316 $ 67,787,000 ================= ================ ================
A summary of mandatorily redeemable convertible preferred stock outstanding as of March 31, 1999, December 31, 1998 and 1997 and changes during the periods then ended is presented below:
CANCELLATION (SHARES) OUTSTANDING OUTSTANDING OUTSTANDING DURING THREE OUTSTANDING AS OF AS OF AS OF MONTHS ENED AS OF DECEMBER 31, ISSUANCES IN DECEMBER 31, ISSUANCES IN DECEMBER 31, MARCH 31, MARCH 31, SERIES 1996 1997 1997 1998 1998 1999 1999 ------------- ------------- ------------- ------------- -------------- -------------- ------------- A......... 6,421,385 -- 6,421,385 -- 6,421,385 -- 6,421,385 B......... 3,674,446 -- 3,674,446 -- 3,674,446 -- 3,674,446 C......... 1,456,554 -- 1,456,554 -- 1,456,554 -- 1,456,554 D......... 3,810,527 -- 3,810,527 -- 3,810,527 -- 3,810,527 E......... -- 2,089,878 2,089,878 210,526 2,300,404 (250,000) 2,050,404 ------------- ------------- ------------- ------------- -------------- -------------- ------------- 15,362,912 2,089,878 17,452,790 210,526 17,663,316 (250,000) 17,413,316 ============= ============= ============= ============= ============== ============== =============
ACTIVITY DURING THREE MONTHS (DOLLARS) AS OF AS OF AS OF ENDED DECEMBER 31, ACTIVITY IN DECEMBER 31, ACTIVITY IN DECEMBER 31, MARCH 31, AS OF MARCH SERIES 1996 1997 1997 1998 1998 1999 1999 ------------- ------------- ------------- ------------- ------------- -------------- ------------ A......... $ 3,999,000 $ -- $ 3,999,000 $ -- $ 3,999,000 $ -- $ 3,999,000 B......... 5,153,000 -- 5,153,000 -- 5,153,000 -- 5,153,000 C......... 2,912,000 -- 2,912,000 -- 2,912,000 -- 2,912,000 D......... 35,234,000 133,000(1) 35,367,000 134,000(1) 35,501,000 34,000(1) 35,535,000 E......... -- 19,354,000(2) 19,354,000 2,407,000(3) 21,761,000 (2,375,000)(4) 19,386,000 ------------- ------------- ------------- ------------- ------------- -------------- ------------ $ 47,298,000 $ 19,487,000 $ 66,785,000 $ 2,541,000 $ 69,326,000 $ (2,341,000) $66,985,000 ============= ============= ============= ============= ============= ============== ============
(1) accretion of difference between carrying value and redemption value (as discussed herein) (2) issuance of shares, net of loan made to Chief Executive Officer for purchase of a portion of the shares issued (see Note 3) (3) issuance of shares and repayment of loan made to Chief Executive Officer (see Note 3) (4) cancellation of unvested shares F-130 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The holders of mandatorily redeemable convertible preferred stock have various rights and preferences as follows: VOTING Each share of mandatorily redeemable convertible preferred stock has voting rights equal to an equivalent number of shares of common stock into which it is convertible and votes together as one class with the common stock. As long as any of the shares of mandatorily redeemable convertible preferred stock remain outstanding, the Company must obtain approval from the holders of at least 55% of the shares of mandatorily redeemable convertible preferred stock in order to alter the articles of incorporation as they relate to mandatorily redeemable convertible preferred stock, change the authorized number of shares of mandatorily redeemable convertible preferred stock, authorize or issue other equity having a preference over the preferred stock with respect to voting dividends, redemption, or upon liquidation, repurchase any shares of common stock other than shares subject to the right of repurchase by the Company, pay any dividends on common stock, or change the authorized number of directors. DIVIDENDS Holders of Series A, B, C, D and E mandatorily redeemable convertible preferred stock are entitled to receive noncumulative dividends at the rate of $0.062, $0.14, $0.20, $0.95 and $0.95 per share, respectively, when and if declared by the Board of Directors. The holders of the Series A, B, C, D and E mandatorily redeemable convertible preferred stock will also be entitled to participate in dividends on common stock, when and if declared by the Board of Directors, based on the number of shares of common stock held on a converted basis. No dividends on mandatorily redeemable convertible preferred stock or common stock have been declared by the Board from inception through March 31, 1999. LIQUIDATION In the event of any acquisition, liquidation, dissolution or winding up of the Company, or in the event of a sale of greater than 50% of the assets of the Company, the holders of Series A, B, C, D, and E mandatorily redeemable convertible preferred stock are entitled to receive an amount of $0.6268, $1.4069, $2.00, $9.50 and $9.50 per share, respectively, plus any declared but unpaid dividends prior to and in preference to any distribution to the holders of common stock. After payment has been made to the holders of the mandatorily redeemable convertible preferred stock of the full liquidation amount, any remaining assets of the Company would be distributed with equal priority and pro rata among the holders of common stock. CONVERSION Each share of mandatorily redeemable convertible preferred stock is convertible into common stock on a one-for-one basis at the option of the holder subject to adjustment for dilution. Each share of mandatorily redeemable convertible preferred stock automatically converts into common stock at the then prevailing conversion ratio upon the closing of a public offering of common stock with gross proceeds in excess of $20,000,000. REDEMPTION The holders may request that the shares of mandatorily redeemable convertible preferred stock be redeemed at any time after June 3, 2001. Shares of mandatorily redeemable convertible preferred stock may be redeemed at a price equal to the original issue price, subject to adjustment for dilution and declared but unpaid dividends. The difference between the carrying value of shares of mandatorily redeemable convertible preferred stock and their redemption value is being accreted through June 3, F-131 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2001. Accretion is charged directly to accumulated deficit and totaled $34,000 (unaudited), $134,000 and $133,000 for the three months ended March 31, 1999 and for the years ended December 31, 1998 and 1997, respectively. OTHER In connection with a lease agreement, the Company issued warrants to purchase 39,419 shares of Series B mandatorily redeemable convertible preferred stock during 1995. The warrants are exercisable at a price of $1.4069 per share and expire on July 31, 2002. Management determined that the value of the warrants at the date of grant was insignificant. In connection with an advertising agreement under the terms of which the Company received certain advertising space during December 1996, the Company issued immediately exercisable warrants to purchase 1,052,632 shares of the Company's Series D mandatorily redeemable convertible preferred stock at a per share price of $9.50 of which warrants to purchase 526,316 shares expire in 1999 and warrants to purchase 526,316 shares expire in 2001, subject to provisions for acceleration of the expiration date due to an initial public offering or the acquisition of the Company. The Company calculated the fair value of the warrants, which approximated the value of advertising received at the date of grant, as $3,000,000 (using an established option pricing model) which was recorded as prepaid advertising. The Company is recognizing the advertising expense over the greater of straight-line over the advertising period or as such advertising is used by the Company. The Company has recorded advertising expense of $400,000 and $2,276,000 for the years ended December 31, 1998 and 1997, respectively, related to the advertising agreement which is included in sales and marketing in the accompanying statement of operations. Under the terms of the CEO Agreement, the Chief Executive Officer received 375,000 shares of the Company's Series E mandatorily redeemable convertible preferred stock at the date of hiring. The shares were subject to repurchase by the Company in the event of termination for any reason; provided, however, that such repurchase right lapsed as to 93,750 shares on November 1, 1998, and lapses as to 7,812 shares on the 1st day of each month thereafter. The Company recorded deferred stock compensation of $3,563,000 in connection with the Executive Agreement based on the price of preferred shares sold to unaffiliated investors in contemporaneous transactions. The deferred stock compensation is being amortized over the vesting period of the shares. Deferred compensation expense of $379,000 (unaudited), $463,000 (unaudited), $1,704,000 and $309,000 was amortized during the three months ended March 31, 1999 and 1998 and for the years ended December 31, 1998 and 1997, respectively. Additionally, the Chief Executive Officer purchased 125,000 shares of the Company's Series E mandatorily redeemable convertible preferred stock at $9.50 per share under the Executive Agreement. The purchase price of the shares was similar to that paid by unaffiliated investors in contemporaneous transactions. In conjunction with the resignation of the Chief Executive Officer in March 1999, the Company entered into a Cessation of Employment Agreement (the "Agreement") with the Chief Executive Officer. At the date of his resignation, 125,000 shares of the Series E mandatorily redeemable convertible preferred stock that had been granted to the Chief Executive Officer were fully vested. 7. COMMON STOCK A portion of the outstanding shares are subject to a right of repurchase by the Company at the original price paid by the purchaser subject to vesting, which is generally over a four year period from the earlier of grant date or employee hire date, as applicable. At December 31, 1998 and 1997, there were 148,087 and 448,746, respectively, shares subject to repurchase. F-132 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) As of March 31, 1999, the Company has reserved shares of common stock as follows:
Conversion of mandatorily redeemable convertible preferred stock (unaudited).............................................................. 17,413,000 Exercise of common stock and mandatorily redeemable convertible preferred stock warrants (unaudited)..................................... 1,405,000 Options under stock option plan (Note 8) (unaudited)....................... 10,334,000 --------------- Total shares reserved...................................................... 29,152,000 ===============
8. COMMON STOCK OPTIONS AND WARRANTS In 1994, the Company adopted the 1994 Stock Option Plan (the "Plan"). The Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may be granted only to Company employees (including officers and directors who are also employees). Nonqualified stock options ("NSO") may be granted to Company employees and consultants. Options under the Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant, respectively. Options are exercisable immediately and if exercised prior to vesting subject to a repurchase option which expires over the four year vesting period. To date, options granted generally vest over four years. In connection with certain option grants and stock issues during the years ended December 31, 1998 and 1997, the Company recognized unearned compensation totaling $1,264,000 and $1,018,000, respectively, which is being amortized over the four year vesting periods of the related options. Amortization expense recognized during the years ended December 31, 1998 and 1997 totaled approximately $819,000 and $309,000, respectively. In 1997, approximately, 200,000 of such options were exercised by the holder in exchange for a full recourse note receivable. The note bears interest at an annual rate of 6.01%, is due on October 21, 2001 and was recorded in Other Shareholders' Equity in the accompanying balance sheet at December 31, 1997. Amounts outstanding under the note totaled $200,000 at December 31, 1997. The loan was canceled in 1998 in exchange for the repurchase of the 200,000 shares by the Company at an amount equal to the original exercise price. In 1998, a further 220,000 of such options were exercised by another holder in exchange for a full recourse note receivable. This note bears interest at an annual rate of 6.01%, is due on April 15, 2001 or ninety days following termination and was recorded in Other Shareholders' Equity in the accompanying balance sheet at December 31, 1998. During the year, the Company terminated the services of this individual, however this loan remained outstanding at year end. No allowance for this loan was made at December 31, 1998 as management believes the amount owed is collectible. During 1997, the Company accelerated the vesting of common stock options for certain executives in connection with severance agreements and recorded compensation expense of $247,000. Such compensation expense represents the difference between the exercise price and the then-deemed fair value of the shares on the date that vesting was accelerated. In conjunction with the $14,500,000 of note payable entered into in 1998, the Company will issue warrants to purchase common stock to the holders of these notes if the amounts remain outstanding on the following selected dates. Provided the notes remain outstanding after March 31, 1999, the Company F-133 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) will issue 1,799,775 warrants and an additional 359,955 warrants in each of the five subsequent months. The warrants which bear an exercise price of $0.01 expire on March 31, 2004 if not exercised. During 1997, the Company issued warrants to purchase 312,500 shares of the Company's common stock to partnerships associated with two directors. The warrants have an exercise price of $5.00, which the Company believes represents the fair value of the Company's common stock at the date of grant, and expire in 2002. The warrants were issued in exchange for services by a director as an acting Chief Executive Officer while the Company completed its search for a Chief Executive Officer. The director received no cash compensation for his services. Management determined that the value of the warrants at the date of grant was not material. A summary of options outstanding under the Plan and certain other options noted below outstanding as of March 31, 1999, December 31, 1998 and 1997 and changes during the periods then ended is presented below:
OPTIONS OUTSTANDING ------------------------------------------------- DECEMBER 31, MARCH 31, -------------------------------- 1999 1998 1997 --------------- --------------- --------------- (UNAUDITED) Outstanding at beginning of year.......................... 5,831,000 7,245,000 4,099,000 Granted................................................ -- 2,287,000 4,919,000 Exercised.............................................. (54,000) (1,182,000) (1,223,000) Canceled............................................... (2,108,000) (2,519,000) (550,000) --------------- --------------- --------------- Outstanding at end of year................................ 3,669,000 5,831,000 7,245,000 Weighted average fair value of options granted during the year........................................ $ -- $ 4.25 $ 3.49
At March 31, 1999, 6,665,000 options were available for grant under the Plan.
OPTIONS VESTED AT OPTIONS OUTSTANDING AT MARCH 31, 1999 (UNAUDITED) MARCH 31, 1999 (UNAUDITED) ----------------------------------------------------------- ----------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE - ------------------ ---------------- --------------------- ----------------- ---------------- ----------------- $0.00 - 0.54 386,000 1.2 $0.33 262,000 $0.30 0.55 - 1.09 392,000 0.5 1.00 82,000 1.00 1.10 - 3.29 1,007,000 3.3 2.77 234,000 2.43 3.30 - 5.49 1,884,000 2.1 4.54 1,010,000 4.12 ---------------- ---------------- 3,669,000 1,588,000 ================ ================
FAIR VALUE DISCLOSURES Had the Company's stock based compensation cost been determined based on the minimum value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1997 ------------------ ------------------ Net loss: As reported................... $29,264,000 $29,111,000 ================== ================== Pro forma..................... $30,405,000 $30,253,000 ================== ================== F-134 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Company calculated the minimum value of each option grant on the date of grant using the minimum value method with the following assumptions: no dividend yield, weighted average expected option term of 2.75 years; risk free interest rate of 4.99% and 5.51% for the years ended December 31, 1998 and 1997, respectively. 9. EMPLOYEE BENEFIT PLANS In 1995, the Company adopted a 401(k) Plan that is intended to qualify under section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all of the Company's employees. Participants may elect to contribute a percentage of their compensation to this plan, up to the statutory maximum amount. Through March 31, 1999, the Company has made no discretionary contributions to the 401(k) Plan. 10. INCOME TAXES No provision for income taxes was recorded from inception through December 31, 1998 as the Company incurred net operating losses during the period. The components of the net deferred tax asset as of December 31, 1998 and 1997 were as follows: DECEMBER 31, --------------------------------- 1998 1997 --------------- --------------- Net operating loss carryforwards........... $26,600,000 $16,020,000 Cumulative temporary differences........... 1,375,000 1,305,000 Tax credit carryforwards................... 1,829,000 1,059,000 --------------- --------------- 29,804,000 18,384,000 Less: Valuation allowance.................. (29,804,000) (18,384,000) --------------- --------------- Net deferred tax asset..................... $ -- $ -- =============== =============== Management believes that, based on a number of factors including the absence of taxable income to date, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. At December 31, 1998, the Company had approximately $68,000,000 of federal and $31,000,000 of California net operating loss carryforwards available to offset future taxable income. The federal loss carryforwards expire through the year 2018 and the California loss carryforwards expire at various dates from 1999 through the year 2002. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. During 1997, in connection with the sale of preferred stock, the Company triggered a limitation, and as a result at December 31, 1998 was limited to utilizing approximately $11,000,000 of federal net operating losses annually to offset taxable income. 11. SUBSEQUENT EVENTS On April 19, 1999, the Company sold a 41% interest in its PointCast Japan L.L.C. joint venture ("joint venture") to the minority shareholder in the joint venture, for approximately $2.25 million in cash. The Company recorded a gain of $2.25 million in income as the carrying amount of the investment was $0 at the time of the sale. The Company's remaining interest in the joint venture is 19% and will continue to account for the investment under the equity method as it continues to have the ability to exercise significant influence over the joint venture's operating and financial policies. F-135 POINTCAST INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) On May 10, 1999, the $14.5 million notes payable due on March 31, 2000 was forgiven by the Company's creditors pursuant to the Settlement Agreement and Full and Final Release. In addition to the forgiveness of the loan and accrued interest, the creditors also made a cash payment of $4.5 million to the Company; the Company's obligations to issue warrants, (see Note 8) were also discharged by the creditors. An extraordinary gain of approximately $19.7 million was recorded in income in May 1999 as a result of this transaction. The creditors terminated all financial interests in the Company and there are no continuing obligations by the Company to the creditors. In May 1999, the Company cancelled the note receivable issued in connection with the 220,000 stock option exercise (see Note 8) and the underlying shares were forfeited by the shareholder. On May 27, 1999, Launchpad Technologies, Inc. ("Launchpad"), a majority owned subsidiary of idealab! Holdings L.L.C., which is a wholly owned subsidiary of Bill Gross' idealab!, completed its acquisition of PointCast Incorporated ("PointCast") pursuant to an agreement and plan of reorganization dated May 10, 1999; Launchpad was subsequently renamed EntryPoint. As consideration for the purchase, Entrypoint issued to the stockholders of PointCast 4,316,547 shares of EntryPoint Preferred Series E stock and paid them $1 million in cash The Preferred Series E stock was valued at approximately $6 million based on the deemed fair value of the shares issued on the date the transaction was announced. The total purchase price was approximately $7 million. F-136 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of CarsDirect.com, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Potamkin Auto Center, Ltd. (the "Company") at December 31, 1998 and September 30, 1999, and the results of its operations and its cash flows for the years ended December 31, 1997 and 1998 and the nine month period ended September 30, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP New York, New York December 22, 1999 F-137 POTAMKIN AUTO CENTER, LTD. BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1998 1999 ----------------- ------------------ ASSETS Current assets Cash................................................................ $ 116,614 $ 121,312 Accounts receivable, net............................................ 3,939,367 3,387,117 Inventories......................................................... 10,391,356 7,949,884 Due from related parties............................................ 113,922 33,152 Prepaid expenses and other current assets........................... 380,900 358,332 ----------------- ------------------ TOTAL CURRENT ASSETS.............................................. 14,942,159 11,849,797 Property and equipment, net............................................ 7,009,853 6,915,743 Other assets........................................................... 113,808 113,808 ----------------- ------------------ TOTAL ASSETS...................................................... $ 22,065,820 $ 18,879,348 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities Book overdrafts..................................................... $ 2,169,175 $ 427,924 Floor plan notes payable............................................ 10,027,706 8,377,902 Accounts payable.................................................... 891,919 1,143,372 Accrued expenses and other liabilities.............................. 1,387,558 1,528,665 Current maturities of long-term debt................................ 181,448 192,296 Due to related parties.............................................. 20,308 22,871 Note payable to shareholders........................................ -- 500,000 Deferred revenue.................................................... 1,594,409 1,625,814 ----------------- ------------------ TOTAL CURRENT LIABILITIES......................................... 16,272,523 13,818,844 ----------------- ------------------ Long-term debt, excluding current maturities........................... 5,441,474 5,301,131 ----------------- ------------------ TOTAL LIABILITIES................................................. 21,713,997 19,119,975 ================= ================== Stockholders' equity (deficit) Common stock, no par value, 100 shares authorized; 70 issued and outstanding....................................................... -- -- Additional paid-in capital.......................................... 1,900,000 1,900,000 Accumulated deficit................................................. (1,548,177) (2,140,627) ----------------- ------------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT).............................. 351,823 (240,627) ----------------- ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).............. $ 22,065,820 $ 18,879,348 ================= ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-138 POTAMKIN AUTO CENTER, LTD. STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ------------------------- 1997 1998 1998 1999 ------------ ------------ ----------- ------------ (UNAUDITED) Revenues Vehicle sales....................... $152,617,145 $130,635,912 $94,644,249 $102,203,465 Other revenues, net................. 3,199,410 3,812,088 2,874,659 2,923,729 ------------ ------------ ----------- ------------ TOTAL REVENUES.................... 155,816,555 134,448,000 97,518,908 105,127,194 Cost of sales, including floor plan note interest of approximately $820,000, $791,000, $611,000 (unaudited) and $441,000, respectively........................ 140,623,616 120,925,182 87,321,179 95,120,180 ------------ ------------ ----------- ------------ GROSS PROFIT...................... 15,192,939 13,522,818 10,197,729 10,007,014 Selling, general and administrative.... 13,459,175 12,806,989 9,647,558 10,033,848 ------------ ------------ ----------- ------------ INCOME (LOSS) FROM OPERATIONS..... 1,733,764 715,829 550,171 (26,834) Interest expense....................... 571,692 467,801 355,080 327,511 ------------ ------------ ----------- ------------ Income (loss) before income taxes. 1,162,072 248,028 195,091 (354,345) Provision for state and local income taxes (Note 2)...................... 138,421 33,471 33,471 23,579 ------------ ------------ ----------- ------------ NET INCOME (LOSS)................. $ 1,023,651 $ 214,557 $ 161,620 $ (377,924) ============ ============ =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-139 POTAMKIN AUTO CENTER, LTD. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK -------------- ADDITIONAL TOTAL ISSUED PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT) ------ ------ ----------- ----------- ---------------- Balances, December 31, 1996......... 70 $ -- $ 1,900,000 $ (884,409) $ 1,015,591 Distribution to shareholders........ -- -- -- (443,000) (443,000) Net income for 1997................. -- -- -- 1,023,651 1,023,651 ------ ------ ----------- ----------- ---------------- Balances, December 31, 1997......... 70 -- 1,900,000 (303,758) 1,596,242 Distribution to shareholders........ -- -- -- (1,458,976) (1,458,976) Net income for 1998................. -- -- -- 214,557 214,557 ------ ------ ----------- ----------- ---------------- Balances, December 31, 1998......... 70 -- 1,900,000 (1,548,177) 351,823 Distribution to shareholders........ -- -- -- (214,526) (214,526) Net loss for the nine months ended September 30, 1999............... -- -- -- (377,924) (377,924) ------ ------ ----------- ----------- ---------------- Balances, September 30, 1999........ 70 $ -- $ 1,900,000 $(2,140,627) $ (240,627) ====== ====== =========== =========== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-140 POTAMKIN AUTO CENTER, LTD. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ----------------------------- 1997 1998 1998 1999 ------------- ------------- ------------- -------------- (UNAUDITED) Cash flows from operating activities Net income (loss)................................. $ 1,023,651 $ 214,557 $ 161,620 $ (377,924) Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation and amortization................... 147,357 139,337 96,673 102,661 Changes in operating assets and liabilities Accounts receivable........................... 2,001,265 206,152 (147,293) 552,250 Inventories................................... (5,337,316) 3,384,678 3,060,057 2,441,472 Prepaid expenses and other current assets.............................. (187,447) (2,679) (119,632) 22,568 Other assets.................................. (5,625) -- -- -- Floor plan notes payable...................... 6,816,777 (3,449,660) (2,906,038) (1,649,804) Accounts payable ............................. 251,106 (232,331) 308,140 251,453 Accrued expenses and other liabilities........ (120,013) 473,473 (5,219) 141,107 Due to related parties, net................... (225,073) 165,230 174,426 83,333 Deferred revenue.............................. 630,400 180,844 135,633 31,405 ------------- ------------- ------------- -------------- Net cash provided by operating activities............ 4,995,082 1,079,601 758,367 1,598,521 ------------- ------------- ------------- -------------- Cash flows from investing activities Purchase of property and equipment................ (80,801) (33,863) (25,610) (8,551) ------------- ------------- ------------- -------------- Net cash used in investing activities................ (80,801) (33,863) (25,610) (8,551) ------------- ------------- ------------- -------------- Cash flows from financing activities Book overdrafts................................... (3,991,154) 635,439 746,686 (1,741,251) Repayments of long-term debt...................... (492,675) (154,696) (115,085) (129,495) Advances from related parties..................... -- -- -- 500,000 Distribution to shareholders...................... (443,000) (1,458,976) (1,294,577) (214,526) ------------- ------------- ------------- -------------- Net cash used in financing activities................ (4,926,829) (978,233) (662,976) (1,585,272) ------------- ------------- ------------- -------------- (Decrease) increase in cash ......................... (12,548) 67,505 69,781 4,698 Cash, beginning of year........................... 61,657 49,109 49,109 116,614 ------------- ------------- ------------- -------------- Cash, end of year................................. 49,109 $ 116,614 $ 118,890 $ 121,312 ============= ============= ============= ============== Supplemental disclosure of cash flow information: Interest paid .................................... $ 1,308,092 $ 1,262,903 $ 984,187 $ 820,261 ============= ============= ============= ============== Income taxes paid................................. $ 164,250 $ 106,470 $ 106,470 $ 42,143 ============= ============= ============= ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-141 POTAMKIN AUTO CENTER, LTD. NOTES TO FINANCIAL STATEMENTS 1. BACKGROUND The Potamkin Auto Center, Ltd. (the "Company") is engaged in the sale of new and used automobiles and light trucks of numerous manufacturers. In addition, the Company arranges financing for and sells extended warranties to vehicle customers. The Company operates from a central location in Manhattan with remote sales locations in Westbury, Brooklyn and until April 1999, Nanuet, New York. Approximately 50% of the common stock of the Company was owned by Robert Potamkin and Alan Potamkin who have similar or greater ownership interests in various entities (herein referred to as the Potamkin Companies or "related parties") engaged in the sale of new and used automobiles and light trucks and related products and services. On October 19, 1999, CarsDirect.com, Inc. ("CarsDirect.com") acquired from the Company certain tangible and intangible assets and substantially all of the business of the Company in exchange for common stock of CarsDirect.com. These financial statements exclude any effect of the transaction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH Cash accounts that have book overdrafts are reclassified to current liabilities in the financial statements. REVENUE RECOGNITION Revenues are recognized by the Company when vehicles are delivered to consumers. OTHER REVENUES Other revenues include finance fee income, net of estimated chargebacks, and extended warranty commissions, net of historical cancellation experience. Finance fee income represents revenue earned by the Company for notes placed with financial institutions in connection with customer vehicle financing. Finance fee income is recognized as income upon acceptance of the credit by the financial institution. The Company is charged back a portion of these fees should the customer terminate or prepay the contracts prior to making the first three payments to the financial institution. The estimated allowance for these chargebacks ("chargeback reserve") is based upon the Company's historical experience. Extended warranty commissions represent commissions earned from third-party extended warranty companies for the sale of third party extended warranty policies to the Company's customers. The Company defers the commission revenue received from the extended warranties, net of estimated cancellations, and recognizes such amounts as revenue ratably over the lives of the underlying contracts. Costs directly related to sales of these contracts are deferred and charged to expense proportionately as revenues are recognized. INVENTORIES Inventories are valued at the lower of cost or market. The Company uses the last-in, first-out ("LIFO") method for new vehicles and the specific identification method for used vehicles. F-142 POTAMKIN AUTO CENTER, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the respective lives of the assets. The ranges of estimated useful lives are as follows: Buildings.............................................................................................39 years Furniture, fixtures, and equipment................................................................5 to 7 years Leasehold improvements...........................Economic life or life of the lease term, whichever is shorter
When depreciable assets are sold or retired, the related cost and accumulated depreciation are removed from the accounts. Any gains or losses are included in selling, general and administrative expenses in the accompanying statement of operations. Such amounts were not material for the years ended December 31, 1997 and 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999, respectively. Major additions and betterments are capitalized. Maintenance and repairs that do not materially improve or extend the lives of the respective assets are charged to operating expenses as incurred. LONG-LIVED ASSETS The Company reviews long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. ADVERTISING AND PROMOTIONAL COSTS Advertising and promotional costs are expensed as incurred and are included in selling, general, and administrative expenses in the accompanying statements of operations. Advertising and promotional costs for the years ended December 31, 1997 and 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999 amounted to approximately $2,340,000, $2,777,000, $1,744,000 and $2,177,000, respectively. INCOME TAXES The Company has elected to be taxed for federal income tax purposes under the provisions of Subchapter S of the Internal Revenue Code by unanimous consent of their shareholders. Under these provisions, the Company does not pay corporate income taxes on its taxable income. Instead, the shareholders are individually liable for the federal income taxes on the Company's income. The Company periodically makes shareholder distributions to fund personal tax liabilities resulting from the Company's taxable income. A provision for state and local income taxes is included in the financial statements since S Corporation elections are not recognized for state and local income tax purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Unless otherwise disclosed, the fair value of financial instruments, including cash, accounts receivable, floor plan notes payable, accounts payable and accrued liabilities, approximates their recorded values due primarily to the short-term nature of their maturities. Management believes that the fair value of the Company's long-term debt approximates its recorded value based on the variable nature of the related interest rates. F-143 POTAMKIN AUTO CENTER, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. GEOGRAPHIC CONCENTRATION The diversity of the Company's customers and suppliers reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base, competition or sources of supply. The Company's operations currently are concentrated in the northeastern United States. A severe economic downturn in the northeastern United States could negatively impact the Company's operating results. Due to the Company's geographic concentration, management cannot assure that unanticipated events will not have a negative impact on the Company. INTERIM FINANCIAL STATEMENTS The unaudited financial statements presented herein have been prepared by the Company without audit and, in the opinion of management, contain all adjustments, consisting of only normal recurring adjustments necessary to present the results of its operations and cash flows for the nine month period ended September 30, 1998 (unaudited) fairly and on a basis consistent with the financial statements for the year ended December 31, 1998 and the nine month period ended September 30, 1999. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 --------------------- ---------------------- Contracts in transit............................................ $ 3,765,686 $ 3,066,967 Finance income and other receivables............................ 223,681 370,150 --------------------- ---------------------- Total........................................................ 3,989,367 3,437,117 Less finance income chargebacks reserve......................... (50,000) (50,000) --------------------- ---------------------- $ 3,939,367 $ 3,387,117 ===================== ======================
Contracts in transit primarily represent receivables from financial institutions that provide funding for customer vehicle financing. These receivables are normally collected within 30 days of the sale of the related vehicle. Finance income receivables represent amounts due from financial institutions earned from arranging financing with the Company's customers. Concentrations of credit risk with respect to contracts in transit and finance income receivables are limited primarily to financial institutions. F-144 POTAMKIN AUTO CENTER, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. INVENTORIES Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------------ ------------------- New vehicles..................................................... $ 4,921,856 $ 3,835,319 Used vehicles.................................................... 5,634,606 4,255,443 ------------------ ------------------- Total before LIFO reserve..................................... 10,556,462 8,090,762 Less LIFO reserve................................................ (165,106) (140,878) ------------------ ------------------- Net inventories.................................................. $ 10,391,356 $ 7,949,884 ================== ===================
As previously noted, inventories are valued at the lower of cost or market. The Company uses the last-in, first-out ("LIFO") method for new vehicles and the specific identification method for used vehicles. During 1998 and 1999, inventory quantities were reduced, which resulted in liquidations of LIFO inventory layers carried at lower costs which prevailed in the prior years. The effect of the liquidations was not significant to any of the periods presented. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------------ -------------------- Land............................................................. $ 3,847,826 $ 3,847,826 Buildings and leasehold improvements............................. 3,324,970 3,324,970 Furniture, fixture and equipment................................. 537,183 545,734 ------------------ -------------------- Total......................................................... 7,709,979 7,718,530 Less accumulated depreciation and amortization................... (700,126) (802,787 ) ------------------ -------------------- $ 7,009,853 $ 6,915,743 ================== ====================
6. FLOOR PLAN NOTES PAYABLE The Company's floor plan agreements are with Chrysler Financial Corporation and provide financing for purchases of substantially all new and certain used vehicles. Floor plan notes payable reflect amounts for the purchase of specific vehicle inventory and consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------------ -------------------- Chrysler Financial Corporation with interest at LIBOR plus 2.25% at December 31, 1998 and LIBOR plus 1.75% at September 30, 1999 $ 10,027,706 $ 8,377,902 ================== ====================
The floor plan agreements grant the lender a collateral interest in the specific inventory and certain other assets of the Company, and generally require the repayment of debt upon the sale of the vehicle. At December 31, 1998 and September 30, 1999, new and used vehicle inventory financed under floor plan agreements are pledged as collateral under these agreements. F-145 POTAMKIN AUTO CENTER, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The weighted average annual interest rate on the floor plan borrowings was 7.9% and 7.8% for the year ended December 31, 1998 and for the nine month period ended September 30, 1999, respectively. 7. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------------- ------------------- Mortgage, 7.72% (adjustable every fifth year), monthly interest and principal payment of $36,700, matures January 1, 2015..... $ 4,067,374 $ 3,973,702 Mortgage, 7.72 (adjustable every fifth year), monthly interest and principal payment of $14,040, matures January 1, 2015..... 1,555,548 1,519,725 ------------------- ------------------- Total long-term debt.......................................... 5,622,922 5,493,427 Less current maturities of long-term debt........................ (181,448) (192,296) ------------------- ------------------- Long-term debt, excluding current maturities..................... $ 5,441,474 $ 5,301,131 =================== ===================
The mortgages described above are collateralized by certain land and buildings with a net book value of approximately $6,700,000 and $6,600,000 at December 31, 1998 and September 30, 1999, respectively. Scheduled maturities of long-term are as follows:
YEAR ENDING DECEMBER 31, - -------------------------- 1999................................................................................... $ 46,747 2000................................................................................... 195,962 2001................................................................................... 211,437 2002................................................................................... 228,566 2003................................................................................... 246,849 2004................................................................................... 266,595 Thereafter............................................................................. 4,297,271 ------------------- $ 5,493,427 ===================
8. EMPLOYEE BENEFIT PLAN The Company provides medical benefits to its employees after the first ninety days of employment. Medical benefit coverage for family members and dental coverage for employees and their family members are paid by the employee. The Company's total costs for medical benefits were approximately $232,000, $329,000, $259,000 and $333,000 for the the years ended December 31, 1997 and 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999, respectively. 9. RELATED PARTY TRANSACTIONS The Company has several demand notes payable to its shareholders in aggregate amounts of $500,000 at September 30, 1999. As these notes are payable on demand, they have been classified as current liabilities on the accompanying balance sheet. Interest on these notes accrues at rates generally consistent with the floor plan note interest rate. Interest expense recorded by the Company related to these notes was approximately $15,000 for the nine month period ended September 30, 1999. The Company participates in a casualty insurance program (coverage for property damage, loss from theft and umbrella liability coverage) administered by the Potamkin Companies. The total costs of F-146 POTAMKIN AUTO CENTER, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) this program are allocated to the participating companies based upon various methodologies depending upon the type of coverage, including historical claims, value of property and number of employees and net revenue. The Company's total costs for this program were $181,000, $196,000, $158,000 and $86,000 for the years ended December 31, 1997 and 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999, respectively. The Company has vehicle purchases and sales with related parties, which are as follows:
YEAR ENDED NINE MONTHS ENDED ---------------------------------- ----------------------------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1998 1999 --------------- --------------- ---------------- ---------------- (UNAUDITED) Purchases........................ $ 18,756,000 $ 9,844,000 $ 7,930,000 $ 5,269,000 Sales............................ $ 3,063,000 $ 318,000 $ 240,000 $ 131,000
The statements of operations include the costs of certain administrative and other services provided by the Potamkin Companies. These services include accounting, treasury, tax, human resources, legal, information systems and other related costs. These costs are allocated to the Company based upon the estimated percentage of the personnel time spent on Company matters. The amounts of such costs allocated were $148,000, $144,000, $114,000 and $185,000 for the years ended December 31, 1997 and 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999, respectively. In addition to these amounts, commencing in 1998, the Potamkin Companies have charged the Company a general management fee amounting to approximately $85,000, $151,000, and $113,000 for the year ended December 31, 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999, respectively. 10. COMMITMENTS The Company leases certain of the land and building where its dealership operations are located under operating lease agreements with related parties. The property leases are noncancelable and generally have renewal options in series of five-year renewals subject to renewal under essentially the same terms and conditions as the original lease. The aggregate minimum rental commitments for all noncancelable operating leases are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - --------------------------- ---------------- 1999 (three months)................................................................ $ 247,010 2000............................................................................... 1,021,004 2001............................................................................... 1,048,300 2002............................................................................... 1,083,529 2003............................................................................... 1,112,909 2004............................................................................... 975,957 Thereafter......................................................................... 505,914 ---------------- $ 5,994,623 ================
Rent expense under all operating leases approximated $949,000, $968,000, $725,000 and $734,000 for for the years ended December 31, 1997 and 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999, respectively. The Company has guaranteed certain leases between related parties and third parties. The Company has guaranteed the floor plan notes payable between a related party and a third party. The floor plan notes payable is used to provide financing for the purchase of vehicles. F-147 POTAMKIN AUTO CENTER, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 11. OTHER In April 1999, the Company closed its Nanuet, NY sales office. Included in selling, general and administrative expenses is approximately $214,800 to provide for the portion of the Company's lease commitment related to the closed sales office which management estimates will not be recouped through sub-lease to a third party. For the years ended December 31, 1997 and 1998 and the nine month periods ended September 30, 1998 (unaudited) and 1999, this sales office had total revenues of approximately $7,828,000, $5,819,000, $4,364,000 and $2,078,000 and gross profit of approximately $515,000, $376,000, $275,000 and $130,000, respectively. 12. SUBSEQUENT EVENT As previously noted, on October 19, 1999 CarsDirect.com acquired from the Company certain tangible and intangible assets and substantially all of the business of the Company in exchange for common stock of CarsDirect.com. F-148 [Set forth on the inside back cover is a picture of the opening screen from idealab!'s web page.] ======================================================= ======================================================== No dealer, salesperson or any other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell Shares only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus [LOGO] is current only as of its date. --------------- TABLE OF CONTENTS Common Stock PAGE Prospectus Summary.............................. 3 Risk Factors.................................... 7 ---------- Use of Proceeds................................. 21 Dividend Policy................................. 21 PROSPECTUS Capitalization.................................. 22 Dilution........................................ 23 ---------- Selected Consolidated Financial Data............ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 26 Business........................................ 40 GOLDMAN, SACHS & CO. Management...................................... 55 DONALDSON, LUFKIN & JENRETTE Related Party Transactions...................... 70 MERRILL LYNCH & CO. Principal Stockholders.......................... 74 ROBERTSON STEPHENS Description of Capital Stock.................... 76 THOMAS WEISEL PARTNERS LLC Shares Eligible for Future Sale................. 80 Underwriting.................................... 82 Representatives of the Underwriters Legal Matters................................... 84 Experts......................................... 84 Additional Information.......................... 85 Index to Financial Statements................... F-1 --------------- Through and including ________________ , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in the underwritten offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. ======================================================= =======================================================
PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by idealab! in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. AMOUNT TO BE PAID --------- SEC registration fee ....................... $ 79,200 NASD filing fee ............................ 30,500 Nasdaq National Market listing fee ......... * Printing and engraving expenses............. * Legal fees and expenses .................... * Accounting fees and expenses ............... * Blue Sky qualification fees and expenses ... * Transfer agent and registrar fees .......... * Miscellaneous fees ......................... * --------- Total ................................. $ * ========= - --------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Sections 78.7502 and 78.751 of the Nevada General Corporation Law provide for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons under some circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article _____________ of our articles of incorporation (Exhibit 3.1(b) hereto) provides for indemnification of our directors, officers, employees and other agents to the extent and under the circumstances permitted by Sections 78.7502 and 78.751 of the Nevada General Corporation Law. We have also entered into agreements with our directors and officers that will require us, among other things, to indemnify them against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by law. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by ourselves, our underwriters and our directors and officers of the underwriters, for certain liabilities, including liabilities arising under the Securities Act, and affords rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES From January 31, 1997 through the date of this Registration Statement, the registrant has issued and sold the following securities: (a) From May 1997 through June 1998 the registrant issued and sold an aggregate of 5,717,305 shares of Series B preferred stock to 28 purchasers. The aggregate consideration for the issuance of the shares was $9,719,419. (b) Between February and May 1999 the registrant issued and sold an aggregate of 6,000,000 shares of Series C preferred stock to 7 purchasers. The aggregate consideration for the issuance of the shares was $18,000,000. (c) In April and May 1999, the registrant issued and sold 11,500,000 shares of common stock to three of its executives pursuant to restricted stock purchase agreements. The aggregate consideration for the issuance of the shares was $3,727,500. II-1 (d) Between December 1999 and March 2000, the registrant issued and sold an aggregate of 10,006,950 shares of Series D preferred stock to 111 purchasers. The aggregate consideration for the issuance of the shares consisted of $765,559,500 in cash, $234,135,500 in securities of other public and private companies and $1,000,000 in other forms of non-cash consideration. (e) In January 2000, the registrant issued and sold 663,917 shares of our common stock to seven purchasers in exchange for 2,213,065 shares of Firstlook.com, Inc. common stock. (f) In February 2000, the registrant issued and sold 1,730,000 shares of common stock to one purchaser in exchange for certain intellectual property assets associated with Metasearch.com. (g) In March 2000, the registrant issued and sold 200,000 shares of common stock to one purchaser in exchange for certain intellectual property assets associated with Big.com. (h) In March 2000, the registrant issued and sold 365,846 shares of common stock to 22 purchasers in exchange for 483,000 shares of HomePage.com, Inc. common stock. (i) As of January 31, 2000, an aggregate of 131,127,250 shares of common stock had been issued upon exercise of options under the registrant's 1996 Stock Plan and 20,127,500 shares of common stock had been issued upon exercise of options under the registrant's 1999 Employee Stock Plan. The issuances of the securities described in (a)-(h) above were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Regulation D under the Securities Act and/or Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The issuances of the securities described in (i) above were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 under the Securities Act as transactions by an issuer in compensatory circumstances. All of the securities were acquired by the recipients for investment and with no view toward the resale or distribution thereof. In each instance, the recipients were sophisticated investors or employees of ours, the offer and sales were made without any public solicitation and the stock certificates bear restrictive legends. No underwriter was involved in the transactions and no commissions were paid. All recipients had adequate access, through their relationships with the registrant, to information about the registrant. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION - ------------ ----------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement 3.1* Form of Articles of Incorporation of registrant 3.2* Form of Bylaws of registrant 4.1* Specimen common stock certificate 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 1996 Stock Plan 10.2 1999 Employee Stock Plan 10.3 1999 Executive Stock Plan 10.4 Restricted Stock Purchase Agreement dated as of April 19, 1999 by and between Lawrence Gross and the registrant 10.5 Stock Option Agreement dated as of January 1, 1999 by and between Robert Kavner and the registrant 10.6 Stock Option Agreement dated as of January 1, 1999 by and between Howard Morgan and the registrant 10.7 Promissory Note dated March 10, 2000 by and between Bill Gross and the registrant 10.8 Security Agreement dated March 10, 2000 by and between Bill Gross and the registrant 10.9 Investor Rights Agreement dated January 28, 2000 among registrant and purchasers of registrant's Series D preferred stock 10.10 First Amendment to Lease dated August 7, 1997 by and between Typecraft, Inc. and registrant for premises located at 130 and 132 W. Union Street in Pasadena, CA 10.11 Lease dated March 3, 1997 by and between Typecraft, Inc. and registrant for premises located at 130 and 132 W. Union Street in Pasadena, CA 10.12 Lease dated January 24, 1998 by and between Typecraft, Inc. and registrant for premises located at 140 W. Union Street in Pasadena, CA 10.13 First Amendment to Lease Abstract for premises located at 2nd, 3rd and 8th floors of 74 N. Pasadena Avenue in Pasadena, CA 10.14 Sub-Sublease Agreement dated as of September 15, 1999 by and between Countrywide Home Loans, Inc. and registrant for premises located at 55 South Lake Avenue in Pasadena, CA 10.15 Lease Agreement dated June 17, 1999 by and between Parsons Information & Technology Group Inc. and registrant for premises located at 74 North Pasadena Avenue in Pasadena, CA 10.16 Assignment and Assumption of Lease Agreement dated as of January 7, 2000 by and between Tellme Networks, Inc. and registrant for premises located at 380 Portage Avenue in Palo Alto, CA 10.17 Sublease Agreement dated December 23, 1999 by and between 675 Ownership LLC and registrant for premises located at 675 Sixth Avenue, New York, NY 10.18 Office Building Lease by and between Eastwest Property Fund, L.P., as Landlord and registrant as Tenant 21.1 List of subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of PricewaterhouseCoopers LLP 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of PricewaterhouseCoopers LLP 23.5 Consent of PricewaterhouseCoopers LLP 23.6 Consent of PricewaterhouseCoopers LLP 23.7 Consent of PricewaterhouseCoopers LLP 23.8* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1) 23.9 Consent of Ernst & Young LLP 23.10 Consent of Ernst & Young LLP
II-3 24.1 Power of Attorney (included on page II-5) 27.1 Financial data schedule - -------- *To be filed by amendment. (b) Financial Statement Schedules Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS 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 by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PASADENA, STATE OF CALIFORNIA, ON THE 17TH DAY OF APRIL, 2000. IDEALAB! By: /s/ BILL GROSS ------------------------------------- Bill Gross CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Bill Gross and Bradley Ramberg, each of them acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her any and all capacities, to sign any and all amendments (including, without limitation, post-effective Amendments and any amendments or abbreviated registration statements increasing the amount of securities for which registration is being sought) to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED BELOW.
SIGNATURE TITLE DATE - ------------------------------- ---------------------------------------------- -------------------------- /s/ BILL GROSS Chief Executive Officer and Director(Principal April 17, 2000 - ------------------------------- Executive Officer) Bill Gross /s/ BRADLEY RAMBERG Vice President and Chief Financial Officer April 17, 2000 - ------------------------------- (Principal Financial and Accounting Officer) Bradley Ramberg /s/ MARCIA GOODSTEIN Director April 17, 2000 - ------------------------------- Marcia Goodstein /s/ LAWRENCE GROSS Director April 17, 2000 - ------------------------------- Lawrence Gross /s/ ROBERT M. KAVNER Director April 17, 2000 - ------------------------------- Robert M. Kavner /s/ HOWARD MORGAN Director April 17, 2000 - ------------------------------- Howard Morgan /s/ BENJAMIN M. ROSEN Director April 17, 2000 - ------------------------------- Benjamin M. Rosen /s/ JOHN F. WELCH, JR. Director April 17, 2000 - ------------------------------- John F. Welch, Jr.
II-5 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------------ ----------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement 3.1* Form of Articles of Incorporation of registrant 3.2* Form of Bylaws of registrant 4.1* Specimen common stock certificate 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 1996 Stock Plan 10.2 1999 Employee Stock Plan 10.3 1999 Executive Stock Plan 10.4 Restricted Stock Purchase Agreement dated as of April 19, 1999 by and between Lawrence Gross and the registrant 10.5 Stock Option Agreement dated as of January 1, 1999 by and between Robert Kavner and the registrant 10.6 Stock Option Agreement dated as of January 1, 1999 by and between Howard Morgan and the registrant 10.7 Promissory Note dated March 10, 2000 by and between Bill Gross and the registrant 10.8 Security Agreement dated March 10, 2000 by and between Bill Gross and the registrant 10.9 Investor Rights Agreement dated January 28, 2000 among registrant and purchasers of registrant's Series D preferred stock 10.10 First Amendment to Lease dated August 7, 1997 by and between Typecraft, Inc. and registrant for premises located at 130 and 132 W. Union Street in Pasadena, CA 10.11 Lease dated March 3, 1997 by and between Typecraft, Inc. and registrant for premises located at 130 and 132 W. Union Street in Pasadena, CA 10.12 Lease dated January 24, 1998 by and between Typecraft, Inc. and registrant for premises located at 140 W. Union Street in Pasadena, CA 10.13 First Amendment to Lease Abstract for premises located at 2nd, 3rd and 8th floors of 74 N. Pasadena Avenue in Pasadena, CA 10.14 Sub-Sublease Agreement dated as of September 15, 1999 by and between Countrywide Home Loans, Inc. and registrant for premises located at 55 South Lake Avenue in Pasadena, CA 10.15 Lease Agreement dated June 17, 1999 by and between Parsons Information & Technology Group Inc. and registrant for premises located at 74 North Pasadena Avenue in Pasadena, CA 10.16 Assignment and Assumption of Lease Agreement dated as of January 7, 2000 by and between Tellme Networks, Inc. and registrant for premises located at 380 Portage Avenue in Palo Alto, CA 10.17 Sublease Agreement dated December 23, 1999 by and between 675 Ownership LLC and registrant for premises located at 675 Sixth Avenue, New York, NY 10.18 Office Building Lease by and between Eastwest Property Fund, L.P., as Landlord and registrant as Tenant 21.1 List of subsidiaries 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of PricewaterhouseCoopers LLP 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of PricewaterhouseCoopers LLP 23.5 Consent of PricewaterhouseCoopers LLP 23.6 Consent of PricewaterhouseCoopers LLP 23.7 Consent of PricewaterhouseCoopers LLP 23.8* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1) 23.9 Consent of Ernst & Young LLP 23.10 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on page II-5) 27.1 Financial data schedule - -------- *To be filed by amendment. EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 BILL GROSS' IDEALAB! 1996 STOCK PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (f) "COMMON STOCK" means the Common Stock of the Company. (g) "COMPANY" means Bill Gross' idealab!, a California corporation. (h) "CONSULTANT" means any person (including a Director) who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "DIRECTOR" means a member of the Board of Directors of the Company. (j) "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (p) "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. (q) "OPTION" means a stock option granted pursuant to the Plan. (r) "OPTION AGREEMENT" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (s) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. -2- (t) "OPTIONED STOCK" means the Common Stock subject to an Option or a Stock Purchase Right. (u) "OPTIONEE" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (v) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "PLAN" means this 1996 Stock Plan. (x) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (y) "SERVICE PROVIDER" means an Employee, Director or Consultant. (z) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (aa) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock pursuant to Section 11 below. (bb) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 15,000,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) ADMINISTRATOR. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: -3- (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xi) to modify or amend each Option or Stock Purchase Right; and (xii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. -4- 5. ELIGIBILITY. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees or Service Providers. Incentive Stock Options may be granted only to Employees. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. TERM OF OPTION. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. OPTION EXERCISE PRICE AND CONSIDERATION. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. -5- (ii) In the case of a Nonstatutory Stock Option (A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option; provided, however, that the Optionee shall have the right to receive any -6- distributions or dividends paid to a shareholder of the Company up to the number of Shares vested on such dated. The Company shall issue (or cause to be issued) such Shares, and any distributions or dividends thereon, promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -7- (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. The Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. STOCK PURCHASE RIGHTS. (a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The terms of the offer shall comply in all respects with Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. (b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five (5) years from the date of purchase. (c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or -8- Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be adjusted as the Administrator may determine, in its sole discretion, as equitably required to prevent dilution or enlargement of the rights of Optionees that would otherwise result from any reacapitalization or other change in the capital structure of the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Adminstrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option or Stock Purchase Right until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen -9- by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan. (b) SHAREHOLDER APPROVAL. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. CONDITIONS UPON ISSUANCE OF SHARES. (a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any -10- liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. RESERVATION OF SHARES. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. 19. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. -11- EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 BILL GROSS' IDEALAB! 1999 EMPLOYEE STOCK PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (f) "COMMON STOCK" means the Common Stock of the Company. (g) "COMPANY" means Bill Gross' idealab!, a California corporation. (h) "CONSULTANT" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "DIRECTOR" means a member of the Board of Directors of the Company. (j) "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (p) "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. (q) "OPTION" means a stock option granted pursuant to the Plan. (r) "OPTION AGREEMENT" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (s) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (t) "OPTIONED STOCK" means the Common Stock subject to an Option or a Stock Purchase Right. -2- (u) "OPTIONEE" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (v) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "PLAN" means this 1999 Employee Stock Plan. (x) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (y) "SERVICE PROVIDER" means an Employee, Director or Consultant. (z) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (aa) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock pursuant to Section 11 below. (bb) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares that may be subject to option and sold under the Plan is 9,000,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) ADMINISTRATOR. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: (i) to determine the Fair Market Value; -3- (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. -4- 5. ELIGIBILITY. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. TERM OF OPTION. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. OPTION EXERCISE PRICE AND CONSIDERATION. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option -5- (A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder to Officers and Directors shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other -6- right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. The Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any -7- manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. STOCK PURCHASE RIGHTS. (a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The terms of the offer shall comply in all respects with Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. (b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five (5) years from the date of purchase. (c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in -8- the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option or Stock Purchase Right until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. -9- 13. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan. (b) SHAREHOLDER APPROVAL. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. CONDITIONS UPON ISSUANCE OF SHARES. (a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. RESERVATION OF SHARES. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. -10- 19. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. -11- EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 BILL GROSS' IDEALAB! 1999 EXECUTIVE STOCK PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional ince ntive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (f) "COMMON STOCK" means the Common Stock of the Company. (g) "COMPANY" means Bill Gross' idealab!, a California corporation. (h) "CONSULTANT" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "DIRECTOR" means a member of the Board of Directors of the Company. (j) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (n) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (o) "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. (p) "OPTION" means a stock option granted pursuant to the Plan. (q) "OPTION AGREEMENT" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (r) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (s) "OPTIONED STOCK" means the Common Stock subject to an Option or a Stock Purchase Right. -2- (t) "OPTIONEE" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (u) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (v) "PLAN" means this 1999 Stock Plan. (w) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (x) "SECTION 16(b)" means Section 16(b) of the Securities Exchange Act of 1934, as amended. (y) "SERVICE PROVIDER" means an Employee, Director or Consultant. (z) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (aa)"STOCK PURCHASE RIGHT" means a right to purchase Common Stock pursuant to Section 11 below. (bb)"SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 17,500,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: -3- (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(f) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. 5. ELIGIBILITY. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. -4- (b) Each Option shallbe designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. TERM OF OPTION. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. OPTION EXERCISE PRICE AND CONSIDERATION. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. -5- (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives:(i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the -6- date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider as a result of the Optionee's disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Option is not exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. If such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option on the day three months and one day following such termination. (d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. STOCK PURCHASE RIGHTS. (a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside -7- of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The purchase price for the Shares subject to the Stock Purchase Right shall be no less than 85% of the Fair Market Value of the Shares at the time the Stock Purchase Right is granted. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five years from the date of purchase. (c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with -8- respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Option or Stock Purchase Right shall terminate immediately prior to the consummation of such proposed action. (c) MERGER. In the event of a merger of the Company with or into another corporation, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. If, in such event, an Option or Stock Purchase Right is not assumed or substituted for, the Option or Stock Purchase Right shall terminate as of the date of the closing of the merger. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger, the consideration (whether stock, cash, or other securities or property) received in the merger by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger. 13. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan. (b) SHAREHOLDER APPROVAL. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the -9- Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. CONDITIONS UPON ISSUANCE OF SHARES. (a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. RESERVATION OF SHARES. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. 19. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. -10- EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 BILL GROSS' IDEALAB! RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of April 19, 1999 between Bill Gross' idealab!, a California corporation (the "Company") and Lawrence S. Gross (the "Purchaser"). WHEREAS the Purchaser is an employee of the Company and his continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in order to give the Purchaser an opportunity to acquire an equity interest in the Company as an incentive for the Purchaser to participate in the affairs of the Company, the Company is willing to sell to the Purchaser and the Purchaser desires to purchase 2,210,000 (Two Million Two Hundred Ten Thousand) shares of Common Stock according to the terms and conditions hereof. THEREFORE, the parties agree as follows: 1. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 2,210,000 (Two Million Two Hundred Ten Thousand) shares of the Company's Common Stock (individually or collectively, the "Shares"), at the price of $0.35 (Thirty Five Cents) per share for an aggregate purchase price of $773,500 (Seven Hundred Seventy Three Thousand Five Hundred Dollars) (the "Purchase Price"). 2. PAYMENT OF PURCHASE PRICE. Purchaser has delivered to the Company $154,700 (One Hundred Fifty Four Thousand Seven Hundred Dollars) in cash and a promissory note in the amount of $618,800 (Six Hundred Eighteen Thousand Eight Hundred Dollars) (the "Note") as payment of the Purchase Price of the Shares. The Note is attached as Exhibit E. The Note is secured pursuant to the terms of a Security Agreement dated as of April 19th 1999 (the "Security Agreement") 3. ISSUANCE OF SHARES. Upon receipt by the Company of the Purchase Price, the Company shall issue duly executed certificates evidencing the Shares in the name of the Purchaser. Vested Shares (the "Vested Shares") (initially, 442,000 Shares) will be delivered to Purchaser and unvested shares (the "Unvested Shares") (initially, 1,768,000 Shares) will be held in escrow until expiration of the Company's Repurchase Option as described in this Agreement. 4. REPURCHASE OPTION. (1) All Unvested Shares, and any stock dividends or stock distributions paid thereon (collectively, the "Restricted Shares"), are subject to the Company's Repurchase Option (as defined below). Vested Shares whether held by Purchaser or by Escrow Holder shall not be considered Restricted Shares. (2) In the event of the voluntary or involuntary termination of the Purchaser's employment with or services to the Company for any or no reason (including death or disability) (a "Termination") before all of the Restricted Shares become Vested Shares and are released from the Repurchase Option under Section 5, the Company shall, upon the date of the Termination (as reasonably fixed and determined by the Company) have an irrevocable, exclusive option (the "Repurchase Option") for a period of 90 (ninety) days from such date to repurchase all or any portion of the Restricted Shares (i.e., those which have not vested and become Vested Shares and thus have not been released from the Repurchase Option at such time) at the original purchase price per share ($0.35). (3) The Repurchase Option shall be exercised by the Company by written notice to the Purchaser or his executor (with a copy to the Escrow Holder (as defined below)) and, at the Company's option, (i) by delivery to the Purchaser or his executor with such notice of a check in the amount of the repurchase price for the Restricted Shares being repurchased, or (ii) by cancellation by the Company of an amount of the Purchaser's indebtedness to the Company equal to the repurchase price for the Restricted Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such repurchase price. Upon delivery of such notice and the payment of the repurchase price in any of the ways described above within the ninety (90) day period, the Company shall become the legal and beneficial owner of the Restricted Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Restricted Shares being repurchased by the Company. (4) Whenever the Company shall have the right to repurchase Restricted Shares hereunder, the Company may designate and assign one or more employees, officers, directors or stockholders of the Company or other persons or organizations to exercise all or a part of the Company's repurchase rights under this Agreement and purchase all or a part of such Restricted Shares. 5. RELEASE OF SHARES FROM REPURCHASE OPTION. (1) As of the date of this Agreement 442,000 (Four Hundred Forty Two Thousand) Shares are Vested Shares which are not subject to the Repurchase Option. (2) The remaining Shares that are initially subject to the Repurchase Option shall vest and become Vested Share in equal increments of 110,500 (One Hundred Ten Thousand Five Hundred) Shares each, quarterly over sixteen (16) quarters, beginning June 30, 1999 and ending March 31, 2003, subject, in each case, to a Termination not having occurred on or prior to the applicable vesting date. Vested Shares are no longer Restricted Shares or subject to the Repurchase Option and are deemed released from such Repurchase Option. (3) Notwithstanding the foregoing, if a Termination occurs prior to October 5, 2000, for any reason other than (A) a voluntary termination by the Purchaser, or (B) a termination for "Cause" (as defined below), the number of Shares equal to the -2- difference between 1,000,000 (One Million) and the number of Shares which are already vested as of the date of Termination shall become immediately vested as of the date of Termination. "Cause" shall mean (i) any act of personal dishonesty taken by the Purchaser in connection with his or her responsibilities to the Company, or (ii) Purchaser's conviction of, or plea of nolo contendere to, a felony; or (iii) a willful act by the Purchaser which constitutes misconduct and is injurious to the Company. (4) Upon the merger or consolidation of the Company with or into another corporation, entity or person or the sale of all or substantially all of the Company's assets to another corporation, entity or person, where immediately after such merger, consolidation or sale of assets, less than 50% of the capital stock or equity interests in such other corporation, entity or person are owned by persons who owned in the aggregate greater than 50% of the capital stock of the Company immediately before such merger, consolidation or sale of assets, the surviving entity shall assume the rights and obligations of the Repurchase Option and the Purchaser shall remain subject to the conditions set forth herein. 6. RESTRICTION ON TRANSFER. Except for the escrow described in Section 7 or transfer of the Restricted Shares to the Company or its assignees contemplated by this Agreement, or transfer of Restricted Shares to Purchaser's family members or trusts established by Purchaser for himself and his family members as permitted below, none of the Unvested Shares nor any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until they become vested and are therefore released from the Company's Repurchase Option in accordance with the provisions of this Agreement. It is agreed that the Purchaser may transfer Restricted Shares to any such family member or to a trust for the Purchaser and/or his family members, provided that such transferee(s) execute(s) an agreement acknowledging the application of this Agreement, including the applicability of the Repurchase Option to Restricted Shares and the requirement that Restricted Shares remain in escrow as provided herein. 7. ESCROW OF SHARES. (1) The Restricted Shares issued under this Agreement shall be held by the Secretary of the Company as escrow holder ("Escrow Holder"), along with a stock assignment executed by the Purchaser in blank, until they become Vested Shares and are therefore released from the Company's Repurchase Option in accordance with the provisions of this Agreement (2) The Escrow Holder is hereby directed to permit transfer of the Restricted Shares held by Escrow Holder only in accordance with this Agreement or instructions signed by both parties. In the event the Escrow Holder desires further instructions, he shall be entitled to rely upon directions executed by a majority of the authorized number of the Company's Board of Directors and by the Purchaser. The Escrow Holder shall have no liability for any act or omission hereunder while acting in good faith in the exercise of his own judgment. -3- (3) If the Company or any assignee exercises its Repurchase Option hereunder, the Escrow Holder, upon receipt of written notice of such option exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (4) When the Repurchase Option has been exercised or expires unexercised, or a portion of the Restricted Shares become Vested Shares and are released from such Repurchase Option, the Escrow Holder shall (a) promptly cause new certificates to be issued for such Vested Shares and for the remaining Restricted Shares, if any, (b) promptly deliver the certificate for the Vested Shares to the Purchaser (subject to the requirements of delivery of certificates under the Security Agreement to the Pledgeholder under the Security Agreement with respect to Vested Shares, if any, that then remain subject to the Security Agreement) and (c) retain the certificate for any remaining Restricted Shares that are still subject to the Repurchase Option. (5) Subject to the terms hereof, the Purchaser shall have all the rights of a stockholder with respect to Restricted Shares while they are held in escrow, including without limitation, the right to vote the Restricted Shares and receive any dividends declared thereon. If, from time to time during the term of the Company's Repurchase Option, there is (i) any stock dividend, stock split or other change in the Restricted Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of his ownership of the Restricted Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Restricted Shares" for purposes of this Agreement and the Company's repurchase option. 8. LEGENDS. The share certificate evidencing the Restricted Shares issued hereunder shall be endorsed with the following legends: (1) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (2) "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY." (3) Any legend required to be placed thereon by applicable state securities laws. 9. INVESTMENT REPRESENTATIONS. In connection with the purchase of the Shares, the Purchaser represents to the Company the following: -4- (1) He is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. He is purchasing these securities for investment for his own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933 (the "Securities Act"). (2) He understands that the securities have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of his investment intent as expressed herein. In this connection, he understands that, in the view of the Securities and Exchange Commission (the "Commission"), the statutory basis for such exemption may not be present if his representations meant that his present intention was to hold these securities for a minimum capital gains period under the tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future. (3) He further acknowledges and understands that the securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. He further acknowledges and understands that the Company is under no obligation to register the securities. He understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (4) He is aware of the adoption of Rule 144 by the Commission, promulgated under the Securities Act, which permits limited public resale of securities acquired in a non-public offering subject to the satisfaction of certain conditions. (5) He further acknowledges that in the event all of the requirements of Rule 144 are not met, compliance with Regulation A or some other registration exemption will be required; and that although Rule 144 is not exclusive, the staff of the Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. 10. RESTRICTIONS ON TRANSFER. The Purchaser agrees, in connection with the Company's initial public offering of the Company's securities, (i) not to sell, make short sales of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by the Purchaser (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for up to one hundred eighty (180) days from the effective date of such registration and (ii) further agrees to execute any agreement reflecting the provisions of clause (i) above as may be requested by the -5- underwriters at the time of the public offering. Despite the foregoing, the restrictions on the Purchaser will be no greater than the least restrictive restrictions required of any other executive officer of the Company. 11. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares, Vested Shares, Unvested Shares, Restricted Shares and the Purchase Price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Restricted Shares which may be made by the Company after the date of this Agreement. 12. GENERAL PROVISIONS. (1) This Agreement shall be governed by the internal laws of the State of California without reference to its conflict of law provisions. This Agreement represents the entire agreement between the parties with respect to the current purchase of Common Stock by the Purchaser, may only be modified or amended by a writing signed by both parties and satisfies all of the Company's obligations to the Purchaser with regard to the issuance or sale of securities. (2) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. (3) The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. Purchaser may only transfer Restricted Shares or interests therein as permitted by this Agreement. (4) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. (5) Both parties agree upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (6) The Purchaser understands that he (and not the Company) shall be responsible for his own federal, state, local or foreign tax liability and any of the other tax consequences that may arise as a result of the transactions contemplated by this Agreement. The -6- Purchaser shall rely solely on the determinations of his tax advisors or his own determinations, and not on any statements or representations by the Company or any of his agents, with regard to all such tax matters. The Purchaser has notified the Company in writing that the Purchaser is filing an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with the Internal Revenue Service. The Purchaser will provide a copy of such filing to the Company. (7) THE PURCHASER UNDERSTANDS THAT THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. PURCHASER HEREBY ACKNOWLEDGES AND AGREES THAT THIS DOCUMENT REPRESENTS THE DEFINITIVE AGREEMENT BETWEEN THE PURCHASER AND THE COMPANY WITH REGARD TO THE ISSUANCE OF COMPANY SECURITIES TO THE PURCHASER AND THAT IT SUPERSEDES ANY OTHER AGREEMENT, EITHER ORAL OR WRITTEN, RELATING TO THE PURCHASER'S RIGHTS TO COMPANY SECURITIES. PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT ANY AND ALL FUTURE ISSUANCES OF COMPANY SECURITIES TO THE PURCHASER MUST BE APPROVED BY THE COMPANY'S BOARD OF DIRECTORS AND EVIDENCED BY AN EXECUTED WRITTEN AGREEMENT IN ORDER TO BECOME BINDING ON THE COMPANY. BILL GROSS' IDEALAB! a California corporation PURCHASER: LAWRENCE S. GROSS By: ------------------------- ------------------------------- Marcia Goodstein, (Signature) Chief Operating Officer -7- ASSIGNMENT SEPARATE FROM CERTIFICATE April 19, 1999 FOR VALUE RECEIVED I, Lawrence S. Gross, hereby sell, assign and transfer to __________________ (___________) shares of the Common Stock of Bill Gross' idealab! (the "Company") standing in my name on the books of the Company represented by Certificate No.__________ and do hereby irrevocably constitute and appoint Wilson Sonsini Goodrich & Rosati, attorney, to transfer said stock on the books of the Company with full power of substitution in the premises. This Assignment Separate from Certificate may only be used in accordance with and pursuant to the terms of the Restricted Stock Purchase Agreement dated April 19, 1999. ____________________________ Lawrence S. Gross INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE. THE PURPOSE OF THIS ASSIGNMENT IS TO ENABLE THE COMPANY TO EXERCISE THE REPURCHASE RIGHT SET FORTH IN THE AGREEMENT WITHOUT REQUIRING ADDITIONAL SIGNATURE ON THE PART OF PURCHASER. EXHIBIT D SECURITY AGREEMENT This Security Agreement is made as of April 19, 1999 between Bill Gross' idealab!, a California corporation ("Pledgee"), and Lawrence S. Gross ("Pledgor"). RECITALS Pursuant to Pledgor's election to purchase Shares under the Restricted Stock Purchase Agreement dated April 19, 1999 (the "Stock Purchase Agreement"), between Pledgor and Pledgee under Pledgee's 1999 Stock Plan, and Pledgor's election under the terms of the Stock Purchase Agreement to pay for such shares in part with his promissory note (the "Note"), Pledgor has purchased 2,210,000 (Two Million Two Hundred Ten Thousand ) shares of Pledgee's Common Stock (each individually, a "Share," and collectively, the "Shares") at a price of $0.35 (Thirty Five Cents) per share, for a total purchase price of $773,500 (Seven Hundred Seventy Three Thousand Five Hundred Dollars). Initially, 442,000 (Four Hundred Forty Two Thousand) Shares are vested (individually and collectively the "Vested Shares") and 1,768,000 (One Million Seven Hundred Sixty Eight Thousand) Shares are unvested (individually and collectively the "Unvested Shares") The Note, initially in the amount of $618,800 (Six Hundred Eighteen Thousand Eight Hundred Dollars), and the obligations thereunder are as set forth in EXHIBIT E to the Stock Purchase Agreement. NOW, THEREFORE, it is agreed as follows: 1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of the transfer of the Unvested Shares to Pledgor under the Stock Purchase Agreement, Pledgor, pursuant to the Delaware Commercial Code, hereby pledges all Unvested Shares (herein sometimes referred to as the "Collateral") represented in whole or part by certificate numbers C-885, duly endorsed in blank or with executed stock powers, and herewith delivers said certificates to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Unvested Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Stock Purchase Agreement, and the Pledgeholder shall not encumber or dispose of such Unvested Shares except in accordance with the provisions of this Security Agreement. 2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. -2- (b) ENCUMBRANCES. The Unvested Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Unvested Shares without the prior written consent of Pledgee. (c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. VOTING RIGHTS. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Unvested Shares pledged hereunder. 4. STOCK ADJUSTMENTS. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional unvested shares or other unvested securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the then remaining Unvested Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Unvested Shares" in this Security Agreement shall include the substituted unvested shares of capital stock of Pledgor as a result thereof. 5. OPTIONS AND RIGHTS. In the event that, during the term of this pledge, subscription options or other rights or options shall be issued in connection with the pledged Unvested Shares, such rights, and options shall be the property of Pledgor and, if exercised by Pledgor, all new unvested stock or other unvested securities so acquired by Pledgor as it relates to the pledged Unvested Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the then remaining Unvested Shares pledged. 6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of this Security Agreement (the "Default") in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 (ten) days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Stock Purchase Agreement or contained in this Security Agreement for a period of 10 days (ten) after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the Delaware Commercial Code. 7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge from time to time a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion -3- to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. Certificates for released shares shall be delivered to Pledgor in accordance with the Stock Purchase Agreement. 8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. TERM. The within pledge of Unvested Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of Default. 11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. GOVERNING LAW. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of Delaware. -4- IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the day and year first above written. "PLEDGOR" ------------------------------------- Signature ------------------------------------- Lawrence S. Gross Address: 16155 High Valley Place -------------------------------------- Encino, CA 91436 -------------------------------------- "PLEDGEE" BILL GROSS' IDEALAB! a California corporation ------------------------------------- Signature ------------------------------------- Print Name ------------------------------------- Title "PLEDGEHOLDER" ------------------------------------- Secretary of Bill Gross' idealab! -5- EXHIBIT E NOTE $618,800 Pasadena, CA April 19, 1999 FOR VALUE RECEIVED, Lawrence S. Gross (the "Obligor") promises to pay to Bill Gross' idealab!, a California corporation (the "Company"), or order, the principal sum of $618,800 (Six Hundred Eighteen Thousand Eight Hundred Dollars), together with interest on the unpaid principal hereof from the date hereof at the rate of 7% (seven percent) per annum, compounded annually. 1. Interest only shall be paid annually on each of March 31, 2000, 2001, 2002 and 2003 with all principal and remaining interest due on March 31, 2003. Any cash dividends or cash liquidations due from the Company on the shares of Common Stock then held by the Obligor shall be paid by Obligor to the Company to be applied first to any accrued or other interest due and then to principal of this Note. Payment of principal and interest shall be made in lawful money of the United States of America. 2. On the date Obligor ceases to be a service provider (i.e. an employee, director or consultant) for the Company, payment for all outstanding principal under this Note (and all interest accrued on this Note) shall be due and payable. 3. Obligor may prepay the principal or interest on this Note at any time. 4. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. 5. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. 6. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ------------------------------------ Lawrence S. Gross EX-10.5 6 EXHIBIT 10.5 EXHIBIT 10.5 BILL GROSS' IDEALAB! 1996 STOCK PLAN STOCK OPTION AGREEMENT -- EARLY EXERCISE Unless otherwise defined herein, the terms defined in the 1996 Employee Stock Plan (the "Plan") shall have the same defined meanings in this Stock Option Agreement (the "Option Agreement"). I. NOTICE OF STOCK OPTION GRANT Name: Bob Kavner Address: ------------------------ ------------------------ You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number 29 Date of Grant January 1, 1999 Vesting Commencement Date January 1, 1999 Exercise Price per Share $0.20 Total Number of Shares Granted 2,000,000 Total Exercise Price $400,000 Type of Option: NSO Term/Expiration Date: January 29, 2009 VESTING SCHEDULE. This Option shall be exercisable in whole or in part, and shall vest according to the following vesting schedule: a. 20% of the Shares subject to this Option shall vest on Vesting Commencement Date. b. The remaining Shares subject to this Option shall vest in equal increments of 5% quarterly thereafter over a four (4) year period, beginning three (3) months following this Option's Vesting Commencement Date, subject to Optionee's continuing to be a Service Provider on each vesting date. c. Notwithstanding the foregoing, if Optionee's employment is terminated within 18 months of the Vesting Commencement Date for any reason other than (A) a voluntary termination by the Optionee, or (B) a termination for "Cause" (as defined below), the number of Shares equal to the difference between 1,000,000 Shares and the number of Shares which is vested as of the employment termination date shall become immediately vested as of the employment termination date. "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee in connection with his or her responsibilities to the Company, or (ii) Optionee's conviction of, or plea of NOLO CONTENDERE to, a felony, or (iii) a willful act by the Optionee which constitutes misconduct and is injurious to the Company. TERMINATION PERIOD: This Option may be exercised, to the extent it is then vested, for three months after Optionee ceases to be a Service Provider. Upon death or Disability of the Optionee, this Option may be exercised, to the extent it is then vested, for one year after Optionee ceases to be Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. GRANT OF OPTION. The Administrator of the Company hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the number of Shares set forth in the Notice of Grant, at the exercise price per Share set forth in the Notice of Grant (the "Exercise Price"), and subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option ("NSO"). 2. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: a. RIGHT TO EXERCISE. (i) Subject to subsections 2(a)(ii) and 2(a)(iii) below, this Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Grant. Alternatively, at the election of the Optionee, this Option may be exercised in whole or in part at any time as to Shares which have not yet vested. Vested Shares shall not be subject to the Company's repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as EXHIBIT C-1). 2 (ii) As a condition to exercising this Option for unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement. (iii) This Option may not be exercised for a fraction of a Share. b. Method of Exercise. This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the "Exercise Notice") which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. OPTIONEE'S REPRESENTATIONS. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as EXHIBIT B, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. LOCK-UP PERIOD. Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 5. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: a. cash or check; b. consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; 3 c. surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or d. promissory note. 6. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law. 7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 8. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 9. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. a. EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular federal income tax liability upon the exercise of an NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. b. EXERCISE OF ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. c. EXERCISE OF ISO FOLLOWING DISABILITY. If the Optionee ceases to be an Employee as a result of a disability that is not a total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within three months of such termination for the ISO to be qualified as an ISO. 4 d. DISPOSITION OF SHARES. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price of the Exercised Shares and the lesser of (i) the Fair Market Value of the Exercised Shares on the date of exercise, or (ii) the sale price of the Exercised Shares. Different rules may apply if the Shares are subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code) at the time of purchase. Any additional gain will be taxed as capital gain, short-term depending on the period that the ISO Shares were held. e. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. f. SECTION 83(B) ELECTION FOR UNVESTED SHARES PURCHASED PURSUANT TO OPTIONS. With respect to the exercise of an Option for unvested Shares, an election (the "Election") may be filed by the Optionee with the Internal Revenue Service, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase. In the case of an NSO, this will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised over the purchase price for the Exercised Shares. Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. In the case of an ISO, such an election will result in a recognition of income to the Optionee for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised, over the purchase price for the Exercised Shares. Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S BEHALF. 10. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's 5 interest except by means of a writing signed by the Company and Optionee. This Option Agreement is governed by the internal substantive laws but not the choice of law rules of California. 11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: BILL GROSS' IDEALAB! - ------------------------------ ----------------------------- Signature By Bob Kavner - ------------------------------ ----------------------------- Print Name Name, Title 6 EXHIBIT A 1996 EMPLOYEE STOCK PLAN EXERCISE NOTICE Bill Gross' idealab! 130 W. Union Street Pasadena, CA 91103 Attention: President 1. EXERCISE OF OPTION. Effective as of today, January 29, 1999, the undersigned ("Optionee") hereby elects to exercise Optionee's option (the "Option") to purchase 2,000,000 shares of the Common Stock (the "Shares") of Bill Gross' idealab! (the "Company") under and pursuant to the Bill Gross' idealab! 1999 Employee Stock Plan (the "Plan") and the Stock Option Agreement dated January 1, 1999 (the "Option Agreement"). 2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the full purchase price of the Shares, as set forth in the Option Agreement. 3. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. RIGHTS AS SHAREHOLDER. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the optioned stock, notwithstanding the exercise of the Option. The Shares shall be issued to the Optionee as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance except as provided in Section 12 of the Plan. 5. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). a. NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). b. EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. c. PURCHASE PRICE. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. d. PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. e. HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. f. EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. g. TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal shall terminate as to any Shares upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 6. TAX CONSULTATION. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 2 7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. a. LEGENDS. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. b. STOP-TRANSFER NOTICES. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. c. REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Notice or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 8. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and the terms and conditions of this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, the terms and conditions of this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9. INTERPRETATION. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Administrator which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties. 10. GOVERNING LAW; SEVERABILITY. This Exercise Notice is governed by the internal substantive laws, but not the choice of law rules, of California. 3 11. ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Restricted Stock Purchase Agreement, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. Submitted by: Accepted by: OPTIONEE: BILL GROSS' IDEALAB! - ---------------------------------- ------------------------------ Signature By Bob Kavner - ---------------------------------- ------------------------------ Print Name Name, Title ADDRESS: ADDRESS: - ------- ------- 130 W. Union Street Pasadena, CA 91103 ------------------------------ Date Received 4 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE: Bob Kavner COMPANY: BILL GROSS' IDEALAB! SECURITY: COMMON STOCK AMOUNT: 2,000,000 Shares DATE: January 29, 1999 In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: a. Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). b. Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, and with any other legend required under applicable state securities laws. c. Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. d. Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. Signature of Optionee: ------------------------------ Date: January 29, 1999 2 EXHIBIT C-1 BILL GROSS' IDEALAB! 1999 EMPLOYEE STOCK PLAN RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made between Bob Kavner (the "Purchaser") and Bill Gross' idealab! (the "Company") as of January 29, 1999. Unless otherwise defined herein, the terms defined in the 1999 Employee Stock Plan shall have the same defined meanings in this Agreement. RECITALS A. Pursuant to the exercise of the option (grant number 29) granted to Purchaser under the Plan and pursuant to the Option Agreement dated January 1, 1999 by and between the Company and Purchaser with respect to such grant (the "Option"), which Plan and Option Agreement are hereby incorporated by reference, Purchaser has elected to purchase 1,600,000 of those shares of Common Stock which have not become vested under the vesting schedule set forth in the Option Agreement ("Unvested Shares"). The Unvested Shares and the shares subject to the Option Agreement which have become vested are sometimes collectively referred to herein as the "Shares". B. As required by the Option Agreement, as a condition to Purchaser's election to exercise the option, Purchaser must execute this Agreement, which sets forth the rights and obligations of the parties with respect to Shares acquired upon exercise of the Option. I. REPURCHASE OPTION. (a) If Purchaser's status as a Service Provider is terminated for any reason, including for cause, death, and Disability, the Company shall have the right and option to purchase from Purchaser, or Purchaser's personal representative, as the case may be, all of the Purchaser's Unvested Shares as of the date of such termination at the price paid by the Purchaser for such Shares (the "Repurchase Option"). (b) Upon the occurrence of such termination, the Company may exercise its Repurchase Option by delivering personally or by registered mail, to Purchaser (or his transferee or legal representative, as the case may be), within ninety (90) days of the termination, a notice in writing indicating the Company's intention to exercise the Repurchase Option and setting forth a date for closing not later than thirty (30) days from the mailing of such notice. The closing shall take place at the Company's office. At the closing, the holder of the certificates for the Unvested Shares being transferred shall deliver the stock certificate or certificates evidencing the Unvested Shares, and the Company shall deliver the purchase price therefor. (c) At its option, the Company may elect to make payment for the Unvested Shares to a bank selected by the Company. The Company shall avail itself of this option by a notice in writing to Purchaser stating the name and address of the bank, date of closing, and waiving the closing at the Company's office. (d) If the Company does not elect to exercise the Repurchase Option conferred above by giving the requisite notice within ninety (90) days following the termination, the Repurchase Option shall terminate. (e) The Repurchase Option shall terminate in accordance with the vesting schedule contained in Optionee's Option Agreement. 2. TRANSFERABILITY OF THE SHARES; ESCROW. (f) Purchaser hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the Unvested Shares as to which the Repurchase Option has been exercised from Purchaser to the Company. (g) To insure the availability for delivery of Purchaser's Unvested Shares upon repurchase by the Company pursuant to the Repurchase Option under Section 1, Purchaser hereby appoints the Secretary, or any other person designated by the Company as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such Unvested Shares, if any, repurchased by the Company pursuant to the Repurchase Option and shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company, or such other person designated by the Company, the share certificates representing the Unvested Shares, together with the stock assignment duly endorsed in blank, attached hereto as EXHIBIT C-2. The Unvested Shares, stock assignment and any dividends paid to the Purchaser upon the Unvested Shares shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as EXHIBIT C-3 hereto, until the Company exercises its Repurchase Option, until such Unvested Shares are vested, or until such time as this Agreement no longer is in effect. As a further condition to the Company's obligations under this Agreement, the spouse of the Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as EXHIBIT C-4. Upon vesting of the Unvested Shares, the escrow agent shall promptly deliver to the Purchaser the certificate or certificates representing such Shares, and any dividends paid thereon, in the escrow agent's possession belonging to the Purchaser, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. (h) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment. (i) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and the Exercise Notice executed by the Purchaser with respect to any Unvested Shares purchased by Purchaser and shall acknowledge the same by signing a copy of this Agreement. 3. OWNERSHIP, VOTING RIGHTS, DUTIES. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 4. LEGENDS. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable federal and state securities laws): 2 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 5. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend, cash dividend or any other dividend paid to the holders of the Company's common Stock and other change in the Shares which may be made by the Company pursuant to Section 12 of the Plan after the date of this Agreement. 6. NOTICES. Notices required hereunder shall be given in person or by registered mail to the address of Purchaser shown on the records of the Company, and to the Company at their respective principal executive offices. 7. SURVIVAL OF TERMS. This Agreement shall apply to and bind Purchaser and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 8. SECTION 83(B) ELECTION. Purchaser hereby acknowledges that he or she has been informed that, with respect to the exercise of an Option for Unvested Shares, an election (the "Election") may be filed by the Purchaser with the Internal Revenue Service, WITHIN 30 DAYS of the purchase of the exercised Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the exercised Shares and their Fair Market Value on the date of purchase. In the case of a Nonstatutory Stock Option, this will result in a recognition of taxable income to the Purchaser on the date of exercise, measured by the excess, if any, of the Fair Market Value of the exercised Shares, at the time the Option is exercised over the purchase price for the exercised Shares. Absent such an Election, taxable income will be measured and recognized by Purchaser at the time or times on which the Company's Repurchase Option lapses. In the case of an Incentive Stock Option, such an Election will result in a recognition of income to the Purchaser for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the exercised Shares, at the time the option is exercised, over the purchase price for the exercised Shares. Absent such an Election, alternative minimum taxable income will be measured and recognized by Purchaser at the time or times on which the Company's Repurchase Option lapses. Purchaser is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as EXHIBIT C-5 for reference. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S BEHALF. 9. REPRESENTATIONS. Purchaser has reviewed with his own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Purchaser understands that he (and not the Company) shall be responsible for his 3 own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 10. GOVERNING LAW. This Agreement shall be governed by the internal substantive laws, but not the choice of law rules, of California. Purchaser represents that he has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. 4 IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. OPTIONEE: BILL GROSS' IDEALAB! - -------------------------------- ----------------------------------- Signature By Bob Kavner - -------------------------------- ----------------------------------- Print Name Name, Title Dated: January 29, 1999 5 EXHIBIT C-2 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Bob Kavner, hereby sell, assign and transfer unto Bill Gross' idealab! (____________________) shares of the Common Stock of Bill Gross' idealab! standing in my name of the books of said corporation represented by Certificate No. C- _____ herewith and do hereby irrevocably constitute and appoint ____________________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement between Bill Gross' idealab! and the undersigned dated January 29, 1999. Dated: Signature: ----------------------------- INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its "repurchase option," as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. EXHIBIT C-3 JOINT ESCROW INSTRUCTIONS Corporate Secretary 130 W. Union Street Pasadena, CA 91103 Attention: Secretary Dear:______________________: As Escrow Agent for both Bill Gross' idealab! (the "Company"), and the undersigned purchaser of stock of the Company (the "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") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Company's repurchase option set forth in the Agreement, the Company shall 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 the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver the stock assignments, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's repurchase 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 defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's repurchase option has been exercised, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's repurchase option. Within 120 days after cessation of Purchaser's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's repurchase option. 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 shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall 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. You shall 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 shall 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, you shall 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 shall not be liable in any respect on account of the identity, authorities 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 shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel 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 shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 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 shall 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 held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final 2 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 shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. 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 shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 18. These Joint Escrow Instructions shall be governed by the internal substantive laws, but not the choice of law rules, of California. 3 PURCHASER: BILL GROSS' IDEALAB! - ----------------------------------- --------------------------------------- Signature By BOB KAVNER - ----------------------------------- --------------------------------------- Print Name Name, Title ESCROW AGENT - ----------------------------------- --------------------------------------- Secretary, Bill Gross' idealab Dated: 4 EXHIBIT C-4 CONSENT OF SPOUSE I,_______________________, spouse of Bob Kavner, have read and approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In consideration of granting of the right to my spouse to purchase shares of Bill Gross' idealab!, as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: Signature: ----------------------------- EXHIBIT D SECURITY AGREEMENT This Security Agreement is made as of January 29, 1999 between Bill Gross' idealab!, a California corporation ("Pledgee"), and Bob Kavner ("Pledgor"). RECITALS Pursuant to Pledgor's election to purchase Shares under the Option Agreement dated January 1, 1999 (the "Option"), between Pledgor and Pledgee under Pledgee's 1999 Stock Plan, and Pledgor's election under the terms of the Option to pay for such shares with his promissory note (the "Note"), Pledgor has purchased 2,000,000 shares of Pledgee's Common Stock (the "Shares") at a price of $ 0.20 per share, for a total purchase price of $400,000. The Note and the obligations thereunder are as set forth in EXHIBIT E to the Option. NOW, THEREFORE, it is agreed as follows: 1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Corporations Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number CS- _______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) ENCUMBRANCES. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. -2- 3. VOTING RIGHTS. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. STOCK ADJUSTMENTS. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. OPTIONS AND RIGHTS. In the event that, during the term of this pledge, subscription Options or other rights or options shall be issued in connection with the pledged Shares, such rights, Options and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Corporations Code. 7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. TERM. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. -3- 10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. GOVERNING LAW. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. -4- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" --------------------------------------- Signature BOB KAVNER --------------------------------------- Print Name Address: --------------------------------------- --------------------------------------- "PLEDGEE" BILL GROSS' IDEALAB! a California corporation --------------------------------------- Signature --------------------------------------- Print Name --------------------------------------- Title "PLEDGEHOLDER" --------------------------------------- Secretary of Bill Gross' idealab! -5- EXHIBIT E NOTE $400,000 Pasadena, CA January 29, 1999 FOR VALUE RECEIVED, Bob Kavner (the "Obligor") promises to pay to Bill Gross' idealab!, a California corporation (the "Company"), or order, the principal sum of Four Hundred Thousand Dollars ($400,000), together with interest on the unpaid principal hereof from the date hereof at the rate of seven percent (7%) per annum, compounded semiannually. 1. Subject to the terms and conditions of Section 2, (i) interest shall be paid annually commencing on January 29, 2000, and continuing on the same day of each successive year thereafter and (ii) unpaid principal on this Note applicable to the shares that have vested under that certain Restricted Stock Purchase Agreement dated of even date herewith between the Company and the Obligor (the "Purchase Agreement") on the date of determination (the "Vested Shares"), and all interest accrued on this Note and not otherwise paid, shall be due and payable on the earlier to occur of (A) January 29, 2003, (B) the date the Company pays to the Obligor cash dividends (or a portion of a cash liquidation) on the shares of Common Stock then held by the Obligor, provided that if the proceeds from such cash dividend or cash liquidation is not sufficient to pay the principal and all accrued but unpaid interest attributable to such Vested Shares, the entire amount of such cash dividend or cash liquidation shall be paid by Obligor to the Company as partial payment of this Note or (C) the date the Obligor sells any Vested Shares. If principal and/or interest are paid pursuant to clause (ii)(B) or (C) above, all unpaid principal (and interest accruing thereon) shall again be subject to the repayment terms in clauses (i) and (ii) above. Payment of principal and interest shall be made in lawful money of the United States of America. 2. On the date Obligor ceases to be a service provider (i.e. an employee, director or consultant) for the Company, (i) payment for all outstanding principal under this Note applicable to the Vested Shares (and all interest accrued on this Note) shall be due and payable and (ii) the principal of this Note attributable to the shares that have not vested under the Purchase Agreement shall be applied to the Company's payment for such unvested shares pursuant to Section 4 of the Purchase Agreement. 3. Except as set forth above, the Obligor may not prepay the principal or interest on this Note without the prior written consent of the Company. 4. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. 5. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. 6. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. --------------------------------------- Bob Kavner EX-10.6 7 EXHIBIT 10.6 EXHIBIT 10.6 BILL GROSS' IDEALAB! 1996 STOCK PLAN STOCK OPTION AGREEMENT -- EARLY EXERCISE Unless otherwise defined herein, the terms defined in the 1996 Employee Stock Plan (the "Plan") shall have the same defined meanings in this Stock Option Agreement (the "Option Agreement"). I. NOTICE OF STOCK OPTION GRANT Name: Howard Morgan Address: ------------------ ------------------ You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number 39 Date of Grant January 1, 1999 Vesting Commencement Date January 1, 1999 Exercise Price per Share $0.20 Total Number of Shares Granted 2,000,000 Total Exercise Price $400,000 Type of Option: NSO Term/Expiration Date: January 1, 2009 VESTING SCHEDULE. This Option shall be exercisable in whole or in part, and shall vest according to the following vesting schedule: a. 20% of the Shares subject to this Option shall vest on Vesting Commencement Date. b. The remaining Shares subject to this Option shall vest in equal increments of 5% quarterly thereafter over a four (4) year period, beginning three (3) months following this Option's Vesting Commencement Date, subject to Optionee's continuing to be a Service Provider on each vesting date. c. Notwithstanding the foregoing, if Optionee's employment is terminated within 18 months of the Vesting Commencement Date for any reason other than (A) a voluntary termination by the Optionee, or (B) a termination for "Cause" (as defined below), the number of Shares equal to the difference between 1,000,000 Shares and the number of Shares which is vested as of the employment termination date shall become immediately vested as of the employment termination date. "Cause" shall mean (i) any act of personal dishonesty taken by the Optionee in connection with his or her responsibilities to the Company, or (ii) Optionee's conviction of, or plea of NOLO CONTENDERE to, a felony, or (iii) a willful act by the Optionee which constitutes misconduct and is injurious to the Company. TERMINATION PERIOD: This Option may be exercised, to the extent it is then vested, for three months after Optionee ceases to be a Service Provider. Upon death or Disability of the Optionee, this Option may be exercised, to the extent it is then vested, for one year after Optionee ceases to be Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. GRANT OF OPTION. The Administrator of the Company hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the number of Shares set forth in the Notice of Grant, at the exercise price per Share set forth in the Notice of Grant (the "Exercise Price"), and subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option ("NSO"). 2. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: a. RIGHT TO EXERCISE. (i) Subject to subsections 2(a)(ii) and 2(a)(iii) below, this Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Grant. Alternatively, at the election of the Optionee, this Option may be exercised in whole or in part at any time as to Shares which have not yet vested. Vested Shares shall not be subject to the Company's repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as EXHIBIT C-1). 2 (ii) As a condition to exercising this Option for unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement. (iii) This Option may not be exercised for a fraction of a Share. b. Method of Exercise. This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the "Exercise Notice") which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. OPTIONEE'S REPRESENTATIONS. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as EXHIBIT B, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. LOCK-UP PERIOD. Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 5. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: a. cash or check; b. consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; c. surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and 3 (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or d. promissory note. 6. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law. 7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 8. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 9. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. a. EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular federal income tax liability upon the exercise of an NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. b. EXERCISE OF ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. c. EXERCISE OF ISO FOLLOWING DISABILITY. If the Optionee ceases to be an Employee as a result of a disability that is not a total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within three months of such termination for the ISO to be qualified as an ISO. d. DISPOSITION OF SHARES. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at 4 least one year after exercise and at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price of the Exercised Shares and the lesser of (i) the Fair Market Value of the Exercised Shares on the date of exercise, or (ii) the sale price of the Exercised Shares. Different rules may apply if the Shares are subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code) at the time of purchase. Any additional gain will be taxed as capital gain, short-term depending on the period that the ISO Shares were held. e. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. f. SECTION 83(B) ELECTION FOR UNVESTED SHARES PURCHASED PURSUANT TO OPTIONS. With respect to the exercise of an Option for unvested Shares, an election (the "Election") may be filed by the Optionee with the Internal Revenue Service, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase. In the case of an NSO, this will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised over the purchase price for the Exercised Shares. Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. In the case of an ISO, such an election will result in a recognition of income to the Optionee for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised, over the purchase price for the Exercised Shares. Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S BEHALF. 10. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This Option Agreement is governed by the internal substantive laws but not the choice of law rules of California. 5 11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: BILL GROSS' IDEALAB! - --------------------------- -------------------- Signature By HOWARD MORGAN - --------------------------- -------------------- Print Name Name, Title 6 EXHIBIT A 1996 EMPLOYEE STOCK PLAN EXERCISE NOTICE Bill Gross' idealab! 130 W. Union Street Pasadena, CA 91103 Attention: President 1. EXERCISE OF OPTION. Effective as of today, January 29, 1999, the undersigned ("Optionee") hereby elects to exercise Optionee's option (the "Option") to purchase 2,000,000 shares of the Common Stock (the "Shares") of Bill Gross' idealab! (the "Company") under and pursuant to the Bill Gross' idealab! 1999 Employee Stock Plan (the "Plan") and the Stock Option Agreement dated January 1, 1999 (the "Option Agreement"). 2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the full purchase price of the Shares, as set forth in the Option Agreement. 3. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. RIGHTS AS SHAREHOLDER. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the optioned stock, notwithstanding the exercise of the Option. The Shares shall be issued to the Optionee as soon as practicable after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date of issuance except as provided in Section 12 of the Plan. 5. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). a. NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). b. EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. c. PURCHASE PRICE. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. d. PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. e. HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. f. EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. g. TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal shall terminate as to any Shares upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 6. TAX CONSULTATION. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 2 7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. a. LEGENDS. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. b. STOP-TRANSFER NOTICES. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. c. REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Notice or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 8. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and the terms and conditions of this Exercise Notice shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, the terms and conditions of this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9. INTERPRETATION. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Administrator which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Administrator shall be final and binding on all parties. 10. GOVERNING LAW; SEVERABILITY. This Exercise Notice is governed by the internal substantive laws, but not the choice of law rules, of California. 3 11. ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Restricted Stock Purchase Agreement, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. Submitted by: Accepted by: OPTIONEE: BILL GROSS' IDEALAB! - --------------------------- -------------------- Signature By HOWARD MORGAN - --------------------------- -------------------- Print Name Name, Title ADDRESS: ADDRESS: 130 W. Union Street Pasadena, CA 91103 -------------------- Date Received 4 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE: Howard Morgan COMPANY: BILL GROSS' IDEALAB! SECURITY: COMMON STOCK AMOUNT: 2,000,000 Shares DATE: January 29, 1999 In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: a. Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). b. Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, and with any other legend required under applicable state securities laws. c. Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. d. Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. Signature of Optionee: --------------------------- Date: January 29, 1999 2 EXHIBIT C-1 BILL GROSS' IDEALAB! 1999 EMPLOYEE STOCK PLAN RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made between Howard Morgan (the "Purchaser") and Bill Gross' idealab! (the "Company") as of January 29, 1999. Unless otherwise defined herein, the terms defined in the 1999 Employee Stock Plan shall have the same defined meanings in this Agreement. RECITALS A. Pursuant to the exercise of the option (grant number 39) granted to Purchaser under the Plan and pursuant to the Option Agreement dated January 1, 1999 by and between the Company and Purchaser with respect to such grant (the "Option"), which Plan and Option Agreement are hereby incorporated by reference, Purchaser has elected to purchase 1,600,000 of those shares of Common Stock which have not become vested under the vesting schedule set forth in the Option Agreement ("Unvested Shares"). The Unvested Shares and the shares subject to the Option Agreement which have become vested are sometimes collectively referred to herein as the "Shares". B. As required by the Option Agreement, as a condition to Purchaser's election to exercise the option, Purchaser must execute this Agreement, which sets forth the rights and obligations of the parties with respect to Shares acquired upon exercise of the Option. 1. REPURCHASE OPTION. (a) If Purchaser's status as a Service Provider is terminated for any reason, including for cause, death, and Disability, the Company shall have the right and option to purchase from Purchaser, or Purchaser's personal representative, as the case may be, all of the Purchaser's Unvested Shares as of the date of such termination at the price paid by the Purchaser for such Shares (the "Repurchase Option"). (b) Upon the occurrence of such termination, the Company may exercise its Repurchase Option by delivering personally or by registered mail, to Purchaser (or his transferee or legal representative, as the case may be), within ninety (90) days of the termination, a notice in writing indicating the Company's intention to exercise the Repurchase Option and setting forth a date for closing not later than thirty (30) days from the mailing of such notice. The closing shall take place at the Company's office. At the closing, the holder of the certificates for the Unvested Shares being transferred shall deliver the stock certificate or certificates evidencing the Unvested Shares, and the Company shall deliver the purchase price therefor. (c) At its option, the Company may elect to make payment for the Unvested Shares to a bank selected by the Company. The Company shall avail itself of this option by a notice in writing to Purchaser stating the name and address of the bank, date of closing, and waiving the closing at the Company's office. (d) If the Company does not elect to exercise the Repurchase Option conferred above by giving the requisite notice within ninety (90) days following the termination, the Repurchase Option shall terminate. (e) The Repurchase Option shall terminate in accordance with the vesting schedule contained in Optionee's Option Agreement. 2. TRANSFERABILITY OF THE SHARES; ESCROW. (f) Purchaser hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the Unvested Shares as to which the Repurchase Option has been exercised from Purchaser to the Company. (g) To insure the availability for delivery of Purchaser's Unvested Shares upon repurchase by the Company pursuant to the Repurchase Option under Section 1, Purchaser hereby appoints the Secretary, or any other person designated by the Company as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such Unvested Shares, if any, repurchased by the Company pursuant to the Repurchase Option and shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company, or such other person designated by the Company, the share certificates representing the Unvested Shares, together with the stock assignment duly endorsed in blank, attached hereto as EXHIBIT C-2. The Unvested Shares, stock assignment and any dividends paid to the Purchaser upon the Unvested Shares shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as EXHIBIT C-3 hereto, until the Company exercises its Repurchase Option, until such Unvested Shares are vested, or until such time as this Agreement no longer is in effect. As a further condition to the Company's obligations under this Agreement, the spouse of the Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as EXHIBIT C-4. Upon vesting of the Unvested Shares, the escrow agent shall promptly deliver to the Purchaser the certificate or certificates representing such Shares, and any dividends paid thereon, in the escrow agent's possession belonging to the Purchaser, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. (h) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment. (i) Transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions hereof and the Exercise Notice executed by the Purchaser with respect to any Unvested Shares purchased by Purchaser and shall acknowledge the same by signing a copy of this Agreement. 3. OWNERSHIP, VOTING RIGHTS, DUTIES. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 4. LEGENDS. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable federal and state securities laws): 2 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 5. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend, cash dividend or any other dividend paid to the holders of the Company's common Stock and other change in the Shares which may be made by the Company pursuant to Section12 of the Plan after the date of this Agreement. 6. NOTICES. Notices required hereunder shall be given in person or by registered mail to the address of Purchaser shown on the records of the Company, and to the Company at their respective principal executive offices. 7. SURVIVAL OF TERMS. This Agreement shall apply to and bind Purchaser and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 8. SECTION 83(B) ELECTION. Purchaser hereby acknowledges that he or she has been informed that, with respect to the exercise of an Option for Unvested Shares, an election (the "Election") may be filed by the Purchaser with the Internal Revenue Service, WITHIN 30 DAYS of the purchase of the exercised Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the exercised Shares and their Fair Market Value on the date of purchase. In the case of a Nonstatutory Stock Option, this will result in a recognition of taxable income to the Purchaser on the date of exercise, measured by the excess, if any, of the Fair Market Value of the exercised Shares, at the time the Option is exercised over the purchase price for the exercised Shares. Absent such an Election, taxable income will be measured and recognized by Purchaser at the time or times on which the Company's Repurchase Option lapses. In the case of an Incentive Stock Option, such an Election will result in a recognition of income to the Purchaser for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the exercised Shares, at the time the option is exercised, over the purchase price for the exercised Shares. Absent such an Election, alternative minimum taxable income will be measured and recognized by Purchaser at the time or times on which the Company's Repurchase Option lapses. Purchaser is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as EXHIBIT C-5 for reference. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER'S BEHALF. 9. REPRESENTATIONS. Purchaser has reviewed with his own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Purchaser understands that he (and not the Company) shall be responsible for his 3 own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 10. GOVERNING LAW. This Agreement shall be governed by the internal substantive laws, but not the choice of law rules, of California. Purchaser represents that he has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. 4 IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. OPTIONEE: BILL GROSS' IDEALAB! - --------------------------- -------------------- Signature By HOWARD MORGAN - --------------------------- -------------------- Print Name Name, Title Dated: January 29, 1999 5 EXHIBIT C-2 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, Howard Morgan, hereby sell, assign and transfer unto Bill Gross' idealab! (_____________________) shares of the Common Stock of Bill Gross' idealab! standing in my name of the books of said corporation represented by Certificate No. C-___ herewith and do hereby irrevocably constitute and appoint ___________________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement between Bill Gross' idealab! and the undersigned dated January 29, 1999. Dated: Signature: ---------------------------- INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its "repurchase option," as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. EXHIBIT C-3 JOINT ESCROW INSTRUCTIONS Corporate Secretary 130 W. Union Street Pasadena, CA 91103 Attention: Secretary Dear_____________________: As Escrow Agent for both Bill Gross' idealab! (the "Company"), and the undersigned purchaser of stock of the Company (the "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") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Company's repurchase option set forth in the Agreement, the Company shall 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 the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver the stock assignments, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's repurchase 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 defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's repurchase option has been exercised, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's repurchase option. Within 120 days after cessation of Purchaser's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's repurchase option. 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 shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall 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. You shall 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 shall 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, you shall 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 shall not be liable in any respect on account of the identity, authorities 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 shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel 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 shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 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 shall 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 held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final 2 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 shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. 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 shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 18. These Joint Escrow Instructions shall be governed by the internal substantive laws, but not the choice of law rules, of California. 3 PURCHASER: BILL GROSS' IDEALAB! - --------------------------- -------------------- Signature By HOWARD MORGAN - --------------------------- -------------------- Print Name Name, Title ESCROW AGENT - --------------------------- Secretary Bill Gross' idealab! Dated: 4 EXHIBIT C-4 CONSENT OF SPOUSE I, ____________________, spouse of Howard Morgan, have read and approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In consideration of granting of the right to my spouse to purchase shares of Bill Gross' idealab!, as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: Signature: --------------------------- EXHIBIT D SECURITY AGREEMENT This Security Agreement is made as of January 29, 1999 between Bill Gross' idealab!, a California corporation ("Pledgee"), and Howard Morgan ("Pledgor"). RECITALS Pursuant to Pledgor's election to purchase Shares under the Option Agreement dated January 1, 1999 (the "Option"), between Pledgor and Pledgee under Pledgee's 1999 Stock Plan, and Pledgor's election under the terms of the Option to pay for such shares with his promissory note (the "Note"), Pledgor has purchased 2,000,000 shares of Pledgee's Common Stock (the "Shares") at a price of $ 0.20 per share, for a total purchase price of $400,000. The Note and the obligations thereunder are as set forth in EXHIBIT E to the Option. NOW, THEREFORE, it is agreed as follows: 1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Corporations Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number CS-_____, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) ENCUMBRANCES. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 2 3. VOTING RIGHTS. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. STOCK ADJUSTMENTS. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. OPTIONS AND RIGHTS. In the event that, during the term of this pledge, subscription Options or other rights or options shall be issued in connection with the pledged Shares, such rights, Options and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Corporations Code. 7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. TERM. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 3 10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. GOVERNING LAW. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" ------------------------- Signature HOWARD MORGAN ------------------------- Print Name Address: "PLEDGEE" BILL GROSS' IDEALAB! a California corporation ------------------------- Signature ------------------------- Print Name ------------------------- Title "PLEDGEHOLDER" ------------------------- Secretary Bill Gross' idealab! 5 EXHIBIT E NOTE $400,000 Pasadena, CA January 29, 1999 FOR VALUE RECEIVED, Howard Morgan (the "Obligor") promises to pay to Bill Gross' idealab!, a California corporation (the "Company"), or order, the principal sum of Four Hundred Thousand Dollars ($400,000), together with interest on the unpaid principal hereof from the date hereof at the rate of seven percent (7%) per annum, compounded semiannually. 1. Subject to the terms and conditions of Section 2, (i) interest shall be paid annually commencing on January 29, 2000, and continuing on the same day of each successive year thereafter and (ii) unpaid principal on this Note applicable to the shares that have vested under that certain Restricted Stock Purchase Agreement dated of even date herewith between the Company and the Obligor (the "Purchase Agreement") on the date of determination (the "Vested Shares"), and all interest accrued on this Note and not otherwise paid, shall be due and payable on the earlier to occur of (A) January 29, 2003, (B) the date the Company pays to the Obligor cash dividends (or a portion of a cash liquidation) on the shares of Common Stock then held by the Obligor, provided that if the proceeds from such cash dividend or cash liquidation is not sufficient to pay the principal and all accrued but unpaid interest attributable to such Vested Shares, the entire amount of such cash dividend or cash liquidation shall be paid by Obligor to the Company as partial payment of this Note or (C) the date the Obligor sells any Vested Shares. If principal and/or interest are paid pursuant to clause (ii)(B) or (C) above, all unpaid principal (and interest accruing thereon) shall again be subject to the repayment terms in clauses (i) and (ii) above. Payment of principal and interest shall be made in lawful money of the United States of America. 2. On the date Obligor ceases to be a service provider (i.e. an employee, director or consultant) for the Company, (i) payment for all outstanding principal under this Note applicable to the Vested Shares (and all interest accrued on this Note) shall be due and payable and (ii) the principal of this Note attributable to the shares that have not vested under the Purchase Agreement shall be applied to the Company's payment for such unvested shares pursuant to Section 4 of the Purchase Agreement. 3. Except as set forth above, the Obligor may not prepay the principal or interest on this Note without the prior written consent of the Company. 4. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. 5. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. 6. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ------------------------------------ Howard Morgan EX-10.7 8 EXHIBIT 10.7 EXHIBIT 10.7 PROMISSORY NOTE $30,000,000.00 Pasadena, CA March 10, 2000 FOR VALUE RECEIVED, Bill Gross (the "Obligor") promises to pay to Bill Gross' idealab!, a California corporation (the "Company"), or order, the principal sum of $30,000,000.00 (Thirty Million Dollars), together with interest on the unpaid principal hereof from the date hereof at the rate of 7% (seven percent) per annum, compounded annually, on or before April 30, 2000. 1. Interest shall be paid upon repayment of the principal. 2. Any cash dividends or cash liquidations due from the Company on the shares of capital stock then held by the Obligor shall be paid by Obligor to the Company to be applied first to any accrued or other interest due and then to principal of this Note. 3. Payment of principal and interest shall be made in lawful money of the United States of America. 4. On the date Obligor ceases to be a service provider (i.e. an employee, director or consultant) for the Company, payment for all outstanding principal under this Note (and all interest accrued on this Note) shall be due and payable. 5. Obligor may prepay the principal or interest on this Note at any time. 6. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. 7. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the Company shall be paid by the undersigned. 8. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. ------------------------------------ Bill Gross 130 W. Union Street Pasadena, CA 91103 EX-10.8 9 EXHIBIT 10.8 EXHIBIT 10.8 SECURITY AGREEMENT This Security Agreement is made as of March 10, 2000, between Bill Gross' idealab!, a California corporation ("Pledgee"), and Bill Gross ("Pledgor"). RECITALS In connection with Pledgor's purchase of shares of Pledgee's Series D Preferred Stock ("Series D Shares") for a total purchase price of $30,000,000, by payment of a note from Pledgor (the "Note"), Pledgor desires to secure the purchase of the Series D Shares with the collateral as described below. NOW, THEREFORE, it is agreed as follows: 1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of the transfer of the Series D Shares to Pledgor, Pledgor, pursuant to the California Corporations Code, hereby pledges 50,000,000 shares (the "Shares") of Pledgee's Common Stock (herein sometimes referred to as the "Collateral") represented by certificate number CS-651, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) ENCUMBRANCES. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. VOTING RIGHTS. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. STOCK ADJUSTMENTS. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. OPTIONS AND RIGHTS. In the event that, during the term of this pledge, subscription options or other rights or options shall be issued in connection with the pledged Shares, such rights and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Corporations Code. 7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. TERM. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at ---- which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 2 10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. GOVERNING LAW. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" --------------------------------------- Signature BILL GROSS --------------------------------------- Print Name Address: 130 WEST UNION STREET PASADENA, CA 91103 "PLEDGEE" BILL GROSS' IDEALAB! a California corporation --------------------------------------- Signature --------------------------------------- Print Name --------------------------------------- Title "PLEDGEHOLDER" --------------------------------------- Secretary of Bill Gross' idealab! 4 EX-10.9 10 EXHIBIT 10.9 EXHIBIT 10.9 =========================== BILL GROSS' IDEALAB! INVESTOR RIGHTS AGREEMENT JANUARY 28, 2000 =========================== TABLE OF CONTENTS PAGE 1. Certain Definitions........................................................1 2. Restrictions on Transferability............................................3 3. Restrictive Legend.........................................................3 4. Notice of Proposed Transfers...............................................4 5. Registration...............................................................4 5.2 Company Registration..............................................4 5.3 Registration on Form S-3..........................................5 5.4 Subsequent Registration Rights....................................7 5.5 Expenses of Registration..........................................7 5.6 Registration Procedures...........................................7 5.7 Indemnification...................................................7 5.8 Information by Holder.............................................9 5.9 Rule 144 Reporting................................................9 5.10 Termination of Registration Rights...............................10 6. Lock-Up Agreement.........................................................10 7. Transfer of Rights........................................................10 8. Amendment.................................................................11 9. Governing Law.............................................................11 10. Entire Agreement..........................................................11 11. Notices, etc..............................................................11 12. Counterparts..............................................................12 EXHIBITS A Schedule of Purchasers -i- BILL GROSS' IDEALAB! INVESTOR RIGHTS AGREEMENT This Investor Rights Agreement (this "AGREEMENT") is made effective as of Januray 28, 2000, by and among Bill Gross' idealab!, a California corporation (the "COMPANY"), and purchasers of the Company's Series D Preferred Stock listed on EXHIBIT A hereto (the "PURCHASERS"). RECITALS A. The Company and the Purchasers are parties to the Series D Preferred Stock Purchase Agreement dated as of Januray 28, 2000 (the "PURCHASE AGREEMENT"), whereby the Company will sell, and the Purchasers will buy, Series D Preferred Stock of the Company. B. The obligations of the Company and the Purchasers under the Purchase Agreement are conditioned, among other things, upon the execution and delivery of this Agreement by the Company and the Purchasers. C. The Company desires to grant to the Purchasers, and the Purchasers desire to be granted, the rights created herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises and covenants herein, the receipt and sufficiency are hereby acknowledged, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "COMMISSION" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "CONVERSION STOCK" means the Company's Common Stock issued or issuable pursuant to conversion of the Company's Series D Preferred Stock. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any similar federal rule or statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "HOLDER" means (i) any Purchaser holding Registrable Securities and (ii) any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 7 hereof. "INITIATING HOLDERS" means any Holder or Holders who, in the aggregate, hold not less than 50% of the Registrable Securities then outstanding. "PREFERRED STOCK" shall mean the Company's Series D Preferred Stock issued pursuant to the Purchase Agreement. "QUALIFIED INITIAL PUBLIC OFFERING" shall mean the Company's initial public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of the Company's Common Stock to the public with gross proceeds to the Company of not less than $100,000,000. "REGISTRABLE SECURITIES" means (i) the Conversion Stock and (ii) any Common Stock of the Company issued or issuable in respect of any of the foregoing upon any stock split, stock dividend, recapitalization, merger or similar event; PROVIDED, HOWEVER, that securities shall only be treated as Registrable Securities if and so long as (x) they have not been registered or sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction and (y) the registration rights with respect to such securities have not terminated pursuant to 5.9. The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses, except as otherwise stated below, incurred by the Company in complying with Sections 5.1 and 5.2 hereof, including without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). Registration Expenses shall also include the fees and disbursements for one special counsel to the selling stockholders, not to exceed $15,000 per registration. "RESTRICTED SECURITIES" shall mean the securities of the Company required to bear the legends set forth in Section 3 hereof. "RULE 144" and "RULE 145" shall mean Rules 144 and 145, respectively, promulgated under the Securities Act, or any similar federal rules thereunder, all as the same shall be in effect at the time. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal rule or statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. -2- "SELLING EXPENSES" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set forth above, all fees and disbursements of counsel for any Holder. 2. RESTRICTIONS ON TRANSFERABILITY. The Preferred Stock, the Conversion Stock and any other securities issued in respect of such stock upon any stock split, stock dividend, recapitalization, merger or similar event, shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Each Holder or transferee will cause any proposed purchaser, assignee, transferee or pledgee of any such shares held by the Holder or transferee to agree to take and hold such securities subject to the restrictions and upon the conditions specified in this Agreement. 3. RESTRICTIVE LEGEND. Each certificate representing the Preferred Stock, the Conversion Stock or any other securities issued in respect of such stock upon any stock split, stock dividend, recapitalization, merger or similar event, shall (unless otherwise permitted by the provisions of Section 4 below) be stamped or otherwise imprinted with legends in substantially the following form (in addition to any legends required by agreement or by applicable state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE COMPANY, SUCH TRANSFER MAY BE MADE PURSUANT TO RULE 144 OR REGISTRATION UNDER THE ACT IS OTHERWISE UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCK-UP PERIOD OF UP TO 180 DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION STATEMENT OF THE COMPANY FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AS SET FORTH IN AN AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH LOCK-UP PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES. Each Holder consents to the Company making a notation on its records and giving stop transfer instructions to any transfer agent of its capital stock in order to implement the restrictions on transfer established in this Agreement. -3- 4. NOTICE OF PROPOSED TRANSFERS. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 4. Without in any way limiting the immediately preceding sentence, no sale, assignment, transfer or pledge of Restricted Securities shall be made by any holder thereof to any person unless such person shall first agree in writing to be bound by the restrictions of this Agreement. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and, if requested by the Company, the holder shall also provide, at such holder's expense, either (i) a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company; provided, however, that the Company shall not request an opinion of counsel or "no action" letter with respect to (i) a transfer not involving a change in beneficial ownership, (ii) a transaction involving the distribution without consideration of Restricted Securities by the holder to its constituent partners or members in proportion to their ownership interests in the holder, or (iii) a transaction involving the transfer without consideration of Restricted Securities by an individual holder during such holder's lifetime by way of gift or on death by will or intestacy. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 3 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for such holder and counsel for the Company such legend is not required in order to establish compliance with any provision of the Securities Act. Notwithstanding the foregoing, each holder of Restricted Securities agrees that it will not request that a transfer of the Restricted Securities be made or that the legend set forth in Section 3 be removed from the certificate representing the Restricted Securities, solely in reliance on Rule 144(k), if as a result thereof the Company would be rendered subject to the reporting requirements of the Exchange Act. 5. REGISTRATION. 5.1 COMPANY REGISTRATION. (a) NOTICE OF REGISTRATION. Beginning 180 days immediately following the effective date of, any registration statement pertaining to securities of the Company, and for the period ending twelve months thereafter, if the Company shall determine to register any of its equity securities, either for its own account or the account of a Holder or other holders, other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Rule 145 -4- transaction, or (iii) a registration in which the only equity security being registered is Common Stock issuable upon conversion of convertible debt securities which are also being registered, the Company will, for the first two such registrations occuring in such twelve month period: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualifications including compliance with Blue Sky laws), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within ten days after the date of such written notice from the Company, by any Holder. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 5.1(a)(i). In such event, the right of any Holder to registration pursuant to Section 5.1 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting shall be limited to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other Holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 5.1, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration (i) in the case of the Company's initial public offering, to zero, and (ii) in the case of any other offering, to an amount no less than 30% of all shares to be included in such offering. The Company shall so advise all Holders requesting to be included in the registration and underwriting, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all the Holders requesting to be included in the registration and underwriting in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by them at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company. (c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 5.1 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 5.2 REGISTRATION ON FORM S-3. (a) REQUEST FOR REGISTRATION. Beginning when the Company first becomes a registrant entitled to use Form S-3 and for a period ending twenty four months thereafter, if the -5- Company shall receive from Initiating Holders a written request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities the aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $50,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use commercially reasonable efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as such Holder or Holders may reasonably request; provided, however, that the Company shall not be required to effect more than one registration pursuant to this Section 5.2 in any twelve month period. If such offer is to be an underwritten offer, the underwriters must be reasonably acceptable to both the Initiating Holders and the Company. The Company shall inform the other Holders of the proposed registration and offer them the opportunity to participate. In the event the registration is proposed to be part of a firm commitment underwritten public offering, the substantive provisions of Section 5.1(b) shall be applicable to each such registration initiated under this Section 5.2. (b) EXCEPTIONS. Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 5.2: (i) Following the filing of, and for 180 days immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) Within twelve months after the Company has effected such a registration pursuant to this Section 5.2(a), and such registration has been declared or ordered effective; or (iii) If the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company (i) giving notice of its bona fide intention to effect the filing of a registration statement with the Commission, or (ii) stating that, in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed in the near future, then the Company's obligation to use its commercially reasonable efforts to file a registration statement shall be deferred one or more times for a period not to exceed 180 days from the receipt of the request to file such registration by such Initiating Holder or Holders, provided that the Company may not exercise this deferral right more than once per twelve-month period. -6- 5.3 SUBSEQUENT REGISTRATION RIGHTS. (a) Without the consent of any holder of Registrable Securities hereunder, the Company may grant to any holder of securities of the Company registration rights inferior to those granted hereunder. (b) The Company shall not enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights superior to or on a pari passu basis with the rights granted the Holders hereunder without the written consent of the holders of a majority of the Registrable Securities. Notwithstanding the foregoing, the Company may, without obtaining any further consent of the holders of Registrable Securities, amend this Agreement to the extent necessary to grant rights and obligations on a pari passu basis with the rights and obligations of the Holders to investors in any subsequent round of financing with respect to the securities purchased by such investors in such financing. 5.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with Sections 5.1 and 5.2 shall be borne by the Company. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders and all other registration expenses shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered or proposed to be so registered. 5.5 REGISTRATION PROCEDURES. In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of such registration and as to the completion thereof. The Company will: (a) Prepare and file with the Commission a registration statement and such amendments and supplements as may be necessary and use commercially reasonable efforts to cause such registration statement to become and remain effective for at least 90 days or until the distribution described in the registration statement has been completed, whichever first occurs; and (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities. 5.6 INDEMNIFICATION. (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration has been effected pursuant to this Agreement, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or -7- supplement thereto, incident to any such registration, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act, the Exchange Act, state securities laws or any rule or regulation promulgated under such laws applicable to the Company in connection with any such registration, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, for any legal and any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or controlling person, and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or the amended prospectus is filed with the Commission pursuant to Rule 424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any Holder, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act, and if the Final Prospectus would have cured the defect giving rise to the loss, liability, claim or damage. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration is being effected, indemnify the Company, each of its directors and officers, other holders of the Company's securities covered by such registration statement, each person who controls the Company within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Holder of the Securities Act, the Exchange Act, state securities laws or any rule or regulation promulgated under such laws applicable to the Holder, and will reimburse the Company, such other Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating or defending any such claim, loss, damage, liability or action, but in the case of the Company or the other Holders or their officers, directors or controlling persons, only to the extent that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder. Notwithstanding the foregoing, the liability of each Holder under this subsection 5.6(b) -8- shall be limited in an amount equal to the initial public offering price of the shares sold by such Holder, unless such liability arises out of or is based on willful misconduct or fraud by such Holder. (c) Each party entitled to indemnification under this Section 5.6 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or there are separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party (whose consent shall not be unreasonably withheld), 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. (d) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 5.7 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration referred to in this Agreement. 5.8 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use commercially reasonable efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and -9- (c) So long as a Holder owns any Restricted Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 5.9 TERMINATION OF REGISTRATION RIGHTS. The rights granted pursuant to Sections 5.1 and 5.2 of this Agreement shall terminate as to any Holder upon the earlier of (i) the end of the applicable periods specified in Sections 5.1 and 5.2 and (ii) the date such Holder is able to immediately sell all shares of Registrable Securities held or entitled to be held upon conversion by such Holder under Rule 144 during any 90-day period. 6. LOCK-UP AGREEMENT. Each Holder and transferee hereby agrees that, in connection with the first two registrations of the offering of any securities of the Company under the Securities Act for the account of the Company, if so requested by the Company or any representative of the underwriters (the "MANAGING UNDERWRITER"), such Holder or transferee shall not sell or otherwise transfer any securities of the Company during the period specified by the Company's Board of Directors at the request of the Managing Underwriter (the "MARKET STANDOFF PERIOD"), with such period not to exceed 180 days following the effective date of a registration statement of the Company filed under the Securities Act, provided that such Holder shall in any event be subject to the same Market Standoff Period as imposed on the officers, directors, and holders of more than 5% of the voting securities of the Company. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. The Company shall use commercially reasonable efforts to place similar contractual lock-up restrictions on all capital stock issued now or hereafter to officers, directors, employees and consultants of the Company and holders of registration rights with respect to capital stock of the Company. 7. TRANSFER OF RIGHTS. The rights granted under Section 5 of this Agreement may be assigned to any transferee or assignee, other than a competitor or potential competitor of the Company (as determined in good faith by the Company's Board of Directors) in connection with any transfer or assignment of Registrable Securities by the Holder, provided that: (i) such transfer is otherwise effected in accordance with applicable securities laws and the terms of this Agreement; (ii) such assignee or transferee acquires at least the lesser of (A) 500,000 shares (as adjusted for stock splits, stock dividends, stock combinations and the like) of Registrable Securities (including Preferred Stock convertible into Registrable Securities) or (B) thirty three percent (33%) of the shares of Registrable Securities (as adjusted for stock splits, stock dividends, stock combinations and the like) initially acquired by the transferring Holder (including Preferred Stock convertible into Registrable Securities), (iii) written notice is promptly given to the Company, and (iv) such transferee or assignee agrees to be bound by the provisions of this Agreement. Notwithstanding the foregoing, the rights granted to the Holders hereunder may be assigned without compliance with -10- item (ii) above to any constituent partner or member of a Holder which is a partnership or limited liability company, or to an affiliate (as such term is defined in Rule 405 of the Securities Act) of a Holder which is a corporation, partnership or limited liability company. 8. AMENDMENT. Except as otherwise provided herein, additional parties may be added to this Agreement, any provision of this Agreement may be amended or 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 a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with Section 5.4 or Section 8, as applicable, shall be binding upon each Purchaser, Holder of Registrable Securities at the time outstanding, each future holder of any of such securities, and the Company. 9. GOVERNING LAW. This Agreement shall be governed in all respects by the internal laws of the State of California without regard to conflict of laws provisions. 10. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and Agreement among the parties regarding the matters set forth herein. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon the successors, assigns, heirs, executors and administrators of the parties hereto. 11. NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by facsimile transmission, by hand or by messenger, addressed: (a) if to a Holder, at such Holder's address as set forth in EXHIBIT A, or at such other address as such Holder shall have furnished to the Company. (b) if to the Company, to: _________________ _________________ _________________ Attn:____________ Fax: ____________ or at such other address as the Company shall have furnished to the Holders, with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Attn: Martin Korman Fax: (650) 493-6811 -11- Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, if sent by facsimile, the first business day after the date of confirmation that the facsimile has been successfully transmitted to the facsimile number for the party notified, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. 12. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one instrument. -12- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. "COMPANY" "PURCHASERS" [__________________________] [__________________________] By: ___________________________________ By: ______________________________ Name: _________________________________ Name: ____________________________ Title: ________________________________ Title: ___________________________ [__________________________] By: ______________________________ Name: ____________________________ Title: ___________________________ [SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT] EXHIBIT A SCHEDULE OF PURCHASERS (to the Investor Rights Agreement) Name and Address Shares ----------------------------------------------- ------------------- EX-10.10 11 EXHIBIT 10.10 EXHIBIT 10.10 1ST AMENDMENT TO LEASE BY AND BETWEEN TYPECRAFT, INC. AND IDEALAB! AUGUST 7, 1997 Whereas Typecraft Inc. (Lessor) and idealab! (Lessee) entered into a lease on 3/3/97 (Lease) for the real property at 130 and 132 W. Union Street in Pasadena and. Whereas that lease granted an option(s) to Lessee to take additional space. Lessee hereby exercises its option to Lease 136 W. Union Street. The lease is now modified to incorporate the following terms: As specified in paragraph 51(c) of lease, base rental for 136 W. Union Street shall be $3,850 per month. Base rental for the entire Premises consisting now of 130, 132 and 136 W. Union Street shall be $15,350 per month. As specified in paragraph 51(d) of Lease, the $10,000 paid for the Option shall be credited to rent. This equates to 2 months and eighteen days of prepaid rent for 136 W. Union. As specified in paragraph 51(e) Lessee shall be granted 31.8 months (31 months and 24 days) of rent abatement in exchange for completing the work outlined in Lease addendum 9. For purpose of clarification, accounting for rent abatement and prepaid rent for 130, 132 and 136 W. Union, the first rent payment due on 130 and 132 W. Union shall be $11,500 on September 1st, 1999. In June of 2,000, idealab! will pay $12,783.33 (11,500 + 10 days rent for 136 W. Union.) Commencing July, 2000 rent payments for 130, 132 and 136 W. Union shall then be $15,350 due on the first of each month throughout the initial term. Lease commencement shall be November 8th, 1997 and termination of initial term shall be February 28th, 2002. As specified in paragraph 5 of Lease, Lessee hereby increases its security deposit by an additional $3,850. Lessee's total deposit now equals $15,350. Exercised by Lessee Acknowledged by Lessor IDEALAB! TYPECRAFT, INC. 130 W. Union Street 2040 E. Walnut Street Pasadena, CA 91103 Pasadena, CA 91107 /s/ WILLIAM GROSS 8/12/97 /s/ D. HARRY MONTGOMERY 8/14/97 - -------------------------------------- ------------------------------------ By William Gross Date D. Harry Montgomery Date /s/ LEON JASMIN 8/14/97 ----------------------------------- Leon Jasmin Date EX-10.11 12 EXHIBIT 10.11 EXHIBIT 10.11 LEASE-SINGLE TENANT-NET 1. BASIC PROVISIONS (Basic Provisions) 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, 03/03/97 10:09 AM is made by and between TYPECRAFT,INC. ("Lessor") and IDEALAB! ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease commonly known by the street address of 130 AND 132 W. UNION STREET, PASADENA CA 91103 located in the County of LOS ANGELES State of CALIFORNIA and is identified as PARCELS 7 & 8 OF PAGE 4 OF THE LOS ANGELES COUNTY ASSESSOR'S BOOK OF MAPS NUMBER 5713. ("Premises"). (See Paragraph 2 further provisions.) 1.3 TERM: FIVE (5) YEARS AND ZERO MONTHS ("Original Term") commencing MARCH 1ST, 1998 ("Commencement Date") and ending FEBRUARY 28TH, 2002 ("Expiration Date"). (See Paragraph 3 for further provisions.) (a) OPTION(S) FOR ADDITIONAL SPACE. Lessee shall have ONE (1) ONE YEAR OPTION to lease additional space. See paragraphs 39and 51 for additional provisions) (b) OPTION(S) TO RENEW. Lessee shall have TWO FIVE (5) YEAR OPTION(S) to renew. (See Paragraphs 39 and 52 for additional provisions). (c) DELIVERY: 130 WEST UNION - UPON MUTUAL LEASE EXECUTION. 132 WEST UNION - UPON PRESENTATION TO TYPECRAFT BY IDEALAB! OF BUILDING PERMITS. 136 AND 140 WEST UNION- UPON COMMENCEMENT OF OPTION TO LEASE BY IDEALAB! (SEE PARAGRAPHS 39 AND 52 FOR PROVISIONS) 1.4 EARLY POSSESSION: UPON MUTUAL LEASE EXECUTION ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $11,500 PER MONTH, ("Base Rent"), payable on the 1st day of each month, commencing JUNE, 1999. (See Paragraph 4 for further provisions.) (a) ABATEMENT: RENT SHALL BE ABATED FOR THE FIRST 31.8 MONTHS OF THIS LEASE. 1.6 BASE RENT PAID UPON EXECUTION: $13,629.00 as Base Rent for the period OCTOBER AND NOVEMBER 1999. 1.7 SECURITY DEPOSIT: $11,500.00 ("Security Deposit). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: LESSEE SHALL BE PERMITTED TO USE THE PREMISES FOR GENERAL OFFICE, INCLUDING BUT NOT LIMITED TO A COMPUTER/COMMUNICATIONS COMPANY OR OTHER USE PERMITTED BY THE CITY OF PASADENA (SEE PARAGRAPH 6 FOR FURTHER PROVISIONS.) 1.9 INSURING PARTY: LESSEE Is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers collectively, the ("Brokers") and brokerage relationships exist in this transaction and a consented to by the Parties: HORACE MACVAUGH, D.B.A. "MACVAUGH & CO." represents Lessor exclusively ("Lessor's Broker"); PODLEY, CAUGHEY AND DOAN represents Lessee exclusively ("Lessee's Broker"); 1.11 GUARANTOR: The obligations of the Lessee under this Lease are to be guaranteed by N/A ('Guarantor'). (See Paragraph 37 for further provisions.) 1.12 ADDENDA: Attached hereto is an Addendum or Addenda consisting of Paragraphs 1-9 and Exhibits "A-SITE PLAN," AND "B-PARKING LEASE" all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term at the rental and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date. Lessor represents to the best of Lessor's knowledge that there are no underground storage tanks located on the Premises. 2.3 COMPLIANCE with Covenants, Restrictions and Building Code. Lessor makes no representation concerning the improvements on the Premises and their compliance with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. (SEE ADDENDUM #1) 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. /s/ Initials Lessor Initials Lessee /s/ 1 of 17 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the original Term. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement 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, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its 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, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel, this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and such other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason hereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to prepayment for any moneys to be paid by Lessee under this Lease. 6. USE 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of the same, which notice shall include an explanation of Lessors reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice registrations or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to a meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from any governmental authority or private party, or persons entering or occupying the Premises concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or under the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at time of such agreement. In a like manner, Lessor shall indemnify, /s/ Initials Lessor Initials Lessee /s/ 2 of 17 protect, defend and hold Lessee, its agents and employees harmless from and against all liability arising out of or involving any Hazardous Substance or storage tank not brought onto the Premises by Lessee, or an agent or employee of Lessee. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION - COMPLIANCE. Lessor and Lessor's Lender(s)(as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's representation as to condition), 2.3 (Lessor's representation as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repairs, 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 equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior), ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements therein or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels. (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. (c) (SEE ADDENDUM #2) 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (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, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. Notwithstanding the provisions herein, Lessor shall maintain the exterior walls, foundations, and roof. (SEE ADDENDUM #3) Notwithstanding anything to the contrary, in the lease or addendum thereto, Lessor's obligations to repair the roof shall commence after approval of a roof inspection by Lessor (which approval shall not be unreasonably withheld) after Lessee's construction of its initial improvements have ceased and/or a certificate of occupancy has been issued by the City of Pasadena. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term ""Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Notwithstanding the foregoing, or anything to the contrary in the Lease, Lessee may make alterations to the interior of the premises (excluding roof) without Lessor's consent so long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls and so long as such Alteration or Utility Installation does not cost more than $10,000. Lessee shall provide Lessor five (5) days prior to commencing the construction of any Alteration or Utility Installation which does not require Lessor's consent. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with any Applicable Law. /s/ Initials Lessor Initials Lessee /s/ 3 of 17 Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. Notwithstanding anything to the contrary in the Lease, Lessee shall not be required to remove any general office use improvements made to the Premises by Lessee. (c) INDEMNIFICATION. 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 on the Premises, which claims are or may be secured by any mechanics' or materialmen's 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, on or about the Premises, 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 lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair, of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises (Lender(s)), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature, or age of the improvements involved, such latter amount is less than full replacement cost. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender,* including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any budding, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1 (c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease or one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor that are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee owned Alterations and Utility Installations. /s/ Initials Lessor Initials Lessee /s/ 4 of 17 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B +, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto, and not withstanding anything to the contrary in this lease, without regard to the negligence or willful misconduct of the entity so released. 8.7 INDEMNITY. Except for Lessor's gross negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not, in case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs in the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receive said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) 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 (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of /s/ Initials Lessor Initials Lessee /s/ 5 of 17 such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. (a) In the event of partial damage or destruction to the Premises and the repair would reasonably be expected to take more than one hundred and eighty (180) days, Lessee shall have the option to terminate the lease. Notice shall be provided to Lessor within thirty (30) days of the event of the damage or destruction. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following 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. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage - Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 INTENTIONALLY DELETED 9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1 (b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal, income, or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events /s/ Initials Lessor Initials Lessee /s/ 6 of 17 occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its 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 said 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 or, at Lessor's option, as provided in Paragraph 10.1 (b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. (SEE ADDENDUM #4) 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment" ) or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. In the event an assignment or sublease is made, 50% of profits gained from a assignment or subletting shall go to Lessor. Consent shall not be unreasonably withheld. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of fifty one (51%) or more of the voting control of Lessee shall constitute a change in control for this purpose. If the change of control is to an entity that has a greater market capitalization than Lessee, no consent is necessary and if it is smaller consent shall not be unreasonably withheld. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. (f) Lessor acknowledges that Lessee's business involves the provision of capital and services to individuals and companies that are in the early stages of forming a business (Start-ups) and that these Start-ups will be occupying the Premises from time to time. Based on this acknowledgment, and not withstanding anything to the contrary in this Lease, so long as the Start-ups are not paying rent to Lessee, the occupancy of the Premises by these Start-ups shall not be considered a subletting or assignment requiring Lessor's consent. If Start-ups do pay rent, it will not constitute subletting if Lessee has a greater than five (5%)percent equity stake in Start-up. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease. (,) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's examination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to /s/ Initials Lessor Initials Lessee /s/ 7 of 17 be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the Sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such Sublessor or for any other prior Defaults or Breaches of such Sublessor under such sublease. (c) Any matter or thing requiring the consent of the Sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3)days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1 (b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1 (b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or 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 (iv) 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 net discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the /s/ Initials Lessor Initials Lessee /s/ 8 of 17 worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) 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 Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph if termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraph 13.1 (b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1. In the event that Lessee does not complete the initial improvements for a particular building and is in material default of this Lease beyond any period provided for cure, Lessor shall have the right, in addition to any other damages provided for herein, to seek damages in the amount of base rent for any abated period of abated rent applicable to the building containing incomplete initial improvements. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and 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 the terms of any ground lease, mortgage or trust deed covering Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%)of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and owner expenses incurred by Lessor in the condemnation matter, 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 be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. (SEE ADDENDUM #5 AND #6) 15. BROKER'S FEE. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $ separate agreement for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) or any Option subsequently granted which is substantially similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 9 of 17 pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.4 Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a third party beneficiary of the provisions of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "Responding Party" ) shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean the owner or owner at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and represents to the best of Lessor's knowledge to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall, constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. (SEE ADDENDUM #7) 27. 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. /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 10 of 17 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT- NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a ["non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorney to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and upon twenty four (24) hours notice for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION, MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee. the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises: provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach. except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 11 of 17 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS 39.1 DEFINITION. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; p) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the Prior Options to extend or renew this Lease have been validly exercised 39.4 Effect of Default on options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which any Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease. or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds the parking and reloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises. Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 12 of 17 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property, of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. 49) PARKING. SO LONG AS LESSEE IS NOT IN DEFAULT UNDER THIS LEASE, LESSEE SHALL HAVE THE RIGHT TO LESSORS INTEREST IN PARKING, IN THE PROPORTIONATE AMOUNT OF SPACE RENTED BY LESSEE TO LAND AREA OWNED BY LESSOR, AT PARSON'S GARAGE. AS ANTICIPATED BY THIS LEASE, LESSEE MAY USE 18 SPACES. LESSEE SHALL PAY TO LESSOR WHEN INVOICED, FEES AS CHARGED BY PARSON'S FOR THIS USE. (SEE EXHIBIT B.) LATE CHARGES (PARAGRAPH 13.4) SHALL APPLY. 50) IMPROVEMENTS. (SEE ADDENDUM #9) 51 OPTION(S) FOR ADDITIONAL SPACE. Lessor hereby grants to Lessee the option to lease additional space. Lessee may lease either 136 W. Union Street or 140 W. Union Street or both 136 and 140 W. Union Street under each and all of the following terms and conditions: (a) Lessee gives to Lessor, and Lessor actually receives on a date which is prior to March 1st, 1998 (if exercised) by at least three (3) and not more than six (6) months, a written notice of the exercise of the option(s) to Lease additional space. If said notification of the exercise of said option(s) is (are) not so given and received, the option(s) shall automatically expire; said option(s) may (if more than one) only be exercised consecutively. (b) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (c) The initial base rental for 136 W. Union shall be $3,850 per month. The initial base rental for 140 W. Union shall be $11,330 per month The initial base rental for both 136 and 140 W. Union shall be $15,180 per month. (d) The consideration for this option shall be $10,000.00. If this option is exercised, this consideration will be applied to rent, if this option is not exercised, consideration shall be retained by Lessor. (e) If Lessee exercises option, rent for the optioned space shall be abated for 31.8 months from the commencement of the Option and Lessee will perform improvements as specified in Addendum 9 (Improvements.) (f) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; 51.1 BROKER'S FEE. The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each option exercised as specified above in accordance with paragraph 15 of the attached Lease. 52 OPTION(S) TO EXTEND. Lessor hereby grants to Lessee the option to extend the term of this Lease for two (2) additional sixty (60)month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: (a) Lessee gives to Lessor, and Lessor actually receives on a date which is prior to the date that the option period would commence (if exercised) by at least three (3) and not more than six (6) months, a written notice of the exercise of the option(s) to extend this Lease for said additional term(s), time being of essence. If said notification of the exercise of said option(s) is (are) not so given and received, the option(s) shall automatically expire; said options(s) may (if more than one) only be exercised consecutively; (b) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (c) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (d) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: 52.1 COST OF LIVING ADJUSTMENT(S)(COL). (a) On March 1st, 2002, the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the cumulative change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for CPI W (Urban Wage Earners and Clerical Workers,) for Los Angeles Anaheim Riverside, All Items (1982-1984=100), herein referred to as "C.P.I." (January 1997 index = 153.6) (b) The monthly rent payable in accordance with paragraph 52. 1(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph 52.1(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month".) The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rule of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. 52.2 MARKET RENTAL VALUE ADJUSTMENT(S)(MRV). (a) On March 1st, 2007 the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted to the "Market Rental Value" of the property as follows: (b) Four months prior to the Market Rental Value (MRV) Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an agreed upon new MRV for the specified term. If agreement cannot be reached, then: (c) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the parties, or (d) Both Lessor and Lessee shall each immediately select and pay the appraiser or broker of their choice to establish a MRV within the next 30 days. If, for any reason, either one of the appraisals is not completed within the next 30 days, as stipulated, then the appraisal that is completed at that time shall automatically become the new MRV. If both appraisals are completed and the two appraisers/brokers cannot agree on a reasonable average MRV then they shall immediately select a third mutually acceptable appraiser/broker to establish a third MRV within the next 30 days. The average of the two appraisals closest in value shall then become the new MRV. The costs of the third appraisal will be split equally between the parties. /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 13 of 17 (e) In any event, the new MRV shall not be less than the rent payable for the month immediately preceding the date for rent adjustment greater than $1.75 per square foot, NNN. (f) Upon the establishment of each New Market Rental Value as described in paragraph 52.2: (1) the monthly rental sum so calculated for each term as specified in paragraph 52.2 (a) will become the new "Base Rent" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph 52.2 (a) above and; (2) the first month of each Market Rental Value term as specified in paragraph 52.2 (a) shall become the new "Base Month" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph 52. 52.3 NOTICE. Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustments shall be made as specified in paragraph 23 of the attached Lease. 52.4 BROKER'S FEE. The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the attached Lease. LEASE ADDENDUM This Lease Addendum is to that certain Lease - Single Tenant - Net dated March 3, 1997 for the premises located at 130 and 132 Union Street, Pasadena CA 91103 ("Premises") between Typecraft, Inc. ("Lessor") and Idealab! ("Lessee"). 1. Lessee hereby accepts the Premises in their current condition existing as of the Lease Commencement Date or date the Lessee takes possession of the Premises, whichever is earlier, strictly "AS IS", subject to all Applicable Law, and Lessee accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. 2. If Lessee fails to perform Lessee's obligations under paragraph 7.1, Lessor, at Lessor's option may, but shall not be required to, enter upon the Premises after fourteen (14) days prior written notice to Lessee, and put the same in good order, condition and repair, and the cost thereof, together with interest thereon at the rate of ten percent (10%) per annum, shall become due and payable as additional rent to Lessor together with Lessee's next rental installment, provided however, that Lessor shall not be permitted to perform Lessee's obligations under paragraph 7.1 of the Lease if prior to the end of the notice period set forth in this Lease Addendum paragraph 2. 3. Any maintenance or repair obligations of Lessor as described in paragraph 7.2 of this Lease which become necessary or desirable by reason of the negligence of Lessee, or of Lessee's subtenants, licensees, employees, invitees, customers or contractors, shall be at Lessee's sole cost and expense; and provided, further, that if Lessee makes any alteration of or addition to or performs work of any kind on the foundations, exterior walls, and roof, any repairs thereof thereafter required due to Lessee's activities shall be at Lessee's expense. 4. Lessor may, with reasonable prior written notice to Lessee (or, in an emergency, with such notice or lack of notice as may be reasonable under the circumstances), shut off and discontinue those utilities under paragraph 11 of the Lease whenever such continuance is necessary to make repairs or alterations. Lessee shall indemnify, defend and hold harmless Lessor from any liens arising from the charges for such utilities or services. Lessor shall not be liable for any failure or interruption of any utility service furnished to the Premises and no failure or interruption shall entitle Lessee to terminate this Lease or to recover any compensatory damages from Lessor, including, but not limited to, direct, incidental, consequential or other monetary damages of any type or description. 5. Notwithstanding the provisions of paragraph 14 of the Lease to the contrary, it is expressly agreed that any condemnation, taking or dedication of any portion of the Premises as may be required by any governmental agency having jurisdiction over the erection of improvements on the Premises shall not result in the abatement, proration, termination or other reduction in the Base Rent to be paid by Lessee under this Lease so long as any such condemnation, taking or dedication is required or implemented as part of, or reasonably relate to the initial construction or erection of Lessee's improvements on the Premises or as otherwise required by any such governmental agency the continued use and operation by Lessee of its improvements during the Lease Term. 6. In the event of a condemnation under paragraph 14 of the Lease, if the condemnor should take only the right to possession of the Premises for a fixed period of time or for the duration of an emergency or other temporary condition, then, notwithstanding anything to the contrary provided in paragraph 14, this Lease shall continue in full force and effect without any abatement of rent, but the /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 14 of 17 amounts payable by the condemnor with respect to any period of time prior to the expiration or sooner termination of this Lease shall be paid by the condemnor to Lessor and the condemnor shall be considered a sublessee of Lessee. Landlord shall apply the amount received from the condemnor applicable to the rent clue hereunder net of costs of Lessor for the collection thereof, or as much thereof as may be necessary for the purpose, toward the amount due from Lessee as rent for that period; and Lessee shall pay the Lessor any deficiency between the amount less paid by the condemnor and the amount of the rent, or Lessor shall credit to future rental payments due from Lessee any excess of the amount the award over the amount of the rent. 7. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease; provided that if Lessee remains in possession of the Premises without Lessor's consent, the Lessee's Base Rent shall increase by two hundred percent (200%) over the then current Base Rent. 8. All of the foregoing initial rental rates shall be subject to further adjustments as set forth in paragraphs 52.1 and 52.2 of the Lease. a) Lessee, at its sole cost and expense, and in compliance with all applicable codes, laws, regulations and ordinances, shall seismically upgrade the Building and make the roof water tight. Further, at its option, it may completely reconstruct the Premises. All improvements must be done in accordance with plans and specifications ("Plans") which Lessee shall submit to Lessor and which are acceptable to Lessor in its reasonable discretion. b) Lessee, at Lessee's sole expense, shall prepare the Plans for its improvements and, thereafter, shall submit two (2) copies of the Plans to Lessor for approval. c) Lessor shall promptly review and approve the Plans or will note in writing any required changes and corrections which must be made to the Plans. Any required changes or corrections must be made by Lessee and the Plans must be resubmitted to Lessor within seven (7) days after such corrections or changes have been noted and Lessor shall have seven (7) days from the receipt of the revised Plans to approve or disapprove thereof. d) Once approved by Lessor the Plans shall not be modified or amended without the prior written consent of Lessee and Lessor. Lessee shall give Lessor thirty (30) days prior written notice of its intention to commence construction of any improvements and Lessor shall have the right to post notices of nonresponsibility in connection with construction of Lessee's improvements. e) No Plans, although approved by Lessor, are approved for architectural or engineering design, and Lessor, by approving such Plans, assumes no liability or responsibility for such approval. f) Lessee, at its sole cost and expense, shall be responsible for obtaining any necessary permits, approvals, licenses, bonds or other consents or agreements required by any governmental agency for the construction of improvements on the Premises. Lessor will cooperate with Lessee in obtaining any of the preceding. g) Lessee shall indemnify and hold harmless Lessor from and against any and all losses, claims and damages resulting from the failure of Lessee or its agents or contractors to pay contractors or subcontractors or to discharge any mechanics liens on the Premises, resulting from construction of Lessee's improvements. Lessee shall proceed diligently to construct the improvements in accordance with the approved Plans. Lessee shall contract directly with the contractors, be in control of the bidding process, direct the work involved, and be responsible for payment of contractors. Lessee shall further pay for the costs incurred by Lessor to hire or employ a supervisor or inspector to monitor, supervise and inspect the work performed by Lessee, the cost for which shall be agreed upon by Lessor and Lessee prior to the commencement of any construction by Lessee. h) Lessee contractors shall warrant against any leakage caused by their penetrations of or work upon the roof. /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 15 of 17 i) Lessee's improvements and all subsequent additions thereto, alterations therein and replacements thereof, shall become and remain a part of the Premises subject to the use and occupancy of Lessee, and none of the same shall be transferred, removed or materially altered, accept as otherwise provided in this Lease. Upon the expiration of the Lease Term or upon any earlier termination of this Lease, all of the improvements shall become the property of Lessor without payment of any consideration therefore. /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 16 of 17 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS. STORAGE TANK OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. By Lessor: By Lessee: TYPECRAFT, INC. IDEALAB! /s/ D. HARRY MONTGOMERY /s/ WILLIAM GROSS - ---------------------------------------- --------------------------- By: D. Harry Montgomery, Its President By: William Gross 130 W. Union Street Pasadena, CA 91103 - ---------------------------------------- By: Len Jasmin 2040 E. Walnut Street Pasadena, CA 91109 (818) 795-8093 Exhibit A [map] /s/["ILLEGIBLE"] Initials Lessor Initials Lessee /s/["ILLEGIBLE"] 17 of 17 EX-10.12 13 EXHIBIT 10.12 EXHIBIT 10.12 LEASE SINGLE TENANT- NET 1. BASIC PROVISIONS (BASIC PROVISIONS) 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, 01/24/98 2:53 PM is made by and between TYPECRAFT, INC. ("Lessor") and IDEALAB! ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 140 W. UNION STREET, PASADENA CA 91103 located in the County of LOS ANGELES State of CALIFORNIA and is identified as PARCEL 5 OF PAGE 4 OF THE LOS ANGELES COUNTY ASSESSOR'S BOOK OF MAPS NUMBER 5713. ("Premises"). (See Paragraph 2 for further provisions.) 1.3 TERM: FIVE (5) YEARS AND ZERO MONTHS ("Original Term") commencing FEBRUARY 1ST, 1998 ('Commencement Date') and ending JANUARY 31ST, 2003 ("Expiration Date"). (See Paragraph 3 for further provisions.) (a) OPTION(S) FOR ADDITIONAL SPACE. Lessee shall have N/A OPTION to lease additional space (b) OPTION(S) TO RENEW. Lessee shall have ONE (1) FOUR (4) YEAR OPTION TO RENEW AND AN ADDITIONAL FIVE-YEAR OPTION. (See Paragraphs 39 and 52 for additional provisions). (c) DELIVERY: FEBRUARY 1ST, 1998 1.4 EARLY POSSESSION: N/A ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $10,506 PER MONTH, ("Base Rent"), payable on the 1st day of each month, commencing FEBRUARY, 1ST, 1998 (See Paragraph 4 for further provisions.) See paragraph 51 regarding Base Rent Increase. (a) ABATEMENT: NONE. 1.6 BASE RENT PAID UPON EXECUTION: $10,506.00 as Base Rent for the period FEBRUARY, 1998. 1.7 SECURITY DEPOSIT: $10,506.00 ("Security Deposit). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: LESSEE SHALL BE PERMITTED TO USE THE PREMISES FOR GENERAL OFFICE, INCLUDING BUT NOT LIMITED TO A COMPUTER/COMMUNICATIONS COMPANY OR OTHER USE PERMITTED BY THE CITY OF PASADENA (SEE PARAGRAPH 6 FOR FURTHER PROVISIONS.) 1.9 INSURING PARTY: LESSEE is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers collectively, the ("Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties: HORACE MACVAUGH, D.B.A. "MACVAUGH & CO." represents Lessor exclusively ("Lessor's Broker"); PODLEY, CAUGHEY AND DOAN represents Lessee exclusively ("Lessee's Broker"); 1.11 GUARANTOR: The obligations of the Lessee under this Lease are to be guaranteed by N/A ('Guarantor'). (See Paragraph 37 for further provisions.) 1.12 ADDENDA:. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 - 10 AND EXHIBIT "A," LEASE BY AND BETWEEN TYPECRAFT, INC., AND RESTORATION HARDWARE, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date. Lessor represents to the best of Lessor's knowledge that there are no underground storage tanks located on the Premises. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor makes no representation concerning the improvements on the Premises and their compliance with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. (SEE ADDENDUM #1) /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 1 of 16 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 if Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the original Term. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement 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, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its 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, however, that if such written notice by Lessee is net received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option to the last assignee if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8 or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of the same, which notice shall include an explanation of Lessor's reasonable objections to the change in use 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous Substance" as used in this Lease shall mean any product substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately have written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice registration application permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 2 of 16 (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at time of such agreement. In a like manner, Lessor shall indemnify, protect, defend and hold Lessee, its agents and employees harmless from and against all liability arising out of or involving any Hazardous Substance or storage tank not brought onto the Premises by Lessee, or an agent or employee of Lessee. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION - COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to, advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's representation as to condition), 2.3 (Lessor's representation as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repairs, 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 equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior), ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, the at was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. (c) (SEE ADDENDUM #2) 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (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, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. Notwithstanding the provisions herein, Lessor shall maintain the exterior walls, foundations, and roof. (SEE ADDENDUM #3) Notwithstanding anything to the contrary in the lease or addendum thereto, Lessor's obligations to repair the roof shall commence after approval of a roof inspection by Lessor (which approval shall not be unreasonably withheld) after Lessee's construction of its initial improvements have ceased and/or a certificate of occupancy has been issued by the City of Pasadena. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility installations are deemed as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Notwithstanding the foregoing, or anything to the contrary in the Lease, Lessee may make alterations to the interior of the premises (excluding roof) without Lessor's consent so long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls and so long as such Alteration or /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 3 of 16 Utility Installation does not cost more than $10,000. Lessee shall provide Lessor five (5) days prior to commencing the construction of any Alteration or Utility Installation which does not require Lessor's consent. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. Notwithstanding anything to the contrary in the Lease, Lessee shall not be required to remove any general office use improvements made to the Premises by Lessee. (c) INDEMNIFICATION. 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 on the Premises, which claims are or may be secured by any mechanics' or materialmen's 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, on or about the Premises, 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 lien, claim or demand then Lessee shall at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted, "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (A) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If the coverage is available and commercially appropriate such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender),* including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1 (c). (B) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies, in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 4 of 16 taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B +, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto, and not withstanding anything to the contrary in this lease, without regard to the negligence or willful misconduct of the entity so released. 8.7 INDEMNITY. Except for Lessor's gross negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation Lessee's part to be performed under this Lease The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury Or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 5 of 16 If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise, agreed Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) 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 (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. (a) In the event of partial damage or destruction to the Premises and the repair would reasonably be expected to take more than one hundred and eighty (180) days, Lessee shall have the option to terminate the lease. Notice shall be provided to Lessor within thirty (30) days of the event of the damage or destruction. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months or the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following 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. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage - - Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)) shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes insurance premiums and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no clam against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 INTENTIONALLY DELETED 9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1 (b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 6 of 16 to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary, or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal, income, or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its 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 said 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 or, at Lessor's option, as provided in Paragraph 10.1 (b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. (SEE ADDENDUM #4) 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. In the event an assignment or sublease is made, 50% of profits gained from a assignment or subletting shall go to Lessor. Consent shall not be unreasonably withheld. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of fifty one (51%) or more of the voting control of Lessee shall constitute a change in control for this purpose. If the change of control is to an entity that has a greater market capitalization than Lessee, no consent is necessary and if it is smaller consent shall not be unreasonably withheld. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise) whether or not a formal assignment or hypothecation of this Lease or Lessee s assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease snail be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. (f) Lessor acknowledges that Lessee's business involves the provision of capital and services to individuals and companies that are in the early stages of forming a business (Start-ups) and that these Start-ups will be occupying the Premises from time to time. Based on this acknowledgment, and not withstanding anything to the contrary in this Lease, so long as the Start-ups are not paying rent to Lessee, the occupancy of the Premises by these Start-ups shall not be considered a subletting or assignment requiring Lessor's consent. If Start-ups do pay rent, it will not constitute subletting if Lessee has a greater than five (5%) percent equity stake in Start-up. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (iii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without retaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 7 of 16 (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease. Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the Sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such Sublessor or for any other prior Defaults or Breaches of such Sublessor under such sublease. (c) Any matter or thing requiring the consent of the Sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor In connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1 (b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1 (b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or previsions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or 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 (iv) 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 within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 8 of 16 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) 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 Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1 (b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1 (b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1. In the event that Lessee does not complete the initial improvements for a particular building and is in material default of this Lease beyond any period provided for cure, Lessor shall have the right, in addition to any other damages provided for herein, to seek damages in the amount of base rent for any abated period of abated rent applicable to the building containing incomplete initial improvements. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and 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 the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation" ), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, 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 be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. (SEE ADDENDUM #5 AND #6) 15. BROKER`S FEE. (SEE ADDENDUM #10) 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 9 of 16 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers (or in the event there is no separate written agreement between Lessor and said Brokers, the sum of $46,749.80 for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) or any Option subsequently granted which is substantially similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Brokers a fee of three (3%) percent of gross rent for the option period. 15.4 Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a third party beneficiary of the provisions of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and represents to the best of Lessor's knowledge to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature; quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 10 of 16 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. (SEE ADDENDUM #7) 27. 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. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT- NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device" ), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3; Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorney to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise; settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and upon twenty four (24) hours notice for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any Sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION, MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 11 of 16 (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11 the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS 39.1 DEFINITION. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew this lease. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the Prior Options to extend or renew this Lease have been validly exercised 39.4 Effect of Default on options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all, reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 12 of 16 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed previsions of this Lease and the typewritten or handwritten previsions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. 49) PARKING. SO LONG AS LESSEE IS NOT IN DEFAULT UNDER THIS LEASE, LESSEE SHALL HAVE THE RIGHT TO LESSORS INTEREST IN PARKING, IN THE PROPORTIONATE AMOUNT OF THE SPACE RENTED BY LESSEE TO LAND AREA OWNED BY LESSOR, AT PARSON'S GARAGE LATE CHARGES (PARAGRAPH 13.4) SHALL APPLY. 50) IMPROVEMENTS. (SEE ADDENDUM #9) 51 RENT INCREASE: (a) ON EACH ANNIVERSARY OF THE COMMENCEMENT DATE, the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the cumulative change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for CPI W (Urban Wage Earners and Clerical Workers,) for Los Angeles, Anaheim Riverside, All Items (1982-1984 =100), herein referred to as "C.P.I." (December 1998 index = 155.3) (b) The monthly rent payable in accordance with paragraph 51.1(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph 51.1(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month"). The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties The cost of sad Arbitrators shall be paid equally by Lessor and Lessee 52 OPTION TO EXTEND. Lessor hereby grants to Lessee the option to extend the term of this Lease for one (1) additional forty-eight month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: followed by one (1) additional sixty (60) month period (a) Lessee gives to Lessor, and Lessor actually receives on a date which is prior to the date that the opt on period would commence (if exercised) by at least three (3) and not more than six (6) months a written notice of the exercise of the opt on(s) to extend this Lease for said additional term(s) time being of essence, If said notification of the exercise of said option(s) is (are) not so given and received, the option(s) shall automatically expire; said option(s) may (if more than one) only be exercised consecutively; (b) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (c) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (d) The monthly rent for each month of the option period shall be on the same terms and conditions as the underlying lease. 52.1 BROKER'S FEE. The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified above in accordance with paragraph 15 of the attached Lease. LEASE ADDENDUM This Lease Addendum is to that certain Lease - Single Tenant - Net dated Saturday, January 24, 1998, for the premises located at 140 W. Union Street, Pasadena CA 91103 ("Premises") between Typecraft, Inc. ("Lessor") and Idealab! ("Lessee"). 1. Lessee hereby accepts the Premises in their current condition existing as of the Lease Commencement Date or the date the Lessee takes possession of the Premises, whichever is earlier, strictly "AS IS", subject to all Applicable Law, and Lessee accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. 2. If Lessee fails to perform Lessee's obligations under paragraph 7.1, Lessor, at Lessor's option may, but shall not be required to, enter upon the Premises after fourteen (14) days prior written notice to Lessee, and put the same in good order, condition and repair, and the cost thereof, together with interest thereon at the rate of ten percent (10%) per annum, shall become due and payable as additional rent to Lessor together with Lessee's next rental installment, provided however, that Lessor shall not be permitted to perform Lessee's obligations under paragraph 7.1 of the Lease if prior to the end of the notice period set forth in this Lease Addendum paragraph 2. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 13 of 16 3. Any maintenance or repair obligations of Lessor as described in paragraph 7.2 of this Lease which become necessary or desirable by reason of the negligence of Lessee, or of Lessee's subtenants, licensees, employees, invitees, customers or contractors, shall be at Lessee's sole cost and expense; and provided, further, that if Lessee makes any alteration of or addition to or performs work of any kind on the foundations, exterior walls, and roof, any repairs thereof thereafter required due to Lessee's activities shall be at Lessee's expense. 4. Lessor may, with reasonable prior written notice to Lessee (or, in an emergency, with such notice or lack of notice as may be reasonable under the circumstances), shut off and discontinue those utilities under paragraph 11 of the Lease whenever such continuance is necessary to make repairs or alterations. Lessee shall indemnify, defend and hold harmless Lessor from any liens arising from the charges for such utilities or services. Lessor shall not be liable for any failure or interruption of any utility service furnished to the Premises and no failure or interruption shall entitle Lessee to terminate this Lease or to recover any compensatory damages from Lessor, including, but not limited to, direct, incidental, consequential or other monetary damages of any type or description. 5. Notwithstanding the provisions of paragraph 14 of the Lease to the contrary, it is expressly agreed that any condemnation, taking or dedication of any portion of the Premises as may be required by any governmental agency having jurisdiction over the erection of improvements on the Premises shall not result in the abatement, proration, termination or other reduction in the Base Rent to be paid by Lessee under this Lease so long as any such condemnation, taking or dedication is required or implemented as part of, or reasonably related to, the initial construction or erection of Lessee's improvements on the Premises or as otherwise required by any such governmental agency for the continued use and operation by Lessee of its improvements during the Lease Term. 6. In the event of a condemnation under paragraph 14 of the Lease, if the condemnor should take only the right to possession of the Premises for a fixed period of time or for the duration of an emergency or other temporary condition, then, notwithstanding anything to the contrary provided in paragraph 14, this Lease shall continue in full force and effect without any abatement of rent, but the amounts payable by the condemnor with respect to any period of time prior to the expiration or sooner termination of this Lease shall be paid by the condemnor to Lessor and the condemnor shall be considered a sublessee of Lessee. Landlord shall apply the amount received from the condemnor applicable to the rent due hereunder net of costs of Lessor for the collection thereof, or as much thereof as may be necessary for the purpose, toward the amount due from Lessee as rent for that period; and Lessee shall pay the Lessor any deficiency between the amount less paid by the condemnor and the amount of the rent, or Lessor shall credit to future rental payments due from Lessee any excess of the amount of the award over the amount of the rent. 7. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease; provided that if Lessee remains in possession of the Premises without Lessor's consent, the Lessee's Base Rent shall increase by two hundred percent (200%) over the then current Base Rent. 8. All Of the foregoing initial rental rates shall be subject to further adjustments as set forth in paragraphs 52.1 and 52.2 of the Lease. a) Lessee, at its sole cost and expense, and in compliance with all applicable codes, laws, regulations and ordinances, shall seismically upgrade the Building and make the roof water tight. Further, at its option, it may completely reconstruct the Premises. Any improvements must be done in accordance with plans and specifications ("Plans") which Lessee shall submit to Lessor and which are acceptable to Lessor in its reasonable discretion. b) Lessee, at Lessee's sole expense, shall prepare the Plans for its improvements and, thereafter, shall submit two (2) copies of the Plans to Lessor for approval. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 14 of 16 c) Lessor shall promptly review and approve the Plans or will note in writing any required changes and correction which must be made to the Plans. Any required changes or corrections must be made by Lessee and the Plans must be resubmitted to Lessor within seven (7) days after such corrections or changes have been noted and Lessor shall have seven (7) days from the receipt of the revise Plans to approve or disapprove thereof. d) Once approved by Lessor the Plans shall not be modified or amended without the prior written consent of Lessee and Lessor. Lessee shall give Lessor thirty (30) days prior written notice of its intention to commence construction of any improvements an Lessor shall have the right to post notices of non-responsibility in connection with construction of Lessee's improvements. e) No Plans, although approved by Lessor, are approved for architectural or engineering design, and Lessor, by approving such Plans, assumes no liability or responsibility for such approval. f) Lessee, at its sole cost and expense, shall be responsible for obtaining any necessary permits, approvals, licenses, bonds or other consents or agreements required by any governmental agency for the construction of improvements on the Premises. Lessee will cooperate with Lessee in obtaining any of the preceding. g) Lessee shall indemnify and hold harmless Lessor from and against any and all losses, claims and damages resulting from the failure of Lessee or its agents or contractors to pay contractors or subcontractors or to discharge any mechanics liens on the Premise resulting from construction of Lessee's improvements. Lessee shall proceed diligently to construct the improvements in accordance with the approved Plans. Lessee shall contract directly with the contractors, be in control of the bidding process, direct the work involved, and be responsible for payment of contractors. Lessee shall further pay for the costs incurred by Lessor to hire or employ a supervisor or inspector to monitor, supervise and inspect the work performed by Lessee, the cost for which shall be agreed upon by Lessor and Lessee prior to the commencement of any construction by Lessee. h) Lessee contractors shall warrant against any leakage caused by their penetrations of or work upon the roof. j) Lessee's improvements and all subsequent additions thereto, alterations therein and replacements thereof, shall become and remain a part of the Premises subject to the use and occupancy of Lessee, and none of the same shall be transferred, removed or materially altered, accept as otherwise provided in this Lease. Upon the expiration of the Lease Term or upon any earlier termination of this Lease, all of the improvements shall become the property of Lessor without payment of any consideration therefore. 9. Existing Tenant Typecraft is currently leasing the rear portion of the Premises to Restoration Hardware on a month to month basis. So long as lessee is not in default under this lease, Lessee shall have the right to Lessor's interest in both income and rights to cancellation of this lease Typecraft will notify Restoration Hardware of transaction within five (5) days of lease execution. 10. Broker's Fee Brokers shall be paid from rent received. /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 15 of 16 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS. STORAGE TANK OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. By Lessor: By Lessee: TYPECRAFT, INC. 130 W. UNION STREET 2040 E. Walnut Street Pasadena, CA 91103 Pasadena, CA 91109 IDEALAB! /s/ D. HARRY MONTGOMERY, 1/29/98 /s/ WILLIAM GROSS - ------------------------------------- --------------------- By: D. Harry Montgomery, Date By: William Gross Its President /s/ LEN JASMIN 1/31/98 - ------------------------------------- By: Len Jasmin Date /s/ BRYNNE A. STALEY 1/30/98 - ------------------------------------- By: Brynne A. Staley Date /s/ MEGAN B. MONTGOMERY 1/31/98 - ------------------------------------- By: Megan B. Montgomery Date /s/ [illegible] Initals Lessor Initials Lessee /s/ [illegible] - --------------- --------------- Page 16 of 16 EXHIBIT A LEASE - MODIFIED GROSS - short form 1. BASIC LEASE PROVISIONS ("BASIC LEASE PROVISIONS") 1.1 PARTIES: This Lease, dated, for reference purposes only. OCTOBER 23, 1995, is made by and between TYPECRAFT, INC., (herein called "Lessor") and RESTORATION HARDWARE, INC. doing business under the name of , (herein called"(Lessee"). 1.2 PREMISES: Suite Number(s) N/A, FIRST floors, consisting of approximately 3,500 rentable feet, more or less, as defined in paragraph 2 and as shown in Exhibit "A" hereto (the "Premises"). 1.3 BUILDING: Commonly described as being located at 138 W. UNION STREET, in the City of PASADENA, County of LOS ANGELES State of CALIFORNIA, Zip Code 91103, as described in Exhibit A hereto, and as defined in paragraph 2. 1.4 USE: WAREHOUSE , subject to paragraph 6. 1.5 TERM: MONTH TO MONTH commencing NOVEMBER 1ST, 1995 ("Commencement Date") and ending UPON 90 DAYS WRITTEN NOTICE EITHER PARTY, AS DEFINED IN PARAGRAPH 3. 1.6 BASE RENT: $2,100 per month, payable on the 1ST day of each month, per paragraph 4.1 1.7 BASE RENT INCREASE: On THE ANNIVERSARY OF THE COMMENCEMENT DATE EVERY YEAR the monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below. 1.8 RENT PAID UPON EXECUTION: $2,100.00 for RENT FROM RENT FROM NOVEMBER 1ST, TO NOVEMBER 31, 1995 1.9 SECURITY DEPOSIT: $2,100.00 1.10 LESSEE'S SHARE OF OPERATING EXPENSES INCREASE: N/A % as defined in paragraph 4.2. 1.11 BASE YEAR: N/A 1.12 OPTION TO EXTEND: Lessee shall have N/A option(s) to renew the Lease, terms and conditions described in Addendum Lessee shall be required to give Lessor at least 180 days but no more than 210 days prior written notice of its intent to renew the Lease. This Option is further defined in paragraph 39. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 PREMISES: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provision. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Building." Lessor hereby leases to Lessee from Lessor for the term, at the rental, and upon all of the conditions set forth herein the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises," including rights to Common Areas as hereinafter specified. 3. TERM. 3.1 TERM. The Term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 4. RENT. 4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provision. Rent for any period during the term thereof which is less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other place as Lessor may designate in writing. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the than current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 1.6 of the Basic Lease Provisions. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as had not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignees, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created here in between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the state existing on the data that the Lease term commences, not without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restriction or record, or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Dare. In the event it is determined that this warranty has been violated, the it shall be the obligation of the Lessor, after written notice form Lessee, to promptly, at Lessor's sole cost and expense rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants, and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy form that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the premises of the Common Areas in any manner that will tend to create waste or nuisance or shall tend to disturb other occupants of the Building. 6.3 CONDITIONS OF PREMISES. (a) Lessor shall deliver the premises to Lessee in a clean condition on the lease Commencement Date (unless Lessee is already in possession.) Page 1 of 7 (b) Except as otherwise provided in this Lease. Lessee hereby accepts the Premises and the Building in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants, or restrictions of record and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor not Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Building for the conduct of Lessee's business. 7. MAINTENANCE, REPAIRS, ALTERATIONS, AND COMMON AREA SERVICES. 7.1 LESSEE'S OBLIGATIONS. (a) Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent of that portion of the cost on any maintenance of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings; the replacement of fluorescent light tubes as necessary, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) 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 received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishing and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings and plumbing in the Premises and in good operating condition. 7.2 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility Installations or repairs in, on or about the Premises, or Building. As used in this paragraph 7.3 the term "Utility Installations" shall mean carpeting, windows and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additional and Utility Installations, and the restoration of the Premises and the Building to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and 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, improvements, additions or Utility Installations without prior written approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additional or Utility Installations in or about the Premises or the Building that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, additions or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) 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 an mechanic's or materialmen's lien against the Premises, the Building or the Building, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days prior notice to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgement that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Building, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surely bond satisfactory to the Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability of the same and holding the Premises, the Building and the Building free for the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorney's fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest to do so. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions, or Utility Installations 7.3 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Building for the benefit or Lessor or Lessee, or any other lessee of the Building, including but not in way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and defection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity 8.1 LIABILITY INSURANCE Lessee shall, at Lessee's expense, obtain and keep in force the term of this Lease a policy of Comprehensive General Liability Insurance utilizing an Insurance Services Office standard form with Board Form General Liability Endorsement (GL0404), or equivalent, in an amount of not less that $1,000,000 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 LIABILITY INSURANCE LESSOR. Lessor shall obtain and keep in force during the term of this lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Building in an amount not less than $1,000,000.00 per occurrence. Page 2 of 7 8.3 PROPERTY INSURANCE-LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvement. 8.4 PROPERTY INSURANCE-LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Building improvement, but not Lessee's personal property, fixtures, equipment or tenant improvement, in the amount of the full replacement cost thereof, as the same may exist form time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included with the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other permits as Lessor deems advisable or may be required by a lender having a lien on the Building. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1 (f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Building over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any or omission of Lessee. 8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 6.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the commencement Date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Building, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach of 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 omission of Lessee, or any of Lessee's agents contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Building arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Building, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, storm, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Building, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user the Building, nor from the failure of Lessor to enforce the provisions of any lease of any other lessee of the Building. 8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. DAMAGE OR DESTRUCTION. INTENTIONALLY DELETED 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Building subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying any increase in real property tax specific in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Building by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, or ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Building or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal equitable interest of Lessor in the Building or in any portion thereof, as against Lessor's right to rent or other income therefrom and as against Lessor's business of leasing the Building. The term "real property tax," shall also include any tax, fee, levy, assessment or charge (i) in substitution of partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax", or (ii) the nature of which was hereinabove included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Building or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 11. UTILITIES. Page 3 of 7 11.1 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and janitorial service within Premises and any other services specially or exclusively supplied and/or metered exclusively to the Premises or to the Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable portion to be determined by Lessor of all charges jointly metered with other premises in the Building. 12. ASSIGNMENT AND SUBLETTING 12.1 Lessee shall not voluntarily or be operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises. 13. DEFAULT; REMEDIES 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee; (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not rent is paid. (b) The breach by Lessee of any of the covenants or provisions of Paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting) 13.1 (vacation or abandonment) 13.1(e) (insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to made 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 from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those reflected in subparagraphs (b) and (c) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee: provided however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, the Lessee shall not be deemed to be in default if Lessee commenced such sure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e)(i) The making by Lessee of any general agreement or general assignment for the benefit of creditors: (ii) Lessee becoming a "debtor" as defined in 11U.S.C.ss. 101 or any successor statute thereto unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of the 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 (30) days; or (iv) 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 within thirty (30) days in the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 REMEDIES. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have be reason of such default. (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this lease and the term hereof 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 fees, and 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 proved could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this lease. (b) Maintain Lessee's right to possession on which case this Lease shall continue in effect whether or not Lessee shall have vacated or 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 decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bare interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to conclusion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent. Lessee's Share of Operating Expense Increase of other sums due thereafter 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 on Lessor by the terms of any mortgage or trust deed covering the Building. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to ten (10%) percent of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by 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. 14. CONDEMNATION. INTENTIONALLY DELETED 15. BROKER'S FEE. (a) The brokers involved in this transaction are HORACE MACVAUGH as "listing broker" and NONE OTHER as "cooperating broker," Licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is not separate agreement between Lessor and said broker(s) the sum of SEPARATE AGREEMENT percent of gross rentals, for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such Page 4 of 7 transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor, provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (c) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s), if any, whose names are set forth in paragraph 15(a), above), in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorney's fees or liability for compensation or charges which may by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. ESTOPPEL CERTIFICATE. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Building, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relived from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered on the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST OF PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest a the maximum rate then allowable by law or judgements from the date due. Payment of such interest shall not excuse or sure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense Increase and any other expenses payable y Lessee hereunder shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Building and Lessee acknowledges that Lessee assumes all responsibly regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed noticed shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may be notice to the other specify a different address for notice purposes except that upon Lessees' taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The Acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Lessee shall not record this lease. 26. HOLDING OVER. If Lessee, with Lessor's consent, 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 upon all provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provision hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where Building is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Building is located. 30. SUBORDINATION. 31. ATTORNEY'S FEES. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms of hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgement. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorney's fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. LESSOR'S ACCESS. 32.1 Lessor and Lessor's agents shall have the right to enter Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessee's, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the premises or to the Building as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long Page 5 of 7 as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" or "For Lease" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement or rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than the files, vaults, safes, and in case of emergency to enter the Premises by any reasonable appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this Paragraph shall constitute a material default of this Lease. 34. SIGNS. Lessee shall pay for all directory and suite signage. Such signage shall be to Building's Standard Signage program, meeting Lessor's approval shall not be unreasonably with held. Lessee shall not place any sign upon the premises or the Building without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office building Project. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all such subtenancies. 36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have the quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Building. 39. OPTIONS. INTENTIONALLY DELETED 40. SECURITY MEASURES-LESSOR'S RESERVATION. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Building. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office building Project or any part thereof in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Building or building in which the Premises are located upon not less that 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building Standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office building Project or no pole signs in the Common Areas. 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Building or their name(s) in connection with Lessee's business. (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. EASEMENTS. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restriction, so long as any easements, rights, dedication, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this lease without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, in no way affects this Lease or imposes any liability upon Lessor. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligations to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of the party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of the said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. AUTHORITY. If Lessee is a corporation, trust or general or limited partnership, Lessee, and each individual executing this lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall warrant, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provision, Exhibits or addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. LENDER MODIFICATION. Lessee agrees to make such reasonable modification to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Building. 47. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all person or entities named herein as such Lessor or Lessee, respectively. 48. WORK LETTER. INTENTIONALLY DELETED. Page 6 of 7 County of Los Angeles Assessor's Map Book 5713 page 4 (Map) "120 W. UNION STREET" PASADENA, 91103 49. COMMUNICATIONS. Lessee shall be responsible for telephone/communications wire and equipment installation. An electrical permit may be required by the City of Pasadena. This permit will be secured by Lessee's Vendor. 50. ADDENDA. A) Tenant shall be responsible for installing electrical power to Premises. 51. ATTACHMENTS. Attached hereto are the following documents which constitute a part of this Lease: EXHIBIT "A" FLOOR PLAN LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. 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 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR 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 TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE TYPECRAFT, INC C/O D. HARRY MONTGOMERY RESTORATION HARDWARE, INC. 2040 E. WALNUT STREET 15 KOCH ROAD, SUITE J PASADENA, CA 91105 CORTE MADERA, CA 94925 (818) 795-8093 (415) 924-1905 /s/ D. HARRY MONTGOMERY DATE 10/26/95 /s/ TOM CHRISTOPHER DATE 10/26/95 - ------------------------ -------- -------------------- -------- By: D. HARRY MONTGOMERY, BY: TOM CHRISTOPHER, ITS PRESIDENT ITS C.E.O. (415) 925-0428 FAX /s/ LEN JASMIN DATE 10/26/95 - ------------------------ -------- BY: LEN JASMIN Page 7 of 7 AMENDMENT TO LEASE This is an amendment to the lease by and between Typecraft, Inc. (Lessor) and Restoration Hardware, Inc. (Lessee) for the property at 136 W. Union Street, Pasadena CA dated October 23d. 1995. Lessee and Lessor have mutually agreed to relocate the Premises to the rear section of 140 W. Union Street, consisting of approximately 3,500 square feet. Lessor shall have a demising wall constructed from the floor to the bottom of the roof truss. Lessee's anticipated move date shall be September 7th or shortly thereafter. All other terms and conditions of the Lease shall remain the same. Lessor Lessee Typecraft, Inc. Restoration Hardware, Inc. 2040 E. Walnut Street 15 Kock Road, Suite J Pasadena, CA 91107 Corte Madera, CA 94925 /s/ TOM CHRISTOPHER - ----------------------------------- --------------------------------- by: D. Harry Montgomery date by: Tom Christopher date by: Leon Jasmin date County of Los Angeles Assessor's Map Book 5713 page 4 (Map) "120 W. UNION STREET" PASADENA, 91103 EX-10.13 14 EXHIBIT 10.13 EXHIBIT 10.13 IDEALAB! FIRST AMENDMENT TO LEASE ABSTRACT FOR 2ND, 3RD & 8TH FLOORS 74 N. PASADENA AVENUE - -------------------------------------------------------------------------------- AMENDMENT DATE August 18, 1999 PREMISES Entire 2nd, 3rd and 8th Floors, approx. (ARTICLE 1) 29,064 rentable square feet each, totaling 87,192 rentable square feet. POSSESSION 2nd & 3rd floors - September 7, 1999 FIXTURIZATION PERIOD 2nd & 3rd floors - 60 days from (ARTICLE 1) possession, extended on a day for day basis due to delays caused by Lessor or Force Majeure. TERM 8th floor - 64 months and 1 week (ARTICLE 1) 2nd & 3rd floors - 59 months and 3 weeks COMMENCEMENT 8th Floor - June 24, 1999 (ARTICLE 1) 2nd & 3rd Floors - November 7, 1999 LEASE EXPIRATION October 31, 2004 (ARTICLE 1) BASE RENTAL RATE 8th floor - 6/24/99 to 12/31/99 $1.50 per (ARTICLE 1) rentable square foot, full service gross ($43,596.00 per month) 1/1/01 to 10/31/04 $1.83* per rentable square foot, full service gross ($53,187.12 per month). *THE RENT FOR THE 8TH FLOOR, COMMENCING 1/1/01, WAS REDUCED FROM $1.87 TO $1.83. 2nd & 3rd floors - 11/7/99 to 10/31/04 $1.78 per rentable square foot, full service gross ($103,467.84 per month). TOTAL MONTHLY RENT - FLOORS 2, 3 & 8: 11/7/99 TO 12/31/99 = $147,063.84. 1/1/00 TO 10/31/04 = $156,654.96. Page 1 of 6 IDEALAB! FIRST AMENDMENT TO LEASE ABSTRACT FOR 2ND, 3RD & 8TH FLOORS 74 N. PASADENA AVENUE - -------------------------------------------------------------------------------- PARKING Additional spaces for 2nd & 3rd floors: (ARTICLE 1) 7 per 1000 square feet (407 spaces): - 10 spaces, designated @ $65 per space, per month for entire term. - 397 spaces, non-designated @ $55 per space, per month for entire term. Total spaces for floors 2, 3 & 8, as of 11/7/99 to 10/31/04 73 designated. 595 non-designated --- 668 Total PARKING RENT 6/24/99-11/6/99 - $14,955 per month for (ARTICLE 1) designated and non-designated. 11/7/99-10/31/04 - $32,725 per month for designated and non-designated. OPERATING EXPENSES Base Year 2000 TENANT'S PROPORTIONATE SHARE (ARTICLE 1) 34.06% SECURITY DEPOSIT 8th floor - $138,670.00, 5%, non- (ARTICLE 1) compounded, interest will be paid annually, commencing 7/7/01, payable on or before 12/1/02 and December 1st of each year thereafter. 2nd & 3rd floors - $123,626.00 (one month's rent), 5% non-compounded interest will be paid on or before 12/1/00, and December 1st of each year thereafter. LETTER OF CREDIT - $251,906.00 (two month's rent). Provided there are no uncured defaults, Letter of Credit to be reduced by $125,953.00 as of 11/1/00 and is terminated as of 11/1/01 provided there are no uncured defaults. Page 2 of 6 IDEALAB! FIRST AMENDMENT TO LEASE ABSTRACT FOR 2ND, 3RD & 8TH FLOORS 74 N. PASADENA AVENUE - -------------------------------------------------------------------------------- TENANT IMPROVEMENTS "As-is". (Tenant received a $13.30 per (PARAGRAPH 3, PAGE 3 OF THE rentable square foot credit for the 2nd & FIRST AMENDMENT) 3rd floor, and a $10 per rentable square foot credit for the 8th floor. Tenant must spend a minimum of $290,640.00 ($10 per rentable square foot) on the 8th floor and a total of $871,920.00 ($15 per rentable square foot) on the 2nd & 3rd floors, in order to maintain the reduced rate. ASSIGNMENT/SUBLETTING Tenant has right to sublease; also (PARAGRAPH 14 OF THE LEASE, Affiliated Company Exception (Paragraph PAGE 15) 14.6 page 17). EXPANSION OPTIONS "First Option Space": Tenant has the right (PARAGRAPH 6, PAGE 4 OF to lease 2 additional floors or any THE FIRST AMENDMENT) portion thereof, as these floors become available. Landlord shall deliver to Tenant the Offer Notice describing the available space and its availability. Tenant must provide Landlord with written notice within 20 business days, after Offer Notice, but, not earlier than 9 months before Landlord expects applicable space to be available, accepting or rejecting the Offer Notice. Failure by Tenant to deliver notice within said period shall be deemed a rejection of the First Option Space and Tenant shall have no further rights to such space. If Tenant exercises its option, the term shall be co-terminus with the remaining term of the Lease. Base rent, tenant improvements and the base year shall be determined in accordance with Section 5.1.4.2 (market evaluation, arbitration, etc.) of the Lease. The period to agree on terms shall be reduced to 15 business days. Page 3 of 6 IDEALAB! FIRST AMENDMENT TO LEASE ABSTRACT FOR 2ND, 3RD & 8TH FLOORS 74 N. PASADENA AVENUE - -------------------------------------------------------------------------------- "Second Option Space": Provided Tenant has exercised its First Option, Tenant shall have a Second Option on the remaining floors of the Building. All of the terms and conditions of the First Option Space and Offer Notice shall apply to the Second Option. If Lessor requires an extension of the Lease Term, the extended term shall be for no more than 3 years, depending on the term remaining on Tenant's existing Lease, and the Base Rent shall be determined in accordance with Section 5.1.4.2 (market evaluation, arbitration, etc.) of the Lease. If the Second Option Space is exercised during Tenant's option period, then Tenant shall be granted one additional five year option, to be exercised by Tenant in writing, at least one year from the expiration of the remaining lease term. The base rent and other terms shall be in accordance in Section 5.1.4.2 of the Lease. If Tenant does not exercise its option for the Second Option Space, its rights with respect to the Second Option Space shall become subordinate to the rights granted to other tenant(s) who lease new space and/or expand their premises at the East Annex or the West Annex of the Parsons Campus after Tenant's rejection of the Second Option Space. The above expansion options are subject to existing leases, including options existing at the time of the execution of the First Amendment. Page 4 of 6 IDEALAB! FIRST AMENDMENT TO LEASE ABSTRACT FOR 2ND, 3RD & 8TH FLOORS 74 N. PASADENA AVENUE - -------------------------------------------------------------------------------- BELOW IS A STACKING PLAN FOR THE WEST ANNEX. TENANT FLOOR RENTABLE TERMINATION OPTIONS SQ. FT. DATE Kaiser Basement 17,420 07/31/03 2 @ 1 Yr Kaiser 1st 29,064 10/31/01 1 @ 5 Yrs Kaiser 4th 29,064 09/30/03 2 @ 1 Yr Kaiser 7th 29,064 10/30/03 2 @ 1 Yr Arco 5th & 6th 58,128 09/14/03 None RENEWAL OPTIONS One five year option, at fair market in (PARAGRAPH 4, PAGE 4 OF THE accordance with Paragraph 5.1.4.2 of the FIRST AMENDMENT) Lease. Must be exercised by 10/31/03 (one year in advance). Pursuant to Tenant's Second Option Space expansion rights, Tenant shall have an additional five year renewal option if Second Option Space expansion has been exercised during Tenant's first five year option (see Article 6.2.2 of the First Amendment to Lease and Article 29.19.5 of the Lease Agreement). FEMA RELOCATION Tenant shall reimburse Landlord for actual (PARAGRAPH 7, PAGE costs incurred by the Federal Emergency 6 OF THE FIRST AMENDMENT) Management Authority in its relocation from the 2nd floor of the West Annex to the East Annex. Such reimbursement shall not exceed $50,000 and shall be based on actual costs verified by copies of invoices. Payment must be made, to Landlord, within 20 days of receipt of invoices. Page 5 of 6 IDEALAB! FIRST AMENDMENT TO LEASE ABSTRACT FOR 2ND, 3RD & 8TH FLOORS 74 N. PASADENA AVENUE - -------------------------------------------------------------------------------- AFTER-HOURS HVAC After-hours HVAC - Exhibit "E" modified PARAGRAPH 10, PAGE 7 OF as follows: THE FIRST AMENDMENT) HOURLY RATES 1 FLOOR 2 FLOORS 3 FLOORS ------- -------- -------- Less than 2 hours in A 24-Hour Period $30 $56 $84 2-3 Hours in a 24-Hour Period $25 $46 $69 3 or More Hours in a 24-Hour Period $23 $42 $63 BUILDING SIGNAGE Tenant has the right, at its sole cost and (PARAGRAPH 8, PAGE 6 OF expense, to install a second monument sign THE FIRST AMENDMENT) at the Union Street entrance to the building. At the time Tenant has under lease, sublease or assignment, or any combination thereof, 4 full floors of the West Annex, provided Tenant has committed in writing for a 5th floor when available, then Tenant shall have the right at its sole cost and expense, to top of the building signage, facing Union Street, such signage to be consistent with the size of Parson's signage. Page 6 of 6 EX-10.14 15 EXHIBIT 10.14 EXHIBIT 10.14 SUB-SUBLEASE AGREEMENT THIS SUB-SUBLEASE AGREEMENT ("Agreement"), dated as of the 15TH day of September, 1999 for reference purposes only, between Countrywide Home Loans, Inc., a New York corporation ("Sub-sublessor") and Bill Gross' idealab!, a California corporation ("Sub-subtenant"). 1. BASIC TERMS. 1.1 ADDRESS OF SUB-SUBLESSOR: Countrywide Home Loans, Inc. 4500 Park Granada Attn: Patricia I. Poe Mail Stop CH-11 Calabasas, CA 91302 or such other address as may from time to time be designated by Sub-sublessor in writing. 1.2 ADDRESS OF SUB-SUBTENANT: Bill Gross' idealab! 130 Union Street Pasadena, CA 91103 Attn: Marcia Goldstein, Chief Operating Office With copy to: Bill Gross' idealab! 130 Union Street Pasadena, CA 91103 Attn: Pam Rushman, Facilities Manager or such other address as may from time to time be designated by Sub-subtenant in writing. 1.3 DEMISED PREMISES: The entire fourth floor consisting of approximately 24,007 rentable square feet of area in the Building as shown on EXHIBIT "A" attached hereto. 1.4 BUILDING: The Building in which the Demised Premises are located, the common address of which is 55 South Lake Avenue, Pasadena, CA. 1.5 MAIN LEASE: Pasadena Towers Office Lease dated as of September 24, 1990, as amended and assigned by instruments dated June 12, 1992, November 24, 1997 and June 24, 1997 (collectively, the "Main Lease"). Aon Service Corporation, assignee of Alexander & Alexander of California, Inc. ("Sublessor"), as tenant under the Main Lease entered into a Sublease Agreement dated as of November 24, 1997 with Sub-sublessor (the "Main Sublease"). Sub-sublessor represents and warrants that true, correct and complete copies of the Main Lease and the Main Sublease, including all Exhibits and Riders thereto, are attached hereto as EXHIBIT "B." 1.6 LANDLORD: EOP-Pasadena Towers, LLC, a Delaware limited liability company (successor in interest to Home Savings of America, F.A.). 1.7 SUBLESSOR: Aon Service Corporation, assignee of Alexander & Alexander of California, Inc. 1.8 SUB-SUBLEASE TERM: Commencement Date: Upon delivery of possession of any portion of the Demised Premises to Sub-subtenant following receipt of Landlord's consent and Sublessor's consent to this Agreement. Upon delivery of possession of the Demised Premises and receipt of the consents set forth herein, the Commencement Date shall be filled in here: SEPTEMBER 16, 1999. Expiration Date: December 29, 2001. Option to Extend: Provided Sub-sublessor has exercised its option to extend the Main Sublease, Sub-subtenant shall have one option to extend the Sub-sublease Term for five (5) years and approximately one (1) month. See SECTION 32. 1.9 RENT: All sums, moneys, payments, costs and expenses required to be paid by Sub-subtenant to Sub-sublessor pursuant to this Agreement. 1.10 BASIC RENT: $1.80 per rentable square foot per month ($43,212.60 per month). 1.11 PROVISIONS OF MAIN LEASE NOT INCORPORATED BY REFERENCE: 1(c), 1(d), 1(g), 1(j), 1(k), 1(l), 1(o), 1(p), 1(q), 1(r), 1(s), 1(t), 1(u), 1(v), 1(w), 1(x), 1(y), 6(c), 10, 15(b), 21(c), Exhibit C, Exhibit G, Exhibit I, Exhibit 1, 60, 61, 62, 64, 65, 66, 67, 68, 69, 70, 71, 73, 74, 75, 80, 81, 83, 87, 88(a), 89, 90, 91, 92, 95, 97, 98, 99, 101, 102, 103. 1.12 BASE YEAR: 2000 calendar year. 1.13 SUB-SUBTENANT'S PROPORTIONATE SHARE: 11.6% (which reflects the ratio of the rentable square feet of the Demised Premises to the rentable square feet of the Building). 1.14 SECURITY DEPOSIT: $129,637.80. The Security Deposit shall be delivered by Sub-subtenant to Sub-sublessor upon execution by Sub-subtenant of this Agreement and the receipt of Landlord's and Sublessor's consent to this Agreement, and shall be retained by Sub-sublessor as cash security for the faithful performance and observance by Sub- 2 subtenant of the covenants, agreements and conditions of this Agreement. Notwithstanding anything to the contrary contained in any law or statute now existing or hereafter passed (i) except as provided below, Sub-subtenant shall not be entitled to any interest on the Security Deposit; (ii) Sub-sublessor shall not be obligated to hold the Security Deposit in trust or in a separate account; and (iii) Sub-sublessor shall have the right to commingle the Security Deposit with its other funds. Sub-sublessor may use, apply or retain the whole or any part of the Security Deposit to the extent required for the payment of any Basic Rent or any other sums payable hereunder as to which Sub-subtenant is in default or to the extent required for the reimbursement to Sub-sublessor of any sum which Sub-sublessor may expend or may be required to expend by reason of Sub-subtenant's default with respect to any of the covenants, agreements or conditions of this Agreement. If any portion of the Security Deposit is so used or applied, Sub-subtenant shall within five (5) days after written demand therefor deposit cash with Sub-sublessor in an amount sufficient to restore the Security Deposit to the "Current Amount", as defined below, and Sub-subtenant's failure to do so shall constitute a material breach of this Sub-sublease. For the period commencing on the Commencement Date and ending on the last day of the sixth full calendar month following the Rent Commencement Date, as defined herein, the Current Amount shall be $129,637.80; for the period beginning on the first day of the seventh full calendar month following the Rent Commencement Date and ending on the last day of the fourteenth full calendar month following the Rent Commencement Date, the Current Amount shall be $86,425.20; and for the period beginning on the first day of the fifteenth full calendar month following the Rent Commencement Date, the Current Amount shall be $43,212.60. If Sub-subtenant is not then in default and has restored the Security Deposit to the then applicable Current Amount, Sub-sublessor shall apply $43,212.60 of the Security Deposit to the Basic Rent payable by Sub-subtenant hereunder for the seventh full calendar month following the Rent Commencement Date. If Sub-subtenant is not then in default and has restored the Security Deposit to the then applicable Current Amount, Sub-sublessor shall apply $43,212.60 of the Security Deposit to the Basic Rent payable by Sub-subtenant hereunder for the fifteenth full calendar month following the Rent Commencement Date. If Sub-subtenant shall fully and faithfully comply with all of the covenants, agreements and conditions of this Agreement, the then Current Amount shall be returned to Sub-subtenant after the date fixed as the expiration of the term hereof and surrender of the Demised Premises to Sub-sublessor. Sub-subtenant shall be entitled to receive five percent (5%) annual interest on $43,212.60 of the Security Deposit during the entire term of this Agreement. 1.15 PERMITTED USES: General office purposes, development of Internet companies, and all related uses permitted under the Main Lease. 1.16 BROKER: Travers Realty. 2. DEMISE AND TERM. Sub-sublessor hereby sub-subleases to Sub-subtenant, and Sub-subtenant hereby hires from Sub-sublessor, the Demised Premises, which Demised Premises are subleased under the Main Sublease to Sub-sublessor. The term of this Agreement shall be for the period specified in SECTION 1.8, commencing on the Commencement Date and ending on the 3 Expiration Date, unless sooner terminated or extended as herein provided. Sub-subtenant and Sub-sublessor agree that for the purposes of this Agreement, the rentable square footage of the Demised Premises shall be as designated in PARAGRAPH 1.3 and that there shall be no remeasurement of the Demised Premises. Possession of approximately 12,000 rentable square feet of the Demised Premises shall be delivered to Sub-subtenant on or before September 13, 1999, and possession of the remainder of the Demised Premises shall be delivered to Sub-subtenant on or before October 4, 1999; provided, however, that the effectiveness of this Agreement shall be subject to receiving Landlord's and Sublessor's consent to this Agreement. 3. SUBORDINATE TO MAIN SUBLEASE AND MAIN LEASE. This Agreement is and shall be subject and subordinate to the Main Sublease, the Main Lease, and to the matters to which the Main Lease is or shall be subject and subordinate. 4. INCORPORATION BY REFERENCE. 4.1 Except for the provisions of the Main Lease described in SECTION 1.11, the terms, covenants and conditions of the Main Lease are incorporated herein by reference so that, except to the extent that they are inapplicable or modified by the provisions of this Agreement for the purpose of incorporation by reference, each and every term, covenant and condition of the Main Lease binding or inuring to the benefit of the Landlord thereunder shall, in respect of this Agreement, bind or inure to the benefit of Sub-sublessor, and each and every term, covenant and condition of the Main Lease binding or inuring to the benefit of the Tenant thereunder shall, in respect of this Agreement, bind or inure to the benefit of Sub-subtenant, with the same force and effect as if such terms, covenants and conditions were completely set forth in this Agreement, and as if the words "Landlord" and "Tenant," or words of similar import, wherever the same appear in the Main Lease, were construed to mean, respectively, "Sub-sublessor" and "Sub-subtenant" in this Agreement, and as if the word "Premises," or words of similar import, wherever the same appear in the Main Lease, were construed to mean "Demised Premises" in this Agreement, and as if the word "Lease," or words of similar import, wherever the same appear in the Main Lease, were construed to mean this "Agreement." 4.2 Except for the time limits imposed on Sub-subtenant for the payment of Rent, the time limits contained in the Main Lease for the giving of notices, making of demands or performing of any act, condition or covenant on the part of the tenant thereunder, or for the exercise by the tenant thereunder of any right, remedy or option, are changed for the purposes of incorporation herein by reference by shortening the same in each instance by four (4) days, so that in each instance (other than for the times of performance set forth in Section 25(a) of the Main Lease) Sub-subtenant shall have four (4) days less time to observe or perform hereunder than Sublessor has as the Tenant under the Main Lease. 4.3 Any non-liability, release, indemnity or hold harmless provision in the Main Lease for the benefit of the Landlord under the Main Lease that is incorporated herein by reference, shall be deemed to inure to the benefit of Sub-sublessor, Sublessor and the Landlord, 4 for the purpose of incorporation by reference in this Agreement. 4.4 Any right of the Landlord of access or inspection and any right of the Landlord under the Main Lease to do work in the Demised Premised under the Main Lease or in the Building and any right of the Landlord in respect of rules and regulations shall be deemed to inure to the benefit of Sub-sublessor, Sublessor and the Landlord, for the purpose of incorporation by reference in this Agreement. 4.5 If any of the express provisions of this Agreement shall conflict with any of the provisions incorporated by reference, such conflict shall be resolved in every instance in favor of the express provisions of this Agreement. 5. PERFORMANCE BY SUB-SUBLESSOR. 5.1 Any obligation of Sub-sublessor which is contained in this Agreement by the incorporation by reference of the provisions of the Main Lease shall be observed or performed by Sub-sublessor using commercially reasonable efforts to cause the Landlord under the Main Lease to observe and/or perform the same, and Sub-sublessor shall have a reasonable time to enforce its rights to cause such observance or performance. Sub-sublessor shall not be required to furnish, supply or install anything under any article of the Main Lease. Sub-subtenant shall not in any event have any rights in respect of the Demised Premises greater than Sub-sublessor's rights under the Main Sublease and the Main Lease, and notwithstanding any provision to the contrary, as to obligations that pertain to the Demised Premised and are contained in this Agreement by the incorporation by reference of the provisions of the Main Lease, Sub-sublessor shall not be required to make any payment or perform any obligation, and Sub-sublessor shall have no liability to Sub-subtenant for any matter whatsoever, except for Sub-sublessor's obligation to pay the rent and additional rent due under the Main Sublease, Sub-sublessor's obligation to comply with the terms and conditions of the Main Sublease which have not become obligations of Sub-subtenant pursuant to this Agreement and for Sub-sublessor's obligation to use commercially reasonable efforts, upon request of Sub-subtenant, to cause the Sublessor under the Main Sublease to observe and/or perform its obligation under the Main Sublease and Landlord under the Main Lease to observe and/or perform its obligations under the Main Lease. Sub-sublessor shall not be responsible for any failure or interruption, for any reason whatsoever, of the services or facilities that may be appurtenant to or supplied at the Building by the Landlord or otherwise, including, without limitation, heat, air conditioning, water, electricity, maintenance and/or repairs, elevator service and cleaning service, if any; and no failure to furnish, or interruption of, any such services or facilities shall give rise to any liability on the part of Sub- sublessor except to the extent caused by Sub-sublessor's failure (a) to pay the rent and additional rent due under the Main Sublease and to otherwise comply with the provisions of the Main Sublease, except for provisions that have become the obligation of Sub-subtenant pursuant to this Agreement, to the extent that such failure would materially adversely affect Sub-subtenant's use of the Demised Premises, or (b) to use commercially reasonable efforts to cause Landlord to perform such obligations under the Main Lease. Sub-sublessor shall provide to Sub-subtenant true and correct copies of all communications between Sub-sublessor and the Landlord in connection with Sub-sublessor's performance of its obligations under this Section. 5 5.2 Notwithstanding any contrary provision of this Agreement, Sub-sublessor shall be liable to Sub-subtenant for breach of this Agreement where: (a) Sub-sublessor fails to use commercially reasonable efforts to cause (i) Sublessor under the Main Sublease to observe, perform and discharge the obligations of Sublessor thereunder insofar as they pertain to the Demised Premises, and/or (ii) Landlord under the Main Lease to observe, perform and discharge the obligations of Landlord thereunder insofar as they pertain to the Demised Premised; (b) (i) Sublessor is excused from performing under the Main Sublease as a consequence of Sub-sublessor's default thereunder and such default is not attributable to a corresponding default by Sub-subtenant under this Agreement and/or (ii) Landlord is excused from performing under the Main Lease as a consequence of Sub-sublessor's default thereunder and such default is not attributable to a corresponding default by Sub-subtenant under this Agreement; or (c) Sub-sublessor fails to reasonably cooperate with Sub-subtenant as required to secure enforcement of the Main Sublease against Sublessor and/or damages for breach thereof and/or the Main Lease against Landlord and/or damages for breach thereof. 5.3 It is the parties' intention that Sub-subtenant shall be provided all of the utilities and services which the Landlord is obligated to provide under the Main Lease to the Demised Premises. Certain provisions of the Main Lease are not incorporated by reference in this Agreement because they pertain to obligations Landlord is to perform under the Main Lease which Sub-sublessor is not capable of independently performing under this Agreement. To the extent these provisions of the Main Lease pertain to the Demised Premises, Sub-sublessor shall use commercially reasonable efforts to enforce the observance and performance thereof by Landlord. It is understood that the absence of privity of contract between Sub-subtenant and Landlord may necessitate that Sub-sublessor prosecute in its name, for Sub-subtenant's benefit, such proceedings at law or equity as may be reasonably required to enforce such rights and remedies accorded to Sub-subtenant hereunder. In the event of any such prosecution, Sub-subtenant shall pay all costs of Sub-sublessor in prosecuting such proceeding, including attorneys' fees and costs. 5.4 Sub-subtenant agrees that due to the absence of privity of contract between Sub-sublessor and Landlord, Sub-sublessor shall be deemed to have discharged any duty hereunder to use commercially reasonable efforts to cause Landlord to perform its obligations under the Main Lease if Sub-sublessor shall have used commercially reasonable efforts to cause Sublessor to cause Landlord to so perform. 6. NO BREACH OF MAIN LEASE. With respect to Sub-subtenant's obligations under this Sub-sublease, Sub-subtenant shall not do or permit to be done any act or thing which may constitute a breach or violation of any term, covenant or condition of the Main Lease by the tenant thereunder, whether or not such act or thing is permitted under the provisions of this Agreement. Sub-sublessor shall perform its obligations under the Main Lease and the Main Sublease except to the extent Sub-subtenant is obligated herein to perform same. 6 7. INTENTIONALLY DELETED. 8. INDEMNITY. Notwithstanding the incorporation by reference of Rider Section 100 of the Main Lease, Sub-sublessor shall not be responsible, nor shall Sub-subtenant be relieved of its indemnity obligation, for loss, cost, liability, damage and expense resulting from the passive negligence (as opposed to active negligence) of Landlord or its agents, contractors, servants, employees or licensees. Except as provided in the preceding sentence, Sections 19 and 20 of the Main Lease, and Rider Section 100 of the Main Lease, are incorporated herein by reference such that the terms thereof shall have the same force as if completely set forth in this Agreement, and as if the words "Landlord" and "Tenant" wherever they appear therein were construed to mean, respectively, "Sub-sublessor" and "Sub-subtenant", and as if the words "Lease" and "Premises" wherever they appear therein were construed to mean, respectively, "Sub-sublease" and "Demised Premises". 9. BASIC RENT. From and after December 13, 1999 (the "Rent Commencement Date"), Sub-subtenant shall pay without deduction or offset, monthly basic rent ("Basic Rent") in the amounts specified in SECTION 1.10. Basic Rent shall be payable in advance on the first day of each month during the term of this Agreement. Basic Rent and all other amounts payable by Sub-subtenant to Sub-sublessor (except in the event Sub-subtenant is required to make such payments to the Landlord) under the provisions of this Agreement (such amounts other than Basic Rent being herein called the "Additional Rent") shall be paid when due (within five (5) business days after receipt of demand as to Additional Rent but without notice as to Basic Rent). Sub-sublessor shall have the same rights and remedies for the non-payment of Additional Rent as for the non-payment of Basic Rent. Basic Rent and Additional Rent shall be paid to Sub-sublessor in lawful money of the United States at the address of Sub-sublessor set forth at the head of this Agreement or to such other person and/or at such other address as Sub-sublessor may from time to time designate by, notice to Sub-subtenant. No payment by Sub-subtenant or receipt by Sub-sublessor of any lesser amount than the amount stipulated to be paid hereunder shall be deemed other than on account of the earliest stipulated Basic Rent or Additional Rent; nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction, and Sub-sublessor may accept any check or payment without prejudice to Sub-sublessor's right to recover the balance due or to pursue any other remedy available to Sub-sublessor. 10. RENT ABATEMENT. To the extent that Sub-sublessor receives a rent abatement relating to the Demised Premises pursuant to the Main Lease Rider No. 1, Paragraph 95, Sub-subtenant shall be entitled to a dollar-for-dollar rent abatement of rent owing under this Agreement. 11. OPERATING EXPENSES. 11.1 Commencing January 1, 2001 and continuing on the first day of each succeeding month during the Sub-sublease Term, Sub-subtenant shall pay Sub-subtenant's Proportionate Share of increased Operating Expenses (as the term "Operating Expenses" is 7 defined in the Main Lease) for the then current calendar year over Operating Expenses for the Base Year with respect to the Building. At such time as Landlord reconciles estimated payments of Operating Expenses in accordance with the Main Lease, Sub-sublessor likewise shall reconcile the estimated payments of Operating Expenses to actual amounts thereof adjusted to reflect the assumption that the Building is 100% occupied for the Base Year and the applicable expense year. Any amount owed by one party to the other to be paid within thirty (30) days after Sub-sublessor delivers to Sub-subtenant copies of both the Landlord's annual reconciliation statement under the Main Lease and Sub-sublessor's statement of Sub-subtenant's Proportionate Share of Operating Expenses in excess of the Operating Expenses for the Base Year with respect to the Building. The provisions of this Section 11.1 shall survive the expiration or earlier termination of this Agreement. 11.2 Sub-subtenant's Proportionate Share of Operating Expenses shall be determined as follows: (a) Sub-sublessor shall determine the Operating Expenses which would be payable by Sub-sublessor under Section 6 of the Main Lease with respect to the Demised Premises as if the Base Year under the Main Lease were the same as the Base Year under this Agreement; and (b) Sub-subtenant's Proportionate Share under PARAGRAPH 1.13 shall be applied to the increases in Operating Expenses for the Building over the Base Year. Subject to PARAGRAPH 11.3 below, Sub-sublessor shall be entitled to rely on the computations of Operating Expenses made by Landlord under the Main Lease. 11.3 If Landlord makes any permitted adjustment to Operating Expenses under the Main Lease after the annual reconciliation has been completed, a corresponding adjustment shall be made under this Agreement. If requested by Sub-subtenant, Sub-sublessor will at Sub-subtenant's expense cause Sublessor to exercise its rights under the Main Lease to inspect and audit Landlord's books and records pertaining to Operating Expenses. 12. USE. Sub-subtenant shall use and occupy the Demised Premises for the use specified in SECTION 1.15 above and for no other purpose. 13. CONDITION OF DEMISED PREMISES; USE OF FACILITIES. Sub-subtenant is leasing the Demised Premises "as is." In making and executing this Agreement, Sub-subtenant has relied solely on such investigations, examinations and inspections as Sub-subtenant has chosen to make or has made. Sub-subtenant acknowledges that Sub-sublessor has afforded Sub-subtenant the opportunity for full and complete investigations, examinations, and inspections. Any improvements to be made by Sub-subtenant pursuant to this Agreement shall be the sole responsibility of Sub-subtenant. Sub-sublessor shall vacate the Demised Premises, including the Computer/Switch Room in the Demised Premises, no later than October 4, 1999. During the period commencing on September 13, 1999 and ending October 4, 1999, Sub-sublessor shall at its sole cost and expense segregate its existing equipment in such Computer/Switch Room in a manner that prevents Sub-subtenant from gaining access to such equipment without Sub- 8 sublessor's consent. Sub-sublessor, at its sole cost and expense, shall segregate the security control systems serving the Demised Premises from the security control systems serving other premises occupied by Sub-sublessor in the Building by de-activating Sub-sublandlord's security system access cards with respect to the Demised Premises and providing Sub-subtenant with use of and full access to the security systems with respect to the Demised Premises. Upon reasonable prior notice to Sub-subtenant (except in emergencies), Sub-subtenant agrees to provide Sub-sublessor with access to such control systems serving the Demised Premises in the event that Sub-sublessor requires such access to maintain or repair the control systems serving the other premises occupied by Sub-sublessor. Sub-subtenant agrees to provide to Sub-sublessor following the commencement of the term hereof the names of the persons authorized to grant such access to Sub-sublessor. All furniture in the Demised Premises belonging to Sub-sublessor shall be removed by Sub-sublessor at its sole expense, provided that all electricity floor boxes and the conference room table and chairs shall remain in the Demised Premises and shall be available for use by Sub-subtenant during the term of this Agreement at no additional cost to Sub-subtenant. Notwithstanding the foregoing, in the event Sub-sublessor shall vacate all of Sub-sublessor's Premises, Sub-sublessor shall leave the security control systems for use by Sub-subtenant during the Term of this Agreement. 14. CONSENTS AND APPROVALS. In any instance when Sub-sublessor's consent or approval is required under this Agreement, Sub-sublessor's refusal to consent to or approve any matter or thing shall be deemed reasonable if, INTER ALIA, such consent or approval has not been obtained from the Landlord under the Main Lease or the Sublessor under the Main Sublease. Otherwise, Sub-sublessor's consent or approval as required under this Agreement shall not be unreasonably withheld or delayed. 15. NOTICES. All notices, consents, approvals, demands and requests which are required or desired to be given by either party to the other hereunder shall be in writing and shall be either (a) personally delivered or (b) sent by United States postal service, return receipt requested and postage prepaid or (c) sent by nationally recognized overnight courier. Notices, consents, approvals, demands and requests which are served upon Sub-sublessor or Sub-subtenant in the manner provided herein shall be deemed to have been given or served for all purposes hereunder (i) on the date of delivery if personally delivered or sent by courier service or (ii) on the date on which such notice, consent, approval, demand or request shall have been mailed if mailed as aforesaid. All notices, consents, approvals, demands and requests shall be addressed as specified in SECTION 1.1 and/or 1.2, or at such other place as the receiving party may from time to time designate in a notice given in accordance with the provisions of this Section. 16. TERMINATION OF MAIN LEASE OR MAIN SUBLEASE. If for any reason the term of the Main Lease or Main Sublease shall terminate prior to the expiration date of this Agreement, this Agreement shall thereupon be terminated and Sub-sublessor shall not be liable to Sub-subtenant by reason thereof unless said termination shall have been effected because of the breach or default of Sub-sublessor under the Main Lease, Main Sublease or this Agreement. If the Landlord or Sublessor wrongfully terminates or attempts to wrongfully terminate the Main Lease or Main Sublease, Sub-sublessor shall use commercially reasonable efforts to keep the Main Lease and Main Sublease in full force and effect. 9 17. INSURANCE. Sub-subtenant shall maintain throughout the term of this Agreement the insurance required under the Main Lease to be maintained by Sublessor relating to the Demised Premises. All insurance maintained by Sub-subtenant shall name Sub-sublessor, Sublessor and the Landlord as additional insureds. Sub-subtenant shall deliver to Sub-sublessor, Sublessor and the Landlord certificates of insurance issued by the carriers or their duly authorized agents prior to the Commencement Date. Sub-subtenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Sub-subtenant shall deliver to Sub-sublessor, Sublessor and the Landlord such renewal policies or certificates at least ten (10) days before the expiration of any existing policy. All such policies shall meet the requirements in the Main Lease and shall be issued by companies of recognized responsibility licensed to do business in the State of California and all such policies shall contain a provision whereby the same cannot be canceled or modified unless Sub-sublessor, Sublessor and the Landlord are given at least 20 days' prior written notice by certified or registered mail of such cancellation or modification. 18. ESTOPPEL CERTIFICATES. Sub-subtenant shall, within ten (10) business days after receipt of each and every request by Sub-sublessor hereto, execute, acknowledge and deliver to the party that made the request a statement in writing (a) certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (b) specifying the dates to which the Basic Rent and Sub-subtenant's Proportionate Share of Operating Expenses (as defined in the Main Lease and adjusted as provided in this Agreement) have been paid, (c) stating whether or not, to the best knowledge of Sub-subtenant, Sub-sublessor is in default in performance or observance of its obligations under this Agreement, and, if so, specifying each such default, (d) stating whether or not, to the best knowledge of the party signing same, any event has occurred which with the giving of notice or passage of time, or both, would constitute a default by Sub-sublessor under this Agreement, and, if so specifying each such event, (e) stating whether Sub-subtenant has exercised any option(s) to extend the term of this Agreement, and, if so, specifying each such extension, and (f) any other matter reasonably requested by Sub-sublessor. Any such statement delivered pursuant to this section may be relied upon by any prospective assignee or transferee of the leasehold estate under the Main Lease or the subleasehold estate under the Main Sublease or the sub-subleasehold estate under this Agreement. 19. ALTERATIONS. Sub-subtenant shall not make, cause or permit the making of any alterations, addition, change, replacement, or installation in or to the Demised Premises without obtaining the prior consent of the Sub-sublessor, and Sub-subtenant will be required to obtain the consent of the Landlord in each instance if required under the Main Lease and the Sublessor if required under the Main Sublease. 20. RIGHT TO CURE SUB-SUBTENANT'S DEFAULTS. If Sub-subtenant shall at any time fail to make any payment or perform any other obligation of Sub-subtenant hereunder, then Sub-sublessor shall have the right, but not the obligation, after 10 days' notice to Sub-subtenant, or without notice to Sub-subtenant in the case of any emergency, and without waiving or releasing Sub-subtenant from any obligations of Sub-subtenant hereunder, to make such payment or perform such other obligation of Sub-subtenant in such manner and to such extent as Sub-sublessor shall deem necessary, and in exercising any such right, to pay any incidental costs 10 and expenses, employ attorneys, and incur and pay reasonable attorneys' fees. Sub-subtenant shall pay to Sub-sublessor within five (5) days after receipt of demand all sums so paid by Sub-sublessor and all incidental costs and expenses of Sub-sublessor in connection therewith, together with interest thereon at the rate of one and one-half percent per calendar month or any part thereof or the then maximum lawful interest rate, whichever shall be less, from the date of the making of such expenditures until payment shall be made. 21. BROKERAGE. Sub-subtenant and Sub-sublessor each represent to the other that it dealt with no broker or other person in bringing about this Agreement other than the broker(s) listed in SECTION 1.16 above. Sub-sublessor shall be solely responsible for payment of commissions to such brokers pursuant to written agreements between Sub-sublessor and such brokers. Sub-sublessor shall indemnify, defend and hold harmless Sub-subtenant from and against any loss, liability, damage, cost and expenses (including, without limitation, reasonable attorneys' fees) in connection with Sub-sublessor's obligation to pay commissions to such brokers as contained in such written agreements. Each party hereto shall indemnify, defend and hold harmless, the other party from and against, any loss, liability, damage, cost and expense (including, without limitation, reasonable attorneys' fees) in connection with (a) any claims made by any other broker or other person for a brokerage commission, finder's fee, or similar compensation, by reason of or in connection with this Agreement if such other broker or other person claims to have had dealings with the indemnifying party and/or (b) the enforcement of the indemnified party's rights under this Section. 22. ARBITRATION. Except for any breach of this Agreement for which Sub- sublessor shall be entitled to file an unlawful detainer action (which shall not be precluded by this Section 22), any claim demand or cause of action, which arises out of or is related to this Agreement (collectively, "Claims"), shall be resolved by binding arbitration in accordance with (i) the Federal Arbitration Act; (ii) the Code of Procedure ("Code") of the National Arbitration Forum ("NAF") and (iii) this Agreement, which shall control any inconsistency between it and the Code. The NAF shall provide each party a list of arbitrators and each party shall have the right to strike one name. The number of arbitrators on the list will be the number of parties plus one. The decision of an arbitrator on any Claims submitted to arbitration shall follow applicable substantive law and be in writing setting forth the findings of fact and law and the reasons supporting the decision. Such decision shall be final and binding upon the parties, subject to the right of appeal described below. Judgment upon any arbitration award may be entered in any court having jurisdiction. The arbitrator has exclusive authority to resolve any dispute relating to the applicability or enforceability of this Agreement, including the provisions of this section. After a demand for arbitration is made, each party may conduct a limited number of depositions (including the production of documents) by mutual agreement or as permitted by the arbitrator. 23. NO WAIVER. The failure of Sub-sublessor or Sub-subtenant to insist in any one or more cases upon the strict performance or observance of any obligation of Sub-subtenant or Sub-sublessor hereunder or to exercise any right or option contained herein shall not be construed as a waiver or relinquishment for the future of any such obligation of Sub-subtenant or Sub-sublessor or any right or option of Sub-sublessor or Sub-subtenant. Sub-sublessor's receipt and acceptance of Basic Rent or Operating Expenses, or Sub-sublessor's acceptance of performance of any other obligation by Sub-subtenant, with knowledge of Sub-subtenant's breach of any 11 provision of this Agreement, shall not be deemed a waiver of such breach. No waiver by Sub-sublessor or Sub-subtenant of any term, covenant or condition of this Agreement shall be deemed to have been made unless expressed in writing and signed by Sub-sublessor or Sub-subtenant, as the case may be. 24. COMPLETE AGREEMENT. There are no representations, warranties, agreements, arrangements or understandings, oral or written, between the parties or their representatives relating to the subject matter of this Agreement which are not fully expressed in this Agreement. This Agreement cannot be changed or terminated orally or in any manner other than by a written agreement executed by both parties. 25. SUCCESSORS AND ASSIGNS. The provisions of this Agreement, except as herein otherwise specifically provided, shall extend to, bind and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and permitted assigns. In the event of any assignment or transfer of Sub-sublessor's interest in the leasehold estate under the Main Lease or Main Sublease, the transferor or assignor, as the case may be, shall be and hereby is entirely relieved and freed of all obligations under this Agreement arising after the date of such assignment or transfer. No such assignment or transfer by Sub-sublessor shall be effective unless and until the assignee or transferee assumes in writing all of Sub-sublessor's obligations under this Agreement. 26. THIRD PARTY CONSENTS. 26.1 This Agreement shall have no effect until the Landlord and Sublessor shall each have given its written consent hereto. If the Landlord or Sublessor does not give its consent to this Agreement for any reason whatsoever on or before thirty (30) days after the date of execution hereof by Sub-subtenant and Sub-sublessor, then either party may cancel this Agreement by notice given to the other party. 26.2 If this Agreement is cancelled pursuant to PARAGRAPH 26.1 of this Agreement, (i) this Agreement shall be deemed null and void and of no effect, (ii) if Sub-subtenant is then in possession of all or any part of the Demised Premises, Sub-subtenant shall (x) immediately quit and surrender to Sub-sublessor the Demised Premises and (y) remove all of its property, and (iii) Sub-sublessor shall promptly return to Sub-subtenant the Security Deposit, and the amount paid by Sub-subtenant upon the execution of this Agreement for the payment of the first full monthly installment of Basic Rent. Sub-subtenant shall repair any damage caused by the removal of its property and shall restore the Demised Premises to their condition prior to the installation of the items so removed. 27. NO THIRD PARTY BENEFICIARY. None of the provisions of this Agreement shall be construed to accrue to the benefit of, or be enforceable by, any third party, other than the Landlord and Sublessor. 28. INTERPRETATION. Irrespective of the place of execution or performance, this Agreement shall be governed by and construed in accordance with the laws of the State of California. If any provision of this Agreement or the application thereof to any person or 12 circumstances shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of that provision to other persons or circumstances shall not be affected but rather shall be enforced to the extent permitted by law. The captions, headings and titles, if any, in this Agreement are solely for convenience or reference and shall not affect its interpretation. This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party causing this Agreement to be drafted. Each covenant, agreement, obligation or separate and independent covenant of the party bound by, undertaking or making same, shall not be dependent on any other provision of this Agreement unless otherwise expressly provided. All terms and words used in this Agreement shall mean a natural person or persons, a partnership, a corporation or other form of business or legal association or entity. 29. AMENDMENT OR MODIFICATION. Sublessor and Landlord shall not amend or modify the Main Lease, and Sub-sublessor and Sublessor shall not modify the Main Sublease, in any way so as to materially or adversely affect Sub-subtenant or its interest hereunder or in the Demised Premises, materially increase Sub-subtenant's obligations hereunder or materially restrict Sub-subtenant's rights hereunder. 30. QUIET ENJOYMENT; RIGHT TO CURE. Sub-subtenant shall peacefully have, hold and enjoy the Demised Premises, subject to the terms and conditions of this Agreement, provided that Sub-subtenant pays all Basic Rent and Additional Rent and performs all of Sub-subtenant's covenants and agreements contained herein. In the event, however, that Sub-sublessor defaults in the performance or observance of any of Sub-sublessor's obligations hereunder or under the Main Sublease or Main Lease, then Sub-subtenant shall give Sub-sublessor notice specifying in what manner Sub-sublessor has defaulted, and if such default shall not be cured by Sub-sublessor within thirty (30) days thereafter (except that if such default cannot be cured within said thirty (30)-day period, this period shall be extended for an additional reasonable time, provided that Sub-sublessor diligently commences to cure such default within such thirty (30)-day period and proceeds diligently thereafter to effect such cure as quickly as possible), then in addition, Sub-subtenant shall be entitled, at Sub-subtenant's option, to cure such default and promptly collect from Sub-sublessor Sub-subtenant's reasonable expenses in so doing (including, without limitation, reasonable attorneys' fees and court costs). Sub-subtenant shall not be required, however, to wait the entire cure period described herein if earlier action is required to comply with the Main Lease or Main Sublease or with any applicable governmental law, regulation or order. Sub-sublessor shall provide copies to Sub-subtenant of all notices received from Landlord and/or Sublessor. 31. TERMINATION OF MAIN SUBLEASE BY SUB-SUBLESSOR. Sub-sublessor shall not voluntarily terminate the Main Sublease during the Term hereof unless and until Sublessor has agreed in writing to continue this Agreement in full force and effect as a direct sublease between Sublessor and Sub-subtenant upon and subject to all of the terms, covenants and conditions of this Agreement for the balance of the Term hereof. If Sublessor so consents, Sub-subtenant shall attorn to Sublessor in connection with any such voluntary termination and shall execute an attornment agreement in such form as may reasonably be requested by Sublessor; 13 provided, however, that the attornment agreement does not materially adversely affect the use by Sub-subtenant of the Demised Premises in accordance with the terms of this Agreement, materially increase Sub-subtenant's obligations under this Agreement or materially decrease Sub-subtenant's rights under this Agreement. If this Agreement terminates as a result of Sub-sublessor's default under the Main Sublease, then, so long as Sub-subtenant is not then in default beyond any applicable cure period under the terms of this Agreement, this Agreement shall continue in full force and effect as a direct sublease between Sub-subtenant and Sublessor, upon and subject to all of the terms, covenants and conditions of the Agreement for the balance of the Term hereof. In such event, Sub-subtenant shall attorn to Sublessor as set forth in this paragraph. 32. OPTION TO EXTEND. 32.1 Provided Sub-sublessor has exercised its option to extend as provided in the Main Sublease, Sub-subtenant shall have one option to extend the term of this Agreement for a period of five (5) years and approximately one (1) month (the "Option Term"), which option shall be exercisable by notice delivered by Sub-subtenant to Sub-sublessor not less than thirteen (13) months prior to the Expiration Date. Upon the proper exercise of such Option to extend, the term of this Agreement shall be extended for a period of five (5) years and approximately one (1) month, so as to expire on January 31, 2007. The Basic Rent payable by Sub-subtenant during the Option Term shall be the fair market rental value as negotiated between Sub-sublessor and Sublessor pursuant to Section 32 of the Main Sublease, provided, however, that in no event shall the Basic Rent payable during the Option Term be less than the Basic Rent specified in SECTION 1.10. Sub-subtenant shall pay Additional Rent and its Proportionate Share of Operating Expenses during the Option Term as set forth in this Agreement. 33. PARKING. Sub-subtenant shall be entitled to 72 parking spaces (calculated at the rate of 3 parking spaces per 1,000 rentable square feet of the Demises Premises) on the terms and conditions set forth in the Main Lease. Except as otherwise provided herein, all provisions of the Main Lease applicable to parking privileges are incorporated herein by reference. 34. ASSIGNMENT AND SUBLETTING. Sub-subtenant shall not assign or encumber its interest in this Agreement or the Demised Premises, or further sublease all or any part of the Demised Premises, without the prior written consent of Sub-sublessor, which consent shall not be unreasonably withheld, conditioned, or delayed. Notwithstanding the foregoing, subject to any restrictions in the Main Lease or Main Sublease, Sub-subtenant shall have the right upon prior written notice to Sub-sublessor to assign this Agreement in its entirety or to further sublease all or any portion of the Demised Premises to: (i) any entity resulting from a merger or consolidation with Sub-subtenant; or (ii) any entity succeeding to the business and assets of Sub-subtenant. Sub-sublessor shall be entitled to receive fifty percent (50%) of any Profits (as hereinafter defined) from any assignment or further sublease by Sub-subtenant requiring the prior written consent of Sub-sublessor. As used herein, "Profits" shall mean any rents, additional charges or other consideration payable to Sub-subtenant by the subtenant or assignee in excess of Basic Rent and Additional Rent (less Sub-subtenant's reasonable costs associated with such sublease) payable by Sub-subtenant under this Agreement. In no event shall any assignment or sublease by Sub-subtenant (regardless of whether such assignment or sublease required Sub-sublessor's consent) release or relieve Sub-subtenant from any obligation under this Agreement. 14 35. ATTORNEYS' FEES. In any action between Sub-sublessor and Sub-subtenant to enforce any of the terms and provisions of this Agreement, the prevailing party in such action shall be awarded, in addition to damages or other relief, its actual attorneys' fees and all fees, costs and expenses incurred in connection with such action. 36. RIGHT OF FIRST OFFER. Sub-subtenant shall have a right of first offer (the "Right of First Offer") to sub-sublease, at its option, any additional premises in the Building subleased by Sub-sublessor as of the date hereof that Sub-sublessor wishes to sub-sublet during the term hereof ("Additional Space"). Sub-sublessor shall notify Sub-subtenant of its intent to sub-sublet Additional Space (the "Notice") as well as the number of square feet proposed to be sub-sublet, and Sub-subtenant shall have ten (10) days to exercise the Right of First Offer. If Sub-subtenant does not notify Sub-sublessor in writing of its election to exercise the Right of First Offer within such ten (10) day period, then Sub-subtenant shall be deemed to have waived the Right of First Offer with respect to the Additional Space of which it has been notified. If Sub-subtenant exercises the Right of First Offer, Sub-subtenant shall sub-sublease from Sub-sublessor the entire Additional Space described in the Notice on the terms and conditions set forth in this Agreement, except that the Basic Rent payable with respect to the Additional Space shall be the amount of Basic Rent per rentable square foot being paid for the Demised Premises by Sub-sublandlord at the time Sub-subtenant exercises the Right of First Offer. 37. REPRESENTATIONS BY SUB-SUBLESSOR. Sub-sublessor represents and warrants that(a) to Sub-sublessor's best knowledge, the copy of the Main Lease and Main Sublease attached hereto as "Exhibit B" is true and complete copy of the Main Lease and the Main Sublease and, except as set forth therein, there are no additional agreements between Landlord and Sub-sublessor with respect to the Demised Premises, and (b) to Sub-sublessor's best knowledge, there are no defaults on the part of Landlord, Sublessor or Sub-sublessor under the Main Sublease and, to Sub-sublessor's best knowledge, no event has occurred which, with the giving of notice and the passage of time, would constitute a default under the Main Sublease. 38. COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed in counterparts, each of which shall be fully effective and all of which together shall constitute one and the same instrument. This Agreement shall be effective upon delivery by each party to the other of a facsimile of an executed signature page, subject to delivery of a signature page bearing an original signature with 24 hours. 15 IN WITNESS WHEREOF, Sub-sublessor and Sub-subtenant have hereunto executed this Agreement as of the day and year first above written. Countrywide Home Loans, Inc., a New York corporation By: ----------------------------------------- Name: --------------------------------------- Its: ---------------------------------------- Bill Gross' idealab! a California corporation By: /s/ MARCIA GOODSTEIN ----------------------------------------- Name: Marcia Goodstein --------------------------------------- Its: Chief Operating Officer ---------------------------------------- 16 EX-10.15 16 EXHIBIT 10.15 EXHIBIT 10.15 LEASE AGREEMENT PARSONS WEST ANNEX 74 N. PASADENA AVE. PASADENA, CALIFORNIA LESSOR: PARSONS INFORMATION & TECHNOLOGY GROUP, INC. LESSEE: BILL GROSS' IDEALAB! PARSONS WEST ANNEX LEASE AGREEMENT TABLE OF CONTENTS
Page ARTICLE 1: BASIC LEASE PROVISIONS .........................................................................1 1.1 Provisions ............................................................................1 ARTICLE 2: EXHIBITS .......................................................................................3 2.1 Enumeration ...........................................................................3 ARTICLE 3: DESCRIPTION OF THE BUILDING AND PREMISES .......................................................4 3.1 The Building ..........................................................................4 3.2 Premises ..............................................................................4 3.3 Common Areas ..........................................................................5 3.4 Restricted Common Areas ...............................................................5 ARTICLE 4: LEASE TERM .....................................................................................5 4.1 Lease Term ............................................................................5 4.2 Option to Extend ......................................................................5 4.3 Confirmation of Actual Commencement Date ..............................................6 4.4 Lessor's Delay in Delivery ............................................................6 ARTICLE 5: RENT ...........................................................................................6 5.1 Rent ..................................................................................6 5.2 Building Operating Expenses ...........................................................7 5.3 Late Fee ..............................................................................8 5.4 Rent ..................................................................................8 5.5 Address for Payments ..................................................................8 ARTICLE 6: TAXES ..........................................................................................9 6.1 Real Estate Taxes .....................................................................9 6.2 Personal Property Taxes ..............................................................10 ARTICLE 7: POSSESSION AND USE ............................................................................10 7.1 Possession ...........................................................................10 7.2 Permitted Uses .......................................................................10 7.3 Rules and Regulations ................................................................10 ARTICLE 8: UTILITIES AND SERVICES ........................................................................10 8.1 Lessor's Covenants ...................................................................10 8.2 Lessee's Covenants ...................................................................11 8.3 Standards for Utilities and Services .................................................11 8.4 Lessor's Right to Cease Service ......................................................11 ARTICLE 9: INDEMNITY AND INSURANCE .......................................................................12 9.1 Indemnity by Lessee ..................................................................12 9.2 Lessor's Insurance ...................................................................12 9.3 Lessee's Insurance ...................................................................12 9.4 Assumption of Risk ...................................................................13 9.5 Insurance Related Use Restrictions ...................................................13
(i) ARTICLE 10: ALTERATIONS ...................................................................................13 10.1 Alterations ..............................................................................13 10.2 Rights Upon Termination ..................................................................14 ARTICLE 11: MECHANIC'S LIENS ..............................................................................14 11.1 Lessee's Covenants ...................................................................14 11.2 Contest of Lien ......................................................................14 11.3 Right to Cure ........................................................................14 11.4 Notice of Lien .......................................................................14 11.5 Notice of Nonresponsibility ..........................................................14 ARTICLE 12: SIGNAGE 15 12.1 Signage Criteria .....................................................................15 12.2 Lessor's Approval ....................................................................15 12.3 Lessor's Responsibility ..............................................................15 12.4 Lessee's Responsibility ..............................................................15 ARTICLE 13: FIXTURES AND PERSONAL PROPERTY ................................................................15 13.1 Trade Fixtures and Personal Property .....................................................15 ARTICLE 14: ASSIGNMENT, SUBLETTING, MORTGAGING, AND CHANGE IN OWNERSHIP .....................................................................................15 14.1 Definitions ..........................................................................15 14.2 Restrictions on Occupancy Transactions ...............................................16 14.3 Procedures for Approval of Occupancy Transactions ....................................16 14.4 Documentation and Expenses ...........................................................17 14.5 Rent Payments by Transferee ..........................................................17 14.6 Affiliated Company Exception .........................................................17 14.7 Disposition of Profits from Occupancy Transaction ....................................17 14.8 Lessee's Liability ...................................................................17 ARTICLE 15: LESSEE'S CONDUCT OF BUSINESS ..................................................................17 15.1 Advertising Prohibition ..............................................................17 15.2 Trash and Rubbish ....................................................................18 15.3 Conformance with Laws ................................................................18 15.4 Safe and Clean Environment ...........................................................18 ARTICLE 16: REPAIRS AND MAINTENANCE .......................................................................18 16.1 Lessor's Obligations .................................................................18 16.2 Lessee's Obligations .................................................................18 16.3 Lessee's Acceptance and Waiver .......................................................18 ARTICLE 17: RECONSTRUCTION ................................................................................19 17.1 Insured Casualty .....................................................................19 17.2 Uninsured Casualty ...................................................................19 17.3 Abatement of Rent ....................................................................19 17.4 Waiver and Notice ....................................................................19
(ii) ARTICLE 18: COMMON AREA EXPENSES ..........................................................................19 18.1 Responsibility and Payment for Common Area Expenses ..................................19 18.2 Definition Common Area Expenses ......................................................19 18.3 Liability for Security ...............................................................21 18.4 Reserved and Visitor Parking Restrictions ............................................21 18.5 Control of Common Areas ..............................................................22 ARTICLE 19: DEFAULT BY LESSOR .............................................................................22 19.1 No Right of Termination ..................................................................22 19.2 Limitation of Liability ..................................................................23 ARTICLE 20: DEFAULT BY LESSEE .............................................................................23 20.1 Actions or Omissions Causing Default .................................................23 20.2 Legal Notices ........................................................................24 20.3 Rent Acceptance, No Waiver ...........................................................24 ARTICLE 21: REMEDIES UPON DEFAULT .........................................................................24 21.1 Lessor Election of Remedies ..........................................................24 21.2 Bankruptcy Code Limitations ..........................................................24 21.3 Action Without Termination ...........................................................25 21.4 Damages Upon Termination .............................................................25 21.5 Lessor's Right to Declare Forfeiture .................................................26 21.6 Fixtures and Personal Property .......................................................26 21.7 No Limitation of Remedies ............................................................26 21.8 No Waiver Unless In Writing ..........................................................26 ARTICLE 22: EMINENT DOMAIN ................................................................................26 22.1 Taking Resulting in Termination ......................................................26 22.2 Taking Without Termination ...........................................................26 22.3 Disposition of Award .................................................................27 22.4 Transfer Under Threat of Taking ......................................................27 ARTICLE 23: ATTORNEYS' FEES AND COSTS .....................................................................27 23.1 Recovery to Prevailing Party .............................................................27 ARTICLE 24: SALE OF PREMISES BY LESSOR ....................................................................27 24.1 Release of Lessor ........................................................................27 ARTICLE 25: SUBORDINATION, ATTORNMENT, AND ESTOPPEL CERTIFICATE ...........................................27 25.1 Subordination ........................................................................27 25.2 Attornment ...........................................................................27 25.3 Estoppel Certificates ................................................................27 ARTICLE 26: QUIET ENJOYMENT ...............................................................................28 26.1 Quiet Enjoyment ..........................................................................28 ARTICLE 27: CONSENTS AND APPROVALS ........................................................................28 27.1 Lessor's Consent .........................................................................28 27.2 Reimbursement for Cost of Approvals ......................................................28
(iii) ARTICLE 28: SECURITY DEPOSIT ..............................................................................28 28.1 Security Deposit .....................................................................28 28.2 Use and Restoration ..................................................................28 28.3 Disposition Upon Bankruptcy ..........................................................28 28.4 Disposition Upon Sale ................................................................28 28.5 Security Deposit Adjustment ..........................................................29 ARTICLE 29: MISCELLANEOUS .................................................................................29 29.1 Captions .............................................................................29 29.2 Parties ..............................................................................29 29.3 Gender ...............................................................................29 29.4 Legal Address ........................................................................29 29.5 Construction .........................................................................29 29.6 Relationship of Parties ..............................................................29 29.7 Severability .........................................................................29 29.8 Warranty of Authority.................................................................29 29.9 Entire Agreement .....................................................................29 29.10 Lessees Selected by Lessor. ..........................................................30 29.11 Governing Law; Forum; Construction ...................................................30 29.12 Force Majeure ........................................................................30 29.13 Use of Name of Building ..............................................................30 29.14 Lender Requirements ..................................................................30 29.15 Violations by Other Lessees ..........................................................30 29.16 Time is of Essence ...................................................................30 29.17 Real Estate Broker ...................................................................31
(iv) PARSONS WEST ANNEX LEASE AGREEMENT Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the following described Premises upon the terms and conditions as set forth in this Lease Agreement ("Lease"). ARTICLE 1: BASIC LEASE PROVISIONS 1.1 PROVISIONS. The Basic Lease Provisions outline certain major terms which are supplemented by other Articles of the Lease. DATE: JUNE 17, 1999 LESSOR: Parsons Information & Technology Group Inc. ADDRESS OF LESSOR: 100 West Walnut Street Pasadena, California 91124 Attn: Finance Department With Copy to: Dacam Management Corporation 111 Elm Street, Suite 460 San Diego, California 92101 LESSEE: Bill Gross' Idealab!, a California corporation ADDRESS OF LESSEE: Idealab 130 W. Union Street Pasadena, California 91103 Attn: Pam Rushman With Copy to: Marcia Goodstein Chief Operating Officer Idealab 130 W. Union Street Pasadena, California 91103 PREMISES: The Eighth Floor of the office building located at 74 North Pasadena Avenue, Pasadena, California, designated by diagonal lines on the floor plan attached hereto as EXHIBIT "A", containing rentable area of approximately 29,064 square feet (the "Premises". Lessee's "Rentable Area" has been computed by adding to Lessee's useable area (measured from dominant face of exterior walls of the Premises to centerline of demising walls), Common Areas on Lessee's floor, and Lessee's proportionate share of the main lobby of the Building, but excluding vertical shafts, stairwells, and mechanical rooms in the basement which serve the entire building. (SEE SECTION 3.2) PERMITTED USE: General Offices, including the development of internet companies (SEE SECTION 7.2) LEASE TERM: Twenty Four (24) Months (SEE SECTION 4.1) ANTICIPATED COMMENCEMENT DATE: June 24, 1999 (SEE SECTION 4.1) FIXTURIZATION PERIOD: Two (2) Weeks (SEE SECTION 4.1) BASE RENT: Forty Three Thousand Five Hundred Ninety Six and 00/100 Dollars ($43,596.00) per month, commencing June 24, 1999 through December 31, 1999. Fifty Four Thousand Three Hundred Forty Nine and 68/100 Dollars ($54,349.68) per month, commencing January 1,2000 through June 30, 2001. (SEE SECTION 5.1.1) PARKING RENT: Fifty Five and 00/100 Dollars ($55.00) per month for non-designated spaces and Sixty Five and 00/100 ($65.00) per month for designated spaces during each year of the Lease Term, adjusted as set forth in Section 5.1.4.2 in the event of exercise by Lessee of the option described in Section 4.2. Parking Rent shall be Fourteen Thousand Nine Hundred Eighty Five and 00/100 Dollars ($14,985.00) per month during the initial term ($4,095 for designated spaces and $10,890 for non-designated spaces). 2 (SEE SECTION 5.1.2) STORAGE RENT: Not Applicable (SEE SECTION 5.1.3) LESSEE'S PROPORTIONATE SHARE OF BUILDING OPERATING EXPENSES: 29,064 divided by 256.005 equals 11.4%. (SEE SECTION 5.2) RESERVED PARKING SPACES: Two Hundred Sixty One (261) spaces, including designated and non-designated spaces as follows: Designated Spaces: Sixty Three (63) Non-Designated Spaces: One Hundred Ninety Eight (198) Total Reserved Parking: Two Hundred Sixty One (261) (SEE SECTION 18.4) SECURITY DEPOSIT: One Hundred Thirty Eight Thousand Six Hundred Seventy and 00/100 Dollars ($138,670.00) (SEE SECTION 28.1) REAL ESTATE BROKER (IF ANY): Lessee: Travers Realty Lessor: Dacam Management Corporation (SEE SECTION 29.17) ARTICLE 2: EXHIBITS 2.1 ENUMERATION. The exhibits enumerated in this Article and ----------- attached to this Lease are incorporated herein by reference: Exhibit A - Floor Plan of the Premises Exhibit B - Tenant Improvement Manual Exhibit C - Rules and Regulations Exhibit D - Acceptance of Premises Exhibit E - Standards for Utilities and Services 3 Exhibit F - Designated Parking ARTICLE 3: DESCRIPTION OF THE BUILDING AND PREMISES 3.1 THE BUILDING. As used herein, the term "Building" shall mean those areas of land and the improvements, landscaping, parking, pedestrian walkways, and other features commonly referred to as "Parsons West Annex" or "West Annex", located at common address 74 North Pasadena Avenue, Pasadena, California. The Building may be altered, or expanded from time to time by Lessor, provided that no such alteration shall materially affect Lessee's use of the Premises, parking, or access thereto, or decrease Lessee's rights or increase Lessee's obligations hereunder. 3.2 PREMISES. Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, for the Lease Term, at the Rent (as such terms are hereinafter defined), and upon the terms and conditions hereinafter set forth, the commercial office space described in the Basic Lease Provisions designated by diagonal lines on the Floor Plan attached as EXHIBIT "A" hereto, and incorporated by reference herein (the "Premises"). 3.2.1 The Rentable Area of the Premises set forth in the Basic Lease Provisions and the location delineated on EXHIBIT "A" are approximations. Lessor makes no representations as to the exact rentable square footage or location. By occupancy of the Premises, Lessee acknowledges that it has inspected the Premises and that the area so inspected is the area hired by Lessee pursuant to the terms of this Lease. 3.2.2 The Premises shall include only the appurtenances specifically granted in this Lease, reserving to Lessor each of the following: 3.2.3.1 Areas of the Building not designated for common use; 3.2.3.2 The space above the ceiling and below the floor; 3.2.3.3 Exterior portions of the Building; and 3.2.3.4 The right to install, maintain, use, repair, and replace pipes, ductwork, conduits, utility lines, mechanical rooms, and wires in the areas reserved by Lessor, subject to the limitations set forth in this Section 3. 3.2.3 Lessor agrees that where possible all work in the Premises shall be performed in a manner which shall not unreasonably interfere with the normal business operations of Lessee. 3.2.4 The Premises have been improved with certain leasehold improvements. Responsibilities and procedures for completion of future improvements (the "Improvements") as set forth in the Tenant Improvement Manual attached as EXHIBIT "B" hereto and incorporated by reference herein. Improvements to be completed by Lessee are hereinafter referred to as "Lessee's Work". Lessee shall abide by procedures and regulations set forth in the Tenant Improvement Manual for construction of the Improvements. The failure to comply with such procedures or regulations on a timely basis shall constitute a breach of this Lease. In the event Lessee exercises the option referred to in Section 4.2, Lessee may, based upon market conditions, be entitled to reimbursement for certain tenant improvements. In such case, any amounts due Lessee shall be credited ratably over the first year of the option period as provided in the Tenant Improvement Manual. 3.2.5 Lessor shall be required to complete any improvements to the Premises required by State and local municipalities to bring the Premises in compliance with the Americans with Disabilities Act and/or state and local fire and life safety laws. Lessor shall also thoroughly clean Premises prior to Lessee's occupancy. Lessor shall replace broken and/or missing ceiling tiles and carpet tiles with substitutes reasonably available in the marketplace. It is understood that due to the age of the existing 4 improvements that there may be variances in color. Except for such requirements and punch list items addressed to Lessor in writing within thirty (30) days of occupancy by Lessee, Lessee accepts the Premises on an "as is" basis. 3.3 COMMON AREAS. The term "Common Areas" as used in this Lease shall be deemed to include those portions of the Building and other areas that are designated by Lessor from time to time for the non-exclusive use, convenience, and benefit of Lessor, Lessee, other lessees of the Building, and other authorized users. Common Areas shall include, without limitation, exterior walls of the Building and appurtenances thereto, the main lobby from the parking garage to the Building, the parking garage, driveways, roadways, sidewalks, stairways, service bay, pedestrian walkways, elevators, landscaped and planted areas, open and enclosed courts, museum pieces, artwork, artistic displays, and landscape and pedestrian easements on public right-of-ways. The use and occupation of the Premises by Lessee shall include a revocable license to use in common with others entitled thereto Common Areas as may be designated by Lessor from time to time revocable upon breach by Lessee and Lessee's failure to cure such breach within the applicable cure period. Lessor reserves the right at any time to relocate the automobile parking areas and other amenities in the Common Areas and the identity and type of tenancies, subject to the limitations otherwise set forth herein. Lessee's use of Common Areas shall be subject to the provisions of this Lease, rules and regulations described in Section 7.3 (the "Rules and Regulations"), attached as EXHIBIT "C" hereto and incorporated by reference herein. 3.4 RESTRICTED COMMON AREAS. "Restricted Common Areas" shall include areas of the Building designated by Lessor from time to time as Restricted Common Areas. Lessor may restrict certain areas of the Building from free entry by Lessee or its agents, such as mechanical rooms, or similar areas required for the orderly management and maintenance of the Building, or which are considered unsafe or inappropriate for unrestricted entry and use. Restricted Common Areas not freely accessible to Lessee or its agents may nevertheless be serviced as a part of the cost of maintaining Common Areas, provided that Lessee shall have no liability for (i) such services, except for its Proportionate Share of Operating Expenses set forth in Section 5.2 and (ii) liability for the negligence, omissions, and willful acts of its employees, agents and contractors otherwise set forth herein. ARTICLE 4: LEASE TERM 4.1 LEASE TERM. The "Lease Term" shall be the number of months specified in the Basic Lease Provisions and shall include any extension, renewal, or holdover thereof. The Lease Term shall commence on the earlier of the date when Lessee takes occupancy of the Premises or the Anticipated Commencement Date specified in the Basic Lease Provisions ("Actual Commencement Date"). Notwithstanding the foregoing, Lessee shall be granted the "Fixturization Period" specified in the Basic Lease Provisions to complete alterations to be made by Lessee ("Lessee's Work"). In the event that Lessor does not deliver the Premises to Lessee in time to allow Lessee the full Fixturization Period, the Anticipated Commencement Date shall be extended by the number of days of such delay so that Lessee will have the full Fixturization Period to complete Lessee's Work. If the Actual Commencement Date falls on other than the first day of the month, the Lease Term shall be extended by the number of days between the Actual Commencement Date and the first day of the following month. A "Lease Year" shall be each twelve (12) month period, starting with the first day of the first full month of the Lease Term, and each twelve (12) month period thereafter. 4.2 OPTION TO EXTEND. Lessee shall have the option to extend the term of this Lease for one (1) additional three (3) year period upon all terms and conditions set forth in the Lease subject to the following provisions: 4.2.1 The option to extend shall terminate in the event that any time during the term of this Lease (i) Lessee failed to pay or caused to be paid within ten (10) days of written notice any Rent or 5 charges required by the Lease to be paid; (ii) Lessee has abandoned the Premises; (iii) Lessee has failed to do or cause to be done any act, other than the payment of Rent or charges, required by this Lease, which breach is not cured within the applicable cure period, (iv) Lessee has caused, permitted, or suffered without Lessor's prior written consent, any act which requires the consent of Lessor under the terms of this Lease, or (v) Lessee has caused, suffered, or permitted any act of bankruptcy as defined under the terms of this Lease. 4.2.2 Lessee shall exercise its option to extend by delivery of written notice to Lessor not less than six (6) months prior to expiration of the initial Lease term. If written notice is not delivered within said time period, such option shall terminate. 4.3 CONFIRMATION OF ACTUAL COMMENCEMENT DATE. Lessee agrees to execute a supplemental agreement within thirty (30) days after receipt in the form set forth in EXHIBIT "D" attached hereto and incorporated by reference herein, which shall confirm the Actual Commencement Date. 4.4 LESSOR'S DELAY IN DELIVERY. If Lessor has not delivered possession of the Premises by the Anticipated Commencement Date, Lessor shall not be liable for any damage caused for failing to deliver possession, and this Lease shall not be void or voidable, but Lessee shall not be liable for Rent as defined in Section 5.4, until the Actual Commencement Date. If Lessor does not deliver possession of the Premises to Lessee within one (1) month after the Anticipated Commencement Date, Lessee may elect to terminate this Lease by giving written notice to Lessor within ten (10) days after the expiration of said one (1) month period. ARTICLE 5: RENT 5.1 RENT. Lessee agrees to pay as Rent for the use and occupancy of the Premises, at the times and in the manner provided herein, on the first day of each month without set-off or deduction, except as expressly otherwise provided herein, commencing on the first day of the Lease Term, Base Rent specified in Section 5.1.1, Parking Rent, except as otherwise expressly provided herein, specified in Section 5.1.2, if applicable, Storage Rent specified in 5.1.3, if applicable, and Excess Expenses specified in Section 5.2. 5.1.1 BASE RENT. Lessee shall pay in twelve (12) equal installments during each Lease Year, monthly in advance, the Base Rent specified in the Basic Lease Provisions. Base Rent for the first month of the Lease Term has been delivered to Lessor upon execution and delivery of this Lease. If the Actual Commencement Date occurs on other than the first day of the month, Base Rent for the second month shall be prorated based upon the number of days remaining in the month and thirty (30) days. 5.1.2 PARKING RENT. Lessee shall pay in twelve (12) equal installments during each Lease year, monthly, in advance, the Parking Rent set forth in the Basic Lease Provisions. Parking Rent for the first month of the Lease Term has been delivered to Lessor upon execution and delivery of the Lease. Parking Rent shall be prorated and adjusted in the same manner as Base Rent under Section 5.1.1. Notwithstanding the Parking Rent set forth herein, Lessee by written notice delivered to Lessor at least ten (10) days in advance may, during the first four (4) months of the Lease Term reduce the number of parking spaces hired with a proportionate reduction of Parking Rent. Any such reduction shall be effective only on the Commencement Date or the first day of the month. 5.1.3 STORAGE RENT. If the description of Lessee's Premises includes a Storage Area, Lessee shall pay in twelve (12) equal installments during each Lease year, monthly, in advance, the Storage Rent set forth in the Basic Lease Provisions. Storage Rent for the first month of the Lease Term has been delivered to Lessor upon execution and delivery of the Lease. Storage Rent shall be prorated and adjusted in the same manner as Base Rent under Section 5.1.1. 5.1.4 RENT DURING OPTION PERIOD. In the event Lessee exercises the option providedo herein, Base Rent, Parking Rent, and Storage Rent shall be adjusted as follows: 6 5.1.4.1 Base Rent, Parking Rent and Storage Rent shall be adjusted at the inception of the option period to "Fair Market Rent" as hereinafter defined, but not less than the Base Rent for the immediately preceding period. Fair Market Rent shall be deemed to include an allowance for market tenant improvements for the extended term, which amount shall be credited against Base Rent during the first year of the option period as set forth in the Tenant Improvement Manual. Fair Market Rent and tenant improvements shall also take into consideration any reasonable and documented costs incurred by Lessor in relocating the data and telecom facilities for FEMA if Lessee elects to relocate. 5.1.4.2 Fair Market Rent for the Base Rent and Parking Rent shall reflect actual market rates prevailing in the Pasadena area and shall be based upon buildings and parking structures of a similar number of floors, square footage, floor sizes, quality, and age, taking into consideration all factors influencing actual market rates such as terms of rental escalation, base year, tenant improvements, and any other concessions. If the parties are unable to agree on the Fair Market Rent within three (3) months of written notice by Lessee of its intention to exercise its option to renew, each party may appoint a consultant who is a licensed broker in the State of California with knowledge of the Pasadena market, each of which shall be instructed to arrive at an indication of Fair Market Rent for the Premises and parking. If such indications are within ten percent (10%) of each other, the average of the two shall become the Base Rent for the Premises and Parking Rent for the parking spaces. If the two consultants' indications of Fair Market Rent differ by more than ten percent (10%), the two consultants shall be asked to select a third consultant, and the average of the two indications of Fair Market Rent of the three consultants which are the closest in amount shall become the Fair Market Rent for the option period. Each party shall pay the fees associated with its respective consultant. Costs associated with the third consultant shall be shared equally between Lessee and Lessor. 5.2 BUILDING OPERATING EXPENSES. In order that the Rent payable during the Lease Term reflect any increase in Building Operating Expenses, after December 31, 2000, Lessee shall pay to Lessor as Rent, Lessee's Proportionate Share (as set forth in the Basic Lease Provisions) of Building Operating Expenses in excess of those incurred in the calendar year 2000 (the "Base Year)", as hereinafter set forth: 5.2.1 Building Operating Expenses shall include all costs incurred by Lessor to maintain and operate the Building including, but not limited to, each of the following: 5.2.1.1 "Taxes" as set forth in Section 6.1. 5.2.1.2 "Utilities and Services" as set forth in Section 8.1. 5.2.1.3 "Insurance" as set forth in Section 9.2. 5.2.1.4 "Common Area Expenses" as set forth in Section 18.1. 5.2.2 Lessee's Proportionate Share of Building Operating Expenses in excess of the amount incurred in the Base Year (" Excess Expenses") shall be computed and paid by Lessee to Lessor as follows: 5.2.2.1 Commencing with the first full calendar month after the first Lease Year, Lessee shall pay as Rent an amount equal to Lessee's Proportionate Share of Excess Expenses. Such payments shall be made in monthly installments as reasonably estimated by Lessor from time to time. It is the intention of the parties to estimate the amount of Excess Expenses for each calendar year and Lessee's Proportionate Share thereof, and to make an adjustment in the following calendar year based upon Excess Expenses incurred during the preceding year. 5.2.2.2 After the end of each calendar year, Lessor shall deliver to Lessee a statement setting forth Lessee's Proportionate Share of the Excess Expenses for the preceding calendar 7 year. If Lessee's Proportionate Share of the Excess Expenses for the previous calendar year exceeds the total of the estimated monthly amount of Excess Expenses paid by Lessee for such year, Lessee shall pay Lessor the amount of the deficiency within thirty (30) days of receipt of a statement indicating the amount due. If the total amount of Excess Expenses paid by Lessee exceeds Lessee's Proportionate Share of Excess Expenses for such calendar year, Lessor shall credit against Lessee's next monthly installment(s) of Rent an amount equal to the difference until the credit is exhausted. If a credit is due from Lessor to Lessee on the date of termination of the Lease, Lessor shall pay to Lessee the amount of the credit, reduced by any amounts payable by Lessee to Lessor, within thirty (30) days of the date of termination. The obligations of Lessee and Lessor to make payments required under this Section 5.2. shall survive the termination of the Lease. 5.2.2.3 Lessee's Proportionate Share of Excess Expenses shall be prorated for any partial year. 5.2.2.4 In the event that the Building is less than ninety five percent (95%) occupied in the Base Year, for purposes hereof Base Year Building Operating Expenses shall be proportionately adjusted to reasonably reflect Building Operating Expenses if the Building were ninety five percent (95%) occupied. 5.2.2.5 If any dispute arises as to the amount of Excess Expenses, Lessee shall have the right, after reasonable notice and at reasonable times, to inspect accounting records for the Building for the current and/or immediately preceding Lease Year at the Building or at Lessor's offices. If, after such inspection, Lessee still disputes the Excess Expenses owed, a certification as to the proper amount shall be made by Lessor's Certified Public Accountant, which certification shall be final and conclusive. Lessee agrees to pay the cost of such certification unless it is determined that Lessor's original statement overstated Excess Expenses by more than five percent (5%) 5.3 LATE FEE. If Lessee fails to pay Rent within ten (10) days after written notice, Lessee and Lessor agree that (i) Lessor will incur additional expenses in the form of extra collection efforts, handling costs, and potential impairment of credit on liens for which this Lease is security; (ii) it is extremely difficult and impractical to ascertain the extent of detriment; (iii) the amount described herein is and will be reasonable; and, (iv) Lessor shall be entitled to recover from Lessee as liquidated damages the greater of One Hundred Dollars ($100) or three percent (3%) of the amount due ("Late Fee"). Past due amounts shall also bear interest at the prime rate of Bank of America plus three percent (3%) per annum or the maximum rate permitted by law, whichever is less ("Lease Interest Rate"). Lessee shall further pay, as Rent, a charge of Fifty Dollars ($50) for each payment of Rent by check which is returned due to insufficient funds to reimburse Lessor for Lessor's costs of handling. Lessor shall have the right to require that Lessee pay Rent in the form of a cashier's check or money order if any check of Lessee is not honored upon presentment to Lessee's bank. Notwithstanding the foregoing, the obligation to pay such Late Fee, interest, or to pay by cashier's check shall not alter or preclude Lessor's right, prior to actual receipt of any delinquent installment of Rent, to exercise any right or remedy which Lessor may have under the terms of this Lease. Furthermore, acceptance of any monies by Lessor shall not constitute a waiver by Lessor of Lessee's breach or prevent Lessor from exercising any other rights or remedies available to Lessor as provided herein or by law. 5.4 RENT. Base Rent, Parking Rent, Excess Expenses and any other charges due hereunder, are collectively referred to in this Lease as "Rent". If such amounts or charges are not paid at the time provided in this Lease, they shall nevertheless be collectible with the next monthly installment of Rent due thereafter. Nothing herein contained shall be deemed to suspend or delay the payment of any amount or charge at the time the same becomes due and payable hereunder, or limit any other remedy of Lessor. 5.5 ADDRESS FOR PAYMENTS. All Rent and other payments due from Lessee shall be paid to Lessor at the address set forth in the Basic Lease Provisions, or at such other place as may from time to time be designated by Lessor in writing at least ten (10) days prior to the next ensuing payment date. 8 Pending further notice, all payments due hereunder shall be made to Dacam Management Corporation at 111 Elm Street, Suite 460, San Diego, California 92101. Upon written notice from any first mortgagee that Lessor is in default pursuant to the terms of any agreement with such lender, Lessee shall pay all Rent due pursuant to the terms hereof to said lender as directed in the notice. Any Rent paid pursuant to such written notice shall be credited against Lessee's obligation for Rent due pursuant to the terms hereof. ARTICLE 6: TAXES 6.1 REAL ESTATE TAXES. Lessor shall pay, subject to partial reimbursement by Lessee under Section 5.2, all Taxes (hereinafter defined) assessed or imposed, or which become a lien upon or become chargeable against the Building and personal property situated in Common Areas. With respect to any assessment which may be levied against or upon the Building, or which under the laws then in force may be evidenced by improvement or other bonds, and interest thereon, and may be paid in annual installments, only the amount of such installment, with appropriate proration for any partial year, shall be included within the computation of "Taxes". For purposes of this Lease, "Taxes" shall include each of the following: 6.1.1 Any form of assessment, license fee, license tax, business license tax, commercial rental tax, levy, charge, penalty, possessory interest tax, public charge, or tax, imposed by any authority having the direct power to tax, including any city, county, state, or federal government, or any school, agricultural, lighting, drainage, or other improvement or special district thereof, as against any legal or equitable interest of Lessor in the Premises or the Building. 6.1.2 Any tax on Lessor's right to Rent or on other income from the Premises or the Building, or as against Lessor's business of leasing the Premises. 6.1.3 Any assessment, tax, fee, levy or charge in substitution of, or in addition to, partially or totally, any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Lessee and Lessor that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Lessee and Lessor that all such substitute, new, additional and increased assessments, taxes, fees, levies and charges be included within the definition of Taxes for purposes of this Lease. 6.1.4 Any tax allocable to or measured by the area of the Premises or Rent payable hereunder, including, without limitation, any gross income tax or excise tax levied by the state, any political subdivision thereof, city, or federal government, with respect to the receipt of Rent, or upon or with respect to the possession, leasing, operating, management, alteration, repair, use, or occupancy by Lessee of the Premises, the Building, or any portion thereof. 6.1.5 All costs and fees incurred by Lessor to appeal or contest the amount or existence of any Taxes, or any governmental imposition or surcharge imposed or assessed against Lessor, the automobile parking areas and parking garage. 6.1.6 Any tax upon this transaction or any document to which Lessee is a party, creating or transferring an interest or an estate in the Premises, and any and all assessments Lessor must pay pursuant to any covenants, conditions, or restrictions, reciprocal easement agreements, tenancy in common agreements, or similar restrictions affecting the Building. 6.1.7 Taxes shall not include state or federal income, franchise, inheritance, or estate taxes of Lessor, or its partners. 9 6.2 PERSONAL PROPERTY TAXES. Lessee shall pay before delinquency all taxes, assessments, license fees and public charges levied, assessed or imposed upon its business operation, its trade fixtures, and other personal property in or upon the Premises. In the event that any items of personal property are assessed with the Building, such assessment shall be equitably divided between Lessor and Lessee to the extent that Lessee shall pay only its equitable proportion of such assessment. Lessor shall determine the equitable division based upon the assessor's valuation of items being assessed. ARTICLE 7: POSSESSION AND USE 7.1 POSSESSION. Lessor shall deliver the Premises to Lessee and Lessee shall accept the Premises subject to all applicable municipal, county, and state laws, ordinances, and regulations governing the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject to these and to all other matters disclosed to Lessee and/or in the exhibits attached hereto. Lessee acknowledges that neither Lessor nor its employees or agents have made any representations or warranties as to the present or future suitability of the Premises for the conduct of Lessee's business. 7.2 PERMITTED USES. Lessee shall use the Premises solely for the Permitted Uses specified in the Basic Lease Previsions. Lessee shall not use or permit the Premises to be used for any other use or purpose, without the prior written consent of Lessor. Lessor's consent to any change of use shall be based upon Lessor's reasonable judgment that such change does not (i) change the character of Lessee's use of the Premises; (ii) adversely affect the image of the Building; or (iii) otherwise adversely, affect other lessees of the Building. Lessee shall not permit any person to use the Premises for any purpose in violation of the laws, ordinances, regulations, and requirements of all duly constituted lawful authorities. The Premises shall be kept by Lessee in a clean and wholesome condition, free of any objectionable noises, odors, or nuisances. Lessee shall not perform any act or carry on any practice which may injure the Building, be a nuisance or menace to, or disturb the quiet enjoyment of other lessees in the Building. Lessee will, at its expense, comply with all requirements with respect to the Premises of insurance underwriters and governmental authorities, including compliance with requirements for the Premises necessary to maintain reasonable fire and extended coverage insurance for the Building. Notwithstanding the foregoing, Lessee shall not be required to make structural alterations unless required by Lessee's use of, or Alterations (as defined in Article 10) to, the Premises. 7.3 RULES AND REGULATIONS. Lessee's use of the Premises shall be subject to the Rules and Regulations set forth in Exhibit "C". Lessee, its employees, agents, licensees, and visitors will, at all times, observe and comply with the Rules and Regulations. Lessor may from time to time reasonably delete, add, or amend the Rules and Regulations for the use, safety, cleanliness, and care of the Premises and the Building and for the comfort, quiet enjoyment, and convenience of all lessees, and their employees, agents, and customers. Modifications or additions to the Rules and Regulations will be effective upon notice to Lessee from Lessor, or Lessor's agent. In the event of any breach of the Rules and Regulations, or any amendments or additions thereto, Lessor will have all remedies provided in this Lease, or at law or in equity, including the right to enjoin a breach of the Rules and Regulations. Lessor will not be liable to Lessee for a violation of the Rules and Regulations by any other lessee, its employees, agents, visitors, or licensees, or by any other person. In the event of any conflict between the provisions of the Lease and the Rules and Regulations, the provisions of the Lease shall govern. ARTICLE 8: UTILITIES AND SERVICES 8.1 LESSOR'S COVENANTS. Provided that Lessee is not in default hereunder beyond any applicable cure period, Lessor shall provide to the Premises electricity for normal desk top office and copying equipment, and heating, ventilation and air conditioning ("HVAC"), Monday through Friday from 10 8:00 a.m. to 6:00 p.m. and on Saturdays from 8:00 a.m. to 1:00 p.m., except on holidays. If Lessee desires HVAC at any other time, Lessor shall use reasonable efforts to furnish such service upon reasonable notice from Lessee and Lessee shall pay Lessor's cost to operate such equipment as Rent, within thirty (30) days of receipt of an invoice from Lessor. Lessor's cost shall include, but is not limited to, utilities, amortization of the cost of mechanical equipment required to provide such services, additional maintenance costs, staff time to activate and deactivate such equipment, plus overhead equal to ten percent (10%) of the total of such expenses (collectively referred to as "HVAC Use Charges"). Specific charges for such expenses are set forth in Exhibit E. Lessor shall maintain and keep lighted Common Areas of the Building. Lessor shall furnish janitorial service to the Premises and Common Areas Monday through Friday, except on holidays. Lessor shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) the failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Lessor, or by the making of necessary repairs or improvements to the Premises or the Building, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises or the Building. Lessor shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Lessee uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by the HVAC system, Lessor reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof, shall be payable by Lessee to Lessor as Rent upon demand. 8.2 LESSEE'S COVENANTS. Lessee shall not connect any apparatus using electric current except through existing electrical outlets in the Premises. Lessee shall not consume water or electric current in excess of that usually furnished or supplied for the use of Premises as general office space without first procuring Lessor's written consent, which consent shall not be unreasonably withheld. The use of supplemental air conditioning equipment for computer and telephone switching rooms, and space heaters shall be deemed to require current in excess of that supplied for use as general office space. In such case, Lessor may have installed a water meter or electrical current meter to measure the amount of water or electric current consumed, and the cost of any such meter and of its installation, maintenance and repair shall be paid for by Lessee as Rent, within thirty (30) days of receipt of an invoice from Lessor indicating the amount due. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Lessor at Lessee's expense. 8.3 STANDARDS FOR UTILITIES AND SERVICES. Standards for Building Utilities and Services and Rent due from Lessee to Lessor for exceeding such standards are more particularly set forth in Exhibit F, attached hereto and incorporated by reference herein. 8.4 LESSOR'S RIGHT TO CEASE SERVICES. Lessor shall have the right in its reasonable discretion to reduce, interrupt or cease service of the HVAC, elevator, plumbing, electrical systems, telephone systems and/or utilities serving the Premises or the Building because of (i) any accident, emergency, governmental regulation or Act of God, or (ii) the making of repairs, additions, alterations or improvements to the Premises or the Building as provided herein until said repairs, additions, alterations or improvements shall have been completed. No such interruption, reduction or cessation of any services or utilities shall constitute (i) an eviction or disturbance of Lessee's use or possession of the Premises, (ii) an ejection of Lessee from the Premises, (iii) a breach by Lessor of any of its obligations, (iv) render Lessor liable for any damages, including but not limited to any damages or claims arising from any interruption or cessation of Lessee's business, (v) entitle Lessee to be relieved from any of its obligations under the Lease, or (vi) result in any abatement of Rent. In the event of any such interruption, reduction or cessation, Lessor shall use reasonable diligence to restore such service where it is within Lessor's control to do so. If an interruption of services 11 continues for more than five (5) days due to Lessor's failure to make repairs which Lessor is obligated to make hereunder, Lessee shall have the right to discontinue the payment of Rent. ARTICLE 9: INDEMNITY AND INSURANCE 9.1 INDEMNITY BY LESSEE. Neither Lessor nor any mortgagee of the Building shall be liable for any damage or liability, or for any injury to or death of persons, or for damage to property of Lessee or any other person, provided, however, Lessor may be liable for damages or injury occasioned by the negligence or willful misconduct of Lessor, its employees or agents. Lessee indemnifies and holds Lessor and its mortgagees harmless from any liability, on account of any claimed damages or injury and from all liens, claims, and demands, including reasonable attorney's fees, investigation costs, and reasonable costs, with respect to any claim or demand, arising out of (i) the use, condition, operation, or occupation by Lessee of the Premises; (ii) any repairs, alterations, additions, or changes made by Lessee to the Premises ("Alterations"); (iii) any act, omission, or negligence by Lessee, its employees, agents, sublessees, invitees, or licensees; or (iv) any failure by Lessee to comply with the terms or conditions of this Lease. Lessee shall also hold Lessor harmless from any liability, cost, or expense arising from Lessee's use or storage in the Premises of any hazardous or toxic substance. Lessee shall, at Lessee's expense and by counsel satisfactory to Lessor, defend Lessor in any actin or proceeding arising from any such claim and shall indemnify Lessor against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. Lessor indemnifies and holds Lessee harmless from any liability, on account of any claimed damages or injury and from all liens, claims, and demands, including reasonable attorney's fees, investigation costs, and reasonable costs, with respect to any claim or demand, arising out of the negligence or willful misconduct of Lessor, its contractors, agents or employees. Lessor shall, at Lessor's expense and by counsel reasonably satisfactory to Lessee, defend Lessee in any action or proceeding arising from any such claim and shall indemnify Lessee against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. 9.2 LESSOR'S INSURANCE. Lessor shall carry insurance to protect the Building and Lessor, as Lessor shall from time to time deem necessary, based upon reasonable for comparable buildings in the Pasadena area. The cost of such insurance shall be included as a part of Common Area Expenses. 9.3 LESSEE'S INSURANCE. Lessee's obligations with respect to insurance shall be as follows: 9.3.1 Lessee agrees to apply for and obtain from insurance companies reasonably acceptable to Lessor and authorized to do business in California with a financial rating of at least A, VI in the most current available edition of "Best's Insurance Reports", effective from and after the Actual Commencement Date, at Lessee's sole cost and expense, insurance coverage as follows: 9.3.1.1 Comprehensive general liability coverage issued in the names of Lessee and Lessor with limits of not less than One Million Dollars ($1,000,000) for damage to property and not less than One Million Dollars ($1,000,000) single limit liability for injury to persons with respect to the Premises, the business operated by Lessee in the Premises, and the maintenance, use, and condition thereof. Such public liability and property damage insurance shall specifically insure the performance by Lessee of the indemnity provided in Section 9.1; 9.3.1.2 Insurance covering Improvements included in Lessee's Work, Alterations, trade fixtures, and personal property in or on the Premises, in an amount not less than one hundred percent (100%) of their full replacement cost, providing protection against any peril included within the classification "Fire and Extended Coverage", together with protection against flood, sprinkler damage, vandalism, and malicious mischief. If requested by Lessor, Lessee shall name Lessor's first mortgagee as loss payee under any such casualty insurance carried by Lessee. Any policy proceeds 12 shall be used for the repair and replacement of the property damaged or destroyed, unless this Lease shall terminate pursuant to Section 17.2. Upon termination of the Lease following a casualty, Lessee shall be entitled to any proceeds received for its trade fixtures and personal property, and the balance shall be paid to Lessor. 9.3.1.3 Worker's Compensation as required by law. 9.3.2 Executed copies of such policies of insurance, or certificates thereof, shall be delivered to Lessor within ten (10) days after issuance of each such policy. All policies shall contain a provision that Lessor, although named as an insured, shall nevertheless be entitled to recovery under said policies for any loss occasioned to it, its employees and agents by reason of the negligence of Lessee. As often as any such policy shall expire or terminate, renewal or additional policies shall be procured and maintained by Lessee in like type and amount. New policies, or renewals, shall be delivered to Lessor at least ten (10) business days prior to the expiration of the term of the existing policy. All policies of insurance delivered to Lessor must contain a provision that the company writing such policy will give Lessor notice in writing at least thirty (30) days in advance of any cancellation or lapse, or the effective date of any reduction in type or amount of coverage. All policies shall be written as primary policies, not contributing with and not in excess of coverage which Lessor may carry. 9.3.3 Lessee's obligation to carry insurance may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee, provided, however, (i) Lessor shall be named as an additional insured thereunder as its interest may appear; (ii) the coverage required by this Section 9.3 will not be reduced or diminished by reason of the use of such blanket policy of insurance; and (iii) the requirements set forth herein are otherwise satisfied. If Lessee does not obtain the insurance coverage as required in this Section 9.3, Lessor may, but it is not obligated to, secure such coverage and Lessor shall be entitled to reimbursement for the cost thereof plus interest at the Lease Interest Rate as Rent. 9.3.4 Lessee shall report in writing to Lessor any accident causing property damage reasonably estimated at more than Five Thousand Dollars ($5,000) or involving any injury to a person on the Premises or caused by Lessee, its employees and/or agents at the Building. 9.4 ASSUMPTION OF RISK. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to Lessee's personal property or injury to persons, in, upon or about the Premises and the Building from any cause, except for damage or injury caused by the negligence or willful acts of Lessor, its employees, agents, and contractors, and Lessee hereby waives any such claims against Lessor. Lessor, its employees, and agents shall not be liable for any damage to Lessee's personal property entrusted to Lessor, nor for loss or damage to Lessee's personal property by theft or otherwise. 9.5 INSURANCE RELATED USE RESTRICTIONS. Lessee agrees that it will not do anything in or about the Premises that will in any way increase the rates for insurance covering the Building, or cause a loss of coverage for the Building. Lessee agrees to pay to Lessor, within thirty (30) days of receipt of an invoice and supporting documentation from the insurer, the amount of any increase in premiums charged to Lessor for any insurance carried by Lessor, which increase results from Lessee's violation of the foregoing restriction, whether or not Lessor has consented to Lessee's actions. Lessee shall install any fire extinguishing equipment that Lessor's insurance underwriters or applicable fire, safety, and building codes and/or regulations may require at the Premises after Lessee's acceptance thereof. ARTICLE 10: ALTERATIONS 10.1 ALTERATIONS. Lessee agrees that it will not make any Alterations to the Premises without the prior written consent of Lessor, which consent shall not be unreasonably withheld. Lessee shall be responsible for the entire cost of all permitted Alterations. All Alterations shall be (i) under the supervision of a competent architect or competent licensed structural engineer; (ii) made in accordance 13 with plans and specifications which are approved in writing by Lessor before the commencement of work; (iii) done in a workmanlike manner by a licensed contractor approved in writing by Lessor;, and (iv) diligently prosecuted to completion to the end that the Premises shall at all times be a complete unit except during the period of work. Any Alterations shall be performed and done strictly in accordance with all laws and ordinances relating thereto including, without limitation, all requirements of the City of Pasadena and County of Los Angeles. In performing any Alterations, Lessee shall have the work performed in such a manner as not to obstruct access to the Premises or interfere with the quiet enjoyment of any other lessees in the Building. Upon completion of such work, Lessee shall file of record, in the office of the Los Angeles County Recorder, a Notice of Completion as permitted by law. Lessee shall provide to Lessor, or cause to be provided, a copy of the building permit, building inspection approvals, and recorded Notice of Completion. 10.2 RIGHTS UPON TERMINATION. Upon the expiration or earlier termination of Lessee's leasehold estate, Alterations approved by Lessor shall not be removed by Lessee, but shall become a part of the Premises and the property of Lessor. Notwithstanding the foregoing, Lessor may, at Lessor's option, require that Lessee remove, at Lessee's expense, Alterations placed in the Premises by Lessee upon the expiration or earlier termination of this Lease, if Lessor's approval of such Alterations was conditioned upon such removal. Lessor may exercise said option as to any or all Alterations, either before or after the expiration or earlier termination of this Lease. If Lessor exercises such option and Lessee fails to remove the designated items prior to termination of the Lease, Lessor shall have the right to have such items removed at the expense of Lessee and charge Lessee Rent for the time during which such items remain on the Premises after the date of termination. As to any Alterations that Lessor does not require Lessee to remove, title thereto shall vest in Lessor without cost to Lessor. ARTICLE 11: MECHANIC'S LIENS 11.1 LESSEE'S COVENANTS. Lessee agrees to pay all costs for work done by it or caused to be done by it in the Premises. Lessee will keep the Premises and the Building free and clear of all mechanic's and other liens on account of work done by Lessee or persons claiming under it. Lessee agrees to indemnify, defend, and save Lessor free and harmless against liability, loss, damages, costs, attorneys' fees, and all other expenses on account of claims of lien laborers or materialmen or others for work performed or materials furnished for Lessee or persons claiming under Lessee. 11.2 CONTEST OF LIEN. If a lien or notice of the lien is filed with respect to any work done by or for Lessee, Lessee shall, within ten (10) days of the filing of such lien or notice, furnish to Lessor adequate security in the amount of the claim, plus estimated costs and interest, or a bond from a corporate surety approved in writing by Lessor, in an amount adequate to insure the discharge of the lien. If, as final judgment establishing the validity of existence of a lien for any amount is entered, Lessee shall immediately pay the same. 11.3 RIGHT TO CURE. If Lessee shall be in default in paying any charge for which a mechanic's lien claim has been filed and shall not have given Lessor security to protect the Building and Lessor against such claim of lien, Lessor may, but shall not be so required to, pay said claim and any costs, and the amount so paid, together with reasonable attorneys' fees incurred in connection therewith, shall be immediately due from Lessee to Lessor as Rent. Lessee shall pay the same to Lessor with interest at the Lease Interest Rate from the date(s) of Lessor's payment(s). 11.4 NOTICE OF LIEN. Should any claim of lien be filed against the Premises, or any action affecting the title to the Building be commenced, the party receiving notice of such lien or action shall forthwith give the other party written notice thereof. 11.5 NOTICE OF NONRESPONSIBILITY. Lessor, its employees, lender, and agents shall have the right to go upon and inspect the Premises at all reasonable times and shall have the right to post and keep posted thereon a notice of nonresponsibility, or such other notices which Lessor may deem to be proper for the protection of Lessor's interest in the Premises. At least five (5) days before the 14 commencement of any Alterations, Lessee shall give to Lessor written notice of Lessee's intention to commence work to enable Lessor to post such notice. ARTICLE 12: SIGNAGE 12.1 SIGNAGE CRITERIA. Subject to Lessor's reasonable approval as set forth below, Lessee, at Lessee's expense, shall be permitted to install at the south pedestrian entrance, a monument or garden wall sign identifying Lessee in size, color, and content consistent with existing signage. 12.2 LESSOR'S APPROVAL. Lessee shall not art's, paint, erect or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Premises or Building, including without limitation, the inside or outside of windows or doors, without the written consent of Lessor. Lessor shall have the right to remove any signs or other matter, installed without Lessor's permission, without being liable to Lessee by reason of such removal, and to charge the cost of removal to Lessee as Rent, payable within ten (10) days after receipt of an invoice from Lessor. 12.3 LESSOR'S RESPONSIBILITY. Lessor, at Lessor's expense, shall identify Lessee's occupancy of the Premises with a directory or other signage in the main lobby of the Building. 12.4 LESSEE'S RESPONSIBILITY. Except as otherwise provided herein, Lessee, at Lessee's expense, shall furnish all signs, including parking signs, wall signs, and directory identification strips, if any. ARTICLE 13: FIXTURES AND PERSONAL PROPERTY 13.1 TRADE FIXTURES AND PERSONAL PROPERTY. Any trade fixtures and personal property of Lessee not permanently affixed to the Premises shall remain the property of Lessee. Lessor agrees that Lessee shall have the right, upon the expiration or earlier termination of the Lease Term, to remove its trade fixtures and other personal property which it stored or installed in the Premises. At Lessor's option, Lessee shall have the obligation to remove all trade fixtures and personal property upon expiration or earlier termination of the Lease Term. Lessee, at its expense, shall immediately repair any damage occasioned to the Premises by reason of the removal of any such trade fixtures and personal property and shall, upon the last day of the Lease Term or date of earlier termination, leave the Premises in a neat and clean condition, free of debris. ARTICLE 14: ASSIGNMENT, SUBLETTING, MORTGAGING, AND CHANGE IN OWNERSHIP 14.1 DEFINITIONS. As used in this Article, the following definitions shall apply: 14.1.1 "Transfer" means any (i) voluntary or involuntary assignment of Lessee's entire interest, rights, and duties in the Lease or the Premises, including Lessee's right to use, occupy, and possess the Premises; or (ii) sublease of Lessee's right to use, occupy, and/or possess the Premises, in whole or in part. 14.1.2 "Encumbrance" means any conditional, contingent, or deferred assignment or sublease, voluntarily or involuntarily made by Lessee, of some or all of Lessee's right to use, occupy, and possess the Premises, including, without limitation, any mortgage, deed, deed of trust, pledge, hypothecation, lien, franchise, license, concession, or other security arrangement. 14.1.3 "Change of Control" means the transfer by sale, assignment, death or incompetency, mortgage, trust, operation of law, or otherwise of any shares, voting rights, or ownership interests (including partnership interests) which will result in a change in the identity of the person or persons exercising, or who may exercise, effective control of Lessee, unless such change results from 15 the trading of such shares listed on a recognized public stock exchange and such trading is not for the purpose of acquiring effective control of Lessee. If Lessee is a private corporation whose stock becomes publicly held with its shares listed on a recognized public stock exchange, the transfer of such stock from private to public ownership shall not be deemed a Change of Control. 14.1.4 "Occupancy Transaction" means any Transfer, Encumbrance, Change of Control, or other arrangement whereby the identity of the person or persons using, occupying, or possessing the Premises changes or may change, whether such change be of an immediate, deferred, conditional, exclusive, nonexclusive, permanent, or temporary nature. 14.1.5 "The Transferee" means any proposed assignee, sublessee, mortgagee, pledgee, or other recipient of Lessee's interest, rights, or duties in this Lease or the Premises in an Occupancy Transaction. 14.2 RESTRICTIONS ON OCCUPANCY TRANSACTIONS. Any Occupancy Transaction shall be subject to restrictions as hereinafter provided. 14.2.1 Lessee shall not enter into any Occupancy Transaction with respect to any of Lessee's interest in the Premises without first procuring the written consent of Lessor, which consent shall not be unreasonably withheld. Any attempted Occupancy Transaction without Lessor's written consent shall be void and confer no rights upon any third person. Lessor reserves the right to refuse to give such consent unless Lessee remains fully liable for the unexpired portion of the Lease Term. The consent by Lessor to any assignment or subletting shall not be construed to relieve Lessee or any Transferee from complying with the terms of this Article 14 with respect to any future Occupancy Transaction. 14.2.2 By way of example and without limitation, Lessor and Lessee hereby agree that it shall be reasonable for Lessor to withhold its consent if any of the following situations exist or may exist: (i) The Transferee's proposed use of the Premises is different than the Permitted Uses described in the Basic Lease Provisions. (ii) In Lessor's reasonable judgment, the Transferee lacks sufficient ability, management and/or expertise to operate a successful business. (iii) With respect to a nonaffiliated entity, the net worth is insufficient to provide Lessor with reasonable assurances regarding the Transferee's ability to pay the remaining obligations hereunder based upon reasonably industry standards. 14.3 PROCEDURES FOR APPROVAL OF OCCUPANCY TRANSACTIONS: 14.3.1 Should Lessee desire to enter into an Occupancy Transaction, Lessee shall request in writing Lessor's consent to such Occupancy Transaction at least fifteen (15) working days before the effective date of such transaction, and shall provide Lessor with the following: (i) The particulars of the proposed Occupancy Transaction, including its nature, all consideration to be paid, the effective date, terms and conditions, and copies of any offers, agreements, subleases, letters of commitment or intent, and/or other documents pertaining to such Occupancy Transaction. (ii) A description of the identity, net worth, and previous business experience of the Transferee and the persons involved therein including, without limitation, copies of the Transferee's latest income statement, balance sheet, and change-of-financial-position statement (with accompanying notes and disclosures of all material changes thereto) in audited form, if available, and certified as accurate by the Transferee. 16 (iii) Business and financial references of the Transferee and the persons involved therein. (iv) Any further information relevant to the Occupancy Transaction which Lessor may reasonably request. (v) A statement that Lessee intends to consummate the Occupancy Transaction if Lessor consents thereto. 14.3.2 Within fifteen (15) working days after receipt by Lessor of the information required by Section 14.3.1 above, Lessor may either: (i) Consent to the Occupancy Transaction; or (ii) Refuse to consent to the Occupancy Transaction if, pursuant to Section 14.2 above, Lessor is entitled to withhold its consent. 14.4 DOCUMENTATION AND EXPENSES. Each Occupancy Transaction to which Lessor has consented shall be evidenced by an instrument made in written form reasonably satisfactory to Lessor, executed by Lessee and the Transferee. By such instrument, the Transferee shall assume and promise to perform the terms, covenants, and conditions of this Lease which are obligations of Lessee, including the payment of Rent. Lessee shall, upon demand of Lessor, reimburse Lessor for Lessor's reasonable costs, including attorneys' fees, incurred in obtaining advice, reviewing, and preparing documentation for each Occupancy Transaction for which consent has been requested, but not to exceed Five Hundred Dollars ($500.00). 14.5 RENT PAYMENTS BY TRANSFEREE. In the event Lessor shall consent to an Occupancy Transaction, the Transferee shall thereafter pay directly to Lessor the Rent specified herein. 14.6 AFFILIATED COMPANY EXCEPTION. Notwithstanding the foregoing, occupancy of all or part of the Premises by parent, subsidiary, or affiliated companies of Lessee, or an entity into which Lessor is merged or consolidated, including an entity which acquires substantially all of the assets of Lessee, shall not be deemed an Occupancy Transaction provided that such parent, subsidiary, affiliated company, or entity was not formed as a subterfuge to avoid Lessee's ob`1 ligations under this Section 14. In such case, Lessee shall provide Lessor with all information required for an Occupancy Transaction to enable Lessor to verify compliance with the terms of this exception. 14.7 DISPOSITION OF PROFITS FROM OCCUPANCY TRANSACTION. In the event that the Rent due from a transferee in an Occupancy Transaction is greater than the Rent provided herein, any excess Rent after deducting all expenses incurred by Lessor and Lessee in consummating such Occupancy Transaction, shall be payable fifty percent (50%) to Lessor and fifty percent (50%) to Lessee. The party receiving payment from the Transferee shall pay the other party fifty percent (50%) of the excess rent within thirty (30) days of receipt. 14.8 LESSEE'S LIABILITY. Nothing herein contained shall be constituted to release Lessee from its liability hereunder in the event of an Occupancy Transaction. ARTICLE 15: LESSEE'S CONDUCT OF BUSINESS 15.1 ADVERTISING PROHIBITION. Lessee shall not display or sell merchandise, or allow tables, aerials, antennae, portable signs, or any other objects to be stored or placed outside of the walls which demise the Premises. Lessee shall remove any objects maintained in violation of this Section 15.1 immediately upon notice from Lessor or Lessor shall be entitled to remove said objects. Within ten (10) days of receipt of an invoice from Lessor, Lessee shall reimburse Lessor for its costs and expenses in removing any of said objects, and the amount of such reimbursement shall be deemed Rent payable 17 hereunder. In addition, Lessee shall not solicit in the Building without the prior written approval of Lessor. 15.2 TRASH AND RUBBISH. Lessee agrees that all trash and rubbish of Lessee shall only be deposited within trash receptacles provided by Lessee in the Premises. Garbage must be in watertight containers that do not permit any dripping or any odors to escape. Lessor shall cause trash receptacles filled with normal office refuse to be emptied and trash removed as a part of the janitorial service, which service shall be charged as a part of Common Area Expenses. Any extraordinary trash generated by Lessee must be removed from the Building by Lessee. Should Lessee fail to use the designated trash receptacles and/or remove any extraordinary trash from the Building within twenty-four (24) hours after notice from Lessor to do so, Lessor may correct said problem and Lessee shall pay to Lessor the cost thereof plus a twenty percent (20%) administrative fee as Rent. Acceptance of any such charges shall not constitute a waiver by Lessor of Lessee's breach or prevent Lessor from exercising any of the other rights and remedies available to Lessor hereunder or as provided by law. 15.3 CONFORMANCE WITH LAWS. Lessee shall, at its sole cost and expense, conform to, abide by, and comply with all laws, statutes, ordinances, rules, and regulations of all governmental authorities having jurisdiction over the Premises. Nothing herein contained shall obligate Lessee for structural alterations unless required by Lessee's use of, or Alterations to, the Premises except in connection with its liability for its Proportionate Share of Common Area Expenses set forth in Section 18.2, as Excess Expenses. Where permits are required from governmental authorities for a particular operation, such permits shall be secured before such operation is undertaken. 15.4 SAFE AND CLEAN ENVIRONMENT. Lessee shall keep the Premises in a safe, clean, wholesome, and sanitary condition to the reasonable satisfaction of Lessor, who shall have the right, upon reasonable notice, to enter and inspect the Premises and the business conducted on the Premises. Should Lessor or any representative of an appropriate governmental authority determine the Premises are not being maintained in compliance with the terms of this Lease, Lessor shall be entitled to put the Premises in a safe, clean, wholesome, and sanitary condition as required hereunder or by law and o charge expenses thereby incurred to Lessee as Rent. ARTICLE 16: REPAIRS AND MAINTENANCE 16.1 LESSOR'S OBLIGATIONS. Lessor shall maintain in good order, condition and repair the Building consistent with comparable first class buildings, except for the obligations of Lessee, and other lessees as hereinafter set forth. 16.2 LESSEE'S OBLIGATIONS. 16.2.1 Lessee, at Lessee's sole expense, shall, except for services furnished by Lessor pursuant to Article 8 hereof, maintain the Premises in good order, condition and repair, including the interior surfaces of the ceilings, walls and floors, all doors, all interior windows, and special items and equipment installed by or at the expense of Lessee. 16.2.2 Lessee shall be responsible for all repairs in and to the Premises, the Building, and the facilities and systems thereof, the need for which arises out of (i) errors in design of Lessee's lighting, plumbing and heating and air conditioning systems, (ii) the installation, removal, use or operation of Lessee's property in the Premises, (iii) defective workmanship in the completion of Lessee's Work or Alterations, (iv) the moving of Lessee's property into or out of the Building, or (v) the willful act, omission, misuse or negligence of Lessee, its agents, contractors, employees or invitees. 16.3 LESSEE'S ACCEPTANCE AND WAIVER. By accepting possession of the Premises, Lessee accepts the Premises as being in the condition called for by this Lease, except for such items as Lessee shall advise Lessor in writing within ten (10) days from the date Lessee accepts possession of the Premises and latent defects. Lessee hereby waives any provisions of law permitting repairs by Lessee at 18 the expense of Lessor, including, without limitation, all rights granted to Lessee under Sections 1941 and 1942 of the Civil Code of the State of California. ARTICLE 17: RECONSTRUCTION 17.1 INSURED CASUALTY. In the event of damage or destruction of the Premises by fire, the elements, acts of God, or any other cause, which damage or destruction is covered by insurance then in effect with respect to the Building, Lessor shall repair such damage or destruction and this Lease shall continue in full force and effect. Lessee, at its sole cost and expense, shall promptly repair the interior of the Premises, including Improvements included in Lessee's Work, Alterations, fixtures, furniture, furnishings, and equipment. 17.2 UNINSURED CASUALTY. In the event the damage or destruction of the Premises is not fully covered by insurance, Lessor shall have the option to repair or not to repair the Premises. If Lessor elects to repair the Premises, this Lease shall remain in full force and effect and Lessee, at its sole cost and expense, shall promptly repair the interior of the Premises, including the Improvements included in Lessee's Work, Alterations, fixtures, furniture, furnishings, and equipment. If Lessor elects not to repair the Premises, Lessor shall give written notice of such election to Lessee within ninety (90) days of the event of damage or destruction and this Lease shall thereupon terminate. Notwithstanding the foregoing, if the repairs cannot reasonably be completed within a period of six (6) months from the date of damage or destruction, either party by written notice delivered to the other may terminate this Lease within thirty (30) days after Lessor has notified Lessee of the schedule for reconstruction. Lessor shall provide such schedule within sixty (60) days from the date of such damage or destruction. 17.3 ABATEMENT OF RENT. In the event that Lessor undertakes repairs, Lessee shall continue the operation of its business in the Premises during such repair period, to the extent reasonably practicable from the standpoint of prudent business management. The Rent due from Lessee to Lessor during the period such damage or repair continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, unless such damage or repair was caused by the negligence or willful misconduct of Lessee, its employees or agents. If caused by the negligence or willful misconduct of Lessee, its employees or agents, Rent shall not be abated. Lessee shall not be entitled to any compensation or damages from Lessor for any loss of use of the Premises, Lessee's personal property, or any inconvenience or annoyance occasioned by such damage, repair, reconstruction, or restoration. 17.4 WAIVER AND NOTICE. With respect to any partial or total destruction which Lessor is obligated to restore or elects to restore under any of the provisions of this Lease, the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4 of the Civil Code of California, are hereby waived by Lessee. Lessee shall give written notice to Lessor of any damage or destruction that occurs on the Premises within ten (10) days of such damage or destruction. ARTICLE 18: COMMON AREA EXPENSES 18.1 RESPONSIBILITY AND PAYMENT FOR COMMON AREA EXPENSES. Lessor shall keep, or cause to be kept, the Common Areas of the Building in a neat, clean, and orderly condition, properly lighted and landscaped and provide services in the Premises as are more particularly described in Exhibit F. Common Area Expenses are included in determining Excess Expenses, which are charged to Lessee as set forth in Section 5.2. 18.2 DEFINITION COMMON AREA EXPENSES. The phrase "Common Area Expenses" shall include the total cost incurred in operating, maintaining, and managing the Building, including the Common Areas, specifically including each of the following services: (i) Salaries and benefits for onsite staff required to operate and maintain the Building. 19 (ii) Sanitary control, pest control, janitorial services, and removal of trash, rubbish, garbage, and other refuse. (iii) Lighting and utility systems, including incidental temporary power, which may be provided for the construction of tenant improvements in the Building. (iv) Gardening, planting, and landscaping. (v) Property management fees, but not exceeding property management fees charged by major real estate firms in the Pasadena area. (vi) Roof, building, and project signage repairs. (vii) Parking lot sealing, line, restriping, sweeping, and cleaning. (viii) Reasonable reserves for replacements and repairs. (ix) Bookkeeping and/or accounting fees, including any reports required to be completed by a certified public accounting firm. (x) Maintenance and repair of any fire protection systems. (xi) Directional signs and other markers and bumpers. (xii) Contractor, installation, and maintenance costs and expenses pertaining to security for the Building. (xiii) Capital improvements or additions to the Building and any machinery or equipment installed therein which are required by any governmental authority or which have the effect of reducing Common Area Expenses. Lessor shall amortize the cost of any capital improvements or additions with a life in excess of two (2) years, which capital improvement or addition costs is in excess of Ten Thousand Dollars ($10,000). In such event, only the current portion, together with reasonable interest thereon, shall be charged as a Common Area Expense. Appropriate prorations shall be made for any partial year during the Lease Term. (xiv) Capital repairs required to the roof, structure, mechanical, electrical, plumbing, or any other mechanical or structural components of the Building. Lessor shall amortize the cost of any capital repair with a life in excess of two (2) years, which repair cost is in excess of Ten Thousand Dollars ($10,000). In such event, only the current portion, together with reasonable interest thereon, shall be charged as Common Area Expenses. Appropriate prorations shall be made for any partial year during the Lease Term. (xv) Seasonal and other decorations consistent with holidays and special events observed in the Pasadena area. (xvi) Maintenance of street trees and landscaping, sidewalks, pedestrian walkways, pavement embellishments, and improvements, if any, in the public right of way which affect the appearance of, or otherwise benefit, the Building. (xvii) Any costs or expenses incurred in connection with any changes permitted under the terms of this Lease, repairs, or maintenance of the Building, including the cost of operation of any additional or replacement parking. (xviii) Any other reasonable charges resulting from the operation, maintenance, and management of the Building. 20 Notwithstanding any provision to the contrary, Common Area Expenses shall not include: (i) Any expenditures incurred by Lessor in the expansion of the Building, or as a part of tenant improvements for any lessee. (ii) Costs, repairs or other work reimbursed by fire or other casualty insurance of Lessor, except for the amount of any deductibles. (iii) Leasing commissions and other expenses incurred in leasing or procuring new tenants. (iv) Legal fees, other than those related to the operation of the Building, planning fees, architectural fees, and engineering fees incurred in connection with the leasing of the Building. (v) Any costs in defending any lawsuits with mortgagees unless caused by an event of default by Lessee or other lessees. (vi) Any construction allowance paid by Lessor to any lessee of the Building. (vii) Any other costs specified herein to be at Lessor's cost and expense. (viii) Increases in Common Area Expenses exceeding five percent (5%) per year except for capital repairs resulting from occurrences beyond the reasonable control of Lessor. Lessor shall use due diligence to obtain goods and services required for the maintenance of the Building at prices competitive in the Pasadena area. 18.3 LIABILITY FOR SECURITY. Nothing contained herein shall be deemed to create any liability upon Lessor for any loss of, or damage to, the property of Lessee, its employees, agents, or customers, or for loss of property. Lessee acknowledges that if Lessor elects to engage a security service and/or device, Lessor does not represent or guarantee that Lessee, its employees, agents or customers will be secure from losses caused by the illegal acts of third parties and does not assume responsibility to prevent any such illegal acts. In order to induce Lessor to engage such service and/or device, Lessee hereby waives any present or future claims Lessee may have against Lessor, whether known or unknown, for bodily injury or property damage or loss arising from the performance of such security service. Lessor hereby grants to Lessee the right to install its own security system and/or provide for a secured area in the Premises, provided that reasonable access shall be provided Lessor and its agents to provide the services and such other purposes as are set forth herein. 18.4 RESERVED AND VISITOR PARKING RESTRICTIONS. 18.4.1 Parking spaces are available in the parking garage serving the Building (the "Parking Garage"). Lessee has hired spaces on a designated and non-designated basis as set forth in the Basic Lease Provisions. Designated spaces, if any, hired by Lessee are identified by diagonal lines on Exhibit "F", attached hereto and incorporated by reference herein. For each space reserved in the Parking Garage, Lessee has been provided with a magnetic card, which card Lessee shall maintain in good condition and repair. Lessee shall pay to Lessor the amount of Twenty Dollars ($20.00) as Rent, in the event that a magnetic card provided by Lessor to Lessee is lost or damaged. 18.4.2 Visitor parking is available on a fee basis in the Parking Garage. Visitor parking is currently available at a daily rate of Four Dollars ($4.00) per day. Lessee shall be permitted to purchase from Lessor visitor tokens or passes for access to and egress from the Parking Garage at a cost equal to seventy-five percent (75%) of the daily rate. Lessor reserves the right, in its sole discretion, to change the daily rate (and visitor rate charged to Lessee) based upon market conditions from time to time in the City of Pasadena. 21 18.4.3 In the event any surcharge or regulatory fee is imposed by any governmental authority based upon reserved parking at the Building, Lessee shall (commencing after two weeks' notice to Lessee) pay, per reserved parking space, such surcharge (or regulatory fee) to Lessor concurrently with the next monthly installment of rent due for parking. 18.4.4 Lessee's automobiles are accepted for parking only. Lessor assumes no liability for fire, theft, or damage in or to any automobile, except through the negligence or willful misconduct of Lessor, its employees, agents, or contractors. Lessor shall not be responsible for articles left in any automobile, including, but not limited to CB radios, antennas, CD or tape decks, and compact discs or tape cassettes. No employee of Lessor, or their agents, have authority to vary or increase Lessor's liability. Notice to Lessor's employees of personal property left in automobiles poses no liability on Lessor. 18.4.5 Lessee shall be liable to Lessor for any loss or damage to the Property or injury to persons or other property caused by Lessee or Lessee's agents, employees, or contractors relating to the parking privileges set forth herein. 18.4.6 Lessee may not sell, assign, or sublet any of the parking rights granted in this Lease, without the prior written consent of Lessor. Lessor may withhold consent in its sole and absolute discretion. 18.4.7 If Lessee has reserved designated spaces, Lessee will provide Lessor with a list of employees and cars assigned to designated spaces, updated at least quarterly, and cooperate with Lessor in enforcement of parking controls set forth in the Rules and Regulations. 18.4.8 Lessee, employees, agents, and clients who violate any of the parking provisions set forth in this Section 18 and the Rules and Regulations may be ticketed and/or towed, in the sole discretion of Lessor. Parking tickets shall be payable to the City of Pasadena in accordance with municipal ordinances. The cost of towing a vehicle owned by Lessee, its employees, agents and/or clients, shall be paid by Lessee to Lessor as Rent within thirty (30) days of receipt of an invoice from Lessor. 18.4.9 Lessee's rights to designated and non-designated spaces provided herein shall be available on a twenty four (24) hour basis, except Holidays and Special Event Days as hereinafter defined. While parking is available on a twenty four (24) hour basis, designated spaces may be used by others after 6:00 p.m. and at all times on Special Event Days and Holidays. The location and type of parking spaces shall be in accordance with general industry practices as determined from time to time by Lessor. Lessee acknowledges that certain spaces in the parking garage have been designated for exclusive use by other lessees. Holidays shall include New Years Day, Memorial Day, Independence Day, Labor Day, thanksgiving Day, and Christmas Day. Special Event Days shall include days during which the Rose Bowl is being utilized for UCLA games, Rose Parade and rose Bowl games, and other weekend days where a major event of the Rose Bowl results in demand for parking at the West Annex Garage. 18.5 CONTROL OF COMMON AREAS. Lessor shall have the right to control the use by Lessee, its employees, agents, and clients, of the Parking areas, driveways, entrances and exits, sidewalks and pedestrian passageways, and other designated Common Areas. Lessor may at any time exclude and restrain any person from use of Common Areas, excepting, however, bona fide clients, patrons, and suppliers of Lessee and other lessees who use said areas in accordance with the Rules and Regulations. ARTICLE 19: DEFAULT BY LESSOR 19.1 NO RIGHT OF TERMINATION. In the event that Lessee claims that Lessor is in breach of this Lease or that Lessor has failed to perform any of the terms, covenants, or conditions contained herein, 22 Lessee shall give written notice of such claim of breach to Lessor. Lessor shall have thirty (30) days after receipt of written notice, or such additional time as may be reasonably required, to cure such breach. Lessor shall not be considered in breach of this Lease unless this procedure has been followed by Lessee. In any event, Lessee may not terminate this Lease as a consequence of any such breach. 19.2 LIMITATION OF LIABILITY. Lessee agrees, in the event of any actual or alleged breach by Lessor, as follows: 19.2.1 The sole and exclusive remedy shall be against Lessor's interest in the Building. 19.2.2 No service of process shall be made against any officer or employee of Lessor (except as may be necessary to secure jurisdiction of the corporation). 19.2.3 No officer or employee of Lessor shall be required to answer or otherwise plead to any service of process. 19.2.4 No judgment will be taken against any officer or employee of Lessor. 19.2.5 Any judgment taken against any officer or employee of Lessor may be vacated and set aside at any time effective as of the date such judgment was entered. 19.2.6 No writ of execution will ever be levied against the assets of any officer or employee Lessor. 19.2.7 These covenants and agreements are enforceable by Lessor and by any officer or of Lessor. 19.2.8 No action may be brought by Lessee against Lessor, or its successor, for any claim occurring during a period for which Lessee has represented in a writing, such as an estoppel certificate, that Lessor is not in breach of the terms hereof. 19.2.9 In no event shall any action be brought by Lessee against Lessor more than three (3) years after the action or occurrence which is the basis for the alleged claim. ARTICLE 20: DEFAULT BY LESSEE 20.1 ACTIONS OR OMISSIONS CAUSING DEFAULT. The occurrence of any of the following actions or omissions shall constitute a material breach of this Lease by Lessee: 20.1.1 The failure of Lessee to pay, or cause to be paid when due, Rent or other charges required by this Lease to be paid by Lessee when such failure continues for a period of ten (10) days after written notice. 20.1.2 The legal abandonment of the Premises by Lessee. 20.1.3 The failure of Lessee to do, or cause to be done, any act required by this Lease, other than payment of Rent or other charges, which failure continues for a period of ten (10) days after written notice or, if such breach cannot reasonably be cured within said ten (10) day period, Lessee fails to commence curative action within said ten (10) day period and diligently to pursue the same to completion. 20.1.4 Lessee causing, permitting, or suffering, without the prior written consent of Lessor, any act when this Lease requires Lessor's prior written consent or prohibits such act. 23 20.1.5 To the extent permitted by law, any act of bankruptcy caused, suffered, or permitted by Lessee. For purposes of this Lease, "act of bankruptcy" shall include any of the following: (i) Any general assignment or general arrangement for the benefit of creditors; (ii) The filing of any petition by or against Lessee to have Lessee adjudged a bankrupt or a petition for reorganization or arrangement under Title 11 of the United States Code relating to bankruptcy, as amended or comparable law ("Bankruptcy Code"), unless such petition is filed against Lessee and dismissed within ninety (90) days; (iii) The appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located in the Premises or Lessee's interest in this Lease; (iv) The attachment, execution, or other judicial seizure of substantially all of Lessee's assets located in the Premises or Lessee's interest in this Lease; or (v) The discovery by Lessor that any financial statement initially given to Lessor by Lessee, or its successor-in-interest, or by any guarantor of Lessee's obligations hereunder, was intentionally false. 20.2 LEGAL NOTICES. Any notice required herein shall be in lieu of, and not in addition to, any notice required by California Code of Civil Procedure Section 1161 et. seq. In the event that Lessor issues a three (3) day notice, notice of abandonment, or comparable document by reason of Lessee's breach, and Lessee cures such breach, Lessee agrees to pay to Lessor the reasonable cost of preparation, delivery, and/or service of any such notice. 20.3 RENT ACCEPTANCE, NO WAIVER. The acceptance by Lessor of Rent due hereunder after breach by Lessee shall not constitute a waiver of such breach, unless a writing to that effect has been delivered to Lessee. ARTICLE 21: REMEDIES UPON DEFAULT 21.1 LESSOR ELECTION OF REMEDIES. In the event of a breach by Lessee, in addition to other rights or remedies of Lessor at law or in equity, Lessor shall have the right, without further notice or demand of any kind, to do the following: 21.1.1 Terminate this Lease and Lessee's right to possession of the Premises and reenter the Premises and take possession thereof, and Lessee shall have no further claim to the Premises or under this Lease; or 21.1.2 Continue this Lease in effect, re-enter and occupy the Premises for the account of Lessee, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or 21.1.3 Re-enter the Premises under the provisions of Section 21.1.2 above, and thereafter elect to terminate this Lease and Lessee's right to possession of the Premises. 21.2 BANKRUPTCY CODE LIMITATIONS. If Lessor shall not be permitted to terminate this Lease as hereinabove provided because of the provisions of the Bankruptcy Code, Lessee, as a debtor-in-possession, or any trustee appointed for the benefit of Lessee, agrees promptly, within no more than sixty (60) days upon request by Lessor to the Bankruptcy Court, to assume or reject this Lease. Lessee on behalf of itself and any trustee agrees not to seek or request any extension or adjournment of any application by Lessor to assume or reject this Lease with the Bankruptcy Court. In such event, Lessee, or any trustee for Lessee, may only assume this Lease if it (i) cures or provides adequate assurance that the trustee will promptly cure any breach hereunder; (ii) compensates Lessor or provides adequate 24 assurance that Lessee will promptly compensate Lessor for any actual pecuniary loss to Lessor resulting from any breach; and (iii) provides adequate assurance of performance during the remaining Lease Term of all covenants and conditions of this Lease to be performed by Lessee. In no event, after the assumption of this Lease, shall any then-existing breach remain uncured for a period in excess of ten (10) days. Adequate assurance of performance of this Lease, shall include, without limitation, reasonable assurance that (i) there is a source of payment of Rent reserved hereunder; and (ii) the assumption of this Lease will not breach any provision hereunder. In the event of a filing of a petition under the Bankruptcy Code by or against Lessee, Lessor shall have no obligation to provide Lessee with any services required, unless Lessee shall have paid and is current with all payments of Base Rent, Parking Rent, Excess Expenses, and other charges provided herein. 21.3 ACTION WITHOUT TERMINATION. If Lessor re-enters the Premises under the provisions of either Sections 21.1.2 or 21.1.3 above, Lessor shall not be deemed to have terminated this Lease or the obligation of Lessee to pay Rent or other charges thereafter accruing even if Lessee surrenders possession of the Premises pursuant to a notice under the unlawful detainer statutes, unless Lessor notifies Lessee in writing of Lessor's election to terminate this Lease. In the event of any re-entry or retaking of possession by Lessor, Lessor shall have the right, but not the obligation, to remove all or any part of Lessee's property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Lessee. If Lessor elects to re-let the Premises for the account of Lessee, the Rent received by Lessor from such re-letting shall be applied as follows: (i) To the payment of any obligations other than Rent due hereunder from Lessee to Lessor; (ii) To the payment of any costs of such re-letting; (iii) To the payment of the cost of any alterations or repairs to the Premises; (iv) To the payment of Rent due and unpaid hereunder; and (v) The balance, if any, shall be held by Lessor and applied in payment of future Rent, as it becomes due. If that portion of Rent received from the re-letting which is applied against the Rent due hereunder is less than the amount of Rent due, Lessee shall pay the deficiency to Lessor promptly upon demand by Lessor. Such deficiency shall be calculated and paid monthly. Lessee shall also pay to Lessor, as soon as determined, any costs incurred by Lessor in connection with such re-letting or in making alterations and repairs to the Premises reasonably required to secure a new lessee, which are not covered by any amounts received from the re-letting. 21.4 DAMAGES UPON TERMINATION. In the event that Lessor elects to terminate this Lease under the provisions of either Sections 21.1.1 or 21.1.3 above, Lessor may recover as damages from Lessee the following: 21.4.1 The worth at the time of award of the unpaid Rent which had been earned at the time of termination. Worth at the time of award" shall be computed by allowing interest at the Lease Interest Rate from the first day the breach occurs. 21.4.2 The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided. "Worth at the time of award" shall be determined by allowing interest at the Lease Interest Rate from the first day a breach occurs. 21.4.3 The worth at the time of award of the amount by which the unpaid Rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Lessee proves could be reasonably avoided. "Worth at the time of award" shall be computed by discounting 25 such amount at the discount rate at the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 21.4.4 Any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under the Lease or which in the ordinary course of business would be likely to result therefrom including, but not limited to, expenses of re-letting, attorneys' fees, real estate commissions, cost of alterations and repairs, recording fees, filing fees, and any other expenses customarily resulting from obtaining possession of leased premises and re-leasing. 21.5 LESSOR'S RIGHT TO DECLARE FORFEITURE. It is understood that all covenants made by Lessee herein are conditions of this Lease. Therefore, in the event of any breach of Lessee in fulfilling any covenant, Lessor may at any time thereafter declare a forfeiture of this Lease. Any holding over thereafter shall be construed to be a tenancy from month-to-month only, for the same rental and under the same conditions, except as to Lease Term, as set forth in this Lease. 21.6 FIXTURES AND PERSONAL PROPERTY. In the event of abandonment, subject to the obligations of Lessee under Section 10.2, all of Lessee's furniture, fixtures, equipment, Alterations, and personal property left on the Premises shall, at the option of Lessor, be deemed abandoned. In such event, Lessor shall have the right to take exclusive possession of and use same, free of charge, and/or dispose of said personal property and is hereby relieved of any liability in doing so. 21.7 NO LIMITATION OF REMEDIES. The remedies given to Lessor in this Article 21 shall be in addition and supplemental to all other rights or remedies which Lessor may have under laws then in force. Lessee hereby expressly waives all rights of redemption granted under any present or future laws in the event that Lessee abandons the Premises or Lessor obtains possession of the Premises by reason of the violation by Lessee of any covenant of this Lease. 21.8 NO WAIVER UNLESS IN WRITING. The waiver by Lessor of any breach of this Lease shall not be deemed to be a waiver of any subsequent or other breach. The acceptance of Rent, interest, a Late Fee, or other charges hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any other term, covenant, or condition of this Lease, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such charge. No covenant, term, or condition of this Lease shall be deemed to have been waived by Lessor, unless such waiver is in writing from Lessor. ARTICLE 22: EMINENT DOMAIN 22.1 TAKING RESULTING IN TERMINATION. If the Premises, or any part thereof, are appropriated or taken under the power of eminent domain by any public or quasi-public authority ("Condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes possession. In the event that more than ten percent (10%) of the Rentable Area of the Premises is taken by Condemnation, and if the remaining portion of the Premises is not reasonably suitable for the conduct of business by Lessee, either Lessor or Lessee may terminate this Lease as of the date the condemning authority takes possession by delivery of written notice of such election within sixty (60) days after receipt by such party of notice that said Premises have been condemned or, in the absence thereof, within ten (10) days after the date of condemning authority takes possession. In the event of an election to terminate, Lessor and Lessee shall be released from any obligations hereunder to the other occurring after the date the condemning authority takes possession. 22.2 TAKING WITHOUT TERMINATION. If neither Lessor nor Lessee terminate this Lease, less than ten percent (10%) of the Rentable Area of the Premises is condemned, or if the remaining portion is reasonably suitable for the conduct of business by Lessee, Lessee shall continue to occupy that portion of the Premises which shall not have been condemned as herein provided and the parties will proceed as follows: 26 (i) At Lessor's expense, as soon as reasonably possible, Lessor will restore the Premises; (ii) Rent shall be reduced on an equitable basis, taking into account the relative values of the portion remaining; and (iii) Lessor shall be entitled to receive the total award or compensation in such proceedings, except as otherwise provided in Section 22.3. Lessee hereby waives any statutory rights of termination which may arise by reason of any partial taking of the Premises under the power of eminent domain. 22.3 DISPOSITION OF AWARD. In the event of Condemnation, Lessor shall be entitled to the entire award or compensation from any proceedings with respect to the Premises, but the Rent and other charges for the last month of Lessee's occupancy shall be prorated and Lessor agrees to refund to Lessee any Rent, and other charges paid in advance. Notwithstanding the foregoing, Lessee shall have the right to receive compensation or damages for the loss of, or damage to, fixtures and personal property which Lessee has the right to remove, goodwill, lost profits, and for relocation costs. 22.4 TRANSFER UNDER THREAT OF TAKING. A voluntary sale or conveyance under threat in lieu of condemnation shall be deemed an appropriation or taking under the power of eminent domain. ARTICLE 23: ATTORNEYS' FEES AND COSTS 23.1 RECOVERY TO PREVAILING PARTY. In the event that Lessor or Lessee shall institute any action or proceeding against the other relating to the provisions of this Lease, the unsuccessful party in such action agrees to reimburse the prevailing party for the actual attorneys' fees, legal expenses, and costs incurred. The parties agree that the actual attorneys' fees and costs so incurred shall be deemed reasonable. ARTICLE 24: SALE OF PREMISES BY LESSOR 24.1 RELEASE OF LESSOR. In the event of a sale or transfer of the Building by Lessor and the assumption in writing by the transferee of Lessor's obligations hereunder, Lessor shall be freed of all liability under covenants contained in or derived from this Lease, or arising out of any act, occurrence, or omission relating to the Premises and this Lease, which occurs after the consummation of such sale, transfer, or assignment. ARTICLE 25: SUBORDINATION, ATTORNMENT, AND ESTOPPEL CERTIFICATE 25.1 SUBORDINATION. Upon written request of Lessor or its lender, Lessee will, in writing, subordinate its rights hereunder to the lien of any mortgage, deed of trust, lease, or easement, now or hereafter placed upon the Building, and to all advances made or hereafter to be made upon the security thereof. Notwithstanding the foregoing, so long as Lessee is not in breach hereunder after the expiration of any applicable cure period, this Lease shall remain in full force and effect and Lessee shall have quiet enjoyment of possession of the Premises as provided in Section 26.1. Lessee may require, as a condition of execution of an agreement to subordinate, that the party to whom such right is granted provide written assurances that Lessee's right of quiet enjoyment will not be disturbed so long as Lessee is not in default under the terms hereof. 25.2 ATTORNMENT. In the event of any foreclosure or exercise of the power of sale under any mortgage or deed of trust made by Lessor covering the Building, Lessee shall attorn to the purchaser upon any such foreclosure or sale, and recognize such purchaser as Lessor under this Lease. 27 25.3 ESTOPPEL CERTIFICATES. Within twenty (20) days after written request therefor by Lessor, Lessee shall execute and deliver a certificate in such form as may be reasonably required by Lessor, a prospective purchaser of the Building, assignee, or mortgagee, addressed to any such prospective purchaser, assignee, or mortgagee, or to Lessor certifying that this Lease is in full force and effect and that there are no defenses or offsets claimed by Lessee. ARTICLE 26: QUIET ENJOYMENT 26.1 QUIET ENJOYMENT. Lessor agrees that Lessee, upon timely payment of Rent and performing the other covenants and conditions of this Lease, shall quietly have and enjoy possession of the Premises during the Lease Term. ARTICLE 27: CONSENTS AND APPROVALS 27.1 LESSOR'S CONSENT. Wherever this Lease provides that Lessee is required to obtain Lessor's consent or approval, such consent or approval must be obtained in advance and shall not be valid or effective unless consented to or approved expressly in writing. Any such consent or approval by Lessor, or its designated agent, may be given or denied at the sole and absolute discretion of any person having the right to give or deny such consent or approval, except as otherwise provided in this Lease. Lessor's consent to or approval of any act by Lessee shall not be deemed to waive or render unnecessary Lessor's consent to or approval of any subsequent similar act by Lessee. Notwithstanding the foregoing, in no event shall such consent be unreasonably delayed or withheld. 27.2 REIMBURSEMENT FOR COST OF APPROVALS. In addition to other obligations of Lessee set forth herein, Lessee agrees to reimburse Lessor for payment made for any municipal or other out of pocket fees or charges assessed in connection with obtaining and/or processing approvals requested by Lessee hereunder. ARTICLE 28: SECURITY DEPOSIT 28.1 SECURITY DEPOSIT. Lessee has paid to Lessor the sum specified in the Basic Lease Provisions as a deposit ("Security Deposit"), receipt of which is hereby acknowledged. The Security Deposit shall be held by Lessor without liability for interest as security for the faithful performance by Lessee of all of the terms and conditions of this Lease. The Security Deposit may be commingled with other funds of Lessor. The Security Deposit shall not be mortgaged, assigned, transferred, or encumbered by Lessee, and any act by Lessee purporting to accomplish same shall be without force and effect and shall not be binding upon Lessor. 28.2 USE AND RESTORATION. If Rent or any other sum payable by Lessee to Lessor hereunder shall be overdue and unpaid, or should Lessor make payments on behalf of Lessee, or Lessee fails to perform any of the covenants or conditions of this Lease, then Lessor may, at its option and without prejudice to any other remedy which Lessor may have on account thereof, apply said Security Deposit, or so much thereof as may be necessary to compensate Lessor, to the payment of Rent, loss, or damage sustained by Lessor due to such breach by Lessee. Lessee shall immediately upon demand restore the Security Deposit to the sum previously deposited. Should Lessee comply with all said covenants and conditions and promptly pay all rent as it falls due, and any other sums payable by Lessee to Lessor, the Security Deposit shall be returned in full to Lessee within thirty (30) days after the expiration of the Lease Term. 28.3 DISPOSITION UPON BANKRUPTCY. In the event of bankruptcy or other debtor-creditor proceedings against Lessee, any Security Deposit shall be applied to the payment of Rent and other charges first due to Lessor for the period prior to the filing of such proceedings. 28 28.4 DISPOSITION UPON SALE. Lessor may deliver the Security Deposit to the purchaser of Lessor's interest in the Premises in the event of the sale of such interest. With such delivery, Lessor shall be discharged from any further liability with respect to the Security Deposit. This provision shall also apply to any subsequent transfers. 28.5 SECURITY DEPOSIT ADJUSTMENT. In the event of the exercise by Lessee of the option set forth in Section 4.2 and/or the expansion of Lessee's Premises pursuant to Section 29.19, which options include Fair Market tenant improvements and/or increased Rent, the Security Deposit shall be increased, as appropriate, to provide (i) additional reasonable security, guarantees, and/or alternative collateral for tenant improvements, commissions and other costs, to be paid and/or credited by Lessor and (ii) the increased Rent due from Lessee to Lessor. ARTICLE 29: MISCELLANEOUS 29.1 CAPTIONS. The captions of Articles and Sections of this Lease are for convenience only, and do not in any way limit or amplify the terms, covenants, and conditions of this Lease. 28.2 PARTIES. If more than one person or corporation is named as Lessee in this Lease and executes the same as such, then the word "Lessee" wherever used in this Lease is intended to refer to all such persons or corporations, and the liability of such persons or corporations for compliance with and performance of all the terms, covenants, and conditions of this Lease shall be joint and several. 29.3 GENDER. The masculine pronoun used herein shall include the feminine or the neuter, as the case may be, and the use of the singular shall include the plural. 29.4 LEGAL ADDRESS. Whenever provision is made under this Lease for any demand, notice, or declaration of any kind, or where it is deemed desirable or necessary by either party to give or serve any such notice, demand, or declaration to the other party, it shall be in writing and sent by United States Certified Mail, postage prepaid, return receipt requested, or by a reputable courier, addressed to the address(es) set forth in the Basic Lease Provisions. Either party may change such address by giving written notice by certified or registered mail to the other. 29.5 CONSTRUCTION. The parties hereto agree that all the provisions hereof are to be construed as covenants and agreements, and the words importing such covenants and agreements shall be construed as though used in each separate paragraph hereof. All of the provisions hereof shall bind and inure to the benefit of the parties hereto, their respective heirs, legal representatives, successors, and assigns. 29.6 RELATIONSHIP OF PARTIES. It is agreed that nothing contained in this Lease shall be deemed or construed as creating a partnership or joint venture between Lessor and Lessee or between Lessor and any other party, or cause Lessor to be responsible in any way for the debts or obligations of Lessee, or any other party. 29.7 SEVERABILITY. It is agreed that if any provision of this Lease shall be determined to be void by any Court of competent jurisdiction, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. It is the intention of the parties that if any prevision of this Lease is capable of two constructions, only one of which would render the provision valid, the provision shall have the meaning which renders it valid. 29.8 WARRANTY OF AUTHORITY. If Lessee is a corporation, the parties executing this Lease on behalf of Lessee hereby covenant and warrant that (i) Lessee is a duly qualified corporation and all steps have been taken prior to the date hereof to qualify Lessee to do business in California; (ii) all franchise and corporate taxes have been paid to date; and (iii) all future forms, reports, fees, and other documents necessary to comply with applicable laws will be filed and/or paid when due. 29 29.9 ENTIRE AGREEMENT. No oral agreements exist between the parties hereto affecting this Lease. This Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements, and understandings, if any, between Lessor and Lessee, their employees and agents, and none thereof shall be used to interpret or construe this Lease. This Lease is and shall be considered to be the only agreement between the parties. All negotiations and oral agreements acceptable to both parties have been merged into and are included herein. There are no other representations or warranties between the parties and all reliance with respect to such representations is based solely upon the representations and agreements contained in this Lease. 29.10 LESSEES SELECTED BY LESSOR. Lessor reserves the right to effect such other tenancies in the Building as Lessor, in the exercise of its sole business judgment, shall determine to best promote the interest of the Building. Lessee does not rely on the fact, and Lessor does not represent, that any specific tenant or number of tenants shall occupy space in the Building during the Lease Term. 29.11 GOVERNING LAW; FORUM; CONSTRUCTION. The laws of the State of California shall govern the validity, performance, and enforcement of this Lease. Should either party institute legal suit or action for enforcement of any obligation contained herein, it is agreed that the venue of such suit or action shall be Los Angeles County, California. Although the printed provisions of this Lease were drawn by Lessor, this Lease shall not be construed either for or against Lessor or Lessee, but this Lease shall be interpreted in accordance with the general tenor of the language in an effort to reach the result intended by the language. 29.12 FORCE MAJEURE. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain materials or reasonable substitutes therefor, governmental action, civil commotion, fire, or other casualty, and other causes beyond the reasonable control of the party obligated to perform shall excuse the performance by such party for a period equal to any such prevention, delay, or stoppage, except obligations imposed herein upon Lessee with regard to the payment of Rent and other charges. 29.13 USE OF NAME OF BUILDING. Lessor reserves the right to change or modify the name of the West Annex or Parsons West Annex as Lessor may desire from time to time. Lessee acknowledged that the names "Parsons", "Parsons West Annex", and "West Annex" are proprietary names held by Lessor and not geographic names. Lessee shall not have or acquire any property right or interest in the aforementioned names, the logo, or in any other name or logo for the Building, and shall not use Parsons, Parsons West Annex, or West Annex, the logo, or any other name or logo of the Building as a part of its tradename, service mark, or business name, without Lessor's prior written consent. 29.14 LENDER REQUIREMENTS. The parties agree that whenever Lessor's approval is requested and/or required and Lessor is first required to secure the approval of a mortgagee for such request or requirement pursuant to the terms of any loan agreement or deed of trust, Lessor may disapprove any such request, subject to applicable law, if the mortgagee fails or refuses to grant such approval. In such case, Lessor's disapproval shall be deemed reasonable. The parties agree that this Lease shall be modified at the request of Lessor in any manner requested by a lender providing financing, provided that no such modification shall substantially affect the rights of Lessee hereunder and, in no event, shall such modification change the amount of Rent or other charges payable by Lessee hereunder. 29.15 VIOLATIONS BY OTHER LESSEES. Lessor shall not be responsible to Lessee for the non-enforcement or violation of the provisions of any other Lease affecting the Building. 29.16 TIME IS OF ESSENCE. Time is of the essence of each of the terms and conditions of this Lease. 30 29.17 REAL ESTATE BROKER. Lessor and Lessee warrant that each party has had no dealings with any real estate broker or agent in connection with the negotiations and/or execution of this Lease, except for the broker(s) listed in the Basic Lease Provisions, if any. Each party hereby indemnifies and holds the other harmless from and agrees to defend the other against any costs, expenses, attorneys' fees, or liability for compensation or charges which may be claimed by any unnamed broker or agent by, reason of any dealings or actions of such other party. IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Lease as of the date set forth in the Basic Lease Provisions. LESSEE: BILL GROSS' IDEALAB! By: /S/ MARCIA GOODSTEIN MARCIA GOODSTEIN - --------------------------------------------- (Please Print Name and Title) CHIEF OP. OFCR. By: ----------------------------------------- - --------------------------------------------- (Please Print Name and Title) LESSOR: PARSONS INFRASTRUCTURE & TECHNOLOGY GROUP, INC. By: /S/ [illegible] ----------------------- 31 ADDENDUM TO LEASE AGREEMENT BILL GROSS' IDEALAB! 29.18 YEAR 2000 COMPLIANCE. Lessor shall provide Lessee with reasonable assurances that the building systems are year 2000 compliant (Y2K), including heating and air conditioning, elevators, parking, and fire and life safety systems. In the event any of such systems fail to operate correctly with the transition to the year 2000, Lessor, at Lessor's expense will undertake all reasonable measures to ensure that the building systems operate correctly. 29.19 EXPANSION. Lessee may expand its Premises to include floor 2, or floors 2 and 3, effective January 1, 2000 upon the following terms and conditions: 29.19.1 Lessee's satisfaction of the conditions precedent to, and exercise of, its option to extend with respect to the Premises in accordance with the terms and conditions set forth in Sections 4.2 and 5.1.4. 29.19.2 Agreement by the parties of (i) Base Rent and Parking Rent, tenant improvements, parking, and other terms for the expansion area for the period January 1, 2000 through June 30, 2004 and (ii) additional Security Deposit, guarantees and/or collateral as more particularly described in Section 28.5. 29.19.3 Execution of an Amendment to Lease prior to August 15, 1999, formalizing the expansion of the Premises and agreement by the parties of the terms as required in this Section. 29.19.4 Lessee's option to expand its Premises to include floor 3 is also subject to (i) Lessor's ability to relocate FEMA at a reasonable cost to Lessor( taking into consideration FEMA's one year extension)and/or (ii) Lessee, prior to August 15, 1999, agrees in writing to pay any excess costs to be incurred by Lessor in connection with such relocation. 29.19.5 If Lessor and Lessee agree on terms for expansion of Lessee's Premises as provided above, such terms shall include one additional option for a period of five (5) years to be exercised by Lessee by written notice delivered to Lessor prior to June 30, 2003. In such case, Lessor and Lessee shall determine Fair Market Rent for Base Rent and Parking Rent for the second option period based upon the time periods and procedures set forth in 5.1.4.2. 29.20 NOTICE OF AVAILABLE SPACE. Upon request of Lessee, Lessor shall provide Lessee with information on existing and projected areas which will be available for lease in the West Annex. Nothing herein contained shall require that Lessor lease such areas to Lessee, it being understood that Lessor will exercise its judgement in connection with future tenancies in the West Annex in its sole and absolute discretion. 32 EXHIBIT "A" WEST ANNEX BUILDING 8TH FLOOR EXHIBIT "B" TENANT IMPROVEMENT MANUAL PARSONS WEST ANNEX 74 NORTH PASADENA AVENUE I. INTRODUCTION A. The Parsons West Annex ("West Annex") has been designed to be a high quality office building. To maintain this quality, it is important that tenant improvements be completed with the least disturbance to other lessees and that the Common Areas be consistently maintained at a high standard. B. This Tenant Improvement Manual is for the mutual benefit of all lessees. In the event of any conflict between the Tenant Improvement Manual and the Lease, the Lease shall govern. II. LESSEE'S ARCHITECT A. SELECTION APPROVAL. Lessee shall retain, at Lessee's expense, the services of a licensed architect and/or recognized interior designer ("Lessee's Architect") for the design of the improvements to include interior design, signage, mechanical, plumbing and electrical systems, and utilities. The selection of such firm is at the discretion of Lessee, subject to the reasonable approval of Lessor. B. FIELD MEASUREMENT. If requested, Lessee's Architect will be provided with a copy of Lessor's plans and specifications ("Lessor's Plans"), including a floor plan for the floor on which the Premises is located, and applicable mechanical, electrical, and plumbing drawings which are available to Lessor. Lessee shall reimburse Lessor for any costs incurred in reproducing such plans. Lessee's Architect shall be responsible to field measure the Premises and advise Lessor within seven (7) days of receipt of Lessor's Plans of any discrepancies. C. UTILITY VERIFICATION. Lessee's Architect shall verify that the utilities available to the Premises are adequate to satisfy Lessee's requirements. II. PLAN SUBMISSION PROCEDURES A. LESSEE'S PRELIMINARY PLANS AND SPECIFICATIONS 1. Within twenty (20) working days after receipt of Lessor's Plans, Lessee shall submit to Lessor for Lessor's approval three (3) sets of preliminary design drawings for the Improvements prepared by Lessee's Architect, which drawings shall indicate Lessee's specific requirements, including, without limitation, fully dimensioned floor plans (Scale 1/4 = 1".0") describing in reasonable detail the layout of access to Common Areas and interior partitions, and indicating the proposed use of each enclosed area. 2. Lessor shall approve or disapprove Lessee's preliminary design drawings within five (5) working days after Lessor's receipt thereof. If disapproved, Lessor shall indicate the reasons and/or corrections required for approval. B. LESSEE'S CONSTRUCTION PLANS AND SPECIFICATIONS 1. Within fifteen (15) working days after Lessor's approval of Lessee's preliminary design drawings, and subject to Lessee's field measurement of the Premises, Lessee shall, at Lessee's expense, submit to Lessor for approval three (3) sets of plans and one (1) set of reproducible plans of fully detailed architectural working drawings and specifications ("Lessee's Construction Plans") prepared by Lessee's Architect describing the Improvements to be completed in the Premises including, without limitation, floor plans (Scale1/4" = 1'.0"), Common Areas, interior partitions, trade fixtures, lighting, electrical outlets; telephone jacks; telecommunication systems; reflected ceiling plan, including ceiling height(s) (Scale1/4" = 1'.0"); plumbing; location, size and details of signage; areas of unusual floor loading; mechanical and electrical requirements; and all other improvements to be performed by Lessee pursuant to Section V thereof ("Lessee's Work"). 2. In the event there are any design changes required in securing required permits for completion of Lessee's Work, Lessee shall forthwith provide Lessor with three (3) sets of plans and one (1) set of reproducible plans which describe the required revisions for Lessor's approval. The revised plans shall thereupon become "Lessee's Construction Plans". Lessor shall have five (5) working days after receipt of same within which to examine and to approve or disapprove Lessee's revised Construction Plans. The failure by Lessor to disapprove Lessee's Construction Plans in writing within said five (5) working days shall be deemed an approval thereof. 3. Lessee shall promptly and diligently modify Lessee's Construction Plans until same have been approved by Lessor. 4. Construction of the Improvements specified on Lessee's Construction Plans shall not commence until Lessee's Construction Plans have been approved by Lessor. 5. Lessee shall furnish as-built plans and specifications to Lessor within thirty (30) days after completion of Lessee's Work. 6. If Lessee's Construction Plans are in conflict with terms and conditions of this Tenant Improvement Manual, the Tenant Improvement Manual shall control. 7. Any additional changes, expenses or costs (including architects' fees and attorneys' fees) arising by reason of any subsequent change, modification or alteration of Lessee's Construction Plans, made at the request of Lessor, shall be at the expense of Lessee. No changes, modifications or alterations shall be made to Lessee's Constructions Plans without the prior written consent of Lessor. 8. Lessor's approval of Lessee's Construction Plans, or any work or installation made by Lessee, shall not constitute a warranty or representation by Lessor that Lessee's drawings, work or installations comply with the requirements of any applicable law, ordinance or 2 regulation, or are safe, sound, merchantable or fit for the purpose intended. Lessor shall have no liability to Lessee in the event Lessee is required to change its drawings, or Lessee's Work, to meet applicable governmental requirements or in the event that such drawings or Lessee's Work are defective or cause injury to persons or property. IV. LESSEE'S CONTRACTOR A. LICENSED CONTRACTORS. Each contractor and subcontractor engaged by Lessee to perform Lessee's Work ("Lessee's Contractor") shall be licensed in the State of California. The selection of such firm(s) is at the discretion of Lessee, subject to the reasonable approval of Lessor. By approving Lessee's Contractor, Lessor assumes no liability for the work completed by, or other obligation of, Lessee's Contractor. Lessor hereby approves Lucent Technologies as Lessee's Contractor. B. COORDINATION. Lessee's Contractor shall coordinate Lessee's Work with all other work being performed or to be performed at or in connection with the West Annex so that Lessee's Work does not interfere with or delay the completion of such other work or the orderly operation of business by other lessees in the West Annex. C. MATERIAL STORAGE. Lessee's Contractor shall not use any space outside of the Premises and within the West Annex and/or on sidewalks or adjacent streets for storage, handling, or moving of materials and equipment, and/or for the location of any field office or facilities required for construction personnel without the prior written authorization of Lessor. Construction vehicles shall be prohibited from parking in the West Annex parking garage, except in accordance with parking regulations for day parking in the parking garage, or as otherwise authorized by Lessor in writing. Notwithstanding the foregoing, Lessee's Contractor may, during the period of construction, (i) maintain a construction dumpster in the Service Bay in a location designated by Lessor for a period reasonably required for completion of Lessee's Work and (ii) authorize individuals engaged to complete Lessee's Work to use parking passes previously issued to Lessee for the purpose of parking their vehicles in the Parking Garage. D. DEBRIS REMOVAL. Lessee's Contractor shall remove and dispose of all debris and rubbish caused by or resulting from Lessee's Work on a daily basis. No trash receptacles or carts will be allowed to be stored, even temporarily, in the Common Areas, including the parking garage, on sidewalks or adjacent streets. Upon completion of Lessee's Work, Lessee's Contractor shall remove all temporary structures, surplus materials, debris and rubbish remaining within the West Annex which has been brought in or created as a result of Lessee's Work. If Lessee's Contractor shall neglect, refuse or fail to remove any temporary structures, surplus materials, debris and rubbish within twenty-four (24) hours after notice to Lessee from Lessor, Lessor may remove or cause same to be removed, and Lessee shall pay the expense of removal and hold Lessor harmless therefrom. E. INSURANCE - OSHA COMPLIANCE. In addition to the requirements of the Lease, and without any limitation thereof, Lessee's Contractor shall (i) comply with all governmental rules and regulations including applicable OSHA standards and (ii) carry workers' compensation and public liability insurance (including property damage), with limits and in a form approved in advance, ("Course of Construction Insurance") by Lessor and issued by insurance companies approved in advance 3 by Lessor. Lessor, Lessee, the Building Manager, and the contractor and/or subcontractors procuring the insurance shall be named insureds (or named as additional insureds) in each policy of said liability insurance, which policy shall have a cross-liability endorsement or its equivalent. Certificates evidencing the foregoing insurance shall be delivered to Lessor before any work is commenced by Lessee's Contractor and before his equipment and/or materials are brought to the West Annex. V. LESSEE'S CONSTRUCTION RESPONSIBILITIES A. LESSEE'S WORK. All remodeling in the Premises shall be performed diligently by Lessee, at Lessee's expense, and in a first class manner. Lessee's Work shall include, but is not limited to, the purchase, installation, and performance of the following additions and modifications, if reflected in Lessee's approved Construction Plans: 1. Interior partitions and glazed walls within the Premises, including drywall and taping on exterior walls and drywall and taping on, and insulation in, demising walls. 2. Ceilings. 3. Interior painting, wallpaper and other finishes. 4. Floor covering and floor finishes, preparations of surfaces to receive same, and any special reinforcing, raised areas or depressions in the concrete floor. 5. Plumbing fixtures and accessories, toilets, water heaters, water treatment systems and drinking fountains with plumbing thereto connected to services as shown in Lessor's Plans. Grease traps will be required for any food preparation areas having pot sinks or other grease producing appliances that discharge grease into the waste system at such location as shall be specified in Lessee's Construction Plans. 6. Internal communications, security, fire detection, and alarm systems. 7. Fixtures and furnishings. 8. Signs. 9. Heating, cooling or ventilating equipment and ducting including revisions required by local building codes or otherwise. 10. Telephone service and equipment, telephone conduit, cabinets and outlets within the Premises, including wiring from the terminal board existing in the telephone room in the basement, through existing conduits which are provided in the Premises, or the addition of conduits from the telephone room, if required. 11. Electrical work and equipment, including lighting. 12. Fire sprinkler system. 4 B. CONTRACTOR'S WARRANTY. Lessee shall ensure that Lessee's contractor shall guarantee that portion thereof for which he is responsible against any defects in workmanship and materials for a period of not less then one (1) year from the date of final completion of Lessee's Work. The correction of such work shall include, without limitation, all expenses and corrections to, or in connection with, the structure of the West Annex, should the Building be damaged or affected by defective work or by the repair or replacement of such defective work. All such warranties or guarantees as to materials or workmanship with respect to Lessee's Work shall be contained in Lessee's agreement with Lessee's Contractor. Lessee shall require each contractor to include such warranties or guarantees in each subcontract, and all such warranties or guarantees shall be so written so that same shall inure to the benefit of both Lessee and Lessor, as their respective interests may appear, and so that same may be directly enforced by Lessee or Lessor. Lessee hereby covenants to give to Lessor an assignment or other assurance necessary to perfect such right to permit enforcement by Lessor. C. LESSOR'S INSPECTION. Lessor's prior inspection and written approval shall be a condition precedent to Lessor's acceptance of Lessee's Work as being complete and in accordance with Lessee's Construction Plans. Lessee shall give Lessor at least five (5) working days prior written notice of the anticipated completion date of Lessee's Work. Lessee shall be required to settle and/or bond against any mechanic's or materialman's liens, or other similar liens, filed against the West Annex as a result of Lessee's Work in accordance with the provisions relating to such liens in the Lease. Lessee shall reimburse Lessor in full, and indemnify, defend and hold Lessor harmless from and against any liability, cost or expense incurred by Lessor in connection with any such lien. D. NOTICE OF COMPLETION. Lessee shall, within ten (10) working days after completion of Lessee's Work, execute and file of record, or cause to be filed of record, a notice of completion with respect thereto in a form complying with the applicable provisions of the California Civil Code specifying the name of Lessee's Contractor and the work done. Lessee shall furnish a conformed copy thereof to Lessor upon recordation. If Lessee fails to record said notice, Lessee hereby appoints Lessor as Lessee's attorney-in-fact for the purpose of executing and filing same on behalf of Lessee. This power of attorney is coupled with an interest in the Lease and is irrevocable. VL. CONSTRUCTION RULES AND REGULATIONS To expedite the completion of the Improvements with the least amount of inconvenience to all concerned, the following Construction Rules and Regulations are applicable to Lessee, its employees, contractors, and agents. A. TIMELY COMPLETION. The interior of the Premises shall, as soon as practically possible, be constructed by Lessee at Lessee's expense, in accordance with Lessee's Construction Plans. Lessee agrees to pursue Lessee's Work diligently to completion, complying with all applicable city, county, state and federal laws, ordinances and regulations relating thereto. B. PERMITS. Lessee shall obtain and transmit copies to Lessor of all permits and approvals with respect to Lessee's Work required or given by the City of Pasadena, County of Los Angeles and/or any utility service, unless Lessor shall have already obtained said permit(s) and/or utility service(s). Lessee must 5 furnish evidence of permits to Lessor prior to the commencement of Lessee's Work. C. BOND. Lessor shall have the right, in Lessor's reasonable discretion, to require Lessee or Lessee's Contractor to furnish a bond or other security in form satisfactory to Lessor covering the prompt and faithful performance of Lessee's Work in an amount equal to one hundred twenty-five percent (125%) of the cost thereof. Lessor hereby waives a bond with respect to Lucent Technologies, and will waive bonds for other contractors with comparable net worth. D. SECURITY. Lessee will be responsible for the security of the Premises during construction and shall take all necessary steps to secure the same. Lessor shall have no liability for any loss or damage, including theft of building materials, equipment or supplies. E. WORKING HOURS. Work in the Premises which does not involve core drilling, saw cutting, or other procedures likely to disturb other lessees shall be completed during regular working hours which shall be 6:00 a.m. to 6:00 p.m., Monday through Friday, or such other hours as may be approved by the Building Manager in writing. Work which may affect systems in the Building or disturb other lessees shall be completed at other times arranged in advance with the Building Manager. F. PUBLIC SAFETY. It is the responsibility of Lessee to ensure that Lessee's Contractor exercises caution in matters relating to public safety and to prevent damage to the Building and other leased areas. G. CLEANLINESS OF THE COMMON AREAS. Lessee shall ensure that Lessee's Contractor keeps the Common Areas, including the elevators, stairways, restrooms, garage, sidewalks and adjacent streets in an absolutely clean and neat condition at all times. Drop cloths shall be used whenever reasonable to preclude damage to, or maintain cleanliness in, the Common Areas. If Lessee's Contractor violates this regulation on more than one (1) occasion, or fails to immediately cure such default, Lessor may prohibit Lessee's Contractor from entering the West Annex. H. PROTECTION OF FLOOR AREAS AND ELEVATORS. All supplies, merchandise, materials, equipment or trash being delivered to or removed from the Premises across the Common Areas or within the elevators which requires the use of dollies or handtrucks must be transported on dollies or handtrucks with soft rubber tires. I. FLOOR LOADING. The following limitations shall be observed by the Lessee in the conduct of Lessee's Work: 1. No suspended loads will be attached to the underside of the floor or roof structure, with the exception of normal suspended ceiling and light fixtures, without Lessor's prior written approval. 2. No wall mounted fixtures will be applied to demising walls, other than those approved in writing by Lessor. Lessee acknowledges that the standard steel stud and drywall demising walls are not designed to support wall mounted fixtures. Notwithstanding the foregoing, Lessee shall not be required to remove any existing wall mounted fixtures. 6 3. No load shall be imposed upon any floor areas of the Premises in excess of the design live load of 100 pounds per square foot uniformly distributed. J. RESTROOMS. Restrooms may be used only for personal functions. Cleaning of tools or painting equipment will not be allowed in the restrooms. Utility sinks will contain a water supply, but may not be used for tool or painting equipment cleaning or other construction work. VII. LESSOR'S FUNDING OF LESSEE'S WORK A. TENANT IMPROVEMENT ALLOWANCE. Lessor shall not be responsible to fund any tenant improvements during the initial term. In consideration for exercise of the option set forth in Section 4.2 by Lessee, Lessor agrees to reimburse Lessee an amount equal to market tenant improvements as determined in accordance with Section 5.1.4.1 ("Tenant Improvement Allowance"). The Tenant Improvement Allowance shall be reduced by 4% of the amount which Landlord is required to fund for Lessee's tenant improvements. B. PAYMENT REQUEST. In order to receive credit for the Tenant Improvement Allowance, Lessee shall request such credit from Lessor in writing ("Payment Request"), which Payment Request shall conform with and/or include unconditional lien releases from Lessee's Contractor and a detailed cost breakdown indicating the cost for each trade and a copy of all contracts with Lessee's Contractor. Upon receipt of documentation confirming that cost of improvements completed by Lessee in the Premises exceed the Tenant Improvement Allowance, and Lessee's compliance with other requirements set forth in this Tenant Improvement Manual, Lessor shall credit the Tenant Improvement Allowance in twelve (12) equal monthly installments against Base Rent next due and owing during the option period. 7 EXHIBIT "C" RULES AND REGULATIONS PARSONS WEST ANNEX 74 NORTH PASADENA AVENUE I. GENERAL A. Parsons West Annex is designed as a high quality professional office building. While certain specific requirements for conduct and/or business operations are established by these Rules and Regulations, general rules of courtesy and reasonable business procedures must also be observed in order that the common good of all is served. B. The Rules and Regulations for 74 North Pasadena Avenue, Pasadena, California and the adjacent parking garage, (collectively, the "Building") are intended to ensure the quiet enjoyment of Lessee and other lessees to establish a professional environment for Lessee, its employees, and clients. C. The Rules and Regulations will be revised as necessary from time to time, in Lessor's reasonable judgement, to meet the needs of the majority of the lessees of the Building. If a lessee has suggestions for any revision of the Rules and Regulations, the matter should be brought to the attention of the onsite representative of Lessor ("Building Manager"). D. Every lessee is expected to read and be familiar with the Rules and Regulations. Lessee, or its office manager, shall read the Rules and Regulations, execute a statement prepared by Lessor verifying that she/he has read same, and deliver such signature page to the Building Manager. E. The Building Manager may take any reasonable action required to ensure compliance with the Rules and Regulations. Notwithstanding the foregoing, Lessor and/or the Building Manager shall not be responsible or liable to any lessee for the failure to enforce the Rules and Regulations. F. If Lessee, or its employees, observes an infraction of the Rules and Regulations which they believe may have a negative impact on the conduct of their business, Lessee should report this infraction to the Building Manager as soon as possible in order to permit the Building Manager to take effective action. II. BUSINESS OPERATIONS A. Lessee, and/or its employees, shall immediately report to the Building Manager any theft, or other illegal activity that is observed in the Building. B. Neither Lessee, nor its employees, agents, visitors, or licensees shall at any time bring to or keep on the Premises any flammable, combustible or explosive fluid, chemical or substance or any toxic, hazardous or radioactive matter, except combustible fluids or toxic substances required to be used in the ordinary course of business and contained in appropriate containers to prevent a leakage and/or fire. C. No projection shall be attached to the outside walls of the Premises or the exterior of the Building without the prior written consent of Lessor. D. No curtains, blinds, shades, screens, film or other materials shall be attached to or hung in, or used in connection with, any window or door of the Premises, without the prior written consent of Lessor. E. Lessee shall not use the Premises for lodging or sleeping or for any immoral or illegal purposes. No one shall be permitted to remain on the Premises who is under the influence of alcohol or drugs. No illegal drugs shall be allowed on the Premises at any time. The violation of this provision shall be considered a material breach of the Lease. F. No additional locks or bolts of any kind shall be placed upon any of the doors or windows of the Premises by Lessee, nor shall any changes be made to the locks or the mechanism approved and/or installed by Lessor. Lessee must, upon the termination of its tenancy, return to Lessor all keys to the Premises, internal offices, storerooms, and toilet rooms. Lessee shall furnish Lessor with a key to the Premises to permit access during emergencies or provide Lessor with written advise of Lessee's designated representative(s) who will be available at all times to permit access in the case of an emergency. If a key to the Premises is not provided to Lessor, and Lessee's designated representative is not available to permit access for an emergency, Lessee shall be responsible for the cost of damages resulting from a forced entry. G. No cooking shall be done or permitted on the Premises, provided that the preparation of coffee, tea, hot chocolate, soft drinks, and similar drinks for Lessee, its employees, agents and clients shall be permitted in employee break rooms. Lessee shall not cause or permit any unusual or objectionable odors to be produced on or permeate from the Premises. Lessee shall not obtain or purchase food or beverages at the Building from any vendor or supplier except as approved by Lessor. Notwithstanding the foregoing, Lessee may install vending machines in the Premises. H. Lessee shall not use any sound or light producing equipment on the Premises which can be seen or heard outside the Premises, to the end that the quiet enjoyment of other lessees and their clients shall not be disturbed. I. The sidewalks, halls, passages, stairways and elevators shall not be used by Lessee for any purpose other than for ingress to and egress from the Premises. The halls, passages, entrance, elevators, stairways and portions of the roof are not for the use of the general public. Lessor retains the right to control and prevent access thereto from all persons whose presence, in the judgment of Building Manager, shall be prejudicial to the safety, character, reputation and interests of the Building or its lessees. Nothing herein contained shall be construed to prevent access to persons with whom Lessee deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Lessee, its employees, agents and clients, shall not go in or upon unauthorized areas of the Building without the written consent of Lessor or the Building Manager. J. The carrying in or out of any safes, freight, furniture, or bulky matter of any description must be under the supervision of the Building Manager and take place during non- business hours scheduled with the Building Manager. The persons employed by Lessee for such work must be approved by the Building Manager and provide appropriate insurance as reasonably determined by the Building Manager, based upon the scope of their work. All damages done to the Building by moving or maintaining a safe or other property shall be repaired at the sole expense of Lessee. K. Lessor shall have the right to prescribe the weight, size, and position of all safes, other heavy equipment, file cabinets, file storage areas, and library banks, allowed into the 2 Building.Safes, other heavy equipment, file cabinets, file storage areas, and library banks shall, if considered necessary by Lessor, stand on a platform of such thickness as is necessary to property distribute the weight. L. Toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage, resulting from the violation of this Rule, by Lessee, its employees, agents, and clients shall be borne by Lessee. M. Deliveries shall be conducted in an expeditious manner. No delivery vehicle shall be left unattended in front of the Building, in parking areas, or at the service bay and loading dock area (the "Service Bay") for more than ten (10) minutes, without the approval of the Building Manager. N. All delivery handtrucks, dollies, and carts shall be equipped with rubber tires and side guards. O. Except with the written consent of Lessor, no person or persons other than those approved by Lessor shall be permitted to enter the Building for the purpose of cleaning same. Lessee shall not cause any unnecessary labor by reason of Lessee's carelessness or indifference in the preservation of good order and cleanliness. Janitorial service shall include ordinary dusting and cleaning by the janitor assigned to such work and include shampooing of carpets as reasonably required from time to time. Window cleaning, including the cleaning of inside windows, shall be done only by Lessor or its agents. Lessor shall not be responsible to Lessee for the loss of property from the Premises, however occurring, or for damage done to the effects of Lessee by a janitorial or other contractor, or person, engaged by Lessor to provide services to the Building. P. Lessor will direct electricians as to where and how telephone, computer, and other wires servicing the Premises are to be introduced. No boring or cutting for wires or stringing of wires will be allowed without the written consent of Lessor. Q. Lessee shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Lessor. The expense of removal of any floor covering and repairing any damage resulting from a violation of this Rule by Lessee, its employees, contractors or agents, shall be borne by Lessee. R. Except for usual and customary wall hangings, Lessee shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof. Lessee shall pay the cost of repairs resulting from violating the foregoing provision. S. Lessor reserves the right to regulate access of all persons to the Building at such times as Lessor may deem advisable for the protection and safety of the Building and its lessees. Lessor may refuse admission to the Building outside of ordinary business hours to any person not known to Lessor, or its agents, and may require persons admitted to or leaving the Building to register. Any person whose presence in the Building at any time shall, in the sole judgement of Lessor, be prejudicial to the safety, character, reputation and interests of the Building or its lessees may be denied access to the Building or may be ejected therefrom. Lessor may require any person leaving the Building with any package or other object to exhibit a key from Lessee from whose Premises the package or object is being removed. The establishment and enforcement of such requirement shall not impose any responsibility on Lessor for the protection of Lessee against the removal of property from the Premises. Lessor shall, in no event, be 3 liable for damages for any error with regard to the admission or exclusion from the Building of any person. T. The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the use of the Premises for general office purposes. No Lessee shall occupy or permit any portion of the Premises to be occupied as an office for a public stenographer or typist or for the manufacture or sale of liquor, narcotics, or tobacco in any form, or as a medical office, or as a barber or manicure shop, or as an employment bureau, or as a travel agency, without the consent of Lessor. No Lessee shall sell or permit the sale of any other goods or merchandise in or on the Premises. No Lessee shall engage or pay any employees on the Premises except those actually working for such Lessee on the Premises nor shall any Lessee advertise for laborers giving an address at the Premises. U. Lessee shall see that the doors to the Premises are closed and securely locked before leaving the Building. Lessee must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Lessee or its employees leave the Building. Lessee shall also make sure that all electricity, gas and air are shut off, so as to prevent waste or damage. V. Lessee shall cooperate with Lessor in obtaining maximum effectiveness of the cooling system by closing drapes when the sun's rays fall directly on windows of the Premises. Lessee shall not obstruct, alter, or in any way impair the efficient operation of the heating, ventilating and air conditioning system in the Building. Lessee shall not place any obstructions on the air supply or exhaust grilles so as to interfere with air flow. W. All doors opening onto public corridors shall be kept closed, except when in use for ingress and egress. All doors leading to equipment and utility rooms shall be kept closed. X. No bicycles, skateboards, vehicles or animals of any kind shall be brought into or kept in or about the Building. Notwithstanding the foregoing, bicycles may be brought into the parking garage by employees, and stored in locations designated in the garage for such purpose. Y. Lessee, upon the expiration or earlier termination of the Lease Term, shall deliver to the Lessor keys to the Premises which were furnished to Lessee. In the event of loss of any keys so furnished, Lessee shall pay Lessor the greater of (i) Ten Dollars ($10.00) per key or (ii) the cost of replacing the key(s). Z. Any construction in the Premises shall be subject to the restrictions set forth in the Tenant Improvement Manual. II. DELIVERIES A. The carrying in or out of any safes, freight, furniture, or bulky matter of any description must be accomplished under the supervision of the Building Manager and take place during non-business hours scheduled with the Building Manager. The persons employed by Lessee for such work must be approved by the Building Manager and provide appropriate insurance as reasonably determined by the Building Manager, based upon the scope of their work. B. The Service Bay is designated for receipt of deliveries or removal of construction materials, trade fixtures, and/or trash and shall be used only for such purposes. 4 C. Whenever possible, deliveries through the lobby which require the use of a cart shall be made before 8:00 a.m. or after 6:00 p.m. Deliveries shall be conducted in art expeditious manner. No delivery vehicle shall be left unattended in the Service Bay for more than thirty (30) minutes without the approval of the Building Manager. D. All deliveries to, and removals from, the Premises shall be made on the service elevators. E. No furniture shall be placed in front of the Building, or in any lobby or corridor or balcony, without the prior written consent of the Building Manager. Lessor shall have the right to remove all non-permitted furniture, without notice to Lessee and at the expense of the Lessee. F. All delivery handtrucks, dollies, and carts shall be equipped with rubber tires. G. Lessee shall be responsible for any damage to the Building or required maintenance of Common Areas resulting from deliveries made to the Premises. IV. PARKING A. Lessor shall have exclusive control over the parking garage and vehicular entry and exit. Control of entry and exit may be by personnel and/or equipment reasonably determined by Lessor from time to time. B. Spaces designated for visitor parking shall not be used by Lessee or its employees. C. Lessor shall have the right to designate such portions of the parking garage for the exclusive use of designated lessees, and/or their employees and customers, as Lessor may deem appropriate from time to time. D. Lessor reserves the right to preclude any vehicles from entering the parking garage, or thereafter remove such vehicle from the parking garage, if, in the reasonable judgement of the Building Manager, such vehicle creates an unsafe or unclean environment or otherwise creates a nuisance. Vehicles creating excessive exhaust, leaking oil, or with distasteful language, signage, or advertising displayed on the vehicle will be excluded. E. Any vehicle left in the garage over night must first receive the approval of the Building Manager. If such approval is not first obtained, the Building Manager may remove such vehicle as hereinafter provided. F. Vehicles must be parked entirely within the painted stall lines of a single parking stall. G. All directional signs and arrows must be observed. H. The speed limit within all parking areas shall be five (5) miles per hour. I. Parking is prohibited in areas not striped for parking, including, but not limited to, aisles, where "no parking" signs are posted, access ramps to the parking garage, and along driveways providing access to the Building. J. Washing, waxing, cleaning or servicing of any vehicle in any parking area at the Building is prohibited. 5 K. Lessee shall acquaint all persons to whom Lessee provides parking validation of these Rules and Regulations. L. Every parker is required to park and lock his own vehicle. All responsibility for damage to a vehicle is assumed by the vehicle owner. M. An employee of Lessee who has been provided with a designated space shall not park in other than his/her designated space. N. Any vehicle left in the parking garage or visitor parking area which violates any provision of the Rules and Regulations, or the Lease, may be ticketed for illegal parking by the City of Pasadena and/or removed by the Building Manager to a secured lot without notice to Lessee or the owner of the vehicle. If the person violating the Rules and Regulations is Lessee, its employee, or agent, Lessee shall pay to Lessor the cost to remove and store such vehicle as Rent. IV. SIGNS A. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, printed or affixed on or to the Premises or to the outside or inside of the Building without the prior written consent of Lessor. Lessor shall have the right, unless Lessor has given prior written consent, to remove any such sign, placard, picture, advertisement, name or notice, without notice to and at the expense of Lessee. Lessor shall not be liable in damages for removal of signage not approved in writing by Lessor. All signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Lessee, in content and style approved by Lessor, and by a vendor selected by Lessor. B. If directories are provided for the Building, such directories shall be exclusively for the display of the name and location of lessees of the Building. The listing of Lessee on directories shall be in content and style approved by Lessor, at the expense of Lessee. LESSEE: BILL GROSS' IDEALAB! By: /S/ [illegible] ------------------------------------ 6 EXHIBIT "D" ACCEPTANCE OF PREMISES PARSONS WEST ANNEX 74 NORTH PASADENA AVENUE LESSEE: Bill Gross' Idealab! LESSOR: Parsons Information & Technology Group Inc. LEASE DATE: TERM OF LEASE: ADDRESS OF PREMISES: 8th Floor containing approximately 29,064 rentable sq. ft. located at 74 North Pasadena Avenue, Pasadena, California, 91124. COMMENCEMENT DATE: June 24, 1999 EXPIRATION DATE: June 30, 2001 The Premises are accepted by Lessee as required under the terms of its Lease Agreement with Lessor. The above described Lease term commences and expires on the dates set forth above. LESSEE: BILL GROSS' IDEALAB! By: /S/ [illegible] --------------------------------------- By: --------------------------------------- EXHIBIT "E" STANDARDS FOR UTILITIES AND SERVICES PARSONS WEST ANNEX 74 NORTH PASADENA AVENUE The furnishing of building services and utilities to Lessee shall be in accordance with Article 8 of the Lease and subject to the terms and conditions set forth in this Exhibit "F". Lessor reserves the right to adopt from time to time such reasonable modifications and additions hereto as Lessor deems appropriate. A. Subject to the full performance by Lessee of all of Lessee's obligations under the Lease, and excepting legal holidays, Lessor shall, on Monday through Friday, from 8:00 a.m. to 6:00 p.m., and on Saturday, from 8:00 a.m. to 1:00 p.m., ("Normal Hours") provide the following building services: 1. Elevator service with one elevator available at all times. 2. Heating, ventilation, and air conditioning ("HVAC") when, in the reasonable judgment of Lessor, it is required for the comfortable occupancy of the Premises for general office purposes. Lessor shall not be responsible for any inadequacy of performance of the HVAC system if: (i) the occupancy of the Premises exceeds standards as set forth by the Pacific Fire Rating Bureau, (ii) electrical power requirements for Lessee's office equipment exceed those hereinafter set forth, (iii) Lessee installs partitions or other installations which interfere with the proper operation of the interior climate control systems, or (iv) window coverings on exterior windows are not kept fully closed. Lessee shall reimburse Lessor for use of the HVAC system beyond Normal Hours at Lessor's costs of providing such service including, but not limited to, utility charges, amortization of the cost of mechanical equipment required to provide such services, additional maintenance costs, staff time to activate and deactivate, plus a ten percent (10%) overhead fee. The initial charges for after Normal Hours HVAC service shall be as follows: (i) Less than 2 hours in a 24-hour period - $30/hour (ii) 2 hours in a 24-hour period but less than 3 hours - $25/hour (iii) 3 or more hours in a 24-hour period - $23/hour Lessor may Increase the foregoing rates based upon actual increases in its actual cost of utilities, labor, and/or maintenance. 3. Electric current for routine lighting, HVAC, and the operation of general office machines such as typewriters, dictating equipment, desk model adding machines, photocopy machines and "small" computers incidental to the conduct of normal office business, which use 110/220-volt electric power not to exceed six (6) watts of electricity per rentable square foot per year. Notwithstanding the foregoing, Lessee shall reimburse Lessor, Lessor's cost plus a 20% administrative fee, for (i) all electrical, gas, and/or water usage resulting from non-standard equipment, such as mainframe computers and self contained air conditioning units, and (ii) all electrical consumption exceeding 6 wafts of electricity per rentable square foot per year. 4. Water for restrooms and restroom facilities and landscaping. 5. Janitorial services Monday through Friday (except legal holidays), provided that (i) the Premises are used consistently with the terms of the Lease and are kept reasonably in order by Lessee and (ii) said janitorial services can be performed during the evenings without interference by Lessee or Lessee's employees. Lessor shall not be responsible or liable for any act or omission or commission on the part of the persons employed to perform said janitorial services. B. Lessor shall replace electric light bulbs, tubes, and ballasts in the Premises. Lessor may, in Lessor's sole discretion, adopt a system of re-lamping and re-ballasting on a basis consistent with good practice. C. No electrical or HVAC equipment, or plumbing additions shall be installed, nor shall any changes be made to the Building's HVAC, electrical or plumbing systems which would increase the cost of operating the Building or otherwise adversely affect the Building or such systems without prior written consent from Lessor, which consent may be withheld by Lessor in its sole discretion. Lessor reserves the right to designate and/or approve any contractor proposed by Lessee to modify, alter, or expand HVAC, electrical, or plumbing systems. Any permitted installations shall be completed in conformity with the terms and conditions set forth in the Tenant Improvement Manual. Lessee shall pay for any costs resulting from structural changes necessitated by increased floor loading and additional equipment required as a result of such installations. D. Lessor shall not provide in the Premises, reception outlets or television or radio antennas for television or radio broadcast or reception. Lessee shall not install any such equipment without prior written consent from Lessor, which consent may be withheld by Lessor in its sole discretion. E. Lessee shall not, without the prior written consent of Lessor, use any apparatus, machine or device in the Premises, which will increase the amount of electricity or water furnished or supplied for use of the Premises as general office space, nor connect to any electric current, except through existing outlets in the Premises, any apparatus or device for the purpose of using such electric current in excess of that furnished or supplied for use of the Premises as general office space. F. Lessee's telecommunication requirements shall be accomplished, at Lessee's sole expense. Lessee shall arrange with the applicable local public authorities, utility companies and telephone companies, as the case may be, for the furnishing of, and payment of the cost of, all telephone services required by Lessee's use of the Premises. Lessee shall pay directly for such telephone services, including the establishment and connection thereof, at the rates charged for such services by said authority, telephone company or utility. The failure of Lessee to obtain or to continue to receive such services for any reason shall not relieve Lessee of any of its obligations under the Lease, nor constitute a breach of the Lease by Lessor. G. Lessee shall cooperate with Lessor to assure, and to abide by all requirements which Lessor may adopt from time to time for the proper functioning and protection of the Building's HVAC, electrical, security, plumbing, and fire and life safety systems. Lessee shall comply with all laws, statutes, ordinances and governmental rules and regulations now in force or which may later be enacted or promulgated in connection with building services furnished to the Premises, including, without limitation, any rule or regulation relating to the HVAC, electrical, security, plumbing, and fire and life safety systems. H. Notwithstanding anything to the contrary set forth herein, the Building, which includes the adjacent parking structure, shall be available to Lessee and its employees at all 2 times, except times when prevented from entering due to causes beyond the reasonable control of Lessor such as natural disasters, fire drills, bomb threats, and other casualties. 3 EXHIBIT "F" WEST PARKING STRUCTURE LEVEL A EX-10.16 17 EXHIBIT 10.16 EXHIBIT 10.16 LANDLORD'S CONSENT TO ASSIGNMENT OF LEASE OF PREMISES AT 380 PORTAGE AVENUE, PALO ALTO, CALIFORNIA EL CAMINO CENTER, A CALIFORNIA LIMITED PARTNERSHIP, as Landlord under the Lease attached hereto and made a part hereof as Exhibit A, consents to the Assignment of the Lease by TELLME NETWORKS, INC., Assignor, to BILL GROSS' IDEALAB!, Assignee, and, contingent upon the execution of the Assignment And Assumption of Lease Agreement dated of even date herewith by Assignor and Assignee, a copy of which Agreement is attached hereto as Exhibit B, fully and completely releases Assignor from any and all liability of Assignor for any and all acts or omissions, liabilities or obligations arising from and after the Effective Date of the Assignment. Assignee acknowledges that pursuant to Paragraph 42 of said Lease, in signing this Consent, Landlord has relied upon the completeness and accuracy of the financial information provided to Landlord by Assignee, although Landlord acknowledges that its release of Assignor shall be fully effective notwithstanding any such reliance. Landlord further waives the requirement to augment the Security Deposit by the Letter of Credit or Certificate of Deposit as set forth in Paragraph 4 of said Lease. "Landlord" EL CAMINO CENTER, A CALIFORNIA LIMITED PARTNERSHIP By: /s/ RICHARD M. JACOBSEN ------------------------------- RICHARD M. JACOBSEN, PARTNER ------------------------------- [Print Name] ------------------------------- ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT THIS ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT (this "Assignment") is dated as of January 7, 2000 by and between TELLME NETWORKS, INC., a Delaware corporation ("Assignor") and BILL GROSS' IDEALAB!, a California corporation ("Assignee"). WHEREAS, Assignor is Tenant under that certain Office Lease dated October 12, 1999 (the "Lease"), between El Camino Center, a California limited partnership ("Landlord"), and Assignor, as Tenant, for approximately 22,167 rentable square feet in that certain building (the "Premises") located at 380 Portage Avenue, California; and WHEREAS, Assignor desires to assign its interest in the Lease to Assignee and Assignee desires to assume Assignor's obligations under the Lease. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Assignor and Assignee agree as follows: 1. EFFECTIVE DATE OF ASSIGNMENT. This assignment contained in this Assignment shall take effect on January 15, 2000 (the "Effective Date"). Assignor shall give possession of the Premises to Assignee on that date. 2. ASSIGNMENT OF LEASE. Assignor does hereby transfer, assign, convey and deliver to Assignee its entire right, title and interest in the Lease and the Premises. Assignor hereby agrees to indemnify Assignee against and hold Assignee harmless from any and all cost, liability, loss, damage or expense, including, without limitation, attorneys' fees, arising out of Assignor's breach of the Lease prior to the Effective Date. 3. ASSUMPTION OF OBLIGATIONS. Assignee does hereby accept this assignment and, for the benefit of Assignor and Landlord, expressly assumes and agrees to hereafter perform all of the terms, covenants, conditions and obligations of Assignor under the Lease. Assignee hereby agrees to indemnify Assignor against and hold Assignor harmless from any and all cost, liability, loss, damage or expense, including, without limitation, attorneys' fees, arising out of or relating to events occurring after the Effective Date and arising out of Assignee's obligations as tenant under the Lease or Assignee's breach of the Lease. If Assignee breaches its obligations under the Lease and (i) Assignor pays rent to Landlord; and/or (2) fulfills any of Assignee's other obligations in order to prevent Assignee from being in default, Assignee immediately shall reimburse Assignor for the amount of rent or costs expended by Assignor together with interest on those sums at the highest rate allowed by law. 4. SECURITY DEPOSIT. The parties acknowledge that Landlord currently holds a security deposit in the amount of $50,000.00 (the "Security Deposit") pursuant to the terms of the Lease. Upon execution of this Assignment, Assignee agrees to pay Assignor in cash the amount of the Security Deposit and upon such payment, Assignor shall 1. release all claims to the Security Deposit, which thereafter will be held by Landlord for the benefit of Assignee, subject to the provisions of the Lease. 5. ASSIGNMENT REIMBURSEMENT. Upon execution of this Assignment, Assignee agrees to reimburse Assignor in cash the amount of $34,294.98 for the following costs, fees, and expenses paid by Assignor: A. Ninth Month's Rent (prepaid): $24,383.70 B. Design Fees: $9,335.00 C. Tax Reimbursement: $576.28 --------------------------------------------- Total: $34,294.98 6. BROKERAGE COMMISSIONS. Upon execution of this Assignment, Assignee agrees to pay a commission to Cornish & Carey Commercial in the amount of Two Hundred Five Thousand Three Hundred Thirty-three and 76/100 Dollars ($205,333.76). Neither Assignor nor Landlord shall have any obligation to pay commissions to any real estate broker in connection with this transaction. 7. CONTINGENCY. Notwithstanding anything to the contrary herein, this Assignment shall be contingent upon the unconditional written consent of Landlord, including full and complete release of Assignor from all liability satisfactory to Assignor, which shall be received by the parties no later than the Effective Date. 8. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 9. ENFORCEMENT BY LANDLORD. Landlord is a third party beneficiary of this Assignment. As such, the provisions of this Assignment inure to the benefit of, and are enforceable by, Landlord. 10. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. 11. ATTORNEY'S FEES. If there is any legal or arbitration action or proceeding between the parties to enforce any provision of this Assignment or to protect or establish any right or remedy of any of the parties, the unsuccessful party to such action or proceeding will pay to the prevailing party all costs and expenses, including reasonable attorney's fees incurred by such prevailing party in such action or proceeding and in any appearance in connection therewith, and if such prevailing party recovers a judgment in any such action, proceeding or appeal, such costs, expenses and attorney's fees will be determined by the court or arbitration panel handling the proceeding and will be included in and as a part of such judgment. 12. NOTICES. Any notices or other communications required or permitted under this Agreement will be in writing and either served personally or sent by prepaid, first-class 2. mail and addressed to the other party at the address set forth below. Either party may change its address by notifying the other party of the change of address. 13. REPRESENTATION OF ASSIGNOR. Assignor holds all of the right, title and interest of Tenant under the Lease and has the complete and unrestricted power and the unqualified right to assign the Lease to Assignee, subject to consent of Landlord. ASSIGNOR: TELLME NETWORKS, INC., a Delaware corporation By: /s/ J. W. PITTS, III -------------------------------- Name: J.W. PITTS, III --------------------------- Its: VICE PRESIDENT ---------------------------- ADDRESS: 977 Commercial Street Palo Alto, California 94303 Fax: 650-815-0291 ASSIGNEE: BILL GROSS' IDEALAB!, a California corporation By: /s/ BRIAN A.C. STEEL -------------------------------- Name: BRIAN A.C. STEEL --------------------------- Its: Managing Director & ---------------------------- Chief Operating Officer ADDRESS: idealab! 501 Macara Avenue Sunnyvale, California 94086 3. LEASE AGREEMENT This Lease, made this 12TH day of October, 1999 between the El Camino Center, a California Limited Partnership, hereinafter called Landlord, and TELLME NETWORKS, INC., A DELAWARE CORPORATION, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") more particularly described as follows: Approximately 18,550 square feet of enclosed warehouse and 3,617 square feet of roofed and fenced open area as outlined in red on Exhibit "A", attached hereto and incorporated herein by this reference thereto. Premises are further identified as: 380 Portage Avenue, Palo Alto, Santa Clara County, California As used herein the Complex shall mean and include all of the land outlined in red and described in Exhibit "B", attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE Landlord hereby discloses to Tenant and Tenant hereby acknowledges that the prior use of the Premises was for warehousing and distribution, and that any change in use is subject to the approval of the City of Palo Alto. Landlord is in the process of obtaining approval from the City of Palo Alto to allow the Premises to be used for software development and other similar uses. This Lease is specifically conditioned upon Landlord's obtaining approval from the City of Palo Alto, by November 1, 1999, for a use of the Premises that will allow Tenant to conduct Tenant's intended business. Landlord shall deliver to Tenant a copy of all documents issued by the City of Palo Alto to Landlord which indicate the City of Palo Alto's approval. In the event Landlord is unable to obtain the City of Palo Alto's approval for the proposed change in use by November 1, 1999, this Lease shall be void and of no force and effect between the parties and neither Landlord nor Tenant shall be liable to one another for having entered into this Lease and Landlord shall return to Tenant any security deposit and Letter of Credit (if so received). Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances and shall conform to any specific guidelines as issued by the City of Palo Alto. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or the Complex. No physical sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated or allowed by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and 1 hold Landlord harmless against any loss, expense, damage, attorney's fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM A. Subject to the contingency described in Paragraph 1 above, the term of this Lease shall be for a period of Seven Years and Two Months (7 and 2/12) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 15th day of November, 1999 and end on the 14TH day of January, 2007. B. Subject to the contingency described in Paragraph 1 above, possession of the Premises shall be deemed tendered and the term of this Lease shall commence November 1, 1999. 3. POSSESSION Subject to paragraph 1 above, if Landlord, for any reason whatsoever, cannot deliver possession of said Premises to Tenant at the commencement of said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2 (B), above. The above, is, however, subject to the provision that the period of delay of delivery of the Premises shall not exceed 45 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. 4. RENT A. BASIC RENT. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of Three Million Seven Hundred Eighty-Five Thousand Three Hundred Seventy and 29/100 ($3,785,370.29 ) Dollars in lawful money of the United States of America, payable as follows: $24,383.70 upon execution of this lease, represents the Basic Rent for the 9th month of the Lease Term Month of Lease Term Total Monthly Basic Rent 0-8 $0 9-20 $24,383.70 (9th month paid) 21-26 $48,767.40 27-38 $50,230.42 39-50 $51,737.33 51-62 $53,289.45 63-74 $54,888.14 75-86 $56,534.78 B. TIME FOR PAYMENT. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. LATE CHARGE. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rent as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) 2 days. Said late charge shall equal five (5%) percent of each rental payment so in default. D. ADDITIONAL RENT. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (1) Tenant's proportionate share of all utilities relating to the Complex as set forth in Paragraph 11, and (2) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (3) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and (4) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (5) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorney's fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled at the end of each calendar year as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. Tenant's payment for such Additional rent as of the commencement of the term of this lease shall be Two Thousand One Hundred ($2,100.00) Dollars per month. Any payments required to be made by Tenant for Additional Rent shall be made by check or instrument separate from that check or instrument used by Tenant to make any payments for Basic Rent pursuant to paragraph 4 A. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. E. PLACE OF PAYMENT OF RENT AND ADDITIONAL RENT. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at 3201 Ash Street, Palo Alto, California 94306, or to such other person or to such other place as Landlord may from time to time designate in writing. F. SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of Fifty Thousand ($50,000.00) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and 3 faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. In addition to the cash Security Deposit as defined in this paragraph 4.F. Tenant agrees to tender to Landlord no later than January 2, 2000, an irrevocable standby Letter of Credit in the amount of $300,000. The form of the irrevocable standby Letter of Credit must be acceptable to Landlord. The Letter of Credit must provide that Landlord has the ability to cash or draw the entire amount solely upon Landlord's representing to the issuing Bank that Tenant is in an uncured monetary default of the Lease. The Letter of Credit required hereunder shall remain in full force and effect until December 31st, 2003. In the event Tenant has not provided Landlord the Letter of Credit as required, then on January 15, 2000, Tenant agrees to tender to Landlord a Certificate of Deposit in Landlord's name in the amount of $300,000. Any interest generated by the Certificate of Deposit during the term of the Lease shall be given to Tenant. 5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area" This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. 6. PARKING Tenant shall have the right to use with other tenants or occupants of the Complex 80 parking spaces in the common parking areas of the Complex outlined in red on Exhibit C. Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 80 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park not permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an 4 additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. 7. EXPENSES OF OPERATION, MANAGEMENT AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX, PREMISES AND BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. Tenant agrees to contract and pay for five-day janitorial service for the leased Premises and Landlord agrees to maintain the Complex in a first-class manner. Expenses for the operation, management and maintenance of the Premises and Building shall not include and Tenant shall in no event have any obligation to perform or to pay directly, or to reimburse Landlord for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, charges, costs and expenses (collectively, "Costs"): Costs occasioned by the act, omission or violation of any law by Landlord, or its respective agents, employees or contractors; (b) Costs occasioned by fire, (except fires caused by Tenant), acts of God, or other casualties or by the exercise of the power of eminent domain; (c) Interest, charges and fees incurred on debt; (d) Costs of structural repairs to the Premises (other than repairs or modifications required because of Tenant's improvements); (e) costs which could properly be capitalized under generally accepted accounting principles, except to the extent amortized over the useful life of the capital item in question. 8. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Tenant agrees to lease the Premises in an AS-IS condition, and any alteration, addition, or modification to the Premises shall be made in accordance with this Paragraph 8 and Paragraph 9 of the Lease and shall be made at Tenant's sole cost and expense and shall not delay the commencement of Lease nor delay the payment of any rental due hereunder. Notwithstanding anything herein to the contrary, Landlord shall have the right to review and approve Tenant's initial build-out of the Premises, and Tenant shall only be required to restore the Premises to the condition and configuration in existence upon completion of the initial build-out. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire or normal wear and tear excepted), with all interior walls cleaned and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the air conditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the 5 expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. Tenant shall request in writing Landlord's approval of any alterations or additions to the Premises, and Landlord shall approve or disapprove Tenant's request for alterations within 5 working days of receipt of Tenant's written request. At such time as Landlord approves or disapproves Tenant's request for alterations, Landlord shall also indicate which alterations, if any, must be removed and restored to the condition of the initial build-out, such restoration to be performed pursuant to the terms and conditions of Paragraph 8 above. If Landlord consents to the making of any alteration, addition, or improvement to or of the Premises by Tenant, the same shall be made by Landlord at Tenant's sole cost and expense. In the event Landlord elects not to perform the construction of Tenant's improvements, Landlord shall have the right to review and approve in writing Tenant's contractor and to set forth reasonable rules and guidelines that must be followed in the construction of Tenant's improvements. In the event Landlord performs the construction, Landlord shall receive a construction fee equal to 10% of the direct cost of construction of the improvements. Any modifications to the building or building systems as a result of Tenant's alterations, additions or improvements required by governmental code or otherwise shall be made at Tenant's sole cost and expense. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, airconditioning, partitioning, drapery, carpeting and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make any alterations or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's liens file against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days alter the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. MAINTENANCE Tenant shall at its sole cost and expense, keep and maintain the interior of the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, plumbing systems (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air-conditioning systems (such as compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and return grills), store 6 fronts, roofs, downspouts, all interior improvements within the Premises including but not limited to wall coverings, window coverings, carpet, floor coverings, partitioning, ceilings, doors (both interior and exterior, including closing mechanisms, latches, locks, skylights (if any), automatic fire extinguishing systems, and all other interior improvements of any nature whatsoever. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. Tenant specifically agrees to maintain the interior of the Premises, all mechanical equipment and plumbing and electrical systems in a first-class manner. Copies of all maintenance contracts entered into by Tenant shall be supplied to Landlord on a regular basis. In the event the Premises are damaged and Landlord has elected to rebuild the Premises, as set forth in paragraph 24 below, then Tenant shall be excused from maintaining the Premises during the period of rebuilding. 11. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED Tenant shall pay promptly, as the same become due, all charges for water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the term of this Lease, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. 12 TAXES A. As Additional Rent and in accordance with paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein; any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorney's fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such Real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. Real Property Taxes shall not include and Tenant shall not be required to pay any portion of any tax or 7 assessment expense or any increase therein: (a) Levied on Landlord's rental income, unless such tax or assessment expense is imposed in lieu of real property taxes; (b) In excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest permitted term; (c) Attributable to Landlord's net income, transfer, or state taxes. B. TAXES ON TENANT'S PROPERTY (1) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (2) If the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for Real Property Tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the Real Property Taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12A(i), above. If the records of the County Assessor are available and sufficient detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force during the term of this Lease a policy of comprehensive public liability insurance with limits in the amount of $1,000,000/1,000,000 for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage insurance with limits of $500,000. The policy or policies affecting such insurance, certificates of which shall be furnished to Landlord, shall name Landlord as additional insured, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender, insurance advisor or counsel, the amount of insurance described in this paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor or counsel shall deem adequate. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKER'S COMPENSATION INSURANCE Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of worker's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE Landlord shall purchase and keep in force and, as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification 8 of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent. If such insurance cost is increased due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, howeve, the negligence of Landlord, its agents, servants, employees, invitees, or contractors. Except as to injury to persons or damage to property the principal cause of which is the negligence of Landlord, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorney's fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of these provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgement 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 such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes or improvements, except to the extent such changes or improvements are required as a result of Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 18. LIENS Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. Landlord shall respond to Tenant's request for consent hereunder with 15 days after receiving the written notice by Tenant. As a condition for granting its consent to any subletting, Landlord may require that Tenant agrees to pay to Landlord, as additional rent, all rents received by Tenant from its subtenants in excess of the rent payable by Tenant to Landlord hereunder (after first deducting from such excess rent Tenant's reasonable costs and expenses of assigning the lease or subletting all or any portion of the Premises, including the cost of any special improvements made to the Premises by Tenant specific to said sublease or assignment, reasonable advertising fees, reasonable brokerage fees, reasonable legal fees, the unamortized cost of any alterations 9 or additions made to the Premises which were paid for by Tenant). Tenant shall, by forty five (45) days' written notice, advise Landlord of its intent to sublet the Premises or any portion thereof for any part of the term hereof. Upon receipt of said notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro-rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the premises, without also having obtained the prior written consent of Landlord. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder to be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord. As a condition to its consent, Landlord may require Tenant to pay all expenses in connection with the assignment, and Landlord may require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. Tenant may, without Landlord's prior written consent, sublet the Premises or assign the Lease to (a) a subsidiary, affiliate or corporation controlling, controlled by or under common control with Tenant, (b) a successor corporation related to Tenant by merger, consolidation, nonbankruptcy, reorganization, or government action, or (c) a purchases of substantially all of Tenant's assets located in the Premises. A sale or transfer of Tenant's capital stock shall not be deemed an assignment, subletting or any other transfer of the Lease or the Premises. Tenant shall in these instances remain fully liable for their performance of Tenant's obligations under the Lease. 20. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Tenant hereby irrevocably appoints Landlord the attorney in fact of Tenant to execute, deliver and record any such instrument or instruments for and in the name and on behalf of Tenant. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. Tenant agrees to send to any mortgagees and/or deed of trust holders, by registered mail, a copy of any notice of default served by Tenant upon the Landlord, provided that prior to such notice, Tenant has been notified, in writing (by way of notice of assignment of rents or otherwise) of the addresses of such mortgages and/or deed of trust holders. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, any such mortgagees and/or deed of trust holders shall have an additional thirty (30) days within which to cure such default, or if such default is not reasonably susceptible of cure within that time, then such additional time as may be reasonably necessary if within such (30) days, any mortgagee and/or deed of trust holder has commenced and is diligently pursuing the remedies necessary to cure such default, (including but not limited to commencement of foreclosure proceedings), in which event this Lease shall not be terminated when such remedies are being diligently pursued. 21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however, 10 that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in 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, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. Landlord agrees to respect the confidentiality of Tenant's business information that may be observed during any such entry. 22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustments thereto. Tenant shall have a period of ten (10) days from the date of written notice from Landlord within which to cure any other default under this Lease. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to, recovery of 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 rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code 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 as the Premises and in the same geographic vicinity. 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 the rental loss that could be reasonably avoided from 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. (b) The rights and remedies provided by California Civil Code which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the 11 right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession; acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) The right and power, as attorney-in-fact for Tenant, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord, as attorney-in-fact for Tenant, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and such other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorney's fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. For all purposes set forth in this subparagraph (d), Landlord is hereby irrevocably appointed attorney-in-fact for Tenant, with power of substitution. No taking possession of the Premises by Landlord, as attorney-in-fact for Tenant, shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e) The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord as attorney-in-fact for Tenant pursuant to subparagraph (d) above. 23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time during the term of this Lease; and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the 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, except such property as may be mortgaged to Landlord. 24. DESTRUCTION In the event the Premises are destroyed in whole or in part from any cause, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease. If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises. If Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors dues to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior 12 written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not canceled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. In the event the destruction of the Premises is caused by Tenant, Tenant shall pay the deductible portion of Landlord's insurance proceeds. 25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the Premises or any portion thereof, or if any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or any such spaces is so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking or conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee 13 title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modifications except as may be represented by Landlord; that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. CONSTRUCTION CHANGES It is understood that the description of the Premises and the location of the ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment of performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of non-payment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS FEES (A) In the event that Landlord should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against Tenant hereunder, then all costs and expenses, including reasonable attorney's fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgement. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection 14 with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. WAIVER The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices, demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at 3201 Ash Street, Palo Alto, CA 94306. Each notice, request, demand advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. Landlord and Tenant mutually intend that neither shall have any binding contractual obligations to the other with respect to the matters referred to herein unless and until this instrument has been fully executed by both parties. 36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such than more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 38. (deleted) 39. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord and Landlord's assets; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership) (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership) (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgement shall be taken against any partner of Landlord; (vi) any judgement taken against any partner of Landlord may be vacated and set aside at any 15 time without hearing; (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. (ix) The term, "Landlord", as used in this section, shall mean only the owner or owners from time to time of the fee title or the tenant's interest under a ground lease of the land described in Exhibit "B", and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers the then grantor) shall be relieved from and after the date of such transfer of all liability as respects Landlord's obligations thereafter to be performed, provided that any funds in the hands of Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be delivered to the grantee. Similarly, the obligations contained in this Lease to be performed by Landlord shall be binding on Landlord's successors and assigns only during their respective periods of ownership. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 40. BROKERS Tenant warrants that it had dealing with only of the following real estate brokers or agents in connection with the negotiation of this Lease: CORNISH AND CAREY and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 41. SIGNS No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any unconsented to sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, then upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant 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. 42. FINANCIAL STATEMENTS In the event Tenant tenders to Landlord any information on the financial stability, credit worthiness or ability of the Tenant to pay the rent due and owing under the Lease, then Landlord shall be entitled to rely upon the information provided in determining whether or not to enter into this Lease Agreement with Tenant and Tenant hereby represents and warrants to Landlord the following: (i) That all documents provided by Tenant to Landlord are true and correct copies of the original; and (ii) Tenant has not withheld any information from Landlord which is material to Tenant's credit worthiness, financial condition or ability to pay the rent; and (iii) all information supplied by Tenant to Landlord is true, correct and accurate; and (iv) no part of the information supplied by Tenant to Landlord contains misleading or fraudulent statements. A default under this paragraph shall be a non-curable default on behalf of Tenant and Landlord shall be entitled to pursue any right or remedy available to Landlord under the terms of this Lease or available to Landlord under the laws of the State of California. 43. HAZARDOUS MATERIALS A. As used herein, the term "Hazardous Material" shall mean any substance or material which has been determined by any state, federal or local governmental authority to be capable of posing a risk of injury to health, safety or property including all of those materials and substances designated or defined as "hazardous" or "toxic" by (i) the Environmental Protection Agency, the California Water Quality Control Board, the Department of Labor, the California Department of Industrial Relations, the Department of Transportation, the Department of Agriculture, the Consumer Product Safety Commission, the Department of Health and Human Services, the Food and Drug Agency or any other governmental agency now or hereafter authorized to regulate materials and substances in the environment, or by (ii) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9601 et seq., as amended; the Hazardous Materials Transportation Act, 49 U.S.C. 1801, et seq., as amended; the 16 Resource Conservation and Recovery Act, 42 U.S.C. 6901, et seq., as amended; the Hazardous Waste Control Law, California Health & Safety Code 25100 et seq., as amended; Sections 66680 through 66685 of Title 22 of the California Administration Code, Division 4, Chapter 30, as amended; and in the regulations adopted and publications promulgated pursuant to said laws. B. Tenant shall not cause or permit any Hazardous Material to be improperly or illegally used, stored, discharged, released or disposed of in, from, under or about the Premises or the Complex, or any other land or improvements in the vicinity of the Premises or the Complex. Without limiting the generality of the foregoing, Tenant, at its sole cost, shall comply with all laws relating to Hazardous Materials. If the presence of Hazardous Materials on the Premises or the Complex caused or permitted by Tenant results in contamination of the Premises or the Complex or any soil in or about the Premises or the Complex, Tenant, as its expense shall promptly take all actions necessary to return the Premises or the Complex to the condition existing prior to the appearance of such Hazardous Material. The termination of this Lease shall not terminate or reduce the liability or obligations of Tenant under this Section, or as may be required by law, to clean up, monitor or remove any Hazardous Materials from the Premises or the Complex. Tenant shall defend, hold harmless and indemnify Landlord and its agents and employees with respect to all claims, damages and liabilities arising out of or in connection with any Hazardous Material used, stored, discharged, released or disposed of in, from, under or about the Premises or the Complex, where said Hazardous Material is or was attributable to the activities of Tenant, its agents or contractors during the Lease term and whether or not Tenant had knowledge of such Hazardous Material, including, without limitation, any cost of monitoring or removal, any reduction in the fair market value or fair rental value of the Premises or the Complex and any loss, claim or demand by any third person or entity relating to bodily injury or damage to real or personal property. Tenant shall not suffer any lien to be recorded against the Premises or the Complex as a consequence of a Hazardous Material, including any so called state, federal or local "super fund" lien related to the "clean up" of a Hazardous Material in or about the Premises, where said Hazardous Material is or was attributable to the activities of Tenant. C. In the event Hazardous Materials are discovered in or about the Premises or the Complex, and Landlord has substantial reason to believe that Tenant was responsible for the presence of the Hazardous Material, then Landlord shall have the right to appoint a consultant, at Tenant's expense, to conduct an investigation to determine whether Hazardous Materials are located in or about the Premises or the Complex and to determine the corrective measures, if any, required to remove such Hazardous Materials. Tenant, at its expense, shall comply with all recommendations of the consultant, as required by law. To the extent it is determined that Tenant was not responsible for the presence of the Hazardous Materials, then Landlord shall reimburse Tenant for any costs incurred by Landlord and paid by Tenant under the terms of this paragraph 45.C. Tenant shall immediately notify Landlord of any inquiry, test, investigation or enforcement proceeding by or against Tenant or the Premises or the Complex concerning a Hazardous Material. Tenant acknowledges that Landlord, as the owner of the Property, at its election, shall have the sole right, at Tenant's expense, to negotiate, defend, approve and appeal any action taken or order issued with regard to a Hazardous Material by an applicable governmental authority. Provided Tenant is not in default under the terms of this Lease, Tenant shall likewise have the right to participate in any negotiations, approvals or appeals of any actions taken or orders issued with regard to the Hazardous Material and Landlord shall not have the right to bind Tenant in said actions or orders. D. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if (i) the proposed assignee's or subtenant's anticipated use of the Premises involves the storage, use or disposal of Hazardous Material; (ii) if the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to "clean up" Hazardous Material; (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, disposal or storage of a Hazardous Material. E. Tenant shall surrender the Premises to Landlord, upon the expiration or earlier termination of the Lease, free of Hazardous Materials which are or were attributable to Tenant. If Tenant fails to so surrender the Premises, Tenant shall indemnify and hold Landlord harmless from all damages resulting from Tenant's failure to surrender the Premises as required by this paragraph, including, without limitation, any claims or damages in connection with the condition of the Premises including, without 17 limitation, damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or rental value of the Premises or the Complex by reason of the existence of any Hazardous Materials, which are or were attributable to the activities of Tenant, in or around the Premises or the Complex. Notwithstanding any provision to the contrary in this Lease, if any action is required to be taken by a governmental authority to clean-up, monitor or remove any Hazardous Materials, which are or were attributable to the activities of Tenant, from the Premises or the Complex and such action is not completed prior to the expiration or earlier termination of the Lease, then at Landlord's election (i) this Lease shall be deemed renewed for a term commencing on the expiration date of this Lease and ending on the date the clean-up, monitoring or removal procedure is completed (provided, however, that the total term of this Lease shall not be longer than 34 years and 11 months); or (ii) Tenant shall be deemed to have impermissibly held over and Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or fair rental value of the Premises or the Complex by reason of the existence of the Hazardous Material. F. Upon the Lease Commencement Date, Tenant shall provide to Landlord a complete list of all chemicals, toxic waste or Hazardous Materials employed by Tenant within the Premises. Throughout the terms of the Lease, Tenant shall continue to update this list of chemicals, contaminants and Hazardous Materials. Landlord hereby represents to Tenant that Landlord is not aware (without a duty to inspect) of the presence of any Hazardous Materials that would affect Tenant's use and occupancy of the Premises. Notwithstanding anything herein to the contrary, Landlord agrees to hold Tenant harmless from any cost or expense related to Hazardous Materials that were in existence at the Premises or Complex prior to the commencement of the Lease or which are not attributable to Tenant's activities or Tenant's use and occupancy of the Premises. 44. MISCELLANEOUS AND GENERAL PROVISIONS a. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. b. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. c. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. d. Time is of the essence of this Lease and of each and all of its provisions. e. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. f. This instrument along with any exhibits and attachments hereto constitutes the entire agreement 18 between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant hereby agree that all prior or contemporaneous oral agreements between and among themselves and the agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h. Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. i. Paragraph(s) _________ through _________ are/is added hereto and are/is included as a part of this Lease. j. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect this Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year first above written. LANDLORD: TENANT: By /s/[ILLEGIBLE] By: /s/[ILLEGIBLE] -------------------------------- --------------------------------- Date: 13 OCT 99 Date: 10/12/99 ------------------------------ ------------------------------- 19 EXHIBIT "A" 380 PORTAGE PALO ALTO EXHIBIT B [TRACT MAP] EX-10.17 18 EXHIBIT 10.17 EXHIBIT 10.17 Execution SUBLEASE AGREEMENT BETWEEN 675 OWNERSHIP LLC AND BILL GROSS' IDEALAB!, A CALIFORNIA CORPORATION DATED: DECEMBER 23, 1999 PREMISES: 675 SIXTH AVENUE NEW YORK, NEW YORK LEASE: THE FIFTH FLOOR AND A PORTION OF THE BASEMENT EXHIBITS: A - FIFTH FLOOR PLAN B - LANDLORD'S WORK C - CERTIFICATE OF OCCUPANCY D - BASEMENT PLAN E - FOURTH FLOOR PLAN F - ADDITIONAL BASEMENT PLAN TABLE OF CONTENTS PAGE ---- Article 1 Rent . . . . . . . . . . . . . . . . . . Article 2 Commencement of Term . . . . . . . . . . Article 3 Adjustments of Rent . . . . . . . . . . Article 4 Electricity . . . . . . . . . . . . . . Article 5 Use. . . . . . . . . . . . . . . . . . . Article 6 Alterations and Installations. . . . . . Article 7 Repairs. . . . . . . . . . . . . . . . . Article 8 Requirements of Law. . . . . . . . . . . Article 9 Insurance, Loss, Reimbursement, Liability . . . . . . . . . . . . . Article 10 Damage by Fire or Other Cause. . . . . . Article 11 Assignment, Mortgaging, Subletting, Etc. . . . . . . . . . . . . . . . Article 12 Certificate of Occupancy . . . . . . . . Article 13 Adjacent Excavation - Shoring . . . . . Article 14 Condemnation . . . . . . . . . . . . . . Article 15 Access to Demised Premises; Changes . . Article 16 Conditions of Limitation . . . . . . . . Article 17 Re-entry by Landlord, Injunction . . . . Article 18 Damages. . . . . . . . . . . . . . . . . Article 19 Landlord's Right to Perform Tenant's Obligations . . . . . . . . . . . . Article 20 Quiet Enjoyment. . . . . . . . . . . . . Article 21 Services and Equipment . . . . . . . . . Article 22 Definitions. . . . . . . . . . . . . . . Article 23 Invalidity of any Provision. . . . . . . Article 24 Brokerage. . . . . . . . . . . . . . . . Article 25 Subordination. . . . . . . . . . . . . . Article 26 Certificate of Tenant. . . . . . . . . . Article 27 Legal Proceedings, Waiver of Jury Trial. Article 28 Surrender of Premises. . . . . . . . . . Article 29 Rules and Regulations. . . . . . . . . . Article 30 Consents and Approvals . . . . . . . . . Article 31 Notices. . . . . . . . . . . . . . . . . Article 32 No Waiver. . . . . . . . . . . . . . . . Article 33 Captions . . . . . . . . . . . . . . . . Article 34 Inability to Perform . . . . . . . . . . Article 35 No Representations . . . . . . . . . . . Article 36 Intentionally Omitted. . . . . . . . . . Article 37 Arbitration. . . . . . . . . . . . . . . Article 38 Indemnity. . . . . . . . . . . . . . . . Article 39 Memorandum of Lease. . . . . . . . . . . Article 40 Signs . . . . . . . . . . . . . . . . . Article 41 Additional Space . . . . . . . . . . . . Article 42 Renewal Option . . . . . . . . . . . . . Article 43 Intentionally Omitted. . . . . . . . . . Article 44 Miscellaneous. . . . . . . . . . . . . . SUBLEASE AGREEMENT made as of this 23 day of December, 1999, between 675 Ownership LLC, having an office at 675 Avenue of the Americas, New York, New York 10010 (hereinafter referred to as "Landlord") and Bill Gross' idealab!, a California Corporation, having an office at 130 West Union Street, Pasadena California 91103 (hereinafter referred to as "Tenant"). WITNESSETH: WHEREAS, by lease dated August 29, 1984 (hereinafter called the "Over Lease"), AVEMER ASSOCIATES (hereinafter called "Over Landlord") leased to Landlord's predecessor, the building (the "Building") and premises known as 675 Sixth Avenue, New York, New York (the "Premises") (a true and complete copy of the "Over Lease", with certain deletions as to economic matters, has previously been exhibited to Tenant); and WHEREAS, Tenant desires to hire from Landlord and Landlord desires to sublet to Tenant a portion of the Premises covered by the Over Lease; Landlord hereby leases and Tenant hereby rents from Landlord the entire fifth floor at the Building as shown on the plan annexed hereto as Exhibit A (the "demised premises"), for a term (the "Term") commencing on the "Commencement Date" and ending on the "Expiration Date" (as said terms are defined in Article 2 hereof) unless the Term shall sooner cease and terminate as hereinafter provided, and Tenant hereby rents from Landlord (as of the date specified in Article 41 hereof), a portion of the basement at the Building, in accordance with Article 41 hereof. The parties hereby covenant and agree as follows: ARTICLE 1 RENT 1.01. A. Tenant agrees to pay to Landlord a fixed annual rent (the "fixed annual rent") as follows: YEAR FIXED ANNUAL RENT MONTHLY INSTALLMENT - ---- ----------------- ------------------- April 1, 2000 to May 31, 2000 $ -0- $ -0- June 1, 2000 to May 31, 2005 1,945,000 162,083 June 1, 2005 to May 31, 2010 2,150,000 179,167 June 1, 2010 to May 31, 2015 2,300,000 191,667 B. In lieu of operating expense escalations, the fixed annual rent shall be increased, on June 1, 2001, by $48,125.00 ($4,010.00 per month), and on each June 1 thereafter during the Term, in addition to the regular "step-up increases" set forth in A. above, by an amount equal to 2.5% of the fixed annual rent, as escalated by the provision of this sentence, for the immediately preceding twelve month period. For example, the fixed annual rent shall be increased on June 1, 2003, by 2.5% of the fixed annual rent payable for the period June 1, 2002 to May 31, 2003, as previously escalated by the provisions of this Section 1.01(B). C. All monthly installments of fixed annual rent shall be paid in advance on the first day of each calendar month during the Term, at the office of Landlord or such other place as Landlord may designate, without any setoff or deduction whatsoever, except such deductions as are specifically referred to in Articles 10 and 14 hereof. The first full month's installment of fixed annual rent (which shall be applied against the first payment of fixed annual rent) shall be paid by Tenant to Landlord upon the execution of this Lease. The payment of fixed annual rent shall commence on the Rent Commencement Date. Should the Commencement Date fall on any day other than the first of a month, then the fixed annual rent for such month shall be prorated on a per diem basis. 1.02. Tenant shall pay the fixed annual rent and all additional rent payable hereunder in lawful money of the United States by check (subject to collection) drawn to Landlord's order on a bank which is a member of the New York Clearinghouse Association or a successor thereto. All sums, other than fixed annual rent, payable by Tenant hereunder shall be deemed additional rent and shall be payable on demand unless other payment dates are hereinafter provided. Landlord shall have the same rights and remedies (including, without limitation, the right to commence a summary proceeding) for a default in the payment of additional rent as for a default in the payment of fixed annual rent notwithstanding the fact that Tenant may not then also be in default in the payment of fixed annual rent. 1.03. If Tenant shall fail to pay when due any installment of fixed annual rent or any payment of additional rent for a period of seven days after such installment or payment shall have become due, Tenant shall pay interest thereon at the Interest Rate (as such term is defined in Article 22 hereof), from the date when such installment or payment shall have become due to the date of the payment thereof, and such interest shall be deemed additional rent. The provisions of this Section 1.03 are in addition to all other remedies available to Landlord for nonpayment of fixed annual rent or additional rent. 1.04. If any of the fixed annual rent or additional rent payable under this Lease shall be or become uncollectible, reduced or required to be refunded because of any Legal Requirement (as such term is defined in Article 22 hereof), Tenant shall enter into such agreement(s) and take such other legally permissible steps as Landlord may request to permit Landlord to collect the maximum rents which from time to time during the continuance of such Legal Requirement may be legally permissible and not in excess of the amounts reserved therefor under this Lease. Upon the termination of such Legal Requirement, (a) the rents hereunder shall be payable in the amounts reserved herein for the periods following such termination and (b) Tenant shall pay to Landlord, to 2 the maximum extent legally permissible, an amount equal to (i) the rents which would have been paid pursuant to this Lease but for such Legal Requirement less (ii) the rents paid by Tenant during the period such Legal Requirement was in effect. ARTICLE 2 COMMENCEMENT OF TERM 2.01. (a) The "Commencement Date" of the Term shall be the later of (i)April 1, 2000; or (ii) the date on which Landlord delivers the demised premises to Tenant vacant, broom clean, free of tenancies and with Landlord's Work (as hereafter defined), substantially completed. (b) The "Rent Commencement Date" shall be two months after the Commencement Date. (c) The "Expiration Date" of the Term shall be the day before the 15th anniversary of the Commencement Date. For purposes of this Lease, a "lease year" shall mean each twelve month period commencing on the Commencement Date and each anniversary thereof. 2.02. Landlord shall deliver the demised premises to Tenant on the Commencement Date, vacant, broom clean and free of rights of tenants and occupants. Landlord shall perform only the work set forth on EXHIBIT B annexed hereto (hereinafter referred to as "Landlord's Work"). Except for the Landlord's Work, Landlord shall not be required to perform any work or expend any services to prepare the demised premises or the Building for Tenant's occupancy. All other installations, materials and work which may be required by Tenant to prepare, equip, decorate and furnish the demised premises for Tenant's occupancy shall be done by Tenant at Tenant's expense and are hereinafter called "Tenant's Extra Work". All Tenant's Extra Work shall be subject to, and conform with, the provisions of this Lease, including, but not limited to, Article 6. Landlord shall reimburse Tenant for the cost of certain of Tenant's Extra Work, as set forth in Section 6.09. ARTICLE 3 ADJUSTMENTS OF RENT 3.01. A. For purposes hereof, the following definitions shall apply: (a) The term "Base Tax" shall mean the Taxes actually payable with respect to the Premises for the July 1, 2000 through June 30, 2001 Tax Year. Landlord represents 3 that there are no tax abatements currently in effect which affect the Base Tax. (b) The term "Tax Year" shall mean each period of twelve months which includes any part of the Term which now or hereafter is or may be duly adopted as the fiscal year for real estate tax purposes of the City of New York. (c) The term "Taxes" shall mean (i) all real estate taxes, assessments, governmental levies, municipal taxes, county taxes, business improvement district, or any other governmental charge, general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind or nature whatsoever, which are or may be assessed, levied or imposed upon all or any part of the Premises and the sidewalks, plazas or streets adjacent thereto, including any tax, excise or fee measured by or payable with respect to any rent, and levied against Landlord and/or the Premises under the laws of the United States, the City or State of New York, or any political subdivision thereof, and (ii) any reasonable expenses incurred by Landlord, including payments to attorneys and appraisers, in contesting any of the items set forth in clause (i) of this sentence, or the assessed valuations of all or any part of the Premises. If due to a future change in the method of taxation or in the taxing authority, a new or additional real estate tax, or a franchise, income, transit, profit or other tax or governmental imposition, however designated, shall be levied against Landlord and/or the Premises, in addition to and similar to the types of taxes included in Taxes, or in substitution in whole or in part for any tax which would constitute "Taxes", or in lieu of additional Taxes, such tax or imposition shall be deemed for the purposes hereof to be included within the term "Taxes". "Taxes" shall not include income, franchise, inheritance, estate, succession, profit, revenue, gains, gift, mortgage, capital levy, transfer or similar such taxes imposed upon Landlord. (d) The term "Tenant's Tax Share" shall mean 16.66%. (Tenant occupies one of the six floors in the Building, with no allocation for the basement space). (e) The term "Escalation Statement" shall mean a statement setting forth the amount payable by Tenant for a specified Tax Year or calendar year, as the case may be, or for some portion thereof pursuant to this Article 3, which shall be accompanied with a copy of the most recent available tax bill(s) from the applicable municipal authority. B. Tenant shall pay to Landlord as additional rent for each Tax Year a sum equal to Tenant's Tax Share of the amount by which the Taxes for such Tax Year exceed the Base Tax (hereinafter referred to as "Tenant's Tax Payment"). Landlord shall furnish to Tenant an annual Escalation Statement (subject to revision as hereinafter provided) for each Tax Year setting forth Tenant's Tax Payment for such Tax Year. Tenant's Tax Payment shall be due and payable as follows: two semi-annual installments, in advance, on the first day of each June and December of each calendar year. If an annual Escalation Statement is furnished to Tenant after the commencement of the Tax Year to which it relates, then (a) until such Escalation Statement is rendered, Tenant shall pay Tenant's Tax Payment for such Tax Year in installments based upon the 4 last Escalation Statement rendered to Tenant with respect to Taxes and (b) Tenant shall, within 10 days after such annual Escalation Statement is furnished to Tenant, pay to Landlord an amount equal to any underpayment of the installments of Tenant's Tax Payment theretofore paid by Tenant for such Tax Year and, in the event of an overpayment by Tenant, Landlord shall permit Tenant to credit against subsequent payments under this Section 3.01 the amount of such overpayment. If this Lease shall have theretofore expired, Landlord shall make such payment directly to Tenant. If there shall be any increase in Taxes for any Tax Year, whether during or after such Tax Year, Landlord shall furnish a revised Escalation Statement for such Tax Year to Tenant, and Tenant's Tax Payment for such Tax Year shall be adjusted and paid in the same manner as provided in the preceding sentence. If during the Term, Taxes are required to be paid (either to the appropriate taxing authorities or as tax escrow payments to a superior mortgagee or to the Over Landlord) in full or in monthly, quarterly, or other installments, on any other date or dates than as presently required, then at Landlord's option, Tenant's Tax Payments shall be correspondingly accelerated or revised so that said Tenant's Tax Payments are due at least 30 days prior to the date payments are due to the taxing authorities or the superior mortgagee or Over Landlord. The benefit of any discount for any early payment or prepayment of Taxes shall accrue solely to the benefit of Landlord and such discount shall not be subtracted from Taxes. C. If Landlord shall receive a refund of Taxes for any Tax Year, Landlord shall permit Tenant to credit against subsequent payments under this Section 3.01, Tenant's Tax Share of the refund, but not in excess of Tenant's Tax Payment paid for such Tax Year. If the Term has expired, Landlord will promptly make such payment to Tenant directly. 3.02. INTENTIONALLY OMITTED. 3.03. Tenant shall pay to Landlord upon demand, as additional rent, any occupancy tax or rent tax hereafter in effect, which Landlord is required to pay with respect to the demised premises or this Lease, unless such tax is specifically excluded from Taxes pursuant to the last sentence of Section 3.01(c). 3.04. If the Commencement Date shall be other than the first day of a Tax Year or if the date of the expiration or other termination of this Lease shall be a day other than the last day of a Tax Year, then Tenant's Tax Payment for such partial year shall be equitably adjusted taking into consideration the portion of such Tax Year falling within the Term. Landlord shall, as soon as reasonably practicable, cause an Escalation Statement with respect to Taxes for the Tax Year in which the Term expires to be prepared and furnished to Tenant. 3.05. In no event shall the fixed annual rent ever be reduced by operation of this Article 3. The rights and obligations of Landlord and Tenant under the provisions of this Article 3 shall survive the termination of this Lease, and payments shall be made pursuant to this Article 3 notwithstanding the fact that an Escalation Statement is furnished to Tenant after the expiration or other termination of the Term. 5 3.06. Landlord's failure to render an Escalation Statement with respect to any Tax Year or Lease Year shall not prejudice Landlord's right to thereafter render an Escalation Statement with respect thereto or with respect to any subsequent Tax Year or Lease Year. 3.07. Each Escalation Statement shall be conclusive and binding upon Tenant unless within 20 days after receipt of such Escalation Statement Tenant shall notify Landlord that it disputes the correctness of such Escalation Statement, specifying the particular respects in which such Escalation Statement is claimed to be incorrect. Any dispute relating to any Escalation Statement, not resolved within 45 days after the giving of such notice by Tenant, may be submitted to arbitration by either party pursuant to Article 37 hereof. Pending the determination of such dispute, Tenant shall pay additional rent in accordance with the Escalation Statement that Tenant is disputing, without prejudice to Tenant's position. ARTICLE 4 ELECTRICITY 4.01. For the period commencing on the Commencement Date, Tenant covenants and agrees to pay directly to the utility company supplying electric current for the demised premises the amounts due for such electric current consumed, including by use of the hvac system serving the demised premises, as indicated by meter(s) measuring Tenant's consumption thereof. As of the Rent Commencement Date, meters measuring only the electrical consumption utilized on the fifth floor shall be installed at the Building and the demised premises shall be serviced with electrical energy. 4.02. Any additional risers, feeders or other equipment or service proper or necessary to supply Tenant's electrical requirements, upon written request of Tenant, may be installed by Tenant at the sole cost and expense of Tenant, if in Landlord's sole and reasonable judgment the same are necessary and will not cause permanent damage or injury to the Premises or the demised premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other tenants or occupants. 4.03. Intentionally Omitted. 4.04. Tenant's use of electric current in the demised premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the demised premises which capacity shall satisfy the provisions of Section 4.08 hereof. Tenant shall not make or perform or permit the making or performing of, any alterations to wiring, installations or other electrical facilities serving the demised premises (to the extent same are outside of the demised premises) without the prior consent of Landlord in each instance. Should Landlord grant any such 6 consent, all additional risers or other equipment required therefor shall be installed by Tenant and the cost thereof shall be paid by Tenant. 4.05. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the demised premises by reason of any requirement, act or omission of the public utility providing the Premises with electricity or for any other reason whatsoever. 4.06. Tenant covenants and agrees that at no time will the connected electrical load in the demised premises exceed 8 watts per usable square foot (excluding hvac), unless otherwise specifically consented to by Landlord. 4.07 Landlord shall make available for exclusive use by Tenant, without charge, up to 20% of available space for riser installations. All such installations shall be performed at Tenant's sole cost and expense and otherwise in accordance with this Lease. ARTICLE 5 USE 5.01. The demised premises shall be used as and for executive, administrative and general offices and uses reasonably ancillary to and incidental to the foregoing, including a kitchen for the service of food only to Tenant's employees and guests, and for no other purpose except as aforesaid. 5.02. Tenant shall not use or permit the use of the demised premises or any part thereof in any way which would violate any of the covenants, agreements, terms, provisions and conditions of this Lease or of the Over Lease or for any unlawful purposes or in any unlawful manner or in violation of the Certificate of Occupancy for the demised premises of the Building; and Tenant shall not permit the demised premises or any part thereof to be used in any manner or anything to be done, brought into or kept therein which, in Landlord's reasonable judgment shall, or tend to, impair or interfere with (because of noise level, traffic or other-wise) (i) the character, reputation or appearance of the Building as a high quality office building, (ii) any of the Building services or the proper and economic heating, cleaning, air conditioning or other servicing of the Building or the demised premises, or (iii) the use of any of the other areas of the Building by, or occasion discomfort, inconvenience or annoyance to, any of the other tenants or occupants of the Building. Tenant shall not install any electrical or other equipment of any kind which, in the reasonable judgment of Landlord, might cause any such impairment, interference, discomfort, inconvenience or annoyance or which might overload the risers or feeders servicing the demised premises or other portions of the Building. Landlord shall have the right to require Tenant, at Tenant's expense and to the satisfaction of Landlord, to insulate the demised premises to reduce any noise 7 generated therein, and to install curtains or blinds on the inside of windows in the demised premises facing the atrium of the Building. 5.03 A. Tenant shall not use, play or operate or permit to be used, played or operated any sound making or sound producing device in the demised premises except in such manner and under such conditions as shall prevent any noise from emanating from the demised premises to other areas in the Building or to street areas outside of the Building; B. Tenant agrees to prevent waste matter or refuse to accumulate in or about the demised premises and shall keep same in a clean and orderly fashion. Tenant shall arrange for the removal from the demised premises and the Building of all of its refuse and rubbish, at Tenant's sole cost and expense. C. Tenant shall not suffer or permit any occupancy or use thereof for any purpose which shall be unlawful, obscene or pornographic. ARTICLE 6 ALTERATIONS AND INSTALLATIONS 6.01. Except as set forth in item 8 below, Tenant shall make no alterations, installations, additions or improvements in or to the demised premises without Landlord's prior written consent and then only by contractors or mechanics first approved by Landlord. All such work, alterations, installations, additions and improvements shall be done at Tenant's sole expense and at such times and in such manner as Landlord may from time to time reasonably designate, so as to minimize interference with the rest of the Building and its tenants. Tenant's Extra Work and any future work in the demised premises shall be done solely in accordance with plans and specifications first approved in writing by Landlord, and by the Over Landlord if such consent is required under the provisions of the Over Lease. Landlord will respond to requests for its approval of such plans and specifications within 15 days of Landlord's receipt thereof. Tenant shall reimburse Landlord promptly upon demand for any reasonable costs and expenses incurred by Landlord in connection with Landlord's review of such Tenant's plans and specifications. Landlord will not unreasonably withhold or delay its consent to requests for such alterations, additions and improvements. Any such approved alterations and improvements shall be performed in accordance with the foregoing and the following provisions of this Article 6: 1. All work shall be done in a good and workmanlike manner. 8 2. (a) Any contractor employed by Tenant to perform any work permitted by this Lease, and all of its subcontractors shall agree to employ only such labor as will not result in jurisdictional disputes or strikes or cause disharmony with other workers employed at the Building. Tenant will inform Landlord in writing of the names of any contractors or subcontractors Tenant proposes to use in the demised premises at least thirty (30) days prior to the beginning of work by such contractors or subcontractors, and Landlord shall not unreasonably withhold or delay its consent to such contractors or subcontractors. (b) Tenant covenants and agrees to pay to the contractor, as the work progresses, the entire cost of supplying the materials and performing the work shown on Tenant's approved plans and specifications, unless Tenant has a good faith basis for not making such payment, and further provided that Tenant nonetheless remains in compliance with the provisions of Section 6.02. 3. All such alterations shall be performed in compliance with all Legal Requirements (as defined in Article 22 hereof) including, without limitation, those imposed by the New York City Building Department, the New York City Fire Department and O.S.H.A. 4. Tenant shall keep the Building and the demised premises free and clear of all liens for any work or material claimed to have been furnished to Tenant or to the demised premises on Tenant's behalf, and all work to be performed by Tenant shall be done in a manner which will not unreasonably interfere with or disturb other tenants or occupants of the Building. 5. During the progress of the work to be done by Tenant, said work shall be subject to inspection by representatives of Landlord who shall be permitted access and the opportunity to inspect, at all reasonable times, but this provision shall not in any way whatsoever create any obligation on Landlord to conduct such an inspection. 6. Prior to commencement of any work, Tenant shall furnish to Landlord certificates evidencing the existence of: (a) worker's compensation insurance covering all persons employed for such work with statutorily required limits; and (b) Employer's liability coverage including bodily injury caused by disease with limits of not less than $100,000 per employee; 9 (c) Comprehensive general liability insurance including but not limited to completed operations coverage, products liability coverage, contractual coverage, broad form property damage, independent contractor's coverage and personal injury coverage naming (i) Landlord and Over Landlord, as well as such representatives and consultants of them as Landlord shall reasonably specify (collectively "Landlord's Consultants"), as well as Tenant, as additional insureds, with coverage of not less than $5,000,000 combined single limit coverage (or such higher limits as Landlord may from time to time impose in its reasonable judgment); (d) To the extent commercially available at commercially reasonable rates, Tenant shall require all contractors engaged or employed by the Tenant to indemnify and hold Tenant, Over Landlord, Landlord, and Landlord's Consultants harmless in accordance with the following clauses: "The contractor hereby agrees to the fullest extent permitted by law to assume the entire responsibility and liability for and defense of and to pay and indemnify Landlord, Over Landlord, Tenant, and Landlord's Consultants against any loss, cost, expense, liability or damage and will hold each of them harmless from and pay any loss, cost, expense, liability or damage (including, without limitation, judgments, attorney's fees, court costs, and the cost of appellate proceedings), which any and each of them incur because of injury to or death of any person or on account of damage to property, including loss of use thereof, or any other claim arising out of, in connection with, or as a consequence of the performance of the work by the contractor and/or any acts or omissions of the contractor or any of its officers, directors, employees, agents or sub-contractors or anyone directly or indirectly employed by the contractor or anyone for whose acts the contractor may be liable as it relates to the scope of this Contract, whether such injuries to person or damage to property are due or claimed to be due to any negligence of the Landlord, Over Landlord, Landlord's Consultants, and/or Tenant, its or their employees or agents or any other person." The contractor's insurance shall specifically insure the foregoing hold harmless provision verbatim. (e) Such insurance shall be placed with solvent and responsible companies reasonably satisfactory to the Landlord and licensed or authorized to do business in the State of New York, with a general policy holder's rating of not less than "A" and a financial rating of not less than "Class X" as rated in the most current available "Bests" Insurance Reports or such other 10 comparable publication as may be acceptable to Landlord in the event that "Bests" Insurance Reports ceases to publish such information, and the policies shall provide that they may not be cancelled without 30 days' prior written notice in writing to Landlord. 7. Movement of all men and materials shall only be done at the direction, the times and in the manner reasonably designated by Landlord. 8. Subject to compliance with the Over Lease, no improvements estimated to cost more than $100,000 in the aggregate in any calendar year (as reasonably estimated by Landlord's architect or engineer or general contractor) shall be undertaken (i) except under the supervision of a licensed architect or licensed professional engineer reasonably satisfactory to Landlord, (ii) except after at least 30 days' prior written notice to Landlord and receipt of Landlord's consent thereto as provided in this Article 6, and (iii) prior to Tenant delivering to Landlord such letters of credit or other security, if any, as is required under the Over Lease. Notwithstanding the contrary, but subject to compliance with the Over Lease, Tenant may perform non-structural or non-building system work in the demised premises which are estimated to cost less than $100,000, upon notice to, but without the prior approval of or submission of plans to, Landlord. 9. Tenant shall deliver such performance bonds and completion bonds and shall comply with such other provisions relating to improvements and alterations, as shall be required under the terms of the Over Lease as a condition to the commencement of work on any improvements or alterations. 6.02. Notice is hereby given that Landlord shall not be liable for any labor or materials furnished to or to be furnished to Tenant upon credit, and that no mechanic's or other lien for any such labor or materials shall attach to or affect the reversion or other estate or interest of Landlord or Over Landlord in and to the demised premises. Any mechanic's lien filed against the demised premises or the Building for work claimed to have been done for or materials claimed to have been furnished to Tenant shall be discharged by Tenant at its expense within fifteen (15) days after such filing, by payment, filing of the bond required by law or otherwise. Failure to comply with the provisions of this Section 6.02 shall constitute a material default by Tenant under this Lease entitling Landlord to exercise any or all of the remedies provided in this Lease in the event of Tenant's default. 6.03. All alterations, installations, additions and improvements made and installed by Landlord at its expense, including without limitation all work referred to in Article 2 hereof shall 11 be the property of Landlord and shall remain upon and be surrendered with the demised premises as a part thereof at the end of the Term. 6.04. All Tenant's Extra Work and all alterations, installations, additions and improvements made and installed by Tenant, or at Tenant's expense upon or in the demised premises which are of a permanent nature and which cannot be removed without damage to the demised premises or Building shall become the property of the Landlord, and shall remain upon and be surrendered with the demised premises as a part thereof at the end of the Term, except that Landlord shall have the right at any time up to two months prior to the expiration of the Term to serve notice upon Tenant that any such alterations, installations, additions and improvements shall be removed and, in the event of service of such notice, Tenant will, at Tenant's own cost and expense, remove the same in accordance with and to the extent of such request, so as to render the demised premises open and clear "slab to slab", including the repair and restoration of any damage caused by the making of such alterations, installations, additions and improvements and/or the removal thereof ("Building Standard"). Tenant shall not be deemed to have surrendered the demised premises until such work has been completed and until the provisions of Section 6.05 have been complied with, whether by Tenant or by Landlord at Tenant's expense, and Tenant shall continue to pay rent, after the expiration of the Term, at the then fair rental value for the demised premises, and otherwise in accordance with the provisions of this Lease until such completion and compliance and shall be liable for any consequential damages incurred by Landlord as a result of any such holding over after the expiration of the Term. 6.05. Where furnished by or at the expense of Tenant, all non-structural furniture, furnishings and trade fixtures, including without limitation, murals, machines and equipment, counters, screens, grille work, special panelled doors, cages, partitions, metal railings, closets, panelling, free standing lighting fixtures and equipment, drinking fountains, refrigeration and other food related equipment and air handling equipment, and any other movable property shall remain the property of Tenant which may at its option remove all or any part thereof at any time prior to the expiration of the Term. In case Tenant shall decide not to remove any part of such property, Tenant shall notify Landlord in writing not less than six (6) months prior to the expiration of the Term, specifying the items of property which it has decided not to remove. If, within 90 days after the service of such notice, Landlord shall request Tenant to remove any of said property, Tenant shall at its expense, remove same. As to such property which Landlord does not request Tenant to remove, the same shall be, if left by Tenant, deemed abandoned by Tenant and thereupon the same shall become the property of Landlord. 6.06. If any alterations, installations, additions, improvements or other property which Tenant shall have the right to remove or be requested by Landlord to remove as provided in Sections 6.04 and 6.05 hereof (herein in this Section 6.06 called the "property") are not removed on or prior to the expiration of the Term, Landlord shall have the right to remove the property and to dispose of the same without accountability to Tenant and at the sole cost and expense of Tenant. In case of any damage to the demised premises or the Building resulting from the removal by 12 Tenant of the property, Tenant shall repair such damage or, in default thereof, shall reimburse Landlord for Landlord's cost in repairing such damage. This obligation shall survive any termination of this Lease. 6.07. Subject to the provisions of this Article 6 Tenant shall, at its sole cost and expense, redecorate the interior of the demised premises at least once during the Term. For purposes hereof, the term "redecorate" shall mean only to repaint or to wallpaper all interior walls in the demised premises and the ceilings thereof, if appropriate, after having first prepared the surfaces thereof by stripping off and priming them as appropriate. All redecoration work shall be done with high-quality materials and where painting is involved, two coats of paint shall be applied. 6.08. Tenant shall keep records of each of Tenant's alterations, installations, additions and improvements costing in excess of $25,000, and of the cost thereof. Tenant shall, within 30 days after demand by Landlord, furnish to Landlord copies of such records if Landlord shall require same in connection with any proceeding to reduce the assessed valuation of the Building, or in connection with any proceeding instituted pursuant to Article 14 hereof. 6.09 Landlord shall reimburse Tenant for any cost in connection with Tenant's Extra Work up to an amount equal to $500,000. Reimbursement by Landlord to Tenant for Tenant's Extra Work shall be made in installments within thirty (30) days of Tenant making a progress payment to Tenant's contractors (who provide either "hard" or "soft" services), in accordance with the contract documents between Tenant and such contractor, copies of which contract and checks evidencing payment by Tenant shall have been furnished to Landlord, and each such installment shall be in an amount equal to $500,000 multiplied by a fraction, the numerator of which shall be the amount of Tenant's progress payment with respect to which Tenant is being reimbursed and the denominator of which shall be the total reasonably estimated completed cost of Tenant's Extra Work. Alternatively, Tenant may require Landlord to pay Tenant's contractors directly, upon presentation of invoices for work performed, but not more than once per month. Landlord shall retain 10% of each such payment which retainage shall be paid to Tenant only upon completion of Tenant's Extra Work in accordance with the terms of this Lease and upon submission to Landlord of documents reasonably satisfactory to Landlord evidencing that such Tenant's Extra Work has been fully and properly completed, that all amounts due for materials and labor have been paid in full and that all other conditions reasonably imposed by Landlord as a condition to such payment have been satisfied in full. ARTICLE 7 REPAIRS 7.01. Tenant shall, at its sole cost and expense, make such repairs to the demised premises and the fixtures and appurtenances therein as are necessitated by the use, act, omission, occupancy or negligence of Tenant or by the use of the demised premises in a manner contrary to the 13 purposes for which same are leased to Tenant, as and when needed to preserve them in good working order and condition. Except as otherwise provided in Section 9.05 hereof, all damage or injury to the Building or Premises, including demised premises, and to its fixtures, appurtenances and equipment caused by Tenant moving property in or out of the Building or by installation or removal by Tenant of furniture, fixtures or other property, shall be repaired, restored or replaced promptly by Tenant at its sole cost and expense, which repairs, restorations and replacements shall be in quality and class equal to the original work or installations. If Tenant fails to make such repairs, restoration or replacements, same may be made by Landlord at the expense of Tenant and such expense shall be collectible as additional rent and shall be paid by Tenant within ten days after rendition of a bill therefor. Subject to Tenant's obligations set forth above, Landlord shall maintain and repair the exterior of the Building and public portions of the Building, all structural elements of the Building, air-conditioning cooling towers on the roof, and all building systems serving the demised premises, including pipes, lines and the like located outside of the demised premises. Landlord shall have no obligation with respect to any items included in Tenant's Extra Work, or constructed or installed in the demised premises by Tenant, or located in the demised premises, or exclusively serving the demised premises. The exterior walls of the Building, the portions of any window sills outside the windows and the windows are not part of the premises demised by this Lease and Landlord reserves all rights to such parts of the Building, but the foregoing shall not relieve Tenant of any obligation to restore, repair, or replace same in accordance with the immediately preceding paragraph. 7.02. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which such floor was designed to carry and which is allowed by law. 7.03. Business machines and mechanical equipment used by Tenant which cause vibration, noise, cold or heat that may be transmitted to the Building structure or to any leased space to such a degree as to be reasonably objectionable to Landlord or to any other tenant in the Building shall be placed and maintained by Tenant at its expense in settings of cork, rubber or spring type vibration eliminators sufficient to absorb and prevent such vibration or noise, or prevent transmission of such cold or heat. The parties hereto recognize that the operation of elevators, air conditioning and heating equipment will cause some vibration, noise, heat or cold which may be transmitted to other parts of the Building and demised premises. Landlord shall be under no obligation to endeavor to reduce such vibration, noise, heat or cold beyond what is customary in current good building practice for buildings of the same type as the Building. 7.04. Except as otherwise specifically provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from the making of any repairs, alterations, additions or improvements in or to any portion of the Building or the demised premises or in or to 14 fixtures, appurtenances or equipment thereof. Landlord shall exercise reasonable diligence so as to minimize any interference with Tenant's business operations, but shall not be required to perform the same on an overtime or premium pay basis. 7.05 Landlord shall maintain a code compliant Class E System and shall comply with the American with Disabilities Act, but the foregoing shall apply only to areas outside of the demised premises and shall not require Landlord to take any action with respect to areas outside of the demised premises resulting from the particular use or occupancy of the demised premises by Tenant. ARTICLE 8 REQUIREMENTS OF LAW 8.01. Tenant shall comply with all Legal Requirements which shall impose any violation, order or duty upon Landlord or Tenant with respect to the particular use by Tenant of the demised premises, or arising out of the particular use or occupation thereof by Tenant. 8.02. Notwithstanding the provisions of Section 8.01 hereof, Tenant, at its own cost and expense, in its name and/or (whenever necessary) Landlord's name, may contest, in any manner permitted by law (including appeals to a court, or governmental department or authority having jurisdiction in the matter), the validity or the enforcement of any Legal Requirements with which Tenant is required to comply pursuant to this Lease, and may defer compliance therewith provided that: (a) such non-compliance shall not subject Landlord to criminal prosecution or subject the Premises to lien or sale; (b) such non-compliance shall not be in violation of any mortgage, or of the Over Lease or of any ground or underlying lease or any mortgage thereon; (c) Tenant shall first deliver to Landlord a surety bond issued by a surety company of recognized responsibility, or other security reasonably satisfactory to Landlord, indemnifying and protecting Landlord or Over Landlord against any loss or injury by reason of such non-compliance; and (d) Tenant shall promptly, diligently and continuously prosecute such contest. Landlord, without expense or liability to it, shall cooperate with Tenant and execute any documents or pleadings required for such purpose, provided that Landlord shall reasonably be satisfied that the facts set forth in any such documents or pleadings are accurate. 15 ARTICLE 9 INSURANCE, LOSS, REIMBURSEMENT, LIABILITY 9.01. Tenant shall not do or permit to be done any act or thing upon or about the demised premises, which will invalidate or be in conflict with New York standard fire insurance policies covering the Building, and fixtures and property therein, or which would increase the rate of fire insurance applicable to the Building to an amount higher than it otherwise would be if the demised premises were used for executive and general offices; and Tenant shall neither do nor permit to be done any act or thing upon the demised premises which shall or might subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being carried on within the demised premises; but nothing in this Section 9.01 shall prevent Tenant's use of the demised premises for the purposes stated in Article 5 hereof. 9.02. If, as a result of any act or omission by Tenant or violation of this Lease by Tenant, the rate of fire insurance applicable to the Building shall be increased, Tenant shall reimburse Landlord for all increases of Landlord's and other tenants' fire insurance premiums so caused; such reimbursement to be additional rent payable within five days after demand therefor by Landlord. Any disputes under Section 9.02 shall be resolved in accordance with Article 37. 9.03. Landlord or its agent shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Building, or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature, unless any of the foregoing shall be caused by or due to the willful misconduct or gross negligence of Landlord, its agents, servants or employees. 9.04. Landlord or its agents shall not be liable for any damage which Tenant may sustain, if at any time any window of the demised premises is broken, or temporarily or permanently closed, darkened or bricked upon for any reason whatsoever, except only Landlord's arbitrary acts if the result is permanent and Tenant shall not be entitled to any compensation therefor or abatement of rent or to any release from any of Tenant's obligations under this Lease, nor shall the same constitute an eviction or constructive eviction. Landlord shall not, unless required by any Legal Requirement, authorize the blocking of any window in the demised premises by any sign or obstruction placed on the Building's facade (unless needed for repair, restoration or maintenance of the Building), or permit the windows to be bricked, closed or darkened, to the extent same is under the control of Landlord.. 9.05. Tenant shall reimburse Landlord for all expenses, damages or fines incurred or suffered by Landlord, by reason of any act, breach, violation or non-performance by Tenant, or its agents, servants or employees, of any covenant or provision of this Lease, or by reason of damage 16 to persons or property caused by moving property of or for Tenant in or out of the Building, or by the installation or removal of furniture or other property of or for Tenant, or by reason of or arising out of any act of Tenant, or its agents, servants or employees, in the use or occupancy of the demised premises. Subject to compliance with the provisions of Section 8.02 hereof, where applicable, Tenant shall have the right, at Tenant's own cost and expense, to participate in the defense of any action or proceeding brought against Landlord, and in negotiations for settlement thereof if, pursuant to this Section 9.05, Tenant would be obligated to reimburse Landlord for expenses, damages or fines incurred or suffered by Landlord. 9.06. Tenant shall give Landlord notice in case of fire or accidents in the demised premises promptly after Tenant becomes aware of such event. 9.07. Tenant agrees to look solely to Landlord's interest in the Premises and in the Over Lease, and the demised premises, for the satisfaction of any right or remedy of Tenant for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord, in the event of any liability by Landlord, and no other property or assets of Landlord shall be subject to levy, execution, attachment, or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the demised premises, or any other liability of Landlord to Tenant. 9.08. Each party, on behalf of itself and on behalf of anyone claiming under or through it by way of subrogation or otherwise, waives all rights and causes of action against the other party, and the officers, employees, agents and invitees of the other party, for any liability arising out of any loss or damage in or to the demised premises and/or the Building or Premises, its contents and other property owned or controlled by or caused by: (i) any peril normally covered under all-risk policies issued in the geographic area in which the Building is located (whether or not such party actually carries such insurance policies), or (ii) if the scope of coverage is broader than in (i) above, then any peril actually covered under the insurance maintained by such party. This release and waiver shall be complete and total even if such loss or damage may have been caused by the negligence of the other party, its officers, employees, agents or invitees and shall not be affected or limited by the amount of insurance proceeds available to the waiving party, regardless of the reason for such deficiency in proceeds. If any additional charge or increase in premium is made by the insurer because of this waiver of subrogation, then the party in whose favor the waiver was obtained shall pay such additional charge or increase in premium; failure to pay the increase in premium will void the release and waiver benefitting such party but shall not affect the benefit of the corresponding release and waiver enjoyed by the other party. 17 However, if one party's insurance carrier prohibits waiver of subrogation regardless of premium, then the other party's release and waiver shall become null and void, it being understood that in this instance each waiver is given in consideration for the other. Each party covenants that from and after the date possession of the demised premises is delivered to Tenant its insurance policies will contain waiver of subrogation endorsements, and that if such endorsements, for any reason whatsoever, are about to become unavailable, it will give the other party not less than thirty (30) days prior written notice of such impending unavailability. 9.09. Tenant covenants and agrees to provide at its expense on or before the Commencement Date and to keep in force during the Term naming Landlord and Over Landlord as additional insured parties a comprehensive general liability insurance policy including but not limited to premises operation blanket contractual insurance, broad form property damage, independent contractor's coverage and personal injury coverage protecting Landlord, Over Landlord and Tenant against any liability whatsoever, occasioned by any occurrence on or about the demised premises or any appurtenances thereto. Such policy is to be written by good and solvent insurance companies licensed to do business in the State of New York reasonably satisfactory to Landlord, and shall be in such limits as Landlord may reasonably require. As of the date of this Lease Landlord reasonably requires limits of liability thereunder of not less than $3,000,000 per occurrence for bodily or personal injury (including death) and in the amount of $1,000,000 per occurrence in respect of property damage. Such insurance may be carried under a blanket policy covering the demised premises and other locations of Tenant, if any, provided that each such policy shall in all respects, comply with this Article and shall specify that the portion of the total coverage of such policy that is allocated to the demised premises is in the amount required pursuant to this Section 9.09. Prior to the time such insurance is first required to be carried by Tenant and thereafter, at least 15 days prior to the effective date of any such policy, Tenant agrees to deliver to Landlord a certificate of such insurance, followed within thirty (30) days by a duplicate original of the aforesaid policy. Said policy shall contain an endorsement that such insurance may not be cancelled except upon 30 days' prior notice to Landlord. Such policy shall also have the indemnity clause referred to in Article 38 hereof typed on the policy evidencing that the "hold harmless" clause has been insured. Tenant's failure to provide and keep in force the aforementioned insurance shall be regarded as a material default hereunder entitling Landlord to exercise any or all of the remedies provided in this Lease in the event of Tenant's default. Notwithstanding anything to the contrary contained in this Lease, the carrying of insurance by Tenant in compliance with this Section shall not modify, reduce, limit or impair Tenant's obligations and liability under Article 38 hereof. ARTICLE 10 DAMAGE BY FIRE OR OTHER CAUSE 18 10.01. If the Building or the demised premises shall be partially or totally damaged or destroyed by fire or other cause (and if this Lease shall not have been terminated as in this Article 10 hereinafter provided), Landlord shall repair the damage and restore and rebuild the Building and/or the demised premises, at its expense with reasonable dispatch after notice to it of the damage or destruction. 10.02. If the Building or the demised premises shall be damaged or destroyed by fire or other causes, then unless such fire or damage shall have resulted from the negligence of Tenant or its officers, contractors, licensees, agents, employees, guests, invitees or visitors, the rents payable hereunder shall be abated to the extent that the demised premises shall have been rendered untenantable for the period from the date of such damage or destruction to the date the damage shall be repaired or restored; provided, however, that should Tenant reoccupy a portion of the demised premises during the period the restoration work is taking place and prior to the date that the whole of said demised premises are made tenantable, fixed annual rent and additional rents allocable to such portion shall be payable by Tenant from the date of such reoccupancy. 10.03. If the Building shall be so damaged or destroyed by fire or other cause (whether or not the demised premises are damaged or destroyed) as to require a reasonably estimated expenditure made by Landlord or a reputable contractor reasonably designated by Landlord of more than 50% of the full replacement value of the Building immediately prior to the casualty, then Landlord may terminate this Lease by giving Tenant notice to such effect within 120 days after the date of the casualty. In case of any damage or destruction mentioned in this Article 10 which Landlord is required to repair and restore, Tenant may terminate this Lease by notice to Landlord if Landlord has not completed the making of the required repairs and restorations within 15 months after the date of such damage or destruction, or within such period after such date (not exceeding 6 months) as shall equal the aggregate period Landlord may have been delayed in doing so by adjustment of insurance, labor trouble, governmental controls, act of God, or any other cause beyond Landlord's reasonable control. 10.04. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the demised premises or of the Building pursuant to this Article 10. 10.05. Notwithstanding any of the foregoing provisions of this Article 10, if Landlord or the Over Landlord or the lessor of any superior lease or the holder of any superior mortgage shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the demised premises or the Building by fire or other cause, by reason of some action or inaction on the part of Tenant or any of its employees, agents or contractors, then, without prejudice to any other remedies which may be available against Tenant, there shall be no abatement of Tenant's rents, but the total amount of such rents not abated (which would otherwise have been abated) shall not exceed the amount of uncollected 19 insurance proceeds. 10.06. Landlord will not carry separate insurance of any kind on Tenant's property (including, without limitation, any property of Tenant which shall become the property of Landlord as provided in Article 6 hereof), and, except as provided by law, Landlord shall not be obligated to repair any damage thereto or replace or clear the same, or any other decorations, installations, equipment or fixtures installed by or for Tenant at Tenant's expense, or Tenant's Extra Work. Tenant shall maintain such fire and casualty insurance as it deems advisable. 10.07. The provisions of this Article 10 shall be considered an express agreement governing any cause of damage or destruction of the demised premises by fire or other casualty, and Section 227 of the Real Property Law of the State of New York, providing for such a contingency in the absence of an express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case. 10.08. Landlord shall maintain fire and other casualty insurance on the Building. ARTICLE 11 ASSIGNMENT, MORTGAGING, SUBLETTING, ETC. 11.01. Except as otherwise expressly provided in this Article 11, Tenant shall not without, in each instance, obtaining the prior consent of Landlord, which consent shall not be unreasonably withheld or delayed, (a) assign or otherwise transfer this Lease or the term and estate hereby granted, (b) sublet all or part of the demised premises or allow the same to be used or occupied by others or in violation of Article 5, (c) mortgage, pledge or encumber this Lease or all or part of the demised premises in any manner by reason of any act or omission on the part of Tenant, or (d) advertise, or authorize a broker to advertise, for a subtenant for all or part of the demised premises or for an assignee of this Lease. For purposes of this Article 11, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant or subtenant, or the transfer of a majority of the total interest in any other entity (partnership or otherwise) which is a tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Lease, or such sublease, as the case may be, provided, however, that the foregoing shall not apply to a public offering of Tenant's securities on a recognized national market, or to any transfer of shares which are publically traded, or to a sale of shares to one acquirer, or to the transfer of shares by a share owner in connection with such share owner's estate planning, (ii) a takeover agreement shall be deemed a transfer of this Lease, (iii) any person or legal representative of Tenant, to whom Tenant's interest under this Lease passes by operation of law, or otherwise, shall be bound by the provisions of this Article 11, and (iv) a modification, amendment or extension without Landlord's prior written consent of a sublease previously consented to by Landlord shall be deemed a new sublease, unless such 20 extension was contained in the sublease previously approved by Landlord, but with a term not beyond the Expiration Date. Tenant agrees to furnish to Landlord upon demand at any time and from time to time such information and assurances as Landlord may reasonably request that neither Tenant, nor any subtenant, shall have violated the provisions of this Section 11.01. 11.02. The provisions of clauses (a), (b) and (d) of Section 11.01 and the provisions of Sections 11.05 and 11.06(e) hereof shall not apply to (and Landlord's consent shall not be required for, but notice shall nonetheless be given to Landlord), transactions entered into by Tenant with a Tenant Affiliate. "Tenant Affiliate" shall mean (i) an entity into which the Tenant is merged or consolidated or to which Tenant sells substantially all its assets, provided such merger, consolidation or asset sale results in the successor entity being fully liable under this Lease and such successor entity having a net worth at least equal to or in excess of the net worth of Tenant as of the date hereof; (ii) an entity which controls, is controlled by or is under common control with Tenant (the term "control" meaning ownership of not less than 25% of the outstanding voting interests of such entity); or (iii) a partnership in which and for so long as Tenant or a Tenant Affiliate shall be a general partner and of which Tenant (or one or more Tenant Affiliates) shall own not less than 25% of the legal equitable interest. 11.03. Any assignment or transfer, whether made with Landlord's consent as required by Section 11.01 or without Landlord's consent pursuant to Section 11.02, shall not be effective unless and until (a) the assignee of the Lease shall execute, acknowledge and deliver to Landlord a recordable agreement, in form and substance reasonably satisfactory to Landlord, whereby the assignee shall (i) assume the obligations and performance of this Lease and agree to be personally bound by all of the covenants, agreements, terms, provisions and conditions hereof on the part of Tenant to be performed or observed on and after the effective date of any such assignment and (ii) agree that the provisions of this Article 11 shall, notwithstanding such assignment or transfer, continue to be binding upon it in the future, and (b) in the case of an assignment or transfer pursuant to Section 11.02(i), Tenant or its successor shall have delivered to Landlord financial statements certified by a reputable firm of certified public accountants evidencing satisfaction of the net worth requirements referred to in Section 11.02. Tenant covenants that, notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of fixed annual rent by Landlord from an assignee or transferee or any other party, Tenant shall remain fully and primarily and jointly and severally liable for the payment of the fixed annual rent and all additional rent due and to become due under this Lease and for the performance and observance of all of the covenants, agreements, terms, provisions and conditions of this Lease on the part of Tenant to be performed or observed. 11.04. The liability of Tenant, and the due performance by Tenant of the obligations on its part to be performed under this Lease, shall not be discharged, released or impaired in any respect by an agreement or stipulation made by the Landlord or any grantee or assignee of Landlord, by way of mortgage, or otherwise, extending the time of, or modifying any of the obligations contained in this Lease, or by any waiver or failure of Landlord to enforce any of the obligations 21 on Tenant's part to be performed under this Lease, and Tenant shall continue to be liable hereunder. If any such agreement or modification operates to increase the obligations of a tenant under this Lease, the liability under this Section 11.04 of the tenant named in the Lease or any of its successors in interest (unless such party shall have expressly consented in writing to such agreement or modification) shall continue to be no greater than if such agreement or modification had not been made. 11.05. Landlord shall not unreasonably withhold or delay its consent to an assignment of this Lease or a subletting of the whole or a part of the demised premises, and shall respond to any request for such consent within 30 days of receipt of such request, provided: (a) Tenant shall furnish Landlord with the name and business address of the proposed subtenant or assignee, information with respect to the nature and character of the proposed subtenant's or assignee's business, or activities, such references and current financial information with respect to net worth, credit and financial responsibility as are reasonably satisfactory to Landlord, and a term sheet setting forth the proposed terms and conditions of such subletting or assignment, as applicable; (b) The proposed subtenant or assignee is a reputable party whose financial net worth, credit and financial responsibility is, considering the responsibilities involved, reasonably satisfactory to Landlord, and in all events with a net worth in excess of $150,000,000 per floor, or part thereof, occupied by such subtenant or assignee. (c) The nature and character of the proposed subtenant or assignee, its business or activities and intended use of the demised premises are, in Landlord's reasonable judgment, in keeping with the standards of the Building; (d) The proposed subtenant or assignee is not then an occupant of any part of the Building or a party who dealt with Landlord or Landlord's agent (directly or through a broker) with respect to space in the Building, during the 12 months immediately preceding Tenant's request for Landlord's consent, but only if Landlord then has vacant space in the Building available for rental, or becoming available within the next 12 months; (e) All costs incurred with respect to providing reasonably appropriate means of ingress and egress from the sublet space or to separate the sublet space from the remainder of the demised premises shall, subject to the provisions of Article 6 with respect to alterations, installations, additions or improvements, be borne by Tenant; (f) Each assignment or sublease shall specifically state that (i) it is subject to all of the terms, covenants, agreements, provisions, and conditions of this Lease, (ii) the subtenant or assignee, as the case may be, will not have the right to further assign or sublet all or part of the demised premises or to allow same to be used by others, without the consent of 22 Landlord in each instance, (iii) a consent by Landlord thereto shall not be deemed or construed to modify, amend or affect the terms and provisions of this Lease, or Tenant's obligations hereunder, which shall continue to apply to the premises involved, and the occupants thereof, as if the sublease or assignment had not been made, (iv) if Tenant defaults in the payment of any rent, Landlord is authorized to collect any rents due or accruing from any assignee, subtenant or other occupant of the demised premises and to apply the net amounts collected to the fixed annual rent and additional rent due hereunder, and (v) the receipt by Landlord of any amounts from an assignee or subtenant, or other occupant of any part of the demised premises shall not be deemed or construed as releasing Tenant from Tenant's obligations hereunder or the acceptance of that party as a direct tenant. (g) Tenant, together with requesting Landlord's consent hereunder, shall have paid Landlord any reasonable costs incurred by Landlord to review the requested consent including any reasonable attorneys' fees incurred by Landlord; (h) In the case of a subletting of a portion of the demised premises, the portion so sublet shall be regular in shape and suitable for normal renting purposes; (i) Tenant shall have given Landlord not less than 30 days prior notice of its intention to offer to sublet more than 50% of the demised premises for more than 75% of the remainder of the Term, or assign this Lease, and shall first offer the space on the same terms to any existing tenant in the Building if so requested by Landlord within 30 days after receipt of Tenant's notice. If Tenant enters into such an assignment or sublet with an existing tenant in the Building, as requested by Landlord, then Tenant shall be relieved of its obligations hereunder with respect to the portion of the demised premises so assigned or sublet, but only to the extent that Tenant's obligations hereunder are specifically assumed by the assignee or sublessee, and except for those obligations which arose prior to such assignment/sublease transaction or which specifically survive any termination or expiration of this Lease. (j) The subletting or assignment shall not be at a lower aggregate rental than that being charged by Landlord at the time for similar space then available for rental in the Building; (k) The proposed assignment or sublease shall provide that it is subject to the Landlord's rights under Section 11.06 hereof. Tenant shall have complied with the provisions of said Section 11.06 and Landlord shall not have made any of the elections provided for therein; and (l) The total number of tenants and subtenants occupying the entire fifth floor shall not exceed three. 11.06 (a) Should Tenant desire to assign this Lease or to sublet all or any 23 portion of the demised premises (other than by an assignment or sublease permitted by Section 11.02 hereof), Tenant shall deliver to Landlord a term sheet, which term sheet shall specifically reference and address the matters set forth in Section 11.05, setting forth the proposed terms and conditions of such subletting or assignment, as applicable, and shall comply with the other provisions of this Article 11, and Landlord shall then have the right to elect by notice to Tenant given within 30 days after such delivery to (i) consent (which consent shall have been deemed granted by Landlord if Landlord shall not have disapproved of the transaction in writing, within 30 days of Landlord's actual receipt of within notice from Tenant advising Landlord of Tenant's intention to assign or sublet along with such other documents and information as is required under this Article 11), or (ii) refuse to consent to such assignment or sublease in accordance with the terms of this Lease. Notwithstanding the foregoing, if such sublet (or such sublet, together with any prior or contemporaneous sublets, in the aggregate) is for 50% or more of the demised premises and is for more than 75% of the remainder of the Term, or if Tenant has agreed to assign this Lease, Landlord may elect to, within 30 days after Landlord receives the term sheet described above, (x) with respect to a proposed assignment of this Lease, terminate this Lease as of the date which is 90 days after Landlord receives the term sheet as described above as if it were the Expiration Date set forth herein; or (y) with respect to a proposed subletting, terminate this Lease as to the portion of the demised premises affected by such subletting as of the date which is 90 days after Landlord receives the term sheer as described above, in which case Tenant shall promptly execute and deliver to Landlord an appropriate modification of this Lease in form satisfactory to Landlord. (b) Tenant shall, as soon as any permitted assignment or sublease is consummated, deliver to Landlord copies of the executed assignment or sublease document. (c) Intentionally omitted. (d) If pursuant to the exercise of any of Landlord's options under this Section 11.06, this Lease is terminated as to only a portion of the demised premises, then the fixed annual rent and the additional rent due under this Lease shall be adjusted in proportion to the portion of the demised premises affected by such termination as reasonably determined by Landlord. (e) If the Landlord shall give its consent to any assignment of this Lease or to any sublease, Tenant shall in consideration therefor, pay to Landlord, as additional rent: (i) in the case of an assignment, an amount equal to 50% of all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale of Tenant's fixtures (other than trade fixtures) and leasehold improvements, sums paid for the sale of Tenant's trade fixtures, equipment, furniture, furnishings or other personal property in excess of the then depreciated value of same as carried on the books of 24 Tenant), less direct and actual costs incurred by Tenant in connection with such assignment, such as real estate commissions, legal fees and alterations made at Tenant's expense pursuant to an assignment agreement, but not including any alterations which would be required to return the space to Building Standard, and not including the unamortized cost of any of Tenant's fixtures, leasehold improvements, equipment, fixtures, furnishings or other items, except as set forth above, and (ii) in the case of a sublease, 50% of any rents, additional charges or other consideration payable under the sublease to Tenant by the subtenant which is in excess of the fixed annual rent and additional rent accruing during the term of the sublease in respect of the subleased space pursuant to the terms hereof (including, but not limited to, sums paid for the sale or rental of Tenant's fixtures (other than trade fixtures) and lease-hold improvements, sums paid for the sale or rental of Tenant's trade fixtures, equipment, furniture or furnishings or other personal property in excess of the then depreciated value of same as carried on the books of Tenant, less direct and actual costs incurred by Tenant in connection with such sublease, such as real estate commissions, legal fees, and alterations made at Tenant's expense pursuant to a sublease agreement, but not including any alterations which would be required to return the space to Building Standard, and not including the unamortized cost of any of Tenant's fixtures, leasehold improvements, equipment fixtures, furnishings or other items, except as set forth above. The sums payable under this Section 11.06(e) shall be paid to Landlord, within fifteen (15) days after payment by the assignee or subtenant to Tenant. Nothing contained in this Section shall restrict Tenant from selling any personal property of Tenant to any person or entity, not an assignee or subtenant, as described above, or retaining all of the proceeds of any such sale. (f) If Landlord exercises any of its options under this Section 11.06, Landlord shall be free to, and shall have no liability to Tenant if Landlord shall, lease the demised premises or any portion thereof with respect to which one of such options exercised, to Tenant's proposed assignee or subtenant, as the case may be. (g) If Landlord exercises any of its options under this Section 11.06 to terminate this Lease, whether as to the whole or any part of the demised premises, Tenant shall be relieved of its obligations hereunder with respect to said whole or portion of the demised premises, as the case may be, except for those obligations which arise prior to such termination or which specifically survive any termination or the expiration of this Lease. ARTICLE 12 25 CERTIFICATE OF OCCUPANCY 12.01. Annexed hereto as Exhibit C is a true and complete copy of the Certificate of Occupancy for the Building. ARTICLE 13 ADJACENT EXCAVATION - SHORING 13.01. If an excavation or other substructure work shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as shall be reasonably necessary to preserve the wall of or the Building of which the demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Landlord, or diminution or abatement of rent. ARTICLE 14 CONDEMNATION 14.01. In the event that the whole of the demised premises shall be lawfully condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title. In the event that only a part of the demised premises shall be so condemned or taken, then, effective as of the date of vesting of title, the fixed annual rent and additional rent due under this Lease shall be abated proportionately according to the reduction in the rentable area of the demised premises resulting from such condemnation or taking. In the event that only a part of the Building shall be so condemned or taken, then (a) Landlord (whether or not the demised premises shall be affected) may, at Landlord's option, if such taking is for more than 50% of the Building, terminate this Lease and the term and estate hereby granted as of the date of such vesting of title by notifying Tenant in writing of such termination within 60 days following the date on which Landlord shall have received notice of vesting of title, or (b) if such condemnation or taking shall be of a substantial part of the demised premises or of a substantial part of the means of access thereto, Tenant may, at Tenant's option, by delivery of notice in writing to Landlord within 30 days following the date on which Tenant shall have received notice of vesting of title, terminate this Lease and the term and estate hereby granted as of the date of vesting of title, or (c) if neither Landlord nor Tenant elects to terminate this Lease, as aforesaid, this Lease shall be and remain unaffected by such condemnation or taking, except that the fixed annual rent payable under Article 1 and additional rents payable under Article 3 shall be abated to the extent hereinbefore provided 26 in this Article 14. 14.02. In the event of termination of this Lease in any of the cases hereinbefore provided, this Lease and the term and estate hereby granted shall expire as of the date of such termination with the same effect as if that were the Expiration Date, and the fixed annual rent and additional rents payable hereunder shall be apportioned as of such date. 14.03. In the event of any condemnation or taking of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this Lease in Tenant. Tenant hereby expressly assigns to Landlord (subject to the preceding sentence), any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof, and agrees that it shall not be entitled to receive any part of such award. 14.04. In the event of any taking of less than the whole of the Building which does not result in a termination of this Lease, Landlord, at its expense, shall proceed with reasonable diligence to repair, alter and restore the remaining parts of the Building and the demised premises to substantially their former condition to the extent that the same may be feasible and so as to constitute a complete and tenantable Building and demised premises. Tenant may terminate this Lease by notice to Landlord if Landlord has not completed the making of the required repairs and restorations within 15 months after the date of such taking, or within such period after such date (not exceeding 6 months) as shall equal the aggregate period Landlord may have been delayed in doing so by adjustment of insurance, labor trouble, governmental controls, act of God, or any other cause beyond Landlord's reasonable control. 14.05. In the event any part of the demised premises be taken to effect compliance with any law or requirement of public authority other than in the manner hereinabove provided in this Article 14, then (i) if such compliance is the obligation of Tenant under this Lease, Tenant shall not be entitled to any diminution or abatement of rent or other compensation from Landlord therefor, but (ii) if such compliance is the obligation of Landlord under this Lease, the fixed annual rent hereunder shall be reduced and additional rents under Article 3 shall be adjusted in the same manner as is provided in Section 14.01 according to the reduction in rentable area of the demised premises resulting from such taking. 14.06. Tenant shall have the right to seek an award for its own personal property loss and relocation costs. ARTICLE 15 ACCESS TO DEMISED PREMISES; CHANGES 15.01. (a) Tenant shall permit Landlord to erect, use and maintain pipes, ducts and 27 conduits in and through the demised premises, provided the same are installed adjacent to, or to the extent reasonably practicable, concealed behind walls and ceilings of the demised premises. Landlord shall to the extent practicable install such pipes, ducts and conduits by such methods and at such locations as will not materially interfere with or impair Tenant's layout or use of the demised premises. Landlord or its agents or designees shall have the right, but only upon reasonable prior notice to Tenant or any authorized employee of Tenant at the demised premises, to enter the demised premises (a) for the making of such repairs or alterations as Landlord may deem necessary for the Building or which Landlord shall be required to or shall have the right to make by the provisions of this Lease or any other lease in the Building, and (b) for the purpose of inspecting them or exhibiting them to existing or prospective purchasers, mortgagees or lessees of all or part of the Building or the Premises or to prospective assignees, agents or designees of any such parties. Landlord shall be allowed to take all material into and upon the demised premises that may be required for the repairs or alterations above mentioned without the same constituting an actual or constructive eviction of Tenant in whole or in part, and the rent reserved hereunder shall not abate while said repairs or alterations are being made by reason of loss or interruption of the business of Tenant because of the prosecution of any such work. Landlord shall exercise reasonable diligence so as to minimize the disturbance to Tenant but nothing contained herein shall be deemed to require Landlord to perform any work on an overtime or premium pay basis. (b) Notwithstanding anything to the contrary contained in the preceding paragraph, it is specifically agreed that Landlord reserves the absolute right for itself and its agents, employees or designees to enter upon the demised premises at such times, and with such frequency, as Landlord shall determine in its sole and absolute discretion, without notice in the case of an emergency and upon such notice as may be practicable under the circumstances in non-emergency situations, for the purposes of installing, inspecting, adjusting, maintaining, repairing or replacing all or any portion of the Building's structural, electrical, plumbing, elevators and mechanical and HVAC systems as are or are to be located in the demised premises and, in connection therewith, to take all material into and upon the demised premises as Landlord deems necessary in its sole and reasonable discretion to accomplish the foregoing purposes. The rights herein reserved by Landlord shall include, without limitation and without the exercise of such rights by Landlord or its agents, employees or designee as herein permitted constituting an actual or constructive eviction, or giving rise to any liability whatsoever on the part of Landlord, or any claim by Tenant for damages or abatement of rents, the following: (i) Access through the demised premises to stairways and elevators at any time for any purpose set forth in or contemplated by this Lease; (ii) Access to all conduits, pipes, wires, ducts and valves located in or accessible through, the demised premises, including, without limitation, all water valves relating to the Building's plumbing, mechanical and HVAC systems. 28 Without limiting the rights of Landlord as expressly reserved above, Landlord shall: (x) Unless otherwise required by emergency or any other cause beyond the reasonable control of Landlord, use reasonable efforts as are practical under the circumstances to be accompanied by an employee of Tenant in such access to the demised premises, and to exercise its rights hereunder in such a manner as to minimize the disturbance to Tenant, but nothing contained herein shall be deemed to require Landlord to perform work on an overtime or premium pay basis; and (y) Repair any damage done to any portion of the demised premises which is damaged or destroyed as a result of Landlord's exercise of the rights reserved in this paragraph 15.01. 15.02. Landlord reserves the right, without the same constituting an actual or constructive eviction and without incurring liability to Tenant therefor, to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairways, toilets and other public parts of the Building; provided, however, that access to the Building shall not be cut off and that there shall be no unreasonable obstruction of access to the demised premises or unreasonable interference with the use or enjoyment thereof. 15.03. Intentionally Omitted. 15.04. Landlord may, during the eighteen (18) months prior to expiration of the Term exhibit the demised premises to prospective tenants, upon reasonable prior notice to Tenant (but Tenant may not require more than 24 hours advance notice), and otherwise subject to this Article 15. 15.05. If Tenant shall not be personally present to open and permit an entry into the demised premises at any time when for any reason an entry therein shall be urgently necessary by reason of fire or emergency, Landlord or Landlord's agents may forcibly enter the same (upon such notice, if any, as may be practicable under the circumstances) without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents shall accord reasonable care to Tenant's property) and without in any manner affecting the obligations and covenants of this Lease. ARTICLE 16 CONDITIONS OF LIMITATION 16.01. This Lease and the term and estate hereby granted are subject to the limitation that whenever Tenant shall make an assignment of the property of Tenant for the benefit of creditors, 29 or if a petition shall be filed by or against Tenant under any provisions of the United States Bankruptcy Code or under the provisions of any other bankruptcy or insolvency law or any law of like import, or whenever a permanent receiver of Tenant or of or for the property of Tenant shall be appointed, then, Landlord may (a) at any time after receipt of notice of the occurrence of any such event, or (b) if such event occurs without the acquiescence of Tenant, at any time after the event continues for thirty (30) days, give Tenant a notice of intention to end the Term of this Lease at the expiration of 5 days from the date of service of such notice of intention, and upon the expiration of said 5 day period this Lease and the Term and estate hereby granted, whether or not the Term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 18. 16.02. This Lease and the Term and estate hereby granted are subject to further limitation as follows: (a) whenever Tenant shall fail to pay any installment of fixed annual rent or any additional rent or any other charge payable by Tenant to Landlord, on the day the same is due and payable pursuant to the terms hereof, and such default shall continue for 5 days after Landlord shall have given Tenant a notice specifying such default, or (b) whenever Tenant shall do or permit anything to be done, whether by action or inaction, contrary to any of Tenant's obligations hereunder, and if such situation shall continue and shall not be remedied by Tenant within 15 days after Landlord shall have given Tenant a notice specifying the same, or, in the case of a happening or default which cannot with due diligence be cured within a period of 15 days and the continuation of the period required for cure will not subject Landlord to the risk of criminal liability (as more particularly described in Article 8 hereof) or termination of the Over Lease or any superior lease or foreclosure of any superior mortgage, if Tenant shall not (i) within said 15 day period advise Landlord of Tenant's intention to duly institute all steps necessary to remedy such situation, (ii) duly institute within said 15 day period, and thereafter diligently and continuously prosecute to completion all steps necessary to remedy the same, and (iii) complete such remedy within such time after the date of the giving of said notice of Landlord as shall reasonably be necessary, or (c) whenever any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted or the unexpired balance of the Term hereof would, by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Article 11, or (d) whenever the demised premises shall be abandoned (unless as a result of such a casualty), or (e) whenever in case any other lease held by Tenant from Landlord shall expire and terminate (whether or not the term thereof shall then have commenced) as a result of 30 the default of Tenant thereunder: in any of said cases set forth in the foregoing Subsections (a), (b), (c), (d), or (e), Landlord may give to Tenant a notice of intention to end the Term at the expiration of 3 days from the date of the service of such notice of intention, and upon the expiration of said 3 days this Lease and the Term and estate hereby granted, whether or not the Term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 18. 16.03. Notwithstanding the cure periods provided for in Section 16.02(b), such cure periods shall be reduced to such number of days as is necessary so as to avoid placing Landlord in default under the provisions of any currently existing Superior Instrument. ARTICLE 17 RE-ENTRY BY LANDLORD, INJUNCTION 17.01. If Tenant shall fail to pay any installment of fixed annual rent, or of any additional rent or any other charge payable by Tenant to Landlord on the date the same is due and payable, and if such default shall continue for 5 days after Landlord shall have given to Tenant a notice specifying such default, or if this Lease shall terminate as in Article 16 provided, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the demised premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law, or by force or otherwise, without being liable to indictment, prosecution or damages therefrom. The word re-enter, as herein used, is not restricted to its technical legal meaning. 17.02. In the event of a breach or threatened breach by Tenant of any of its obligations under this Lease, Landlord shall also have the right of injunction. The special remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled at any time and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 17.03. If this Lease shall terminate under the provisions of Article 16, or if Landlord shall re-enter the demised premises under the provisions of this Article 17, or in the event of the termination of this Lease, or of re-entry by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, then (a) Tenant shall thereupon pay to Landlord the fixed annual rent and additional rent payable by Tenant to Landlord up to the time of such termination of this Lease, or of such recovery of possession of the demised premises by Landlord, as the case may be, and shall also pay to Landlord 31 damages as provided in Article 18, and (b) Landlord shall be entitled to retain all moneys and to draw upon all letters of credit, if any, paid or given by Tenant to Landlord, whether as advance rent, security or otherwise, but such moneys shall be credited by Landlord against any fixed annual rent or additional rent due from Tenant at the time of such termination or re-entry or, at Landlord's option against any damages payable by Tenant under Articles 16 and 18 or pursuant to law. 17.04. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the demised premises by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. ARTICLE 18 DAMAGES 18.01. If this Lease is terminated under the provisions of Article 16, or if Landlord shall re-enter the demised premises under the provisions of Article 17, or in the event of the termination of this Lease or of re-entry by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages (i) the amount required to restore the demised premises to Building Standard; plus (ii) all additional rent accrued but unpaid to such date; plus (iii) the unamortized portion of (x) any real estate brokerage commission paid by Landlord in connection with this Lease and (y) Tenant's reimbursement for Tenant's Extra Work, as set forth in Section 2.02 (each of (x) and (y) to be amortized on a straight line basis over the Term); plus (iv) the unamortized portion of any rent abatement granted by Landlord to Tenant amortized over the term; plus (v) at the election of Landlord, either: (a) a sum which at the time of such termination of this Lease or at the time of any such re-entry by Landlord, as the case may be, is the excess, if any, of (1) the aggregate of the fixed annual rent and the additional rent payable hereunder which would have been payable by Tenant (conclusively presuming the additional rent to be the same as was payable for the year immediately preceding such termination except that additional rent on account of increases in Real Estate Taxes shall be presumed to increase at the average of the rates of increase thereof previously experienced by Landlord during the period (not to exceed 3 years) prior to such termination) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, had this Lease not so terminated or had Landlord not so re-entered the demised premises, over 32 (2) the aggregate rental value of the demised premises for the same period, or (b) sums equal to the fixed annual rent and the additional rent payable hereunder which would have been payable by Tenant had this Lease not so terminated, or had Landlord not so re-entered the demised premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall re-let the demised premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such re-letting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such re-letting, the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the demised premises and in securing possession thereof, as well as the expenses of re-letting, including altering and preparing the demised premises for new tenants (including tenant work letters), brokers' commissions, legal fees, and all other expenses properly chargeable against the demised premises and the rental thereof; it being understood that any such re-letting may be for a period shorter or longer than the remaining term of this Lease. In no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder for the period of such re-letting, nor shall Tenant be entitled in any suit for collection of damages pursuant to this subsection to a credit in respect of any net rents from re-letting, except to the extent that such net rents are actually received by Landlord. If the demised premises or any part thereof should be re-let in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such re-letting and of the expenses of re-letting. If the demised premises or any part thereof be re-let by Landlord for the unexpired portion of the term of this Lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent payable pursuant to such re-letting shall, prima facie, be the fair and reasonable rental value for the demised premises, or part thereof, so re-let during the term of the re-letting. 18.02. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term would have expired if it had not been so terminated under the provisions of Article 16, or under any provision of law, or had Landlord not re-entered the demised premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to prove for and obtain as liquidated damages by reason of the termination of this Lease or re-entry of the demised premises for the default of Tenant under this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved whether or not such amount be greater, equal to, or less than any of the sums referred to in Section 18.01. 33 ARTICLE 19 LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS 19.01 If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under any of the terms or provisions of this Lease, (a) Landlord may remedy such default for the account of Tenant, immediately and without notice in case of emergency, or in any other case if Tenant shall fail to remedy such default with all reasonable dispatch after Landlord shall have notified Tenant in writing of such default and the applicable grace period for curing such default shall have expired; and (b) if Landlord makes any expenditures or incurs any obligations for the payment of money in connection with such default including, but not limited to, reasonable attorneys' fees in instituting, prosecuting or defending any action or proceeding, such sums paid or obligations incurred, with interest at the Interest Rate, shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord upon rendition of a bill to Tenant therefor. The provisions of this Article 19 shall survive the expiration or other termination of this Lease. ARTICLE 20 QUIET ENJOYMENT 20.01 Landlord covenants and agrees that subject to the terms and provisions of this Lease, if, and so long as, Tenant keeps and performs each and every covenant, agreement, term, provision and condition herein contained on the part or on behalf of Tenant to be kept or performed, then Tenant shall be entitled to the quiet enjoyment of the demised premises and Tenant's rights under this Lease shall not be cut off or ended before the expiration of the term of this Lease, subject however, to the obligations of this Lease. ARTICLE 21 SERVICES AND EQUIPMENT 21.01. Landlord shall: (a) Provide one passenger elevator 24 hours per day, seven (7) days per week, three passenger elevators from 8:00 a.m. to 6:00 p.m. on Business Days, and use of one freight elevator. The freight elevator is a manual elevator (although it may be changed by Landlord in the future to automatic), which Landlord's superintendent will operate, upon request, on Business Days from 9:00 a.m. to Noon and 1:00 p.m. to 4:30 p.m., as reasonably requested by Tenant when shipments for Tenant arrive from the outside. Landlord's current charge for freight 34 outside of the foregoing hours ("Overtime Use") is $65.00 per hour, with a 4 hour per day minimum. Request for such Overtime Use must be made at least one day in advance. (b) Furnish reasonable water for lavatory, kitchen and drinking and office cleaning purposes. If Tenant requires, uses or consumes water for any other purposes, Tenant agrees that Landlord may install a meter or meters or other means to measure Tenant's water consumption, and Tenant further agrees to reimburse Landlord for the cost of the meter or meters and the installation thereof, and to pay for the maintenance of said meter equipment and/or to pay Landlord's cost of other means of measuring such water consumption by Tenant. Tenant shall reimburse Landlord for the cost of all water consumed, as measured by said meter or meters or as otherwise reasonably measured, including sewer rents. (c) Furnish reasonable heat to the demised premises from 8 A.M. to 6 P.M. on Business Days. Tenant shall give Landlord prior written notice of need for Overtime Heat. Overtime Heat shall mean before 8 A.M. and after 6 P.M. on Business Days, and all use on days which are not Business Days. Landlord's current charge (which may be increased from time to time to reflect actual increases in cost and/or increases in the consumers price index), for Overtime Heat is $80 per hour, with a 4 hour minimum per day. Request for such use must be made at least one day in advance. (d) Nothing contained herein shall be deemed to require Landlord to furnish at Landlord's expense such electric energy as is required to operate the air conditioning system (including the cooling towers) serving the demised premises, which system Landlord represents contains at least 110 tons (60 tons in the south side unit and 50 tons in the north side unit). All such electric energy shall be furnished to Tenant at Tenant's cost and expense. To the extent such electric energy is not directly metered (such as the cooling towers), so as to measure Tenant's individual consumption, Tenant shall pay to Landlord, as additional rent, within ten days of the furnishing of a bill therefor, Tenant's pro rata portion, determined on a square footage basis, and/or hours of use basis, of the actual cost of electric energy for the cooling towers. Provided Tenant pays for the electrical cost as set forth in the preceding sentence, Landlord will provide to Tenant, chilled water from the cooling towers. Tenant shall give Landlord prior written notice of overtime chilled water use. Overtime Use shall mean before 8 A.M. and after 6 P.M. on Business Days, and all use on days which are not Business Days. Landlord's current charge (which may be increased from time to time to reflect actual increases in cost and/or increases in the consumers price index), for overtime chilled water is $135.00 per hour per floor, with a 4 hour minimum per day. Request for such use must be made at least one day in advance. 21.02. Landlord reserves the right without any liability whatsoever, or abatement of fixed annual rent, or additional rent, to stop the heating, air conditioning, elevator, plumbing, electric and other systems when necessary by reason of accident or emergency or for repairs, alterations, replacements or improvements, provided that except in case of emergency, Landlord will notify Tenant reasonably in advance, if possible, of any such stoppage and, if ascertainable, its estimated 35 duration, and will proceed diligently with the work necessary to resume such service as promptly as possible and in a manner so as to minimize interference with the Tenant's use and enjoyment of the demised premises, but Landlord shall not be obligated to employ overtime or premium labor therefor. 21.03. Tenant shall arrange for the cleaning of the demised premises and the removal of its own refuse and rubbish. 21.04. Landlord shall provide one person in the lobby, 24 hours per day, seven days per week, for security purposes who shall provide such security services as are generally provided in similar office buildings (i.e., sign-in book). 21.05. Tenant shall be entitled, without charge by Landlord, to have 50% of the listings in the current directory located in the lobby, but not less than the percentage of Tenant's Tax Share. 21.06. Landlord will not be required to furnish any other services, except as otherwise provided in this Lease. 21.07 Tenant shall have 24-hours 7-days a week access to the demised premises. ARTICLE 22 DEFINITIONS 22.0. The term "Landlord" as used in this Lease means only the owner, or the mortgagee in possession, at any time, of the Building (or the owner of a lease of the Building or of the Premises and Building), so that in the event of any transfer of title to said Premises and Building or said lease, or in the event of a lease of the Building, or of the Premises and Building, upon notification to Tenant of such transfer or lease the said transferor Landlord shall be and hereby is entirely freed and relieved of all existing or future covenants, obligations and liabilities of Landlord hereunder, and it shall be deemed and construed as a covenant running with the land without further agreement between the parties or their successors in interest, or between the parties and the transferee of title to said Premises and Building or said lease, or the said lessee of the Building or of the Premises and Building, that the transferee or the lessee, as applicable, has assumed and agreed in writing to carry out any and all such covenants, obligations and liabilities of Landlord hereunder, and further provided that the Security, if any, has been transferred to such transferee. 22.02. The term "Business Days" as used in this Lease shall exclude Saturdays, Sundays and all days observed as legal holidays and defined as Public Holidays in the Official Directory of 36 the City of New York as well as all other days recognized as holidays under applicable union contracts. 22.03. The term "Interest Rate" shall mean a rate per annum equal to the lesser of (a) 2% above the "base rate" of Citibank, N.A., as publicly announced from time to time or if Citibank, N.A. shall cease to exist or cease to announce such rate, any similar rate designated by Landlord which is publicly announced from time to time by any other bank in the City of New York having combined capital and surplus in excess of $100,000,000 or (b) the maximum rate of interest, if any, which Tenant may legally contract to pay. 22.04. The term "Legal Requirements" shall mean laws, statutes and ordinances including building codes and zoning regulations and ordinances and the orders, rules, regulations, directives and requirements of all federal, state, county, city and borough departments, bureaus, boards, agencies, offices, commissions and other subdivisions thereof, or of any official thereof, or of any other governmental, public or quasi-public authority, whether now or hereafter in force, which may be applicable to the Premises or Building or the demised premises or any part thereof, or the sidewalks, curbs or areas adjacent thereto. ARTICLE 23 INVALIDITY OF ANY PROVISION 23.01. If any term, covenant, condition or provision of this Lease or the application thereof to any circumstance or to any person, firm or corporation shall be invalid or unenforceable to any extent, the remaining terms, covenants, conditions and provisions of this Lease shall not be affected thereby and each remaining term, covenant, condition and provision of this Lease shall be valid and shall be enforceable to the fullest extent permitted by law. ARTICLE 24 BROKERAGE 24.01. Tenant and Landlord covenant, represent and warrant to the other that each has had no dealings or negotiations with any broker or agent other than Insignia/ESG, in connection with the consummation of this Lease, and each party covenants and agrees to pay, hold harmless and indemnify the other from and against any and all cost, expense (including reasonable attorneys' fees and court costs), loss and liability for any compensation, commissions or charges claimed by any broker or agent, other than the broker set forth in this Section 24.01, with respect to this Lease or the negotiation thereof if such claim or claims by any such broker or agent are based in whole 37 or in part on dealing with the party from whom such indemnity is sought. Landlord agrees to pay to the broker specified in this Section 24.01 such compensation, commissions or charges to which it is entitled pursuant to the separate agreement between said broker and Landlord. ARTICLE 25 SUBORDINATION 25.01. This Lease is and shall be subject and subordinate to all ground or underlying leases, including the Over Lease which may now or hereafter affect the Premises or the Building and to all mortgages which may now or hereafter affect such leases, the Premises or the Building, and to all renewals, refinancings, modifications, replacements and extensions thereof (hereinafter called "Superior Instruments"). The provisions of this Section 25.01 shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute and deliver at its own cost and expense any instrument, in recordable form if required, that Landlord, the holder of any Superior Instrument or any of their respective successors in interest may request to evidence such subordination. 25.02. In the event of a termination of any ground or underlying lease, including the Over Lease, or if the interests of Landlord under this Lease are transferred by reason of, or assigned in lieu of, foreclosure or other proceedings for enforcement of any mortgage, or if the holder of any mortgage acquires a lease in substitution therefor, then Tenant under this Lease may be requested to, at the option to be exercised in writing by the holder of any such Superior Instrument or any purchaser, assignee or lessee, as the case may be, and if so requested shall, either (i) attorn to it and perform for its benefit all the terms, covenants and conditions of this Lease on Tenant's part to be performed with the same force and effect as if it were the landlord originally named in this Lease, or (ii) enter into a new lease with it for the remaining term of this Lease and otherwise on the same terms and conditions and with the same options, if any, then remaining. The foregoing provisions of clause (i) of this Section 25.02 shall enure to the benefit of such holder of a Superior Instrument, purchaser, assignee or lessee, shall be self-operative upon the exercise of such option, and no further instrument shall be required to give effect to said provisions. Tenant, however, upon demand of any such holder of a Superior Instrument, purchaser, assignee or lessee agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of this Section 25.02, reasonably satisfactory to any such holder of a Superior Instrument, purchaser, assignee or lessee, acknowledging such attornment and setting forth the terms and conditions of its tenancy. 25.03. Anything herein contained to the contrary notwithstanding, under no circumstances shall any such holder of a Superior Instrument, purchaser, assignee or lessee, as the case may be, whether or not it shall have succeeded to the interests of Landlord under this Lease, be (a) liable for any act, omission or default of any prior landlord; or 38 (b) subject to any offsets, claims or defenses which the Tenant might have against any prior landlord; or (c) bound by any rent or additional rent which Tenant might have paid to any prior landlord for more than one month in advance or for more than three months in advance where such rent payments are payable at intervals of more than one month; or (d) bound by any modification, amendment or abridgment of this Lease, or any cancellation or surrender of the same, made without its prior written approval. 25.04. If, in connection with the financing of the Building, the holder of any mortgage shall request reasonable modifications in this Lease as a condition of approval thereof, Tenant will not unreasonably withhold, delay or defer making such modifications provided the same do not (i) increase the fixed annual rent or additional rents payable by Tenant (ii) reduce the Term hereof, (iii) extend the Term hereof except as otherwise provided in Section 2.06, or (iv) otherwise increase Tenant's obligations or reduce Tenant's rights under this Lease except in an immaterial manner. 25.05. Upon execution of this Lease, Landlord shall request and use its reasonable commercial efforts to obtain prior to the date which is thirty (30) days after the date hereof, for the benefit of Tenant, a "non-disturbance agreement" in the form then utilized by the holder of the Superior Instrument (and Landlord shall seek to obtain any changes to such form as Tenant shall reasonable request, but Landlord does not assure that any such changes shall be obtained), provided, however, that the failure of Landlord to obtain such non-disturbance agreement shall not be a default by Landlord nor shall such failure affect this Lease. ARTICLE 26 CERTIFICATE OF TENANT 26.01. Tenant shall, without charge, at any time and from time to time, within ten (10) days after request by Landlord, execute, acknowledge and deliver to Landlord, the holder of a Superior Instrument or any other person, firm or corporation specified by Landlord, a written instrument (an "Estoppel Certificate") in such form as may reasonably be required by Landlord or the holder of any Superior Instrument. 26.02. Tenant agrees that, except for the first month's rent hereunder, it will pay no rent under this Lease more than thirty (30) days in advance of its due date, if so restricted by any existing or future Superior Instrument or by an assignment of this Lease to the holder of such Superior Instrument, and, in the event of any act or omission by Landlord which would give Ten- 39 ant the right to terminate this Lease, Tenant will not exercise such right until Tenant shall have first given written notice of such act or omission to the holder of any Superior Instrument who shall have furnished such holder's last address to Tenant, and until a reasonable period, for remedying such act or omission shall have elapsed following the giving of such notices, during which time such holder shall have the right, but shall not be obligated, to remedy or cause to be remedied such act or omission. Tenant further agrees not to exercise any such right if the holder of any such Superior Instrument commences to cure such act or omission within a reasonable time after having received notice thereof and diligently prosecutes such cure thereafter. 26.03. Tenant shall, without charge, at any time and from time to time deliver to Landlord within ten (10) days alter request therefor (a) copies of the most current available financial statements of Tenant and of any guarantor of Tenant's obligations under the Lease certified by an independent certified public accountant and (b) such further detailed financial information with respect to Tenant and any such guarantors as Landlord or the holder of any Superior Instrument may reasonably request. Landlord and the holder of any Superior Instrument shall hold such financial information in confidence and shall not disclose same except as may be legally required. ARTICLE 27 LEGAL PROCEEDINGS, WAIVER OF JURY TRIAL 27.01. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way in connection with this Lease, the relationship of Landlord and Tenant arising out of this Lease, Tenant's use or occupancy of the demised premises, and/or any other claims (except claims for personal injury or property damages), and any statutory emergency or any other statutory remedy. It is further mutually agreed that in the event Landlord commences any summary proceeding for non-payment of rent, Tenant will not interpose and does hereby waive the right to interpose any counterclaim of whatever nature or description in any such proceeding. Tenant shall reimburse Landlord upon demand for all costs and expenses (including attorney's fees and disbursements and court costs) incurred by Landlord in connection with enforcing Tenant's obligations hereunder or in protecting Landlord's rights hereunder whether incurred in connection with an action or proceeding commenced by Landlord, by Tenant, or by a third party which third party claim relates to any action or inaction by Tenant. All such amounts shall be deemed to be additional rent and shall be collectible in the same manner as provided in Section 1.02 hereof. ARTICLE 28 SURRENDER OF PREMISES 40 28.01. Upon the expiration or other termination of the Term, Tenant shall quit and surrender to Landlord the demised premises, broom clean, in good order and in the condition required by this Lease (including restoration of the demised premises to Building Standard, as required by the provisions of Section 6.04 of this Lease), ordinary wear and tear and damage by fire, the elements or other casualty excepted, other than such damage caused by Tenant, and Tenant shall remove all of its property as herein provided. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the Term. 28.02. If Tenant shall, without the written consent of Landlord, hold over the expiration of the Term such tenancy shall be deemed a month-to-month tenancy, which tenancy may be terminated as provided by applicable law. During such tenancy, Tenant agrees to (a) pay to Landlord, each month, the greater of the fair market rental value for the demised premises or one hundred twenty (120) percent of the fixed annual rent and all additional rent payable by Tenant for the last month of the Term and (b) be bound by all of the terms, covenants and conditions herein specified except those pertaining to the Term. Nothing contained in this Section 28.02 shall be deemed in limitation of Landlord's rights and remedies against Tenant for Tenant's failure to have surrendered the demised premises on or prior to the expiration of the Term. ARTICLE 29 RULES AND REGULATIONS 29.01. Tenant and Tenant's servants, employees, agents, licensees, invitees, visitors and patrons shall observe faithfully and comply strictly with such Rules and Regulations as Landlord or Landlord's agents may from time to time reasonably adopt, provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and of any of the Rules and Regulations as originally or as hereafter adopted, the provisions of this Lease shall control. Reasonable written notice of any additional Rules and Regulations shall be given to Tenant. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease, against any other tenant of the Building, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. Landlord shall not discriminate against Tenant in connection with the enforcement of such Rules and Regulations. ARTICLE 30 CONSENTS AND APPROVALS 30.01. Wherever in this Lease Landlord's consent or approval is required, if Landlord shall 41 delay or refuse such consent or approval, Tenant in no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent or approval. Tenant's sole remedy shall be an action or proceeding to enforce any such provision, for specific performance, injunction or declaratory judgment. ARTICLE 31 NOTICES 31.01. Any notice or demand, consent, approval or disapproval, or statement (collectively called "Notices") required or permitted to be given by the terms and provisions of this Lease, or by any law or governmental regulation, either by Landlord to Tenant or by Tenant to Landlord, shall be in writing and unless otherwise required by such law or regulation, shall be sent by United States mail postage prepaid as registered or certified mail, return receipt requested. Any Notice shall be addressed to Landlord at its address set forth on page 1 of this Lease with a copy to David S. Lester, Esq., 1129 Northern Boulevard, Manhasset, New York 11030 and any notice to Tenant shall be sent to Tenant at 130 West Union Street, Pasadena, California, 91103 Attn: Mr. Brad Ramberg. After Tenant shall occupy the demised premises, the address of Tenant for Notices shall be the Building, attention Mr. Howard Morgan, with a copy to the above address of Tenant. By giving the other party at least ten days prior written notice, either party may, by Notice given as above provided, designate a different address or addresses for Notices. 31.02 Any Notice shall be deemed given as of the date of delivery as indicated on the return receipt; and in the case of failure to deliver by reason of changed address of which no Notice was given or refusal to accept delivery, as of the date of such failure as indicated on the return receipt or by notice of the postal department. 31.03. In addition to the foregoing, either Landlord or Tenant may, from time to time, request in writing that the other party serve a copy of any Notice on one other person or entity designated in such request, such service to be effected as provided in Section 31.01 hereof. ARTICLE 32 NO WAIVER 32.01. No agreement to accept a surrender of this Lease shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys of the demised premises prior to the termination of this Lease. The 42 delivery of keys to any employee of Landlord or of Landlord's agent shall not operate as a termination of this Lease or a surrender of the demised premises. In the event of Tenant at any time desiring to have Landlord sublet the premises for Tenant's account, Landlord or Landlord's agents are authorized to receive said keys for such purpose without releasing Tenant from any of the obligations under this Lease. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease or, as to Landlord, any of the Rules and Regulations set forth herein or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations set forth herein, or hereafter adopted, against Tenant and/or any other tenant in the Building shall not be deemed a waiver of any such Rules and Regulations. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by such party. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on the account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment of rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided and Tenant may deliver such check without prejudice to Tenant's right to pursue any other remedy. 32.02. This Lease contains the entire agreement between the parties, and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. ARTICLE 33 CAPTIONS 33.01. The captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this Lease nor the intent of any provision hereof. ARTICLE 34 INABILITY TO PERFORM 34.01. If, by reason of (1) strike, (2) labor troubles, (3) governmental preemption in connection with a national emergency, (4) any rule, order or regulation of any governmental 43 agency, (5) conditions of supply or demand which are affected by war or other national, state or municipal emergency, or any other cause or (6) any cause beyond Landlord's reasonable control, Landlord shall be unable to fulfill its obligations under this Lease or shall be unable to supply any service which Landlord is obligated to supply, this Lease and Tenant's obligation to pay rent hereunder shall in no wise be affected, impaired or excused. ARTICLE 35 NO REPRESENTATIONS 35.01. Landlord or Landlord's agents have made no representations or promises with respect to the Building or demised premises except as herein expressly set forth. ARTICLE 36 SECURITY DEPOSIT 36.01. Tenant shall deposit with Landlord upon execution hereof any of, or a combination of, (i) cash; (ii) an irrevocable and unconditional sight draft letter of credit which shall provide that it may be drawn upon the unilateral action of Landlord, in form and substance and issued by a banking institution acceptable to Landlord; or (iii) negotiable securities listed on any of the NYSE, AMEX or Nasdaq National Market, aggregating an initial amount equal to $3,500,000, (which negotiable securities must be immediately convertible to cash as a result of the unilateral action of Landlord, and which cash must be immediately available to Landlord), as security for the full and faithful performance and observance by Tenant of Tenant's covenants and obligations under this Lease (the "Security"). Any letter of credit shall be renewed annually by Tenant not less than 30 days prior to its expiration. The Security shall at all times be equal to the following amount: LEASE YEARS AMOUNT ----------- ------ 1-3 $3,500,000 4 2,800,000 5 2,100,000 6 1,400,000 7 700,000 8 through 10 350,000 11 and thereafter 0 In the event Tenant fails to timely renew any letter of credit, notwithstanding any other provision contained in this Lease to the contrary, Landlord may immediately draw upon the existing letter of 44 credit without notice to Tenant. Should Tenant default in respect of any of the terms, provisions and conditions of this Lease beyond any applicable cure period, including, but not limited to, the payment of fixed annual rent and additional rent, Landlord may use, apply or retain the whole or any part of the Security (including selling any securities) to the extent required for the payment of any fixed annual rent and additional rent or any other sum as to which Tenant is so in default or for any sum which Landlord may expend or may be required to expend by reason of such Tenant's default in respect of any of the terms, covenants and conditions of this Lease, including but not limited to, any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord, or any costs or expenses incurred in connection with restoring the demised premises to Building Standard as set forth in Section 6.04 of this Lease. Any income or other taxes imposed on the sale of such securities shall be the exclusive liability and responsibility of Tenant, and Tenant hereby indemnifies and holds Landlord harmless from and against any such taxes and any interest or penalties thereon. In the event of a sale of the demised premises and Building, Landlord shall transfer the Security to the vendee and Landlord shall thereupon be released by Tenant from all liability for the return of such Security, and Tenant agrees to look to the new Landlord solely for the return of said Security; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the Security to a new landlord. 36.02 If Landlord shall use, apply or retain the whole or any part of the Security, or should the market value of the securities comprising the Security fall so that the Security on hand shall be less than 95% of the required Security, as set forth in Section 36.01, Tenant shall, upon demand, immediately increase the Security held by Landlord to the amount then required hereunder. 36.03 Landlord shall pay the bank fee for any letter of credit obtained by Tenant as part or all of the Security. 36.04 Landlord shall execute such documents and take such other reasonable actions, without any out of pocket expense to Landlord, as shall be necessary to enable Tenant to reduce the Security as set forth in Section 36.01. ARTICLE 37 ARBITRATION 37.01. In each case specified in this Lease in which resort to arbitration shall be required, such arbitration (unless otherwise specifically provided in other Sections of this Lease) shall be in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association and the provisions of this Lease. The decision and award of the arbitrators shall be in writing, shall be final and conclusive on the parties, and counterpart copies thereof shall be delivered to each of the parties. In rendering such decision and awards, the arbitrators shall not 45 add to, subtract from or otherwise modify the provisions of this Lease. Judgment may be had on the decision and award of the arbitrators so rendered in any court of competent jurisdiction. ARTICLE 38 INDEMNITY 38.01. Tenant shall indemnify Landlord and save it harmless from and against any and all liability, damages, costs or expenses, including attorneys' fees, arising from any misconduct or negligence of Tenant, its sublessees or assignees, and the officers, contractors, licensees, agents, employees, guests, invitees, or visitors of Tenant or its sublessees or assignees, in or about the Building or arising from any breach or default under this Lease by Tenant or its sublessees or assignees, or arising from any accident, injury, or damage, howsoever and by whomsoever caused, but involving Tenant or its sublessees or assignees, or the officers, contractors, licensees, agents, employees, guests, invitees or visitors of Tenant or its sublessees or assignees, occurring in or about the Building or the Premises. This provision shall not be construed to make Tenant responsible for loss, damage, liability or expense resulting from injuries to third parties caused by the negligence or intentional misconduct of Landlord, or its officers, contractors, licensees, agents, employees or invitees. ARTICLE 39 MEMORANDUM OF LEASE 39.01. Tenant shall, at the request of Landlord, execute and deliver a statutory form of memorandum of this Lease for the purpose of recording, but said memorandum of this Lease shall not in any circumstances be deemed to modify or to change any of the provisions of this Lease. ARTICLE 40 SIGNS 40.01. Tenant shall not erect or install any signs in the Building or on the Premises, unless such signs have been approved in writing by Landlord, such approval not to be unreasonably withheld or delayed. It is understood and agreed that Landlord will not approve any sign if, in Landlord's sole judgment, such sign does not conform to the decor and character of the Building. Notwithstanding the foregoing, Tenant may install signs within the demised premises relating to Tenant's various business divisions and other business activities. 46 ARTICLE 41 ADDITIONAL SPACE 41.01. Tenant hereby leases from Landlord a portion of the basement of the Building (as shown on Exhibit D annexed hereto) ("Additional Space"), commencing February 1, 2002. Effective February 1, 2002, the Additional Space shall be delivered to Tenant vacant, broom clean, free of rights of tenants and occupants, and with the work set forth on Exhibit B, paragraph 2, substantially completed, the Lease of the Additional Space shall be included in this Lease, the Additional Space shall be included within the defined term "demised premises" and the Additional Space shall be governed by and subject to all of the terms and conditions of this Lease, and further, effective February 1, 2002, the fixed annual rent, as previously escalated by Section 1.01B, shall be increased by $1,100,000, which $1,100,000 shall be also subject, from and after the date of this Lease, to escalation pursuant to Section 1.01B. Landlord shall provide Tenant with $440,000 in connection with Tenant's work in the basement space, to be paid in accordance with the provisions of Section 6.09. There shall be no increase in Tenant's Tax Share as a result of Tenant leasing the Additional Space. 41.02. Provided that Young & Rubicam Inc. ("YR"), the current tenant on the fourth floor, has not exercised its right to renew its lease for the fourth floor by YR giving notice thereof to Landlord on or before June 1, 2002 (or YR has otherwise formally lost or waived in writing such right), and provided Tenant is then a tenant in the Building and is not in default under this Lease beyond any grace period, Tenant shall have one option (the "Fourth Floor Space Option") to lease from Landlord, effective June 1, 2003 (the "Fourth Floor Effective Date"), all of the fourth floor of the Building, as shown on Exhibit E annexed hereto ("Fourth Floor Space"). The Fourth Floor Space Option shall be exercised by Tenant giving Landlord notice ("Fourth Floor Notice") of its exercise of the Fourth Floor Space Option, on or before 30 days, time of the essence, after Landlord has given Tenant notice that YR has not exercised YR's renewal option or that YR has formally lost or waived in writing such right). Upon the giving of the Fourth Floor Notice and the occurrence of the Fourth Floor Effective Date, the lease of the Fourth Floor Space shall be included in this Lease, the Fourth Floor Space shall be included within the defined term "demised premises", the Fourth Floor Space shall be governed by and subject to all of the terms and conditions of this Lease, and further, effective June 1, 2003: (a) the fixed annual rent, as escalated by Section 1.01B, shall be increased by 100%; (b) Tenant's Tax Share shall be increased to 33.66%; and (c) with respect to any other charge or expense for which Tenant is 47 responsible for its proportionate or pro rata share, such share shall be increased to 33.66%. 41.03. If Tenant shall not timely exercise the Fourth Floor Space Option, Tenant's rights under Section 41.02 shall terminate. 41.04 Provided that YR has not exercised its right to renew its Lease for the basement space as shown on Exhibit F hereto, by giving notice thereof to Landlord on or before June 1, 2002 (or YR has otherwise formally lost or waived in writing such right), and provided Tenant is then a tenant in the Building and is not in default under this Lease beyond any grace period, Tenant shall have one option (the "Additional Basement Option") to lease from landlord, effective June 1, 2003 (the "Additional Basement Effective Date"), the basement space, as shown on Exhibit F annexed hereto ("Additional Basement Space"). The Additional Basement Option shall be exercised by Tenant giving Landlord notice ("Additional Basement Notice") of its exercise of the Additional Basement Option, on or before 30 days, time of the essence, after Landlord has given Tenant notice that YR has not exercised YR's renewal option or YR has otherwise formally lost or waived in writing such right. Upon the giving of the Additional Basement Notice and the occurrence of the Additional Basement Effective Date, the lease of the Additional Basement Space shall be included in this Lease, the Additional Basement Space shall be included within the defined term "demised premises", the Additional Basement Space shall be governed by and subject to all of the terms and conditions of this Lease, and further, effective June 1, 2003, the fixed annual rent, as escalated by Section 1.01B, shall be increased by $72,690; 41.05 If Tenant shall not timely exercise the Additional Basement Option, Tenant's rights under Section 41.04 shall terminate. 41.06 The commencement date of the renting of each of the additional spaces referred to in this Article 41 shall only occur upon Landlord delivering the applicable space to Tenant, vacant, broom clean and free of tenancies, and upon substantial completion of any work required to be performed by Landlord as set forth on Exhibit B hereto. ARTICLE 42 RENEWAL OPTION 42.01. If Tenant is not in default under this Lease beyond any applicable notice and cure periods, Tenant shall have an option (the "Option") to extend the term of the Lease for two (2) additional terms of five (5) years each (each, a "Renewal Term") commencing on the first day next succeeding the Expiration Date upon the same terms, conditions and provisions as are provided for in this Lease other than the provisions of this Article 42, except that the fixed annual rent payable for the Renewal Term shall be the greater of (i) the fixed annual rent payable thereunder immediately prior to the Expiration Date or (ii) the fair market rent for the demised 48 premises as of such Expiration Date determined in the manner hereinafter provided. Tenant may not exercise the second renewal option referred to above unless the first renewal option has been exercised. 42.02. The Option shall be exercised by Tenant giving written notice to Landlord of Tenant's exercise of said Option by certified mail, return receipt requested, not less than eighteen (18) months prior to the expiration of the Term then in effect (the "Exercise Notice"). Upon Tenant's giving of the Exercise Notice, the term of this Lease shall be extended automatically upon the terms and conditions herein specified, including, without limitation, the same Base Tax set forth in Article 3 hereof, without the execution of an extension agreement or other instrument. If Tenant shall not give Landlord the Exercise Notice at the time and in the manner set forth above, the Option shall terminate and be deemed waived by Tenant. Time is of the essence as to the date for the giving of the Exercise Notice. 42.03. After Landlord receives the Exercise Notice, and if in Landlord's opinion an increase in the fixed annual rent for the Renewal Term is warranted because the fair market rent for the demised premises has increased, Landlord shall within 90 days after Landlord receives the Exercise Notice, send Tenant a notice (the "Revised Rent Notice") stating the amount which, in Landlord's opinion, shall constitute the fair market rent for the demised premises as of the Expiration Date. The increased fixed annual rent set forth in the Revised Rent Notice shall be effective as of the first day of the Renewal Term. 42.04. (a) If Landlord gives a Revised Rent Notice, then at any time within 30 days after the giving of such Revised Rent Notice, Tenant may dispute the fair market rent for the demised premises as determined by Landlord by giving notice to Landlord that it is initiating the appraisal process provided for herein and specifying in such Notice the name and address of the arbitrator designated by Tenant to act on its behalf. Within 15 days after the designation of Tenant's arbitrator, Landlord shall give notice to Tenant specifying the name and address of Landlord's arbitrator. The two arbitrators so chosen shall meet within 10 days after the second arbitrator is appointed and if, within 20 days after the second arbitrator is appointed, the two arbitrators shall not agree upon a determination in accordance with Paragraph (c) of this Section 42.04 they shall together appoint a third arbitrator. If said two arbitrators cannot agree upon the appointment of a third arbitrator within 10 days after the expiration of such 20 day period, or if either party shall not timely designate its initial arbitrator, then either party, on behalf of both, and on notice to the other may request such appointment by the American Arbitration Association (or any successor organization) in accordance with its then prevailing rules. If the American Arbitration Association shall fail to appoint said third arbitrator within 10 days after such request is made, then either party may apply, on notice to the other, to the Supreme Court, New York County, New York (or any other court having jurisdiction and exercising functions similar to those now exercised by the foregoing court) for the appointment of such third arbitrator. (b) Each of the arbitrators selected as herein provided shall have at least 49 fifteen years experience in the leasing or management of space in the Borough of Manhattan. Each party shall pay the fees and expenses of the arbitrator selected by it. The fees and expenses of the third arbitrator and all other expenses (not including the attorney's fees, witness fees and similar expenses of the parties which shall be borne separately by each of the parties) of the arbitration shall be borne equally by the parties hereto. (c) The majority of the arbitrators shall determine the fair market rent of the demised premises as of the Expiration Date and render a decision and award as to their determination to both Landlord and Tenant within 20 days after the appointment of the third arbitrator. In no event however, may such fair market rent be determined by the arbitrators to be less than the fixed annual rent payable under this Lease immediately prior to the Expiration Date. In rendering such decision and award, the arbitrators shall assume or take into consideration as appropriate all of the following: (i) the Landlord and prospective tenant are typically motivated; (ii) the Landlord and prospective tenant are well informed and well advised and each is acting in what it considers its own best interest; (iii) a reasonable time under then-existing market conditions is allowed for exposure of the demised premises on the open market; (iv) the rent is unaffected by concessions, special financing amounts and/or terms, or unusual services, fees, costs or credits in connection with the leasing transaction; (v) the demised premises are fit for immediate occupancy and use "as is" and require no additional work by Landlord and that no work has been carried out thereon by the Tenant, its subtenant, or their predecessors in interest during the Term which has diminished the rental value of the demised premises; (vi) in the event the demised premises have been destroyed or damaged by fire or other casualty, they have been fully restored; (vii) the demised premises are to be let with vacant possession and subject to the provisions of this Lease for a 15 year term; and (viii) market rents then being charged for comparable space in other similar office buildings in the same area. In rendering such decision and award, the arbitrators shall not modify the provisions of this Lease. The decision and award of the arbitrators shall be in writing and be final and conclusive on all parties and counterpart copies thereof shall be delivered to each of said parties. Judgment may be had on the decision and award of the arbitrators so rendered in any court of competent jurisdiction. (d) Prior to the determination of the arbitrators, Tenant shall pay as the fixed annual rent it is obligated to pay under this Lease the amount set forth in the Revised Rent Notice and in the event the arbitrators determine that the fixed annual rent payable pursuant to this Article 42 is greater than that set forth in the Revised Rent Notice, then Tenant shall promptly pay to Landlord the amount of its underpayment of fixed annual rent for the period commencing on the first day of the Renewal Term, or if the arbitrators determine that the fixed annual rent payable pursuant to this Article 42 is less than that set forth in the Revised Rent Notice, then Tenant shall be entitled to a credit in the amount of its overpayment for the period commencing on the first day of the Renewal Term against subsequent payments of fixed annual rent due hereunder. (e) Nothing contained in this Article 42 shall be deemed in any way to alter or modify the provisions of Article 3 hereof. 50 (f) In no event shall the fixed annual rent (as the same may have been increased from time to time in accordance with this Article 42) be reduced pursuant to this Article 42. 42.05. Notwithstanding the foregoing provisions of this Article 42, if on the date that Tenant exercises the Option, or if on any subsequent date up to and including the date upon which the extension of the term commences, Tenant is in default, beyond any applicable notice and grace periods, in the payment of fixed annual rent, additional rent, or in the performance of any of the other terms, conditions or provisions of this Lease, Tenant's exercise of such Option and the extension of the Term covered by this Lease contemplated thereby shall, at the option of Landlord exercised by written notice to Tenant, be rendered null and void and shall be of no further force and effect and Tenant shall have no other additional right to exercise such option, which shall be deemed waived by Tenant. 42.06. If Tenant exercises the Option, then, at Landlord's request, Tenant agrees within ten (10) days after such request is made to execute, acknowledge and deliver to Landlord an instrument in form and substance satisfactory to Landlord, confirming (i) the fixed annual rent payable under this Lease pursuant to Article 42, unless Tenant is then, in good faith, disputing same in accordance with the provision of this Article 42, in which case Tenant agrees to execute, acknowledge and deliver a separate instrument satisfactory to Landlord confirming the fixed annual rent as finally determined, (ii) the expiration date of the Term, and (iii) the other modifications provided for in this Article 42, but no such instrument shall be required in order to make the provisions hereof effective. 42.07 Notwithstanding the other provisions of this Article 42, if Tenant shall be the tenant of the fifth floor and the Additional Space, Tenant may elect in its Exercise Notice which of the floor(s) the Renewal Term shall apply to, provided, however, that Tenant may only lease full floors (no partial floors other than the Additional Space) and may not lease any of the basement if Tenant has not elected to lease at least one full floor other than the basement. If Tenant makes the election under this Section 42.07, the fixed annual rent and additional rent shall be determined only with respect to the premises which Tenant has elected the Renewal Term to apply to. ARTICLE 43 THIRD FLOOR 43.01. Provided Tenant is then a tenant in the Building and is not in default beyond any applicable notice and grace period, if Landlord shall have available for rental any space on the third floor of the Building, or if Landlord shall be aware that such space in the Building is 51 becoming available to be put on the market, Landlord shall give notice (the "Notice") to Tenant, and Landlord and Tenant shall meet to discuss Tenant renting the third floor. Neither Landlord nor Tenant shall be obligated to enter into any Lease for such third floor. If Landlord and Tenant shall not agree on the terms and conditions of such third floor rental and enter into a Lease for such third floor within said 30 day period, time being of the essence, Tenant's rights under this Article 43 shall terminate. Tenant's right hereunder shall not apply to any renewal, extension or new lease with a tenant in the building relating to space then occupied by said tenant. ARTICLE 44 MISCELLANEOUS 44.01. Irrespective of the place of execution or performance, this Lease shall be governed by and construed in accordance with the laws of the State of New York. 44.02. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. 44.03. Except as otherwise expressly provided in this Lease, each covenant, agreement, obligation or other provision of this Lease on Tenant's part to be performed shall be deemed and construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease. 44.04. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. 44.05. Time shall be of the essence with respect to the exercise of any Option on the part of Tenant to extend the term of this Lease. 44.06. Except as otherwise provided herein, whenever payment of interest is required by the terms hereof it shall be at the Interest Rate. 44.07. Subject to the provisions of Section 1.01, if the demised premises or any additional space to be included within the demised premises shall not be available for occupancy by Tenant on the specific date hereinbefore designated for the commencement of the Term of this Lease or for the inclusion of such space for any reason whatsoever, then this Lease shall not be affected thereby but, in such case, said specific date shall be deemed to be postponed until the date when the demised premises or such additional space shall be available for occupancy by Tenant, and Tenant shall not be entitled to possession of the demised premises or such additional space until the same are available for occupancy by Tenant; provided, however, that Tenant shall have no 52 claim against Landlord, and Landlord shall have no liability to Tenant by reason of any such postponement of said specific date, and the parties hereto further agree that any failure to have the demised premises or such additional space available for occupancy by Tenant on said specific date or on the Commencement Date shall in no wise affect the obligations of Tenant hereunder nor shall the same be construed in any wise to extend the Term. This Section 44.07 shall be deemed to be an express provision to the contrary of Section 223-a of the Real Property Law of the State of New York and any other law of like import now or hereinafter in force. 44.08. In the event that Tenant is in arrears in payment of fixed annual rent or additional rent hereunder, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. 44.09. All Exhibits referred to in this Lease are hereby incorporated in this Lease by reference. 44.10. The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this Lease, their assigns. 44.11. No remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity. 44.12 This Lease supercedes all prior agreements, whether oral or written, between Landlord and Tenant, which prior agreements are null and void. 44.13 Landlord represents to Tenant that, as of the date of this Lease, the Over Lease is in full force and effect and Landlord is the tenant thereunder, and that Landlord is not aware of any uncured default under said Over Lease and Landlord has not exercised any right to terminate the Over Lease. Landlord agrees that it will not amend the Over Lease if such amendment would materially and adversely effect Tenant's rights under this Lease, nor shall Landlord terminate the Over Lease. Landlord further agrees that it will use its reasonable efforts (without incurring any out of pocket cost), to encourage Mattel, Inc. ("Mattel"), the existing tenant on the Fifth Floor, to timely vacate from the demises premises. If Mattel shall not so vacate by July 1, 2000, or if Landlord's Work shall not be substantially completed by July 1, 2000, due to no fault of Tenant, Tenant may cancel this Lease by written notice to Landlord given before July 10, 2000, time of the essence. If such cancellation notice is not given before July 10, 2000, Tenant's right to cancel this Lease shall be null and void. If Tenant cancels this Lease pursuant to this Section 44.14, Landlord shall return the advance rent payment and the Security to Tenant. 53 44.14 Within 90 days after Mattel, Inc. shall vacate from the entire Building, including from the basement, Landlord shall arrange to remove the floor tiles in which Mattel, Inc. has engraved its name, and replace such tiles with reasonably matching tiles. Tenant shall have the right, at Tenant's sole cost and expense, to have its name engraved in the new replacement tiles. 44.15 This Lease may be executed in counterparts. 44.16 Landlord agrees that it will use its reasonable efforts (without incurring any out of pocket cost), to encourage YR (as defined in Exhibit B), the existing tenant on the fourth floor and a portion of the basement, to timely vacate from the demises premises. INTENTIONALLY BLANK 54 IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease as of the day and year first above written. 675 OWNERSHIP LLC, Landlord By: 675 Managing Member Corp. By: --------------------------- Israel Taub, President BILL GROSS' IDEALAB!, Tenant By: -------------------------- 55 EXHIBIT B 1. Provided Tenant has advised Landlord in writing prior to January 18, 2000 as to the specific partitions and walls within the fifth floor which Tenant requires Landlord to demolish, Landlord shall, on or before the Commencement Date, perform such demolition and deliver the demised premises to Tenant in vacant and broom clean condition, with the Building's sprinkler, mechanical and hvac systems in good working order, except to the extent Tenant has made any changes thereto. If Tenant shall not so advise by January 18, 2000, TIME OF THE ESSENCE, Landlord shall be released of all demolition obligations set forth in the preceding sentence. In addition, on or before the Commencement Date, Landlord shall remove the stairs between the fifth and sixth floors and slab over the opening. Such slab shall meet fifth floor floor load and shall be reasonably smooth in finish. Additionally, Landlord shall deliver ACP-5 Certificates to Tenant prior to the Commencement Date. 2. Provided Tenant has advised Landlord in writing prior to June 1, 2001 as to the specific partitions and walls within the Additional Space which Tenant requires Landlord to demolish, Landlord shall perform such demolition and deliver the Additional Space to Tenant in vacant and broom clean condition, on or before February 1, 2002. If Tenant shall not so advise by June 1, 2001, TIME OF THE ESSENCE, Landlord shall be released of all obligations as set forth on this Exhibit B as to the Additional Space. Landlord shall reasonably cooperate with Tenant with respect to plans and information concerning the installations existing in the Additional Space, but Landlord shall incur no out of pocket expense with respect thereto. 3. Provided YR is obligated under its lease to perform such demolition, and provided Tenant has advised Landlord in writing in sufficient time to enable Landlord to require YR to do so, as to the specific partitions and walls within the Fourth Floor Space which Tenant requires Landlord to demolish, Landlord shall require YR to perform such demolition and Landlord shall deliver the Fourth Floor Space to Tenant in vacant and broom clean condition, on or before such date as is reasonably and mutually agreed to by Landlord and Tenant. Landlord will keep Tenant reasonable informed as to the status of YR's rights with respect to the Fourth Floor Space and the requirements of Landlord as to the timing of Tenant's furnishing of information with respect to the demolition to be performed in the Fourth Floor Space. If Tenant shall not so timely advise Landlord, TIME OF THE ESSENCE, Landlord shall be released of all obligations as set forth on this Exhibit B as to the Fourth Floor Space. Landlord shall reasonably cooperate with Tenant with respect to plans and information concerning the installations existing in the Fourth Floor Space, but Landlord shall incur no out of pocket expense with respect thereto. 56 EX-10.18 19 EXHIBIT 10.18 EXHIBIT 10.18 EXETER STREET THEATRE BUILDING 181 NEWBURY STREET BOSTON, MASSACHUSETTS OFFICE BUILDING LEASE BY AND BETWEEN EASTWEST PROPERTY FUND, L.P., A GEORGIA LIMITED PARTNERSHIP, AS LANDLORD, AND BILL GROSS' IDEALAB!, A CALIFORNIA CORPORATION AS TENANT TABLE OF CONTENTS PAGE ---- 1. Premises 1 2. Term 2 3. Delivery of Possession of Premises 2 4. Rental 2 5. Security Deposit 7 6. Use of Premises 9 7. Compliance With Laws 10 8. Services to Tenant 10 9. Liability of Landlord 11 10. Improvements, Repairs by Landlord 12 11. Landlord's Right to Enter Premises 12 12. Repairs by Tenant 13 13. Alterations 13 14. Liens 14 15. Assignment and Subletting 14 16. Eminent Domain 17 17. Destruction or Damage to Premises 17 18. Indemnification 18 19. Insurance 18 20. Damage or Theft of Personal Property 20 21. Hazardous Materials 20 22. Landlord's Lien [TEXT INTENTIONALLY DELETED] 23 23. Relocation [TEXT INTENTIONALLY DELETED] 23 24. Subordination and Attornment 23 25. Estoppel Certificate 24 26. Default 24 27. Remedies 25 28. Effect of Termination of Lease 27 29. Attorneys' Fees 27 30. Quiet Enjoyment 27 31. Surrender of Premises 28 32. Holding Over 28 33. Removal of Fixtures 28 34. Notices 28 35. Agency Disclosure 29 36. Exculpation of Landlord 30 37. Signage 30 38. Force Majeure 30 39. Authority 30 40. Definitions 30 41. Rules and Regulations 31 42. Guaranty [TEXT INTENTIONALLY DELETED] 31 43. Special Stipulations 31 44. Demolition [TEXT INTENTIONALLY DELETED] 31 45. Entire Agreement 31 Addendum of Special Stipulations Exhibit A -- Floor Plan of Premises i Exhibit B -- Description of Property on Which the Project is Situated Exhibit C -- Plans and Specifications for Improvements to Premises Exhibit D -- Hazardous Materials List Exhibit E -- Rules and Regulations Exhibit F -- Schedule of Lease Expiration Dates and Renewal Options Exhibit G -- Cleaning Specifications Exhibit H -- Letter of Credit ii OFFICE BUILDING LEASE THIS LEASE, made this _______ day of ______________, 2000 (the "Effective Date"), is entered into by and between EASTWEST PROPERTY FUND, L.P., a Georgia limited partnership (the "Landlord"), and BILL GROSS' IDEALAB!, a California corporation (the "Tenant"). FOR AND IN CONSIDERATION of the mutual covenants and conditions contained herein, the parties hereto do hereby agree as follows: 1. PREMISES Tenant hereby leases from Landlord approximately 22,052 rentable square feet of space, as outlined by the floor plan attached hereto as Exhibit "A" and incorporated herein by this reference, to be known as Suite 110, comprised of 1,002 rentable square feet of space on the ground floor, 6,350 rentable square feet of space on the mezzanine level, approximately 7,350 rentable square feet of space on the second floor, and approximately 7,350 rentable square feet of space on the third floor (the "Premises") of the Building known as the Exeter Street Theatre Building, located at 181 Newbury Street, Boston, Massachusetts 02116 (the "Building"), which is situated on certain real property more particularly described in Exhibit "B" attached hereto and incorporated herein by this reference (the "Property"; the Building and the Property are collectively referred to herein as the "Project"). The actual rentable square footage of the Premises shall be determined by Tenant's architect in accordance with BOMA standards. In the event that the actual rentable square footage of the Premises, as determined by Tenant's architect, varies from that set forth in this Lease, then the parties agree to execute an amendment to this Lease reflecting the actual rentable square footage of the Premises and modifying all provisions of this Lease affected by such variation. All exhibits attached to this Lease are incorporated herein by reference. This Lease shall create the relationship of landlord and tenant between Landlord and Tenant; no estate shall pass out of Landlord; Tenant has only a leasehold interest in the Premises, not subject to levy and sale and not assignable by Tenant except by Landlord's consent. In addition to the interest in the Premises demised to Tenant under this Lease, Landlord hereby grants Tenant a nonexclusive license for so long as this Lease is in full force and effect to use the "Common Areas," as hereinafter defined, of the Project in common with others entitled to use the Common Areas, including Landlord and other tenants of the Project and their respective employees and invitees and other persons authorized by Landlord, subject to the terms and conditions of this Lease, including any and all rules and regulations promulgated by Landlord in accordance with the terms of this Lease. As used herein, the term "Common Areas" means all areas and facilities in the Project that are provided and designated from time to time by Landlord for the general nonexclusive use and convenience of Tenant, Landlord and all other tenants of the Project and their respective employees, invitees, licensees, or other visitors, and may include without limitation the hallways, entryways, stairs, elevators, loading areas, and restroom facilities of the Building, and the walkways of the Project. Landlord may from time to time change the size, use, shape, configuration or nature of any portion of the Common Areas, so long as such change does not deprive Tenant of the substantial benefit and enjoyment of the Premises. Neither Landlord nor Landlord's agents have made any representations, warranties or promises with respect to the Project, the physical condition of the Building, the land upon which it is erected, or the Premises, or any matter or thing affecting or related to the Premises except as expressly set forth in this Lease. 1 2. TERM The term of this Lease (the "Term") shall commence on the Effective Date, defined above (the "Commencement Date"), and shall expire on the last day of the month in which the tenth (10th) anniversary of the "Rent Commencement Date," defined below, occurs (the "Expiration Date"), except as otherwise provided herein. "Lease Year" shall mean each successive twelve-month period throughout the Term provided that the first Lease Year shall commence on the Rent Commencement Date and expire on the last day of the month in which the anniversary of the Rent Commencement Date occurs, and each subsequent Lease Year shall commence on the day following the expiration of the previous Lease Year. 3. DELIVERY OF POSSESSION OF PREMISES Landlord represents that the base building systems, including fire, life safety, electrical, mechanical, and HVAC are in good working order as of the Effective Date of this Lease. On or before the Commencement Date, Landlord shall remove the existing bookcases from the Premises, but Landlord shall otherwise deliver possession of the Premises to Tenant in their present, "as is" condition as of the date of the execution of this Lease, broom clean and free of debris and any items of personalty of Landlord or any prior tenant, and Tenant hereby agrees to accept such delivery of the Premises by Landlord. Commencing on the Effective Date, Tenant shall have full access to the Premises to complete the Improvements, as defined hereinbelow. Unless specifically set forth in this Lease, Landlord shall have no obligation to make any improvements whatsoever to the Premises. Tenant, by taking possession of the Premises shall be deemed to have agreed that the Premises are then in the condition required by the terms of this Lease, subject to latent defects. 4. RENTAL (a) BASE RENTAL. Commencing the earlier of one hundred twenty (120) days following the Commencement Date, or the date on which a certificate of occupancy is received by Tenant reflecting the substantial completion of the "Improvements," as defined in Exhibit "C" (the "Rent Commencement Date"), Tenant shall pay base rental to Landlord as follows (the "Base Rental"): RATE PER RENTAL PERIOD SQUARE FOOT MONTHLY ANNUALLY ------------- ----------- ------- -------- Lease Years 1-5 $36.00 $66,156.00 $793,872.00 Lease Years 6-10 $38.00 $69,831.33 $837,976.00 2 Each monthly installment shall be due and payable promptly on the first day of each month, in advance and without offset, deduction or prior demand, during the Term of this Lease. In the event that the Term of this Lease shall commence on a date other than the first day of the month, rent for such month shall be prorated and such prorated amount (which shall be equal to the monthly Base Rental stated above multiplied by a fraction, the numerator of which shall be the number of days from the Commencement Date through the end of such month, inclusive of both days, and the denominator of which shall be the number of days in such month) shall be due and payable on the Commencement Date. All payments of rent or any other sum due under this Lease shall be made payable to Landlord, and shall be forwarded by Tenant to Landlord as follows: TMW Real Estate Management, Inc., Suite 400, Two Ravinia Drive, Atlanta, Georgia 30346. In the event Tenant shall fail to pay a monthly installment within five (5) days of the due date, a late charge of five percent (5%) of the monthly Base Rental, with a minimum of twenty dollars ($20.00) per month, shall be added to the Base Rental and paid to Landlord for each such late payment and the same shall be treated as additional rent. Should Tenant present a check to Landlord that is returned from Tenant's bank for any reason, Tenant shall pay to Landlord as additional rent all costs incurred by Landlord as a result of such return, and Landlord reserves the right to demand that all future rental payments be made in the form of cashiers' checks or certified funds. Tenant agrees to pay Landlord interest at a rate of twelve percent (12%) per annum (or the maximum rate permitted by applicable law, whichever is less) on all Base Rental, additional rental or other sums due hereunder that are not paid when such amounts are due and payable. Nothing contained herein shall require Landlord to accept any tender of payment from Tenant for less than the full amount then due under this Lease, including any and all late charges, interest and attorneys' fees that may then be due from Tenant in accordance with the express terms of this Lease. Landlord may elect to accept less than the full amount then due from Tenant hereunder; however, no payment by Tenant or receipt by Landlord of such lesser amount shall be deemed to be other than payment on account, and no restrictive endorsement or statement on any check or payment shall be deemed to alter the express provisions of this Lease, nor constitute an accord and satisfaction. Landlord may accept less than the full amount then due from Tenant without prejudice to Landlord's right to recover the balance of the full amount then due, or to pursue any other remedies then available to Landlord under this Lease or applicable law. In all events, including but not limited to Landlord's acceptance of a partial payment from Tenant, any payment accepted by Landlord from Tenant may be applied first to retire the oldest receivables due from Tenant hereunder, then to any current rental or other payment then due hereunder, and the balance, if any, will be applied to any rental or other payment which will become due from Tenant hereunder. (b) ADDITIONAL RENTAL - OPERATING EXPENSES AND REAL ESTATE TAXES. (1) DEFINITIONS. The following definitions shall apply for purposes of this Section: 3 All sums other than Base Rental due from Tenant to Landlord under this Lease shall constitute "Additional Rental." The term "Operating Expenses" as used herein shall include all direct costs of administration, operation and maintenance of the Building, and the Common Areas, as determined in accordance with generally accepted accounting principles, and shall include Landlord's costs and expenses incurred in connection with the following by way of illustration but not limitation: the cost of labor, materials and services for the operation and maintenance of the Building, and the Common Areas, including but not limited to license, permit and inspection fees; water and sewer charges; garbage and waste disposal; gas, fuel, electricity and other utilities; heat, air conditioning and ventilation repairs; elevator service; plumbing service and other normal repairs; janitorial and cleaning service; window washing services, snow and ice removal; landscaping; repairs, maintenance and replacement of curbs, walkways and all other paved areas; association fees; pest control; maintenance contracts; security services or personnel; insurance for fire, extended coverage, general liability, and other insurance which Landlord is required to maintain on the Building and its appurtenances either by the terms of this Lease or by the holder of any mortgage or deed to secure debt encumbering the Building, or which Landlord reasonably deems to be necessary in connection with the ownership and operation of the Building; personnel engaged in onsite management, administration, operation and maintenance of the Building, its Common Areas and its appurtenances together with payroll taxes, employee benefits, workers' compensation insurance premiums and the cost of uniforms associated therewith; rental expenses for onsite management offices, management fees; supplies, materials, tools, equipment and general costs associated therewith, all accrued and based on a calendar year type operation; but excluding tenant alterations, depreciation on the Building and equipment, costs of a capital nature not expressly permitted to be included hereunder, interest, executive salaries, payments made to any affiliate of Landlord for goods or services that exceed the fair market value of such goods or services that would be charged by an unrelated party in an arm's length transaction, Landlord's costs incurred in maintaining and repairing the structural portions and the roof of the Building, all costs billed directly to tenants of the Building either by Landlord or a third party, and all expenses incurred by Landlord in cleaning, maintaining and repairing the Common Area entrance and facilities associated with the Newbury Street entrance to the Building. If, for any reason, including imposition of governmental requirements, laws or regulations, Landlord shall make an expenditure, directly or indirectly, which is intended to reduce the energy consumption of the Building and which, by generally accepted accounting principles would be treated as a capital expenditure, the annual Operating Expenses of the Building shall also include the amortization of such capital expenditure based upon a useful life acceptable to the appropriate taxing authority; provided, however, that the amount of such capital expenditure included in any calendar year for purposes of calculating Tenant's Additional Rental hereunder shall not exceed the savings achieved in such year as a result of such expenditure. In the event that any local, state or federal government shall, by any legally enforceable legislative, administrative or judicial action, whether by ordinance, act, statute, order, mandate, rule, regulation or otherwise, require during the Term of this Lease any alteration of or improvement to any portion of the Project or Building, excluding the Premises or any premises leased or available to be leased by other tenants of the Building (a "Mandated Alteration"), which, by generally accepted accounting principles would be treated as a capital expenditure, then, provided that such Mandated Alteration is the result of the adoption of a new or changed ordinance, act, statute, order, mandate, rule or regulation or interpretation thereof not existing on the Commencement Date of this Lease, the annual Operating Expenses of the Building shall also include the annual amortization of such capital expenditure based upon a useful life of not less than five (5) years. "Tenant's Proportionate Share" shall be calculated by dividing the rentable square footage of the Premises by the total rentable square footage of the Building. The rentable square footage of the Building is 45,502 rentable square feet; accordingly, Tenant's Proportionate Share is 48.4638%. 4 The term "Taxes" shall include every type of tax, charge or other amount assessed against the Building or upon the real estate upon which the Building is located, including any sales tax assessed on the rent collected by Landlord in connection with leasing space in the Building, together with any expenses for tax consulting services and legal services in appealing or protesting such taxes. Landlord agrees to make commercially reasonable efforts to determine whether the amount of Taxes assessed each year is appropriate, and to determine whether an appeal or protest of the amount of such Taxes should be pursued. Taxes shall not include income taxes, inheritance, estate, gift, excise, franchise, gross receipts, stamp or profit taxes imposed upon Landlord, any tax upon the sale, transfer and/or assignment of Landlord's interest in the Project other than a sales tax on rent, as referenced above, and any interest or penalties resulting from the late payment of Taxes by Landlord. (2)REIMBURSEMENT OF OPERATING EXPENSES AND TAXES. Commencing on the Rent Commencement Date, Tenant shall pay as Additional Rental Tenant's Proportionate Share of Operating Expenses and Taxes for each calendar year or part thereof during the Lease Term, as the same may be extended by the parties from time to time (referred to herein as an "Expense Year") as and when specified below. An annual determination of Operating Expenses and Taxes shall be made by Landlord pursuant to generally accepted accounting principles and shall be binding upon Landlord and Tenant. (3)ESTIMATES OF OPERATING EXPENSES AND TAXES. Prior to the actual determination of the Operating Expenses and Taxes for any Expense Year, Landlord may, if it so elects and at any time or from time to time during such Expense Year, estimate in good faith the amount of such Operating Expenses and Taxes that will be paid or incurred in such year, based upon the amount of Operating Expenses and Taxes that were incurred in the previous year. Landlord may give Tenant written notice of the amount of such estimated Operating Expenses and Taxes and the amount that will be due each month from Tenant. In such event, Tenant shall, subsequent to receipt of such written notice, pay monthly Tenant's Proportionate Share of such estimated amount at the same time and in the same manner as Base Rental is due from Tenant hereunder. (4)ANNUAL RECONCILIATION. If, in any Expense Year, the total amount Tenant actually paid for estimated Operating Expenses and Taxes for such year is less than Tenant's Proportionate Share of the actual amount of the Operating Expenses and Taxes owed by Tenant for such year, Tenant shall pay to Landlord as Additional Rental in one lump sum the difference between the total amount actually paid by Tenant for such year and the amount Tenant should have paid pursuant to subparagraph 2 above; this lump sum payment shall be made within thirty (30) days of receipt of Landlord's statement therefor; or if the total amount Tenant actually paid for estimated Operating Expenses and Taxes is more than Tenant's Proportionate Share of the actual amount of such Operating Expenses and Taxes, then Landlord shall remit the excess to Tenant within thirty (30) days of the making of such determination or, at Landlord's election, credit such amount against the next monthly installment of Base Rental. 5 (5)PRORATIONS. If the Rent Commencement Date is other than January 1 or if the Expiration Date is other than December 31, Tenant's Proportionate Share of Operating Expenses and Taxes for such year shall be prorated, with the proration for the months in which the Rent Commencement Date and the Expiration Date occurs to be based upon a 30-day month. Even if the Term has expired, and Tenant has vacated the Premises when the final determination is made of Tenant's Proportionate Share of Operating Expenses and Taxes for the year in which this Lease expires, Tenant shall pay any increase due over the estimated amount paid and conversely any overpayment made shall be rebated by Landlord to Tenant, all as specified above. (6)AUDIT. Tenant shall have the right to have Landlord's books and records pertaining to Operating Expenses for any Expense Year reviewed, copied and audited ("Tenant's Audit") provided that (i) such right shall not be exercised more than once during any calendar year; (ii) if Tenant elects to conduct Tenant's Audit, Tenant shall provide Landlord with written notice thereof no later than thirty (30) days following Tenant's receipt of Landlord's statement of Operating Expenses for the year to which Tenant's Audit will apply; (iii) Tenant shall have no right to conduct Tenant's Audit if Tenant is, either at the time Tenant forwards Landlord written notice that Tenant's Audit will be conducted or at any time during Tenant's Audit, then in default under this Lease; (iv) conducting Tenant's Audit shall not relieve Tenant from the obligation to pay Tenant's Proportionate Share of Operating Expenses, as billed by Landlord, pending the outcome of such audit; (v) Tenant's right to conduct such audit for any calendar year shall expire thirty (30) days following Tenant's receipt of Landlord's statement of Operating Expenses for such year, and if Landlord has not received written notice of such audit within such thirty (30) day period, Tenant shall have waived its right to conduct Tenant's Audit for such calendar year; (vi) Tenant's Audit shall be conducted by a Certified Public Accountant not employed by or otherwise affiliated with Tenant, except to the extent that such accountant has been engaged by Tenant to conduct Tenant's Audit; (vii) Tenant's Audit shall be conducted at Landlord's office where the records of the year in question are maintained by Landlord, during Landlord's normal business hours; and (viii) except as set forth below, Tenant's Audit shall be conducted at Tenant's sole cost and expense. In the event that Tenant's Audit demonstrates to Landlord's reasonable satisfaction that Landlord has overstated the Operating Expenses for the year audited, then Tenant's Proportionate Share of the overstated amount shall be credited against Tenant's Base Rental and Additional Rental next due under this Lease until such credit has been exhausted, or if the Lease Term has expired and no further amounts are due from Tenant under this Lease, Landlord shall refund such overstated amount to Tenant within thirty (30) days following Landlord's receipt of documentation reasonably acceptable to Landlord reflecting the calculation of such overstated amount. Additionally, in the event that Tenant's Audit demonstrates to Landlord's reasonable satisfaction that Landlord has overstated the Operating Expenses for the year audited by more than five percent (5%), then, in addition to reimbursing Tenant for Tenant's Proportionate Share of such overstated amount, as set forth above, Landlord shall also reimburse Tenant for Tenant's actual reasonable cost incurred in conducting Tenant's Audit within thirty (30) days of Landlord's receipt of documentation reasonably acceptable to Landlord reflecting the amount of such cost. 6 5. SECURITY DEPOSIT (a) DESCRIPTION OF LETTER OF CREDIT. As security for the full and faithful performance of all the terms, conditions and obligations of Tenant under this Lease (collectively, the "Obligations"), Tenant shall maintain in full force and effect throughout the Term of this Lease, an irrevocable, standby letter of credit in favor of Landlord or its successors or assigns, issued by a banking institution reasonably acceptable to Landlord (the "Issuer"), in the amounts set forth in this section (the "Letter of Credit"). The Letter of Credit shall be in a form substantially similar to the form Letter of Credit attached hereto as Exhibit "H," or in such other form as may be reasonably acceptable to Landlord. Contemporaneously with Tenant's execution and delivery of this Lease to Landlord for execution, Tenant shall deliver the executed Letter of Credit to Landlord, and upon Tenant's delivery of the executed Letter of Credit to Landlord, and Landlord's acceptance of same, a true and genuine photocopy of the executed Letter of Credit shall be attached hereto as Exhibit "H-1" and incorporated herein by this reference. (b) INITIAL AMOUNT OF LETTER OF CREDIT. The initial amount of the Letter of Credit shall be Eight Hundred Ninety-five Thousand, One Hundred Ninety-two Dollars ($895,192.00), which amount represents the "Allowance," as defined in Exhibit "C" to this Lease, and the leasing commissions to be paid by Landlord in connection with this transaction. (c) REDUCTIONS IN AMOUNT OF LETTER OF CREDIT. At the commencement of the second (2nd), third (3rd), fourth (4th), fifth (5th) and sixth (6th) Lease Years the amount of the Letter of Credit may be reduced by the amount of One Hundred Thirty-seven Thousand, Thirty-eight and 40/100 Dollars ($137,038.40); thereafter, the Letter of Credit shall be maintained by Tenant in such reduced amount (which will then be Two Hundred Ten Thousand Dollars ($210,000.00), assuming that all scheduled reductions are made) throughout the balance of the Term of the Lease, as the same may be extended by the parties from time to time. Provided, however, that a scheduled reduction in the Letter of Credit shall not occur if (i) at the time of such scheduled reduction Tenant is in default of its Obligations under this Lease, beyond any notice and period of cure applicable under this Lease, and (ii) Issuer receives written notice of such uncured default from Landlord not less than thirty (30) days prior to the date on which such reduction is scheduled to occur. (d) DRAWING UPON THE LETTER OF CREDIT IN EVENT OF DEFAULT. In the event that Tenant shall default in any of its Obligations under this Lease, and fail to cure such default within the time permitted under this Lease, then in addition to any other remedies provided under this Lease, Landlord shall be entitled to a draw upon the Letter of Credit, in the manner described in the Letter of Credit, in such amount as may be necessary in order to cure such default on behalf of Tenant. In the event that Landlord draws upon the Letter of Credit, Tenant shall, within ten (10) days of receipt of notice from Landlord that the Letter of Credit has been drawn down, restore the Letter of Credit to the full amount of the Letter of Credit then required to be maintained by Tenant hereunder, and provide Landlord with documentation reasonably acceptable to Landlord that the Letter of Credit has been so restored. If Tenant (i) allows the Letter of Credit to lapse at any time during the Term of this Lease, or (ii) fails to restore the Letter of Credit to the amount required hereunder after the Letter of Credit has been drawn upon by Landlord in accordance with the terms hereof, then Tenant shall be in default under the Lease and Landlord shall be entitled to exercise all remedies for default set forth in this Lease. 7 (e) DRAWING UPON THE LETTER OF CREDIT WHERE LETTER OF CREDIT IS NOT RENEWED. The parties acknowledge that the Letter of Credit will be issued for an initial period of one (1) year, which shall be automatically renewed by Issuer for successive periods of one (1) year throughout the Term of this Lease, unless Issuer provides Landlord with written notice of its election not to renew the Letter of Credit upon the expiration of its then current term. The parties agree that in such event, Landlord may immediately draw upon the Letter of Credit in accordance with its terms which expressly provide for such draw to be permitted, even if no default by Tenant has occurred under this Lease. In such event, the funds drawn by Landlord upon the Letter of Credit shall be held by Landlord as a security deposit, in accordance with the terms of subparagraph (f) below. (f) SECURITY DEPOSIT. Landlord shall place any funds received by drawing upon the Letter of Credit under subparagraph (e) above (the "Security Deposit") in an interest bearing account, and the interest accruing on the Security Deposit shall be held, disbursed, returned and/or retained in the same manner as the principal amount of the Security Deposit. If funds are received by Landlord under subparagraph (e) above prior to the commencement of the sixth (6th) Lease Year, then the principal amount of the Security Deposit shall be reduced in the same manner and upon the same schedule as reductions in the amount of the Letter of Credit are permitted under subparagraph (c) above, provided that at the time of the permitted reductions Tenant is not then in default of its Obligations under this Lease beyond any notice and period of cure; at the time of any reductions in the principal amount of the Security Deposit, the amount by which the Security Deposit is to be reduced shall be refunded to Tenant, together with all interest then accrued on the Security Deposit. The balance of the Security Deposit existing as of the commencement of the sixth (6th) Lease Year (which will be Two Hundred Ten Thousand Dollars ($210,00.00) if all scheduled reductions are made), and all interest thereafter accruing, shall be held by Landlord throughout the balance of the Lease Term. The balance of the Security Deposit is refundable to Tenant within thirty (30) days following the Expiration Date, as the same may be extended by the parties from time to time, provided that no defective conditions are left unrepaired by Tenant, other than normal wear and tear, loss by fire or other casualty not caused by Tenant, Tenant's employees, agents or contractors or condemnation, and provided Tenant is not otherwise in default under this Lease. Landlord may, but shall not be required to, apply all or a portion of the Security Deposit toward sums due to Landlord by Tenant hereunder and/or in order to make any repairs to the Premises required to be made by Tenant hereunder, and any portion of this Security Deposit used by Landlord for such purposes shall be restored by Tenant within fifteen (15) days after written demand therefor from Landlord. Any portion of the Security Deposit not required to reimburse Landlord for Landlord's expense in repairing defective conditions caused by Tenant or for paying amounts owed by Tenant to Landlord, shall be refunded to the Tenant as provided above. (g) ASSIGNMENT OF THE LEASE BY LANDLORD. In the event that Landlord assigns this Lease pursuant to a sale of the Property or otherwise, then Tenant shall present Landlord with such documentation as may be required by Issuer to transfer Landlord's interest as beneficiary of the Letter of Credit to Landlord's assignee, and all costs of processing such transfer shall be paid by Tenant directly to Issuer. 8 6. USE OF PREMISES Tenant shall use the Premises only for general business or professional office purposes, and shall not use the Premises for any illegal purpose, or violate any statute, regulation, rule, or order of any governmental body, or create or allow to exist any nuisance, or trespass, or do any act in or about the Premises, or bring anything onto or in the Premises or the Building which will in any way increase the rate of insurance on the Premises or said Building, deface or injure the Premises or such Building, or overload the floor of the Premises. Cigar smoking is prohibited in all areas of the Building, including the Premises. Tenant shall not permit smoke from cigarettes or any other type of smoking instrument used by Tenant or Tenant's employees, agents, invitees, or licensees to filter into the Common Areas of the Building, or into other tenants' premises, or to create in any manner a nuisance which interferes with other tenants' rights of quiet enjoyment of their premises in the Building (collectively the "Smoking Nuisance"). Additionally, Tenant shall inform all of its employees (and all other agents and contractors who regularly occupy the Premises) that smoking is prohibited in all Common Areas of the Building, and of the foregoing restrictions set forth in this paragraph. If a Smoking Nuisance is generated in the Premises, Landlord shall notify Tenant, and Tenant shall have twenty (20) days from the date of receipt of Landlord's notice to eliminate the Smoking Nuisance in a manner approved by Landlord. If Tenant fails to eliminate the Smoking Nuisance to Landlord's satisfaction, [THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK] 9 Landlord, at Tenant's expense, may install all reasonable filtering devices necessary to eliminate the Smoking Nuisance. 7. COMPLIANCE WITH LAWS (a) LANDLORD'S COMPLIANCE. During the Term of this Lease, Landlord shall be responsible for making any modifications to the Project and Building or its appurtenances, excluding the Premises, but including the Common Areas, elevators and entrances serving the Project and Building, required pursuant to any applicable federal, state and local laws, ordinances, building codes, and rules and regulations of governmental entities having jurisdiction over the Project, including but not limited to the Americans with Disabilities Act (the "ADA") and all regulations and orders promulgated pursuant to the ADA (collectively, the "Applicable Laws"). Any modifications to the Project and/or the Building made by Landlord pursuant to the provisions of this paragraph shall initially be at Landlord's expense; however, such expense may be included in Landlord's Operating Expenses of the Building as set forth in Paragraph 4(b)(1) of this Lease. (b) TENANT'S COMPLIANCE. Tenant shall comply with all governmental laws, ordinances, and regulations applicable to the use of the Premises, and shall promptly comply with all governmental orders and directives for the correction, prevention, and abatement of nuisances in, upon, or connected with the Premises, all at Tenant's sole expense. Tenant warrants that all improvements or alterations of the Premises made by Tenant or Tenant's employees, agents or contractors, either prior to Tenant's occupancy of the Premises or at any time during the term of this Lease, will comply with all Applicable Laws. In addition, Tenant warrants that its use of the Premises will be in strict compliance with all Applicable Laws. During the Term of this Lease, Tenant shall, at Tenant's sole cost and expense, be responsible for making any modifications to the Premises that may be required pursuant to any Applicable Laws. (c) MUTUAL INDEMNITY. Landlord agrees to indemnify, defend and hold Tenant harmless from and against any claims, losses or causes of action arising out of Landlord's failure to comply with the provision of subparagraph (a) above. Tenant shall indemnify, defend and hold Landlord harmless from and against any claims, losses or causes of action arising out of Tenant's failure to comply with the provisions of subparagraph (b) above. The indemnities set forth in this paragraph shall survive the expiration or earlier termination of this Lease. 8. SERVICES TO TENANT Landlord shall provide, subject to limitations contained in any governmental controls now or hereafter imposed, or matters beyond Landlord's control, the following services: (a) Furnish heated and chilled water or other heating/cooling medium to the Premises for a heat pump system installed or to be installed to maintain the Premises at comfortable temperatures. (b) General cleaning and janitorial service five times per week, in accordance with the Cleaning Specifications attached hereto as Exhibit "G." 10 (c) Reasonable quantities of water to lavatories and toilets in or appurtenant to the Premises. (d) The Premises are equipped with a separate meter to monitor the amount of electricity used to operate the lights and any equipment, machinery or other items connected to the power outlets in the Premises, as well as the heating, ventilation and air conditioning system serving the Premises. The cost of all electricity furnished to the Premises will be billed to Tenant by Landlord on a monthly basis. Tenant shall promptly pay all bills for such service, and Tenant's failure to do so shall constitute an additional event of default under this Lease. Tenant will not use any electrical equipment which in Landlord's opinion will overload the wiring installations or interfere with the reasonable use thereof by other users in the Building. Tenant will not, without Landlord's prior written consent in each instance, connect any items such as non-building standard tenant lighting, vending equipment, printing or duplicating machines, computers (other than desktop word processors, personal computers and photocopy equipment not requiring dedicated or special circuitry) or auxiliary air conditioners to the electrical system of the Premises, or make any alteration or addition to the electrical system in the Premises or Building. If any additional circuitry or wiring is required by Tenant, and Landlord approves the installation of the same in writing, such work shall be performed at Tenant's expense by Landlord's electrician or under Landlord's control and supervision, and Tenant shall pay Landlord for such additional work as billed. (e) Passenger elevator service to the Premises, 24 hours per day, 7 days per week, subject to the terms of this Lease, including the Rules and Regulations attached hereto as Exhibit "E." The 181 Newbury Street elevator will be the main access passenger elevator for Tenant. (f) Loading dock access to the Building and freight elevator access to the Premises in accordance with the Rules and Regulations for the Building and Landlord's policies and procedures as established from time to time for the loading and unloading of freight and for the use of the freight elevator. (g) Tenant shall have access to the Premises 24 hours per day, 7 days per week, subject to the terms of this Lease. 9. LIABILITY OF LANDLORD Excepting for the willful misconduct or gross negligence of Landlord, its agents, contractors and employees, Landlord shall not be liable to Tenant in any manner whatsoever for failure or delay in furnishing any service provided for in this Lease, and no such failure or delay to furnish any service or services by Landlord shall be an actual or constructive eviction of Tenant nor shall any such event operate to relieve Tenant from the prompt and punctual performance of each and all of the covenants to be performed herein by Tenant; nor shall Landlord be liable to Tenant for damage to person or property caused by defects in the cooling, heating, electric, water, elevator or other apparatus or systems or by water discharged from sprinkler systems, if any, in the Building; nor shall Landlord be liable to Tenant for the theft, or loss of any property of Tenant whether from the Premises or any part of the Building or property adjoining the Building containing the Premises. Landlord agrees to make reasonable efforts to protect Tenant from interference or disturbance of third persons including other tenants, however, Landlord shall not be liable for any such interference or disturbance whether caused by another tenant or tenants or Landlord or other person, nor shall Tenant be relieved from any obligation under this Lease because of such interference, disturbance or breach; provided, however, that if Landlord shall fail to provide any service to Tenant that Landlord is required to provide to Tenant hereunder, and such failure shall persist for a period of ten (10) days after Landlord's receipt of written notice from Tenant of the existence of such failure, and such failure is not due to a force majeure event, and as a result of such failure, the Premises or a portion thereof shall be substantially unusable by Tenant for the purposes for which they were demised to Tenant under this Lease, then, commencing with the expiration of such ten (10) day period, Tenant's Base Rental and Additional Rental due under this Lease shall abate in the proportion that the rentable square footage of the portion of the Premises rendered substantially unusable by such failure bears to the total rentable square footage of the Premises for the period of time that such portion is substantially unusable. 11 10. IMPROVEMENTS, REPAIRS BY LANDLORD Except as may be specifically set forth in this Lease and any Special Stipulations attached hereto, Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises. Landlord shall, however, repair and maintain all Common Areas of the Project and the structural portions of the Building, including elevators of the Building, and the basic plumbing, air conditioning, heating and electrical systems serving the Premises and Common Areas installed in accordance with similar buildings in Boston, Massachusetts, but taking into consideration the age of the Building, unless the condition requiring such maintenance is caused in part or in whole by the act, neglect, fault or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay Landlord the reasonable cost of such maintenance or repairs. Landlord's costs incurred in maintaining and repairing the structural portions and the roof of the Building shall not be included in Operating Expenses. By taking possession of the Premises, Tenant accepts them as being in good order, condition and repair, and in the condition which Landlord is obligated to deliver them to Tenant, except for latent defects and such items as Tenant may set forth on a punch list to be provided from Tenant to Landlord in accordance with the Notices provision of this Lease within ten (10) days after Landlord's delivery of possession of the Premises to Tenant. Landlord shall not be liable for any failure to make any repairs or to perform any maintenance required of Landlord hereunder, unless such failure shall persist for an unreasonable period of time after written notice of the need for such repairs or maintenance is given to Landlord by Tenant in accordance with the Notices provision of this Lease; provided, however, that if such failure shall persist for a period of ten (10) days after Landlord's receipt of written notice from Tenant of the need for such repairs or maintenance, and such failure is not due to a force majeure event, and as a result of such failure, the Premises or a portion thereof shall be substantially unusable by Tenant for the purposes for which they were demised to Tenant under this Lease, then, commencing with the expiration of such ten (10) day period, Tenant's Base Rental and Additional Rental due under this Lease shall abate in the proportion that the rentable square footage of the portion of the Premises rendered substantially unusable by such failure bears to the total rentable square footage of the Premises for the period of time that such portion is substantially unusable. 11. LANDLORD'S RIGHT TO ENTER PREMISES Landlord shall retain duplicate keys to all doors of the Premises. Tenant shall not change the locks on any entrance to the Premises. Upon Tenant's written request to Landlord, Landlord will make a reasonable change of locks on behalf of Tenant at Tenant's sole cost and expense. Landlord and its agents, employees and independent contractors shall have the right to enter the Premises at all times in the event of an emergency, and at reasonable hours to make repairs, additions, alterations, and improvements that are required by this Lease or are otherwise performed with Tenant's prior written consent; to exhibit the Premises to prospective purchasers, lenders or tenants, but Landlord may enter to exhibit the Premises to prospective tenants only during the last twelve (12) months of the Term or following any event of default for as long as such event of default remains uncured; and to inspect the Premises to ascertain that Tenant is complying with all of its covenants and obligations hereunder. Landlord shall also have the right to enter the Premises at reasonable hours to install, maintain, repair and replace pipes, wires, cables, duct work, conduit and utility lines through hung ceiling space and column space within the Premises. Landlord agrees to use reasonable efforts to minimize any interference with Tenant's business caused by such entry. Landlord shall, except in case of emergency, afford Tenant such prior notification of an entry into the Premises as shall be reasonably practicable under the circumstances; such prior notification may take the form of a telephone call to Tenant at the Premises or written notice forwarded to Tenant at Tenant's address for notices set forth in this Lease. During such time as such work is being carried on in or about the Premises, payments provided herein shall not abate and Tenant waives any claim or cause of action against Landlord for damages by reason of interruption of Tenant's business or loss of profits therefrom because of the prosecution of any such work or any part thereof. 12 12. REPAIRS BY TENANT With the exception of those items set forth in this Lease that are required to be repaired by Landlord, Tenant, during the Term of this Lease or any extension or renewal of this Lease, shall, at its sole cost and expense, make all repairs as shall be reasonably necessary to keep the Premises, and any portion of the Building under Tenant's exclusive control, in good condition and repair, normal wear, loss by fire or other casualty not caused by Tenant, Tenant's employees, agents or contractors and condemnation excepted. Tenant further agrees that all damage or injury of whatever nature done to the Premises by the Tenant or by any person in or upon the Premises except the Landlord, Landlord's agents, servants, contractors and employees, shall be repaired by Tenant at its sole cost and expense. 13. ALTERATIONS Tenant shall make no alterations or other improvements (collectively, "Alterations") to the Premises without Landlord's prior written consent, which shall not be unreasonably withheld or delayed; provided, however, that Tenant may make decorative changes to the interior of the Premises, including but not limited to repainting and recarpeting the Premises, without Landlord's consent. Unless otherwise agreed, all such approved Alterations shall be made by Landlord at Tenant's sole expense and shall become the property of Landlord and be surrendered with the Premises upon the expiration of this Lease. Landlord may, at Landlord's option, require Tenant to remove any or all such Alterations, and repair any damage to the Premises resulting from such Alterations, upon the expiration or earlier termination of this Lease, provided that Landlord informs Tenant at the time of providing its written consent to the making of any such Alteration that Tenant will be required to remove such Alteration, and repair of any damage to the Premises resulting from such Alteration or the removal of such Alteration, prior to the expiration or earlier termination of this Lease. 13 14. LIENS Tenant shall pay or cause to be paid all costs for work done by or on behalf of Tenant or caused to be done by or on behalf of Tenant on the Premises of a character which will or may result in liens against Landlord's interest in the Premises, the Building or the Project, or any part thereof and Tenant will keep the same free and clear of all mechanics' liens and other liens on account of work done for or on behalf of Tenant or persons claiming under Tenant. Tenant hereby agrees to indemnify Landlord for, and defend and hold Landlord harmless from and against all liability, loss, damages, costs or expenses, including reasonable attorneys' fees, incurred in connection with any claims of any nature whatsoever for work performed for, or materials or supplies furnished to, Tenant, including lien claims of contractors, laborers, or materialmen. Should any such liens be filed or recorded against the Premises, the Building or the Project with respect to work done for or materials supplied to or on behalf of Tenant or should any action affecting the title thereto be commenced, Tenant shall cause such liens to be released of record within twenty (20) days after notice thereof. If Tenant desires to contest any such claim of lien, Tenant shall nonetheless cause such lien to be released of record by the posting of adequate security with a court of competent jurisdiction as may be provided by Massachusetts' mechanics' lien statutes. If Tenant shall be delinquent in paying any charge for which such a mechanics' lien or suit to foreclose such a lien has been recorded or filed and shall not have caused the lien to be released as aforesaid, Landlord may (but without being required to do so) pay such lien or claim and costs associated therewith, and the amount so paid, together with interest thereon at the highest rate permitted by law and reasonable attorneys' fees incurred in connection therewith, shall be immediately due from Tenant to Landlord as Additional Rental. 15. ASSIGNMENT AND SUBLETTING Tenant may not, without at least fifteen (15) days' prior written notice to Landlord in accordance with the Notices provision of this Lease, and the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed, assign this Lease or any interest hereunder, or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (collectively, an "Assignment"). In the event that Tenant provides Landlord with notice of such proposed Assignment, such notice shall be accompanied by a copy of any and all documents, instruments and agreements pertaining to such transaction reasonably necessary for Landlord to evaluate such proposed Assignment. Whether or not such proposed Assignment is approved by Landlord, Tenant shall reimburse Landlord for its reasonable attorneys' fees incurred in connection with reviewing any proposed Assignment. Landlord shall have fifteen (15) days from its receipt of Tenant's notice of the proposed Assignment and all other required and reasonably requested information within which to make a decision as to whether or not such proposed Assignment will be approved. At a minimum, without limitation, in each event the following requirements must be satisfied: (a) Tenant shall not be released from any obligations or any liabilities hereunder as a result of any such Assignment; (b) 14 Tenant shall not be in default hereunder at the time it requests Landlord's consent or on the effective date of the proposed Assignment; (c) any Assignment or attempted Assignment without Landlord's consent shall be voidable at Landlord's option; (d) Landlord shall be provided with such information regarding the name, identity, business reputation and creditworthiness of the proposed assignee or subtenant as Landlord shall reasonably request; and (e) in the case of an assignment of the Lease, the assignee shall deliver to Landlord a written agreement whereby it assumes jointly and severally with Tenant all of the obligations and liabilities of Tenant under this Lease. In the event Landlord elects to approve a requested Assignment, Landlord has the right, but not the obligation, to terminate the Lease effective as of the date Tenant vacates the Premises; provided, however, that Landlord shall have no right to terminate the Lease under this paragraph in the event that the Assignment is a "Permitted Assignment," as defined below. Should Landlord elect to terminate the Lease, Tenant shall be relieved of any liability or obligation to pay rent beyond the date of termination. Unless Landlord expressly agrees to terminate the Lease or Tenant's obligations hereunder, in no event shall any Assignment, whether approved by Landlord or not, relieve Tenant from its obligations under this Lease. Consent to one Assignment shall not destroy or waive this provision, and all later Assignments shall likewise be made only upon prior written consent of Landlord. Assignees shall become liable directly to Landlord for all obligations of Tenant hereunder, without relieving Tenant's liability. In the event that Tenant shall be entitled to any rent, rentals, payment, profit or any other sum or cost paid by the assignee or subtenant in connection with such Assignment in excess of the then applicable rent and other charges payable by Tenant to Landlord under this Lease ("Excess Rental"), then as and when such Excess Rental is received from such assignee or subtenant, Tenant may retain one-half of such Excess Rental, and Tenant shall pay one-half of such Excess Rental to Landlord. In determining whether to consent or withhold consent to a proposed Assignment, Landlord and Tenant agree that Landlord may withhold its consent to any proposed Assignment, and such withholding of consent by Landlord will not be unreasonable, if: (1) if the proposed assignee or subtenant is a party who would, or whose use would, detract from the character of the Building, such as, without limitation, a dental, medical, chiropractic or a governmental office; or (2) if the proposed assignee or subtenant proposes to engage in a business in the Premises which is not consistent with the standards of the Building or is not permitted by or would contravene the provisions of this Lease; or (3) if the lease to, or use of the Premises or any portion thereof by, such 15 subtenant or assignee will cause Landlord to be in violation of any restrictive use covenants granted by Landlord to any other tenant in the Project in such tenant's lease; or (4) if, in the case of a proposed assignment, the proposed assignee is not of sufficient financial worth to perform its obligations under this Lease as such obligations become due; or (5) the proposed assignee or subtenant is then a tenant in the Project, or is then negotiating with Landlord to become a tenant in the Project; provided, however, it is understood and agreed that bases set forth above upon which Landlord may reasonably withhold its consent to a proposed Assignment are not intended, and shall not be construed, to be an exclusive list of reasonable bases upon which Landlord may withhold its consent, and Landlord reserves the right to withhold its consent to any proposed Assignment by virtue of any other reasonable basis. Upon execution of any sublease or assignment approved by Landlord under this Article, a fully-executed counterpart of the sublease or assignment shall be promptly delivered to Landlord by Tenant. A change, whether voluntary, involuntary or by operation of law, or a merger, consolidation or other reorganization of more than a 49% ownership in Tenant shall be an assignment of this Lease and subject to the provisions of this Article. Notwithstanding the foregoing, Tenant may, without securing Landlord's consent, do any one or more of the following things (each of which is a "Permitted Assignment"): (i) Assign this Lease or sublet the Premises, in whole or in part, to any subsidiary company, parent company, or other affiliated company of Tenant; as used herein, a company is an "affiliated" company of Tenant if it directly or indirectly controls, or is controlled by, or is under direct or indirect common control with, Tenant; and, as used herein, "control" means the power to direct the management and policies of an entity, directly or indirectly, through the exercise of voting rights; and/or (ii) Assign this Lease or sublet the Premises to any company with which Tenant may merge, consolidate or be sold to, or to any company resulting from a merger or consolidation to which Tenant may be a party; and/or (iii) Assign this Lease or sublet the Premises pursuant to a reorganization under which a majority of the capital stock or substantially all of the assets of Tenant are acquired by a publicly owned company; and/or (iv) Assign this Lease or sublet the Premises to any person, firm, or corporation purchasing all or substantially all of Tenant's assets or a controlling interest in Tenant's stock; and/or (v) Assign this Lease or sublet the Premises to any person, firm, or corporation who has a net worth exceeding Twenty-five Million Dollars ($25,000,000.00). Provided, that in the event of such Permitted Assignment, (a) the use of the Premises to be made by the assignee under such Permitted Assignment (the "Permitted Assignee") will be substantially the same as the use then being made of the Premises by Tenant, and will be within the permitted uses of the Premises under the Lease; (b) no later than fifteen (15) days after the effective date of the assignment of the Lease or the subletting of the Premises to a Permitted Assignee, Tenant provides Landlord with written notice of 16 such assignment or subletting, including (i) the written acknowledgment of Tenant that Tenant remains fully liable for all of Tenant's obligations under this Lease until the expiration of the Term of the Lease, and (ii) in the case of an assignment of the Lease to the Permitted Assignee, the express assumption by the Permitted Assignee of all obligations of Tenant under the Lease and the Permitted Assignee's express agreement to be bound by all terms and conditions of the Lease; and (c) Tenant provides Landlord with all documentation reasonably requested by Landlord in order to evaluate the Permitted Assignment. 16. EMINENT DOMAIN If the whole or any part of the Premises shall be taken by Federal, State, County or City authority for public use, or under any statute, or by right of eminent domain (or is conveyed by Landlord in lieu of such taking), then the Term hereby granted and all rights of the Tenant hereunder shall cease and terminate as of the day before the effective date of such taking. It is expressly agreed that the Tenant shall not have any right or claim to any award made to or received by the Landlord for such taking. Provided, however, that Tenant shall have the right to separately pursue an award from the condemning authority for its damages incurred in relocating its business to other premises, so long as such award or the pursuit thereof will not reduce any award that would otherwise be available to Landlord from such condemning authority. 17. DESTRUCTION OR DAMAGE TO PREMISES If the Premises shall be damaged or destroyed in whole or in part by fire, casualty or other causes covered by Landlord's insurance, Landlord shall promptly and diligently restore the Premises to their condition on the date originally demised to Tenant under this Lease, including the "Improvements" to the Premises constructed by Tenant in accordance with the provisions of Exhibit "C" to this Lease, ordinary wear and tear excepted ("Landlord's Restoration"), provided that, in Landlord's reasonable estimation, such repairs can be made within one hundred twenty (120) days of such destruction or damage. In the event that restoration of the Premises estimated by Landlord to take one hundred twenty (120) days or less to complete has not been substantially completed within one hundred twenty (120) days after the occurrence of such damage or destruction, then Tenant shall have the option of terminating this Lease, provided that (i) at the time Tenant is required to exercise such option, Landlord is not then actively in the process of completing such restoration; (ii) the delay in substantial completion of the restoration of the Premises is not caused, in whole or in part, by Tenant or any force majeure; and (iii) Tenant provides Landlord with written notice that Tenant elects to exercise such option no later than fifteen (15) days following the expiration of such one hundred twenty (120) day period. In the event that Tenant exercises its option to terminate this Lease in accordance with the terms of this paragraph, such termination shall be effective on the thirtieth (30th) day following Landlord's receipt of Tenant's notice exercising such option; and, the Term of the Lease shall expire on such thirtieth (30th) day as if such date were the Expiration Date. Tenant shall, upon substantial completion by Landlord, promptly and diligently, and at its sole cost and expense, repair and restore any improvements to the Premises made by Tenant after the Rent Commencement Date to the condition thereof prior to such destruction or damage. If, in Landlord's reasonable estimation, the Premises cannot be restored, to the extent required herein, within one hundred twenty (120) days of such damage or destruction, Landlord at its option shall, by written notice to Tenant given within sixty (60) days after the date of such fire or other casualty, either (i) elect to repair or restore such damage, this Lease continuing in full force and effect, or (ii) terminate this Lease as of a date specified in such notice, which date shall not be less than thirty (30) nor more than sixty (60) days after the date such notice is given. Until Landlord's Restoration is complete, there shall be an abatement or reduction of Base Rental and Additional Rental for Operating Expenses only (and not Taxes) in the same proportion that the square footage of the Premises so damaged or destroyed and under restoration bears to the total square footage of the Premises, unless the damaging event was caused by the negligence or willful misconduct of Tenant, its employees, officers, agents, licensees, invitees, visitors, customers, concessionaires, assignees, subtenants, contractors or subcontractors, in which event there shall be no such abatement. 17 Notwithstanding the foregoing provisions of this paragraph, if damage to or destruction of the Premises, in excess of fifty percent (50%) of the value of the Premises, shall occur within the last year of the Term of this Lease, as the same may be extended as provided hereinafter, the obligation of Landlord to restore the Premises shall not arise unless (i) Landlord, at its sole option, elects to undertake Landlord's Restoration; (ii) neither party has elected to terminate this Lease as provided below; (iii) Landlord, at its sole option, elects to provide Tenant with the opportunity of extending the Term of this Lease for an additional period so as to expire five (5) years from the date of the completion by Landlord of Landlord's Restoration; and, (iv) Tenant gives written notice to Landlord within thirty (30) days after Landlord's request that it agrees to such extension. Such extension shall be on the terms and conditions provided herein, if an option to extend this Lease remains to be exercised by Tenant hereunder, or under the terms prescribed in Landlord's notice, if no such further extension period is provided for herein. Upon receipt of such notice from Tenant, Landlord agrees to promptly undertake Landlord's Restoration. Failing such notice to extend, Landlord at its option shall have the right to terminate this Lease as of the date of the damaging event, or to restore the Premises and the Lease shall continue for the remainder of the then unexpired Term, or until the Lease is otherwise terminated as provided herein. Additionally, if damage to or destruction of the Premises, in excess of fifty percent (50%) of the value of the Premises, shall occur within the last year of the Term of this Lease, as the same may be extended by the parties from time to time, then Tenant shall have the option of terminating this Lease by providing Landlord with written notice of such termination no later than thirty (30) days after the occurrence of such damage or destruction, and in such event this Lease shall be terminated effective on the thirtieth (30th) day following Landlord's receipt of Tenant's notice exercising such option; and, the Term of the Lease shall expire on such thirtieth (30th) day as if such date were the Expiration Date. 18. INDEMNIFICATION Subject to the other provisions of this Lease, Tenant hereby indemnifies Landlord from and agrees to hold Landlord harmless against, any and all liability for any loss, injury, or damage (collectively, a "Loss"), including, without limitation, all costs, expenses, court costs and reasonable attorneys' fees, imposed on Landlord by any person whomsoever, caused by or resulting from (i) any Loss occurring in the Premises (except where such Loss is caused by or results from the gross negligence or willful misconduct of Landlord or its employees, agents or contractors); and (ii) any Loss occurring in the Building or anywhere in the Project other than the Premises that is caused by or results from the gross negligence or willful misconduct of Tenant, its employees, agents or contractors. Subject to the provisions of this Lease, Landlord hereby indemnifies Tenant from, and agrees to hold Tenant harmless against, any and all liability for any Loss occurring in the Premises, the Building or anywhere in the Project, including, without limitation, all costs, expenses, court costs and reasonable attorneys' fees, imposed on Tenant by any person whomsoever, caused by or resulting from the gross negligence or willful misconduct of Landlord or its employees, agents or contractors. The provisions of this paragraph shall survive the expiration or any termination of this Lease. 19. INSURANCE (a) Landlord's Insurance. (1) Landlord shall obtain and keep in force during the Term of this Lease an insurance policy or policies of all-risks fire, extended coverage, theft, vandalism, malicious mischief and other casualty, covering loss or damages to the Project and the Common Areas, as well as all improvements thereto, and the structural improvements to the Premises. (2) Landlord shall also obtain and keep in force during the Term of this Lease such other insurance in such amounts and with such policy provisions as it shall deem necessary or appropriate, including without limitation the following: commercial general liability insurance pertaining to the Project and the Common Areas, and bodily injuries, death and property damage arising or occurring therein. 18 (3) Tenant shall reimburse Landlord for any increase in the cost of any of Landlord's insurance pertaining to the Project if said increase is caused by or results from Tenant's use or occupancy of the Premises, the breach of this Lease by Tenant, or the acts, omissions, or negligence of Tenant, its employees, officers, agents, licensees, invitees, visitors, customers, concessionaires, assignees, subtenants, contractors or subcontractors. Landlord shall deliver to Tenant a certificate of insurance reflecting that the insurance that Landlord is required to maintain under this Lease has been obtained and is in full force and effect upon Landlord's receipt of Tenant's written request for same. (b) TENANT'S INSURANCE. During the Term of this Lease, and any extension and renewal thereof, Tenant, at its sole cost and expense, shall carry and maintain the following policies of insurance with insurance companies licensed or authorized to do business in the Commonwealth of Massachusetts and rated as no less than A-, Class VI in the current edition of Best's Guide, insuring Landlord, Landlord's management agent and authorized agent, Tenant, and any lender of record encumbering the Premises if requested by Landlord, and shall deliver to Landlord a certificate of insurance evidencing such coverage both prior to taking possession of the Premises and annually thereafter: (1) Property Insurance on the Special or All-Risk Form (including theft, sprinkler leakage, boiler and machinery insurance), covering Tenant's personal property, trade fixtures, inventory and equipment located in the Premises in an amount equal to the full replacement cost of all items. (2) Commercial General Liability Insurance on an occurrence form including premises operations, products/completed operations, hazard and contractual coverage with limits of no less than $2,000,000 per occurrence, $2,000,000 General Aggregate and $2,000,000 Completed Operations Aggregate. The insurance required of Tenant hereunder may be satisfied by an umbrella policy, so long as the minimum coverage requirements set forth under this paragraph are satisfied. (3) Workers' Compensation Insurance with liability limits required by the laws of the state in which the Premises are located and employers liability coverage. (4) Business Interruption Insurance in amounts sufficient to pay for Tenant's expenses and lost income attributable to perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises as a result of such perils. 19 Tenant's Commercial General Liability insurance shall, to the extent permitted by law, name Landlord, Landlord's management agent and authorized agent as additional insureds, and all Tenant's insurance required hereunder shall provide for thirty (30) days' prior written notice to Landlord and its asset and property manager before any modification or termination of said insurance. The above-referenced insurance shall be considered primary and non-contributory with or secondary to coverage provided by Landlord. Landlord reserves the right to require additional coverage and increase limits as industry standards change. Should Tenant engage the services of a contractor, Tenant will make certain that such contractor will carry General Liability Insurance and will name Landlord and its asset and property manager as additional insureds. (c) WAIVER OF SUBROGATION. Landlord and Tenant shall each have included (so long as commercially reasonable and obtainable) in all policies of all risks, fire, extended coverage, business interruption and other property insurance respectively obtained by them covering the Premises, the Building and contents therein, a waiver by the insurer of all right of subrogation against the other in connection with any loss or damage thereby insured against. Any additional premium for such waiver shall be paid by the primary insured. To the full extent permitted by law, Landlord and Tenant each waives all right of recovery against the other (and any officers, directors, partners, employees, agents, and representatives of the other) for, and agrees to release the other from liability for, loss or damage to the extent such loss or damage is covered by valid and collectible insurance in effect covering the party seeking recovery at the time of such loss or damage or would be covered by the insurance required to be maintained under this Lease by the party seeking recovery. If the release of either party, as set forth in the immediately preceding sentence, should contravene any law with respect to exculpatory agreements, the liability of the party in question shall be deemed not released but shall be secondary to the liability of the other's insurer. 20. DAMAGE OR THEFT OF PERSONAL PROPERTY Tenant agrees that all personal property brought into the Premises shall be at the risk of the Tenant only and that the Landlord shall not be liable for the loss thereof or any damages thereto occasioned from any act of any co-tenant, or other occupants of said Building or any other person, unless such loss results from the gross negligence or willful misconduct of Landlord. 21. HAZARDOUS MATERIALS Tenant agrees that Tenant, its agents and contractors, licensees, or invitees shall not handle, use, manufacture, store or dispose of any flammables, explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances, petroleum products or derivatives (collectively "Hazardous Materials") on, under, or about the Premises, without Landlord's prior written consent (which consent shall not be unreasonably withheld as long as Tenant demonstrates and documents to Landlord's reasonable satisfaction (i) that such Hazardous Materials (A) are necessary or useful to Tenant's business; and (B) will be used, kept, and stored in compliance with all laws relating to any Hazardous Materials so brought or used or kept in or about the Premises; and (ii) that Tenant will give all required notices concerning the presence in or on the Premises (or the release of such Hazardous Materials from the Premises) provided that Tenant may handle, store, use or dispose of products containing small quantities of Hazardous Materials, which products are of a type customarily found in offices and households (such as aerosol cans containing insecticides, toner for copies, 20 paint, paint remover, and the like), provided further that Tenant shall handle, store, use and dispose of any such Hazardous Materials in a safe and lawful manner and shall not allow such Hazardous Materials to contaminate the Premises or the environment. Tenant shall comply with all federal, state and local laws and ordinances relating to the protection of the environment or the keeping, use or disposition of environmentally hazardous materials, substances, or wastes, presently in effect or hereafter adopted, all amendments to any of them, and all rules and regulations issued pursuant to any of such laws or ordinances (collectively "Environmental Laws"). Tenant further agrees that Tenant will not permit any substance suspected of causing cancer or reproductive toxicity to come into contact with groundwater under the Premises. Any such substance coming into contact with groundwater shall be considered a Hazardous Material for purposes of this Article. Notwithstanding the above provisions, Tenant may handle, store, and use Hazardous Materials, limited to the types, amounts, and use identified in the Hazardous Materials List, if any are identified, on Exhibit "D" attached hereto. Tenant hereby certifies to Landlord that the information provided by Tenant pursuant to this paragraph is true, correct, and complete. Tenant covenants to comply with the use restrictions shown on the attached Hazardous Materials List. Tenant's business and operations, and more especially its handling, storage, use and disposal of Hazardous Materials shall at all times comply with all applicable laws pertaining to Hazardous Materials. Tenant shall secure and abide by all permits necessary for Tenant's operations on the Premises. Tenant shall give or post all notices required by all applicable laws pertaining to Hazardous Materials. If Tenant shall at any time fail to comply with this Paragraph, Tenant shall immediately notify Landlord in writing of such noncompliance. Tenant shall provide Landlord with copies of any Material Safety Data Sheets (as required by the Occupational Safety and Health Act) relating to any Hazardous Materials to be used, kept, or stored at or on the Premises, at least 30 days prior to the first use, placement, or storage of such Hazardous Material on the Premises. Landlord shall have 10 days following delivery of such Material Safety Data Sheets to forbid, or, in its sole discretion, to approve subject to the limitations contained above, such use, placement, or storage of a Hazardous Material on the Premises. Tenant shall not store hazardous wastes on the Premises for more than 90 days; "hazardous waste" has the meaning given it by the Resource Conservation and Recovery Act of 1976, as amended. Tenant shall not install any underground or above ground storage tanks on the Premises. Tenant shall not dispose of any Hazardous Material or solid waste on the Premises. In performing any alterations of the Premises permitted by the Lease, Tenant shall not install any Hazardous Material in the Premises without the specific consent of Landlord attached as an exhibit to this Article. Any increase in the premiums for necessary insurance on the Property which arises from Tenant's use and/or storage of Hazardous Materials shall be solely at Tenant's expense. Tenant shall procure and maintain, at its sole expense, such additional insurance as may be necessary to comply with any requirement of any Federal, State or local governmental agency with jurisdiction. 21 If Landlord, in its sole discretion, believes that the Premises or the environment have become contaminated with Hazardous Materials that must be removed under the laws of the state where the Premises are located, in breach of the provisions of this Lease, Landlord, in addition to its other rights under this Lease, may enter upon the Premises and obtain samples from the Premises, including without limitation the soil and groundwater under the Premises, for the purposes of analyzing the same to determine whether and to what extent the Premises or the environment have become so contaminated. Tenant shall reimburse Landlord for the costs of any inspection, sampling and analysis that discloses contamination for which Tenant is liable under the terms of this Article. Tenant may not perform any sampling, testing, or drilling to locate any Hazardous Materials on the Premises without Landlord's prior written consent. Without limiting the above, Tenant shall reimburse, defend, indemnify and hold Landlord harmless from and against any and all claims, losses, liabilities, damages, costs and expenses, including without limitation, any actual or asserted failure of Tenant to fully comply with all applicable Environmental Laws, and any loss of rental income, loss due to business interruption, and attorneys fees and costs, arising out of or in any way connected with the use, manufacture, storage, or disposal of Hazardous Materials by Tenant, its agents or contractors on, under or about the Premises including, without limitation, the costs of any required or necessary investigation, repair, cleanup or detoxification and the preparation of any closure or other required plans in connection herewith, whether voluntary or compelled by governmental authority. The indemnity obligations of Tenant under this clause shall survive any termination of the Lease. At Landlord's option, Tenant shall perform any required or necessary investigation, repair, cleanup, or detoxification of the Premises. In such case, Landlord shall have the right, in its sole discretion, to approve all plans, consultants, and cleanup standards. Tenant shall provide Landlord on a timely basis with (i) copies of all documents, reports, and communications with governmental authorities; and (ii) notice and an opportunity to attend all meetings with regulatory authorities. Tenant shall comply with all notice requirements and Landlord and Tenant agree to cooperate with governmental authorities seeking access to the Premises for purposes of sampling or inspection. No disturbance of Tenant's use of the Premises resulting from activities conducted pursuant to this paragraph shall constitute an actual or constructive eviction of Tenant from the Premises. In the event that such cleanup extends beyond the termination of the Lease, Tenant's obligation to pay rent (including additional rent and percentage rent, if any) shall continue until such cleanup is completed and any certificate of clearance or similar document has been delivered to Landlord. Rent during such holdover period shall be at market rent; if the parties are unable to agree upon the amount of such market rent, then Landlord shall have the option of (a) increasing the rent for the period of such holdover based upon the increase in the cost-of-living from the third month preceding the commencement date to the third month preceding the start of the holdover period, using such indices and assumptions and calculations as Landlord in its sole reasonable judgement shall determine are necessary; or (b) having Landlord and Tenant each appoint a qualified MAI appraiser doing business in the area; in turn, these two independent MAI appraisers shall appoint a third MAI appraiser and the majority shall decide upon the fair market rental for the Premises as of the expiration of the then current term. Landlord and Tenant shall equally share in the expense of this appraisal except that in the event the rent is found to be within fifteen percent of the original rate quoted by Landlord, then Tenant shall bear the full cost of all the appraisal process. In no event shall the rent be subject to determination or modification by any person, entity, court, or authority other than as set forth expressly herein, and in no event shall the rent for any holdover period be less than the rent due in the preceding period. 22 Notwithstanding anything set forth in this Lease, Tenant shall only be responsible for contamination of the Premises by Hazardous Materials or any cleanup resulting directly therefrom, if the matter which resulted in the contamination occurred or the Hazardous Materials were deposited during the Lease Term, or during any other period of time during which Tenant is in actual or constructive occupancy of the Premises. Tenant shall take reasonable precautions to prevent the contamination of the Premises with Hazardous Materials by third parties. It shall not be unreasonable for Landlord to withhold its consent to any proposed Assignment if (i) the proposed assignee's or sublessee's anticipated use of the premises involves the generation, storage, use, treatment or disposal of Hazardous Materials; (ii) the proposed assignee or sublessee has been required by any prior landlord, lender, or governmental authority to take remedial action in connection with Hazardous Materials contaminating a property, if the contamination resulted from such assignee's or sublessee's actions or use of the property in question; or (iii) the proposed assignee or sublessee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal, or storage of Hazardous Materials. Any of Tenant's insurance insuring against claims of the type dealt with in this Article shall be considered primary coverage for claims against the Property arising out of or under this paragraph. In the event of any transfer of Tenant's interest under this Lease, Tenant shall continue to be fully liable for all of its obligations set forth herein regarding Hazardous Materials arising under this Lease throughout the entire Term of this Lease. In the event that the Premises become contaminated with Hazardous Materials, and Tenant is responsible for such contamination as set forth herein, then Tenant's duty to pay Base Rental and Additional Rental shall continue until the obligations imposed by this Lease and such laws are satisfied in full and any certificate of clearance or similar document has been delivered to Landlord. All consents given by Landlord pursuant to this Article shall be in writing. Landlord hereby agrees to indemnify, defend, and hold Tenant harmless from any and all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from, or as a result of the presence or use of any Hazardous Materials anywhere in the Project, Building or the Premises, other than the presence or use of Hazardous Materials for which Tenant is responsible under this Lease. 22. LANDLORD'S LIEN [TEXT INTENTIONALLY DELETED.] 23. RELOCATION [TEXT INTENTIONALLY DELETED.] 24. SUBORDINATION AND ATTORNMENT 23 Tenant agrees that this Lease shall be subject and subordinate to any mortgage, security deed, loan deed or similar instrument now on said Premises and to all advances already made, or which may be hereafter made, on account of said instruments to the full extent of all debts and charges secured thereby and to any renewals or extensions of all or any part thereof and to any such instruments which any owner of said Premises may hereafter at any time elect to place on said Premises (collectively, a "Security Instrument"), and Tenant agrees upon request to hereafter attorn to the holder of such Security Instrument as the Landlord under this Lease and execute any paper or papers which the counsel for Landlord may deem necessary to accomplish that end and, if Tenant fails to do so, Tenant shall be in default of its non-monetary obligations under this Lease. Provided, however, that the subordination of this Lease and Tenant's interest hereunder to any Security Instrument shall be contingent upon Landlord, Tenant and the holder of the security interest under such instrument entering into an agreement reasonably acceptable to each of them whereby such holder agrees that Tenant's right of quiet enjoyment of the Premises will not be disturbed in the event of a foreclosure of such holder's interest under such instrument, so long as Tenant does not default in its obligations under this Lease, and fail to cure such default within the time provided in this Lease for the cure of defaults, if any. 25. ESTOPPEL CERTIFICATE Upon Landlord's request, Tenant shall execute and deliver to the Landlord, within ten (10) days from Tenant's receipt of said request, a statement in writing certifying that this Lease is in full force and effect, and setting forth the dates to which the rent and any other charges have been paid, and such statement so delivered to the Landlord may be relied upon by any prospective purchaser of, or by any holder or prospective holder of a mortgage or other security interest in the Building of which the Premises are a part. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification, except as may be represented by Landlord, that there are no defaults in Landlord's performance, and that not more than one (1) month's rental has been paid in advance. Upon Tenant's request, Landlord shall execute and deliver to Tenant, within ten (10) days from Landlord's receipt of said request, a statement in writing certifying that this Lease is in full force and effect, and setting forth the dates to which the rent and any other charges have been paid. Landlord's failure to deliver such statement within such time shall be conclusive upon Landlord that this Lease is in full force and effect, without modification, except as may be represented by Tenant, and that, to the best of Landlord's knowledge without inquiry, there are no defaults in Tenant's performance under the Lease. Provided, however, that Tenant may not request such statement from Landlord any more frequently than twice in any Lease Year. 26. DEFAULT The occurrence of any of the following shall constitute a default hereunder by Tenant: (a) The Base Rental payable under this Lease (including any Additional Rental) or any sum of money due hereunder is not paid when due, and such failure to pay continues for more than five (5) days after Tenant's receipt of notice thereof from Landlord. Provided, however, that Landlord shall not be required to provide Tenant with the notice and five-day period set forth in this subparagraph more than two (2) times during the Term of this Lease, and the third and each subsequent failure to timely pay such sums shall immediately constitute an event of default hereunder. 24 (b) The Premises are abandoned, even though the Tenant continues to pay the stipulated Base Rental, and such condition is not corrected within ten (10) days of Tenant's receipt of notice thereof from Landlord to Tenant. Provided, however, that Landlord shall not be required to provide Tenant with the notice and ten-day period set forth in this subparagraph more than once during the Term of this Lease, and the second, and each subsequent occurrence of such condition shall immediately constitute an event of default hereunder. (c) Tenant files any petition for debt relief under any section or chapter of the national or federal bankruptcy code or any other applicable federal or state bankruptcy, insolvency or other similar act. (d) Any petition is filed against Tenant under any section or chapter of the national or federal bankruptcy code or any other applicable federal or state bankruptcy, insolvency or other similar act, and such petition is not dismissed within sixty (60) days after the date of such filing. (e) Tenant shall become insolvent or transfer property to defraud creditors. (f) Tenant makes material misrepresentations to Landlord prior to or contemporaneously with the execution of this Lease. (g) Tenant shall make an assignment for the benefit of creditors. (h) A receiver is appointed for any of the assets of Tenant, and such receiver is not removed within sixty (60) days of Tenant's receipt of notice from Landlord to obtain such removal. (i) A lien is filed against the Premises, Building or Project, or Landlord's estate therein, by reason of any work, labor, services or materials performed or furnished, or alleged to have been performed or furnished, to Tenant or anyone holding the Premises by, through or under Tenant, and Tenant fails to cause the same to be vacated and canceled of record, or bonded off in accordance with the provisions of this Lease, within twenty (20) days after Tenant's receipt of written notice of the existence of such lien from Landlord. (j) Tenant fails to observe, perform and keep each and every one of the covenants, agreements, provisions, stipulations and conditions contained in this Lease to be observed, performed and kept by Tenant, including without limitation the "Rules and Regulations" for the Project of which the Premises is a part, and unless otherwise specified herein, Tenant persists in such failure for twenty (20) days after receipt of notice by Landlord requiring that Tenant correct such failure; provided, that in the event any such failure is not reasonably susceptible of cure within such twenty (20)-day period, Tenant shall have a reasonable time to cure such failure, provided Tenant commences cure as soon as is reasonably possible, and prosecutes such cure diligently to completion. 27. REMEDIES Upon the occurrence of a default by Tenant, Landlord shall have the option to do and perform any one or more of the following: 25 (a) Landlord may terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant shall fail to do so, Landlord may, without notice and prejudice to any other remedy available, enter and take possession of the Premises and remove Tenant, or anyone occupying the Premises, and its effects without being liable to prosecution or any claim for damages. In the event of termination of this Lease, Tenant shall be responsible to Landlord for (i) all payments due under this Lease prior to the date of termination, (ii) all costs incurred by Landlord in connection with such termination, and (iii) the entire amount of Base Rental, Additional Rental and other charges due hereunder for the remainder of the Term, less the then fair market rental value of the Premises for the remainder of the Term, with such difference discounted to its present value by using a discount factor of 6%. Such amount shall be paid by Tenant to Landlord immediately upon demand by Landlord and shall constitute liquidated damages and not a penalty or forfeiture (Tenant and Landlord agree that the actual damages are impossible to ascertain and that the amount described above is a reasonable estimate thereof). If Landlord elects to terminate this Lease, Tenant's liability to Landlord for damages shall survive such termination. (b) Landlord may correct such default, and Tenant shall reimburse Landlord, upon demand, for the cost incurred by Landlord in curing such default. (c) Landlord may terminate Tenant's right of possession of the Premises without terminating this Lease. Landlord may enter upon and take possession of the Premises as agent of Tenant without terminating this Lease (termination of this Lease shall only occur by written notice of such termination from Landlord to Tenant) and without being liable to prosecution or any claim for damages. In the event that Landlord terminates Tenant's right of possession of the Premises without terminating the Lease, then Landlord shall make commercially reasonable efforts to relet the Premises. In the event that Landlord relets the Premises, Landlord may make any reasonable alterations or refurbish the Premises, or both, or change the character or use of the Premises. Landlord may relet all or any portion of the Premises, alone or in conjunction with other portions of the Building, for a term longer or shorter than the Term of this Lease, at a rental rate other than that provided in this Lease, and upon such other terms (including the granting of concessions) as Landlord reasonably determines to be acceptable. If Landlord elects to reenter and relet all or any portion of the Premises, Landlord shall apply the rent so collected as follows: (1) first, to any amount due hereunder other than Base Rental and Additional Rental; (2) second, to the payment of costs and expenses of such reletting; (3) third, to the payment of Base Rental and Additional Rental; (4) fourth, the residue shall be held and applied to future Base Rental and Additional Rental due hereunder, and if any such excess exists at the termination of this Lease it shall be paid over to Tenant. 26 No such reentry or taking possession of the Premises shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. Landlord, however, shall have no duty to relet the Premises, and Landlord's failure to do so shall not release Tenant's liability for rent or damages. Tenant shall remain fully liable to Landlord for the deficiency between any rent collected as a result of reletting and the rent and other sums that are owed from Tenant to Landlord under this Lease. Landlord shall have the right to rent any other available space in the building before reletting or attempting to relet the Premises. (d) In addition to all other sums that are owed by Tenant to Landlord under this Lease, upon such event of default, Tenant shall become liable for any costs incurred by Landlord under this Lease for the completion of any improvements to the Premises, and any real estate commissions paid by Landlord under this Lease (collectively, the "Landlord's Costs"), to the extent set forth in this paragraph. The entire amount of the Landlord's Costs shall be amortized evenly over the Lease Term, and so long as Tenant does not default in its obligations under this Lease, and fail to cure such default within the applicable period of cure, if any, provided under this Lease, then Tenant shall have no liability to Landlord for the repayment of any portion of the Landlord's Costs. However, in the event that Tenant shall default in its obligations under this Lease, and Tenant shall fail to cure such default within the applicable period of cure, if any, provided under this Lease, then in addition to all of Landlord's other remedies available under this Lease, Tenant shall also be liable to Landlord for the portion of the Landlord's Costs that remains amortized but unpaid between the date of such default and the expiration of the Term of this Lease. (e) The above-stated remedies of Landlord are to be in addition to, and not in lieu of, any other rights and remedies provided Landlord either at law or in equity. No delay in enforcing the provisions of the Lease shall be deemed to constitute a waiver of such default by Landlord, and the pursuit by Landlord of one or more remedies shall not be deemed to constitute an election against other remedies. 28. EFFECT OF TERMINATION OF LEASE No termination of this Lease prior to the normal ending thereof by lapse of time or otherwise shall affect Landlord's right to collect sums due hereunder for the period prior to termination thereof. 29. ATTORNEYS' FEES If any rent or other sum due and owing under this Lease is collected by or through an attorney at law, then, in addition to such sums, Tenant shall also pay Landlord's reasonable attorneys' fees and other reasonable costs incurred in such collection. In the event that any dispute under this Lease shall result in litigation, then the non-prevailing party shall reimburse the prevailing party for its actual reasonable attorneys' fees incurred in bringing or defending such action; provided, however that a recovery of attorneys' fees by Landlord against Tenant under this sentence shall include, but shall not duplicate, the recovery by Landlord against Tenant of its reasonable attorneys' fees and other reasonable costs of collection permitted under the first sentence of this Section. 30. QUIET ENJOYMENT Landlord represents and warrants that it has the full right and authority to enter into this Lease and that Tenant, while paying the rental and performing its other covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or disturbance from Landlord, or any party claiming an interest in the Premises by or through Landlord, subject to the terms and provisions of this Lease. 27 31. SURRENDER OF PREMISES At the termination of this Lease, Tenant shall surrender the Premises and keys thereto to Landlord in same condition as at commencement of the Term, together with the Improvements defined in Exhibit "C," normal wear and tear, loss by fire or other casualty not caused by Tenant, Tenant's employees, agents or contractors, and condemnation excepted. 32. HOLDING OVER If Tenant remains in possession of the Premises after expiration of the Term hereof, without Landlord's written consent, Tenant shall be a holdover tenant at sufferance, and there shall be no renewal of this Lease by operation of law. During the first two (2) months of any holdover, Tenant shall pay holdover rent equal to 150% of the last Base Rental and Additional Rental amount due from Tenant prior to such holdover; thereafter and for the remainder of any such holdover period, Tenant shall pay holdover rent equal to 200% of the last Base Rental and Additional Rental amount due from Tenant prior to any holdover. 33. REMOVAL OF FIXTURES Tenant may prior to the expiration of this Lease, or any extension thereof, remove all unattached and movable personal property and equipment which Tenant has placed in the Premises, provided Tenant repairs all damages to the Premises caused by such removal. All personal property of Tenant remaining on the Premises after the end of the Term shall be deemed conclusively abandoned, notwithstanding that title to or a security interest in such personal property may be held by an individual or entity other than Tenant, and Landlord may dispose of such personal property in any manner it deems proper, in its sole discretion, and Tenant shall reimburse Landlord for the cost of removing such personal property. Tenant hereby waives and releases any claim against Landlord arising out of the removal or disposition of such personal property, and Tenant hereby agrees to indemnify and hold Landlord harmless from and against the claims of all third parties resulting from such removal. Tenant's obligations under this paragraph shall survive the expiration or earlier termination of this Lease. 34. NOTICES 28 Any notice or other communication required or permitted to be given under this Lease must be in writing and shall be effectively given or delivered if hand delivered to the addresses for Landlord and Tenant stated below, or if sent by certified United States Mail, return receipt requested, or if sent by receipted overnight delivery service to said addresses. Notice effected by hand delivery or receipted overnight delivery service shall be deemed to have been received upon the earlier of actual receipt or refusal thereof. Any notice mailed shall be deemed to have been received upon the earlier of (a) actual receipt, (b) refusal thereof, or (c) three (3) days after mailing of same. Either party shall have the right to change its address to which notices shall thereafter be sent, and the party to whose attention such notice shall be delivered, by giving the other party notice thereof in accordance with the provisions of this paragraph; provided, however, that the party in actual or constructive possession of the Premises under this Lease from time to time may not change its address to which notices shall thereafter be sent to eliminate the Premises as an acceptable address where notices to such party may be forwarded or delivered. Until such time as either party shall change its address for notices, notices shall be forwarded as follows: To Landlord: EastWest Property Fund, L.P. c/o TMW Real Estate Management, Inc. 5500 Interstate North Parkway Suite 220 Atlanta, Georgia 30328 Attention: Director of Asset Management WITH A COPY TO: Lincoln Property Company 101 Arch Street Boston, Massachusetts 02110 Attention: Building Manager To Tenant: Bill Gross' idealab! 181 Newbury Street Suite 110 Boston, Massachusetts 02116 Attention: Lars Perkins WITH A COPY TO: McDermott, Will & Emery 28 State Street Boston, Massachusetts 02109 Attention: Peter Friedenberg, Esquire 35. AGENCY DISCLOSURE Hunneman Commercial Company ("Landlord's Broker") has represented the Landlord in this transaction, and The Columbia Group Realty Advisors, Inc. ("Tenant's Broker") has represented the Tenant in this transaction (Landlord's Broker and Tenant's Broker are collectively referred to herein as "Broker"), and Broker will be compensated by Landlord by separate agreement. Landlord and Tenant (each of which is an "Indemnifying Party" 29 hereunder) represent to each other that they have dealt with no broker, agent or finder in connection with this transaction other than Broker. Each Indemnifying Party hereby indemnifies the other party and agrees to hold such other party harmless from and against any and all claims, causes, demands, losses, liabilities, fees, commissions, settlements, judgments, damages, and expenses (including attorneys' fees and court costs) in connection with any claim for commission, fees, compensation or other charge relating in any way to this agreement, or to the consummation of the transactions contemplated hereunder, which may be made by any person, firm or entity, other than Broker, based upon any agreement made or alleged to have been made by such Indemnifying Party or its agent or representative, or the conduct or the alleged conduct of such Indemnifying Party or its agent or representative. The provisions of this paragraph shall survive termination or expiration of the Lease. 36. EXCULPATION OF LANDLORD Landlord's obligations and liability to Tenant with respect to this Lease shall be limited solely to Landlord's interest in the Building, and neither Landlord nor any joint ventures (if any), partners, officers, directors, employees or shareholders of or in Landlord shall have any personal liability whatsoever with respect to this Lease. 37. SIGNAGE Landlord agrees that Tenant shall be listed on the Building directory at no cost or expense to Tenant. Tenant shall not place any signs, decals or other materials upon the windows or suite doors of the Premises, nor on the exterior walls of the Premises. Landlord agrees to provide Tenant, at Landlord's expense, one building standard suite door tenant identification sign, and one building standard floor directory identification sign. Provided that Tenant applies for and obtains, at its expense, all required permits, Tenant shall have the right to install the maximum signage allowable by applicable law or variance obtained by Tenant on the exterior of the Building, which shall include the vertical exterior banners along Newbury Street, as well as the marquee fronting Exeter Street; Landlord agrees to cooperate with Tenant in obtaining the permits required for such exterior signage. No other signage is acceptable. 38. FORCE MAJEURE Each party shall be excused from performing an obligation or undertaking provided for in this Lease (other than the obligation of Tenant to pay any and all items of rent as the same become due under the applicable provisions of this Lease) so long as such performance or undertaking is prevented, delayed, or hindered by a strike, lockout, labor dispute, civil commotion, act of God, or any other cause outside and beyond such party's control. 39. AUTHORITY If Tenant 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 the bylaws and resolutions of said corporation, and that this Lease is binding upon said corporation. If Tenant is a partnership, each individual executing this Lease on behalf of such partnership represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the partnership, and that this Lease is binding on the partnership. The submission or delivery of this document for examination and review does not constitute an option, an offer to lease space in the Building or an agreement to lease. This document shall have no binding effect on the parties unless and until executed by both Landlord and Tenant. 40. DEFINITIONS "Landlord" as used in this Lease shall include the first party named in this Lease, and its representatives, assigns and successors in title to Premises. "Tenant" shall include the second party named in this Lease, and his, hers or its heirs and representatives, and if this Lease shall be validly assigned or sublet, shall include also Tenant's assignees or subtenants, as to Premises covered by such assignment or sublease. 30 41. RULES AND REGULATIONS The current rules and regulations for the Building are attached hereto as Exhibit "E," and are incorporated herein by this reference. Additionally, Landlord may hereafter, from time to time, adopt and promulgate such additional rules and regulations for the government and management of said Building as Landlord may reasonably determine to be necessary (all such existing and future rules and regulations are collectively referred to as the "Rules"). During the Term of this Lease, Tenant shall at all times comply with the Rules and shall ensure compliance with the Rules by Tenant's employees, agents and contractors. Provided, however, that Tenant shall not be required to comply with any Rules adopted after the Effective Date of this Lease which materially impair the rights of Tenant under this Lease or increase the cost to Tenant of exercising its rights under this Lease. In the event of any conflict between the terms of this Lease and the Rules and Regulations, as the same may exist from time to time, the terms of this Lease shall control. Subject to the foregoing, Landlord shall enforce the Rules against all tenants of the Building uniformly, in a non-discriminatory manner. 42. GUARANTY [TEXT INTENTIONALLY DELETED] 43. SPECIAL STIPULATIONS Insofar as the following stipulations conflict with any of the foregoing provisions, the following shall control: See Addendum of Special Stipulations attached hereto and by reference incorporated herein. 44. DEMOLITION [TEXT INTENTIONALLY DELETED.] 45. ENTIRE AGREEMENT This Lease, including any attachments made a part hereof, contains the entire agreement of the parties and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. The failure of either party to exercise any power given such party hereunder, or to insist upon strict compliance by the other party of any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of such provision or of the right to demand exact compliance with the terms hereof. [SIGNATURES APPEAR ON NEXT PAGE] 31 IN WITNESS WHEREOF, the parties have hereunto set their hands and seals, the day and year first above written. TENANT: BILL GROSS' IDEALAB!, a California corporation By: [SIGNATURE] Typed Name: Title: [PRESIDENT OR VICE PRESIDENT] Attest: [SIGNATURE] Typed Name: Title: [CORPORATE SECRETARY OR ASSISTANT SECRETARY] [CORPORATE SEAL] LANDLORD: EASTWEST PROPERTY FUND, L.P., a Georgia limited partnership BY: EASTWEST PROPERTY FUND MANAGEMENT, LLC, a Georgia limited liability company, general partner By: TMW Real Estate Management, Inc., a Georgia corporation, its authorized agent By: Barry L. Howell, Vice President 32 ADDENDUM OF SPECIAL STIPULATIONS 1. PARKING. If TGI Friday's, an existing tenant of the Building, does not renew its lease in the Building, Landlord shall then offer to Tenant two (2) parking spaces adjacent to the Building. Tenant shall pay rent for such spaces at the then market rate for monthly parking contracts for the Newbury/Boylston Street area. Additionally, in the event that the premises leased by TGI Friday's become available during the initial Term of this Lease, and in the event that Tenant exercises its Right of First Offer, as defined below, as to TGI Friday's premises, then Landlord shall offer Tenant the remaining parking spaces adjacent to the Building at the then market rate for monthly parking contracts in the Newbury/Boylston Street area. 2. RIGHT OF FIRST OFFER. (a) GRANT OF RIGHT OF FIRST OFFER. So long as this Lease is in full force and effect, and so long as Tenant is not in default in the performance of its covenants under the Lease beyond any applicable notice, grace or cure period, either at the time of exercise of the right set forth herein or on the date the "Option Space," as hereinafter defined, is to become a part of the Premises, Tenant shall have the right of first offer (the "Right of First Offer") to lease any space in the Building that becomes available during the term of the Right of First Offer, subject to all of the terms and conditions set forth herein. Tenant's Right of First Offer shall be subject and subordinate to the right of the existing tenant of the Option Space to renew the term of its lease for such space, and to any other rights of any other parties to lease all or any portion of such available space, if such rights have already been granted in writing prior to the Effective Date hereof. A Schedule of Lease Expiration Dates and Renewal Options which sets forth the existing rights of other tenants in the Building to which the Right of First Offer is subordinate is attached hereto as Exhibit "F." (b) TERM OF THE RIGHT OF FIRST OFFER. The term of the Right of First Offer (the "Option Term") shall commence on the Effective Date of this Lease, and shall expire on the earlier of (i) six (6) months prior to the expiration of the Term of the Lease, as the same may be extended by the written agreement of the parties from time to time, or (ii) the first date on which all space in the Building has either been leased by Tenant or has been presented to Tenant as "Option Space," as defined below, and as to which Tenant's Right of First Offer has been terminated, as provided below. (c) AVAILABILITY OF THE OPTION SPACE. If Landlord becomes aware that any space in the Building is or will become available to be leased by a third party during the Option Term, then prior to making such space available to be leased by a third party, Landlord shall forward written notice of the availability of such space (the "Notice of Availability") to Tenant in accordance with the notices provision of this Lease; the Notice of Availability shall specify the location of the space that is or will become available (the "Option Space"). 1 (d) RENT APPLICABLE TO THE OPTION SPACE. Landlord shall include in its Notice of Availability the terms and conditions it would find acceptable for the leasing of the Option Space by Tenant. Specifically, Landlord shall specify the Base Rental and all Additional Rental that would be applicable to the Option Space (the "Option Space Rent"), and the date on which Landlord anticipates that the Option Space would be available for Tenant's occupancy, which date shall not be sooner than sixty (60) days following Tenant's receipt of the Notice of Availability. The Option Space Rent shall be determined by Landlord, and shall consist of Landlord's good faith determination of prevailing market rent for the Option Space at the time the Option Space would become a part of the Premises, taking into consideration such factors as rental for comparable premises in the Building; rental for comparable premises in existing buildings in the same geographical area as the Building (taking into consideration, but not limited to, use, quality, age and location of the applicable building); the rentable area of the premises being leased; the length of the pertinent rental term; improvement allowances, rent credits, moving allowances, space planning allowances or similar inducements, if any, then being offered in the market place; and the quality and creditworthiness of the tenant, and such other factors as Landlord may reasonably determine are relevant. (e) EXERCISE OF THE RIGHT OF FIRST OFFER. In the event that Tenant elects to exercise the Right of First Offer, Tenant shall provide Landlord with notice of its intent to lease the Option Space in accordance with the terms and conditions set forth in Landlord's Notice of Availability, by providing Landlord with written notice of such intent (Tenant's "Notice of Intent") no later than ten (10) business days after Tenant's receipt of Landlord's Notice of Availability. If Tenant does not provide its Notice of Intent to lease the Option Space within such time period, then Tenant shall be deemed to have elected not to exercise the Right of First Offer as to the Option Space; the Right of First Offer shall terminate as to the Option Space; and Landlord shall thereafter be entitled to market and lease the Option Space to any prospective tenant upon such terms and conditions as Landlord may deem appropriate. (f) ARBITRATION NOTICE. If Tenant elects to exercise the Right of First Offer, but Tenant disputes Landlord's determination of the Option Space Rent, then Tenant shall have the option of proceeding with the binding arbitration procedure for determining the Option Space Rent set forth below by delivering written notice of such election, in accordance with the notices provision of this Lease (the "Arbitration Notice"), to Landlord contemporaneously with Tenant's delivery to Landlord of its Notice of Intent. Tenant's election to proceed with arbitration as set forth herein to determine the Option Space Rent shall not delay the date on which the Option Space is to become a part of the Premises as set forth in Landlord's Notice of Availability. (g) ARBITRATION. If Tenant elects to proceed with arbitration, then the Option Space Rent shall be determined in accordance with the procedure set forth in this paragraph ("Arbitration"). (1) APPOINTMENT OF BROKERS. Within fifteen (15) days after Landlord's receipt of Tenant's Arbitration Notice, Landlord and Tenant shall forward written notices to each other, in accordance with the notices provision of this 2 Lease, in which each party shall select a real estate broker with the qualifications set forth below. The expenses of the initial two brokers shall be paid by the party appointing such broker, and the expenses of the third broker, if a third broker is appointed as provided below, shall be shared equally by the parties. Each real estate broker selected for Arbitration (i) must be an independent and licensed real estate broker in the jurisdiction where the Premises are located; (ii) must have a minimum of ten (10) years' experience in commercial office leasing in the jurisdiction where the Premises are located; (iii) must be an active broker in the jurisdiction where the Premises are located and known for commercial office expertise; (iv) must have experience representing both landlords and tenants; (v) in the case of the third broker only, is not then representing either Landlord or Tenant; and (vi) in the case of the third broker only, shall not have been involved in any disputes with Landlord, Tenant or either of the other brokers. (2) DETERMINATION OF OPTION SPACE RENT. Within twenty (20) days after their selection, the brokers selected by Landlord and Tenant shall deliver to each other their separate written determinations of the Option Space Rent, based on the prevailing market base rental and additional rental rate for comparable leases for comparable premises located in the same geographical area and market as the Building. If the separate determinations of the Option Space Rent made by the brokers vary by five percent (5%) or less, then the Option Space Rent shall be determined by averaging such separate determinations. If, however, such separate determinations vary by more than five percent (5%), then, within fifteen (15) days following the brokers' exchange of their separate determinations of the Option Space Rent, a third broker having the qualifications set forth above shall be selected by the initial two brokers. During the fifteen (15) days following the selection of the third broker, such broker shall in good faith review the separate determinations made by the initial two brokers and within such fifteen (15) day period, such broker shall select the determination of the Option Space Rent made by one of the initial two brokers as the Option Space Rent that will be applicable. When the Arbitration process set forth in this paragraph has been completed, the brokers shall notify both Landlord and Tenant in writing of their determination of the Option Space Rent, which determination shall be binding on Landlord and Tenant. (3) PAYMENT OF INTERIM RENTAL. If Arbitration is invoked by Tenant, but for whatever reason, the Arbitration process is not completed and the Option Space Rent has not been determined prior to the date the Option Space is to become a part of the Premises, then Tenant shall commence paying rent for the Option Space at the rate set forth in Landlord's Notice of Availability until the Arbitration process is complete and Landlord has received written notice of the determination of the Option Space Rent made by the brokers (the "Determination Date"); in such event, any excess rental paid by Tenant from the date the Premises were expanded through the Determination Date shall be credited to the Tenant's Base Rental and Additional Rental as the same shall thereafter become due until the entire amount of such credit has been exhausted. 3 (h) EXPANSION OF THE PREMISES. In the event that Tenant provides Landlord with its Notice of Intent to lease the Option Space in the manner provided hereinabove, then, no later than thirty (30) days following Tenant's receipt of Landlord's Notice of Availability (or five (5) business days following Tenant's receipt of the "Amendment" from Landlord, as provided hereinafter, whichever is later), Landlord and Tenant shall execute an amendment to this Lease (the "Amendment") to be prepared by Landlord documenting the expansion of the Premises to include the Option Space, which shall be subject to all existing terms of the Lease except as specified in Landlord's Notice of Availability; the Option Space Rent; and the date on which the Option Space is to become a part of the Premises, as set forth in Landlord's Notice of Availability. In the event that Tenant elects to proceed with the Arbitration procedure set forth herein, then the Amendment presented to Tenant documenting the expansion of the Premises shall provide that the rent initially applicable to the Option Space shall be the Option Space Rent set forth in Landlord's Notice of Availability, until the same is determined through the Arbitration procedure, and upon completion of the Arbitration procedure, the parties shall execute a further amendment to this Lease documenting the amount of the Option Space Rent as determined by Arbitration. In the event that Tenant fails to execute the Amendment within the time required by the terms of this paragraph, then the Right of First Offer shall terminate as to the Option Space, and Landlord shall thereafter be entitled to market and lease the Option Space to any prospective tenant upon such terms and conditions as Landlord may deem appropriate. (i) RIGHT OF FIRST OFFER PERSONAL TO TENANT. The parties expressly agree that, except as set forth herein, the Right of First Offer granted to Tenant herein shall be "personal" to Tenant. The Right of First Offer may only be exercised by Tenant or a Permitted Assignee of Tenant; it may not be exercised by any assignee or subtenant of Tenant other than a Permitted Assignee; and it may not be exercised by Tenant if Tenant is, either at the time that the Notice of Intent is provided by Tenant to Landlord or at the time the Option Space is to become a part of the Premises, negotiating with Landlord or a potential assignee or subtenant to either assign the Tenant's interest under the Lease or to sublet all or a portion of the Premises to a party other than a Permitted Assignee. 3. RENEWAL OPTION. Tenant shall have the following option to renew the Term of this Lease: (A) GRANT OF RENEWAL OPTION. So long as this Lease is in full force and effect, and Tenant is not in default in the performance of any of the covenants or terms and conditions of this Lease beyond any applicable notice and period of cure, either at the time of the exercise of the option set forth herein or at the commencement of the renewal term set forth herein, Tenant is hereby granted the option to renew the Term of this Lease (the "Renewal Option") for a period of five (5) additional years (the "Renewal Term"), to commence at the expiration of the Term of the Lease. The renewal of this Lease shall be upon the same terms and conditions of this Lease, except: (i) the Base Rental applicable during the Renewal Term shall be determined as set forth below; (ii) Tenant shall have no option to renew this Lease beyond the expiration of the Renewal Term; (iii) Tenant shall not have the right to assign its renewal rights to any subtenant of the Premises or assignee of the Lease to a party other than a Permitted Assignee, nor may any such subtenant or assignee exercise or enjoy the benefit of the Renewal Option; and (iv) the leasehold improvements will be provided in their then existing condition at the time the Renewal Term commences. 4 (b) PRELIMINARY NOTICE. If Tenant intends to exercise the Renewal Option, Tenant shall provide Landlord with written notice, in accordance with the notices provision of this Lease (the "Preliminary Notice"), of such intention at least nine (9) months, but no earlier than twelve (12) months, prior to the expiration of the Term of the Lease. If, for whatever reason, Tenant does not forward Preliminary Notice to Landlord, in accordance with the terms of this paragraph, that Tenant intends to exercise the Renewal Option, then the Renewal Option set forth herein shall expire, and Tenant shall not thereafter have any right to exercise the Renewal Option or otherwise acquire an interest in the Premises after the expiration of the initial Term of this Lease. (c) RENTAL APPLICABLE DURING RENEWAL TERM. Within thirty (30) days after Landlord's receipt of Tenant's Preliminary Notice, Landlord shall provide Tenant with written notice, in accordance with the notices provision of this Lease (the "Rent Notice"), of the Base Rental that will be applicable during the Renewal Term, and all Additional Rental that will be owed by Tenant during the Renewal Term (the "Renewal Term Rent"). The Renewal Term Rent shall be determined by Landlord, and shall consist of Landlord's good faith determination of the market rental rate for the Premises as of the commencement of the Renewal Term, taking into consideration such factors as rental for comparable premises in the Building; rental for comparable premises in existing buildings in the Back Bay area (taking into consideration, but not limited to, use, quality, age and location of the applicable building); the rentable area of the premises being leased; the length of the pertinent rental term; improvement allowances, rent credits, moving allowances, space planning allowances or similar inducements, if any, then being offered in the market place; and the quality and creditworthiness of the tenant, and such other factors as Landlord may reasonably determine are relevant. (d) RENEWAL NOTICE. If, after review of Landlord's determination of the Renewal Term Rent, Tenant elects to exercise the Renewal Option, then, no later than thirty (30) days after Tenant's receipt of Landlord's Rent Notice, Tenant shall forward written notice of such election (the "Renewal Notice") to Landlord in accordance with the notices provision of this Lease. Tenant shall, within thirty (30) days after presentation by Landlord, execute an amendment to this Lease, which amendment shall reflect the extension of the Term of the Lease through the expiration of the Renewal Term, and the Renewal Term Rent that will be applicable during the Renewal Term. If, after providing Landlord with Tenant's Preliminary Notice, Tenant does not, for whatever reason, provide Landlord with the Renewal Notice required hereunder in order to exercise the Renewal Option, then the Renewal Option shall expire; Tenant's Preliminary Notice shall be of no further force or effect; and it shall be as if the Preliminary Notice had never been forwarded by Tenant to Landlord. If, however, after Tenant forwards its Renewal Notice to Landlord, Tenant fails to execute the amendment to the Lease as required by the terms of this paragraph, then such failure shall constitute a default by Tenant under the Lease, but the Term of the Lease shall nonetheless be extended in accordance with the terms hereof. (e) NEGOTIATION PERIOD. If, after review of the Rent Notice, Tenant disputes Landlord's determination of the Renewal Term Rent, Tenant may provide Landlord with written notice, in accordance with the notices provision of this Lease, of such dispute, and request that the parties negotiate the amount of such 5 rent (the "Negotiation Notice"), provided that such notice shall be forwarded to Landlord no later than thirty (30) days following Tenant's receipt of the Rent Notice. If, after providing Landlord with Tenant's Preliminary Notice, Tenant does not, for whatever reason, provide Landlord with either the Renewal Notice or the Negotiation Notice as set forth above, then the Renewal Option shall expire as if it had never been executed; Tenant shall not thereafter have any other or further option to renew the Term of the Lease; and the Lease shall expire at the end of the Term. Upon Landlord's receipt of the Negotiation Notice, Landlord and Tenant shall proceed to negotiate in good faith for the thirty (30) days following Landlord's receipt of the Negotiation Notice (the "Negotiation Period") to reach an agreement as to the amount of the Renewal Term Rent. During the Negotiation Period, the amount of the Renewal Term Rent shall be the subject of negotiation only between the parties hereto or their designated agents. If the parties are able to reach an agreement as to the amount of the Renewal Term Rent during the Negotiation Period, then the parties shall execute an amendment to this Lease documenting the renewal of the Lease and the amount or calculation of the Renewal Term Rent; such amendment shall be prepared by Landlord, and Tenant shall execute same within thirty (30) days of Landlord's presentation of same to Tenant. (f) ARBITRATION NOTICE. If the parties are unable to agree on the amount of the Renewal Term Rent during the Negotiation Period, then either party shall have the option of proceeding with the arbitration procedure for determining the Renewal Term Rent set forth below by delivering written notice of such election, in accordance with the notices provision of this Lease (the "Renewal Arbitration Notice"), to the other party within fifteen (15) days after the expiration of the Negotiation Period. If the parties failed to reach an agreement as to the amount of the Renewal Term Rent during the Negotiation Period, but neither party elects to forward a Renewal Arbitration Notice to the other party within the time frame set forth above, then the Renewal Option shall expire as if it had never been executed; Tenant shall not thereafter have any other or further option to renew the Term of the Lease; and the Lease shall expire at the end of the Term. (g) RENEWAL ARBITRATION. If either party elects to proceed with arbitration, then the Renewal Term Rent shall be determined in accordance with the procedure set forth in this paragraph ("Renewal Arbitration"). (1) APPOINTMENT OF BROKERS. Within fifteen (15) days after either party's receipt of a Renewal Arbitration Notice, Landlord and Tenant shall forward written notices to each other, in accordance with the notices provision of this Lease, in which each party shall select a real estate broker with the same qualifications required for the brokers in an arbitration of Option Space Rent. The expenses of the initial two brokers shall be paid by the party appointing such broker, and the expenses of the third broker, if a third broker is appointed as provided below, shall be shared equally by the parties. (2) DETERMINATION OF RENEWAL TERM RENT. Within twenty (20) days after their selection, the brokers selected by Landlord and Tenant shall deliver to each other their separate written determinations of the Renewal Term Rent, based on the prevailing market base rental and additional rental 6 rate for comparable renewal terms of leases for comparable premises located in the same geographical area and market as the Building. If the separate determinations of the Renewal Term Rent made by the brokers vary by five percent (5%) or less, then the Renewal Term Rent shall be determined by averaging such separate determinations. If, however, such separate determinations vary by more than five percent (5%), then, within fifteen (15) days following the brokers' exchange of their separate determinations of the Renewal Term Rent, a third broker having the qualifications set forth above shall be selected by the initial two brokers. During the fifteen (15) days following the selection of the third broker, such broker shall in good faith review the separate determinations made by the initial two brokers and within such fifteen (15) day period, such broker shall select the determination of the Renewal Term Rent made by one of the initial two brokers as the Renewal Term Rent that will be applicable during the Renewal Term of this Lease. When the Renewal Arbitration process set forth in this paragraph has been completed, the brokers shall notify both Landlord and Tenant in writing of their determination of the Renewal Term Rent, which determination shall be binding on Landlord and Tenant. Following the determination of the Renewal Term Rent, the parties shall execute an amendment to this Lease documenting the renewal of the Lease and the amount or calculation of the Renewal Term Rent; such amendment shall be prepared by Landlord, and Tenant shall execute same within thirty (30) days of Landlord's presentation of same to Tenant. (3) PAYMENT OF INTERIM RENTAL. If Renewal Arbitration is invoked by either party, but for whatever reason, the Renewal Arbitration process is not completed and the Renewal Term Rent has not been determined prior to the scheduled commencement of the Renewal Term, then Tenant shall continue to pay rent for the Premises at the rate in effect during the last month of the Term until the Renewal Arbitration process is complete and Landlord has received written notice of the determination of the Renewal Term Rent made by the brokers (the "Determination Date"); in such event, any deficiency between the Renewal Term Rent owed by Tenant from the commencement of the Renewal Term through the Determination Date and the amount of rent actually paid by Tenant for such period shall be calculated by Landlord, and Tenant shall pay such deficiency within thirty (30) days after Tenant's receipt of Landlord's statement therefor forwarded to Tenant in accordance with the notices provision of this Lease. (h) RENEWAL OPTION PERSONAL TO TENANT. The parties expressly agree that, except as set forth herein, the Renewal Option granted to Tenant herein shall be "personal" to Tenant. The Renewal Option may only be exercised by Tenant or a Permitted Assignee of Tenant; it may not be exercised by any assignee or subtenant of Tenant other than a Permitted Assignee; and it may not be exercised by Tenant if Tenant is, at the time that the Renewal Notice is provided by Tenant to Landlord, negotiating with Landlord or a potential assignee or subtenant to either assign the Tenant's interest under the Lease or to sublet all or a portion of the Premises to a party other than a Permitted Assignee. 7 EXHIBIT A FLOOR PLAN OF PREMISES [TO BE ATTACHED BY LANDLORD PRIOR TO LEASE EXECUTION] 8 EXHIBIT B DESCRIPTION OF PROPERTY ON WHICH THE PROJECT IS SITUATED A certain parcel of land with the buildings thereon situated and now numbered 26 on Exeter Street in Boston, Suffolk County, Massachusetts, and bounded and described as follows: Southerly: By Newbury Street, 110 feet Easterly: By a line parallel with and 418 feet west of the westerly line of Dartmouth Street, 112 feet Northerly: By a passageway 16 feet wide, 110 feet and Westerly: By a line parallel with and 528 feet west of the westerly line of Dartmouth Street, 112 feet Said parcel is shown on a plan entitled "Plan of Land - Boston, Massachusetts - Surveyed for a Viola Berlin and Florence Berlin, Trs. First Spiritual Temple" dated March 7, 1974, by Otte & Dwyer, Inc., Surveyors, and recorded with Suffolk deeds in Book 8696, Page 28, on which plan the westerly boundary is shown as bounding on Exeter Street and the northerly boundary as bounding on Public Alley No. 434. 9 EXHIBIT C PLANS AND SPECIFICATIONS FOR IMPROVEMENTS TO PREMISES IMPROVEMENTS TO PREMISES. Tenant accepts the Premises in their existing "as is" condition, and Landlord shall have no obligation to make any improvements to the Premises. All improvements to the Premises (the "Improvements") shall be constructed by Tenant at Tenant's sole cost and expense, subject to Landlord's prior approval as set forth herein. (a) THE PLANS. Prior to constructing the Improvements, Tenant shall submit to Landlord detailed plans and specifications (the "Plans") for construction of the Improvements. After they have been approved by Landlord, a copy of the Plans will be attached hereto as Exhibit "C-1" and incorporated herein by this reference. After attachment of a copy of the Plans hereto, all modifications requested by Tenant to the Plans ("Change Orders") must receive the prior approval of Landlord, which approval shall not be unreasonably withheld or delayed. Upon Landlord's approval of the Plans, which shall not be unreasonably withheld or delayed, Tenant shall commence construction of the Improvements in accordance with the Plans. Landlord shall provide Tenant with either Landlord's approval, or its determination that its approval has been withheld (including Landlord's reasons for withholding such approval), of the Plans or any proposed Change Orders within five (5) business days after Landlord's receipt of such Plans or proposed Change Orders from Tenant. (b) CONSTRUCTION OF THE IMPROVEMENTS. The Improvements shall be constructed in a good and workmanlike manner, and in compliance with all applicable laws, building codes and zoning restrictions. Tenant shall not commence construction of the Improvements until Tenant has provided Landlord with a certificate of insurance evidencing that all insurance that Tenant is obligated to maintain under this Lease has been procured by Tenant and is in full force and effect. Tenant shall not commence occupancy of the Premises until a certificate of occupancy has been obtained from the appropriate governmental authority with jurisdiction over the Premises reflecting that the Improvements have been substantially completed, and a copy of such certificate has been provided by Tenant to Landlord. Within thirty (30) days after completion of the Improvements in accordance with the Plans, Tenant shall provide Landlord with copies of lien waivers from all contractors, subcontractors and materialmen supplying work or labor for the Improvements. After completion of the Improvements, any alterations or additions which Tenant may desire to make to the Premises shall be made in strict compliance with the terms of this Lease. 10 (c) IMPROVEMENT ALLOWANCE. Within thirty (30) days following Landlord's receipt of the lien waivers and the certificate of occupancy required by the terms of the preceding paragraph, together with documentation substantiating to Landlord's reasonable satisfaction Tenant's actual cost incurred in constructing the Improvements, Landlord shall reimburse Tenant for such cost in an amount up to, but not exceeding, an allowance of Thirty Dollars ($30.00) per rentable square foot of the Premises, which amount the parties hereby agree is Six Hundred Sixty-one Thousand, Five Hundred Sixty Dollars ($661,560.00) (the "Allowance"), Tenant shall be fully liable for any cost of constructing the Improvements in excess of the Allowance. In the event that the cost of the Improvements for which reimbursement is sought by Tenant from Landlord pursuant to this paragraph is less than the full amount of the Allowance, then the difference between the Allowance and the cost of the Improvements reimbursed to Tenant hereunder shall be credited against Tenant's rental as the same becomes due and payable hereunder until the entire amount of such credit has been exhausted. 11 EXHIBIT D HAZARDOUS MATERIALS LIST 12 EXHIBIT E RULES AND REGULATIONS 1. Tenant shall not obstruct the sidewalks, entry passages, corridors, halls, elevators or stairways, or use them for any purpose other than ingress and egress. Tenant shall not cover or obstruct the floors, or skylights and windows which reflect or admit light into any place in the Building in which the Premises are located. Nothing shall be thrown by Tenant, its agents, employees or contractors out of the windows or doors, or down the passages of the Building. The water closets and other water apparatus shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, or other obstructing substances, shall be thrown therein. The cost of repairing any damage resulting to any water apparatus, or to associated systems from the misuse of same by Tenant, its agents, employees or contractors, shall be paid by Tenant. 2. Tenant shall not inscribe, paint, or affix any advertisement or other notice to any part of the outside or inside of the Building, except upon the doors of the Premises. Any advertisement or other notice placed upon the doors of the Premises shall be of such order, size and style, and at such places as shall be designated by Landlord. Signage at the entrance of the Premises, identifying Tenant as a tenant of the Building, will be provided by Landlord in accordance with the signage provisions of this Lease. 3. Tenant shall not do or permit to be done in the Premises, or bring or keep anything therein, which shall in any way increase the rate of fire insurance on the Building or the Property, (only artificial and fire resistant Christmas trees and/or decorations are permitted), or obstruct or interfere with the rights of other Tenants, or in any way injure or annoy them, or conflict with any of the rules and ordinances of the Board of Health. Tenant, its agents, employees and contractors shall maintain order in the Building, shall not make or permit any improper or offensive noise within the Premises or the Building, shall not permit any noxious or offensive odors to permeate any of the Common Areas of the Building or Project, and shall not interfere in any way with other tenants rights of quiet enjoyment or the rights of quiet enjoyment of those having business with other tenants of the Building. No rooms shall be occupied or used as sleeping lodging apartments at any time. No part of the Building shall be used or in any way appropriated for gambling, immoral or other unlawful practices, and no intoxicating liquors shall be sold in said Building. 4. Tenant shall not employ any persons, other than Landlord's janitors, for the purposes of cleaning the Premises. 5. Tenant shall strictly comply with any and all regulations set forth by Landlord for the operation, maintenance and management of the parking areas adjacent to the Building or buildings in which the Premises are contained. 6. No animals, birds, bicycles or other vehicles, or other obstructions, shall be allowed in the offices, halls, corridors, elevators or elsewhere in the Building. EXHIBIT E Page 1 OF 2 7. No painting shall be done, nor shall any alterations be made to any part of the Building by erecting or changing any partitions, doors or windows, nor shall there be any nailing, boring or screwing into the woodwork, other than the hanging of art work, or plastering, nor shall any connection be made to the electric wires or gas or electric fixtures, without the consent in writing on each occasion of Landlord or its agent. Landlord requires Tenant to monitor all installation of communications and other non-electrical wiring to ensure that all installed wiring is of a plenum-rated type and that all relevant building and fire codes concerning plenum-rated wiring are maintained by the installer. All glass, locks and trimmings in or upon the doors and windows of the Building shall be kept whole and, when any part thereof shall be broken, the same shall be immediately replaced or repaired and put in order, under the direction and to the satisfaction of Landlord or its agents, and shall be left whole and in good repair. Tenant shall not injure, overload or deface the Building, the woodwork or the walls of the Premises. 8. A reasonable number of keys for each office within the Premises will be furnished to Tenant without charge. No additional locks or latches shall be put upon any door without the consent of Landlord. Tenant, at the termination of this Lease, shall return to Landlord all keys to doors in the Building and Premises. 9. Landlord, in all cases, reserves the right to prescribe the maximum weight, and the location of iron safes or other heavy articles placed in the Premises. 10. The use of burning fluid, camphor, alcohol, benzene, kerosene or anything except gas or electricity for lighting the Premises, is prohibited. No offensive gases or liquids are permitted in the Premises or in the Building. 11. If Tenant desires blinds over the windows, Tenant must obtain Landlord's consent prior to installing such blinds; they must be in installed at Tenant's sole cost and expense; and they must be of such shape, color and material as may be prescribed by Landlord. No awning shall be placed on the Building. EXHIBIT E Page 2 of 2 EXHIBIT F SCHEDULE OF LEASE EXPIRATION DATES AND RENEWAL OPTIONS
TENANT LEASE EXPIRATION DATE RENEWAL OPTIONS - -------------------- --------------------------- -------------------------------------------------------------- Video Express March 31, 2005 5-year option, exercisable upon 6 month's prior notice Wallwork Curry July 31, 2004 None TGI Friday's January 31, 2006 5-year option, exercisable upon 1 year's prior notice
EXHIBIT G CLEANING SPECIFICATIONS [TO BE ATTACHED BY LANDLORD PRIOR TO LEASE EXECUTION] EXHIBIT H LETTER OF CREDIT [Date] [Name of Issuing Bank] Mailing Address: IRREVOCABLE STANDBY LETTER OF CREDIT NO. ----------------- BENEFICIARY: EASTWEST PROPERTY FUND, L.P. - --------------------------- - --------------------------- - --------------------------- GENTLEMEN: At the request of Bill Gross' Idealab! ("Customer"), we hereby establish in your favor an Irrevocable Standby Letter of Credit in the sum of USD EIGHT HUNDRED NINETY-FIVE THOUSAND ONE HUNDRED NINETY-TWO AND 00/100 (US$895,192.00), available by your drafts at sight at our office at ____________________, Boston, Massachusetts, effective immediately and expiring on ___________________. Drafts must be accompanied by a statement on your letterhead and purportedly signed by you stating that: "The amount of the draw specified in the accompanying draft represents funds due to the undersigned by reason of the default by Bill Gross' Idealab! of its obligations under a lease dated __________ between the undersigned, as landlord, and Bill Gross' Idealab! as tenant, which default has continued without cure beyond the expiration of all notice and cure periods set forth in such lease." EXHIBIT H Page 1 of 3 Drafts drawn hereunder may be presented by Beneficiary or its authorized representative and must be marked: "Draw under [issuing bank] Letter of Credit number_______", and must be accompanied by the original of this Letter of Credit and all amendments (if any). Multiple draws are permitted under this Letter of Credit. All drafts shall be paid in the form of a cashier's check in the full amount of the draft (but not in the aggregate in excess of the applicable limit of this Letter of Credit), made payable to the Beneficiary at the following address: Eastwest Property Fund, L.P. c/o TMW Real Estate Management, Inc. Suite 400 Two Ravinia Drive Atlanta, Georgia 30346 Attention: Director of Asset Management. In the event that the Beneficiary would prefer that such payment be made to the Beneficiary in another form or at another address, the Beneficiary shall so state in the draft. We hereby agree with the drawers, endorsers and bonafide holders of all drafts drawn under and in compliance with the terms of this Letter of Credit, that such drafts will be duly honored upon presentation to the drawee on or before [initial expiration date of Letter of Credit] or any subsequent expiration date as herein provided. This Letter of Credit sets forth in full the terms of our undertaking and such undertaking shall not in any way be modified or amended by reference to any other documents whatsoever. This Letter of Credit is subject to ISP 98 (International Standby Practices) Publication No. 590. You may transfer your rights under this Letter of Credit in its entirety (but not in part) to any successor beneficiary, and such transferred rights may be successively transferred. Transfers of this Letter of Credit shall be effected upon presentation to [issuing bank] of the original of this Letter of Credit and all amendments (if any), accompanied by the completed transfer form attached hereto as Annex A [attach issuing bank's form of transfer form] and payment of our transfer fee [state amount]. This Letter of Credit shall be deemed to be automatically extend without amendment for an additional one (1) year term from the present or any future expiration date hereof, unless at least thirty (30) days prior to the present or any future expiration date hereof we notify you in writing by overnight courier service, with receipted delivery, that we elect not to consider this Letter of Credit renewed for any such additional period. Such notice shall be given to you at the address set forth above, or if this Letter of Credit has been transferred in accordance with the provisions hereof, to such address as is set forth in the amendment to this Letter of Credit reflecting such new beneficiary. If we give to you such notice of our election not to renew this Letter of Credit, you shall be entitled to draw hereunder in full or in part upon presentation of your draft, accompanied by a copy of such notice (in which event you need not provide the statement set forth above in the second paragraph of this Letter of Credit). EXHIBIT H Page 2 of 3 The principal amount of this Letter of Credit shall be reduced according to the following schedule unless, not less than thirty days prior to the effective date of the next scheduled reduction as set forth below, we receive from you written notice, on your letterhead and purportedly signed by you, (i) referencing this Letter of Credit, and (ii) stating (a) that a default by Bill Gross' Idealab! of its obligations under a lease dated __________ between you, as landlord, and Bill Gross' Idealab! as tenant, has occurred and is then continuing without cure beyond the expiration of all notice and cure periods set forth in such lease, and (b) your request that the principal amount of this Letter of Credit not be reduced:
SCHEDULED AMOUNT OF NEW PRINCIPAL AMOUNT OF REDUCTION DATE REDUCTION LETTER OF CREDIT - ------------------- -------------- -------------------------- March __, 2001 $137,038.40 $758,153.60 March __, 2002 $137,038.40 $621,115.20 March __, 2003 $137,038.40 $484,076.80 March __, 2004 $137,038.40 $347,038.40 March __, 2005 $137,038.40 $210,000.00
This Letter of Credit will not be automatically renewed after March __, 2010. Very truly yours, [issuing bank] -------------------- Authorized signature EXHIBIT H Page 3 of 3 EX-21.1 20 EXHIBIT 21.1 EXHIBIT 21.1 NAME STATE OF INCORPORATION CarsDirect.com, Inc. Delaware idealab! Holdings, L.L.C. Delaware EX-23.1 21 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 10, 2000, except as to the completion of the Company's reincorporation in the State of Nevada as described in Note 23 which is as of _______, 2000 and except as to a determination that the Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, as described in Note 21 which is as of ___________, 2000, relating to the consolidated financial statements of idealab!, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Woodland Hills, California April 19, 2000 EX-23.2 22 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated February 28, 2000, relating to the financial statements of eVoice, Inc. (a development stage company) which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP San Jose, California April 19, 2000 EX-23.3 23 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated June 30, 1999, except for the information presented in Note 12 for which the dates are August 24, 1999 and November 18, 1999, relating to the financial statements of Intranets.com, Inc. which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts April 17, 2000 EX-23.4 24 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated October 27, 1999 relating to the financial statements of Perga Capital Incorporated, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP London, Ontario, Canada April 18, 2000 EX-23.5 25 EXHIBIT 23.5 EXHIBIT 23.5 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated October 27, 1999 relating to the financial statements of Autodata Marketing Systems Incorporated, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP London, Ontario, Canada April 18, 2000 EX-23.6 26 EXHIBIT 23.6 EXHIBIT 23.6 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated March 26, 1999, except as to the acquisition of PointCast, Inc. by Launchpad Technologies, Inc. described in Note 11, which is as of May 27, 1999, relating to the financial statements of PointCast, Inc. which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP San Jose, California April 17, 2000 EX-23.7 27 EXHIBIT 23.7 EXHIBTI 23.7 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated December 22, 1999, relating to the financial statements of Potamkin Auto Center, Ltd. which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP New York, New York April 17, 2000 EX-23.9 28 EXHIBIT 23.9 EXHIBIT 23.9 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated Februay 8, 2000, with respect to the finiacial statements of GoTo.Com, Inc. included in the Registration Statement (Form S-1 No. 333-________)and related Prospectus of idealab! dated April 20, 2000. /s/ Ernst & Young, LLP Ernst & Young, LLP Los Angeles, CA April 18, 2000 EX-23.10 29 EXHIBIT 23.10 EXHIBIT 23.10 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated Februay 21, 2000, with respect to the finiacial statements of idealab! Capital Management I, LLC included in the Registration Statement (Form S-1 No. 333-________)and related Prospectus of idealab! dated April 20, 2000. /s/ Ernst & Young, LLP Ernst & Young, LLP Los Angeles, CA April 18, 2000 EX-27.1 30 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 1000 Year Year Year Year Jan-31-1997 Jan-31-1998 Jan-31-1999 Jan-31-2000 Mar-14-1996 Feb-1-1997 Feb-1-1998 Feb-1-1999 Jan-31-1997 Jan-31-1998 Jan-31-1999 Jan-31-2000 1084 3826 6339 601474 0 0 0 70526 18 97 92 15268 0 0 15 508 0 0 0 12080 1145 4068 6577 706239 208 1640 3030 27780 26 249 717 9211 2461 16666 47552 1674383 816 6721 5471 143500 0 0 0 0 3450 12154 13652 892782 0 0 0 0 265 749000 15366 388404 2235 3647 2302 (49905) 2461 16666 47552 1674383 0 0 0 0 0 154 805 21158 303 172 82 28380 2410 11563 12297 262344 (99) (252) (7677) (324710) 0 28 0 296 0 178 49 2695 (2367) (11335) (3864) 81125 3 3712 2358 (86245) (2370) (7056) (883) 118484 0 0 0 0 0 0 0 0 0 0 0 0 (2370) (7056) (883) 118484 (0.01) (0.02) 0 0.25 (0.01) (0.02) 0 0.15
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