-----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, HDjcMdahPpyb5IQEBZGUQxAJwwE6qufxTSImkyU+ND8GkRX1ykjVAqIlSG1Qo4OY dcxhQqqNi8KC4Z5G75iU2w== 0000912057-00-013226.txt : 20000327 0000912057-00-013226.hdr.sgml : 20000327 ACCESSION NUMBER: 0000912057-00-013226 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOTJOBS COM LTD CENTRAL INDEX KEY: 0001087728 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26891 FILM NUMBER: 577078 BUSINESS ADDRESS: STREET 1: 24 WEST 40TH STREET STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2126995300 MAIL ADDRESS: STREET 1: 24 WEST 40TH STREET 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10018 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-26891 HOTJOBS.COM, LTD. (Exact name of registrant as specified in its charter) DELAWARE 13-3931821 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
24 WEST 40(TH) STREET, 14(TH) FLOOR NEW YORK, NY 10018 (Address and zip code of principal executive offices) (212) 699-5300 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X/ / No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the registrant, as of February 29, 2000 was approximately $312,785,346 (based on the last reported sale price on the NASDAQ National Market on that date). The number of shares outstanding of the registrant's common stock as of February 29, 2000 was 31,726,187. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's Proxy Statement to be filed with the Securities & Exchange Commission for the Registrant's Annual Meeting of Stockholders to be held in May 2000 are incorporated by reference in Part III of this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HOTJOBS.COM, LTD. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
ITEM PAGE NO. - ---- -------- PART I 1. Business.................................................... 3 2. Properties.................................................. 28 3. Legal Proceedings........................................... 28 4. Submission of Matters to a Vote of Security Holders......... 28 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 29 6. Selected Consolidated Financial Data........................ 30 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 32 8. Consolidated Financial Statements and Supplementary Data.... 42 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 64 PART III 10. Directors and Executive Officers of the Registrant.......... 64 11. Executive Compensation...................................... 64 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 64 13. Certain Relationships and Related Transactions.............. 64 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 65 SIGNATURES......................................................................... 67 INDEX TO EXHIBITS.................................................................. 68
The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations, assumptions, estimates and projections about HotJobs.com and our industry. These forward-looking statements involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements. HotJobs.com's actual results and the timing of certain events could differ significantly from those anticipated in such forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report in the section entitled "Risk Factors" and the risks discussed in our other Securities and Exchange Commission ("SEC") filings including our Registration Statement on Form S-1 declared effective on November 10, 1999 by the SEC (File No. 333-89813) and in our Form 10-Q filed November 9, 1999. HotJobs.com undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. PART I ITEM 1. BUSINESS OVERVIEW HotJobs.com is a leading Internet-based recruiting solutions company. Our suite of services leverages the Internet to provide a direct exchange of information between job seekers and employers. We developed these services based on our experience in the recruiting industry and our in-depth understanding of the needs of job seekers and employers. By solving many of the problems associated with traditional recruiting methods, HotJobs.com allows employers to more effectively manage their recruiting processes to save time and money. The majority of our revenues are recurring and are primarily derived from employer memberships to our online employment exchange, WWW.HOTJOBS.COM. The employment exchange allows member employers to access our database of job seekers and provides member employers with the tools to post, track and manage job openings in a real-time environment. HotJobs.com allows job seekers to identify, research, apply to and evaluate job opportunities, while enabling them to restrict access to their resumes. Headhunters are prohibited from using the employment exchange, ensuring direct contact between job seekers and member employers. HotJobs.com also provides employers with additional recruiting solutions such as its proprietary Softshoe-Registered Trademark- and Shoelace-TM- recruiting software, WorkWorld-TM- career expos and online advertising and consulting services. Revenues from our services have grown rapidly, primarily driven by increased employer memberships to the WWW.HOTJOBS.COM employment exchange. Our revenues increased from approximately $3.5 million for the fiscal year ended December 31, 1998, to approximately $20.7 million for the fiscal year ended December 31, 1999. HotJobs.com was incorporated in Delaware in February 1997 as Hot Jobs, Inc. We changed our name to HotJobs.com, Ltd. on September 23, 1998. Our principal executive offices are located at 24 West 40(th) Street, 14(th) Floor, New York, NY 10018. The telephone number at that location is (212) 699-5300. INDUSTRY BACKGROUND RECRUITING MARKET We believe that companies cannot be competitive without implementing successful recruiting practices. According to industry sources, businesses in the U.S. spent in excess of $13 billion in 1997 to hire new employees by advertising job openings in newspapers and by hiring headhunters. 3 We believe that several factors are causing an increase in spending on recruiting efforts: INCREASED LABOR SHORTAGE. HotJobs.com believes that demographic trends such as the aging of the Baby Boomers and decreasing birth rates, together with the continued growth in the U.S. economy, are combining to cause a tight labor market. As a result, the recruiting process now focuses less on selecting qualified employees from a ready pool of candidates and more on managing a scarce resource. INCREASED EMPLOYEE TURNOVER. We believe that employees currently change jobs more often than they have in the past and that even satisfied employees are increasingly investigating job opportunities. This makes it more difficult for employers to retain qualified, experienced individuals and increases the number of hirings that must occur each year in order to maintain or grow an employer's workforce. INCREASED URGENCY TO REDUCE TIME TO HIRE. HotJobs.com believes that there is a shortage in highly skilled job seekers. As a result, qualified candidates must be hired quickly or they may be lost to competitors. The ability to quickly hire qualified employees may have a significant influence on the future success of a company. Prior to the advent of the Internet, companies traditionally relied on a combination of five recruiting methods. These five methods include newspaper classifieds and other print advertisements, traditional job fairs, on-campus recruiting, internal referral programs and headhunters. The key limitations of each of these methods include: NEWSPAPER CLASSIFIEDS AND OTHER PRINT ADVERTISEMENTS - multiple intermediaries including media buyers and media placement agents are typically involved before an advertisement is placed; - several weeks to several months may pass from the time a job is advertised to the time the recruiter can respond to resumes in which he or she is interested; and - it is typically cost prohibitive to provide a full description of either the employer or the job opportunity and to advertise jobs nationally. TRADITIONAL JOB FAIRS - employers have limited time to meet with job seekers whom they have not pre-screened; and - job seekers often must visit each company's booth prior to determining the specific jobs that are available. ON-CAMPUS RECRUITING - the number of candidates requesting interviews typically exceeds the employers' available time slots; and - employers must visit multiple campuses and have limited time to meet with all qualified candidates. INTERNAL REFERRAL PROGRAMS - incentive programs may divert an employee's attention away from performing his or her job, thereby reducing productivity; and - referring employees may be more concerned about the quantity than the quality of referrals. HEADHUNTERS - placement fees are costly and employers only have access to limited applicant pools; and 4 - job seekers generally receive limited information about the specific companies and positions for which they apply and do not have direct contact with the employer. ONLINE RECRUITING MARKET The emergence of the Internet has created an opportunity to connect job seekers with employers more efficiently and cost effectively when compared to traditional recruiting methods. Online recruiting can automate the recruiting process, providing more informative and responsive real-time interaction between job seekers and employers, and has the potential to lower the cost and time to hire. Job seekers are empowered with access to an aggregation of information about employment opportunities worldwide not previously available to them in one place. We believe that a significant online recruiting marketplace will emerge as more job seekers and employers embrace the advantages the Internet brings to the recruiting process. In addition, Internet-based solutions may replace more expensive client/server recruiting software and change the way companies manage and distribute information about job seekers throughout their organizations. MARKET OPPORTUNITY We believe that most of the advantages offered by Internet technology have not been fully applied to the recruiting market. While online job boards have improved the aggregation of job postings and job seekers, they have not fundamentally improved workflow throughout the recruiting process. Additionally, few Web-based commercial software applications are available to help employers manage their internal recruiting processes. We also believe that most employers are in the early stages of understanding how to use the Internet to increase their competitiveness in recruiting. We believe that many of the current online recruiting offerings suffer from the following limitations: - LACK OF PRIVACY. Most online recruiting solutions do not allow job seekers to restrict access to their resumes. HotJobs.com believes that many experienced professionals will not post their resumes on a job board if there is a chance that they may be detected by their current employers. - HEADHUNTER POSTINGS. Many of the current online recruiting offerings give headhunters complete access to their sites, resulting in a high cost intermediary between employers and job seekers. In addition, employers have to compete with headhunters for the job seekers they are looking to hire. Job seekers do not know whether the jobs to which they are applying are from actual employers or are merely ads placed by headhunters looking for applicants for whom they can charge a fee. - LACK OF SCREENING PROCESS. Many of the current online job boards offer no or only limited testing and screening capabilities. Many sites stress the size of their resume database and the number of people who visit the site each month. This focus on quantity rather than quality results in the recruiter receiving an excessive amount of unwanted resumes. - LACK OF FUNCTIONALITY. Many online job boards serve only to attract candidates without providing employers with the tools they need to manage the recruiting process within their organizations. Additionally, these job boards generally lack the ability to help employers compile and analyze job seeker data. - UNFAVORABLE PRICING MODEL. Most recruiting Websites charge companies to list openings for a fixed period of time on a price-per-ad basis. HotJobs.com believes that this is inefficient for companies with ongoing recruiting needs. Jobs that have been filled remain posted, attracting unwanted applicants, while unfilled jobs need to be posted again and again until a person is hired. Because our recruiting solution does not suffer from these limitations, we believe that an opportunity exists to become the leader in online recruiting solutions. 5 OUR SOLUTIONS HotJobs.com provides comprehensive online recruiting solutions for employers and job seekers. Our solutions include our online employment exchange, WWW.HOTJOBS.COM, our browser-based proprietary recruiting software, Softshoe and Shoelace, and our WorkWorld career expos. Additionally, HotJobs.com provides strategic consulting and development services focused on improving the efficiency and effectiveness of the recruiting process for employers. As companies increasingly utilize the Internet to improve their recruiting processes, HotJobs.com believes that its solution enables its customers to leverage the lower cost and real-time communication enabled by the Internet while retaining many of the positive attributes of traditional recruiting methods. BENEFITS TO JOB SEEKERS The WWW.HOTJOBS.COM employment exchange empowers job seekers to find employment opportunities posted directly by employers at no cost to the job seeker. Key features of the HotJobs.com solution for job seekers include: - DIRECT ACCESS TO A LARGE AND GROWING LIST OF EMPLOYERS. The WWW.HOTJOBS.COM site offers job seekers direct access to job postings from over 3,200 member employers. Unlike most online recruiting services, WWW.HOTJOBS.COM excludes headhunters to ensure direct contact between job seekers and member employers. Job seekers can search for and apply to specific job openings or submit their resumes to our resume database, providing our member employers with access to their resumes unless blocked by the job seeker. - PRIVACY. Through the use of the HotBlock-TM- feature, job seekers can prevent the viewing of their resumes. With this feature, job seekers can eliminate unwanted solicitations and limit detection by their current employers. - PERSONALIZATION. HotJobs.com enables job seekers to set up their own career home page, My HotJobs, free of charge and provides them with tools to manage their job searches. HotJobs.com also provides job seekers with the ability to set up personal job search agents, enabling them to create customized and automated searches based on their specifications, such as job type or geographic preference. This service also provides job seekers with email notification during a specified period of time of any new jobs added to the system which match the job seeker's specifications. - DETAILED CURRENT INFORMATION. HotJobs.com provides in-depth company and job descriptions, enabling job seekers to apply for those jobs for which they are most qualified and minimizing the need for additional research. Additionally, each job posting includes a date stamp, giving the job seeker information about the age of a particular job posting. - JOB SEARCH TOOLS. HotJobs.com provides job seekers with the ability to store job search information, including a "shopping cart" to store multiple job search results as well as cover letter storage related to specific job inquiries. Additionally, job seekers can keep track of currently active jobs for which they have applied and can analyze the effectiveness of their job searches by tracking the number of times their resumes appear in an employer's search and are subsequently viewed. - CAREER CHANNELS. In January 2000, HotJobs.com unveiled its channel strategy that specifically targets a search with 24 categories including Marketing, Start-up, Technology and Telecommunications. We designed this channel strategy to allow job seekers to narrowly target their job search. In connection with the channel development, we also introduced sub-categories to better filter searches. Job postings have been reclassified using a platform dubbed "Job Interests." The new classification acts as a cross-index to narrow job searching to help job seekers target the positions they seek. - CAREER RESOURCES. HotJobs.com provides job seekers with career resources, including a bookstore, original editorial content and job seeker message boards. 6 BENEFITS TO EMPLOYERS HotJobs.com provides employers with a comprehensive Internet-based recruiting solution focused on reducing the cost and time to hire a new employee. This comprehensive solution includes WWW.HOTJOBS.COM, the online employment exchange, Softshoe and Shoelace recruiting software, WorkWorld career expos and related advertising and consulting services. We developed our solution to provide employers with access to a high quality pool of job seekers and the tools necessary to manage the workflow involved in the recruiting process. Key features of the HotJobs.com solution for employers include: - FLEXIBLE PRICING MODEL. HotJobs.com offers employers a fully automated, cost-efficient means to recruit job seekers online. The HotJobs.com pricing model allows employers to choose between different levels of service to meet their needs. Depending upon the employer's requirements, employers may choose to pay periodic subscription fees to become a member of the online employment exchange based on the number of the employer's recruiters that have access to the exchange, to utilize our online software on a subscription fee basis or to purchase customized consulting services. - DIRECT ACCESS TO A LARGE NUMBER OF JOB SEEKERS. Through the WWW.HOTJOBS.COM employment exchange, we offer member employers access to our growing job seeker database. We do not allow headhunters to search our resume database or to place job advertisements on our job board. By limiting access only to member employers, we provide direct access to our pool of job seekers and eliminate competition for candidates from headhunters. - REAL-TIME JOB POSTING, TRACKING AND MANAGEMENT TOOLS. HotJobs.com provides member employers the ability to post, track and manage job openings in a real-time environment. The HotJobs.com solution enables a member employer to remove a posting once a position has been filled and replace it with a new posting. We believe that this reduces unnecessary expenditures of time and money experienced in traditional recruiting methods. - REDUCE UNWANTED RESUMES. Because we do not charge on a per-word basis, our solution allows employers to provide in-depth job descriptions, allowing candidates to self-select jobs for which they are qualified. Additionally, employers can pre-screen applicants using online testing and remove a job posting as soon as it is filled. We believe that these functions minimize the receipt by employers of unqualified or untimely resumes. - VALUE ADDED RECRUITING MANAGEMENT SOFTWARE. In addition to our online employment exchange, we provide our proprietary browser-based recruiting software to help employers better manage the entire recruiting process. Softshoe provides private label job board and applicant tracking capabilities, enabling employers to coordinate online and traditional recruiting methods and to share information throughout their entire organization. This enables improved coordination and communication among recruiters, hiring managers and executive management. Shoelace is a turn-key version of Softshoe that enables companies to leverage the audience, immediacy and efficiency of the Internet to quickly find and hire candidates. - DISTRIBUTION OF JOB POSTINGS. Through our relationships with third-party Websites, we are able to offer our member employers the ability to place their HotJobs.com job postings onto high-traffic third party Websites including Alta Vista, Usenet and America's Job Bank at no additional cost. HotJobs.com has also entered into arrangements with Juno Online Services, theglobe.com, Inc., About.com, Inc. and FAST COMPANY providing direct access to WWW.HOTJOBS.COM from their sites. 7 THE HOTJOBS.COM STRATEGY Our objective is to become the leading global provider of online recruiting services. Key elements of the HotJobs.com strategy include: - BUILD GLOBAL BRAND AWARENESS. HotJobs.com believes that it is essential to establish a strong global brand. We utilize an aggressive marketing program involving print, radio, outdoor, online and television marketing to promote HotJobs.com. For example, in January 1999, we aired a television commercial during the Super Bowl which resulted in a 117% increase in site traffic in the following month. In January 2000, we returned to the Super Bowl with our Hottest Hand on the Web-TM- campaign. We intend to expand our use of public relations, strategic alliances and other marketing programs designed to promote our global brand and build loyalty among our member employers and job seekers. - ACCELERATE NEW SUBSCRIBER GROWTH. We intend to accelerate the growth of our subscriber base by rapidly expanding the size of our sales force and locating in select markets throughout the U.S. Generally, we have found greater success in obtaining member employers in markets in which we have a local presence, providing us with a better understanding of a market's particular recruiting needs. - CONTINUE TO ENHANCE SITE FUNCTIONALITY AND FEATURES. HotJobs.com intends to provide the best available tools to empower job seekers and employers to more effectively manage their job seeking and recruiting processes. We are developing product and service enhancements aimed at both member employers and job seekers to continue to improve our user interface, searching capabilities, workflow and collaboration, data visualization, navigability, reporting and forecasting. In addition, HotJobs.com intends to enhance content for job seekers. We believe that these enhancements will increase interest in and traffic to our Website. - EXPAND RELATIONSHIPS WITH MEMBER EMPLOYERS. We focus significant sales efforts on expanding our relationship with member employers by offering additional products and services. These efforts include the sale of additional subscriptions to WWW.HOTJOBS.COM, Softshoe and Shoelace recruiting software, Mini Job Boards, programs with partners such as We Media, participation in our WorkWorld career expos and online advertising and consulting services. - PROVIDE ADDITIONAL CAREER CHANNELS IN SPECIFIC FIELDS. In January 2000, we implemented our channel strategy to increase the appeal and ease of use of WWW.HOTJOBS.COM for job seekers by offering career channels in specific fields such as healthcare, legal services and biotechnology. - EXPAND INTERNATIONAL OPERATIONS. We intend to expand our international operations to attract new job seekers and member employers in new markets and to allow us to better serve our global member employers. We plan to accomplish this by opening facilities, making acquisitions and effecting strategic alliances, investments or licensing arrangements that enhance our appeal to unique communities of job seekers. By opening international offices, we believe we will be better positioned to acquire new job seekers and member employers in those countries. We launched our Australian operations at the Internet World Show in Sydney, Australia in August 1999. - PURSUE STRATEGIC ACQUISITIONS. From time to time, HotJobs.com evaluates acquisition and investment opportunities in complementary businesses, products and technologies. We explore opportunities that may accelerate our growth; add new content, advertisers, member employers and job seekers; develop new technologies; and penetrate new markets. PRODUCTS AND SERVICES WWW.HOTJOBS.COM Our WWW.HOTJOBS.COM employment exchange creates a direct link between member employers and job seekers. HotJobs.com empowers both job seekers and member employers by providing them with the tools and functionality they need to plan, execute, monitor and control their employment searches. 8 Key features for job seekers and member employers are outlined below:
JOB SEEKER FEATURES MEMBER EMPLOYER FEATURES ------------------------------------- ------------------------------------- Pricing - Free of charge - Recurring subscription fee Reach - Searchable database with access to - Ability to search over 800,000 more than 3,200 member employers resumes - Recorded over 3.4 million visits in January 2000 - Ability to post job listings to third party sites, including AltaVista, Usenet and America's Job Bank, at no additional cost Direct - Direct access to member employers; - No headhunters may post jobs or Exchange no headhunter listings permitted search our resume database Customization - Personal Job Search Agent - Allows for a detailed job - Personal career home page description and a full company profile - Test module feature allows pre- screening of candidates Real-Time - Up-to-date job postings - Ability to remove job postings at - Date stamping of all job postings any time - Date stamping of resumes - Immediate receipt of resume submissions Privacy - Ability to restrict access to their - Search and review job seeker resume resumes anonymously Tracking and - Automatic email notification - Ability to respond directly to job Monitoring confirming application receipt seekers - Online "shopping cart" to store - Storage and management of job jobs listings and resumes - Ability to store resumes and cover - Ability to coordinate job postings letters for member employers with multiple - Archive job applications accounts - Multiple recruiters within an enterprise can share notes on an applicant Statistics - Number of times resume has come up - Number of times a job posting comes in a search and subsequently been up in a search, is viewed and viewed and how many jobs to which applied to by job seekers the job seeker has applied Community - Career resources, bookstore, original editorial content and job seeker message boards
SOFTSHOE-REGISTERED TRADEMARK- Introduced in September 1997, HotJobs.com's Softshoe recruiting software permits employers to manage their enterprise-wide recruiting process by leveraging the cost-efficiencies associated with the Internet. Softshoe provides employers with the ability to create a private label, publicly-viewed job board and an internal employee-only job board, to schedule and track the results of interviews and other 9 recruiting events and to prepare detailed analyses of the company's recruiting efforts. Softshoe provides a browser-based interface that allows multiple participants within an employer's organization to coordinate their efforts in the recruiting process. These participants include recruiters, administrators, executives and hiring managers, each of whom is able to access different levels of information relevant to their involvement in the recruiting process. Softshoe provides extensive online reports that allow users to analyze processes and statistical data to establish and refine strategic recruiting initiatives. Examples of these reports include time to hire, number of hires, source of applicants and equal opportunity employment data. SHOELACE-TM- HotJobs.com launched its Shoelace recruiting solution in January 2000. Hosted by HotJobs.com, Shoelace delivers the same technology that powers the WWW.HOTJOBS.COM employment exchange onto a private label version that can be used on any corporate Website. Shoelace is a real-time, plug-and-play job posting and recruiting management system that enables companies to leverage the audience, immediately and efficiency of the Internet to quickly find and hire candidates. Shoelace is integrated into a company's Website, providing an employment site for internal or external job seekers that allows them to search for and apply to jobs online. Some benefits of Shoelace include: real-time job postings, searches and resume submissions; automatic job posting to WWW.HOTJOBS.COM for additional candidate flow; integrates e-mail, faxed and mailed resumes within the company's job board into a single, searchable database accessible via the Internet; and reporting functions that enable management to analyze key staffing metrics to make informed strategic decisions. WORKWORLD-TM- AND OTHER SERVICES HotJobs.com conducts a series of career expos known as WorkWorld. Like WWW.HOTJOBS.COM, these career expos do not allow headhunters to participate. Unlike the traditional job fair model which leaves recruiters with thousands of paper resumes to sort through, WorkWorld career expos are fully integrated into the WWW.HOTJOBS.COM system, placing all job seekers' information online. Job seekers can log onto WorkWorld.com to view a schedule of upcoming events and a list of participating employers and to apply directly to available jobs. Recruiters can then schedule appointments with candidates prior to the actual event. WorkWorld career expos also serve to provide a physical forum for HotJobs.com's account executives to meet directly with employers. We also offer consulting services to assist employers with automating the recruiting and job advertising processes in areas including recruiting process re-engineering and Web page design, online advertising and customization. CUSTOMERS As of December 31, 1999, our customer base included over 3,200 employers in industries such as technology, financial services, health care, legal, professional services, retail and telecommunications. Some of our member employers include: Calvin Klein, Inc. drugstore.com, inc. Skadden, Arps, Slate, Central Intelligence Agency Hewlett-Packard Company Meagher & Flom LLP City of Palo Alto The Home Depot, Inc. Union Carbide Corporation CNBC Intel Corporation Yahoo! Inc. CNN Merck & Co., Inc. Yankee Group Credit Suisse First Boston Nike, Inc. Young & Rubicam Disney Studios Pets.com, Inc. E*Trade Group Inc. The Procter & Gamble Company
10 As of December 31, 1999, clients that have purchased Softshoe to manage their recruiting systems include, among others: Coors Brewing Company Lucent Technologies Tricon Global DoubleClick Inc. Merrill Lynch, Pierce, Fenner & Restaurants, Inc. Ford Motor Company Smith, Inc. Wang Government Services HomeGrocer.com PepsiCo, Inc. Division Humana Inc. Sabre Inc. Warburg Dillion Read
For the years ended December 31, 1998 and 1999, no customer accounted for more than 10% of our revenues. SALES AND MARKETING As of December 31, 1999, our direct sales force for WWW.HOTJOBS.COM consisted of 85 account executives located in New York, San Francisco, Boston, Chicago and Sydney, Australia. HotJobs.com obtains new corporate members primarily through telemarketing directly to employers as well as leads generated from online inquiries and referrals. In addition, HotJobs.com solicits employers through participation in human resource industry trade shows and similar events. To encourage our account executives to maintain and build our relationship with our member employers, we pay them a monthly commission that is a fixed percentage of all periodic fees paid by the accounts with which they have established a relationship. This also creates an opportunity for account executives to sell other components of our online recruiting solution, participation in our WorkWorld career expos and related advertising and promotional opportunities. HotJobs.com utilizes an aggressive marketing program involving print, radio, outdoor, online and television advertising to promote WWW.HOTJOBS.COM as a leading employment exchange. We also support a consistent direct marketing and educational campaign to our member companies regarding online recruiting developments and practices. We plan to continue to use key marketing events, coupled with public relations efforts, to promote awareness of the HotJobs.com brand. In addition, we have developed co-promotional events and marketing campaigns for both WWW.HOTJOBS.COM and WorkWorld. Some examples of these include: Jane Magazine Fall College Tour and Experienceonline.com college career center tour. Our October '99 WorkWorld career expo was produced in conjunction with the Fall Internet World '99 Exhibit and Conference. BUSINESS ALLIANCES We have entered into alliances to expand our distribution network, providing added value to our member employers, and increasing recognition of the HotJobs.com brand. Some of these alliances include: ABOUT.COM, INC. HotJobs.com has entered into an exclusive co-branding agreement and an advertising agreement with About.com. Under the co-branding agreement, HotJobs.com will build, maintain and host targeted, co-branded job listings sites which users of About.com will be able to access from certain channels such as finance/investing, health/fitness and Internet/online. Under the advertising agreement, About.com has agreed to deliver advertising impressions to us through such avenues as home page-links and banner ads. FAST COMPANY. In February 2000, FAST COMPANY named HotJobs.com as its exclusive provider of job-related postings and searching capabilities. Under the terms of the agreement, HotJobs.com will provide FAST COMPANY with a co-branded site featuring HotJobs.com's proprietary technology, job search capabilities and jobs database. The co-branded site will be updated monthly to highlight openings at companies designated by FAST COMPANY as "Fast Companies" for their commitment to real solutions, innovative ideas and human values. 11 JUNO ONLINE SERVICES. HotJobs.com and Juno Online Services, a provider of Internet-related services to millions of computer users throughout the U.S., entered into a strategic alliance in December 1999. Under this alliance, HotJobs.com has become the exclusive provider of employment listings content and search tools for the "Careers" Web guide on Juno's Web portal. SELLING POWER. In February 2000, the leading sales management magazine, SELLING POWER, named HotJobs.com as its exclusive provider of job-related postings and searching capabilities. HotJobs.com will provide SELLING POWER with a co-branded site as part of the "Career Center" on the SELLING POWER Website. The co-branded site, featuring HotJobs.com's proprietary technology, will be populated with a comprehensive list of sales and marketing-related positions. Articles on career matters and sales skills provided by SELLING POWER will appear on the sales and marketing channels of WWW.HOTJOBS.COM. WE MEDIA. In December 1999, We Media named HotJobs.com as a key provider of content to "WeJobs," an employment service for people with disabilities. Under the terms of the alliance, "WeJobs" will utilize HotJobs.com's proprietary technology to highlight employment opportunities at corporations that have demonstrated a commitment to recruiting and hiring people with disabilities. HotJobs.com also enters into relationships that allow us to acquire editorial content and/or Web services that are relevant to our job seeker audience. These include salary calculators, relocation services, company biographies and other pertinent information. It is possible that parties with whom we have entered into alliances may not perform their obligations as agreed. Our business alliances generally do not establish minimum performance requirements but instead rely on voluntary efforts. In addition, certain of our alliance agreements may be terminated by either party with little notice. TECHNOLOGY We developed our technology to serve a large volume of Web traffic in an efficient, scalable and fault-tolerant manner. The system updates its data files, providing useful search and statistical results to the user. We designed the system to scale easily to support geometric growth without the need to re-architect, or acquire hardware/software systems at a geometric rate. Prior to January 2000, we supported certain of our production servers in-house. All of our production web servers and database servers are currently co-located at Level (3) and Frontier Global Center, Web co-location facilities and Internet service providers. These facilities include features such as: - protection against a power loss; - multiple pathways for data to be passed to the Internet; - arrangements with other ISPs to exchange data in order to allow a packet of data to travel the shortest and least congested pathway; - fire suppression; and - physical space that allows companies to grow without being limited by "environmental" factors while simultaneously providing sufficient bandwidth capacities. As we expand our leased application hosting, we intend to increase our use of the services provided by Level (3) and Frontier Global Center and other co-location providers. Our contract with Level (3) began on April 15, 1999 and has a one-year term with month-to-month renewals thereafter. We pay monthly fees of approximately $15,000 under the agreement. Level (3) can discontinue service under certain circumstances, including failure by us to pay our bills. Our contract with Frontier Global Center began on September 15, 1999 and has a two-year term. Fees payable under our agreement with Frontier Global Center will vary depending upon our usage. 12 Our software is written using open standards, such as ANSI C, C++, ECMA-262 Script, and HTML, and interfaces with products from Oracle, Netscape Communications, Inc. and Thunderstone. Our template-based page generation using our proprietary tagging language allows for rapid deployment of user interface changes without the necessity to recompile code. This also allows us to develop co-branded sites rapidly without re-engineering. We have standardized our hardware platform on Sun Microsystems servers, Foundry Networks and EMC/Clarion disk arrays. Our network topology is designed to sustain multiple failures by various components without down-time. COMPETITION The market for online recruiting solutions is intensely competitive and highly fragmented. The intensity of competition has increased and is expected to further increase in the future. We compete with companies, including recruiting search firms, that offer a single database "job board" solution, such as Monster.com, as well as newspapers, magazines and other traditional media companies that provide online job search services, such as CareerPath.com. We also compete with large Internet information hubs, or portals, such as Excite@Home, recruiting software companies such as Webhire, Inc. and job fair companies such as TechExpo Corporation. We may experience competition from potential customers to the extent that they develop their own online recruiting offerings internally. In addition, we compete with traditional recruiting services, such as headhunters, for a share of employers' total recruiting budgets. We expect to face additional competition as other established and emerging companies, including print media companies and headhunters with established brands, enter the online recruiting market. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger client bases than we do. In addition, current and potential competitors are making and are expected to continue to make strategic acquisitions or establish cooperative or, in some cases, exclusive relationships with significant companies or competitors to expand their businesses or to offer more comprehensive solutions. Presently, the barriers to entry by competitors in the market for online recruiting are low. Current and new competitors can launch new Internet sites and add substantial content on their sites at a low cost within a short period. Therefore, we expect competition to continue to intensify, and the number of competitors could increase significantly in the near future. We believe that there will be rapid business consolidation in the online recruiting industry. Accordingly, new competitors may emerge and rapidly acquire significant market share. In addition, new technologies will likely increase the competitive pressures that we face. The development of competing technologies by market participants or the emergence of new industry standards may adversely affect our competitive position. Competition could result in reduced margins on HotJobs.com products and services, loss of market share or less use of WWW.HOTJOBS.COM by job seekers and employers. If HotJobs.com is not able to compete effectively with current or future competitors as a result of these and other factors, its business could be materially adversely affected. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES An increasing number of laws and regulations in the United States and abroad pertain to the Internet, including laws or regulations relating to user privacy, liability for information retrieved from or transmitted over the Internet, online content regulation and domain name registration. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership and infringement, copyright, patent, trademark, trade secret, obscenity, libel, employment and personal privacy is uncertain and developing. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments. 13 PRIVACY CONCERNS. Government agencies are considering adopting regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Websites. While we have implemented and intend to implement additional programs designed to enhance the protection of the privacy of our users, these programs may not conform to any regulations adopted by these agencies. In addition, these regulatory and enforcement efforts may adversely affect the ability to collect demographic and personal information from users, which could have an adverse effect on our ability to provide advertisers with demographic information. In addition, the European Union (the "EU") has adopted a directive that imposes restrictions on the collection and use of personal data. The directive imposes restrictions that are more stringent than current Internet privacy standards in the United States and may adversely affect the activities of entities such as HotJobs.com that plan to engage in data collection from users in EU member countries. DOMAIN NAMES. Domain names are the user's Internet "addresses." The current system for registering, allocating and managing domain names took effect in November 1999 and is rapidly evolving. Already, a uniform domain name dispute resolution policy has replaced the previous dispute policy administered by Network Solutions, Inc. Moreover, it is likely that new generic top level domains such as .firm and .store will be added to supplement the existing .com, .net and .org generic top level domains. Although we have applied to register "HotJobs.com" as a service mark in the United States, third parties may bring claims for infringement against us for the use of this service mark. In the event those claims are successful, we could lose the ability to use the HotJobs.com domain name. There can be no assurance that our domain name will not lose its value, or that we will not have to obtain entirely new domain names in addition to or in lieu of our current domain names as the current system continues to reform. JURISDICTIONS. Due to the global nature of the Internet, it is possible that, although our transmissions over the Internet originate primarily in New York City, the governments of other states and foreign countries might attempt to regulate our business activities. In addition, because our service is available over the Internet in multiple states and foreign countries, these jurisdictions may require us to qualify to do business as a foreign corporation in each of these states or foreign countries, which could subject us to taxes and other regulations. INTELLECTUAL PROPERTY Our success depends to a significant degree upon the protection of our proprietary technology, including our Softshoe and Shoelace recruiting software, and the HotJobs.com brand name. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it. If this were to occur, our business could be materially adversely affected. We rely upon a combination of copyright, trade secret and trademark laws and non-disclosure and other contractual arrangements to protect our intellectual property rights. The steps we have taken to protect our proprietary rights, however, may not be adequate to deter misappropriation of all proprietary information. We may not be able to detect unauthorized use of our proprietary information or take appropriate steps to enforce our intellectual property rights. In addition, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of other countries in which we may market our services in the future also are developing and uncertain and may afford little or no effective protection of our intellectual property. We filed with the U.S. Patent and Trademark Office (the "PTO") an application to register the service mark "www.hotjobs.com" for "providing a Web site in the field of employment opportunities and career placement which offers the exchange of information." The PTO initially refused registration, citing two prior existing U.S. trademark registrations. We have since overcome the PTO's refusal to register our mark because of the prior registrations and the PTO has authorized the mark to be published for opposition, the final step before registration. We cannot assure you that we will secure a federal registration of the mark 14 "www.hotjobs.com." In addition, in May 1998, a third party made claims of prior use and ownership of "hotjobs" as a trademark. We investigated these claims and did not find them to have any verifiable basis. We responded accordingly on June 1, 1998 and have not received any further correspondence. An adverse outcome to any litigation related to these claims, should it occur, could result in us being limited or prohibited from further using the "www.hotjobs.com" mark and related derivative marks in the future. At this time, we are not able to evaluate the likelihood of any subsequent actions related to those claims or an unfavorable outcome in the event such claims are reasserted, or to estimate the amount or range of any related potential loss. We currently hold a trademark registration in the United States for the marks Softshoe-Registered Trademark-, The Web's Hottest Jobs-Registered Trademark-, The Experienced Professional's Job Board-Registered Trademark- and Reslex-Registered Trademark-. Effective trademark protection may not be available in all countries in which we intend to conduct business. Policing unauthorized use of our marks is also difficult and expensive. In addition, it is possible that our competitors will adopt product or service names similar to ours, impeding our ability to build brand identity and possibly leading to customer confusion. EMPLOYEES As of December 31, 1999, we had 207 employees, of whom 134 worked in sales, marketing, client services, and business development, 44 in product development and 29 in finance, administration, human resources and corporate operations. From time to time, we employ independent contractors and consultants to support our research and development, marketing and sales and business development efforts. None of our employees are represented under collective bargaining agreements. We consider our relations with our employees to be good. RISK FACTORS AN INVESTMENT IN OUR COMPANY INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS REPORT, BEFORE YOU DECIDE TO INVEST IN OUR COMPANY. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THIS CASE, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL WE HAVE A LIMITED OPERATING HISTORY SO IT WILL BE DIFFICULT FOR YOU TO EVALUATE AN INVESTMENT IN HOTJOBS.COM. We were incorporated and began generating revenues in February 1997. Accordingly, we have only a limited operating history for you to evaluate our business and prospects. As a new company, we face risks and uncertainties relating to our ability to successfully implement our strategy. You must consider the risks, expenses and uncertainties that an early stage company in new and rapidly evolving markets like ours faces. Some of these risks include: - ability to sustain historical revenue growth rates; - ability to increase awareness of our brand; - managing our expanding operations; - competition; - attracting, retaining and motivating qualified personnel; - maintaining our current, and developing new, strategic relationships; 15 - ability to anticipate and adapt to the changing Internet market and any changes in government regulation; and - attracting and retaining a large number of member companies for our employment exchange. We also depend on the growing use of the Internet for recruiting purposes and on general economic conditions. If we cannot address these risks and uncertainties or are unable to execute our strategy, we may not be successful. WE HAVE NOT BEEN PROFITABLE, AND WE EXPECT OUR LOSSES TO CONTINUE. We have never been profitable. For the year ended December 31, 1999, we incurred a net loss of approximately $17.8 million. At December 31, 1999, we had an accumulated deficit of approximately $37.2 million. We expect to continue to lose money in the foreseeable future because we anticipate incurring significant expenses in connection with building awareness of the HotJobs.com brand, rapidly expanding our sales and other personnel, developing strategic relationships and improving our products and services. We forecast our future expense levels based on our operating plans and our estimates of future revenues. We may find it necessary to accelerate expenditures relating to our sales and marketing, products and technology and expansion efforts or to otherwise increase our financial commitment to creating and maintaining brand awareness or developing our products. Although our revenues have grown in recent quarters, we cannot assure you that we will achieve sufficient revenues for profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If our revenues grow at a slower rate than we anticipate, or if our spending levels exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not generate sufficient revenues to achieve or sustain profitability. YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. FLUCTUATIONS IN OUR OPERATING RESULTS OR THE FAILURE OF OUR OPERATING RESULTS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS MAY NEGATIVELY IMPACT OUR STOCK PRICE. Our quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter. Fluctuations in our quarterly operating results could cause our stock price to decline. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. Factors that may affect our quarterly results include: - mismatches between resource allocation and consumer demand due to difficulties in predicting consumer demand in a new market; - the demand for and acceptance of our Website, products, product enhancements and services; - the timing, amount and mix of subscription, license and service payments; - changes in general economic conditions, such as recessions, that could affect recruiting efforts generally and online recruiting efforts in particular; - the magnitude and timing of marketing initiatives; - the maintenance and development of our strategic relationships; - the timing of acquisitions; - the introduction, development, timing, competitive pricing and market acceptance of our products and services and those of our competitors; - the attraction and retention of key personnel; 16 - our ability to manage our anticipated growth and expansion; - our ability to attract qualified job seekers; and - technical difficulties or system downtime affecting the Internet generally or the operation of our products and services specifically. As a result of the factors listed above and because the online recruiting market is new and it is difficult to predict customer demand, it is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. This could cause our stock price to decline. In addition, we plan to significantly increase our operating expenses to expand our sales and marketing, administration, consulting and training, maintenance and technical support and research and development groups. If revenues fall below our expectations in any quarter and we are unable to quickly reduce our spending in response, our operating results would be lower than expected and our stock price may fall. OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT BE ADAPTABLE TO A CHANGING MARKET. If we are not able to anticipate changes in the online recruiting market or if our business model is not successful, we may not be able to expand our business or to successfully compete with other companies, which could have a material adverse effect on our business, results of operations and financial condition. Our current business model depends on recurring revenue from employers using our Website and hosting fees associated with our application software. Our revenue model and profit potential are unproven. If current employers decide to discontinue our service and we are unable to replace them with new employers, our revenues could decrease or grow at a slower rate than expected. It is possible that we will be required to further adapt our business model in response to additional changes in the online recruiting market or if our current business model is not successful. WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS AND ANY ADDITIONAL FINANCING MAY BE ON TERMS ADVERSE TO THE INTERESTS OF OUR STOCKHOLDERS. We may need additional financing to continue to grow our business. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand name, develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business. If we are able to raise additional funds and we do so by issuing equity securities, holders of our common stock may experience significant dilution of their ownership interest and holders of these securities may have rights senior to those of the holders of our common stock. If we obtain additional financing by issuing debt securities, the terms of these securities could restrict or prevent us from paying dividends and could limit our flexibility in making business decisions. Because we expect to generate losses for the foreseeable future, we do not expect that income from our operations will be sufficient to meet our needs. We expect to raise additional funds in the future in order to fund our anticipated growth, more aggressive marketing programs or the acquisition of complementary businesses, technologies and services. Obtaining additional financing will be subject to a number of factors including: - market and economic conditions; - our financial condition and operating performance; and - investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive for us. 17 ECONOMIC FLUCTUATIONS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Demand for our services may be significantly and adversely affected by the level of economic activity and employment in the United States and abroad. When economic activity slows, many companies hire fewer permanent employees. A recession could cause employers to reduce or postpone their recruiting efforts generally, and their online recruiting efforts in particular. Therefore, a significant economic downturn or recession, especially in regions or industries where our operations are heavily concentrated, could have a material adverse effect on our business, financial condition and operating results. Further, we may face increased pricing pressures during such periods. There can be no assurance that during these periods our results of operations will not be adversely affected. RISKS RELATED TO OUR MARKETS AND STRATEGY THE INTERNET IS NOT A PROVEN RECRUITING MEDIUM. If we are unable to compete with traditional recruiting and job seeking methods, our revenues could be reduced. The future of our business is dependent on the acceptance by job seekers and employers of the Internet as an effective job seeking and recruiting tool. The online recruiting market is new and rapidly evolving, and we do not yet know how effective online recruiting is compared to traditional recruiting methods. The adoption of online recruiting and job seeking, particularly among those companies that have historically relied upon traditional recruiting methods, requires the acceptance of a new way of conducting business, exchanging information, advertising and applying for jobs. Many of our potential employer customers have little or no experience using the Internet as a recruiting tool, and only select segments of the job seeking population have experience using the Internet to look for jobs. There can be no assurance that companies will allocate or continue to allocate portions of their budgets to Internet-based recruiting. As a result, we cannot be sure that we will be able to effectively compete with traditional recruiting and job seeking methods. If Internet-based recruiting is not widely accepted, our business, results of operations and financial condition could be materially adversely affected. WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS MODEL IF USE OF THE INTERNET GROWS. If Internet usage does not continue to grow, we may not be able to meet our business objectives. Internet usage may be inhibited by any of the following factors: - the Internet infrastructure may not be able to support the demands placed on it, or its performance and reliability may decline as usage grows; - Websites may not be able to provide adequate security and authentication of confidential information contained in transmissions over the Internet; and - The Internet industry may not be able to adequately respond to privacy concerns of potential users. WE MAY NOT BE ABLE TO DEVELOP AWARENESS OF OUR BRAND NAME. We believe that continuing to build and maintain awareness of our brand name is critical to achieving widespread acceptance of our business. Our brand name is critical in our efforts to sustain or increase the number of employers and job seekers who use our Website. We believe that the importance of brand recognition will increase due to the continued growth in the number of competitors entering the online recruiting market. If we fail to successfully protect, promote, position and maintain our HotJobs.com brand name, incur significant expenses in promoting our brand and fail to generate a corresponding increase in revenue as a result of our branding efforts, or encounter legal obstacles which prevent our continued use of our brand name, our business, results of operations and financial condition could be materially adversely affected. Brand recognition is a key differentiating factor among providers of online recruiting services, and we believe it could become more important as competition in the online recruiting 18 market increases. In order to maintain and build brand awareness, we must succeed in our marketing efforts, provide high quality services and increase the number of high quality job seekers using WWW.HOTJOBS.COM. Failure to successfully maintain and build awareness of our brand could reduce our revenues or cause our revenues to grow at a slower rate than expected. WE MAY NOT BE ABLE TO SUCCESSFULLY INTRODUCE NEW OR ENHANCED PRODUCTS AND SERVICES. The failure of any new or enhanced products and services to achieve market acceptance and generate revenue could result in a material adverse effect on our revenues. We expect to introduce enhanced products and services in order to generate additional revenues, attract and retain more employers, attract more job seekers to our Website and respond to competition. Any new or enhanced product or service we introduce that is not favorably received could damage our reputation and the perception of our brand name. WE WILL NOT BE ABLE TO ATTRACT JOB SEEKERS OR EMPLOYERS IF WE DO NOT CONTINUALLY ENHANCE AND DEVELOP THE CONTENT AND FEATURES OF OUR PRODUCTS AND SERVICES. To remain competitive, we must continually improve the responsiveness, functionality and features of our products and services and develop other products and services that are attractive to job seekers and employers. We may not succeed in developing or introducing features, functions, products or services that job seekers and employers find attractive at all or quickly enough. This could reduce the number of job seekers and employers using WWW.HOTJOBS.COM and materially adversely affect our revenues. INTERNET USERS MAY NOT ACCEPT OUR INTERNET CONTENT. Our future growth depends in part on our ability to attract job seekers who are qualified for the jobs posted by our customers. This in turn depends in part on our ability to deliver original and compelling content to these job seekers. We cannot assure you that our content will be attractive to Internet users. We also cannot assure you that we will be able to anticipate, monitor and successfully respond to rapidly changing consumer tastes and preferences to continue to attract a sufficient number of Internet users to our Website. Internet users can freely navigate and instantly switch among a large number of Websites. In addition, many other Websites offer very specific, highly targeted content. These sites could have greater appeal than our Website to particular groups within our target audience. WE MAY LOSE BUSINESS IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES AND CUSTOMER NEEDS. If we are unable to timely and successfully develop and introduce new products and enhancements to existing products in response to our industry's changing technological requirements, our revenues could be materially adversely affected. Our success is dependent on our ability to develop new and enhanced software, services and related products to meet rapidly evolving technological requirements for online recruiting software and solutions. New Internet-based services or enhancements which we have offered or may offer in the future may contain design flaws or other defects that could require extensive modifications or result in a loss of client confidence. Our current technology may not meet the future technical requirements of employers. Trends that could have a critical impact on our success include: - rapidly changing technology in online recruiting; - evolving industry standards, including both formal and DE FACTO standards relating to online recruiting; - developments and changes relating to the Internet; - competing products and services that offer increased functionality; and - changes in employer and job seeker requirements. 19 OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN HIGHLY SKILLED PERSONNEL. If we are unable to hire and retain highly skilled personnel, our growth may be restricted, the quality of our products and services reduced and our revenues may be reduced or grow at a slower rate than expected. Our future success depends on our ability to attract, train, motivate and retain highly skilled employees. Competition for highly skilled employees is intense, particularly in the Internet industry. We may be unable to retain our skilled employees or attract, assimilate and retain other highly skilled employees in the future. We have from time to time in the past experienced, and we may experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR EXPANDING OPERATIONS. In order to execute our business plan, we must continue to grow significantly. If we are not able to expand our operations in an efficient manner, our expenses could grow disproportionately to revenues or our revenues could decline or grow at a slower rate than expected, either of which could have a material adverse effect on our business, results of operations and financial condition. We have recently experienced a period of rapid growth that has placed considerable demands on our managerial, operational, financial and information system resources. To continue to successfully implement our business plan in our rapidly evolving markets requires an effective planning and management process. We continue to increase the scope of our operations, and we have grown our workforce substantially. We had 50 employees as of December 31, 1998. At December 31, 1999, the number of employees had increased to 207. We expect that the number of our employees will continue to increase for the foreseeable future. Our growth is expected to result in increased responsibility for both existing and new management personnel. Our growth has placed, and our anticipated future growth combined with the requirements we face as a public company will continue to place, a significant strain on our management, operations, systems and resources. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to expand, train and manage our workforce. Our success depends to a significant extent on the ability of our executive officers and other members of senior management to operate effectively both independently and as a group. We will also need to continue to expand and maintain close coordination among our products and technology, finance and administration and sales and marketing organizations. We cannot assure you that if we continue to grow, management will be effective in attracting and retaining additional qualified personnel, expanding our physical facilities, integrating acquired businesses, if any, or otherwise managing growth. We cannot assure you that our information systems, procedures or controls will be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan. Our future performance may also depend on our effective integration of acquired businesses, if any. Any such integration, even if successful, may take a significant period of time and expense, and may place a significant strain on our resources. If we are not able to manage existing or anticipated growth, our business, results of operations and financial condition will be materially adversely affected. INTENSE COMPETITION MAY RENDER OUR SERVICES AND PRODUCTS UNCOMPETITIVE OR OBSOLETE. The market for online recruiting solutions is intensely competitive and highly fragmented. We expect competition to continue to increase because the market poses no substantial barriers to entry. We believe that our ability to compete depends upon many factors both within and beyond our control, including the following: - the timing and market acceptance of new solutions and enhancements to existing solutions developed either by us or our competitors; - customer service and support efforts; - sales and marketing efforts; and 20 - the ease of use, performance, price and reliability of solutions developed either by us or our competitors. We compete with companies, including recruiting search firms that offer a single database job board solution, such as Monster.com, as well as newspapers, magazines and other traditional media companies that provide online job search services, such as CareerPath.com. We also compete with large Internet information hubs, or portals, such as Excite@Home, recruiting software companies such as Webhire, Inc. and job fair companies such as TechExpo Corporation. We may experience competition from potential customers to the extent that they develop their own online recruiting offerings internally. In addition, we compete with traditional recruiting services, such as headhunters, for a share of employers' total recruiting budgets. We expect to face additional competition as other established and emerging companies, including print media companies and headhunters with established brands, enter the online recruiting market. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger customer bases than we do. These factors may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development, promotion and sale of their products and services. These competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees and strategic partners. We cannot assure you that our competitors will not develop products or services that are equal or superior to our solutions or that achieve greater market acceptance than our solutions. In addition, current and potential competitors are making and are expected to continue to make strategic acquisitions or establish cooperative, and, in some cases, exclusive relationships with significant companies or competitors to expand their businesses or to offer more comprehensive solutions. We believe that there will be rapid business consolidation in the online recruiting industry. Accordingly, new competitors may emerge and rapidly acquire significant market share. In addition, new technologies will likely increase the competitive pressures that we face. The development of competing technologies by market participants or the emergence of new industry standards may adversely affect our revenues and ultimately our competitive position. Due to competition, we may experience reduced margins on our products and services, loss of market share or less use of WWW.HOTJOBS.COM by job seekers and employers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our revenues could be materially adversely affected. A FAILURE TO ESTABLISH AND MAINTAIN PARTNERSHIPS AND ALLIANCES WITH OTHER WEB PROPERTIES COULD LIMIT THE GROWTH OF OUR BUSINESS. We have entered into, and expect to continue to enter into, arrangements with third parties to increase our member base, bring traffic to our Website and enhance the HotJobs.com brand. If any of our current agreements are terminated, we cannot assure you that we will be able to replace the terminated agreement with an equally beneficial arrangement. We also cannot assure you that we will be able to renew any of our current agreements when they expire or, if we are, that we will be able to do so on acceptable terms. We also do not know whether we will be successful in entering into additional partnerships and alliances or that any relationships, if entered into, will be on terms favorable to us. In late 1999, we brought an action for enforcement of an agreement between us and Digital City, Inc., the outcome of which is uncertain. The outcome of such litigation may have an impact on our business, which impact is uncertain. Any resulting impact on our stock price is also uncertain. 21 LOSS OF ANY OF OUR KEY MANAGEMENT PERSONNEL COULD NEGATIVELY IMPACT OUR BUSINESS. The loss or departure of any of our officers or key employees could materially adversely affect our ability to implement our business plan and could lower our revenues or cause our revenues to grow at a slower rate than expected. Our future success depends to a significant extent on the continued service and coordination of our management team, particularly Richard S. Johnson, our President and Chief Executive Officer. We do not maintain key person insurance for any member of our management team. In addition, certain members of our management team have joined us within the last year. These individuals have not previously worked together and are becoming integrated into our management team. If our key management personnel are not able to work together effectively or successfully, our business could be materially adversely affected. In addition, if one or more key employees join a competitor or form a competing company, though we have non-competition agreements with each of our key employees, we may lose existing or potential clients which could have a material adverse effect on our business, results of operations and financial condition. Though we have confidentiality agreements with each of our employees, if we were to lose a key employee, we cannot assure you that we would be able to prevent the unauthorized disclosure or use of our procedures, practices, new product development or client lists. WE MAY NOT BE SUCCESSFUL IN OUR PLAN FOR INTERNATIONAL EXPANSION. We may not be able to successfully execute our business plan in foreign markets. If revenue from international ventures is not adequate to cover our investment in those ventures, our total revenues could be materially adversely affected. We believe that our member employers are increasingly attempting to fill positions in international markets and that job seekers are increasingly seeking positions in international markets. We believe that expansion into international markets through a combination of internal business expansion, strategic alliances, joint ventures and potential acquisitions will increase the number of job seekers who post their resumes on WWW.HOTJOBS.COM and will increase the number and variety of jobs available to our job seekers. Our future international operations might not succeed for a number of reasons including: - difficulties in staffing and managing foreign operations; - competition from local recruiting services; - operational issues such as longer customer payment cycles and greater difficulties in collecting accounts receivable; - seasonal reductions in business activity; - language and cultural differences; - legal uncertainties inherent in transnational operations such as export and import regulations, tariffs and other trade barriers; - taxation issues; - unexpected changes in trading policies, regulatory requirements and exchange rates; - issues relating to uncertainties of laws and enforcement relating to the protection of intellectual property; and - general political and economic trends. WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OR INVESTMENTS IN OTHER COMPANIES. We expect our growth to continue, in part, by acquiring complementary businesses, products, services or technologies. From time to time, we have had discussions with companies regarding our acquiring, or investing in, their businesses, products, services or technologies. We cannot assure you that we will be able 22 to identify suitable acquisition or investment candidates. Even if we do identify suitable candidates, we cannot assure you that we will be able to make acquisitions or investments on commercially acceptable terms. Acquiring other businesses and technologies involves several risks, including: - the availability of financing at all or on terms we find acceptable; - diversion of our management's attention from other business concerns; - key personnel of the acquired company may decide not to work for us; - entry into markets in which we have little or no direct prior experience; - inability to identify and acquire businesses on a cost-effective basis; - inability to manage and integrate acquired personnel, operations, services, products and technologies into our organization effectively; and - inability to retain and motivate key personnel and to retain the clients or goodwill of acquired entities. In pursuing acquisitions, we may compete with competitors that may be larger and have greater financial and other resources than we have. Competition for these acquisition targets could result in increased prices. In addition, in executing our acquisition strategy, we may incur expenses without being able to identify suitable acquisition candidates, which could reduce our profitability. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY INFRASTRUCTURE WE MAY EXPERIENCE REDUCED VISITOR TRAFFIC, REDUCED REVENUE AND HARM TO OUR REPUTATION IN THE EVENT OF UNEXPECTED NETWORK INTERRUPTIONS CAUSED BY SYSTEM FAILURES. Any system failure, including network, software or hardware failure, that causes an interruption in the delivery of our products and services or a decrease in responsiveness of our services could result in reduced visitor traffic, reduced revenue and could materially adversely affect our reputation and brand. Our servers and software must be able to accommodate a high volume of traffic. We have experienced system interruptions in the past, and we believe that these interruptions will continue to occur from time to time in the future. We believe that visitor traffic is also dependent on the timing and magnitude of our advertising. We have experienced monthly fluctuations in visitor traffic, including short-term reductions. Any substantial increase in demands on our servers will require us to expand and adapt our network infrastructure. If we are unable to add additional software and hardware to accommodate increased demand, we could experience unanticipated system disruptions and slower response times. Any catastrophic failure at one of our co-location facilities could prevent us from serving our Web traffic for up to several days, and any failure of one or more of our Internet service providers may adversely affect our network's performance. Our clients may become dissatisfied by any system failure that interrupts our ability to provide our products and services to them or results in slower response times. We do not maintain business interruption insurance and our other insurance may not adequately compensate us for any losses that may occur due to any failures in our system or interruptions in our service. BREACHES OF OUR NETWORK SECURITY COULD BE COSTLY. Because we host HotJobs.com-related data for many of our customers, we may be liable to any of those customers that experience losses due to our security failures. As a result, we may be required to expend capital and resources to protect against or to alleviate security breaches, which could reduce our profitability. A significant barrier to confidential communications over the Internet has been the need for security. We may incur significant costs to protect against the threat of security breaches or to alleviate 23 problems caused by these breaches. If unauthorized persons penetrate our network security, they could misappropriate proprietary information or cause interruptions in our services. Misappropriation of our proprietary information or interruptions of our services could result in reduced visitor traffic. Reduced visitor traffic may result in fewer job seekers posting their resumes to our WWW.HOTJOBS.COM employment exchange which, in turn, may discourage employers from subscribing to the employment exchange. We generate a substantial portion of our revenue from these subscription fees. COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS, WHICH COULD REDUCE DEMAND FOR OUR SERVICE AND DAMAGE OUR REPUTATION. Computer viruses may cause our systems to incur delays or other service interruptions and could damage our reputation and have a material adverse effect on our business, financial condition and results of operations. In June 1999, we detected a virus on a file server which supports our office equipment. The inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability. Moreover, if a computer virus affecting our system is highly publicized, our reputation could be materially damaged and our visitor traffic may decrease. Any of these events could have a material adverse effect on our revenues. Our success will depend, in large part, upon the maintenance of the Web infrastructure, such as a reliable network backbone with necessary speed, data capacity and security, and timely development of enabling products such as high speed modems, for providing reliable Web access and services and improved content. We cannot assure you that the Web infrastructure will continue to effectively support the demands placed on it as the Web continues to experience increased numbers of users, frequency of use or increased bandwidth requirements of users. Even if the necessary infrastructure or technologies are developed, we may have to spend considerable amounts to adapt our solutions accordingly. Furthermore, the Web has experienced a variety of outages and other delays due to damage to portions of its infrastructure. WE MAY NOT BE ABLE TO ACCESS THIRD PARTY TECHNOLOGY UPON WHICH WE DEPEND. If we lose the ability to access third party technology which we use, are unable to gain access to additional products or are unable to integrate new technology with our existing systems, we could experience delays in our development and introduction of new services and related products or enhancements until equivalent or replacement technology can be accessed, if available, or developed internally, if feasible. If we experience these delays, our revenues could be reduced or grow slower than expected and our business could be materially adversely affected. We license technology that is incorporated into our services and related products from third parties including Oracle Corporation for database technology and Thunderstone Software-EPI, Inc. for full-text indexing. In light of the rapidly evolving nature of Internet technology, we may increasingly need to rely on technology from other vendors. Technology from our current or other vendors may not continue to be available to us on commercially reasonable terms, or at all. POTENTIAL YEAR 2000 PROBLEMS WITH OUR SYSTEMS OR SOFTWARE COULD CAUSE DELAY OR LOSS OF REVENUE, DIVERSION OF RESOURCES OR INCREASED COSTS. Many companies' computer systems, software products and control devices needed to be upgraded or replaced in order to operate properly in the year 2000 and beyond because of an inability to distinguish 21(st) century dates from 20(th) century dates. Our systems and software did not experience any material date-related problems on January 1, 2000 or in connection with the leap year in 2000. However, our systems and software may contain undetected errors or defects associated with year 2000 date functions that have not yet surfaced. If any such errors or defects do exist, we may incur material costs to resolve them. The internal systems used to run our business 24 utilize third party hardware and software. Although to date we have not experienced any date-related problems with third party hardware or software, we cannot assure you that such problems will not surface in the next several months. Our business is dependent on the ability of employers and job seekers to utilize hardware and software in the employment process. We are not aware of any significant date-related hardware or software problems experienced by our member employers or job seekers. However, we cannot assure you that such problems will not arise in the future. If any of these systems do experience date-related problems, we could experience delay or loss of revenue, diversion of resources or increased costs, and our financial condition could be harmed. In addition, although we believe that the costs of ensuring that our systems and software and those of third parties with which we do business do not experience any date-related problems will not be material, we cannot assure you of this. RISKS RELATED TO LEGAL UNCERTAINTY WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES AFFECTING THE INTERNET WHICH COULD ADVERSELY AFFECT OUR BUSINESS. Legal uncertainties and new regulations could increase our costs of doing business, prevent us from delivering our products and services over the Internet or slow the growth of the Internet, any of which could increase our expenses, reduce our revenues or cause our revenues to grow at a slower rate than expected and materially adversely affect our business, financial condition and results of operations. Laws and regulations directly applicable to Internet communications, commerce, recruiting and advertising are becoming more prevalent, and new laws and regulations are under consideration by the United States Congress and state legislatures. Any legislation enacted or restrictions arising from current or future government investigations or policy could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as a communications, commercial, recruiting and advertising medium. The laws governing the Internet, however, remain largely unsettled, even in areas where 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 and taxation apply to the Internet. In addition to new laws and regulations being adopted, existing laws may be applied to the Internet. New and existing laws may cover issues which include: - user privacy; - civil rights and employment claims; - consumer protection; - libel and defamation; - copyright, trademark and patent infringement; - pricing controls; - characteristics and quality of products and services; - sales and other taxes; and - other claims based on the nature and content of Internet materials. In addition, any imposition of state sales and use taxes imposed on the products and services sold over the Internet may decrease demand for products and services that we sell over the Internet. The U.S. Congress passed legislation in 1998 which limits for three years the ability of states to impose any new taxes on Internet-based transactions. Failure by Congress to renew this legislation and the subsequent imposition of state taxes on Internet-based transactions could adversely affect our future operating results which could result in a decline in our stock price. 25 WE MAY BE UNABLE TO OBTAIN A U.S. TRADEMARK REGISTRATION FOR OUR BRAND OR TO PROTECT OUR OTHER PROPRIETARY INTELLECTUAL PROPERTY RIGHTS. FAILURE TO OBTAIN FEDERAL TRADEMARK REGISTRATION FOR WWW.HOTJOBS.COM COULD DISRUPT OUR PROMOTION OF THE HOTJOBS.COM BRAND. If we are unable to secure the rights to use the www.hotjobs.com mark and related derivative marks, a key element of our strategy of promoting "HotJobs.com" as a global brand could be disrupted. Our success depends to a significant degree upon the protection of our proprietary technology, including our Softshoe and Shoelace software and our brands and their value, particularly the "HotJobs.com" brand name. We are also susceptible to others imitating our branding, particularly HotJobs.com. To date, we have not been successful in our efforts to secure a federal registration for "www.hotjobs.com." In addition, in May 1998, another pending trademark applicant, who has since abandoned its application, made claims regarding prior use and ownership of "hotjobs" as a trademark. Adverse outcomes to these or similar claims or any related litigation, should it occur, could result in us being limited or prohibited from further using the "www.hotjobs.com" mark and related derivative marks in the future. FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD PERMIT OTHERS TO APPROPRIATE OUR PROPRIETARY TECHNOLOGY. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology and brand name without paying us for them. If this were to occur, our revenues could be materially adversely affected and the value of our brand could be diminished. The steps we have taken to protect our proprietary rights may not be adequate to deter misappropriation of proprietary information. We may not be able to detect unauthorized use of our proprietary information or take appropriate steps to enforce our intellectual property rights. In addition, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of other countries in which we may market our services in the future are uncertain and may afford little or no effective protection of our intellectual property. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive. The proceedings also could involve a high degree of risk. DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME CONSUMING AND EXPENSIVE, AND WE MAY BE LIABLE FOR INFRINGING ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. IF WE ARE NOT SUCCESSFUL IN DEFENDING AGAINST THESE CLAIMS, WE COULD BE SUBJECT TO SIGNIFICANT DAMAGES AND THE DISRUPTION OF OUR BUSINESS. Successful intellectual property infringement claims against us could result in monetary liability or a material disruption in the conduct of our business. We cannot be certain that our products, content and brand names do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We expect that infringement claims in our markets will increase in number as more participants enter the markets. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. We may incur substantial expenses in defending against these third party infringement claims, regardless of their merit. WE MAY BE LIABLE AS A RESULT OF INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET. We may be sued for defamation, civil rights infringement, negligence, copyright or trademark infringement, personal injury, product liability or other legal claims relating to information that is published or made available on WWW.HOTJOBS.COM and the other sites linked to it. These types of claims have been brought, sometimes successfully, against online services in the past. We could also be sued for the content that is accessible from WWW.HOTJOBS.COM and through links to other Internet sites or through content and materials that may be posted by members in chat rooms or on bulletin boards. We also offer email services, which may subject us to potential risks, such as liabilities or claims resulting from unsolicited email or spamming, lost or misdirected messages, security breaches, illegal or fraudulent use of email or interruptions or delays in email service. Our insurance does not specifically provide for coverage of these types of claims and therefore may not adequately protect us against these types of claims. In 26 addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not liable. If any of these events occur, our revenues could be materially adversely affected. OTHER RISKS OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS. The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile and subject to wide fluctuations. The stock market in general and the market prices of shares in technology companies, particularly those such as ours that offer Internet-based products and services, have been extremely volatile and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. The market price of our common stock has fluctuated in the past and could continue to be highly volatile and subject to wide fluctuations in response to many factors, some of which are largely beyond our control. These factors include: - quarterly variations in our results of operations; - adverse business developments; - changes in financial estimates by securities analysts; - investor perception of us and online recruiting services in general; - announcements by our competitors of new products and services; and - general economic conditions both in the U.S. and in foreign countries. Our stock price may also experience fluctuations due to approximately $5.5 million in non-cash deferred compensation which we expect to amortize over the next four years. SINCE OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES. Litigation brought against us could result in substantial costs to us in defending against the lawsuit and a diversion of management's attention. Securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Since our stock price is volatile, we could be subject to securities litigation and incur higher expenses than expected, which could have a material adverse effect on our business and results of operations. FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or as a result of sales by our existing stockholders, or the perception that these sales could occur. We have and will continue to have a large number of shares of common stock outstanding and available for resale. These sales might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. The shares of our common stock currently outstanding are or will become eligible for sale without registration pursuant to Rule 144 under the Securities Act, subject to certain conditions of Rule 144. Certain holders of our common stock also have certain demand and piggyback registration rights enabling them to register their shares under the Securities Act for sale. IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE HOTJOBS.COM WHICH COULD DEPRESS OUR STOCK PRICE. Delaware corporate law, our amended and restated certificate of incorporation and bylaws, and our Stock Award Plan and 1999 Stock Option/Stock Issuance Plan contain provisions that could have the effect of delaying, deferring or preventing a change in control of HotJobs.com or our management that stockholders may consider favorable or beneficial. These provisions could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. 27 These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include: - authorization to issue "blank check" preferred stock, which is preferred stock that can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of common stock; - a staggered board of directors, so that it would take three successive annual meetings to replace all directors; - prohibition of stockholder action by written consent; - advance notice requirements for the submission by stockholders of nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting; - immediate vesting of options issued under the Stock Award Plan and the 1999 Stock Option/Stock Issuance Plan in connection with a change of control; and - the payment of a cash distribution for surrendered options with limited stock appreciation rights upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. OUR EXECUTIVE OFFICERS, DIRECTORS AND EXISTING STOCKHOLDERS, WHOSE INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS, WILL HAVE THE ABILITY TO EXERCISE SIGNIFICANT CONTROL OVER US. Our executive officers and directors and entities affiliated with them will, in the aggregate, beneficially own a majority of our common stock. These stockholders will be able to exercise significant influence over all matters requiring approval by our stockholders, including the election of directors and the approval of significant corporate transactions, including a change of control of HotJobs.com. The interests of these stockholders may differ from the interests of our other stockholders. ITEM 2. PROPERTIES Our principal executive offices are currently located in approximately 9,900 square feet of office space in New York, New York under a lease that expires in March 2004, but which can be terminated by either party with 90 days notice. On February 18, 2000, we provided our landlord with notice of our intention to terminate this lease. In November 1999, HotJobs.com entered into a lease agreement for approximately 42,000 square feet of office space located at 406 West 31(st) Street, New York, NY 10001, for a term of 10 years and 2 months. We will make lease payments totaling approximately $760,000 in the aggregate for the year ended December 31, 2000. The new facility will house our corporate headquarters. We expect that our New York based operations will be relocated to the new facilities during the second quarter of 2000. We also lease facilities for our sales and marketing operations in San Francisco and Santa Monica, CA, Chicago, IL, Boston, MA, Austin, TX and Sydney, Australia. We intend to expand our sales, marketing and technology operations and therefore may require additional facilities in the future ITEM 3. LEGAL PROCEEDINGS From time to time, HotJobs.com is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights and other intellectual property rights. HotJobs.com is not currently aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our common stock has been quoted on the NASDAQ National Market under the symbol HOTJ since our initial public offering on August 10, 1999. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ National Market:
1999: HIGH LOW - ----- -------- -------- Third Quarter (from August 10, 1999)........................ $36.13 $ 7.50 Fourth Quarter.............................................. $48.00 $21.00
On February 29, 2000, the last sale price of our common stock reported by the NASDAQ National Market was $25.13. HOLDERS As of February 29, 2000, we had approximately 71 holders of record of our common stock. DIVIDEND POLICY We have not declared or paid any cash dividends on our common stock or preferred stock since inception, and we do not expect to pay any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. The payment of dividends will be at the discretion of our board of directors and will depend upon factors such as future earnings, capital requirements, our financial condition and general business conditions. USE OF PROCEEDS FROM SECURITIES SALES On November 1999, we completed a follow-on public offering of 3,600,000 shares of our common stock for gross proceeds to us of $108.0 million, and net proceeds, after deducting costs of the offering, of approximately $102.1 million. On December 8, 1999, the underwriters exercised their over-allotment option for an additional 450,000 shares, resulting in gross proceeds to us of $13.5 million, and net proceeds, after deducting costs of the offering, of approximately $12.8 million. The managing underwriters in the offering were Deutsche Bank Securities Inc., BancBoston Robertson Stephens Inc., SG Cowen Securities Corporation and Thomas Weisel Partners, LLC. The shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (No. 333-89813). The Securities and Exchange Commission declared the Registration Statement effective on November 10, 1999. In connection with the offering, an aggregate of approximately $6.6 million in costs were paid (including the underwriting discounts, commissions and expenses) directly to third parties. On August 10, 1999, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File No. 333-80367) in connection with our IPO. A total of 3,350,000 shares of our common stock (including 350,000 shares issued pursuant to the exercise by the underwriters of a portion of their over-allotment option) were sold at a price of $8.00 per share to an underwriting syndicate led by Deutsche Bank Securities Inc., BancBoston Robertson Stephens Inc., SG Cowen Securities Corporation and E*OFFERING Corp. On August 13, 1999 and September 2, 1999, 3,000,000 and 350,000 shares of our common stock, respectively, were sold and thereafter, the IPO was completed. The aggregated gross proceeds raised in connection with the IPO were $26.8 million. The total costs incurred in connection with the IPO, including underwriting discounts and commissions, and fees for registration, legal, accounting, transfer agent, printing, and other miscellaneous fees, were approximately $3.6 million, resulting in net proceeds to us of approximately $23.2 million. 29 As of December 31, 1999, the net proceeds of the IPO and the follow-on offering had not yet been utilized. The net proceeds will be used for general corporate purposes, including increasing our sales and marketing efforts; developing our infrastructure, products and services; obtaining additional office space; hiring additional personnel; and possible acquisitions. RECENT SALES OF UNREGISTERED SECURITIES In February 1997, we issued and sold 21,300,000 shares of our common stock to purchases, including officers and directors, for par value. Effective May 10, 1999, we issued and sold 1,620,000 shares of Series A Preferred Stock to 18 accredited investors for an aggregate purchase price of $16,200,000. All of the Series A Preferred Stock converted, in accordance with its terms, into 3,934,019 shares of common stock upon consummation of our IPO. From time to time, we have granted stock options to employees and consultants. The following table sets forth certain information regarding grants made during the year ended December 31, 1999.
NUMBER OF SHARES EXERCISE PRICE ---------------- -------------- January 1, 1999 to June 30, 1999............... 3,078,200 $ 0.05-$3.38 July 1, 1999 to December 31, 1999.............. 2,073,000 $8.00-$42.13
The above securities were offered and sold by us in reliance upon exemptions from registration pursuant to either (i) Section 4(2) of the Securities Act, as transactions not involving any public offering or (ii) Rule 701 promulgated under the Securities Act. No underwriters were involved in connection with the above sales. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below with respect to HotJobs.com's consolidated statements of operations for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) through December 31, 1997 and with respect to HotJobs.com's consolidated balance sheets as of December 31, 1999 and 1998, are derived from our audited consolidated financial statements included elsewhere herein. The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes to those statements included elsewhere herein. 30 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PERIOD FROM FEBRUARY 20, 1997 YEAR ENDED DECEMBER 31, (INCEPTION) ----------------------- TO DECEMBER 31, 1999 1998 1997 ---------- ---------- --------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Service fees......................................... $ 15,208 $ 3,038 $ 361 Software license fees................................ 371 225 23 Career expo fees..................................... 2,327 -- -- Other................................................ 2,768 249 13 ---------- ---------- ---------- Total revenues..................................... 20,674 3,512 397 Cost of revenues....................................... 3,491 505 12 ---------- ---------- ---------- Gross profit....................................... 17,183 3,007 385 Operating expenses: Product development.................................. 996 474 174 Sales and marketing.................................. 23,634 3,085 431 General and administrative........................... 9,654 1,642 725 Non-cash compensation................................ 2,012 -- -- ---------- ---------- ---------- Total operating expenses........................... 36,296 5,201 1,330 ---------- ---------- ---------- Loss from operations............................. (19,113) (2,194) (945) Net interest income (expense).......................... 1,297 (63) -- ---------- ---------- ---------- Net loss......................................... $ (17,816) $ (2,257) $ (945) ========== ========== ========== Deemed dividend attributable to issuance of convertible preferred stock...................................... (16,200) -- -- ---------- ---------- ---------- Net loss attributable to common stockholders........... $ (34,016) $ (2,257) $ (945) ========== ========== ========== Basic and diluted net loss per common share............ $ (1.46) $ (0.11) $ (0.04) ========== ========== ========== Weighted average shares outstanding used in basic and diluted net loss per common share calculation........ 23,334,936 21,044,184 21,300,000 ========== ========== ==========
YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities...... $ 138,270 $ 167 $ -- Working capital (deficit)............................. 131,200 (3,694) (808) Total assets.......................................... 152,541 3,654 340 Note payable, excluding current portion............... 28 -- -- Line of credit, excluding current portion............. 499 -- -- Obligations under capital leases, excluding current installments........................................ 216 80 -- Total stockholders' equity (deficit).................. 135,528 (2,883) (808)
31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS OF HOTJOBS.COM'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS REPORT. We are a leading provider of comprehensive recruiting solutions that leverage the Internet to exchange information more efficiently between job seekers and employers. The majority of our revenues are recurring and are derived primarily from employer memberships to our WWW.HOTJOBS.COM employment exchange. We also provide additional recruiting solutions to employers such as our proprietary Softshoe recruiting software, our WorkWorld career expos, online advertising and consulting services. Founded in February 1997, we began operations with seven employees and we had grown to 207 employees at year end 1999. Our early operating activities related primarily to the development of the necessary technological infrastructure for the operation of WWW.HOTJOBS.COM. In February 1997, we commercially launched our WWW.HOTJOBS.COMemployment exchange. In September 1997, we began to license our Softshoe software. During 1998, we experienced significant increases in our revenues from subscriptions to our employment exchange and license and hosting fees for our Softshoe software. In early 1999, we introduced our WorkWorld career expos and expanded our marketing programs to increase awareness of the HotJobs.com brand. In May 1999, we raised net proceeds, after deducting costs of the offering, of approximately $16.1 million in a private placement of our Series A Preferred Stock. In the third quarter of 1999, we raised net proceeds, after deducting costs of the offering, of approximately $23.2 million in our initial public offering and in the fourth quarter of 1999, we raised net proceeds, after deducting costs of the offering, of approximately $114.9 million in our follow-on public offering. We classify our revenues as follows: - Service fees revenue, consisting of subscription fees paid by employers for memberships to our WWW.HOTJOBS.COM employment exchange and software hosting fees paid by customers of our software. We sell memberships to each employer on a per recruiter basis and bill the employer monthly, quarterly, semi-annually, annually or bi-annually. Membership entitles each recruiter to post a specific number of jobs on WWW.HOTJOBS.COM simultaneously. Software hosting fees consist of recurring monthly fees to maintain an employer's Softshoe database as well as the hosting of a miscellaneous proprietary software product. - Software license fees revenue, consisting of license fees paid by our Softshoe customers, who are granted a license for perpetuity, as well as license fees relating to a miscellaneous proprietary software product. - Career expo fees revenue, consisting of fees from employers that rent booths at our WorkWorld career expos. - Other revenue, consisting of fees derived from single-ad job postings on WWW.HOTJOBS.COM, banner advertising, which we sell on a monthly and extended-term basis, barter revenue, co-operative advertising revenue, consulting and other Softshoe-related services, including system customization and resume scanning services, which we bill on a monthly and extended-term basis. We recognize revenue as follows: - Service fees revenue. We provide subscriptions for membership to our employment exchange for a minimum term of three months and a maximum term of 24 months. We recognize subscription revenue over the subscription term. We provide hosting services to Softshoe customers on a monthly basis, and we recognize hosting revenue in the month we provide the service. - Software license fees revenue. We recognize software license revenue ratably over the four-year estimated useful life of the software, in accordance with Statements of Position 97-2 and 98-9 issued by the American Institute of Certified Public Accountants. 32 - Career expo fees revenue. We recognize career expo revenue in the month in which the career expo takes place. - Other revenue. We recognize revenue related to these services over the period of delivery of service. Other revenue also includes barter revenue, which consists of fees generated from exchanges of services with other vendors. We recognize barter revenue over the period that we receive the benefit. We classify our cost of revenues and operating expenses as follows: - Cost of revenues. Cost of revenues for all periods presented primarily consists of compensation and other costs associated with the operation of our WWW.HOTJOBS.COM employment exchange, resume scanning services, depreciation expense and, for 1999, career expo and barter expenses. - Product development expense. Product development expense consists primarily of costs associated with the compensation of product development personnel. Our product development expenses constitute all of our research and development expenditures. - Sales and marketing expense. Sales and marketing expense consists primarily of advertising and promotional expenses, public relations expenses, conference expenses, printing fees, sales and marketing compensation, including base salary and sales commissions, and telemarketing communications expenses. Sales commissions have remained relatively constant as a percentage of revenues, and we expect this to continue. However, the timing and magnitude of marketing initiatives have caused, and will continue to cause, fluctuations in sales and marketing expense as a percentage of revenues. - General and administrative expense. General and administrative expense consists primarily of compensation for administrative and executive staff, fees for professional services, bad debt expense and general office expense. The following table sets forth, as a percentage of total revenues, the results of our operations for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997.
PERIOD FROM YEAR ENDED FEBRUARY 20, DECEMBER 31, 1997 (INCEPTION) ------------------- TO DECEMBER 31, 1999 1998 1997 -------- -------- ---------------- Revenues: Service fees.................................. 74% 87% 91% Software license fees......................... 2 6 6 Career expo fees.............................. 11 -- -- Other......................................... 13 7 3 ----- ----- ----- Total revenues.............................. 100 100 100 Cost of revenues.............................. 17 14 3 ----- ----- ----- Gross profit................................ 83 86 97 Operating expenses: Product development........................... 5 13 44 Sales and marketing........................... 114 88 108 General and administrative.................... 46 47 183 Non-cash compensation......................... 10 -- -- ----- ----- ----- Total operating expenses.................... 175 148 335 ----- ----- ----- Loss from operations........................ (92) (62) (238) Net interest income (expense)................. 6 (2) -- ----- ----- ----- Net loss.................................... (86)% (64)% (238)% ===== ===== =====
33 We have incurred substantial losses in every fiscal period since our inception. From February 20, 1997 (inception) to December 31, 1997, we incurred a net loss of approximately $945,000. For the year ended December 31, 1998, we incurred a net loss of approximately $2.3 million. For the year ended December 31, 1999, we incurred a net loss of approximately $17.8 million. As of December 31, 1998, and December 31, 1999, we had accumulated deficits of approximately $3.2 million and $37.2 million, respectively. Our net losses and resulting accumulated deficit are primarily due to the costs we incurred to develop our online employment exchange and software products in advance of substantial revenues and to expand our sales and marketing programs. We intend to devote significant resources to advertising and brand-marketing programs designed to attract new employers to subscribe to WWW.HOTJOBS.COM and new job seekers to use the site. We anticipate increasing advertising spending in specific periods in the future. This will result in sales and marketing expenses increasing as a percentage of total revenues in these periods. As of December 31, 1999, we had commitments of approximately $15.9 million for various advertising campaigns through December 2000. These commitments include broadcasting, print, online and outdoor advertising. We expect growth in the number of member employers of WWW.HOTJOBS.COM to result in substantial growth in subscription fees. Our strategy contemplates that revenue from employer memberships will likely be the single largest source of revenue for us in the immediate future. As a result of our expansion plans and our expectation that operating expenses will increase significantly in the next several years, especially in the areas of sales and marketing and brand promotion, we expect to incur additional losses from operations for the foreseeable future. To the extent that (1) increases in our operating expenses precede and are not subsequently followed by commensurate increases in revenues or (2) we are unable to adjust operating expense levels accordingly, our operating losses may exceed our expectations for those periods. We cannot be sure that we will ever achieve or sustain profitability. DEFERRED COMPENSATION We recorded deferred compensation net of options forfeited of approximately $7.5 million in the year ended December 31, 1999, and amortized approximately $2.0 million as non-cash compensation expense in 1999. Deferred compensation represents the difference between the exercise price of stock options granted and the fair value for accounting purposes of the underlying common stock at the date of the grant. The remaining deferred compensation at December 31, 1999 of approximately $5.5 million will be amortized over the remaining vesting period of the options. We currently expect to amortize the remaining deferred compensation as follows: For the year ending: December 31, 2000........................................... $1.8 million December 31, 2001........................................... $1.8 million December 31, 2002........................................... $1.4 million December 31, 2003........................................... $0.5 million
BENEFICIAL CONVERSION FEATURE As of May 10, 1999, due to our sale of 1,620,000 shares of Series A Preferred Stock with a conversion price that was below the then expected initial public offering price of our common stock, we recorded a beneficial conversion feature of $16.2 million. Prior to the conversion of the Series A Preferred Stock into common stock, we began to amortize the value of the beneficial conversion feature over the four-year period from the date of issuance of the preferred stock to the date on which the preferred stock was first convertible into common stock, assuming no acceleration of the date of conversion. All of the preferred stock automatically converted into common stock upon completion of our initial public offering and all of the unamortized value of the beneficial conversion feature was immediately recognized as a dividend to preferred stockholders. We amortized an aggregate of $16.2 million of the beneficial conversion feature in 34 the year ended December 31, 1999, which increased our net loss per common share by $0.70 in the year ended December 31, 1999. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 REVENUES Our total revenues increased to approximately $20.7 million for the year ended December 31, 1999, from approximately $3.5 million for the year ended December 31, 1998. The increase in our total revenues was due to increased revenue in all of our revenue categories. SERVICE FEES. Service fees revenue increased to approximately $15.2 million for the year ended December 31, 1999, from approximately $3.0 million for the year ended December 31, 1998. This increase resulted primarily from an increase in the number of employers subscribing to WWW.HOTJOBS.COM and, to a lesser extent, an increase in the hosting fees generated by a larger number of licensees of our Softshoe software. SOFTWARE LICENSE FEES. Software license fees revenue increased to approximately $371,000 for the year ended December 31, 1999, from approximately $225,000 for the year ended December 31, 1998. This increase was due primarily to an increase in the number of companies that license our proprietary Softshoe software. CAREER EXPO FEES. Career expo fees revenue increased to approximately $2.3 million for the year ended December 31, 1999, from $0 for the year ended December 31, 1998. We held our first career expo in February 1999. OTHER. Other revenue increased to approximately $2.8 million for the year ended December 31, 1999, from approximately $249,000 for the year ended December 31, 1998. This increase primarily relates to the inception of single-ad job postings, barter and banner revenues. COST OF REVENUES Our cost of revenues increased to approximately $3.5 million for the year ended December 31, 1999, from approximately $505,000 for the year ended December 31, 1998. As a percentage of revenues, cost of revenues increased to 17% for the year ended December 31, 1999, from 14% for the year ended December 31, 1998. This increase resulted primarily from costs associated with career expo revenues and barter revenues, each of which were initiated in 1999. We incur higher marginal costs associated with both career expo and barter revenues than with our other revenue sources. OPERATING EXPENSES PRODUCT DEVELOPMENT EXPENSE. Product development expense increased to approximately $996,000 for the year ended December 31, 1999, from approximately $474,000 for the year ended December 31, 1998. This increase reflects our continuing efforts to provide enhanced content and features in our products and services and resulted primarily from increased salaries and related expenses associated with hiring additional technology personnel. SALES AND MARKETING EXPENSE. Sales and marketing expense increased to approximately $23.6 million for the year ended December 31, 1999, from approximately $3.1 million for the year ended December 31, 1998. As a percentage of revenues, sales and marketing expense increased to 114% for the year ended December 31, 1999, from 88% for the year ended December 31, 1998. The increase in sales and marketing expense was primarily due to the expansion of the HotJobs.com marketing campaign, including approximately $2.0 million for a television advertisement during the Super Bowl in January 1999. In addition, sales and marketing expense increased due to the hiring of additional sales and marketing personnel. 35 GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased to approximately $9.7 million for the year ended December 31, 1999, from approximately $1.6 million for the year ended December 31, 1998. General and administrative expense increased primarily due to increased salaries and related expenses associated with hiring additional administrative personnel. NON-CASH COMPENSATION EXPENSE. We recorded approximately $2.0 million of non-cash compensation expense for the year ended December 31, 1999, which represents the amortization of approximately $7.5 million of deferred compensation, net of options forfeited, recorded for the year ended December 31, 1999 in connection with stock options granted below the market value during the year ended December 31, 1999. Deferred compensation is amortized over the periods during which the related options vest. The deferred compensation remaining at December 31, 1999 of approximately $5.5 million will be amortized through August 2003 as the options vest. NET INTEREST INCOME (EXPENSE) Net interest income increased to approximately $1.3 million for the year ended December 31, 1999, from a net interest expense of approximately $63,000 for the year ended December 31, 1998. Net interest income reflects the investment of our excess cash, which resulted from the sale of Series A Preferred Stock in May 1999, as well as our initial public offering and our follow-on offering in the second half of 1999. Prior to the sale of the Series A Preferred Stock, we were a net borrower of funds and had recorded net interest expense. TAXES At December 31, 1999, we had a net operating loss carryforward of approximately $22.0 million which expires at various dates through 2019. We have recorded a valuation allowance to fully offset the deferred tax benefit. The valuation allowance increased by approximately $9.5 million for the year ended December 31, 1999. Due to the "change of ownership" provisions in Section 382 of the Internal Revenue Code, the availability of our net operating loss carryforwards may be subject to an annual limitation against taxable income in future periods, which could limit the eventual utilization of these carryforwards. YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD ENDED DECEMBER 31, 1997 REVENUES Our total revenues increased to approximately $3.5 million for the year ended December 31, 1998, from approximately $397,000 for the period ended December 31, 1997. The increase in our total revenues was primarily due to an increase in service fees and other fees associated with the license of miscellaneous proprietary software. SERVICE FEES. Service fees revenue increased to approximately $3.0 million for the year ended December 31, 1998, from approximately $361,000 for the period ended December 31, 1997. This increase resulted primarily from an increase in the number of employers subscribing to WWW.HOTJOBS.COM and, to a lesser extent, an increase in the hosting fees generated from a larger number of licensees of our Softshoe software. SOFTWARE LICENSE FEES. Software license fees revenue increased to approximately $225,000 for the year ended December 31, 1998, from approximately $23,000 for the period ended December 31, 1997. This increase was due to an increase in the number of customers who license our proprietary Softshoe software. CAREER EXPO FEES. We held our first WorkWorld career expo in 1999. Therefore, we did not generate any career expo revenue in either 1998 or 1997. 36 OTHER. Other revenue increased to approximately $249,000 for the year ended December 31, 1998, from approximately $13,000 for the period ended December 31, 1997. This increase is primarily due to an increase in fees related to customizing Softshoe applications. COST OF REVENUES Our cost of revenues increased to approximately $505,000 for the year ended December 31, 1998, from $12,000 for the period ended December 31, 1997. As a percentage of revenues, cost of revenues increased to 14% for the year ended December 31, 1998, from 3% for the period ended December 31, 1997. This increase resulted primarily from an increase in our network operations staff as well as an increase in depreciation expense. OPERATING EXPENSES PRODUCT DEVELOPMENT EXPENSE. Product development expense increased to approximately $474,000 for the year ended December 31, 1998, from approximately $174,000 for the period ended December 31, 1997. This increase resulted primarily from increased salaries and related expenses associated with hiring additional technology personnel required to enhance the content and features of our products and services. SALES AND MARKETING EXPENSE. Sales and marketing expense increased to approximately $3.1 million for the year ended December 31, 1998, from approximately $431,000 for the period ended December 31, 1997, and decreased as a percentage of revenues to 88% for the year ended December 31, 1998, from 108% for the period ended December 31, 1997. The increase in sales and marketing expense was primarily due to costs associated with advertising and increases in sales compensation and commissions related to an increase in the number of our sales and marketing personnel. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased to approximately $1.6 million for the year ended December 31, 1998, from approximately $725,000 for the period ended December 31, 1997. General and administrative expense increased primarily due to increased salaries and related expenses associated with hiring additional personnel. NET INTEREST INCOME (EXPENSE) Net interest expense increased to approximately $63,000 for the year ended December 31, 1998, from $0 for the period ended December 31, 1997. This increase resulted from increased borrowings, as well as increased capital expenditures under capital leases. TAXES At December 31, 1998, we had a net operating loss carryforward of $2.8 million. This carryforward is available to offset future taxable income and expires at various dates through 2018. We have recorded a valuation allowance to fully offset the deferred tax benefit. The valuation allowance increased by approximately $892,000 for the year ended December 31, 1998. UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following table sets forth a summary of our quarterly results for each of the eight quarters ended December 31, 1999. This information was derived from unaudited interim consolidated financial statements that, in the opinion of management, have been prepared on a basis consistent with the consolidated financial statements contained elsewhere in this report and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of such information when read in conjunction with the consolidated financial statements and notes thereto. The consolidated results of operations for any quarter are not necessarily indicative of the consolidated results of operations for any future period. 37 Our revenues have increased in each consecutive quarter since inception as a result of increased market acceptance of our employment exchange service and Softshoe software product. Product development expense as a percentage of revenues has decreased in each quarter of 1999 as compared to the 1998 quarter as a result of a faster increase in revenues relative to product development expense. Sales and marketing expense increased in every quarter, primarily as a result of increased advertising expenditures. Sales commissions have remained relatively constant as a percentage of revenues, and we expect this to continue. However, the timing and magnitude of marketing initiatives have caused, and will continue to cause, fluctuations in sales and marketing expense as a percentage of revenues. General and administrative expense has increased in every quarter since inception due to an increase in personnel, facilities and increased spending on internal operational and financial infrastructure. In light of the evolving nature of our business and limited operating history, we believe that period-to-period comparisons of our historical operating results may not be meaningful and should not be relied upon as indications of future performance. Although we have experienced sequential quarterly revenue growth since inception, our historical revenue growth rates are not necessarily indicative of future revenue growth rates.
QUARTER ENDED --------------------------------------------------------------------------------------- DEC 31, SEPT 30, JUNE 30, MARCH 31, DEC 31, SEPT 30, JUNE 30, MARCH 31, 1999 1999 1999 1999 1998 1998 1998 1998 -------- -------- -------- --------- -------- -------- -------- --------- (IN THOUSANDS) (UNAUDITED) Revenues: Service fees.................. $ 6,352 $ 4,052 $ 2,844 $ 1,960 $1,150 $ 914 $ 627 $ 347 Software license fees......... 126 84 83 78 70 59 51 45 Career expo fees.............. 1,138 659 314 216 -- -- -- -- Other......................... 986 843 544 395 60 169 15 5 ------- ------- ------- ------- ------ ------ ------ ----- Total revenues.............. 8,602 5,638 3,785 2,649 1,280 1,142 693 397 Cost of revenues................ 1,305 954 644 588 200 139 89 77 ------- ------- ------- ------- ------ ------ ------ ----- Gross profit................ 7,297 4,684 3,141 2,061 1,080 1,003 604 320 Operating expenses: Product development........... 331 321 187 157 132 140 112 90 Sales and marketing........... 8,440 7,934 4,031 3,229 1,178 754 629 524 General and administrative.... 3,988 3,172 1,671 823 713 375 280 274 Non-cash compensation......... 472 1,375 165 -- -- -- -- -- ------- ------- ------- ------- ------ ------ ------ ----- Total operating expenses.... 13,231 12,802 6,054 4,209 2,023 1,269 1,021 888 ------- ------- ------- ------- ------ ------ ------ ----- Loss from operations...... (5,934) (8,118) (2,913) (2,148) (943) (266) (417) (568) Net interest income (expense)... 1,148 205 12 (68) (35) (15) (6) (7) ------- ------- ------- ------- ------ ------ ------ ----- Net loss.................. $(4,786) $(7,913) $(2,901) $(2,216) $ (978) $ (281) $ (423) $(575) ======= ======= ======= ======= ====== ====== ====== =====
38
QUARTER ENDED --------------------------------------------------------------------------------------- DEC 31, SEPT 30, JUNE 30, MARCH 31, DEC 31, SEPT 30, JUNE 30, MARCH 31, 1999 1999 1999 1999 1998 1998 1998 1998 -------- -------- -------- --------- -------- -------- -------- --------- (UNAUDITED) AS A PERCENTAGE OF TOTAL REVENUES: Revenues: Service fees.................... 74% 72% 75% 74% 90% 80% 91% 88% Software license fees........... 1 1 2 3 5 5 7 11 Career expo fees................ 13 12 8 8 -- -- -- -- Other........................... 12 15 15 15 5 15 2 1 --- ---- --- --- --- --- --- ---- Total revenues................ 100 100 100 100 100 100 100 100 Cost of revenues.................. 15 17 17 22 16 12 13 19 --- ---- --- --- --- --- --- ---- Gross profit...................... 85 83 83 78 84 88 87 81 Operating expenses: Product development............. 4 6 5 6 10 12 16 23 Sales and marketing............. 98 141 107 122 92 66 91 132 General and administrative...... 46 56 44 31 56 33 40 69 Non-cash compensation........... 6 24 4 -- -- -- -- -- --- ---- --- --- --- --- --- ---- Total operating expenses...... 154 227 160 159 158 111 147 224 --- ---- --- --- --- --- --- ---- Loss from operations........ (69) (144) (77) (81) (74) (23) (60) (143) Net interest income (expense)..... 13 4 -- (3) (3) (1) (1) (2) --- ---- --- --- --- --- --- ---- Net loss.................... (56)% (140)% (77)% (84)% (77)% (24)% (61)% (145)% === ==== === === === === === ====
LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our activities primarily through funding from OTEC, Inc., an affiliate, lines of credit, cash from operations, the private placement of equity securities, our initial public offering and our follow-on public offering. Through May 1999, OTEC provided us with approximately $3.8 million to fund our operations. Effective May 10, 1999, we raised net proceeds, after deducting costs of the offering, of approximately $16.1 million from the sale of our Series A Preferred Stock in a private placement. On August 13, 1999, we completed the initial public offering of 3,000,000 shares of our common stock for gross proceeds of $24.0 million and net proceeds, after deducting costs of the offering, of approximately $20.6 million. On September 2, 1999, the underwriters exercised their over-allotment option to the extent of 350,000 shares, resulting in gross proceeds to us of $2.8 million, and net proceeds, after deducting costs of the offering, of approximately $2.6 million. On November 16, 1999, we completed a follow-on offering of 3,600,000 shares of our common stock for gross proceeds of $108.0 million, and net proceeds, after deducting costs of the offering, of approximately $102.1 million. On December 8, 1999, the underwriters exercised their over-allotment option of an additional 450,000 shares, resulting in gross proceeds to us of $13.5 million, and net proceeds, after deducting costs of the offering, of approximately $12.8 million. Management believes that cash and cash equivalents along with marketable securities on hand of approximately $138.3 million at December 31, 1999 will be sufficient to meet our funding needs for at least the next 12 months. Net cash used in operating activities was approximately $9.8 million in 1999 and approximately $2.1 million in 1998. Net cash used in operating activities both in 1999 and 1998 resulted primarily from our net loss, which mainly resulted from costs incurred to support our sales and marketing efforts and the increased personnel required to manage our growing operations, combined with a higher level of accounts receivable which resulted from increased billings which were partially offset by increased accounts payable 39 and accrued expenses, increased deferred revenue and, for 1999, a non-cash compensation charge of approximately $2.0 million. For the period from February 1997 (inception) to December 31, 1997, our operating activities were primarily self-funded. Net cash used in investing activities was approximately $54.2 million in 1999, and approximately $497,000 in 1998. Net cash used in investing activities in 1999 was for the purchase of marketable securities of approximately $125.0 million and for capital expenditures of approximately $4.3 million, which were partially offset by proceeds of approximately $75.1 million from the sale of marketable securities. The net cash used in investing activities in 1998 was solely for capital expenditures. For the period February 20, 1997 (inception) to December 31, 1997, there were no investing activities. Net cash provided by financing activities was approximately $152.2 million in 1999 and approximately $2.8 million in 1998. Net cash provided by financing activities of approximately $152.2 million in 1999 mainly resulted from public offerings of our common stock which raised approximately $138.2 million of net proceeds, after deducting costs of the offerings, and approximately $16.1 million of net proceeds, after deducting costs of the offering, which were raised in the private placement of Series A Preferred Stock which were partially offset by the repayment of advances from OTEC, Inc. Net cash provided by financing activities in 1998 consisted primarily of advances from OTEC, Inc. For the period February 20, 1997 (inception) to December 31, 1997, net cash provided by financing activities of $4 represented proceeds from the issuance of common stock. As of December 31, 1999, we had approximately $88.4 million of cash and cash equivalents on hand and held marketable securities valued at approximately $49.9 million. We have, as of December 31, 1999, approximately $2.5 million of availability under our existing line of credit. As of December 31, 1999, our principal commitments consisted of approximately $15.9 million for various advertising campaigns through December 2000 and approximately $14.5 million of office lease commitments through December 2009. We believe that our existing cash and cash equivalents, marketable securities and available line of credit will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next 12 months. Our capital requirements will depend on a number of factors, including market acceptance of our products and services, the amount of our resources we devote to WWW.HOTJOBS.COM and expansion of our operations and the amount of our resources we devote to promoting awareness of the HotJobs.com brand. Consistent with our growth, we have experienced a substantial increase in our sales and marketing expenses, capital expenditures and operating lease arrangements since inception, and we anticipate that these increases will continue for the foreseeable future. In addition, we will continue to evaluate possible investments in businesses, products and technologies, the consummation of any of which would increase our capital expenditures. Although we currently believe that we will have sufficient capital resources to meet our anticipated working capital and capital expenditures requirements beyond the next 12 months, unanticipated events and opportunities may require us to sell additional equity or debt securities, increase our current line of credit or establish new credit facilities to raise capital in order to meet our capital requirements. If we sell additional equity or convertible debt securities, the sale could dilute the ownership of our existing stockholders. If we issue debt securities, increase our credit facility or establish a new credit facility, our fixed obligations could increase and result in operating covenants that would restrict our operations. We cannot be sure that any such financing will be available at all or in amounts or on terms acceptable to us. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the potential loss arising from adverse changes in market rates and prices, such as interest and foreign currency exchange rates. Due to the short term maturities of our cash equivalents and marketable securities portfolio at December 31, 1999, we have not entered into any financial instruments to manage or reduce the impact of changes in interest rates. Our interest risk based on a hypothetical increase in interest rates of 100 basis points, for the financial instruments included in our 40 portfolio, would be a decrease of approximately $141,000 in the value of our portfolio. We deem our foreign currency exchange rate risk not to be material as our foreign operation is currently focused in one country and our foreign investment to date is not material. YEAR 2000 COMPLIANCE During 1999, we completed any required modifications to our critical systems and applications relating to year 2000 issues. We also completed our survey of our significant suppliers to assess our vulnerability if these companies were to fail to remediate their year 2000 issues. The responses received indicated that our suppliers were aware of the year 2000 issue and were implementing all necessary changes prior to the end of calendar year 1999. We also formulated contingency plans to ensure that business-critical processes were protected from disruption and will continue to function during and after the year 2000 and to ensure that our ability to produce an acceptable level of products and services is safeguarded in the event of failures of external systems and services. During 1999, we did not incur any material costs in connection with identifying, evaluating or remediating year 2000 issues. Our business and operations experienced no material adverse effects from the calendar change to the year 2000 or from the leap year that occurred in 2000, and we have not been notified of any disruptions to or failures in the systems of any of our suppliers. We will continue to monitor our information technology and non-information technology systems and those of third parties with whom we conduct business throughout the year 2000 to ensure that any latent year 2000 issues that may arise are addressed promptly. Although we do not anticipate any additional expenditures relating to year 2000 compliance, we cannot provide any assurance as to the magnitude of any future costs until significant time has passed. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." This statement changes the way that public business enterprises report segment information, including financial and descriptive information about their selected segment information. Under SFAS No. 131, operating segments are defined as revenue-producing components of the enterprise which are generally used internally for evaluating segment performance. SFAS No. 131 became effective for HotJobs.com fiscal year ending December 31, 1997, and we have determined that under the guidelines of SFAS No. 131, we did not have any separately reportable business segments as of December 31, 1999 and 1998. In February 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes the accounting for costs of software products developed or purchased for internal use, including when such costs should be capitalized. The adoption of this standard has had no impact on our financial condition or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning June 15, 2000. We have not yet determined the effect SFAS No. 133 will have on our results of operations and financial position. 41 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. HOTJOBS.COM, LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Independent Auditors' Report................................ 43 Consolidated Balance Sheets as of December 31, 1999 and 1998...................................................... 44 Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997......................................... 45 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999 and 1998 and for the period February 20, 1997 (inception) to December 31, 1997...................................................... 46 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 and for period from February 20, 1997 (inception) to December 31, 1997......................................... 47 Notes to Consolidated Financial Statements.................. 48
42 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders HotJobs.com, Ltd.: We have audited the accompanying consolidated balance sheets of HotJobs.com, Ltd. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HotJobs.com, Ltd. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG LLP New York, New York February 7, 2000 43 HOTJOBS.COM, LTD. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1999 1998 ------------ ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 88,372,658 $ 167,004 Marketable securities..................................... 49,897,110 -- Accounts receivable, less allowance for doubtful accounts of $801,770 in 1999 and $85,000 in 1998................. 6,456,227 1,553,297 Prepaid expenses and other current assets................. 2,744,041 1,042,675 ------------ ---------- TOTAL CURRENT ASSETS.................................. 147,470,036 2,762,976 Property and equipment, net................................. 4,572,496 589,693 Other assets................................................ 498,720 301,285 ------------ ---------- TOTAL ASSETS.......................................... $152,541,252 $3,653,954 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of credit line............................ $ 166,293 $ 180,000 Accounts payable and accrued expenses..................... 9,233,739 617,879 Due to affiliate.......................................... 1,063 3,631,640 Deferred revenue.......................................... 5,373,352 1,954,582 Other current liabilities................................. 991,749 -- Current portion of note payable........................... 297,753 -- Current installments of obligations under capital leases.................................................. 205,840 72,950 ------------ ---------- TOTAL CURRENT LIABILITIES............................. 16,269,789 6,457,051 Line of credit, excluding current portion................... 498,879 -- Note payable, excluding current portion..................... 27,930 -- Obligations under capital leases, excluding current installments.............................................. 216,479 79,999 ------------ ---------- TOTAL LIABILITIES..................................... 17,013,077 6,537,050 Stockholders' equity (deficit): Preferred stock, $0.01 par value; 10,000,000 shares authorized, no shares issued and outstanding at December 31, 1999 and December 31, 1998................. -- -- Common stock, $0.01 par value; 100,000,000 shares authorized; 31,344,419 and 20,820,000 shares issued and outstanding at December 31, 1999 and 1998, respectively............................................ 313,444 208,200 Deferred compensation..................................... (5,509,523) -- Additional paid-in capital................................ 177,952,759 111,304 Accumulated deficit....................................... (37,219,056) (3,202,600) Accumulated other comprehensive loss...................... (9,449) -- ------------ ---------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................. 135,528,175 (2,883,096) ------------ ---------- Commitments and contingencies TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........................................... $152,541,252 $3,653,954 ============ ==========
See accompanying notes to consolidated financial statements. 44 HOTJOBS.COM, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM FEBRUARY 20, 1997 YEAR ENDED (INCEPTION) DECEMBER 31, TO -------------------------- DECEMBER 31, 1999 1998 1997 ------------ ----------- ------------------ Revenues: Service fees..................................... $ 15,207,866 $ 3,038,317 $ 360,942 Software license fees............................ 371,312 224,892 23,437 Career expo fees................................. 2,326,689 -- -- Other............................................ 2,767,947 249,269 13,117 ------------ ----------- ---------- Total revenues................................. 20,673,814 3,512,478 397,496 Cost of revenues................................... 3,490,496 505,527 12,000 ------------ ----------- ---------- Gross profit................................... 17,183,318 3,006,951 385,496 Operating expenses: Product development.............................. 996,228 474,406 173,846 Sales and marketing.............................. 23,634,186 3,084,712 431,165 General and administrative....................... 9,653,684 1,642,089 725,771 Non-cash compensation............................ 2,012,449 -- -- ------------ ----------- ---------- Total operating expenses....................... 36,296,547 5,201,207 1,330,782 ------------ ----------- ---------- Loss from operations......................... (19,113,229) (2,194,256) (945,286) Net interest income (expense)...................... 1,296,773 (63,058) -- ------------ ----------- ---------- Net loss..................................... $(17,816,456) $(2,257,314) $ (945,286) ============ =========== ========== Deemed dividend attributable to issuance of convertible preferred stock...................... (16,200,000) -- -- ------------ ----------- ---------- Net loss attributable to common stockholders....... $(34,016,456) $(2,257,314) $ (945,286) ============ =========== ========== Basic and diluted net loss per common share........ $ (1.46) $ (0.11) $ (0.04) ============ =========== ========== Weighted average shares outstanding used in basic and diluted net loss per common share calculation...................................... 23,334,936 21,044,184 21,300,000 ============ =========== ==========
See accompanying notes to consolidated financial statements. 45 HOTJOBS.COM, LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL --------------------- DEFERRED PAID-IN ACCUMULATED SHARES AMOUNT COMPENSATION CAPITAL DEFICIT ---------- -------- ------------- ------------ ------------ Issuance of common stock....................... 21,300,000 $213,000 $ -- $ (212,996) $ -- Allocation of compensation from affiliate...... -- -- -- 137,500 -- Net loss for the period from February 20, 1997 (inception) to December 31, 1997............. -- -- -- -- (945,286) ---------- -------- ----------- ------------ ------------ Balance as of December 31, 1997................ 21,300,000 213,000 -- (75,496) (945,286) Allocation of compensation from affiliate...... -- -- -- 182,000 -- Repurchase of common stock..................... (480,000) (4,800) -- 4,800 -- Net loss for the year ended December 31, 1998......................................... -- -- -- -- (2,257,314) ---------- -------- ----------- ------------ ------------ Balance as of December 31, 1998................ 20,820,000 208,200 -- 111,304 (3,202,600) Repurchase of common stock..................... -- -- -- -- -- Offering costs related to preferred stock...... -- -- -- (85,113) -- Beneficial conversion feature related to redeemable convertible preferred stock....... -- -- -- 16,200,000 -- Amortization of beneficial conversion feature...................................... -- -- -- -- (16,200,000) Conversion of preferred stock into common stock........................................ 3,934,019 39,340 -- 16,160,660 -- Issuance of common stock in connection with IPO, net of offering costs................... 3,350,000 33,500 -- 23,202,633 -- Exercise of stock options...................... 390,400 3,904 -- 15,893 -- Deferred compensation, net of options forfeited.................................... -- -- (7,521,972) 7,521,972 -- Amortization of deferred compensation.......... -- -- 2,012,449 -- -- Issuance of common stock in a follow-on offering, net of offering costs.............. 2,850,000 28,500 -- 114,825,410 -- Comprehensive loss: Foreign currency translation................. -- -- -- -- -- Unrealized loss on marketable securities..... -- -- -- -- -- Net loss for the year ended December 31, 1999......................................... -- -- -- -- (17,816,456) ---------- -------- ----------- ------------ ------------ Balance as of December 31, 1999................ 31,344,419 $313,444 $(5,509,523) $177,952,759 $(37,219,056) ========== ======== =========== ============ ============ ACCUMULATED OTHER COMPREHENSIVE TREASURY LOSS STOCK STOCK ------------- -------- ------------ Issuance of common stock....................... $ -- $ -- $ 4 Allocation of compensation from affiliate...... -- -- 137,500 Net loss for the period from February 20, 1997 (inception) to December 31, 1997............. -- -- (945,286) ------- ------- ------------ Balance as of December 31, 1997................ -- -- (807,782) Allocation of compensation from affiliate...... -- -- 182,000 Repurchase of common stock..................... -- -- -- Net loss for the year ended December 31, 1998......................................... -- -- (2,257,314) ------- ------- ------------ Balance as of December 31, 1998................ -- -- (2,883,096) Repurchase of common stock..................... -- (61,000) (61,000) Offering costs related to preferred stock...... -- -- (85,113) Beneficial conversion feature related to redeemable convertible preferred stock....... -- -- 16,200,000 Amortization of beneficial conversion feature...................................... -- -- (16,200,000) Conversion of preferred stock into common stock........................................ -- -- 16,200,000 Issuance of common stock in connection with IPO, net of offering costs................... -- -- 23,236,133 Exercise of stock options...................... -- -- 19,797 Deferred compensation, net of options forfeited.................................... -- -- -- Amortization of deferred compensation.......... -- -- 2,012,449 Issuance of common stock in a follow-on offering, net of offering costs.............. -- 61,000 114,914,910 Comprehensive loss: Foreign currency translation................. (3,688) -- (3,688) Unrealized loss on marketable securities..... (5,761) -- (5,761) Net loss for the year ended December 31, 1999......................................... -- -- (17,816,456) ------- ------- ------------ Balance as of December 31, 1999................ $(9,449) $ -- $135,528,175 ======= ======= ============
See accompanying notes to consolidated financial statements. 46 HOTJOBS.COM, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM FEBRUARY 20, 1997 YEAR ENDED DECEMBER 31, (INCEPTION) TO -------------------------- DECEMBER 31, 1999 1998 1997 ------------ ----------- ------------------ Cash flows from operating activities: Net loss................................................. $(17,816,456) $(2,257,314) $(945,286) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................ 785,749 107,904 -- Provision for doubtful accounts...................... 937,236 85,000 -- Allocation of compensation cost from affiliate....... -- 182,000 137,500 Non-cash compensation................................ 2,012,449 -- -- Changes in: Accounts receivable.................................. (5,840,150) (1,319,160) (319,137) Due to affiliate..................................... (990,782) 697,396 294,449 Prepaid expenses and other current assets............ (1,701,346) (1,021,827) (20,848) Other assets......................................... 794,513 (301,285) -- Accounts payable and accrued expenses................ 8,615,189 540,615 77,264 Deferred revenue..................................... 3,418,627 1,178,528 776,054 ------------ ----------- --------- Net cash used in operating activities............ (9,784,971) (2,108,143) (4) ------------ ----------- --------- Cash flows from investing activities: Purchase of marketable securities........................ (124,952,871) -- -- Sale of marketable securities............................ 75,050,000 -- -- Capital expenditures..................................... (4,311,049) (497,054) -- ------------ ----------- --------- Net cash used in investing activities............ (54,213,920) (497,054) -- ------------ ----------- --------- Cash flows from financing activities: Proceeds from common stock............................... 138,151,043 -- 4 (Repayment to) advances from affiliate................... (2,639,795) 2,639,795 -- Repurchase of common stock............................... (61,000) -- -- Proceeds from issuance of redeemable convertible preferred stock........................................ 16,114,887 -- -- Proceeds from note payable............................... 480,998 -- -- Proceeds from credit lines............................... 665,172 180,000 -- Repayment of note payable................................ (155,315) -- -- Repayment of credit line................................. (180,000) -- -- Proceeds from exercise of options........................ 19,797 -- -- Principal payments under capital lease obligations....... (187,694) (47,594) -- ------------ ----------- --------- Net cash provided by financing activities........ 152,208,093 2,772,201 4 ------------ ----------- --------- Effect of foreign exchange rates on cash................... (3,548) -- -- Net increase in cash and cash equivalents........ 88,205,654 167,004 -- ------------ ----------- --------- Cash and cash equivalents at beginning of period........... 167,004 -- -- Cash and cash equivalents at end of period................. $ 88,372,658 $ 167,004 $ -- ============ =========== ========= Supplemental disclosures of cash flow information: Interest paid............................................ $ 160,284 $ 13,128 $ -- ============ =========== ========= Non cash transactions: Equipment acquired under capital leases.................. $ 457,064 $ 200,543 $ -- Barter transaction....................................... $ 252,500 $ -- $ --
See accompanying notes to consolidated financial statements. 47 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (1) DESCRIPTION OF BUSINESS HotJobs.com, Ltd. (the "Company") was incorporated in the State of Delaware on February 20, 1997 (inception) as Hot Jobs, Inc. On September 23, 1998, Hot Jobs, Inc. changed its name to HotJobs.com, Ltd. On June 18, 1999, the Company established an international presence with the incorporation of HotJobs.com Australia Pty. Ltd. in Australia. The Company is an Internet-based recruiting solutions company. The Company leverages the Internet to provide a direct exchange of information between job seekers and employers. The Company's employment exchange, WWW.HOTJOBS.COM, allows member employers access to a database of job seekers and provides the tools to post, track and manage job openings in a real-time environment. The Company also provides employers with additional recruiting solutions including Softshoe, its proprietary recruiting software, WorkWorld career expos, and online advertising and consulting services. The Company operates in a highly competitive environment and inherent in the Company's business are various risks and uncertainties including its limited operating history and unproven business model. The Company's success may depend in part upon the emergence of the Internet as a recruiting medium, prospective product and service development efforts, and the acceptance of the Company's products and services by the marketplace. (2) SUMMARY OF OPERATIONS (A) PRIVATE PLACEMENT Effective May 10, 1999, the Company entered into a Series A Preferred Stock purchase agreement with a number of investors whereby the Company issued 1,620,000 shares of Series A Preferred Stock for gross proceeds of $16,200,000. Upon the closing of the initial public offering (the "IPO"), the then outstanding shares of the Company's preferred stock automatically converted into 3,934,019 shares of common stock (see Note 11). (B) INITIAL PUBLIC OFFERING On August 13, 1999, the Company completed the initial offering of 3,000,000 shares of the Company's common stock for gross proceeds of $24.0 million and net proceeds of approximately $20.6 million, after deducting costs of the offering. On September 2, 1999, the underwriters exercised their over-allotment option to the extent of 350,000 shares, resulting in gross proceeds to the Company of $2.8 million, and net proceeds of approximately $2.6 million, after deducting costs of the offering. (C) FOLLOW-ON PUBLIC OFFERING On November 16, 1999, the Company completed a follow-on offering of 3,600,000 shares of the Company's common stock, including 1,200,000 shares of treasury stock, for gross proceeds of $108.0 million, and net proceeds, after deducting costs of the offering, of approximately $102.1 million. On December 8, 1999, the underwriters exercised their over-allotment option of an additional 450,000 shares, resulting in gross proceeds to the Company of $13.5 million, and net proceeds of approximately $12.8 million, after deducting costs of the offering. 48 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, HotJobs.com Australia Pty. Ltd., from June 18, 1999 (date of inception). All inter-company transactions and balances have been eliminated in consolidation. (B) USE OF ESTIMATES The preparation of the consolidated financial statements and related disclosures in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (C) FOREIGN CURRENCY TRANSLATION The financial statements of the Company's Australian operations are prepared in Australian dollars. The results of operations and cash flows for the Australian operations are translated at an average exchange rate for the period. The assets and liabilities of the Australian operations are translated at the end of the period exchange rate. Translation adjustments are included in stockholders' equity (deficit) as a separate component of accumulated other comprehensive loss. (D) CASH AND CASH EQUIVALENTS The Company considers all highly liquid securities with original maturities of three months or less to be cash equivalents. (E) MARKETABLE SECURITIES The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation periodically. Marketable securities have been classified as available-for-sale and are carried at fair value, with any unrealized gains and losses, net of tax, included in stockholders' equity (deficit) as a separate component of accumulated other comprehensive loss. (F) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over three to seven years, which is the estimated useful life of the related assets. Leasehold improvements are amortized over their estimated lives or the term of the related lease, whichever is shorter. Equipment under capital leases is stated at the present value of minimum lease payments and is amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the assets. 49 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (G) IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. To date, no impairment has occurred. (H) INCOME TAXES The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that includes the enactment date. (I) REVENUE RECOGNITION Service fees revenues consist of subscription fees paid by employers for membership to the WWW.HOTJOBS.COM employment exchange and software hosting fees paid by customers of Softshoe software. The Company provides membership subscriptions for a minimum term of three months and a maximum term of 24 months. The Company recognizes subscription revenue ratably over the subscription term. The Company provides hosting services on a monthly basis and recognizes revenue in the month it provides the hosting service. The Company also licenses its Softshoe and miscellaneous proprietary recruiting software and may provide hosting of the software. Software license fees revenue is recognized ratably over the four-year estimated useful life of the software in accordance with the guidance provided in AICPA Statements of Position 97-2 and 98-9 "Software Revenue Recognition." Career expo revenue consists of fees from employers that rent booths at WorkWorld career expos. Revenue is recognized in the month in which the career expo takes place. Other revenues primarily consist of fees derived from 30-day single ad job postings on WWW.HOTJOBS.COM, banner advertising, and other Softshoe-related services, including system customization and resume scanning services. The Company recognizes revenue related to these services over the period of delivery of service. Other revenues also include barter revenues. Barter advertising revenues and expenses are recorded at the fair market value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter advertising transactions is recognized as income when advertisements are delivered on WWW.HOTJOBS.COM. Barter expense is recognized when the Company's advertisements are run on third-party Web sites, which is typically in the same period when barter revenue is recognized. Barter expense is included as a component of cost of revenues. 50 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In 1999, the Company entered into a barter arrangement. In exchange for providing a sponsorship on a television commercial, the Company was provided with online advertising on the other party's Web site. The Company recognized $252,500 of revenues and expenses in 1999 relating to this barter arrangement. At December 31, 1999, there were no outstanding unused amounts included on the Company's consolidated balance sheet as an asset or liability. The values assigned to the barter revenue and expense were equal to the actual cost of purchasing advertising on the other party's Web site. (J) DEFERRED REVENUE Deferred revenue represents amounts billed or payments received in advance of the subscription period and maintenance services to be rendered over a certain period of time and is recognized as revenue ratably over the service term. (K) PRODUCT DEVELOPMENT EXPENSES Product development costs include expenses incurred by the Company for research, design and development of the Company's proprietary technology. Product development costs are expensed as incurred. Software development costs are required to be capitalized when a product's technological feasibility has been established by completion of a working model of the product and ending when a product is available for general release to customers. To date, completion of a working model of the Company's product and general release have substantially coincided. As a result, the Company has not capitalized any software development costs because such costs have not been significant. (L) ADVERTISING EXPENSES The Company expenses advertising costs the first time the advertising takes place, in accordance with AICPA Statement of Position 93-7 "Reporting on Advertising Costs." Advertising costs totaling $16,792,581, $1,305,607 and $287,067, respectively, for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) through December 31, 1997. Advertising expenses are included in sales and marketing expenses in the Company's consolidated statements of operations. (M) STOCK-BASED COMPENSATION The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize the fair value of all stock-based awards on the date of grant as expense over the vesting period. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and provide pro forma net loss disclosure for employee stock option grants made as if the fair value-based method defined in SFAS No. 123 had been applied. Under APB Opinion No. 25, compensation expense would be recorded on the date of grant only if the market price of the underlying stock options exceeded the exercise price. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (N) BASIC AND DILUTED NET LOSS PER SHARE The Company computes net income (loss) available per share in accordance with SFAS No. 128, "Computation of Earnings Per Share," and the SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under 51 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the provisions of SFAS No. 128 and SAB 98, basic net income (loss) available per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) available per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. The Company has presented historical basic and diluted net income (loss) available per share in accordance with SFAS No. 128. As the Company had a net loss in each of the periods presented, basic and diluted net income (loss) available per share is the same. Diluted net loss per share for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) through December 31, 1997 does not include the effects of options to purchase 4,172,498, 1,236,000 and 0 shares of common stock, respectively, as the effect of their inclusion is anti-dilutive during each period. Dilutive common stock equivalents include an option granted by the president of an affiliated company to purchase shares personally owned by him. (O) STOCK SPLIT In May 1999, the Company authorized and implemented a 2,000-for-one stock split. Accordingly, all share and per share information in the accompanying consolidated financial statements has been retroactively restated to reflect the effect of this stock split. On June 30, 1999, the board of directors approved a 24-for-one stock split of the Company's common stock which was effected in August 1999 in connection with the IPO. All common share and per share amounts in the accompanying consolidated financial statements have been adjusted retroactively. (P) BUSINESS SEGMENT REPORTING The Company has determined that it does not have any separately reportable business segments. (Q) RECENT ACCOUNTING PRONOUNCEMENTS As of January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities and currency translation adjustments to be included in other comprehensive income. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The adoption of this standard has had no impact on the Company's consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also 52 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. The Company has determined that it does not have any separately reportable business segments and adoption of this standard has had no impact on the Company's consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not yet determined the effect SFAS No. 133 will have on its consolidated results of operations and financial position. (4) MARKETABLE SECURITIES The Company classifies its investments in marketable securities as available-for-sale. These securities are carried on the consolidated balance sheet at fair value and any unrealized gains and losses are reported as a separate component of stockholders' equity (deficit). The Company had the following marketable securities at December 31, 1999:
GROSS UNREALIZED AMORTIZED COST LOSSES FAIR VALUE -------------- ---------- ----------- Market Auction Securities............... $29,550,000 $ -- $29,550,000 Government Securities................... 20,351,026 (3,916) 20,347,110 ----------- ------- ----------- Total................................. $49,901,026 $(3,916) $49,897,110 =========== ======= ===========
(5) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets as of December 31, 1999 and 1998 consist of the following:
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- Prepaid advertising.................................. $ 524,994 $ 791,700 Prepaid insurance.................................... 274,398 -- Prepaid software license............................. 155,292 155,292 Deposits............................................. 1,071,054 -- Interest receivable.................................. 442,219 -- Other................................................ 276,084 95,683 ---------- ---------- Total.............................................. $2,744,041 $1,042,675 ========== ==========
53 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (6) PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1999 and 1998 consist of the following:
DECEMBER 31, --------------------- 1999 1998 ---------- -------- Computer equipment, including assets under capital leases of $657,607 and $200,543, respectively....... $4,635,925 $686,117 Furniture and fixtures and leasehold improvements..... 273,884 11,480 Software.............................................. 546,266 -- ---------- -------- 5,456,075 697,597 Less accumulated depreciation and amortization, including assets under capital leases of $232,619 and $41,895, respectively........................... (883,579) (107,904) ---------- -------- Total............................................. $4,572,496 $589,693 ========== ========
Depreciation expenses were $775,675 and $107,904 in the 1999 and 1998 periods, respectively. (7) INCOME TAXES There has been no provision for U.S. federal or state income taxes for any period as the Company has incurred operating losses since inception. For federal income tax purposes, the Company has unused net operating loss carryforwards of approximately $22.0 million expiring in 2013 through 2019. Due to the "change in ownership" provisions in Section 382 of the Internal Revenue Code, the availability of the Company's net operating loss carryforward may be subject to an annual limitation against taxable income in future periods, which could substantially limit the eventual utilization of these carryforwards. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
DECEMBER 31, ------------------------ 1999 1998 ----------- ---------- Net operating loss carryforwards.................... $ 9,645,654 $1,214,051 Fixed assets, principally due to differences in depreciation...................................... (163,355) (13,550) Accounts receivable allowances...................... 344,761 36,550 Non-cash compensation............................... 865,353 -- Other expenses not currently deductible............. 57,190 2,075 ----------- ---------- Total net deferred tax assets..................... 10,749,603 1,239,126 Less valuation allowance............................ (10,749,603) (1,239,126) ----------- ---------- Net deferred tax assets........................... $ -- $ -- =========== ==========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred 54 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (7) INCOME TAXES (CONTINUED) tax liabilities, projected future taxable income and tax planning in making these assessments. Due to the Company's history of operating losses, there is uncertainty surrounding whether the Company will ultimately realize its deferred tax assets. Accordingly, these assets have been fully reserved. During 1999, the valuation allowance increased by $9,510,477. Of the total valuation allowance, subsequently recognized tax benefits, if any, in the amount of $1,857,947 will be applied directly to contributed capital. This amount relates to the tax effect of employee stock option deductions included in the Company's net operating loss carryforward. (8) RELATED PARTY TRANSACTIONS For the period from February 20, 1997 (inception) to December 31, 1997 and the years ended December 31, 1998 and 1999, OTEC, Inc. ("OTEC"), an affiliated company, paid various expenses on behalf of the Company. The Company recorded its allocated share of the expenses on its consolidated financial statements. The effect of all operating expenses paid on behalf of the Company by OTEC was approximately, $135,508, $1,153,000 and $741,600 for the years ended December 31, 1999 and 1998 and for the period ended December 31, 1997, respectively. These expenses primarily consist of rent, salaries, computer expense and other administrative expenses. OTEC also provided cash advances of $2,639,795 to the Company in 1998, of which $2,259,795 bore interest at rates ranging from 8.75% to 9.5% per annum. The interest expense relating to such cash advances was approximately $94,000 and $49,000 during 1999 and 1998, respectively, and the 1998 amount was included in the due to affiliate balance as of December 31, 1998. In 1999, the Company repaid all but $1,063 due to its affiliate. The Company believes that these transactions were entered into on an arms-length basis. The expenses were based on the actual charge per employee of the Company with respect to salaries and employee benefit plans. With respect to expenses such as rent, computer expenses, and insurance, expenses were based on the number of the Company's employees using the facility or service as a percentage of all employees using the facility or service. All of these expenses were paid to outside third parties at market rates. At December 31, 1999 and 1998, OTEC owned approximately 9.3% and 23.0%, respectively of the Company. The chief executive officer of the Company is a director, executive officer and shareholder of OTEC. Compensation expense for the chief executive officer of $182,000 and $137,500 for the year ending December 31, 1998 and for the period ended December 31, 1997, respectively, was paid by OTEC. These amounts paid by OTEC are included as capital contributions in the consolidated statements of stockholders' equity (deficit), as they are not required to be repaid. The Company has recorded in the consolidated statements of operations revenues from OTEC of $294,000 for both 1999 and 1998 and $18,750 for 1997 for the license of miscellaneous propriety software by OTEC and for the hosting of that software in 1999 and 1998. On March 2, 1999, the chief executive officer of the Company granted the president of OTEC an option, which expires on March 2, 2002, to purchase 34 shares of OTEC common stock owned personally by him at a purchase price of $4,880 per share aggregating to $165,920, and an additional option to purchase 50 shares of each of OTEC's affiliated companies at a purchase price of $1 per share. Similarly, on March 2, 1999, the president of OTEC granted the Company's chief executive officer an option, which expires on March 2, 2002, to purchase 3,264,000 shares of the Company's common stock owned personally 55 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (8) RELATED PARTY TRANSACTIONS (CONTINUED) by the president at a purchase price of approximately $0.05 per share aggregating to $165,920. On November 15, 1999, for no consideration, the chief executive officer of the Company executed a letter agreement pursuant to which he agreed to exercise the option only to the extent of 3,140,352 shares of the Company's common stock. In addition, the chief executive officer of the Company granted to the president of OTEC an irrevocable proxy expiring March 2, 2002 to vote all of the chief executive officer of the Company's shares of stock subject to the option. In turn, the president of OTEC granted the chief executive officer of the Company an irrevocable proxy expiring March 2, 2002 to vote all of his shares of stock in the Company subject to the option. This was a nonmonetary transaction between two individuals with respect to shares personally owned by them and therefore no accounting was required by the Company. Until recently, the Company had several joint insurance polices with OTEC and its affiliates. The Company's commercial property insurance issued by Federal Insurance Company for a one-year term beginning October 15, 1998, covered both its California and New York offices as well as OTEC's California office. The Company's commercial umbrella policy, also issued by Federal Insurance Company for a one-year term beginning October 15, 1998, also covered OTEC and its affiliates, as did the Company's workers compensation insurance, issued by Lumbermans Mutual Casualty Company on December 1, 1998 for a term ending October 15, 1999. Effective June 1, 1999, the Company had stand alone insurance policies in place. The Company had a joint fiduciary liability policy, issued by Travelers Insurance for a one-year term beginning October 20, 1998, with OTEC and its affiliates. Insurance expenses of $85,096 in 1998 have been allocated by OTEC to the Company based on the respective number of personnel of these two companies. On July 20, 1999, the Company obtained its own directors' and officers' liability insurance policy. OTEC and RBL, an affiliated company, jointly and severally, guarantee certain of the Company's obligations, including the Company's obligation to pay rent under its leases, dated as of April 16, 1999, pursuant to which the Company rents the 10th, 14th and 16th floors of a building located at 24 West 40th Street in New York City. On April 2, 1999, the Company repurchased 1,200,000 shares of common stock from the chief executive officer and two employees for approximately $0.05 per share. On May 11, 1999, as part of the Series A Preferred Stock purchase agreement (see note 11), FSA Capital, Inc. purchased 42,189 shares of Series A Preferred Stock for $421,890. The chief financial officer and a director of the Company is a director of FSA Capital, Inc. Generation Capital Partners, L.P. and affiliated investment entities ("Generation Partners") purchased in the aggregate 1,053,704 shares of Series A Preferred Stock for $10,537,040. Generation Partners owns more than 5% of the Company's stock. One of the Company's directors is a Managing Partner of an affiliate of Generation Partners. One of the Company's directors purchased 18,750 shares of Series A Preferred Stock for $187,500. In connection with the Series A Preferred Stock financing, GreenAcre Ventures LLC, of which one of the Company's directors is a managing member, purchased 11,000 shares of the Company's common stock from two employees. One of the Company's directors purchased 21,094 shares of Series A Preferred Stock for $210,940. 56 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (9) LINES OF CREDIT On October 13, 1998, the Company entered into a $500,000 line of credit with The Dime Savings Bank of New York (the "Bank"). Any outstanding balance is payable on demand and bears interest at a fluctuating rate of 1% above the Bank's reference lending rate for domestic commercial loans. All of the Company's assets were pledged as collateral in the event of default. The amount borrowed on the line of credit was $180,000 as of December 31, 1998. On July 20, 1999, the Company repaid $180,000 in principal, along with interest due under its line of credit with the Bank. On September 16, 1999, the Company terminated this $500,000 line of credit. On October 13, 1998, an affiliated company refinanced an obligation under a line of credit. As part of the refinancing agreement, the assets of the Company were pledged as collateral in the event of default by the affiliated company. On June 2, 1999, the Bank removed all cross guarantees with both the Company and the affiliated company lines of credit. On September 16, 1999, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which was subsequently modified on November 22, 1999. The agreement consists of a $4,000,000 revolving line of credit and a $1,000,000 equipment line of credit. The revolving line of credit has a term of one year and bears interest at an annual rate of the bank's prime rate plus 75 basis points. Interest on the revolving line of credit is payable monthly and any principal outstanding is payable at the end of the term. The equipment line of credit has a term of 42 months and bears interest at an annual rate of the bank's prime rate plus 100 basis points. The Company may borrow under this equipment line of credit during the first six months of the term. Interest on the equipment line of credit is payable monthly and the principal is payable over 36 months commencing on April 1, 2000. As of December 31, 1999, the Company had utilized $665,172 of the $1,000,000 equipment line and has available $2,200,000 of the $4,000,000 revolving line of credit as $1,800,000 of the revolving line of credit has been utilized to support a letter of credit issued in 1999 in connection with entering into a lease for new premises. (10) NOTE PAYABLE On August 10, 1999, the Company entered into a note payable agreement with Cananwill, Inc. for an aggregate amount of $480,998 to finance its directors' and officers' liability insurance premium. The agreement calls for monthly payments of $28,077 over 18 months. The note bears interests at a rate of 6.31% per year. As of December 31, 1999, the outstanding balance was $325,683, of which $297,753 is due within one year. (11) CAPITALIZATION (A) AUTHORIZED SHARES In 1998, the Company amended and restated its certificate of incorporation to change its name to HotJobs.com, Ltd. On April 9 and May 10, 1999, the Company amended its certificate of incorporation. As a result, as of May 10, 1999, the total number of shares which the Company was authorized to issue was 50,000,000: 48,000,000 of these shares were common stock, each having a par value of $0.01; and 2,000,000 of these shares were preferred stock, each having a par value of $0.01. Effective upon the closing of the IPO, the Company is authorized to issue up to 100,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. 57 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (11) CAPITALIZATION (CONTINUED) (B) REDEEMABLE CONVERTIBLE PREFERRED STOCK Effective May 10, 1999, the Company issued an aggregate of 1,620,000 shares of Series A Preferred Stock, at a purchase price of $10 per share, in consideration for gross cash proceeds of $16.2 million. Holders of Series A Preferred Stock were not entitled to any dividend. However, in the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock then outstanding were entitled to be paid a preferential amount of $10 per share. Each holder of Series A Preferred Stock was entitled to the number of votes equal to the number of whole shares of common stock into which the shares of preferred stock were convertible on the date of the vote. Upon request of the majority of the Series A Preferred stockholders on or after May 1, 2003, the Company could be required to redeem shares of Series A Preferred Stock at an amount equal to the greater of (a) the amount per share payable to the holders of the Series A Preferred Stock in the event of liquidation, dissolution or winding up of the Company and (b) $10 per share plus an additional amount equal to 10% per annum. At the option of the stockholders, Series A Preferred Stock was convertible, at any time prior to the date of redemption, into shares of common stock. The conversion would result from dividing the Preferential Amount (as defined) for the Series A Preferred Stock as of the date of conversion by the conversion price of $4.12 per share. Such shares automatically converted into shares of common stock upon the completion of the IPO. At the IPO, the 1,620,000 shares of Series A Preferred Stock converted into 3,934,019 shares of common stock. Due to the sale of the Series A Preferred Stock with a conversion price that was below the expected initial public offering price of the common stock, the Company recorded a beneficial conversion feature of $16.2 million. The beneficial conversion feature is limited to the net proceeds received from the preferred stock transaction. The Company began amortizing the value of the beneficial conversion feature as a non-cash preferred stock dividend over the four-year period from the date of issuance of the preferred stock to the date on which the preferred stock was first convertible into common stock, assuming no acceleration of the date of conversion. In connection with the IPO, all of the preferred stock automatically converted into common stock and the Company recognized in its entirety the $16.2 million of the beneficial conversion feature as a deemed dividend to preferred stockholders. (C) COMMON STOCK During 1997, the Company issued 21,300,000 shares of common stock to its founders and original employees at $0.01 per share. (12) CONCENTRATION OF CREDIT RISK For the year ended December 31, 1999, no customer accounted for over 10% of total revenues generated by the Company. No customer had a receivable balance for more than 10% of gross receivables at December 31, 1999. For the year ended December 31, 1998, no customer accounted for over 10% of total revenues generated by the Company during that period. Two customers had balances of 18% and 17%, respectively, of gross accounts receivable at December 31, 1998. 58 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (12) CONCENTRATION OF CREDIT RISK (CONTINUED) For the period from February 20, 1997 (inception) to December 31, 1997, no customer accounted for over 10% of total revenues generated by the Company. (13) PROFIT SHARING RETIREMENT PLAN Until July 1, 1999, the Company's employees participated in a qualified profit sharing retirement plan with a 401(k) deferred compensation provision through an affiliated company. The Company contributed 50% of the amounts contributed by employees up to a maximum of 6% of gross wages. Additionally, a discretionary profit sharing contribution was determined annually by the board of directors. There were no discretionary profit sharing contributions made by the Company during either 1999, 1998 or 1997. As of July 1, 1999, the Company established its own 401(k) Plan. The contributions charged to operations from the 401(k) Plan amounted to $49,750, $23,237 and $21,835 for the 1999, 1998 and 1997 periods, respectively. (14) EMPLOYMENT AGREEMENTS Richard Johnson, Stephen Ellis, Dimitri Boylan and George Nassef each has an employment agreement with the Company. The agreements of Messrs. Johnson, Ellis and Boylan each became effective on May 6, 1999 and expire on May 5, 2002, and will automatically renew for additional one-year terms after that date unless the Company gives the executive written notice of its desire not to renew the agreement at least six months prior to the expiration of the initial or any additional term. Mr. Nassef's employment agreement became effective on June 18, 1999 and shall continue until terminated by him or by the Company. The annual salary for each of these executives is as follows: Richard Johnson, $200,000; Stephen Ellis, $175,000; Dimitri Boylan, $175,000 and George J. Nassef, Jr., $175,000. The annual salary of each of Messrs. Johnson, Ellis and Boylan will increase by a minimum of 10% each year. In addition, Stephen Ellis received a non-qualified stock option to purchase 360,000 shares of the Company's common stock. In connection with the closing of the Company's initial public offering, 180,000 of these options vested automatically, and 90,000 options will vest on each of May 6, 2001 and May 6, 2002. Mr. Nassef received stock options to purchase 180,000 shares of the Company's common stock. In connection with the closing of the Company's initial public offering, 90,000 of these options vested automatically; 30,000 options will vest on June 18, 2001; and 60,000 options will vest on June 18, 2002. Also, each of these executives is entitled to an annual bonus determined by the compensation committee of the board of directors. The Company can terminate these employment agreements with or without cause by delivering written notice to the executive. Each executive may terminate his employment agreement with or without good reason by delivering written notice to the Company. Upon termination of the agreements of each of Messrs. Johnson, Ellis and Boylan by the Company without cause or by the executive for good reason, the executive is entitled to the greater of his annual salary for the remainder of the term of the agreement or one year of salary, and all options become immediately exercisable. Upon termination of Mr. Nassef's employment agreement by the Company without cause or by Mr. Nassef for good reason, Mr. Nassef is entitled to six months of salary. (15) STOCK OPTION PLANS The Company has a Stock Award Plan which provides for the granting of options to employees to purchase shares of its common stock. The Company granted options under the Stock Award Plan until June 30, 1999. The Company is authorized to issue 14,400,000 shares of common stock under the Stock 59 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (15) STOCK OPTION PLANS (CONTINUED) Award Plan. On June 30, 1999, the Company's board of directors adopted and its stockholders approved the 1999 Stock Option/Stock Issuance Plan. Effective July 1, 1999, the Stock Option/Stock Issuance Plan serves as the Company's equity incentive program. The Company is authorized to issue 4,500,000 shares of common stock under the 1999 Stock Option/Stock Issuance Plan. The 1999 Stock Option/Stock Issuance Plan has three separate programs: - A discretionary option grant program under which eligible individuals in the Company's employ or service (including officers, non-employee board members and consultants) may be granted options to purchase shares of the Company's common stock; - A stock issuance program under which such individuals may be issued shares of common stock directly, through the purchase of such shares or as a bonus tied to the performance of services; and - An automatic option grant program under which option grants will automatically be made at periodic intervals to eligible non-employee board members. Options granted under the Stock Award Plan have ten-year terms and will vest through 2009. Options granted under the Stock Option/Stock Issuance Plan have ten-year terms and will vest through 2009, except for one option with a five-year term granted to a greater than 5% stockholder. The options typically vest over three to five years, however, a majority of the options granted under the Stock Award Plan became immediately exercisable upon the consummation of the IPO. Stock option activity during the periods indicated is as follows:
WEIGHTED AVERAGE OPTIONS GRANTED EXERCISE PRICE --------------- -------------- Outstanding at December 31, 1997................. -- $ -- Granted at $0.03 to $0.04........................ 2,340,000 $0.03 Exercised........................................ -- $ -- Forfeited........................................ (1,104,000) $0.03 ---------- Outstanding as of December 31, 1998............ 1,236,000 $0.03 Granted at $0.05 to $42.13....................... 5,151,200 $5.23 Exercised........................................ (390,400) $0.05 Forfeited........................................ (82,400) $5.26 ---------- Outstanding as of December 31, 1999............ 5,914,400 $4.48 ========== Vested at December 31, 1999.................... 3,109,300 $0.18 ----------
The weighted average remaining life of the 5,914,400 options outstanding at December 31, 1999 is approximately 9.1 years. 60 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (15) STOCK OPTION PLANS (CONTINUED) The following summarizes the status of stock options outstanding and exercisable at December 31, 1999:
STOCK OPTIONS OUTSTANDING -------------------------------- WEIGHTED AVERAGE RANGE OF EXERCISE PRICE SHARES EXERCISE PRICE - ----------------------- --------- ---------------- $0.03 to $3.38.................................. 3,867,400 $ 0.64 $3.39 to $8.00.................................. 1,668,250 $ 8.00 $8.01 to $42.13................................. 378,750 $28.19
STOCK OPTIONS EXERCISABLE -------------------------------- WEIGHTED AVERAGE RANGE OF EXERCISE PRICE SHARES EXERCISE PRICE - ----------------------- --------- ---------------- $0.03 to $3.38.................................. 3,102,800 $ 0.16 $3.39 to $8.00.................................. 6,500 $ 8.00 $8.01 to $42.13................................. -- $ --
The Company granted 48,000 options under the Stock Award Plan on April 1, 1998 at an exercise price of $0.03 to a consultant, an employee of a related party who was providing services to the Company. The value of this option using a Black-Scholes pricing model was deemed insignificant. The Company has adopted the disclosure provisions of SFAS No. 123. Had compensation costs on the Company's option plans been determined based on the fair market value on the grant date consistent with the provisions of SFAS No. 123, the Company's net loss would have been increased as per the pro forma amounts indicated below:
1999 1998 ------------ ----------- Net loss actual................................... $(17,816,456) $(2,257,314) Net loss pro forma................................ $(18,747,032) $(2,262,255) Basic and diluted net loss per share actual....... $ (1.46) $ (0.11) Basic and diluted net loss per share pro forma.... $ (1.50) $ (0.11)
Pro forma information regarding net loss has been determined using a Black-Scholes option pricing model with the following weighted average assumptions for 1999 and 1998:
1999 1998 -------- -------- Risk-free interest rate.............................. 5.4% 6.8% Dividend yield....................................... 0.0% 0.0% Volatility factor (post IPO)......................... 148.7% 0.0% Average expected life................................ 3years 9years
As of December 31, 1999, the Company recorded deferred compensation expense, net of options forfeited, of $7,521,972, in connection with the grant of certain options to employees and directors, representing the difference between the deemed fair value of the Company's common stock at the date of grant for accounting purposes and the exercise price of the related options. This amount is presented as a reduction of stockholders' equity (deficit) and amortized over the vesting period. The Company amortized $2,012,449 of deferred compensation during 1999. The Company expects to amortize the following 61 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (15) STOCK OPTION PLANS (CONTINUED) amounts of deferred compensation annually: 2000--approximately $1.8 million; 2001--approximately $1.8 million; 2002--approximately $1.4 million; 2003--approximately $0.5 million. (16) EMPLOYEE STOCK PURCHASE PLAN On August 10, 1999, the Employee Stock Purchase Plan became effective. The plan is designed to comply with the requirements of Section 423 of the Internal Revenue Code. The plan allows eligible employees to purchase shares of common stock at 85% of the lower of the fair market value of the Company's common stock on the employee's entry date into the offering period or the fair market value on the semi-annual purchase date through periodic payroll deductions. A total of 250,000 shares of common stock are available for issuance under the plan. The plan has a series of successive offering periods, each with a maximum duration of 24 months. The initial offering period began on August 10, 1999 and will end on the last business day in July 2001. The next offering period will begin on the first business day in August 2001 and subsequent offering periods will be set by the compensation committee of the board of directors. Through December 31, 1999, employees have contributed $329,263 towards the plan's first purchase date of January 31, 2000. The employees' contribution into the plan is included in other current liabilities in the Company's consolidated balance sheet at December 31, 1999. (17) COMMITMENTS AND CONTINGENCIES (A) OFFICE LEASES The Company leases office space in New York, California, Illinois, Massachusetts and Australia. The minimum lease payments under these leases are payable as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ---------- 2000........................................................ $1,092,557 2001........................................................ $1,205,839 2002........................................................ $1,234,948 2003........................................................ $1,634,430 2004........................................................ $1,625,708 Thereafter.................................................. $7,739,717
Rent expense for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997 was $477,094, $103,398 and $41,667, respectively. In March 1999, the Company entered into a five-year lease agreement for office space in California. The lease is due to expire during May 2004 and has been included above as part of the minimum lease payment schedule. An affiliated company unconditionally guaranteed payment and performance of all obligations, liabilities, terms and conditions of this office lease. In April 1999, the Company entered into two five-year lease agreements for office space in New York. These leases are due to expire on March 31, 2004. Under the terms of these agreements, landlord and tenant have the right to terminate these leases at any time after July 31, 1999 upon giving 90 days' written notice. Due to the existence of this termination clause, these amounts have not been included as part of the minimum lease payment schedule. 62 HOTJOBS.COM, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 IS UNAUDITED) (17) COMMITMENTS AND CONTINGENCIES (CONTINUED) In July 1999, HotJobs.com Australia Pty. Ltd. entered into a three-year lease agreement for office space in Sydney, Australia. The lease is due to expire on July 22, 2002 and has been included above as part of the minimum lease payment schedule. In September 1999, the Company entered into a five-year lease agreement for office space in Chicago, Illinois. The lease is due to expire on November 1, 2004 and has been included above as part of the minimum lease payment schedule. In November 1999, the Company entered into a 122-month lease agreement for office space in New York. The lease is due to expire on December 31, 2009 and has been included above as part of the minimum lease payment schedule. In December 1999, the Company entered into a 60-month, 25-day lease agreement for space in Massachusetts. The lease is due to expire on December 31, 2004 and has been included above as part of the minimum lease payment schedule. (B) EQUIPMENT LEASES The Company is obligated under various capital leases that began in either 1999 or 1998 and expire at various dates through March 2002. Future minimum capital lease payments are payable as follows:
CAPITAL YEAR LEASES - ---- -------- 2000........................................................ $238,660 2001........................................................ 197,970 2002........................................................ 31,600 -------- Total minimum lease payments................................ 468,230 Less amount representing interest (at rates ranging from 9.5% to 21.0%)............................................ 45,911 -------- Present value of net minimum lease payments................. 422,319 Less current installment of obligations under capital leases.................................................... 205,840 -------- Obligations under capital leases, excluding current installments.............................................. $216,479 ========
(C) COMMITMENT TO PURCHASE COMMERCIAL AIRTIME As of December 31, 1999, the Company has commitments of approximately $15.9 million for various advertising campaigns, including a commitment to purchase 30-second commercial airtime from American Broadcasting Company during the National Football League's Super Bowl on January 30, 2000, through December 2000. These commitments include broadcasting, print, online and outdoor advertising. These commitments expire over various time periods. (18) SUBSEQUENT EVENTS--(UNAUDITED) On January 20, 2000, the Company entered into a five-year lease for office space in Santa Monica, California. The lease is due to expire no later than March 15, 2005. The minimum lease payments under the lease amount to approximately $631,000. 63 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SCHEDULE II HOTJOBS.COM, LTD. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO COST CREDITED TO OTHER BALANCE AT END BEGINNING OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ------------------- --------------- ----------------- ---------- -------------- YEAR ENDED 12/31/99 - ----------------------- Allowance for doubtful receivables.......... $85,000 $937,236 $ -- $(220,466) $801,770 YEAR ENDED 12/31/98 - ----------------------- Allowance for doubtful receivables.......... $ -- $ 85,000 $ -- $ -- $ 85,000 YEAR ENDED 12/31/97 - ----------------------- Allowance for doubtful receivables.......... $ -- $ -- $ -- $ -- $ --
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Reference is made to the information contained in HotJobs.com's proxy statement for the 2000 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 1999 (the "2000 Proxy Statement"), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Reference is made to the information contained in the 2000 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Reference is made to the information contained in the 2000 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information contained in the 2000 Proxy Statement, which information is incorporated herein by reference. 64 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) (1) Financial Statements. Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the years ended December 31, 1999, and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997 Notes to Consolidated Financial Statements Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts (2) Financial Statement Schedules. The following financial statement schedule is filed under "Item 8. Consolidated Financial Statements and Supplementary Data": Schedule II--Valuation and Qualifying Accounts All other schedules are omitted either because they are not applicable or because they are not required under Regulation S-X. (3) Exhibits.
NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 3.1* Amended and Restated Certificate of Incorporation. 3.2* Amended and Restated Bylaws. 4.1* Specimen Common Stock certificate. 4.2 Please see Exhibits 3.1 and 3.2 for provisions of the certificate of incorporation and bylaws defining the rights of holders of common stock. 10.1* Series A Convertible Preferred Stock Purchase Agreement, dated as of May 10, 1999, between HotJobs.com and the several purchasers named in Schedule I thereto. 10.2* Amended and Restated Stockholders' Agreement, dated as of May 11, 1999. 10.3* Employment Agreement, dated as of May 6, 1999, between HotJobs.com and Richard S. Johnson. 10.4* Employment Agreement, dated as of May 6, 1999, between HotJobs.com and Dimitri J. Boylan. 10.5* Employment Agreement, dated as of May 6, 1999, between HotJobs.com and Stephen W. Ellis. 10.6*** HotJobs.com Stock Award Plan. 10.7*** 1999 Stock Option/Stock Issuance Plan. 10.8*** Employee Stock Purchase Plan. 10.9* Lease Agreement, dated as of April 16, 1999, between 24 West 40th St. LLC, as landlord, and HotJobs.com, Ltd., as tenant for the 14th and 16th floors of 24 West 40(th) Street, New York, NY. 10.10* Guarantee, made as of April 16, 1999, by OTEC, Inc. and RBL Agency, Ltd., related to the above lease.
65 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (CONTINUED)
NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 10.11* Lease Agreement, dated as of April 16, 1999, between 24 West 40th St. LLC, as landlord, and HotJobs.com, Ltd., as tenant for the 10th floor of 24 West 40(th) Street, New York, NY. 10.12* Guarantee, made as of April 16, 1999, by OTEC, Inc. and RBL Agency, Ltd., related to the above lease. 10.13* Office Lease, dated as of February 10, 1999, between 580 Market Street Corp., as landlord, and HotJobs.com, Ltd., as tenant for 580 Market Street, Suite 300, San Francisco, CA. 10.14 Lease Agreement dated as of November 2, 1999 and amended as of November 12, 1999, between 406 Realty LLC, as landlord, and HotJobs.com, Ltd., as tenant for the 8(th) and 9(th) floors of 406 West 31(st) Street, New York, NY. 10.15* Employment Agreement, dated as of June 18, 1999, between HotJobs.com and George J. Nassef, Jr. 10.16* 401(k) Plan. 10.17** Lease Agreement, dated as of September 24, 1999, between 360 North Michigan Trust, as landlord, and HotJobs.com, Ltd., as tenant, for 360 N. Michigan Avenue, Suite 1300, Chicago, IL. 10.18** Loan and Security Agreement, dated September 16, 1999, between Silicon Valley Bank and HotJobs.com, Ltd. 10.19 First Loan Modification Agreement, dated as of November 22, 1999, between Silicon Valley Bank and HotJobs.com, Ltd. 21.1+ Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP, Independent Auditors. 23.2 Independent Auditors' Report on Schedule. 27.1 Financial Data Schedule.
- ------------------------ * Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-80367), as amended. ** Incorporated by reference to the Company's Registration Statement o Form S-1 (File No. 333-89813), as amended. *** Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 333-86409). + Incorporated by reference to Exhibit 21 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999. (b) Reports on Form 8-K. Form 8-K dated October 21, 1999 and filed November 2, 1999, for the purpose of filing under Item 5--Other Events and Item 7--Financial Statements and Exhibits, a press release setting forth certain financial results of the Registrant for the quarter ended September 30, 1999. (c) Exhibits. See Item 14(a) (3) above. (d) Financial Statement Schedules See Item 14(a) (2) above 66 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on this 23rd day of March, 2000. HotJobs.com, Ltd. By: /s/ RICHARD S. JOHNSON ---------------------------------------- Richard S. Johnson, PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard S. Johnson and Stephen W. Ellis, and each of them, his true and lawful attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- President, Chief Executive Officer /s/ RICHARD S. JOHNSON and Chairman of the Board Of - ------------------------------------ Directors (Principal Executive March 23, 2000 Richard S. Johnson Officer) /s/ STEPHEN W. ELLIS Chief Financial Officer, and Director - ------------------------------------ (Principal Financial and Accounting March 23, 2000 Stephen W. Ellis Officer) /s/ DIMITRI J. BOYLAN Chief Operating Officer, Secretary - ------------------------------------ and Director March 23, 2000 Dimitri J. Boylan /s/ PHILIP GUARASCIO Director - ------------------------------------ March 23, 2000 Philip Guarascio /s/ JOHN A. HAWKINS Director - ------------------------------------ March 23, 2000 John A. Hawkins /s/ JOHN G. MURRAY Director - ------------------------------------ March 23, 2000 John G. Murray /s/ KEVIN P. RYAN Director - ------------------------------------ March 23, 2000 Kevin P. Ryan
67 INDEX TO EXHIBITS
NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 3.1* Amended and Restated Certificate of Incorporation. 3.2* Amended and Restated Bylaws. 4.1* Specimen Common Stock certificate. 4.2 Please see Exhibits 3.1 and 3.2 for provisions of the certificate of incorporation and bylaws defining the rights of holders of common stock. 10.1* Series A Convertible Preferred Stock Purchase Agreement, dated as of May 10, 1999, between HotJobs.com and the several purchasers named in Schedule I thereto. 10.2* Amended and Restated Stockholders' Agreement, dated as of May 11, 1999. 10.3* Employment Agreement, dated as of May 6, 1999, between HotJobs.com and Richard S. Johnson. 10.4* Employment Agreement, dated as of May 6, 1999, between HotJobs.com and Dimitri J. Boylan. 10.5* Employment Agreement, dated as of May 6, 1999, between HotJobs.com and Stephen W. Ellis. 10.6*** HotJobs.com Stock Award Plan. 10.7*** 1999 Stock Option/Stock Issuance Plan. 10.8*** Employee Stock Purchase Plan. 10.9* Lease Agreement, dated as of April 16, 1999, between 24 West 40th St. LLC, as landlord, and HotJobs.com, Ltd., as tenant for the 14th and 16th floors of 24 West 40(th) Street, New York, NY. 10.10* Guarantee, made as of April 16, 1999, by OTEC, Inc. and RBL Agency, Ltd., related to the above lease. 10.11* Lease Agreement, dated as of April 16, 1999, between 24 West 40th St. LLC, as landlord, and HotJobs.com, Ltd., as tenant for the 10th floor of 24 West 40(th) Street, New York, NY. 10.12* Guarantee, made as of April 16, 1999, by OTEC, Inc. and RBL Agency, Ltd., related to the above lease. 10.13* Office Lease, dated as of February 10, 1999, between 580 Market Street Corp., as landlord, and HotJobs.com, Ltd., as tenant for 580 Market Street, Suite 300, San Francisco, CA. 10.14 Lease Agreement dated as of November 2, 1999 and amended as of November 12, 1999, between 406 Realty LLC, as landlord, and HotJobs.com, Ltd., as tenant for the 8(th) and 9(th) floors of 406 West 31(st) Street, New York, NY. 10.15* Employment Agreement, dated as of June 18, 1999, between HotJobs.com and George J. Nassef, Jr. 10.16* 401(k) Plan. 10.17** Lease Agreement, dated as of September 24, 1999, between 360 North Michigan Trust, as landlord, and HotJobs.com, Ltd., as tenant, for 360 N. Michigan Avenue, Suite 1300, Chicago, IL. 10.18** Loan and Security Agreement, dated September 16, 1999, between Silicon Valley Bank and HotJobs.com, Ltd. 10.19 First Loan Modification Agreement, dated as of November 22, 1999, between Silicon Valley Bank and HotJobs.com, Ltd. 21.1+ Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP, Independent Auditors. 23.2 Independent Auditors' Report on Schedule. 27.1 Financial Data Schedule
- ------------------------ * Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-80367), as amended. ** Incorporated by reference to the Company's Registration Statement o Form S-1 (File No. 333-89813), as amended. *** Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 333-86409). + Incorporated by reference to Exhibit 21 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999. 68 EX-10.14 2 EXHIBIT 10.14 Exhibit 10.14 2/94 ================================================================================ STANDARD FORM OF LOFT LEASE The Real Estate Board of New York, Inc. ================================================================================ Agreement of Lease, made as of this 2nd day of November 1999, between 406 REALTY LLC, HAVING AN ADDRESS AT c/o THE EXPANSION GROUP, INC., 250 WEST 57TH STREET, NEW YORK, NEW YORK 10107 (ROOM 1401), party of the first part, hereinafter referred to as OWNER, and HOTJOBS.COM, Ltd., HAVING AN ADDRESS AT 406 West 31st Street, New York, New York 10001, party of the second part, hereinafter referred to as TENANT, Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner THE RENTABLE 8th AND 9th FLOORS (THE "PREMISES") in the building known as 406 WEST 31st STREET in the Borough of MANHATTAN, City of New York, for the term of TEN (10) YEARS AND THREE (3) MONTHS (or until such term shall sooner cease and expire as hereinafter provided) to commence on the COMMENCEMENT DATE AS DEFINED IN ARTICLE 42 OF THE RIDER ANNEXED HERETO, and to end on the 31st day of DECEMBER, TWO THOUSAND NINE and both dates inclusive, at an annual rental rate SET FORTH IN ARTICLE 43 OF THE RIDER which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other place as Owner may designate, without any set off or deduction whatsoever, except as set forth in the Lease, and except that Tenant shall pay the first ___ monthly installment(s) on the execution hereof (unless this lease be a renewal). The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: Rent: 1. Tenant shall pay the rent as above and as hereinafter provided. Occupancy: 2. Tenant shall use and occupy demised premises for GENERAL OFFICE USE, INCLUDING, WITHOUT LIMITATION, INTERNET RECRUITING, provided such use is in accordance with the certificate of occupancy for the building, if any, and for no other purpose. Alterations: 3. Tenant shall make no changes in or to the demised premises of any nature without Owner's prior written consent. Subject to the prior written consent of Owner, and to the provisions of this article, Tenant, at Tenant's expense, may make alterations, installations, additions or improvements which are nonstructural and which do not affect utility services or plumbing and electrical lines, in or to the interior of the demised premises using contractors or mechanics first approved in each instance by Owner. Tenant shall, at its expense, before making any alterations, additions, installations or improvements obtain all permits, approval and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner. Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Tenant is required to maintain hereunder. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by payment or filing the bond required by law or otherwise. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner on Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises unless Owner, by notice to Tenant, elects to relinquish Owner's right thereto and to have them removed by Tenant, in which event the same shall be removed from the demised premises by Tenant prior to the expiration of the lease, at Tenant's expense. Landlord shall be obligated to notify Tenant of its election regarding the removal of Tenant's fixtures, paneling, partitions, etc., simultaneously with Landlord's approval of Tenant's plans for Tenant's Initial Installations, provided that Tenant notify Landlord in writing, simultaneously with the submission of the plans to Landlord, that Landlord must make such election. Nothing in this Article shall be construed to give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the premises or upon removal of other installations as may be required by Owner, as hereinabove provided, Tenant shall immediately and at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All property permitted or required to be removed by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or removed from the premises by Owner, at Tenant's expense. Repairs: 4. Owner shall maintain and repair the exterior of and the public portions of the building, including all structural portions of the Building and all Building-wide systems up to the perimeter of the Premises, including the sprinkler system. Tenant agrees that Landlord's failure to repair or maintain a structural portion of the Building that does not substantially and adversely disrupt the operation of Tenant's business at the Premises shall not give rise to any offset or abatement against its obligation to pay rent, right of self help or damage claim against Landlord. In the event Landlord's failure to repair or maintain the structural portion of the Building does materially and adversely disrupt the operation of Tenant's business at the Premises, and Landlord does not commence and diligently proceed with the repair or maintenance work, Tenant's sole remedy shall be an abatement against its obligation to pay Fixed Rental for such period of disruption. Tenant shall, throughout the term of this lease, take good care of the demised premises including the bathrooms and lavatory facilities (if the demised premises encompass the entire floor of the building) and the windows and window frames and, the fixtures and appurtenances therein and at Tenant's sole cost and expense promptly make all repairs thereto and to the building, whether structural or non-structural in nature, caused by or resulting from the carelessness, omission, neglect or improper conduct of Tenant, Tenant's servants, employees, invitees, or licensees, and whether or not arising from such Tenant conduct or omission, when required by other provisions of this lease, including Article 6. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture or equipment. All the aforesaid repairs shall be of quality or class equal to the original work or construction. If the demised premises be or become infested with vermin, Tenant shall, at its expense, cause the same to be exterminated. Tenant shall give Owner prompt notice of any defective condition in any plumbing, heating system or electrical lines located in the demised premises and following such notice, Owner shall remedy the condition with due diligence, but at the expense of Tenant, if repairs are necessitated by damage or injury attributable to Tenant, Tenant's servants, agents, employees, invitees or licensees as aforesaid. Except as specifically provided in Article 9 or elsewhere in this lease, there shall be no allowance to the Tenant for a diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner, Tenant or others making or failing to make any repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. It is specifically agreed that Tenant shall not be entitled to any set off or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of any action for damages for breach of contract. The provisions of this Article 4 with respect to the making of repairs shall not apply in the case of fire or other casualty with regard to which Article 9 hereof shall apply. Window Cleaning: 5. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the New York State Labor law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. Requirements of Law, Fire Insurance: 6. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter Tenant shall, at Tenant's sole cost and expense, promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, or the Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to Tenant's particular use (as opposed to general office use) of, the demised premise, or, with respect to the building, if arising out of Tenant's particular use (as opposed to general office use) or manner of use of the demised premises of the building (including the use permitted under the lease). Except as provided in Article 30 hereof, nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant shall not do or permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization and other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. If by reason of failure to comply with the foregoing the fire insurance rate shall, at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" or rate for the building or demised premises issued by a body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to reasonably prescribe the weight and position of all safes, business machines and mechanical equipment. Such installation shall be placed and maintained by Tenant, at Tenant's expense, in setting sufficient, in Owner's reasonable judgement, to absorb and prevent vibration, noise and annoyance. Subordination: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument or subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall from time to time execute promptly any certificate that Owner may reasonably request. Tenant's Liability Insurance Property Loss, Damage, Indemnity: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence or willful misconduct of Owner, its agent, servants or employees; Owner or its agents shall not be liable for any damage caused by other tenants or persons in, upon or about said building or caused by operations in connection of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to Owner's own acts, Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld. Destruction Fire and Other Casualty: 9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner as soon as Tenant is aware of same and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent and other items of additional rent as hereinafter expressly provided shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner (or sooner reoccupied in part by Tenant then rent shall be apportioned as provided in subsection (b) above), subject to Owner's right to elect not to restore the same as hereinafter provided. If there is a fire or other casualty which causes damage or destruction to the Building, in whole or in part, whereby Tenant is unable to occupy or gain access to more than eighty percent (80%) of the Premises, Tenant may, in writing delivered to Landlord within thirty (30) days after the date Landlord notifies Tenant of Landlord's estimated timeframe within which restoration would be substantially complete, terminate the Lease as of the date of the damage or destruction, provided that in Landlord's estimate, the repair, replacement, restoration or renewal would likely require more than one hundred eighty (180) days from Landlord's receipt of the insurance proceeds to substantially complete. If the Landlord has commenced restoration of the Premises and the restoration work to the Premises is not substantially complete within said one hundred eighty (180) days, after the Landlord's receipt of insurance proceeds, then Tenant may serve a written notice upon Landlord terminating this Lease as of a date not less than forty-five (45) days after the delivery to Landlord of the notice. If the restoration work is substantially complete within said forty-five (45) day period (or longer period set forth in the notice), then the termination of the Lease shall be void and of no force or effect. If the restoration work is not substantially complete by the date set forth in the notice, then this Lease shall terminate as of the date set forth in the notice. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within ninety (90) days after such fire or casualty, or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Owner's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustments of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume five (5) days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. (c) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. Eminent Domain: 10. If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease. Tenant shall have the right to make an independent claim to the condemning authority for the value of Tenant's moving expenses and personal property, trade fixtures and equipment, provided Tenant is entitled pursuant to the terms of the lease to remove such property, trade fixtures and equipment at the end of the term and provided further such claim does not reduce Owner's award. Assignment, Mortgage, Etc.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant or the majority partnership interest of a partnership Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant beyond applicable notice and grace periods, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collections shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. Electric Current: 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Access to Premises: 13. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time, and, at other reasonable times upon not less than 12 hours advance notice to a person at the Premises (except as set forth in Article 42 above) to examine the same and to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to any portion of the building or which Owner may elect to perform in the premises after Tenant's failure to make repairs of perform any work which Tenant is obligated to perform under this lease, after notice and grace periods, or for the purpose of complying with laws, regulations and other directions of governmental authorities. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided, wherever possible, they are within walls or otherwise concealed. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours upon reasonable advance notice for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants However, at any time during the term of this Lease, Landlord shall not have access to any "secure" areas of the Premises without a representative of Tenant being present except in the event of an emergency or when required by law. If Tenant is not present to open and permit an entry into the demised premises, Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or in any manner permitted by law and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. After the later of February 1, 2000 or the date Tenant occupies the Premises for the operation of its business, Landlord agrees that during the course of any alterations Landlord shall use reasonable efforts to minimize interference with the operations of Tenant's business, provided, however, that Landlord shall not be obligated to use overtime labor or incur additional costs in connection with such efforts. Vault, Vault Space, Area: Occupancy: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. [deleted] If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business, Tenant shall be responsible for and shall procure and maintain such license or permit. Bankruptcy: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) It is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, not withstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rental reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be relet by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, 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 the amount of the difference referred to above. Default: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent; "or if this lease be rejected under section 235 of Title 11 of the U.S. Code (bankruptcy code);" or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if Tenant shall have failed, after five (5) days written notice, to redeposit with Owner any portion of the security deposited hereunder which Owner has applied to the payment of any rent and additional rent due and payable hereunder then in any one or more of such events, upon Owner serving a written twenty (20) days notice upon Tenant specifying the nature of said default and upon the expiration of said twenty (20) days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said twenty (20) day period, and if Tenant shall not have diligently commenced during such default within such twenty (20) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the demised premises to Owner but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserve herein or any item of additional rent herein mentioned or any part of either after three (3) days written notice of such default (Tenant hereby agreeing that any statutory notice or demand providing for at lease three days notice of default shall be deemed sufficient notice hereunder), or in making any other payment herein required; then and in any of such events Owner may without notice, re-enter the demised premises in any manner permitted by law, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. Remedies of Owner and Waiver of Redemption: 18. In case of any such termination for default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent, and additional rent, shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, (c) Tenant or the legal representatives of Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and or covenanted to be paid and the net amount, if any, of the rents collected on account of the subsequent lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. Landlord shall, however, agree to list the Premises for rent with a broker after this Lease has been terminated and all of Tenant's judicial or statutory remedies or right to reinstate this Lease have been specifically waived in writing or lapsed as a matter of law. In computing such liquidated damages there shall be added to the said deficiency such reasonable expenses as Owner may reasonably incur in connection with re-letting, such as legal expenses, reasonable attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceedings. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's sole judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws. Fees and Expenses: 19. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, after notice if required and upon expiration of any applicable grace period if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligations of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorney's fees, in instituting, prosecuting or defending any action or proceedings, and prevails in any such action or proceeding, then Tenant will reimburse Owner for such reasonable sums so paid or obligations incurred with all court costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. Building Alterations and Management: 20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the building and to change the name, number or designation by which the building may be known, provided, however, that Tenant shall have access to the Premises and there shall be no reduction in the square footage of the Premises, other than a de minimus amount unless required by applicable laws, codes, rules and regulations, or in order to obtain the amended or new certificate of occupancy for the Building. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenant making any repairs in the building or any such alterations, additions and improvements. Furthermore, Tenant shall not have any claim against Owner my reason of Owner's imposition of any controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. After the later of February 1, 2000 or the date Tenant occupies the Premises for the operation of its business, Landlord agrees that during the course of any alterations Landlord shall use reasonable efforts to minimize interference with the operations of Tenant's business, provided, however, that Landlord shall not be obligated to use overtime labor or incur additional costs in connection with such efforts. No Representations by Owner: 21. Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the building, the land upon which it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the demised premises or the building except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant 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. End of Term: 22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and tear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property from the demised premises. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. Quiet Enjoyment: 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 34 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. Failure to Give Possession: 24. If permission is given to Tenant to enter into the possession of the demised premises or to occupy premises other than the demised premises prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such possession and/or occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease, except the obligation to pay the fixed annual rent and other charges set forth in page one of this lease. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property law. No Waiver: 25. The failure of Owner or Tenant to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of the original violation. The receipt by Owner or payment by Tenant of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by such party unless such waiver be in writing signed by such party. No payment by Tenant on receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. All checks tendered to Owner as and for the rent of the demised premises shall be deemed payments for the account of Tenant. Acceptance by Owner of rent from anyone other than Tenant shall not be deemed to operate as an attornment to Owner by the payor of such rent or as a consent by Owner to any assignment or subletting by Tenant of the demised premises to such payor, or as a modification of the provisions of this lease. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. Waiver of Trial by Jury: 26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any proceeding or action for possession including a summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding including a counterclaim under Article 4 except for statutory mandatory counterclaims. Inability to Perform: 27. This Lease and the obligation of Tenant to pay rent hereunder and the obligation of Owner or Tenant to perform all of the covenants and agreements hereunder on part of either party to be performed shall in no wise be affected, impaired or excused because such party is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment, fixtures or other materials if such party is prevented or delayed from doing so by reason of strike or labor troubles or any cause whatsoever beyond such party's sole control including, but not limited to, government preemption or restrictions or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reasons of the conditions which have been or are affected, either directly or indirectly, by war or other emergency. Bills and Notices: Water Charges: 29. If Tenant requires, uses or consumes water for any purpose in addition to ordinary lavatory or kitchenette purposes (of which fact Tenant constitutes Owner to be the sole judge) Owner may install a water meter and thereby measure Tenant's water consumption for all purposes. Owner shall pay for the cost of the meter and the cost of the installation, thereof and throughout the duration of Tenant's occupancy Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense in default, beyond notice and grace periods, of which Owner may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant, as additional rent. In the event Landlord installs a water meter and Landlord charges Tenant for water consumed, Tenant shall not be obligated to pay the monthly water and sewer charge set forth in Article 48 below. Tenant agrees to pay for water consumed, as shown on said meter as and when bills are rendered, and on default in making such payment Owner may pay such charges and collect the same from Tenant, as additional rent. Tenant covenants and agrees to pay, as additional rent, the sewer rent, charge or any other tax, rent, levy or charge which now or hereafter is assessed, imposed or a lien upon the demised premises or the realty of which they are part pursuant to law, order or regulation made or issued in connection with the use, consumption, maintenance or supply of water, water system or sewage or sewage connection or system. Sprinklers: 30. Anything elsewhere in this lease to the contrary notwithstanding, if the New York Board of Fire Underwriters or the New York Fire Insurance Exchange or any bureau, department or official office federal, state or city government recommend or require the installation of a sprinkler system or that any changes, modifications, alterations, or additional sprinkler heads or other equipment within the Premises be made or supplied in an existing sprinkler system by reason of Tenant's business, or the location of partitions, trade fixtures, or other contents of the demised premises, or for any other reason, or if any such sprinkler system installations, modifications, alterations, additional sprinkler heads or other such equipment within the Premises become necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in fire insurance rate set by any said Exchange or by any fire insurance company, Tenant shall, at Tenant's expense, promptly make such sprinkler system installations, changes, modifications, alterations, and supply additional sprinkler heads or other equipment as required whether the work involved shall be structural or non-structural in nature. Tenant shall pay to Owner as additional rent the sum of $300, on the first day of each month during the term of this lease, as Tenant's portion of the contract price for sprinkler supervisory service. Landlord represents that there is a sprinkler system installed within the Premises and that it is in working order. Elevators, Heat, Cleaning: 31. Owner shall: (c) furnish STEAM TO THE RADIATORS LOCATED WITHIN THE PREMISES, water and other services supplied by Owner to the demised premises, when and as required by law, on business days from 8 a.m. t 6 p.m. and on Saturdays from 8 a.m. to 1 p.m.; (d) clean the public halls and public portions of the building which are used in common by all tenants. Tenant shall, at Tenant's expense, keep the demised premises, including the windows, clean and in order, to the reasonable satisfaction of Owner, and for that purpose shall employ the person or persons, or corporation approved by Owner, not to be unreasonably withheld or delayed. Tenant shall pay to Owner the cost of removal of any of Tenant's refuse and rubbish from the building. Bills for the same shall be rendered by Owner to Tenant at such time as Owner may elect and shall be due and payable hereunder, and the amount of such bills shall be deemed to be, and be paid as, additional rent. Tenant shall, however, have the option of independently contracting for the removal of such rubbish and refuse in the event that Tenant does not wish to have same done by employees of Owner. Under such circumstances, however, the removal of such refuse and rubbish by others shall be subject to such rules and regulations as, in the reasonable judgment of Owner, are necessary for the proper operation of the building and uniformly enforced against all tenants in the Building. Owner reserves the right to stop service of the heating, elevator, plumbing and electric systems, when necessary, by reason of accident, or emergency, or for repairs, alterations, replacements or improvements, in the reasonable judgment of Owner desirable or necessary to be made, until said repairs, alterations, replacements or improvements shall have been completed. If the building of which the demised premises are a part supplies manually operated elevator service, Owner may proceed diligently with alterations necessary to substitute automatic control elevator service without in any way affecting the obligations of Tenant hereunder. Security: 32. Tenant has deposited with Owner the sum of $1,800,000.00 as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults, beyond the expiration of applicable notice and grace periods in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Owner may expend or may be required to expend by reason of 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 in the reletting of the premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall fully and faithfully comply with all the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building or leasing of the building, of which the demised premises form a part, Owner shall transfer the security to the vendee or lessee and Owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner 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 Owner. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. Captions: 33. 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 thereof. Definitions: 34. The term "Owner" as used in this lease means only the owner of the fee or of the leasehold of the building, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "rent" includes the annual rental rate whether so expressed or expressed in monthly installments, and "additional rent." "Additional rent" means all sums which shall be due to Owner from Tenant under this lease, in addition to the annual rental rate. The term "business days" as used in this lease, shall exclude Saturdays, Sundays and all days observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service. Wherever it is expressly provided in this lease that consent shall not be unreasonably withheld, such consent shall not be unreasonably delayed or conditioned. Adjacent Excavation-Shoring: 35. If an excavation 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 said person shall deem necessary to preserve the wall or the building of which 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 Owner, or diminution or abatement of rent. Rules and Regulations: 36. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations annexed hereto and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to time adopt and make known to Tenant in writing. Notice of any additional rules or regulations shall be given in writing to Tenant. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within fifteen (15) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. The Rules and Regulations shall be uniformly applied to all tenants. If there is any inconsistency between the Lease and the Rules and Regulations, the terms in the Lease shall prevail. Glass: Estoppel Certificate: 38. Tenant, at any time, and from time to time, upon at least twenty (20) days' prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified 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), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this Lease, and, if so, specifying each such default. Upon at least twenty (20) days' prior notice from Tenant, Owner shall deliver to Tenant a statement as to the last date through which rent has been paid and whether Landlord has served any notices of default that have not been cured and whether the Lease has been modified. Directory Board Listing: 39. Owner shall place upon the directory board in the lobby of the building Tenant's name and, one or more names of persons other than Tenant. Such directory board listing shall not be construed as the consent by Owner to an assignment or subletting by Tenant to such person or persons. Successors and Assigns: 40. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. Tenant shall look only to Owner's estate and interest in the land and building and in the rents, issues and profits thereof for the satisfaction of Tenant's remedies for the collection of a judgement (or other judicial process) against Owner in the event of any default by Owner hereunder, and no other property or assets of such Owner (or any partner, member, officer or director thereof, disclosed or undisclosed), shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this lease, the relationship of Owner and Tenant hereunder, or Tenant's use and occupancy of the demised premises. In Witness Whereof, Owner and Tenant have respectively signed and sealed this lease as of the day and year first above written. 406 REALTY LLC [CORP. SEAL] Witness for Owner: ------------------------------- /s/ Elliot Small By: /s/ Johny Melohn [L.S] - ------------------------ ------------------------------- Name: Johny Melohn Title: Member Witness for Tenant HOTJOBS.COM, LTD. [CORP. SEAL] ------------------------------- /s/ Joseph A. Manzi By: /s/ Richard S. Johnson [L.S] - ------------------------ ------------------------------- Name: Richard S. Johnson Title: President, CEO, Chairman ACKNOWLEDGEMENTS CORPORATE TENANT STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in that he is the of the corporation described in and which executed the foregoing instrument, as TENANT; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ------------------------------------------------ INDIVIDUAL TENANT STATE OF NEW YORK, ss.: County of On this day of , 19 , before me personally came to be known and known to me to be the individual described in and who, as TENANT, executed the foregoing instrument and acknowledged to me that he executed the same. ------------------------------------------------ [CLIPART OMITTED] IMPORTANT - PLEASE READ [CLIPART OMITTED] RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 36. 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the building; and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors of halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the buildings by reason of noise, odors, and or vibrations, or interfere in any way, with other Tenants or those having business therein, nor shall any bicycles, vehicles, animals, fish, or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Owner. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or on the inside of the demised premises if the same as visible from the outside of the premises without the prior written consent of Owner, except that the name of Tenant may appear on the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Owner may remove same without any liability and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall the inscribed, painted or affixed for each Tenant by Owner at the expense of such Tenant, and shall be of a size, color and style acceptable to Owner. Tenant has the right to put signs of its choosing within the Premises, as long as they are not visible from the windows or from outside of the Premises. 6. No Tenant shall mark, paint, drill into, or in any way deface any part of the demised premises or the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. 7. No additional locks or bolts of any kind shall be placed upon any of the doors by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner reasonably approved by Owner. Owner reserves the right to exclude from the building all freight which violates any of these Rules and Regulations of the lease of which these Rules and Regulations are a part. 9. Canvassing, soliciting and peddling in the building is prohibited and each Tenant shall cooperate to prevent the same. 12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible, or explosive, or hazardous fluid, material, chemical or substance, other that those normally found in business offices, or cause or permit any odors or cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the demised premises. 13. Tenant shall not use the demised premises in a manner which disturbs or interferes with other Tenants in the beneficial use of their premises. Address Premises ================================================================================ TO ================================================================================ STANDARD FORM OF [SEAL] LOFT [SEAL] LEASE The Real Estate Board of New York, Inc. (c) Copyright 1994. All rights Reserved. Reproduction in whole or in part prohibited. ================================================================================ Dated 19 Rent Per Year Rent Per Month Term From To Drawn by ------------------------------------------------------------------------ Checked by ---------------------------------------------------------------------- Entered by ---------------------------------------------------------------------- Approved by --------------------------------------------------------------------- ================================================================================ TABLE OF CONTENTS 41. RIDER PROVISIONS PREVAIL .................................................1 42. COMMENCEMENT OF TERM .....................................................1 43. FIXED RENTAL, ADDITIONAL RENTAL, AND FUEL ESCALATION .....................1 44. FUEL ESCALATION ..........................................................3 45. AS IS CONDITION; LANDLORD'S WORK .........................................3 46. TENANT'S INITIAL INSTALLATIONS ...........................................5 47. ESCALATIONS FOR INCREASE IN REAL ESTATE TAXES ............................6 48. WATER AND SEWER CHARGES ..................................................7 49. ALL ADDITIONAL RENTAL PAYMENTS ...........................................7 50. ASSIGNMENT AND SUBLETTING ................................................7 51. LIMITATION OF LIABILITY .................................................11 52. INDEMNIFICATION .........................................................11 53. INSURANCE ...............................................................13 54. ELECTRIC CURRENT ........................................................14 55. BROKER ..................................................................16 56. BINDING EFFECT ..........................................................16 57. LATE FEE ................................................................16 58. SECURITY ................................................................16 59. HOLDOVER ................................................................18 60. APPLICABLE LAW ..........................................................18 61. HAZARDOUS MATERIALS .....................................................18 62. NOTICES .................................................................19 63. ADDENDUM TO ARTICLE 16- BANKRUPTCY ......................................19 64. RENT CONTROL ............................................................19 65. REPAIRS .................................................................20 66. LANDLORD'S SERVICES .....................................................21 67. TENANT'S ALTERATIONS ....................................................22 68. SUBORDINATION AND ATTORNMENT ............................................24 69. MISCELLANEOUS ...........................................................26 70. LEASE NOT BINDING UNLESS EXECUTED .......................................28 71. SUBMISSION TO JURISDICTION ..............................................29 72. QUALIFICATIONS AS TO USE ................................................29 73. PARTNERSHIP TENANT ......................................................29 74. CERTIFICATE OF OCCUPANCY AND COMPLIANCE WITH LAWS .......................30 75. ACCESS TO PREMISES ......................................................31 76. USE OF PREMISES .........................................................31 77. SECURITY GUARD, EXCLUSION OF PERSONS FROM PREMISES, AND DELIVERY SYSTEMS ........................................................31 78. ADDENDUM TO RULES AND REGULATIONS .......................................32 79. SCAFFOLDING .............................................................32 80. FIRE ALARM AND SPRINKLER SVSTEMS ........................................32 81. AIR CONDITIONING ........................................................33 82. NOISE AND NOXIOUS ODORS .................................................33 83. BUILDING DIRECTORY ......................................................34 84. ELECTRICAL SERVICE ......................................................34 85. RIGHT TO INSTALL ANTENNA AND OTHER EQUIPMENT ON ROOF ....................34 86. TELECOMMUNICATIONS ......................................................35 RIDER ANNEXED TO LEASE DATED AS OF NOVEMBER 2, 1999 BETWEEN 406 REALTY LLC, AS LANDLORD AND HOTJOBS.COM, LTD., AS TENANT 41. RIDER PROVISIONS PREVAIL If and to the extent that any of the provisions of this Rider conflict or are otherwise inconsistent with any of the preceding printed provisions of this Lease, or of the Rules and Regulations attached to this Lease, whether or not such inconsistency is expressly noted in this Rider, the provisions of this Rider shall prevail. 42. COMMENCEMENT OF TERM The commencement date of the term of this Lease ("Commencement Date") shall be the date Landlord delivers to Tenant or Tenant's attorney a fully-executed copy of this Lease, together with access to the Premises. Subject to the provisions of Article 13 above, as modified by the Numbered Insertions, Tenant shall give Landlord access to the Premises during the construction of Landlord's Work, between the hours of 8:00 a.m. and 6:00 p.m. on Mondays through Fridays without notice and on at least twelve (12) hours advance notice to any person in the Premises, at any other time, and to show the Premises to prospective tenants of other space in the Building on Mondays through Fridays, between the hours of 8:00 a.m. and 6:00 p.m. 43. FIXED RENTAL, ADDITIONAL RENTAL, AND FUEL ESCALATION 43.1 Tenant covenants to pay Landlord, at The Expansion Group Inc., 250 West 57th Street, New York, New York 10107, Room 1401, or at such other address as Landlord shall designate in the future: 43.1.1 A fixed rental ("Fixed Rental") at an annual rate of: (i) $1,239,000.00 per year ($103,250.00 per month) for each lease year commencing on the Commencement Date (defined in Article 42 above) and continuing thereafter to and including December 31, 2000; (ii) $1,276,170.00 per year ($106,347.50 per month) for each lease year commencing January 1, 2001, and continuing thereafter to and including December 31, 2001; (iii) $1,314,455.10 per year ($109,537.93 per month) for each lease year commencing January 1, 2002, and continuing thereafter to and including December 31, 2002; (iv) $1,353,888.75 per year ($112,824.06 per month) for each lease year commencing January 1, 2003, and continuing thereafter to and including December 31, 2003; (v) $1,394,505.42 per year ($116,208.78 per month) for each lease year commencing January 1, 2004, and continuing thereafter to and including December 31, 2004; PAGE 1 (vi) $1,443,313.11 per year ($120,276.09 per month) for each lease year commencing January 1, 2005, and continuing thereafter to and including December 31, 2005; (vii) $1,493,829.07 per year ($124,485.76 per month) for each lease year commencing January 1, 2006, and continuing thereafter to and including December 31, 2006; (viii) $1,546,113.08 per year ($128,842.76 per month) for each lease year commencing January 1, 2007, and continuing thereafter to and including December 31, 2007; (ix) $1,600,227.04 per year ($133,352.25 per month) for each lease year commencing January 1, 2008, and continuing thereafter to and including December 31, 2008; and (x) $1,656,234.98 per year ($138,019.58 per month) for each lease year commencing January 1, 2009, and continuing thereafter to and including December 31, 2009 (the "Termination Date"). Fixed Rental shall be payable by Tenant by check drawn on a bank which is a member of the New York City Clearing House Association having an office in the City of New York, in lawful money of the United States, in equal monthly installments in advance at the office of Landlord without previous demand therefor and without any setoff or deduction whatsoever, except as specifically set forth in the Lease, on the first day of each and every calendar month throughout the term of this Lease, except that the first monthly installment of Fixed Rental due hereunder shall be paid on the execution of this Lease. Provided that Landlord countersigns and delivers a fully-executed copy of this Lease, Landlord may deposit the first monthly payment of rent. So long as Tenant is not in default hereunder at the time that the Fixed Rental becomes due and payable, the payment made on this date shall be applied to the first installment of Fixed Rental due, after application of the Initial Rent Credit (defined below); otherwise, the same shall be applied to the damages, if any, to which Landlord is entitled upon Tenant's breach of this Lease. If the payment made on this date is uncollectible, the Lease shall, at Landlord's option, be of no force and effect, ab initio, whether or not Tenant shall have entered into possession of the Premises. If the Commencement Date (as defined in Article 42 above) occurs on a day other than the first day of a calendar month, the Fixed Rental due after the application of the Initial Rent Credit shall be prorated, and the balance of the first month's Fixed Rental theretofore paid shall be credited against the next monthly installment of Fixed Rental. Tenant's obligation to pay for the cost of electricity and any other Additional Rental for the Premises set forth in this Lease shall commence on the Commencement Date. 43.1.2 Additional rental ("Additional Rental"), consisting of all such moneys other than Fixed Rental as shall be due and payable under this Lease by Tenant. Landlord shall have all of the rights and remedies with regard thereto as are herein provided for Tenant's failure to pay Fixed Rental. 43.2 Provided that Tenant is not then in default beyond applicable grace and notice periods of its obligations under this Lease, Tenant shall be entitled to a one-time, non-recurring credit against the obligation to pay Fixed Rental, in the aggregate amount of $1,548,750 (the "Credit") to be applied as follows: (i) $309,750.00 (the "Initial Credit") to be applied against the Fixed Rental due commencing on the Commencement Date and continuing thereafter through the end of the third (3rd) month of the lease term. If the Commencement Date is a date other than the first day of a month, then this portion of the Credit shall be prorated, and the balance shall be applied against the Fixed Rental due for the fourth (4th) month of the lease term, and (ii) $34,416.66 against the Fixed Rental due for the fourth (4th) month through the thirty-ninth (39th) month of the lease term. Notwithstanding the foregoing, the Credit shall not be applied against any Additional Rental, electricity charges, or other like sums from time to time payable by Tenant pursuant to this Lease, PAGE 2 which amounts shall be paid without abatement in accordance with the terms of this Lease. Tenant acknowledges that $1,239,000.00 of the Credit represents Landlord's allowance to Tenant for the cost of the initial construction work, repairs and decorations to the Premises which Tenant has agreed to perform. 44. FUEL ESCALATION Tenant shall pay and covenants to pay to Landlord as Additional Rental monthly during each year during the term of this Lease an amount equal to Tenant's Proportionate Share (as defined in Section 47.5 below) of the actual heating fuel costs incurred by Landlord in the Building. Landlord shall render to Tenant a statement showing the Tenant's Proportionate Share of the heating fuel costs, together with the applicable fuel bill, and Tenant shall pay such amount within thirty (30) days after such rendition as Additional Rental. Should Landlord, at Landlord's sole option, install any energy saving device or devices or any system which shall have as a primary or secondary purpose the conservation of fuel, and the same results in an actual reduction of fuel consumption in the Building, Tenant shall pay Tenant's Proportionate Share of said cost as Additional Rental, upon Landlord's rendering a statement for same, within fifteen (15) days of such rendition. Notwithstanding any expiration or termination of this Lease, Tenant's obligation to pay Additional Rental under this Paragraph shall continue and shall cover all periods up to the lease expiration date and shall survive any expiration or termination of this Lease. 45. AS IS CONDITION; LANDLORD'S WORK 45.1 Tenant and Tenant's architect and/or engineer have thoroughly examined the Premises and are fully familiar with the condition thereof, and, except as specifically set forth in this Lease, neither Landlord nor Landlord's agents have made any representations, warranties or promises, either express or implied, with regard to the physical condition of the Building, or the Premises, the use or uses to which the Premises may be put, or the condition of any mechanical, plumbing, electrical, flue, ventilation or exhaust systems servicing the Premises. It is expressly understood that Landlord shall not be liable for any latent or patent defects in the Premises, unless they are structural in nature and are Landlord's responsibility to repair under the terms of this Lease. Tenant agrees to accept the Premises "as is" and in such condition as the same may be in at the Commencement Date, and Landlord shall not be obligated or required to do any work or to make any alterations or decorations or install any fixtures, equipment or improvements, or make any repairs or replacements to or in the Premises to prepare or fit the same for Tenant's use or for any other reason whatsoever. Notwithstanding the foregoing, Landlord shall, during the term of this Lease, complete the work described on Exhibit B attached hereto in a good and workmanlike manner. Unless specifically agreed otherwise, all Landlord's Work shall be of material, design, finish and color of the building standard adopted from time to time by Landlord. The installations, facilities, materials and work so to be furnished, installed and performed in the Premises by Landlord at its expense are hereinafter and in Exhibit B referred to as "Landlord's Work." Landlord hereby agrees to repair, at its sole cost and expense, any defect in Landlord's Work resulting from a defect in material or labor for a period of one (1) year after Landlord's substantial completion of the respective item of Landlord's Work. All other installations, facilities, materials and work which may be undertaken by or for the account of Tenant to prepare, equip, decorate and furnish the Premises for Tenant's occupancy, shall be at Tenant's expense, and are hereinafter called "Tenant's Work." In the event specific locations or dimensions are not provided for the furnishing or installation of any particular item of Landlord's Work, the judgment of Landlord reasonably exercised shall be binding on Tenant. In no event shall Landlord be required to provide any material, work or installation not specifically described or included in Landlord's Work. 45.2 Landlord shall undertake to substantially complete the work listed below by the applicable outside dates set forth below: 45.2.1 Substantially complete the installation of all four (4) bathrooms on both floors of the Premises by January 31, 2000. The bathrooms shall contain tiled floors and either fully or partially tiled walls (either ceramic, marble, or terrazzo tile or slab), painted metal or stainless steel partitions, new toilets, new sinks, new urinals where applicable, all as found in Class B buildings in the City of New York; PAGE 3 45.2.2 Substantially complete the installation of the new windows in the Premises by August 31, 2000. The new windows shall be thermopane and similar in size to the existing windows in the Premise; 45.2.3 Install the electrical service as described in Article 84 below by December 15, 1999; 45.2.4 Substantially complete the renovation of the lobby in the Building by November 30, 2001. The renovation of the lobby shall be of a quality not materially inferior than that depicted on the rendering (a copy of which is attached as Exhibit D) shown to Tenant upon execution of this Lease, subject to Landlord's right, in the exercise of its reasonable discretion, to change design, material and layouts; and 4 5.2.5 Substantially complete the renovation of the passenger elevators in the Building by November 30, 2001. 45.3 In the event any of the items listed in Articles 45.2.1 and 45.2.3 above are not substantially completed by the applicable dates set forth in Article 45.2 above, then Tenant's sole remedy shall be an abatement in its obligation to pay Fixed Rental only (for the item of work listed above not so completed), prorated on a daily basis, as follows: 45.3.1 for the work in Article 45.2.1, one hundred percent (100%) of Fixed Rental then payable. Upon substantial completion of one (1) man's and one (1) woman's bathroom on both floors of the Premises, the abatement shall be reduced to twenty-five percent (25%) of Fixed Rental then payable and shall continue until such time as all four (4) bathrooms on both floors of the Premises are substantially complete; and 45.3.2 for the work in Article 45.2.3, one hundred percent (100%) of the Fixed Rental then payable. Each abatement (to the extent Tenant is entitled to same) shall commence on the date by which the work was to have been substantially completed in accordance with the dates set forth in Section 45.2 and shall terminate on the date the work is substantially completed, as determined by Landlord. 45.4 in the event any of the items listed in Articles 45.2.2, 45.2.4 and 45.2.5 are not substantially completed by the respective dates set forth in Articles 45.2.2, 45.2.4 and 45.2.5, then Tenant shall be entitled to an abatement against its obligation to pay Fixed Rental only (for the item of work not so completed), prorated on a daily basis, as follows: 45.4.1 for the work in Article 45.2.2, ten percent (10%) of the Fixed Rental then payable; 45.4.2 for the work in Article 45.2.4, twenty percent (20%) of the Fixed Rental then payable; and 45.4.3 for the work in Article 45.2.5, twenty percent (20%) of the Fixed Rental then payable. Each abatement (to the extent Tenant is entitled to same) shall commence on the date by which the item of work was to have been substantially completed in accordance with the dates set forth in Section 45.4 and shall terminate on the date the work is substantially completed, as determined by Landlord. 45.5 In no event shall the aggregate abatements due under this Article be greater than the Fixed Rental then due. 45.6 Any of the items described in Section 45.2 above shall have been substantially completed when all major items of construction comprising the item have been substantially completed, notwithstanding the fact (i) that minor or insubstantial details of construction, mechanical adjustment or decoration remain to be performed, the non-completion of which do not materially PAGE 4 interfere with Tenant's use of the Premises, and (ii) that such item has been substantially completed except for portions thereof which shall, in the event of Tenant's Delay as defined below, be completed upon the completion of Tenant's Work. 45.7 If the completion of any item of Landlord's Work shall be delayed due to any act or omission of Tenant or any of its employees, agents or contractors or any failure to plan or to execute Tenant's Work diligently and expeditiously ("Tenant's Delay"), the item shall be deemed substantially complete on the date when it would have been substantially complete but for Tenant's Delay. 45.8 Tenant acknowledges that the Building is currently occupied for printing and manufacturing uses, and, as a result, noise and vibrations emanating from the space occupied by other tenants in the Building may be heard and felt within the Premises. Landlord shall not be liable for any disruption to the operation of Tenant's business resulting from such noise and vibrations, nor shall Tenant be entitled to any abatement or offset against its obligations under this Lease. 46. TENANT'S INITIAL INSTALLATIONS 46.1 Tenant agrees, at Tenant's sole cost and expense, to cause the Premises to be improved in accordance with the plans approved by Landlord in writing ("Approved Plan") (which improvement is hereinafter referred to as "Tenant's Initial Installations"), which approval shall not be unreasonably withheld or delayed, and shall be deemed approved if Landlord fails to respond to Tenant's request for consent within fifteen (15) business days, on the condition that the plans delivered by Tenant to Landlord are complete and Tenant's request for consent is in writing and contains a statement that Landlord's failure to respond to Tenant's request within fifteen (15) business days shall be deemed consent. 46.2 Tenant's obligation hereunder shall include, without limitation, the obligation to pay for all soft costs, environmental and other investigatory expenses, construction expenses, filings, architectural fees, engineering fees and other like items necessary in order to lawfully complete Tenant's Initial Installations. Tenant shall prepare an Alteration Type II Application and submit same to Landlord for Landlord's review. Upon Landlord's approval and execution of the Alteration Type II Application, Tenant shall cause same to be filed with the New York City Department of Buildings. Tenant shall obtain all required signoffs and approvals from the New York City Department of Buildings in connection with Tenant's Initial Installations. Tenant's performance of Tenant's Initial Installations shall be performed with due diligence and in a good and workmanlike manner. Tenant's Initial Installations shall be performed and the quality, materials and appearance of Tenant's Initial Installations shall, unless otherwise specifically agreed to by Landlord, be equivalent to or exceed those for a Class B office building in midtown Manhattan. All window treatments must be approved by Landlord in writing, not to be unreasonably withheld or delayed. In the event Tenant installs a dropped ceiling, Tenant must install window wells around all windows in the Premises. Tenant shall not install anything within or without the Premises (either as an Initial Installation or as Tenant's Changes defined in Article 67) that protrudes from the north side of the Building or rests upon the windows of the north side of the Building. 46.3 During the period following the date of this Lease and during the performance by Landlord of Landlord's Work, if any, Tenant agrees to submit to Landlord for Landlord's review and approval all items required in Article 67 below of this Lease with respect to Alterations as the same may pertain to Tenant's Initial Installations. Tenant's Initial Installations shall be commenced promptly after receipt by Tenant of all permits and approvals necessary for the same to be legally carried out and after delivery to Landlord of all items that must be delivered prior to the commencement of any Alterations. All of Tenant's Initial Installations shall be performed in accordance with the provisions of Article 67 below of this Lease. 46.4 Tenant shall use, for its Initial Installations and any other work described throughout this Lease, Landlord's designated expeditor and security and fire alarm contractors. 46.5 Tenant shall use, for its Initial Installations and any other work described throughout this Lease, Landlord's designated electrical, HVAC and plumbing contractors, provided that the prices submitted by such contractors are no greater than fifteen percent (15%) above the bid amounts PAGE 5 of contractors selected by Tenant. Each of Landlord's electrical, HVAC and plumbing contractors shall have the right to adjust their prices after the bids of Tenant's selected contractors have been presented to Landlord, and so long as the respective adjusted prices are within the fifteen percent (15%) range, then the respective contractor designated by Landlord shall be awarded the job. 46.6 Landlord consents to the following in connection with Tenant's Installations or subsequent work performed by Tenant during the term: 46.6.1 Robert Director as Tenant's engineer; 46.6.2 SCR Design as Tenant's architect; 46.6.3 Structure Tone as Tenant's construction manager or general contractor; and 46.6.4 William Vitacco as Tenant's building expediter for filing all plans and permits. 46.7 Tenant shall obtain Landlord's prior approval of any other contractor or subcontractor which is to perform work at the Premises, which approval shall not be unreasonably withheld or delayed. Landlord's approval, or the requirement to use any contractor or subcontractor, is not an endorsement of the work of such contractor or subcontractor nor a representation or warranty of any kind. 47. ESCALATIONS FOR INCREASE IN REAL ESTATE TAXES 47.1 For each Tax Year or portion thereof occurring in whole or in part during the term or any renewal term of this Lease, Tenant shall pay, as Additional Rental, the Tax Payment (hereafter defined) for such Tax Year or portion thereof. 47.2 "Taxes" shall mean the total of all real estate taxes and assessments and special assessments, water and sewer charges, business improvement district charges, special assessment district charges, police tax, and other levies of a similar or dissimilar nature levied, assessed or imposed upon or against the land, the Landlord and/or Building or leasehold improvements located at 406 West 31st Street, New York, New York (individually referred to hereinafter as the "Land" and the "Building"). If at any time during the term of this Lease the methods of taxation prevailing at the commencement of the term hereof shall be altered so that if and to the extent that in lieu of or as a substitute for or in addition to the whole or any part of the taxes, assessments, levies or impositions of charges now levied, assessed or imposed on real estate and the improvements thereon, there shall be levied, assessed or imposed: (i) a tax, assessment, levy, imposition or charge wholly or partially as capital levy or otherwise on the rents received therefrom; (ii) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon the Building or the Land or the Premises and imposed upon Landlord; (iii) a license fee measured by the rents payable by Tenant to Landlord; or (iv) any additional or substitute tax assessment, levy, imposition or charges against the Land and/or the Building; then all such taxes, assessments, levies, impositions or charges or part thereof so measured or based, shall be deemed to be included with the term "Taxes." Taxes shall exclude income or profit tax, excise tax, inheritance, estate, succession, transfer or gift tax, and any penalties, interest and late fees resulting from Landlord's late payment of Taxes. 47.3 "Tax Year" shall mean the fiscal year for which Taxes are levied by the applicable governmental authority, as same may be changed during the term of this Lease. 47.4 "Base Tax" shall mean the Taxes payable in the fiscal year commencing July 1, 1999 and ending June 30, 2000 (such fiscal year being hereinafter referred to as the "Base Tax Year"). 47.5 "Tenant's Proportionate Share" shall mean 14.0%. 47.6 If the Taxes for any Tax Year occurring wholly or partially within the term of this Lease or any renewal or extension thereof shall be greater than the Base Tax, Tenant shall pay as Additional Rental for such Tax Year a sum equal to Tenant's Proportionate Share of the amount by which the Taxes for such Tax Year are greater than the Base Tax (which amount is hereinafter called the "Tax Payment"). Should this Lease commence or terminate prior to the expiration of a Tax Year, PAGE 6 such Tax Payment shall be prorated to correspond with that portion of a Tax Year occurring within the term of this Lease. Tenant's obligation to pay such Additional Rental and Landlord's obligation to refund pursuant to Paragraph 47.7 below, as the case may be, shall survive the termination or sooner expiration of this Lease. 47.7 Only Landlord shall be eligible to institute proceedings to contest the Taxes or reduce the assessed valuation of the Land and Building. Landlord shall be under no obligation to contest the Taxes or the assessed valuation of the Land and Building for any Tax Year or to refrain from contesting the same, and may settle any such contest on such terms as Landlord in its sole judgment considers proper. If Landlord shall receive a refund for any Tax Year for which a Tax Payment shall have been made by Tenant pursuant to Paragraph 47.7 above, Landlord shall repay to Tenant, with reasonable promptness, Tenant's Proportionate Share of such refund after deducting from such refund the reasonable costs and expenses (including experts' and attorneys' fees) of obtaining such refund. 47.8 Landlord shall render to Tenant a comparative statement showing the amount of the Base Tax, the amount of the Taxes for the then current Tax Year, and the Tax Payment, if any, due from Tenant for such Tax Year, together with a copy of the applicable tax bill. Any Tax Payment owed by reason of a special assessment levied against the Building shall be payable by Tenant in installments over the period in which Landlord is obligated to pay same without incurring penalties or interest. The Tax Payment shown on such comparative statement shall be paid in full by Tenant to Landlord within thirty (30) days after Tenant's receipt of such comparative statement. Tenant shall pay the amount of the Tax Payment shown on such comparative statement concurrently with the installment of Fixed Rental then or next due, or if such statement shall be rendered at or after the termination of this Lease, within thirty (30) days after such rendition. Each comparative statement shall be conclusive and binding on Tenant, unless within thirty (30) days after receipt of such comparative statement, Tenant shall notify Landlord in writing of any discrepancy in specific detail. In order to dispute the amount set forth on the comparative statement Tenant must first timely pay all sums due on such statement, failing which, Tenant shall have no right to dispute the amount of the Tax Payment. 48. WATER AND SEWER CHARGES Subject to the provisions of Article 29, as amended by the Numbered Insertions, Tenant shall pay to Landlord, as Additional Rental hereunder, the sum of Three Hundred Dollars ($300.00) per month, on the first day of each month during the term of this Lease, for water and sewer usage. 49. ALL ADDITIONAL RENTAL PAYMENTS 49.1 Landlord's delay or failure during the term of this Lease to prepare and deliver any statements or bills required to be delivered to Tenant under Articles 47 and 48 shall not in any way be deemed to be a waiver of, or cause Landlord to forfeit or surrender its rights to collect any Additional Rental which may have become due pursuant to these Articles during the term of this Lease. Tenant's liability for Additional Rental due under Articles 47 and 48 shall continue unabated during the remainder of the term of this Lease and shall survive the expiration or sooner termination of this Lease for a period of two (2) years thereafter. 49.2 In no event shall any adjustment of any payments payable by Tenant in accordance with the provisions of Articles 47 and 48 result in a decrease in the Fixed Rental or any Additional Rental theretofore payable by Tenant pursuant to these Articles. 49.3 If any Additional Rental is payable with respect to any period that shall end after the expiration or termination of this Lease, the Additional Rental payable by Tenant in respect thereof shall be prorated to correspond to that portion of such lease year occurring within the term of this Lease. 50. ASSIGNMENT AND SUBLETTING 50.1 Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage, or PAGE 7 encumber this Lease or any of its rights or estates hereunder, sublet the Premises or any part thereof, or permit the Premises, or any part thereof, to be used or occupied by others, pursuant to a management agreement, license agreement or otherwise, without the prior written consent of Landlord in each instance. If this Lease be assigned, or if the Premises or any part thereof be sublet or occupied by anybody other than Tenant, Landlord may, after default by Tenant beyond notice and grace periods, collect rent from the assignee, subtenant, or occupant, and apply the net amount collected to the rent herein reserved, but no assignment, subletting, occupancy, or collection shall be deemed a waiver of the provisions hereof, the acceptance of the assignee, subtenant, or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. Landlord's consent to an assignment or subletting shall not, in any wise, be construed to relieve Tenant from obtaining Landlord's express written consent to any further assignment or subletting. In no event shall any permitted sublessee assign or encumber its sublease, further sublet all or any portion of its sublet space, or otherwise suffer to permit the sublet space, or any part thereof, to be used or occupied by others, without Landlord's prior written consent in each instance. A modification, amendment or extension of a sublease shall be deemed to be a subletting. 50.2 If Tenant shall, at any time or times during the term of this Lease, desire to assign this Lease or sublet all or part of the Premises, Tenant shall give notice thereof to Landlord, which notice shall be accompanied by: (a) a conformed or photostatic copy of the proposed assignment or sublease, the effective or commencement date of which shall be not less than fifteen (15) nor more than forty-five (45) days after the giving of such notice; (b) a statement setting forth, in reasonable detail, the identity of the proposed assignee or subtenant and its principals, the nature of its business and its proposed use of the Premises; and (c) current financial information with respect to the proposed assignee or subtenant, including its (and their) most recent financial report(s) reasonably satisfactory to Landlord. Landlord shall then have the option detailed in Article 50.3 below, to be exercised by written notice (the "Exercise Notice") given to Tenant within thirty (30) days of receipt of Tenant's request for assignment. 50.3 If Tenant desires to sublease twenty-five percent (25%) or more of the Premises or to assign its interest in the Lease, Landlord may require Tenant to surrender the entire Premises to Landlord and to accept a termination of this Lease as of a date (the "Recapture Termination Date") to be designated by Landlord in the Exercise Notice, which shall not be less than sixty (60) days nor more than one hundred twenty (120) days following the date of Landlord's Exercise Notice. If Landlord shall elect to require Tenant to surrender the Premises and accept a termination of this Lease, then this Lease shall expire on the Recapture Termination Date as if that date had been originally fixed as the Termination Date, and Tenant's Proportionate Share (as defined in Article 47.5) shall be reduced accordingly. If Landlord exercises its option to terminate this Lease, Landlord shall be free to, and shall have no liability for, leasing the recaptured space or any other space to Tenant's prospective assignee or subtenant. 50.4 Provided that Tenant is not in default of any of Tenant's obligations under this Lease beyond notice and grace periods, Landlord's consent (which shall be in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed, provided and upon condition that: 50.4.1 Tenant shall have complied with the provisions of Article 50.2 above and Landlord has not exercised its options under Article 50.3 above; 50.4.2 In Landlord's reasonable judgment the proposed assignee or subtenant is engaged in a business or activity, and the Premises, will be used in a manner, which (a) is limited to the use of the Premises for the use permitted herein; and (b) will not violate any negative covenant as to use then contained in any other lease of space in the Building; 50.4.3 The proposed assignee or subtenant (or its principal) is reputable and, in connection with an assignment, has a net worth, computed in accordance with generally accepted accounting principles, at least equal to Five Million Dollars ($5,000,000.00), and Landlord has been provided with proof of same; 50.4.4 Neither the proposed assignee or subtenant nor any person who, directly or indirectly, controls, is controlled by, or is under common control with, the proposed assignee or PAGE 8 subtenant, (a) is then a tenant or an occupant of any part of the Building, unless such entity needs expansion space and Landlord does not have such space available, nor (b) is a party who dealt with, or is then negotiating with, Landlord or Landlord's agent (directly or through a broker) with regard to space in the Building either currently or during the three (3) months immediately preceding Tenant's request for consent; 50.4.5 The form of the proposed sublease or instrument of assignment shall be in form reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article; 50.4.6 Tenant shall reimburse Landlord within thirty (30) days of demand for the reasonable costs that may be incurred by Landlord in connection with said assignment or sublease, including, without limitation, the costs of making investigations as to the acceptability of the proposed assignee or subtenant, and reasonable legal fees incurred in connection with any request for consent; 50.4.7 The Premises shall not, without Landlord's prior written consent, have been listed or otherwise been publicly advertised for assignment or subletting at a rental rate lower than the then prevailing rental for other similar space in the Building; and 50.4.8 The proposed occupancy shall not impose an extra burden upon services to be supplied by Landlord to Tenant. 50.5 No assignment or subletting shall be made: 50.5.1 by the legal representatives of Tenant or by any person to whom Tenant's interest under this Lease passes by operation of law, except in compliance with the provisions of this Article; or 50.5.2 to any person or entity for the conduct of a business which is not in keeping with the Certificate of Occupancy and applicable zoning laws. 50.6 The sublease shall expressly prohibit the use of the Premises or any part thereof for any use other than the use set forth in paragraph 2 of the prefixed printed form. 50.7 In the event that Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within forty-five (45) days after the giving of such consent, then Tenant shall again comply with all of the provisions and conditions of Article 50.2 before assigning this Lease or subletting all or part of the Premises. 50.8 Each subletting pursuant to this Article shall be subject to all of the applicable covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such subletting and/or acceptance of rent or additional rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment of the Fixed Rental and Additional Rental due, and to become due, hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any licensee, subtenant, or any other person claiming under or through any subtenant that shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant further agrees that, notwithstanding any such subletting, no other and further subletting of the Premises by Tenant, or any person claiming through or under Tenant shall, or will be made, except upon compliance with, and subject to, the provisions of this Article. If Landlord shall decline to give its consent to any proposed assignment or sublease, Tenant shall indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, damages, costs and expenses (including reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. PAGE 9 50.9 With respect to each and every sublease or subletting, it is further agreed that: 50.9.1 no subletting shall be for a term ending later than one day prior to the expiration date of the term of this Lease; 50.9.2 no sublease shall be valid, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord; 50.9.3 each sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that, in the event of termination, reentry, or dispossess by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant as sublandlord under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not: (a) be liable for any previous act or omission of Tenant under such sublease; (b) be subject to any offset, not expressly provided in such sublease, that theretofore accrued to such subtenant against Tenant; or (c) be bound by any previous modification of such sublease made without Landlord's consent or by any previous prepayment of more than one month's fixed rent or any additional rent then due. 50.10 Any assignment or transfer shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement, in form and substance reasonably satisfactory to Landlord, whereby the assignee shall assume all of the obligations of this Lease on the part of Tenant to be performed or observed and whereby the assignee shall agree that the provisions contained in Article 50.1 shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect of all future assignments and transfers. The original named 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 rent and/or additional rent by Landlord from an assignee, transferee, or any other party, the original named Tenant shall remain fully liable for the payment of Fixed Rental and Additional Rental and for the other obligations of this Lease on the part of the Tenant to be performed or observed. 50.11 In no event shall Tenant be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claims, 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 has unreasonably withheld or unreasonably delayed its consent or approval to a proposed assignment or subletting as provided for in this Article. Tenant's sole remedy shall be an action or proceeding to enforce any such provision, or for specific performance, injunction or declaratory judgment. 50.12 If applicable, one or more sales or transfers, by operation of law or otherwise, or creation of new stock, partnership, membership or voting interests, aggregating in excess of fifty percent (50%) of (i) the voting stock of any corporate tenant, or (ii) the limited or general partnership interest in any partnership tenant, or (iii) the membership interests in any limited liability company tenant, whether in a single transaction or in a series of transactions, shall not be deemed an assignment within the meaning of this Article and shall not require Landlord's prior written consent. 50.13 The joint and several liability of Tenant and any immediate or remote successor in interest to Tenant, and the due performance of the obligations of this Lease on Tenant's part to be performed or observed, shall not be discharged, released, or impaired in any respect by any agreement or stipulation made by Landlord extending the time of, or modifying any of the obligations of this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of this Lease. 50.14 The listing of any name other than that of Tenant, whether on the doors of the Premises, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease, to any sublease of the Premises, or to the use or occupancy thereof by others. PAGE 10 50.15 If Tenant shall enter into any subleases, assignments or other agreements for the occupancy of the Premises or any portion thereof (other than as provided in Section 50.16 below), or if there is a transfer of this Lease by operation of law, or otherwise, and if Tenant shall receive any consideration from its assignee, subtenant or licensee for or in connection with the assignment or the subletting, as the case may be, or, if Tenant shall sublet or otherwise permit occupancy of the Premises at a rental rate (including Additional Rental) or other periodic aggregate consideration in excess of the Fixed and Additional Rental due hereunder, Tenant shall pay to Landlord, upon receipt, as Additional Rental hereunder, one-half of such consideration or excess. 50.16 Notwithstanding anything to the contrary contained herein or in the Lease, as long as HotJobs.Com is the Tenant, Tenant shall have the right, subject to the terms and conditions hereinafter set forth, without the consent of, but on written notice to, Landlord, but subject to Tenant's satisfaction of the conditions set forth in Articles 50.2, 50.4 and 50.10 above, to assign its interest in this Lease (i) to any corporation which is a successor to Tenant either by merger or by consolidation, (ii) to a purchaser of all or substantially all of Tenant's assets (provided such purchaser shall have also assumed substantially all of Tenant's liabilities), or (iii) to an entity which shall control, be under the control of, or be under common control with Tenant (any such entity referred to in this clause (iii) being a Related Entity). 51. LIMITATION OF LIABILITY 51.1 If Landlord shall be an individual, joint venture, tenancy in common, co-partnership, limited liability company, unincorporated association, or other unincorporated aggregate of individuals and/or entities or a corporation, Tenant shall look only to such Landlord's interest and in the rents, issues, and profits thereof in 406 West 31st Street, New York, New York for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default by Landlord hereunder, and no other property or assets of Landlord or any member, partner or principal of Landlord shall be subject to levy, execution 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 or occupancy of the Premises. 51.2 If Tenant shall request Landlord's consent or approval pursuant to any of the provisions of this Lease or otherwise, and Landlord shall fail or refuse to give, or shall delay in giving, such consent or approval, including, but not limited to, Article 50 above, or, if Landlord requires Tenant to take any action or cease any course of conduct, Tenant shall in no event make, or be entitled to make, any claim for damages (nor shall Tenant assert, or be entitled to assert, any such claim by way of defense, set-off, or counterclaim) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or delayed its consent or approval or acted arbitrarily or capricious or in bad faith, and Tenant hereby waives any and all rights that it may have from whatever source derived, to make or assert any such claim. Tenant's sole remedy for any such failure, refusal, delay or requirement to take or cease any action, shall be an action for a declaratory judgment, specific performance, or injunction, and such remedies shall be available only in those instances where Landlord has expressly agreed in writing not to act unreasonably or unreasonably withhold or delay its consent or approval or where, as a matter of law, Landlord may not unreasonably withhold or delay the same. 52. INDEMNIFICATION 52.1 Subject to Section 53.5 hereof, Tenant shall, at all times and at its sole cost and expense, indemnify, defend and hold Landlord, any holder of a Superior Mortgage (defined below), and any lessor under a Superior Lease (defined below), together with their respective agents, affiliates, employees, partners, members, officers, directors and shareholders (collectively, the "Indemnitees") harmless from and against any and all claims, suits, actions, damages, fines, charges, penalties, losses, liens, fees, costs, court costs, expenses (including, but not limited to, all fees and disbursements of attorneys, architects, engineers and other professionals engaged by one or more Indemnitees) and liabilities which may be incurred by or imposed on any Indemnitee or which may arise in connection with any claims, suits or actions, the investigation thereof or the defense of any action or proceeding brought thereon, or from the enforcement of this indemnity, or from and against any orders, judgments and/or decrees which may be entered or which may arise, wholly or in part, PAGE 11 with respect to or on account of: (a) any personal injury, bodily injury, loss of life and/or damage to property that may occur or be claimed by or with respect to any person(s) or property on or about the Premises or the appurtenances thereto or upon the adjacent vaults (if any), sidewalks, ramps, curbs or streets, and resulting from the negligence or willful misconduct of Tenant, its successors, permitted assigns or any subcontractors, or by other persons or entities claiming by, through or under Tenant, or by their respective agents, employees, contractors, licensees, invitees, guests or other such persons or entities, (b) the breach of any term, covenant or condition of this Lease by Tenant, its successors, permitted assigns or any subcontractors, or by other persons or entities claiming by, through or under Tenant, or by their respective agents, employees, contractors, licensees, invitees, guests or other such persons or entities, (c) the filing of any mechanic's or materialmen's lien or of any other attachment or encumbrance against the Land and/or the Building due to work done by or on behalf of Tenant, (d) the condition of the Premises, including any repairs, replacements, changes or Alterations which Tenant has or will perform or fail to perform therein, or (e) Tenant's use or storage of any Hazardous Materials (defined below). All such actions, suits, claims, damages and/or proceedings shall be resisted and defended by Tenant at its sole cost and expense. Landlord shall in no event be liable for any injury or damage to the Premises or any property contained therein, or to Tenant or any successors, permitted assigns or subcontractors, or other persons claiming by, through or under Tenant or their respective agents, employees, licensees, invitees, business visitors and guests or other such persons, or to any property of any such persons, unless due to negligence of Landlord or Indemnitees. Tenant shall promptly reimburse each Indemnitee for any and all expenditures covered by this indemnity and hold harmless. Landlord shall not be liable for any loss suffered by the business of Tenant or its subtenants, licensees, or concessionaires, for any cause whatsoever, including, without limiting the generality thereof, such damage or loss resulting from fire, steam, electricity, gas, water, rain, ice or snow, which may leak or flow from or into any part of the said premises, or from the breakage, leakage, obstruction, or other defects of the pipes, wires, appliances, plumbing, heating, ventilating, air conditioning, or lighting fixtures of the same, whether the said damage or injury results from conditions arising upon the said premises or from other sources, unless due to negligence of Landlord or Indemnitees. Landlord shall not be liable for any damage arising from any act or negligence of any other tenant. 52.2 Except as provided in Articles 50.11 and 51 and subject to the provisions of Article 53.5, Landlord shall, at its sole cost and expense, indemnify, defend and hold Tenant harmless from and against any and all claims, suits, actions, damages, fines, charges, penalties, losses, liens, fees, costs, court costs, expenses (including, but not limited to, all reasonable fees and disbursements of attorneys, architects, engineers and other professionals engaged by Tenant) and liabilities which may be incurred by or imposed on Tenant or which may arise in connection with any claims, suits or actions, the investigation thereof or the defense of any action or proceeding brought thereon, or from the enforcement of this indemnity, or from and against any orders, judgments and/or decrees which may be entered or which may arise, wholly or in part, with respect to or on account of: (a) any personal injury, bodily injury, loss of life and/or damage to property that may occur or be claimed by or with respect to any person(s) or property on or about the public portions of the Building and the Premises or the appurtenances thereto or, if resulting from a slip or fall, upon the vaults (if any) or sidewalks in front of the Building, in each case only if the same results from the negligence or fault of Landlord, and specifically excluding any such injury, loss and/or damage which is due to Tenant's willful or negligent acts or omission, (b) the breach of any term, covenant or condition of this Lease by Landlord, its successors, assigns or any subcontractors, or by other persons or entities claiming by, through or under Landlord, or by their respective agents, employees, contractors, licensees, invitees, guests or other such persons or entities, or (c) Landlord's failure to maintain the structural and public portions of the Building in the condition set forth in this Lease, including Landlord's failure to perform repairs or replacements which Landlord is obligated to perform therein, provided, however, that with regard to (b) and (c) above, Tenant's remedies are limited to those specifically set forth in Articles 45.2, 45.3, 45.4 and 66.4 and all other provisions of this Lease where Tenants rights are specifically set forth or limited. Tenant shall give Landlord written notice of any claims under this Section 52.2 promptly upon becoming aware of such claim. All such actions, suits, claims, damages and/or proceedings shall be resisted and defended by Landlord counsel of its choice, at Landlord's sole cost and expense. This indemnity under this Section 52.2 runs for the benefit of Tenant only, and does not create any right or benefit in favor of any other person or entity. PAGE 12 53. INSURANCE 53.1 Tenant shall obtain and keep in full force and effect during the term of this Lease: 53.1.1 a policy of commercial general public liability insurance, including bodily injury and property damage coverage, with a broad form contractual liability endorsement written on an occurrence basis or its equivalent, naming Tenant as insured and naming 406 Realty LLC, The Expansion Group, Inc., Johny Melohn, and any successor landlord or landlord employee or managing agent or mortgagees or lessors having an interest in the Building of whom Tenant has been notified in writing as additional insureds (issued on an "occurrence" basis and not a "claims made" basis) against claims for personal injury, bodily injury, death and/or third-party property damage occurring in or about the Premises or the Building, and under which the insurer agrees to waive any right of recovery such insurer may have had against Landlord, Landlord's employees and managing agent, and any mortgagees or lessors having an interest in the Building and to indemnify, defend and hold Landlord harmless from and against, among other things, all cost, expense and/or liability (including, without limitation, attorneys' fees) arising out of or based upon any and all claims, accidents, injuries and damages occurring in, on or about the Premises (whether or not such claims, accidents, injuries and damages occurred as a result of Landlord's negligence). Such policy shall contain a provision that no act or omission of Tenant shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained to Landlord. The minimum limits of liability applicable exclusively to the Premises shall be a combined single limit with respect to each occurrence in an amount of not less than $3,000,000 (or in the form of an umbrella liability policy for "excess" liability coverage); and 53.1.2 insurance against loss or damage by fire and such other risks and hazards (including burglary, theft, vandalism, sprinkler leakage, water damage, explosion, breakage of glass within the Premises and, if the Premises are located at or below grade, broad form flood insurance) as are insurable under then available standard forms of "all risk" insurance policies, to Tenant's personal property and business equipment and fixtures (hereinafter, "Tenant's Property") and, whether or not such alterations or tenant improvements had been paid for or performed by Tenant, any alterations and tenant improvements in and to the Premises (hereinafter, "Tenant's Work") for the full replacement cost value thereof (with such policy having a deductible not in excess of $25,000.00) protecting Tenant, Landlord, Landlord's employees and managing agent, and any mortgagees or lessors having an interest in the Building of whom Tenant has been notified in writing; and 53.1.3 business interruption insurance in an amount sufficient to cover Tenant's lost profits and continuing expenses during the period Tenant is unable to do business in the Premises. 53.2 The insurance required under this Article 53 may be maintained under a blanket policy. Prior to the time such insurance is first required to be carried by Tenant and thereafter, at least thirty (30) days prior to the expiration or other termination of any such policies, Tenant agrees to deliver to Landlord certificates evidencing such insurance. All such policies shall contain endorsements that (a) such insurance may not be modified or cancelled or allowed to lapse except upon thirty (30) days' written notice to Landlord by certified mail, return receipt requested, containing the policy number and the names of the insured and the certificate holder, and (b) Tenant shall be solely responsible for payment of all premiums under such policies and Landlord shall have no obligation for the payment thereof notwithstanding that Landlord is or may be named as an additional insured. Tenant's failure to provide and keep in force the aforementioned insurance shall be regarded as a default hereunder, entitling Landlord to exercise any or all of the remedies as provided in this Lease in the event of Tenant's default, including, but not limited to, obtaining said insurance. In the event Landlord shall procure said insurance, Tenant shall reimburse Landlord, as Additional Rental, for all reasonable premiums paid by Landlord within fifteen (15) days of Landlord's demand for same. All insurance required to be carried by Tenant pursuant to the terms of this Lease shall be effected under valid and enforceable policies issued by reputable and independent insurers permitted to do business in the State of New York which rate, in Best's Insurance Guide, or any successor thereto (or if there be none, an organization having a national reputation), as having a general policy-holder rating of "A" and a financial rating of at least "XIII." PAGE 13 Tenant shall not carry separate or additional insurance, whether concurrent or contributing, in the event of any loss or damage, with any insurance required to be obtained by Tenant under this Lease. 53.3 All policies to be maintained by Tenant hereunder and by Landlord with respect to the Building shall contain a provision that no act or omission of Landlord or Tenant, as the case may be, shall affect or limit the obligation of the insurer to pay the amount of any loss sustained. 53.4 The parties hereto shall procure an appropriate clause in, or endorsement on, any "all risk" or fire or extended coverage insurance covering the Premises, the Building, the personal property, fixtures or equipment located thereon or therein, pursuant to which the insurance companies waive subrogation or consent to a waiver of right of recovery by the insured prior to any loss. The waiver of subrogation or permission for waiver of the right of recovery in favor of Tenant shall also extend to all other persons or entities occupying or using the Premises in accordance with the terms of the Lease. If the payment of an additional premium is required for the inclusion of such waiver of subrogation provisions or consent to a waiver of right of recovery, each party shall advise the other of the amount of any such additional premiums by written notice and the other party shall pay the same or shall be deemed to have agreed that the party obtaining the insurance coverage in question shall be free of any further obligations under the provisions hereof relating to such waiver or consent. It is expressly understood and agreed that Landlord will not be obligated to carry insurance on Tenant's Property or Tenant's Work or insurance against interruption of Tenant's business. 53.5 Each party hereby waives all rights of recovery, claim, action, cause of action and releases the other party with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damage or destruction with respect to its property (including rental value or business interruption) occurring during the term of this Lease to the extent to which such party is insured or required to be insured under a policy containing a waiver of subrogation or naming the other party as an additional assured, as provided in this Article. If notwithstanding the recovery of insurance proceeds by either party for loss, damage or destruction of its property (or rental value or business interruption) the other party is liable to the first party with respect thereto or is obligated under this Lease to make replacement, repair or restoration, then provided the first party's right of full recovery under its insurance policies is not thereby prejudiced or otherwise adversely affected, the amount of the net proceeds of the first party's insurance against such loss, damage or destruction shall be offset against the second party's liability to the first party therefor, or shall be made available to the second party to pay for the replacement, repair or restoration, as the case may be. Tenant shall advise insurers of the foregoing and such waiver shall be part of each policy maintained by Tenant which applies to the Premises, any part of the Premises or Tenant's use and occupancy of any part thereof. 53.6 Tenant shall give notice to Landlord, in writing, promptly after Tenant learns of any accident in or about the demised premises. This notification shall not be deemed to imply or impose any liability upon Landlord relating to such accident. 53.7 Landlord currently carries, and shall carry during the term of this Lease, a policy of commercial general public liability insurance including injury and property damage covered with limits greater than Three Million Dollars ($3,000,000) and a fire or other casualty policy for the full replacement value of the Building. 54. ELECTRIC CURRENT 54.1 Tenant agrees that Tenant shall not make any electrical or mechanical installations, alterations, additions or changes to the electrical equipment or appliances in the Premises (except that Tenant may connect standard office equipment without Landlord's consent) without the prior written consent of Landlord, not to be unreasonably withheld, in each such instance and Tenant will at all times comply with the reasonable rules and regulations applicable to the service, equipment, wiring and requirements of Landlord and of the utility company supplying electricity to the Building. Notwithstanding the foregoing, Tenant covenants and agrees that at all times its use of electricity will not exceed the electrical service to be provided by Landlord pursuant to Article 84 below. Tenant shall not use any electrical equipment which, in Landlord's reasonable judgment, will overload such installations or interfere with the use thereof by other tenants in the Building. PAGE 14 If either the quantity or character of the electrical service is changed by Landlord or by the utility company supplying electrical service to the Building or is no longer available or suitable for Tenant's requirements, no such change, unavailability or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of Fixed Rental or Additional Rental, or relieve Tenant from any of its obligations under this Lease or impose any liability upon Landlord, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. 54.2 Electricity shall be furnished by Landlord to Tenant on a "submetering" basis. If not already installed, Tenant shall, at Tenant's sole cost and expense, install a meter or meters for the purpose of measuring the electric current consumed in the Premises, using Landlord's designated electrical contractor and/or electrical metering company; and Landlord or an electrical metering company shall, from time to time, furnish Tenant with a statement indicating the appropriate period during which the Usage was measured and the amount of Tenant's Cost payable by Tenant to Landlord for furnishing electrical current. Within ten (10) days after receipt of each such statement, Tenant shall pay to Landlord as Additional Rental hereunder or at Landlord's discretion, to an electrical metering company designated by Landlord, the amount of Tenant's Cost as set forth thereon, plus an amount equal to the actual out-of pocket costs and expenses incurred by Landlord in connection with reading such meters and preparing bills therefor. For the purposes of this subsection, "Usage" shall mean the number of kilowatt hours of electric current consumed in the Premises, as measured by a meter or meters through which the electric current supplied to the Premises is drawn, for each calendar month or such other period as Landlord shall determine during the term of this Lease. "Rate" shall mean the amount per kilowatt hour and demand kilowatt that would be charged by Consolidated Edison Company of New York for Service Class 4, including, without limitation, all applicable surcharges, demand charges, time-of-day charges, energy charges, fuel adjustment charges, rate increases, taxes, and other sums payable in respect thereof. "Tenant's Cost" shall mean an amount equal to the product of (i) the Rate, multiplied by (ii) the Usage, multiplied by (iii) 110%. If any tax is imposed upon Landlord's receipt from the sale or resale of electrical energy or gas or telephone service to Tenant by any Federal, State or Municipal Authority, Tenant covenants and agrees that, where permitted by law, Tenant's pro-rata share of such taxes shall be passed on to, and in included in the bill of, and paid by, Tenant to Landlord. 54.3 Landlord reserves the right to terminate the furnishing of electricity on a submetering basis upon sixty (60) days' written notice to Tenant, in which event, Tenant shall not be released from any liability under this Lease and Tenant may make application directly to the public utility for the Tenant's entire separate supply of electric current and Landlord shall permit its wire and conduits, to the extent available and safely compatible, to be used for such purpose. If Landlord terminates the furnishing of electricity on a submetering basis by reason of law or the requirements of the public utility, any meters, risers or other equipment or connections necessary to enable Tenant to obtain electric current directly from such utility, shall be installed at Tenant's sole cost and expense. If the decision to terminate furnishing electricity on a submetering basis is entirely discretionary on Landlord's part, any meters, risers or other equipment or connections necessary to enable Tenant to obtain electric current directly from the utility shall be installed by Landlord at Landlord's sole cost and expense. Rigid conduits only will be allowed. Landlord, upon the expiration of the aforementioned sixty (60) days' written notice to Tenant, may discontinue furnishing the electric current (but only if the meter for the Premises is installed and connected), but this Lease shall otherwise remain in full force and effect on all of its terms. 54.4 Any meter(s) installed by Tenant pursuant to this Article shall be maintained and repaired by Tenant at Tenant's sole cost and expense. PAGE 15 55. BROKER 55.1 Tenant represents and warrants to Landlord that it neither consulted nor negotiated with any broker or finder with regard to the rental of the Premises from Landlord, other than Julien J. Studley, Inc., and lnsignia/ESG whose commission shall be paid by Landlord pursuant to Landlord's separate agreement with said brokers. Tenant agrees to indemnify and hold Landlord harmless from any damages, liabilities, settlement payments, costs and expenses (including attorneys' fees incurred in defending an action or claim or enforcing this indemnity) suffered, incurred or paid by Landlord by reason of any claim or action for a commission or other compensation by any broker or other entity or person other than Julien J. Studley, Inc. and Insignia/ESG. The provisions of this Article shall survive the expiration or earlier termination of this Lease. 56. BINDING EFFECT It is specifically understood and agreed that this Lease is offered to Tenant for signature by the managing agent of the Building solely in its capacity as such agent and subject to Landlord's acceptance and approval, and that Tenant shall have affixed its signature hereto with the understanding that such act shall not, in any way, bind Landlord or its agent until such time as this Lease shall have been executed by Landlord and delivered to Tenant. 57. LATE FEE In the event that any payment to be made by Tenant hereunder shall become overdue for a period in excess of five (5) days, a "late charge" equal to the lesser of(a) Five Percent (5%) of the overdue payment or (b) the maximum amount allowable by law may be charged by Landlord and shall be payable by Tenant as Additional Rental on the 1st day of the month following Landlord's demand therefor. It is expressly acknowledged and agreed that nothing herein contained shall be deemed or construed as permitting or allowing Tenant to make any payment of Fixed and/or Additional Rental at a time other than when same shall be required to be paid pursuant to the provisions of this Lease. The acceptance of the late charge referred to in this Article shall not in any manner preclude Landlord from enforcing any of its rights contained elsewhere in this Lease. 58. SECURITY 58.1 It is agreed that in the event Tenant defaults under the terms of this Lease beyond the expiration of all grace and notice periods, Landlord may (but shall not be required to) use, apply or return the whole or any part of the security so deposited for any sum Landlord may expend by reason of Tenant's default, or for the payment of any past-due rental. In the event Landlord shall apply all or any portion of Tenant's security in accordance with this lease, Tenant shall promptly deposit with Landlord an amount sufficient to restore such security to the amount set forth in Article 32, subject to Section 58.4 hereof. If Landlord retains or applies all or a portion of Tenant's security deposit as a result of Tenant's default in the payment of Fixed Rental or Additional Rental and Tenant fails to restore the same as aforesaid, Tenant's failure to restore such security deposit shall be deemed to be a default in the payment of Additional Rental, for default in the payment of which Landlord shall have the same remedies as for a default in the payment of Fixed Rental. If Tenant is entitled to the return of the security pursuant to Article 32 above, Landlord shall return any letter of credit within thirty (30) days of the date due and will instruct Landlord's bank to return any cash security within such thirty (30) day period. 58.2 In the event of a sale or lease of the Building, Landlord shall have the right to transfer the security to the purchaser, and, to the extent such funds (or letter of credit, if applicable) are or is actually transferred by Landlord, Landlord shall thereupon be released by Tenant from all liability for the return of such security. 58.3 Tenant agrees that it shall not assign or encumber the funds deposited as security hereunder. PAGE 16 58.4 Provided that Tenant is not in default under the terms of this Lease, the amount of the security deposit held by Landlord shall be reduced to the following amounts on the following dates: (a) January 1, 2005: $1,400,000.00; and (b) January 1, 2008: $1,000,000.00. 58.5 In lieu of depositing cash for the security deposit hereunder, Tenant may upon the execution of this Lease, deposit as security with Landlord, a clean, irrevocable and unconditional letter of credit in the form annexed hereto as Exhibit C, issued by and drawn upon Silicon Valley Bank with an unconditional, conforming corresponding guaranty by Bank of America in a form reasonably satisfactory to Landlord, which letter of credit shall have an initial term of not less than one year, be for the account of Landlord, and initially be in the amount of One Million Eight Hundred Thousand Dollars ($1,800,000.00). If Tenant elects to provide a letter of credit, the letter of credit shall provide that: 58.5.1 The Issuing Bank shall pay to Landlord or its duly authorized representative an amount up to the face amount of the letter of credit upon presentation of the letter of credit and a sight draft in the amount to be drawn, together with a certificate executed by a managing member of Landlord or its managing agent stating that as of the date of such certificate, Tenant is in default under this Lease beyond any applicable period of notice and/or cure and that the amount drawn by Landlord represents funds that are due and payable to Landlord under the Lease; 58.5.2 The letter of credit shall be deemed to be automatically renewed, without amendment (except as provided below with respect to reduction in face amount), for consecutive periods of one year each during the entire term of this Lease (the last such automatic renewal to expire not earlier than a date which is one (I) month after the expiration date of the term of this Lease) unless the Issuing Bank sends written notice (hereinafter called the "Non-Renewal Notice") to Landlord by certified or registered mail, return receipt requested, not less than sixty (60) days next preceding the then expiration date of the letter of credit, that it elects not to have such letter of credit renewed. Bank of America shall issue a corresponding guaranty of each renewal of the letter of credit, failing which, the letter of credit shall be deemed a Non-Renewal for which Landlord shall have the rights under 58.5.3 below; 58.5.3 Landlord, after receipt of the Non-Renewal Notice, shall have the right, exercisable by a sight draft and an affidavit indicating that Tenant is still obligated under the Lease, to receive the moneys represented by the letter of credit; and 58.5.4 Upon Landlord's sale of the Building, or the transfer of Landlord's interest therein, or a leasing of the Building, the letter of credit shall be transferable by Landlord to the purchaser, vendee or transferee, and all expenses of such transfer shall be paid by Tenant. Furthermore, in the event Tenant elects to provide a letter of credit as the security under this Lease, Tenant shall have the right, at any time after the date that Tenant shall have the right to a reduction in the security deposit amount, to substitute for the $1,800,000.00 letter of credit initially deposited hereunder, a letter of credit in the reduced security deposit amount (i.e., on January 1, 2005 a substitute letter of credit in the amount of $1,400,000.00, and on January 1, 2008 a substitute letter of credit in the amount of $1,000,000.00) (which shall in all other respects comply with the provisions of this Section 58.4) and upon receipt thereof by Landlord, Landlord shall surrender to Tenant the letter of credit then being held by the Landlord under this Lease. In the event Tenant desires to substitute cash for the letter of credit, Landlord will accept such cash deposit in lieu of the letter of credit and, upon receipt of such cash deposit, Landlord will return the letter of credit to Tenant, together with such instruments as Tenant may request to release the banking institution from any obligation to maintain such letter of credit in favor of Landlord. Any such cash deposit shall be held and maintained by Landlord in accordance with the provisions of Articles 34 and this Article 58 of this Lease. 58.6 In the event Landlord draws upon the letter of credit when not entitled to under this Lease, Landlord's sole liability to Tenant shall be to return the amount of cash drawn down in simultaneous exchange for a new letter of credit provided by Tenant in the amount drawn down, which otherwise complies with the provisions of this Article. PAGE 17 59. HOLDOVER 59.1 Tenant agrees that it shall indemnify and save Landlord harmless against all cost, claims, loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. Additionally, the parties recognize and agree that other damage to Landlord resulting from any failure by Tenant timely to surrender the Premises will be substantial, will exceed the amount of monthly rent theretofore payable hereunder, and will be impossible of accurate measurement. Tenant therefore agrees that if possession of the Premises is not surrendered to Landlord within one (1) day after the date of the expiration or sooner termination of the term of this Lease, then Tenant will pay Landlord as liquidated damages for each month and for each portion of any month during which Tenant holds over in the Premises after the expiration or termination of the term of this Lease, a sum equal to one-and-one-half (1-1/2) times the average rent and additional rent which was payable per month under this Lease during the last six months of the term thereof. 59.2 The aforesaid obligations shall survive the expiration or sooner termination of this Lease. Nothing contained in this Article shall be construed to mean that Landlord has given permission for Tenant or anyone else who occupies the Premises to remain on in the Premises as a monthly tenant, or as a tenant from month to month, and Landlord may proceed to evict Tenant as a "Holdover." 59.3 Tenant expressly waives, for itself and for any person claiming through or under Tenant, any rights which Tenant or any such person may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules and of any similar or successor law of same import then in force, in connection with any holdover proceedings which Landlord may institute to enforce the provisions of this Lease. 60. APPLICABLE LAW This Lease shall be governed in all respects by the laws of the State of New York. Tenant hereby specifically consents to jurisdiction in the State of New York in any action or proceeding arising out of this Lease and/or the use and occupation of the Premises and waives any right to trial by jury and the right to interpose any counterclaim in any summary proceeding commenced by Landlord. If Tenant at any time after date of execution hereof or during the term hereof shall not be a New York partnership or a New York corporation or a foreign corporation qualified to do business in New York State, Tenant shall designate in writing an agent in New York County for service under the laws of the State of New York for the entry of a personal judgment against Tenant. Tenant, by notice to Landlord, shall have the right to change such agent, provided that at all times there shall be an agent in New York County for service. In the event of any revocation by Tenant of such agency, such revocation shall be void and have no force and effect unless and until a new agent has been designated for service and Landlord notified to such effect. If any such agency designation shall require a filing in the office of the Clerk of the County of New York, same shall be promptly accomplished by Tenant, at its expense, and a certified copy transmitted to Landlord. 61. HAZARDOUS MATERIALS 61.1 Tenant shall not cause or permit any Hazardous Materials (hereinafter defined) to be used, stored, transported, released, handled, produced or installed in, on or from the Premises or the Building. "Hazardous Materials," as used herein, shall mean any flammables, explosives, radioactive materials, hazardous wastes, hazardous and toxic substances or related materials, asbestos or any material containing asbestos, or any other substance or material as defined by any federal, state or local environmental law, ordinance, rule or regulation, including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, and in the regulations adopted and publications promulgated pursuant to each of the foregoing. 61.2 Landlord has not received any written notice of a violation of federal, state or local environmental law against the Premises which is currently outstanding. PAGE 18 62. NOTICES Any notice or demand which, under the terms of this Lease or under any statute, must or may be given or made by the parties hereto, shall be in writing, and shall be given or made by mailing the same by certified mail, return receipt requested, or by nationally recognized overnight delivery service, or by personal delivery, addressed to Tenant, prior to Tenant moving in to the Premises for the operation of its business, at 24 West 40th Street, 14th floor, New York, New York, and thereafter at the Premises, and to Landlord, at The Expansion Group, Inc., 250 West 57th Street, Room 1401, New York, New York 10107, with a copy of any notice to Landlord to be delivered simultaneously in the same manner to Landlord's attorneys, Greenstein Starr Gerstein & Rinaldi LLP, 57 West 38th Street, New York, New York 10018, Attention: Victor Gerstein, Esq. Either party, however, may designate in writing such new or other address to which such notice or demand shall thereafter be so given, made or mailed. Any notice given hereunder shall be deemed delivered on the third (3rd) day after the notice is deposited in a United States General branch post office, maintained by the United States Government in the City of New York, enclosed in a certified, prepaid wrapper addressed as hereinbefore provided, or, if sent by hand or by overnight delivery service, on the date the same is actually delivered. 63. ADDENDUM TO ARTICLE 16 - BANKRUPTCY 63.1 If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. 101 et seq. (the "Bankruptcy Code") to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment, setting forth (i) the name and address of such person, (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including, without limitation, the assurance referred to in Section 365(b)(3) of the Bankruptcy Code, shall be given to Landlord by Tenant not later than ten (10) days after receipt by Tenant, but in no event later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be paid by such person for the assignment of this Lease. 63.2 Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall, upon demand, execute and deliver to Landlord an instrument confirming such assumption. 63.3 Nothing contained in this Article shall, in any way, constitute a waiver of the provisions of this Lease relating to assignment. Tenant shall not, by virtue of this Article, have any further rights relating to assignment other than those granted in the Bankruptcy Code. 63.4 Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purposes of Section 502(b)(7) of the Bankruptcy Code. 63.5 The term "Tenant," as used in this Article, includes any trustee, debtor in possession, receiver, custodian or other similar officer. 64. RENT CONTROL In the event the Fixed Rental or Additional Rental or any part thereof provided to be paid by Tenant under the provisions of this Lease during the demised term shall become uncollectible or shall be reduced or required to be reduced or refunded by virtue of any federal, state, county or city law, order or regulation, or by any direction of a public officer or body pursuant to law, or the orders, rules, code or regulations of any organization or entity formed pursuant to law, whether such organization or entity be public or private, then Landlord, at its option, may at any time thereafter PAGE 19 terminate this Lease by not less than thirty (30) days' written notice to Tenant, on a date set forth in said notice, in which event this Lease and the term hereof shall terminate and come to an end on the date fixed in said notice as if the said date were the Expiration Date. Landlord shall not have the right to so terminate this Lease if Tenant, within such period of thirty (30) days, shall, in writing, lawfully agree that the rentals herein reserved are a reasonable rental and agrees to continue to pay said rentals, and if such agreement by Tenant shall then be legally enforceable by Landlord. 65. REPAIRS 65.1 Notwithstanding anything contained in Articles 3, 4, 6 or elsewhere in this Lease, all repairs and other work which Tenant is required to perform under any provision of this Lease which Tenant fails to perform within applicable grace and notice periods may be performed by Landlord, if Landlord desires, at Tenant's cost, provided, however, that Tenant shall have five (5) days' notice prior to Landlord's undertaking of any non-emergency repair which Landlord intends to undertake. Tenant shall be permitted to perform such non-emergency repair within such five (5) day period. If Tenant fails to perform such work, and Landlord performs same Tenant shall pay the cost of such repairs and other work, as Additional Rental, within ten (10) days after rendition of a statement therefor by Landlord. 65.2 In addition to Tenant's obligations under Article 4, and subject to Landlord's obligations to repair Landlord's Work set forth in Article 45 above, Tenant, at its sole cost and expense, shall take good care of the Premises and all improvements (including the bathrooms, if located within the Premises), and air conditioning equipment installed by Tenant and exclusively serving the Premises, building systems used by Tenant within the Premises, the heating system within the Premises and exclusively serving the Premises, fire and safety systems installed by Tenant and exclusively serving the Premises, and personal property of Tenant located therein or throughout the Building, including, without limitation, all furniture, trade fixtures, machinery, equipment and all other personal property and stock purchased by Tenant or used in connection with the operation of its business at the Premises (all of the foregoing being hereinafter collectively referred to as "Tenant's Property"), and Tenant shall make all necessary repairs to the Premises and/or Tenant's Property in accordance with the provisions contained herein, whether ordinary, extraordinary, foreseen, or unforeseen, unless caused by the negligence or willful misconduct of Landlord, its agents, contractors or employees. 65.3 When used in this Article, the term "repairs" shall include replacements and substitutions of all property when necessary, of a quality, class and value at least equal to the property replaced or substituted. 65.4 Anything contained in this Lease to the contrary notwithstanding, Tenant acknowledges that it shall be Tenant's responsibility to clean, maintain and repair (subject to applicable legal requirements) the interior windows and window frames in the Premises and any and all interior bathrooms within the Premises at Tenant's sole cost and expense, provided however that Tenant shall repair the exterior of the windows, the window frames, and shall replace glass if the repair or replacement is required as a result of the acts of Tenant, its contractors, employees or agents. Tenant shall maintain throughout the term of this Lease, at its sole cost and expense, with a contractor designated by Landlord, an annual window maintenance contract. In the event Landlord elects to clean the windows in the Building, including the windows in the Premises, Tenant shall reimburse to Landlord, as Additional Rental, within thirty (30) days of receipt of a bill, Tenant's Proportionate Share, as defined in Article 47.5 above, of the reasonable cost to Landlord to clean the windows in the Building. 65.5 Nothing contained herein shall obligate Tenant to make any structural repairs to the Premises except if caused by or resulting from the negligence or willful misconduct of Tenant, Tenant's employees, contractors, invitees or licensees. Subject to Landlord's obligations under Section 45.1, Tenant acknowledges that it shall be Tenant's responsibility to repair any leaks in the bathrooms or emanating through the windows in the Premises. The obligation to repair any other leaks in the pipes servicing the Premises shall be that of Landlord, except if the same are caused by or resulting from the carelessness, omission, neglect or improper conduct of Tenant, Tenant's employees, contractors, invitees or licensees. PAGE 20 65.6 Tenant acknowledges that Landlord is installing new windows and bathrooms within the Premises as part of Landlord's Work. On the Termination Date Tenant shall leave the bathrooms and the windows in same condition as Landlord was required to deliver pursuant to Exhibit B. Tenant shall leave the air conditioning units in good working order on the Termination Date. 66. LANDLORD'S SERVICES 66.1 Landlord shall furnish Tenant with the following services: 66.1.1 Non-exclusive passenger elevator service during regular hours (that is, between the hours of 8:00 a.m. and 6:00 p.m.) of business days (which term is used to mean all days except Saturdays, Sundays, those days that are observed by the State or Federal governments as legal holidays, and those days designated as holidays by the applicable building service union employees' contract) through the year ("Regular Hours"). At all other times, Landlord shall have one elevator subject to call for Tenant's non-exclusive use. Landlord shall have the right in its sole discretion, to designate certain passenger elevators in the Building for nonexclusive use by Tenant and to restrict Tenants use of other passenger elevators in the Building. 66.1.2 Non-exclusive freight elevator service during Regular Hours (that is, between the hours of 9:00 a.m. and 5:00 p.m.) of business days (which term is used to mean all days except Saturdays, Sundays, those days that are observed by the State or Federal governments as legal holidays, and those days designated as holidays by the applicable building service union employees contract) through the year ("Regular Hours"). Use of the freight elevator at times other than Regular Hours shall be arranged by Tenant on not less than twenty-four (24) hours prior notice and shall be provided by Landlord to the extent that no conflict exists with other tenants or other parties requesting such usage (all such conflicts to be resolved by Landlord, in Landlord's sole discretion) and Tenant shall reimburse Landlord for all actual costs relating thereto. If Tenant's initial occupancy or relocation into or out of the Building requires the use of the freight elevator or other standard services at times other than Regular Hours, Tenant shall reimburse Landlord for all costs relating to such elevator usage or other services. Throughout the term of this Lease, Landlord, in its sole discretion shall have the right to designate Tenant's freight elevator use to those elevators on the east or west side of the Building. Until otherwise notified by Landlord in its sole discretion, Tenant may only use the freight elevators located on the west side of the Building. 66.2 Landlord shall not be obligated to install any security system or employ any security personnel in the Building. 66.3 All waste and garbage shall be removed from the Premises to the outside of the Building, at Tenant's sole cost and expense, on a daily basis between the hours of 7:00 p.m. and 8:00 a.m. (or other hours reasonably designated by Landlord), by a private sanitation company independently contracted for and paid for by Tenant. Tenant shall not store any garbage, cartons or inventory outside of the Premises. Tenant covenants and agrees, at its sole cost and expense, to comply with all present and future laws, orders and regulations of all state, federal, municipal and local governmental, departments, commissions and boards regarding the collection, sorting, separation and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as provided by law. To the extent Landlord incurs any costs in connection with Tenant's failure to comply with its waste and garbage removal obligations, Tenant shall reimburse same to Landlord as Additional Rent. 66.4 Landlord reserves the right, without any liability to Tenant and without being deemed a constructive eviction or giving rise to any rental abatement, to stop operating any of the heating, ventilating, electric, sanitary, elevator, or other Building systems serving the Premises, and to stop the rendition of any of the other services required of Landlord under this Lease, whenever and for so long as may be necessary by reason of Year 2000 computer programming, accidents, emergencies, strikes, or the making of emergency repairs or changes that Landlord is required by this Lease or by law to make or deems necessary, or by reason of difficulty in securing proper supplies of fuel, steam, water, electricity, labor, or supplies, or any other reason. Notwithstanding anything to the contrary contained in this Article 66.4, should there be a total lack of services provided by Landlord to either or both floors of the Premises pursuant to the terms of this Lease which causes Tenant to be unable to conduct its business in such floor, and should the total lack of services and PAGE 21 the inability to conduct business continue for a period in excess of ten (10) consecutive days (if the lack of services is caused by something within the reasonable control of Landlord) or fifteen (15) consecutive days (if the lack of services is caused by force majeure), Tenant shall be entitled to a per diem rent abatement from the first day onward until the services are restored. Tenant's agrees that it shall have no action against Landlord in law or in equity and that Tenant's sole remedy shall be a per diem rent abatement. The per diem rent abatement shall be computed by dividing the then current monthly rent by thirty (30). Landlord shall, when possible, notify Tenant at the Premises of any anticipated interruption in services to be provided by Landlord. 66.5 If Landlord has failed to make any repair to the Premises required by Landlord under the terms of this Lease and such failure continues for ten (10) consecutive days after written notice by Tenant to Landlord and provided that Landlord has not otherwise commenced the repair or diligently attempted to provide such service within said ten (10) days and diligently proceed to completion thereafter, Tenant may make the repair and offset the actual cost of the repair against the next occurring installments of Fixed and Additional Rental. 67. TENANT'S ALTERATIONS 67.1 Tenant may, without the consent of Landlord, from time to time during the term of this lease and at Tenant's sole expense, make such alterations, additions, installations, substitutions, improvements and decorations (hereinafter collectively called changes and, as applied to changes provided for in this Article, Tenant's Changes) in and to the Premises, the estimated aggregate cost of which does not exceed $50,000.00 as Tenant may desire, on the following conditions: 67.1.1 the outside appearance or strength of the Building, or of any of its structural parts, shall not be affected; 67.1.2 no part of the Building outside of the Premises shall be physically affected; and 67.1.3 the proper functioning of any of the mechanical, electrical, sanitary and other service systems of the Building and/or the Premises shall not be adversely affected, and the usage of such systems by Tenant shall not be increased. 67.2 Before proceeding with any change either costing in excess of $50,000.00 (exclusive of the costs of decorating work and of any architect's and engineer's fees), or involving any change to the mechanical, electrical, sanitary, HVAC and/or other service systems, irrespective of cost, Tenant shall submit to Landlord, for Landlord's prior approval, which shall not be unreasonably withheld, delayed or conditioned, plans and specifications for the work to be done, drawn by a registered architect or duly licensed engineer. Notwithstanding the foregoing, Landlord shall not be obligated to consent to any alteration contemplated by the prohibitions described in Sections 67.1, 67.1.2 or 67.1.3. Without limiting the generality of the foregoing, Tenant shall cause to be prepared all drawings, plans and specifications, and all other reports, applications and materials, required by the Department of Buildings of the City of New York, the Department of Labor and any other governmental authorities having jurisdiction with respect to Tenant's Changes and any permits and special licenses which may be required for or in connection with Tenant's Changes or the permitted use. Any and all filings of such drawings, plans, specifications, reports, applications and other materials with the Department of Buildings of the City of New York, the Department of Labor and any other governmental authorities having jurisdiction shall be made solely by Tenant at Tenant's sole cost and expense. Landlord shall reasonably cooperate with Tenant in connection with the execution and delivery of documents necessary to obtain work permits. Nothing herein shall be deemed to, or operate to create any liability or other obligation on the part of Landlord in the event that any such filings shall not be approved by the Department of Buildings of the City of New York or any other governmental authority having jurisdiction. Landlord may, as a condition of its consent, require Tenant to reimburse Landlord for Landlord's reasonable out-of-pocket cost for all professionals engaged by Landlord to review the plans and specifications and make revisions in and to the plans and specifications, which professionals shall include, but not be limited to, architects and engineers. PAGE 22 67.3 Tenant shall, at its expense, obtain all necessary governmental licenses, equipment use permits, permits and certificates for the commencement and prosecution of Tenant's Changes, and, upon completion, obtain all necessary signoffs and certificates of acceptance and completion which may be required from such governmental authorities, and Tenant shall cause Tenant's Changes to be performed in compliance with such licenses, permits and certificates, as well as with all applicable laws, codes, ordinances, regulations and requirements of public authorities and all applicable standards and requirements of insurance bodies, the New York Board of Fire Underwriters, the National Electric Code, the Occupational Safety and Health Administration, the American Society of Heating, Refrigeration and Air Conditioning Engineers, I.S.O., and any similar or successor bodies thereto, in a good and workmanlike manner, using new materials and equipment of a quality and class at least equal to the original installations in the Premises. Tenant shall deliver to Landlord promptly upon acceptance by the New York City Buildings Department, the original, signed perforated plans from the City of New York Department of Buildings. Tenant's Changes shall be performed in such a manner as not to unreasonably interfere with or delay, and so as not to impose any additional expense upon Landlord in the maintenance or operation of the Premises, and so as not to interfere with the safety, use, occupancy, comfort or quiet enjoyment of any other tenant or occupant of the Building. If any tenant of the Building complains, or if Landlord in its sole discretion deems it necessary to avoid interference with the use, safety, occupancy, comfort, or quiet enjoyment of other tenants or occupants of the Building, Tenant shall perform such work at times and on days designated by Landlord in its sole discretion, at Tenant's sole cost and expense. If Landlord incurs any costs or expenses in connection with the performance of Tenant's Changes, Tenant shall reimburse Landlord for the actual costs and expenses incurred by Landlord. Throughout the performance of Tenant's Changes and Initial Installations, Tenant shall, at its expense, carry, or cause to be carried, builder's risk insurance, insuring against loss from fire, vandalism or other risks as are customarily covered by a broad-form extended coverage endorsement on a completed value basis for the full insurable value at all times, workers' compensation insurance in statutory limits, and general liability insurance for any occurrence in or about the Building, all as set forth in, and written by insurance companies described in, Article 53 hereof. All such insurance policies (other than the workers' compensation) shall name Landlord and its agents as additional parties insured. The general liability insurance shall be in a combined single limit with respect to each occurrence of not less than $5,000,000 (issued on an "occurrence" basis and not a "claims made" basis) and shall insure against claims for personal injury, death and/or third-party property damage occurring in or about the Premises or the Building, and under which the insurer agrees to waive any right of recovery such insurer may have had against Landlord, Landlord's employees and managing agent, and any mortgagees or lessors having an interest in the Building and to indemnify, defend and hold Landlord harmless from and against, among other things, all cost, expense and/or liability (including, without limitation, attorneys' fees) arising out of or based upon any and all claims, accidents, injuries and damages occurring in, on or about the Premises (whether or not such claims, accidents, injuries and damages occurred as a result of Landlord's negligence). All insurance shall be placed with insurers meeting the standards set forth in Article 53 above. Tenant shall furnish Landlord with satisfactory evidence that such insurance is in effect at or before the commencement of Tenant's Changes. Tenant shall not cause damage to the Building, building systems or any personal property of Landlord or any other tenant or occupant of the Building, and in the event of any such damage will promptly repair any such damage to Landlord's reasonable satisfaction. Tenant shall cover and otherwise protect the windows in the Premises. If any of Tenant's Changes shall involve the permanent removal of any fixtures, equipment, or other property in the Premises that are not Tenant's property, such fixtures, equipment, or other property shall be, upon Landlord's request, stored and preserved, and returned to Landlord upon the expiration or sooner termination of this Lease. All electrical and plumbing work in connection with Tenant's Changes shall be performed by contractors licensed therefor by all governmental agencies having or asserting jurisdiction. 67.4 Subject to Section 46.6, for the purposes of this Article 68 and Article 46 above, Tenant shall obtain Landlord's prior approval of general contractors and subcontractors, and electrical engineers and plumbers performing work at the Premises. Landlord's approval of, or the requirement to use, any contractor or subcontractor is not an endorsement of the work of such contractor or subcontractor nor a representation or warranty of any kind. 67.5 Tenant, at its sole cost and expense, shall: (i) furnish evidence reasonably satisfactory to Landlord that all of Tenant's Changes have been completed and paid for in full and that any and PAGE 23 all liens therefor that have been or might be filed have been discharged of record (by payment, bond, order of a court of competent jurisdiction, or otherwise) or waived, and that no security interests relating thereto are outstanding; (ii) pay Landlord for the cost of any Tenant's Changes done for Tenant by Landlord at Tenant's written request, and all other charges due hereunder; (iii) to the extent not previously provided, furnish to Landlord the insurance certificates required by this Lease; and (iv) if an architect has been used, furnish an affidavit in the form recommended by the American Institute of Architects from Tenant's registered architect certifying that all work performed in the Premises is substantially in accordance with the plans and specifications. 67.6 Tenant shall, at its expense and with diligence and dispatch, procure the cancellation or discharge of all notices of violation arising from, or otherwise connected with, Tenant's Changes that shall be issued by the Department of Buildings of the City of New York or any other public or quasi-public authority having or asserting jurisdiction, unless caused by Landlord, its agents, contractors or employees. Tenant shall defend, indemnify and save Landlord harmless from and against any and all notices of violation and mechanic's and other liens filed in connection with Tenant's Changes, including the liens of any security interest in, conditional sales of, or chattel mortgages upon, any materials, fixtures, or articles so installed in and constituting part of the Premises, and against all costs, expenses and liabilities incurred in connection with any such lien, security interest, conditional sale, or chattel mortgage or any action or proceeding brought thereon, unless caused by Landlord, its agents, contractors or employees. Tenant, at its expense, shall procure the satisfaction or discharge of, by bonding, payment or otherwise, all such liens within ten (10) business days after Landlord makes written demand therefor. Notice is hereby given that neither Landlord, Landlord's agents, nor any mortgagee shall be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and that no mechanic's or other lien for such labor or materials shall attach to or affect any estate or interest of Landlord, or any mortgagee in and to the Premises or the Building. Tenant may finance the acquisition of its furnishings, fixtures and equipment, provided, however, that no lien securing such financing shall be placed upon this Lease or any part of the Premises, Land or Building, nor shall this Lease be assigned as collateral for the financing and any person or entity providing the financing agrees, among other things, to remove any item from the Premises secured by its lien immediately upon Landlord's termination of this Lease. 67.7 Tenant agrees that the exercise of its rights pursuant to the provisions of this Article or Article 45.8 shall not be done in a manner that would: (a) create any work stoppage, picketing, labor disruption, or dispute; or (b) violate the Building's union contracts affecting the Land and/or Building or Landlord's union and/or service contracts, if any, affecting the Premises. In the event of the occurrence of any condition described above arising from Tenant's exercise of any of its rights pursuant to the provisions of this subparagraph 67.7, Tenant shall, irrespective of whether Landlord approved the contractor or use of non-union labor, immediately upon notice from Landlord, cease the manner of exercise of such right giving rise to such condition. In the event that Tenant fails to cease such manner of exercise of its rights as aforesaid, Landlord, in addition to any rights available to it under this lease and pursuant to law, shall have the right to seek an injunction and deem it a default under the terms of this Lease. 67.8 Any approval or consent by Landlord shall in no way obligate Landlord in any manner whatsoever in respect to the finished product designed and/or constructed by Tenant, nor be deemed a representation of warranty of Landlord as to the adequacy or sufficiency of any matter approved or consented to for Tenant's purposes or otherwise. Any deficiency in design or construction, although approved by Landlord, shall be solely the responsibility of Tenant. 67.9 Landlord shall have the right to inspect Tenant's Work at any reasonable time upon notice to verify compliance by Tenant with the provisions of this Article. 68. SUBORDINATION AND ATTORNMENT 68.1 This Lease and all rights of Tenant hereunder are, and shall be, subject and subordinate to: (i) all present and future ground leases, operating leases, superior leases, underlying leases and grants of term of the land on which the Building stands ("Land") and the Building or any portion thereof (collectively, including the applicable items set forth in subdivision (iv) below, the "Superior Lease"); (ii) all mortgages and building loan agreements, including leasehold mortgages PAGE 24 and spreader and consolidation agreements, which may hereafter affect the Land, the Building or the Superior Lease (collectively, including the applicable items set forth in subdivision (iii) and (iv), the "Superior Mortgage") whether or not the Superior Mortgage shall also cover other lands or buildings or leases, except that a mortgage on the Land only shall not be a Superior Mortgage so long as there is in effect a Superior Lease which is not subordinate to such mortgage; (iii) each advance made or to be made under the Superior Mortgage; and (iv) all amendments, modifications, supplements, renewals, substitutions, refinancings and extensions of the Superior Lease and the Superior Mortgage and all spreaders and consolidations of the Superior Mortgage. The provisions of this Article shall be self-operative and no further instrument of subordination shall be required. Tenant shall promptly execute and deliver, at its own expense, any instrument, in recordable form, if reasonably requested, that Landlord, the Superior Lessor or the Superior Mortgagee may reasonably request at any time and from time to time to evidence such subordination. The Superior Mortgagee may elect that this Lease shall be deemed to have priority over such Superior Mortgage, whether this Lease is dated prior to, or subsequent to, the date of such Superior Mortgage. 68.2 Notwithstanding the provisions of Section 68.1 above, this Lease shall not be subordinate to any Superior Mortgage which may hereafter affect the Land and/or the Building unless Landlord shall have obtained from the holder of any such Superior Mortgage an agreement (a "Non-Disturbance Agreement") in recordable form between the holder of the Superior Mortgage and Tenant providing in substance that so long as Tenant shall not be in default under this Lease beyond any period of time given to Tenant to cure such default, that the holder of such Superior Mortgage shall not name or join Tenant as a party defendant or otherwise in any suit, proceeding or action to enforce, nor will this Lease be terminated by enforcement of any rights given to such holder of the Superior Mortgage or its successors or assigns pursuant to the terms, covenants or conditions contained in the Superior Mortgage (including the foreclosure of the same) or otherwise disturb the right of Tenant to the quiet enjoyment of the Premises in the event of the enforcement of the terms of the Superior Mortgage by such holder (including the foreclosure of the same); except that to the extent required by law, Tenant may be named in such proceeding so long as the relief requested does not contravene the provisions of this Section. Tenant shall join in any reasonable agreement issued by the holder of the Superior Mortgage to evidence its agreement and consent thereto, provided that any such Non-Disturbance Agreement shall not increase the obligations or reduce the rights of Tenant under this Lease or increase the rights or reduce the obligations of Landlord under this Lease. In connection with Landlord's attempts to obtain a Non-Disturbance Agreement, Landlord shall in no event be required to (x) make any payment to the holder of any Superior Mortgage or incur any expense in connection with such holder's review of this Lease and the preparation of such agreement, or (y) alter any of the terms of any existing or future Superior Mortgage, or (z) commence any action against any holder of a Superior Mortgage. Tenant shall pay Landlord, as Additional Rental, any fees incurred by Landlord in connection with obtaining the Non-Disturbance Agreement. 68.3 Landlord hereby notifies Tenant that Landlord may enter into a Superior Mortgage whereby this Lease may not be cancelled or surrendered, or modified or amended so as to reduce the Rentals, shorten the term or adversely affect in any other respect, to any material extent, the rights of Landlord hereunder, and that Landlord may not accept prepayments of any installments of Fixed Rental or Additional Rental except for prepayments in the nature of security for the performance of Tenant's obligations hereunder without the consent of any Superior Lessor or Superior Mortgagee in each instance, except that said consent shall not be required for the prosecution of any action or proceedings against Tenant by reason of a default on the part of Tenant under the terms of this Lease. 68.4 If, at any time prior to the termination of this Lease, any Superior Lessor or Superior Mortgagee or any other person or the successors or assigns of the foregoing (collectively referred to as "Successor Landlord") shall succeed to the rights of Landlord under this Lease, Tenant agrees, at the election and upon request of any such Successor Landlord, to fully and completely attorn to and recognize any such Successor Landlord, as Tenant's Landlord under this Lease upon the then executory terms of this Lease, provided such Successor Landlord shall agree in writing to accept Tenant's attornment. The foregoing provisions of this subparagraph shall inure to the benefit of any such Successor Landlord, shall apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of the Superior Lease, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. Upon the request of any such Successor Landlord, Tenant shall execute and deliver, from time to time, instruments PAGE 25 reasonably satisfactory to any such Successor Landlord in recordable form, if requested, to evidence and confirm the foregoing provisions of this subparagraph, acknowledging such attornment and setting forth the terms and conditions of its tenancy. Upon such attornment this Lease shall continue in full force and effect as a direct Lease between such Successor Landlord and Tenant upon all of the then executory terms of this Lease except that such Successor Landlord shall not be: (i) liable for any previous act or omission or negligence of Landlord under this Lease; (ii) subject to any counterclaim, defense or offset, not expressly provided for in this Lease and asserted with reasonable promptness, which theretofore shall have accrued to Tenant against Landlord; (iii) bound by any previous modification or amendment of this Lease made after the granting of such senior interest, or by any previous prepayment of more than one month's Fixed Rental or Additional Rental, unless such modification or prepayment shall have been approved in writing by any Superior Lessor or Superior Mortgagee through or by reason of which the Successor Landlord shall have succeeded to the rights of Landlord under this Lease; (iv) obligated to repair the Premises or the Building or any part thereof, in the event of total or substantial damage beyond such repair as can reasonably be completed with the net proceeds of insurance actually made available to Successor Landlord, provided all insurance to be maintained by the Landlord hereunder is thus maintained; or (v) obligated to repair the Premises or the Building or any part thereof, in the event of partial condemnation beyond such repair as can reasonably be completed with the net proceeds of any award actually made available to Successor Landlord, or consequential damages allocable to the part of the Premises or the Building not taken. Nothing contained in this subparagraph shall be construed to impair any right otherwise exercisable by any such Successor Landlord. 68.5 If any act or omission by Landlord would give Tenant the right, immediately or after lapse of time, to cancel or terminate this Lease or to claim a partial or total eviction, Tenant will not exercise any such right until (i) it has given written notice of such act or omission to each Superior Mortgagee and each Superior Lessor, whose name and address shall have previously been furnished in writing to Tenant, by delivering notice of such act of omission addressed to each such party at its last address so furnished, and (ii) a ten (10) day period for remedying such act or omission shall have elapsed following such giving of notice and following the time when such Superior Mortgagee or Superior Lessor shall have become entitled under such superior Lease or Superior Mortgage, as the case may be, to remedy the same (which shall in no event be less than the period to which Landlord would be entitled under this Lease to effect such remedy) provided such Superior Mortgagee or Superior Lessor shall, with reasonable diligence, give Tenant notice of its intention to remedy such act or omission and shall commence and continue to act upon such intention. 68.6 Landlord represents that there is not currently a Superior Mortgage or Superior Lease affecting the Land. 69. MISCELLANEOUS 69.1 Tenant hereby agrees to pay, as Additional Rental, all attorneys' fees and disbursements (and all other court costs or expenses of legal proceedings) which Landlord may incur or pay out by reason of, or in connection with: 69.1.1 Any action or proceeding by Landlord to terminate this Lease where Landlord obtains a final, unappealable judgment against Tenant; 69.1.2 Any other action or proceeding by Landlord against Tenant (including, but not limited to, any arbitration proceeding, nonpayment proceeding, or other summary or plenary action) where Landlord obtains a final, unappealable judgment against Tenant; and 69.1.3 Any action or proceeding brought by Tenant against Landlord (or any officer, partner or employee of Landlord) in which Tenant fails to secure a final unappealable judgment against Landlord. Tenant's obligations under this Paragraph shall survive the expiration of the term hereof or any other termination of this Lease. This Paragraph is intended to supplement, and not to limit, other provisions of this Lease pertaining to indemnities and/or attorneys' fees. PAGE 26 69.2 Whenever Tenant shall submit to Landlord any plan, agreement or other document for Landlord's review, approval or consent, including, but not limited to, those with regard to the alteration or sublet of the Premises or the assignment of this Lease, Tenant shall pay the reasonable fees and expenses of any of Landlord's professionals retained in connection therewith. Notwithstanding the foregoing, Tenant shall not be obligated to pay any fees or expenses in connection with the review of Tenant's plans for Tenant's Initial Installations. 69.3 If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 69.4 No agreement to accept a surrender of all or any part of the Premises shall be valid unless in writing and signed by Landlord. The delivery of keys to an employee of Landlord or of its agent shall not operate as a termination of this Lease or a surrender of the Premises. If Tenant shall, at any time, request Landlord to sublet the Premises for Tenant's account, Landlord or its agent is authorized to receive said keys for such purposes without releasing Tenant from any of its obligations under this Lease, and Tenant hereby releases Landlord from any liability for loss or damage to any of Tenant's property in connection with such subletting. 69.5 The receipt by Landlord of rent with knowledge of breach of any obligation of this Lease shall not be deemed a waiver of such breach. 69.6 No payment by Tenant, or receipt by Landlord, of a lesser amount than the correct Fixed Rental or Additional Rental due hereunder shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or at law provided. 69.7 The terms "person" and "persons" as used in this Lease shall be deemed to include natural persons, firms, corporations, associations and any other private or public entities. 69.8 If Tenant is in arrears in the payment of Fixed Rental or Additional Rental, Tenant waives its right, if any, to designate the items in arrears against which any payments made by Tenant are to be credited, and Landlord may apply any of such payments to any such items in arrears as Landlord, in its sole discretion, shall determine, irrespective of any designation or request by Tenant as to the items against which any such payments shall be credited. 69.9 The terms "Owner" and "Landlord" as used in this Lease are interchangeable. The terms "Article" and "Paragraph" as used in this Lease are interchangeable. 69.10 If Tenant is a corporation, the person executing this Lease on behalf of Tenant hereby covenants, represents and warrants that Tenant is duly incorporated and is authorized to do business in New York State and that the person executing this Lease on behalf of Tenant is an officer of the corporation authorized to execute this Lease. Landlord hereby represents that the person executing this Lease on behalf of Landlord is authorized to do so. 69.11 If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business in the demised premises, or any part thereof, and if failure to secure such license or permit would in any way adversely affect Landlord, Tenant, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same to inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit. 69.12 Landlord may install and maintain the Building Systems' pipes, conduits and wiring along the ceiling of the Premises, or, wherever possible, above any drop ceiling installed by Tenant. 69.13 Tenant shall not bring into the Building or the Premises any type of motorcycle or vehicle. Bicycles may be brought into the Premises through the freight elevator. PAGE 27 69.14 Tenant agrees that Landlord shall have the right to prohibit the continued use by Tenant of any method of business operation, advertising or interior display visible from the exterior of the Premises if the continued use thereof would impair the reputation of the building, and upon notice from Landlord, Tenant shall forthwith refrain from or discontinue such activities. Landlord acknowledges that the use permitted under Article 2 does not violate the requirements of this subsection. 69.15 If Landlord or Landlord's managing or rental agent accepts from Tenant one or more keys to the Premises in order to assist Tenant in showing the Premises for subletting or other disposition or for performance of work therein for Tenant, or for any other purpose, the acceptance of such key or keys shall not constitute an acceptance of a surrender of the Premises nor a waiver of any of Landlord's rights or Tenant's obligations under this Lease, including, without limitation, the provisions relating to assignment and subletting and the condition of the Premises. 69.16 It is specifically understood and agreed by and between the parties hereto that this Lease is the result of extensive negotiations between the parties. It is understood and agreed that both parties shall be deemed to have drawn this Lease in order to avoid any negative inference by any court as against the preparer of the document. 69.17 Notwithstanding anything contained in this Lease to the contrary, wherever any reference is made to Owner serving any notice upon Tenant under this Lease, any notice served by Owner's agent or attorney shall be deemed as if such notice was served by Owner. 69.18 In connection with any work Landlord is required to do in the Building, Landlord may have access to the Premises, without notice, during Regular Hours, as defined in Article 66 above, and at other times on reasonable notice. Tenant shall take all reasonable actions to protect its property at its sole cost and expense while Landlord is performing work in or about the Premises. 69.19 Tenant shall not permit any animals in the Building other than seeing-eye dogs. Tenant shall not allow hand trucks or carriages in the lobby of the Building, or permits boxes or other items to be delivered through the lobby of the Building. All messengers are to use the west freight elevator unless otherwise instructed by Landlord. 69.20 Tenant shall not place any sign or other thing in or on the windows of the Premises. 69.21 Included in the tenancy created by this Lease is the right of access to the Premises through a lobby in the Building and elevators in the Building. Tenant acknowledges that Landlord shall be performing renovations to the lobby and elevators in the Building, and that during such renovations, Tenant may have to use alternate entrances and elevators to the Premises. 70. LEASE NOT BINDING UNLESS EXECUTED Submission by Landlord of this Lease for execution by Tenant shall confer no rights nor impose any obligations on either party unless and until (i) Tenant shall have submitted to Landlord (a) at least four copies of this Lease to Landlord, duly executed by or on behalf of Tenant (and in the case that Tenant is a corporation, Tenant shall submit to Landlord a duly executed resolution of Tenant's board of directors authorizing this Lease), (b) separate checks payable to the direct order of Landlord on a bank account in Tenant's name in the amount of the first monthly installment of Fixed Rental payable upon the execution of this Lease and the security deposit, (c) a certificate of insurance in form required in this Lease and (d) any other deliveries specifically called for under this Lease to be submitted to Landlord on or prior to the commencement date of the Term and (ii) Landlord shall have countersigned this Lease and duplicate originals thereof shall have been delivered by Landlord to Tenant. In the event Landlord countersigns and delivers this Lease to Tenant at a time when any of the aforementioned deliveries have not been received by Landlord or are not in proper form, this Lease shall be effective, but Tenant shall remain obligated to provide such deliveries, the same not being waived by Landlord, unless Landlord specifically waives receipt of the same in writing. PAGE 28 71. SUBMISSION TO JURISDICTION This Lease shall be deemed to have been made in New York County, City and State of New York, and shall be construed in accordance with the laws of the State of New York. All actions or proceedings relating, directly or indirectly, to this Lease shall be litigated only in courts located within the County of New York. Tenant, and its successors and assigns, hereby subject themselves to the jurisdiction of any state or federal court located within such county, waive personal service of any process upon them in any action or proceeding therein, and consent that such process be served by certified or registered mail, directed to the Tenant and any successor at Tenant's address at the Premises, and to any assignee at the address set forth in the instrument of assignment. Such service shall be deemed made three (3) days after such process is so mailed. 72. QUALIFICATIONS AS TO USE Tenant shall not suffer or permit the Premises or any part thereof to be used in any manner or anything to be done therein, or suffer or permit anything to be brought into or kept therein, which would in any way, (i) violate any of the provisions of any Superior Mortgage or Superior Lease, or the requirements of public authorities, (ii) make void or voidable any fire or liability insurance policy then in force with respect to the Building; (iii) make unobtainable from reputable insurance companies authorized to do business in the State of New York any fire insurance with extended coverage, or liability, elevator, boiler, or other insurance required to be furnished by Landlord under the terms of any Superior Mortgage or Superior Lease at standard rates, if obtainable at such rates prior to the execution and delivery of this Lease; (iv) cause physical damage to the Building or any part thereof (v) constitute a public or private nuisance or otherwise violate any law relating to the protection of the environment or requiring manufacture, treatment or disposal of any material used by Tenant at the Premises in any particular manner; (vi) impair, in the sole opinion of Landlord, the appearance, character or reputation of the Building; (vii) discharge objectionable fumes, vapors or odors into the Building air conditioning system or into the Building flues or vents not designed to receive them or otherwise in a manner as may offend other tenants or occupants of the Building; (viii) impair or interfere with any of the Building services or the proper and economic heating, cleaning, air conditioning or other servicing of the Building or the Premises, or impair or interfere with the use of any of the other areas of the Building by, or occasion discomfort, annoyance or inconvenience to, Landlord or any of the other tenants or occupants of the Building, any such impairment or interference to be in the sole judgment of Landlord; (ix) violate any provision of law pursuant to which Landlord may incur civil or criminal liability as a result of Tenant's action, including, without limitation, civil or criminal forfeiture, padlocking or other restraint of the Premises or the Building by governmental authority; (x) increase the pedestrian traffic in and out of the Premises and/or the Building above an ordinary level or (xi) engage in the sale of any product from the Premises or the Building in violation of 15 U.S.C.A. Section 1051 et seq. or any similar federal or state law. Landlord shall not be liable for the violation by any tenant or other party of the rules and regulations of the Building or for such other party's breach of its lease. 73. PARTNERSHIP TENANT If Tenant is a partnership (or is comprised of two [2] or more persons, individually and as co-partners of a partnership), or if Tenant's interest in this Lease shall be assigned to a partnership (or to two [2] or more persons, individually and as co-partners of a partnership) pursuant to Article 50 (any such partnership and such persons are referred to in this Article as "Partnership Tenant"), the following provisions of this Article shall apply to such Partnership Tenant: (i) the liability of each of the parties comprising Partnership Tenant shall be joint and several, and (ii) each of the parties comprising Partnership Tenant hereby consents in advance to, and agrees to be bound by, any written instrument which may hereafter be executed, changing, modifying or discharging this Lease, in whole or in part, or surrendering all or any part of the Premises to Landlord, and by any notices, demands, requests or other communications which may hereafter be given by Partnership Tenant or by any of the parties comprising Partnership Tenant, and (iii) any bills, statements, notices, demands, requests or other communications given or rendered to Partnership Tenant and all such parties shall be binding upon Partnership Tenant and all such parties, and (iv) if Partnership Tenant shall admit new partners, all of such new partners shall, by their admission to Partnership Tenant, be deemed to have assumed performance of all of the terms, covenants and conditions of this Lease on Tenant's PAGE 29 part to be observed and performed, and (v) Partnership Tenant shall give prompt notice to Landlord of the admission of any such new partners, and upon demand of Landlord, shall cause each such new partner to execute and deliver to Landlord an agreement in form satisfactory to Landlord, wherein each such new partner shall assume performance of all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed (but neither Landlord's failure to request any such agreement nor the failure of any such new partner to execute or deliver any such agreement to Landlord shall vitiate the provisions of subdivision (iv) of this Article). 74. CERTIFICATE OF OCCUPANCY AND COMPLIANCE WITH LAWS 74.1 Tenant shall not at any time use or occupy the Premises in violation of the Certificate of Occupancy issued for the Premises or for the Building as same may be amended by Landlord, provided such Certificate of Occupancy (or amendment thereto) permits the uses under Article 2 of this Lease, and in the event that any department of the City or State of New York shall hereafter at any time contend and/or declare by notice, violation, order or in any other manner whatsoever that the Premises are used for a purpose which is a violation of such amended Certificate of Occupancy, Tenant shall, upon five (5) days' written notice from Landlord, immediately discontinue such use of the Premises. Failure by Tenant to discontinue such use after such notice shall be considered a default in the fulfillment of a covenant of this Lease, and Landlord shall have the right to terminate this Lease immediately, and in addition thereto shall have the right to exercise any and all rights and privileges and remedies given to Landlord by and pursuant to the provisions of Articles 17 and 18 hereof. 74.2 On or before February 1, 2000, Landlord shall submit to the New York City Department of Buildings an Alteration Type I application (the "Alt I Application") for a change in the Building's Certificate of Occupancy which would permit Tenant to use and occupy the 8th and 9th floors of the Building for the purposes permitted under Article 2 above. In the event a violation is issued against Tenant for occupying the Premises for the purposes permitted under Article 2 above, and the issuance of the violation is not as a result of the acts or omissions of Tenant, Landlord shall pay all fines levied in connection with the violation, provided that Tenant gives Landlord prompt notice of the violation and cooperates with Landlord in the removal of the violation. 74.3 If the City of New York or any appropriate governmental agency issues a cease and desist or a vacate order ("Order") precluding Tenant from operating its business in the Premises for the use set forth in Article 2 (the "Intended Use"), or denies the Alt I Application, then, provided Tenant is not in default under this Lease, Landlord, at its expense, shall contest the Order and, if necessary, modify or amend the Alt I Application then pending. If Landlord is unsuccessful in its efforts set forth in the preceding sentence and, solely as a result of the issuance of the Order, Tenant is required to vacate the Premises, Tenant shall have no remedies against Landlord at law or in equity except that Tenant shall have the right to cancel this Lease, and all Fixed and Additional Rentals shall abate from the date on which Tenant vacates the Premises and delivers same to Landlord vacant and otherwise in accordance with Tenant's obligations under this lease, and neither party shall have any further liability or obligation hereunder or by reason hereof, except that Tenant shall remain liable under Article 59 above if Tenant fails to timely vacate the Premises. 74.4 Tenant acknowledges and agrees that it shall be Tenant's responsibility and obligation to comply with all requirements and controls imposed by and of the City of New York, as well as with any and all other now or hereafter existing laws, rules and regulations, as the same now or hereafter may be amended, of the City of New York or any governmental or quasi-governmental agency or department having jurisdiction over the building, with respect to the demised premises only, including, but not limited to, the partitioning, layout, exit signs, telephone communications, fire extinguishers, pressurization, HVAC systems, electrical systems, wiring, conduits, emergency lighting, all systems - -- mechanical or otherwise -- and toilets within the Premises. Tenant further acknowledges and agrees that if Landlord shall perform Tenant's installations or alteration work for Tenant pursuant to any work letter agreement or pursuant to Tenant's request, Landlord's sole responsibility with respect thereto shall be limited to the workmanlike manner of such installation or alteration, and Tenant shall be responsible for the legality of any such installation or alteration, i.e., the drawing of plans in compliance with law and the obtaining of all permits relating thereto, PAGE 30 including, but not limited to, all necessary approvals and signoffs, and compliance, by work or otherwise, with all laws, requirements and controls in accordance with this Article. 75. ACCESS TO PREMISES Tenant understands and agrees that all parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises (including exterior Building walls, core corridor walls, doors and entrances), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Premises, and Landlord shall have the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, alteration and repair. After February 1, 2000, or such later date that Tenant occupies the Premises for the operation of its business, Landlord agrees that during the course of any alterations Landlord shall use reasonable efforts to minimize interference with the operation of Tenant's business, provided however that Landlord shall not be obligated to use overtime labor or incur additional costs in connection with such efforts. 76. USE OF PREMISES Supplementing Article 2, under no circumstances whatsoever shall the Premises or any part thereof be used: (1) by a foreign or domestic governmental agency; (2) as a betting parlor or gambling casino; (3) by a utility company; (4) as a restaurant, luncheonette or coffee shop; (5) for the on-premises or off-premises sale of alcoholic beverages or as a catering or events facility; (6) for the sale of candy or cigarettes; (7) as an amusement arcade or for use of video games, pinball machines or other customer-attracting devices; (8) for the playing of amplified music, for live entertainment, for dancing or as a discotheque or club; (9) for the sale, display or rental of "adult" or pornographic books, magazines or videos; (10) as a medical, psychiatric, abortion, drug or alcohol clinic; (11) for retail, manufacturing or residential use; (12) for a messenger or courier service; (13) as a bank; and/or (14) for any use other than the use set forth in Article 2. 77. SECURITY GUARD, EXCLUSION OF PERSONS FROM PREMISES, AND DELIVERY SYSTEMS 77.1 Tenant acknowledges that there are no Building personnel who guard or otherwise are stationed in the lobby of the Building. In the event Landlord hereafter employs security guards or a guard service or a concierge (hereinafter, the "Guard") in the Building, Tenant shall pay to Landlord, as Additional Rental, in advance, together with each monthly installment of the Fixed Rental provided for herein, Tenant's Proportionate Share (as defined in Article 47.5 above) of the reasonable cost of employing the Guard, including, but not limited to, any employee benefits, social security taxes, and other expenses which are incurred by Landlord therefor. Landlord reserves the right (a) to initially set the number of Guards, the days and hours the Guard is employed, (b) to change, at will, the number of Guards, such hours and days, and (c) to discontinue the employment of the Guard, all in its sole and absolute discretion. The furnishing of the Guard by Landlord shall not be deemed to impose any obligation on the part of Landlord for the security of the Building, the Premises or the contents of the Premises, and Tenant hereby unconditionally waives any rights or claims against Landlord or Landlord's managing agent by reason of any acts or omissions of the Guard employed. 77.2 Landlord reserves the right to exclude from all portions of the Building at any time or times during the term hereof, all messengers, couriers and delivery people other than those who are employees of Tenant. In such event Landlord shall accept on behalf of Tenant all deliveries of mail, air courier packages, express packages and other packages sent by similar means (including any hand deliveries of such mail and packages), shall permit messengers and couriers to pick up mail or packages left by Tenant, and shall provide an area to be used for such purposes to which Tenant's employees shall deliver mail and packages to be picked up by others and from which such employees shall pick up and distribute mail and packages to be delivered to Tenant. Tenant shall comply with Landlord's reasonable rules relating to such area and services. Neither Landlord nor Landlord's agents or security personnel shall be liable to Tenant or Tenant's agents, employees, contractors, customers, clients, invitees or licensees or to any other person for damage to mail or PAGE 31 packages, or the performance or non-performance by Landlord or any person acting by, through or under the direction of Landlord of the services set forth in this Paragraph (including any liability in respect of the property of such persons), unless due to the negligence or willful misconduct of Landlord or Landlord's agents or security personnel. No representation, guaranty or warranty is made or assurance given that the communications or security systems, devices or procedures which may hereafter be installed in the Building will be effective to prevent injury to Tenant or any other person or damage to, or loss (by theft or otherwise) of, any property of Tenant or of any other person, and Landlord reserves the right to discontinue or modify at any time such communications or security systems or procedure without liability to Tenant. 78. ADDENDUM TO RULES AND REGULATIONS The following additional Rules and Regulations are hereby incorporated into and made a part of the Rules and Regulations set forth at the end of the printed form of the Lease: 78.1 Tenant cannot use any exterior fire exit or stairways for other than emergency purposes. Tenant shall not place anything in or on the fire exits or stairways in the Building. Landlord reserves the right to control and operate the public portions of the Building and the public facilities, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 78.2 Notwithstanding anything provided to the contrary in this Lease, Tenant shall not cause any machinery, equipment, sign, banner, or any other thing to protrude from the Premises to the exterior of the Building beyond the horizontal plane of the exterior windows of the Premises or beyond the Premises within the interior of the Building. 79. SCAFFOLDING In the event Landlord shall desire (or becomes obligated) to modify portions of the Building or to alter or renovate the same or clean, repair or waterproof the Building's facade (whether at Landlord's option or to comply with law), Landlord may erect scaffolding, "bridges" and other temporary structures to accomplish the same, notwithstanding that such structures may obscure signs or windows forming a part of the Premises, and notwithstanding that access to portions of the Premises may be temporarily diverted or partially obstructed, provided, however, that Landlord agrees to use reasonable efforts to minimize disruption of Tenant's use of or impairment of access to the Premises. Landlord shall not be liable to Tenant or any party claiming through Tenant for loss of business or other consequential damages arising out of any change in the Building or temporary diversion or partial obstruction resulting from such alteration, renovation, repair or cleaning, out of the foregoing structures, or out of any noise, dust and debris from the performance of work in connection therewith, nor out of the disruption of Tenant's business or access to the Premises necessary to perform such repairs, nor shall any matter arising out of any of the foregoing be deemed a breach of Landlord's covenant of quiet enjoyment or entitle Tenant to any abatement of rent. 80. FIRE ALARM AND SPRINKLER SYSTEMS 80.1 Landlord shall install a skeletal base fire alarm system in the Building in accordance with all applicable laws. It shall be Tenant's responsibility to install the system within the Premises, and to that end, Landlord may either (i) install the fire alarm system within the Premises and Tenant shall be responsible to pay to Landlord as Additional Rental, when billed, the cost to install in the Premises every fire device required by law or the system, including, but not limited to, pull stations, speaker strobes, strobes, smoke detectors, duct detectors, fan shutdowns, water flow switches, warden phones, and door releases, or (ii) elect to have Tenant install the fire alarm system (and every fire device required by law or the system as set forth above) within the Premises at Tenant's sole cost and expense. In addition, Tenant shall be responsible for the cost of any modifications in programming the system or in the command station required as a result of Tenant's particular (as opposed to general office) use or modification of the system within the Premises. Nothing contained herein shall obligate Landlord to install a fire alarm system in the Building unless required by law. 80.2 Tenant shall install, at its sole cost and expense, all fire exit signs and lights. PAGE 32 80.3 Tenant shall install all sprinkler heads and otherwise modify the existing sprinkler system within the Premises so as to insure that the sprinkler system within the Premises complies with all governmental code requirements. 80.4 Tenant shall install, at its sole cost and expense, two (2) smoke purge fans and ducts on each floor within the Premises, the size, type, location and method of installation to be reasonably determined by Landlord, including all electrical hookups and the distribution of electricity from the riser to the fans. 81. AIR CONDITIONING 81.1 Tenant shall purchase from Landlord's HVAC contractor and install, at Tenant's sole cost and expense, on each floor of the Premises four (4) fifteen (15) ton air conditioning units. The air conditioning equipment to be installed by Tenant shall include, but not be limited to, compressors, louvers, ductwork, and other equipment and devices of any nature whatsoever as reasonably specified by Landlord in connection with Tenant's air conditioning system. 81.2 Tenant shall, throughout the term of this Lease, at Tenant's expense, perform, or cause to be performed, ordinary periodic maintenance to its air conditioning units and system. Tenant's obligation to maintain its air conditioning units and system shall include, but not be limited to, the periodic cleaning and/or replacement of filters, replacement of fuses and belts, the calibration of thermostats, and all startup and shutdown maintenance of the units. Such maintenance obligations shall be performed through the term of this Lease, on Tenant's behalf, by a reputable air conditioning maintenance company engaged by Tenant at its expense, and first approved by Landlord, which approval shall not be unreasonably withheld or delayed. Tenant shall also be responsible, at Tenant's sole cost and expense, to repair and, if necessary, replace its air conditioning units and system. 81.3 Tenant shall, at its sole cost and expense, obtain all required permits for the installation and operation of the air conditioning units. 81.4 Landlord shall notify Tenant of the type, size, location and method of installation of the air conditioning units prior to installation. 81.5 Landlord shall pay to Tenant within thirty days of billing, or, at Landlord's option, pay to Landlord's HVAC contractor, the cost to purchase eight (8) fifteen (15) ton air conditioning units approved by Landlord. If Landlord fails timely to pay such costs, Tenant shall have the right to offset such costs against Fixed Rental. 82. NOISE AND NOXIOUS ODORS It is understood that it is Tenant's obligation to prevent any undue noise or vibrations from emanating outside the demised premises, and to the extent that any noise or vibration constitutes a nuisance or annoyance to the owner or occupier of any part of the building or any adjacent or neighboring property, it shall be Tenant's obligation to install such insulation and/or sound deadening device to prevent such nuisance or annoyance. Tenant will also prevent the emanation of any odors caused by the operation of Tenant's business at the business to other parts of the building and will, in accordance with code, provide for appropriate ventilation and exhaust of same. Tenant will not permit the entry of any caustic or other materials or fluids utilized in the operation of its business to enter into the building drain systems. Notwithstanding anything to the contrary contained herein, Tenant acknowledges that Landlord has advised Tenant that it may choose to change the use of the building to an office building. If Landlord chooses to change the use of the building to an office building, it is understood that it shall continue to be Tenant's obligation to prevent any undue noise or vibrations from emanating outside the demised premises, and to the extent that any noise or vibration constitutes a nuisance or annoyance to the owner or occupier of any part of the building or any adjacent or neighboring property, it shall be Tenant's obligation to install such insulation and/or sound deadening device to prevent such nuisance or annoyance. Tenant will also prevent the emanation of any odors caused by the operation of Tenant's business at the business to other parts of the building and will, in accordance with code, provide for appropriate ventilation and exhaust of same. Tenant will not permit the entry of any caustic or other materials or fluids utilized in the PAGE 33 operation of Tenant's business to enter into the building drain systems. Any breach by Tenant of its obligations under this Article shall be deemed a default of this Lease. 83. BUILDING DIRECTORY If, at the request of and as an accommodation to Tenant, Landlord shall place upon the Building's directory board, as Landlord may from time to time maintain in the lobby of the Building, one or more names of persons, firms or corporations other than Tenant, this shall not be deemed to operate as an attornment to Landlord or as a consent by Landlord to an assignment or subletting by Tenant of all or any portion of the Premises to such persons, firms or corporations. Landlord shall provide Tenant with two (2) Building directory listings at no cost to Tenant. If Landlord installs a computer directory in the lobby, Tenant may have up to ten (10) listings. Tenant acknowledges that during the course of the lobby renovation there may not be a directory in the lobby of the Building. Tenant agrees that Landlord may discontinue use of the U.S. Postal Mailbox in the Building and, if so, Tenant shall enclose so much of the mail chute located within the walls of the Premises. 84. ELECTRICAL SERVICE 84.1 On the Commencement Date, Landlord shall deliver to the Premises 200 amperes of electrical service at 208 volts. On or before December 15, 1999, Landlord shall make available to Tenant 760 amperes of electrical service at 208 volts for each floor of the Premises. 760 amperes of electrical service shall be brought to a single location on each floor of the Premises, designated by Landlord. Upon receipt of the 760 amperes at 208 volt service, Tenant shall relinquish all right to use the then existing electrical service on the floor. Tenant shall at all times during the term of this Lease keep the now existing electrical service feeder accessible to Landlord for Landlord's sole use. 84.2 Tenant shall be responsible, at Tenant's sole cost and expense, to distribute each 760 amperes of electrical service at 208 volts from the location designated by Landlord on each floor throughout the Premises, including the bathrooms. 84.3 Without limiting the provisions of section 66.4 above, Landlord shall have the right to interrupt electrical service to the Premises without liability to Tenant in connection with (a) the installation of increased electrical service to the Building, and (b) the switch from the 200 amperes service to the 760 amperes service, and (c) for any other reason. 85. RIGHT TO INSTALL ANTENNA AND OTHER EQUIPMENT ON ROOF 85.1 Subject to the following, Tenant may use up to 25 square feet on the top of the Building, if permitted by applicable law, to be designated by Landlord in Landlord's sole discretion, (the "Site") to be used solely for the installation by Tenant at its sole cost and expense, of an antenna and/or satellite dish ("Telecommunication Equipment"), the size and specifications of which shall be subject to Landlord's approval. Landlord's approval of the Telecommunications Equipment shall not be deemed an endorsement of same nor a representation or warranty of any kind. Tenant shall pay to Landlord, for so long as the Telecommunication Equipment is installed, a monthly fair market rental for the use of the space on which the Telecommunications Equipment is installed. 85.2 The Telecommunication Equipment can be used only by Tenant for the purpose of transmitting its own signals. Tenant may not allow any third party to use the Telecommunications Equipment, nor may Tenant assign or transfer any rights therein, nor create any license for the use thereof nor encumbrance thereof. 85.3 Prior to the installation of any Telecommunications Equipment on the Site, in order to prevent damage to the roof or the voiding or other problems with the enforcement of the warranty for the roof, Tenant agrees to provide Landlord, for Landlord's prior approval, all plans and specifications for the installation of same and for the installation of any conduit required from the Premises to the Site. If Landlord requires, Tenant will, at Tenant's sole cost and expense, have Landlord's contractor perform any work to the Site that would affect any roof warranty, or have such contractor present while the installation is being done. Once the installation has been made, Tenant PAGE 34 will not make any alterations to same without obtaining Landlord's prior written consent. Landlord shall have the right to disapprove any installation or alterations that may adversely affect the roof or void or adversely affect the roof warranty, 85.4 Tenant shall install the Telecommunications Equipment at the sole cost, expense and risk of Tenant, and shall do so in a good, workmanlike manner and in compliance with all federal, State, and local building, zoning, electric, telecommunications and safety codes, ordinances, standards, regulations, laws and requirements, including, without limitation, those of the Federal Communications Commission ("FCC"). Tenant shall, at its sole cost and expense, obtain any permits, licenses, variances, or other approvals required with respect to the installation of the Telecommunications equipment. Tenant shall deliver true and complete copies thereof to Landlord prior to commencing any installations or alterations. 85.5 In the event Tenant is granted a frequency from the FCC (or other agency), Tenant will provide Landlord with a copy of same. Tenant may not change the frequency without the consent of Landlord. The use of the Telecommunications Equipment shall not interfere with the frequency of any existing tenants, and Tenant must make its own investigations as to any potential interference. In the event Tenant's use of the Telecommunications Equipment does interfere with the frequency of existing tenants, Tenant will correct same at its sole cost and expense. 85.6 Tenant shall, in accordance with the provisions of Article 54 above, pay for all electricity consumed in connection with the operation of the Telecommunications Equipment. 85.7 Landlord shall have the right to enter the Site at any time for any reason. 85.8 Landlord may, at any time during the term of this Lease, relocate or require the Tenant to relocate, at its sole cost and expense, the Telecommunications Equipment and any wiring to an alternative site on the Building, upon thirty days prior written notice to Tenant. 85.9 Anything to the contrary contained herein notwithstanding, if, during the term of this Lease, Landlord, in its absolute and sole judgment, believes that Tenant's use of the Site poses a human health or environmental hazard that cannot be remedied within thirty (30) days after written notice thereof, then (i) Tenant shall immediately cease operation of the offending equipment and (ii) Tenant shall immediately remove, at its sole cost and expense, the offending equipment. 85.10 Upon the termination of the Lease, Tenant shall remove the Telecommunication Equipment at its sole cost and expense and repair any damage to the Building as a result thereof. 86. TELECOMMUNICATIONS Tenant shall have the right to use in common with Landlord and other tenants of the Building, existing risers in the Building for the installation by Tenant at its sole cost and expense, of a voice line and a data line to the Premises in connection with the operation of its business. Tenant shall consult with Landlord in advance of any installation, as to the type of communication service and the method of installation of the lines and to determine which risers are available for such use. LANDLORD: 406 REALTY LLC BY: /s/ Johny Melohn _______________________________ Name: Johny Melohn Title: Member FEDERAL ID NO.:___-________ PAGE 35 TENANT: HOTJOBS.COM, LTD. BY: /s/ Richard S. Johnson _______________________________ Name: Richard S. Johnson Title: President, CEO, Chairman FEDERAL ID NO.: 13-3931821 PAGE 36 EXHIBIT A [Intentionally Omitted] EXHIBIT B TO LEASE BETWEEN 406 REALTY LLC, AS LANDLORD, AND HOTJOBS.COM, AS TENANT LANDLORD'S WORK 1. Install two (2) men's and two (2) women's bathrooms on each of the 8th and 91h Floors, which bathrooms shall comply with all applicable laws, including the Americans With Disabilities Act. Landlord shall have the right, in its sole discretion, to remove the window located in each of the bathrooms located on the east side of the 8th and 9th Floors. If at least one sink and one toilet in one man's and one woman's bathroom on each of the 8th and 9th floors is not in working order before Tenant is ready to move into the Premises for the operation of its business, Landlord shall provide Tenant access to other bathrooms in the Building, until such time as one sink and one toilet in one man's and one woman's bathroom are in working order, which shall be no later than thirty (30) days after Tenant moves into the Premises. 2. Supply and install new thermopane windows. Landlord shall use best efforts to commence the window installation in the Building on the 8th and 9th Floors prior to any other floor in the Building. Landlord shall not be obligated to use overtime labor to install the windows. Accordingly, Tenant shall permit access to the Premises to the window installation contractor during Regular Hours. 3. Landlord has delivered to Tenant an ACP-5. Landlord makes no representation as to the accuracy of any of the representations in the ACP-5, and Landlord shall have no liability for same. Landlord makes no representation as to the existence or nonexistence of asbestos within the Premises. EXHIBIT C FORM OF UNCONDITIONAL LETTER OF CREDIT Issue Date: ________________ BENEFICIARY: 406 Realty LLC c/o The Expansion Group Inc. 250 West 57th Street New York, New York 10107 Gentlemen: We hereby establish our irrevocable standby letter of credit no. _____________ in Beneficiary's favor for the account of HotJobs.Com, ________________________, up to the aggregate total amount of ______________________________ Dollars ($________) (U.S. Dollars only), available by payment, against Beneficiary's sight draft(s) drawn on ____________, accompanied by the following documents: A written statement purportedly signed by an authorized representative for the Beneficiary with the following wording: "The undersigned, an authorized signer for the Beneficiary, hereby certifies that HotJobs.Com is in default under the lease agreement dated _________________ between 406 Realty LLC and HotJobs.Com." The original of this letter of credit number _________. Partial drawings under this letter of credit are permitted. We shall, after each presentation of this letter of credit, return the same to you, marking this letter of credit to show the amount paid by us and the date of such payment. It is a condition of this letter of credit that it shall be automatically extended without amendment for additional periods of one year each from the present or any future expiration date unless at least thirty (30) days prior to such date we shall notify you in writing at the above address by registered mail or courier service that we elect not to renew this letter of credit for such additional period. In the event we shall have so notified you of our election not to so extend and renew this letter of credit, or if Bank of America has not issued a corresponding guaranty or confirmation of this letter of credit, then the available amount of this letter of credit may be drawn upon at any time during the thirty (30) days immediately preceding the then current expiration date of this letter of credit upon the presentation by you of only a sight draft bearing this letter of credit number and the original of this letter of credit. This letter of credit, if automatically extended and renewed, shall continue as set forth herein, except that the expiration date hereof shall be the first anniversary of the then current expiration date of this letter of credit. This letter of credit may be successively transferred in full (but not in part) by the issuing bank provided that you deliver to us our written full transfer form H-4 (H-4 attached). The original letter of credit, together with all original amendments (if any), must be returned to us with the completed transfer form and payment of our customary charges. PAGE 1 Any draft drawn under this credit must be marked: "Drawn under irrevocable standby letter of credit no. ___________, issued by _______________________." Unless otherwise expressly stated, this letter of credit is subject to the 1993 revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (publication no. 500). We hereby engage with you that drafts drawn under and in compliance with the terms of this letter of credit will be duly honored on presentation to us at ____________________________. Attention: Letter of Credit Department, on or before _____________________, the expiration date, or any automatically extended expiration date. _______________________________ [Authorized Signature] PAGE 2 EXHIBIT D PHOTOGRAPH OF THE RENDERING [GRAPHIC OMITTED] 406 REALTY LLC C/O THE EXPANSION GROUP, INC. 250 WEST 57TH STREET NEW YORK, NEW YORK 10107 November 12, 1999 Mr. Steve Ellis Chief Financial Officer HotJobs.Com, Ltd. 24 West 40th Street, 14th Floor New York, New York 10018 Dear Mr. Ellis: Reference is made to the lease ("Lease") to be executed by HotJobs.Com, Ltd. ("HotJobs"), as tenant, with 406 Realty LLC ("406 Realty"), as landlord, for the 8th and 9th Floors at 406 West 31st Street, New York, New York ("Premises"). For ten dollars ($10) and such other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree that the Lease is amended as follows: (a) HotJobs agrees that 406 Realty shall cause it's contractors to install each of the two smoke purge fans and related ductwork on each floor of the Premises (as set forth in Article 80.4), which installation includes opening the holes in the exterior walls of the Premises and purchasing and installing the four fans and electrical hookups. HotJobs agrees to pay the invoices of the contractors, as Additional Rent, within thirty (30) days of presentations of the invoices. (b) For the purposes of Article 45.2 of the Lease, the bathrooms shall be deemed substantially complete, notwithstanding that the walls on which windows are located are not tiled or finished, and the ceilings adjacent to the windows will not be finished. 406 Realty shall complete the tiling and finishes and the ceilings when the windows are installed in the bathrooms. (c) There will be no slopsink on the east side of either floor of the Premises. (d) There will be no electrical closet in the Premises. (e) 406 Realty reserves the right to change the layout and fixture count of the bathrooms located on the east side of each floor of the Premises, provided, however, that there shall be at least two (2) toilets in each bathroom. (f) The December 15, 1999 date in Articles 45.2.3 and 84 of the Lease are hereby changed to December 25, 1999. (g) Tenant acknowledges that at Landlord's sole option, Landlord can remove all loading docks and truck bays in the Building and convert the use to any purpose Landlord determines in its sole discretion, including leasing for retail or other use. Tenant acknowledges that Tenant has no right to use the same. (h) Tenant's sole remedy in the event that Landlord and Tenant cannot agree on the fair market rental under Article 85 is to submit the dispute to arbitration pursuant to this paragraph (g). The sole authority of the arbitrators shall be the determination of the fair market rental, it being agreed that the arbitrators shall have no authority to determine any other issue. Tenant hereby waives any right to seek any damages, costs or expenses, or make any claim against Landlord arising from a dispute under Article 85. In connection with any dispute as to the monthly fair market rental in Article 85.1, such dispute shall be settled and finally determined by arbitration in the City of New York in accordance with the following provisions of this Article. Within five (5) business days next following the giving of any notice by Tenant to Landlord stating that it wishes such dispute to be so determined, which notice shall be given by Tenant within seven (7) days after Tenant is notified of Landlord's determination of fair market rental, Landlord and Tenant shall each give notice to the other setting forth the name and address of an arbitrator designated by the party giving such notice. If either party shall fail to give notice of such designation within said five (5) business days, then the arbitrator chosen by the other side shall make the determination alone. The two arbitrators shall designate a third arbitrator. If the two arbitrators shall fail to agree upon the designation of a third arbitrator within five (5) business days after the designation of the second arbitrator, then either party may apply to the Supreme Court of the State of New York, New York County, or to any other court having jurisdiction, for the designation of such arbitrator. All arbitrators shall be persons who shall have had at least ten (10) years' continuous experience in the business of appraising or managing real estate or acting as real estate agents or brokers in the borough of Manhattan. The three arbitrators shall conduct such hearings as they deem appropriate, making their determination in writing of the fair market rental for the balance of the lease term. The three arbitrators shall give notice to the Landlord and Tenant of their determination as soon as practicable, and if possible, within seven (7) business days after the designation of the third arbitrator; the concurrence of any two of said arbitrators shall be binding upon Landlord and Tenant, or, in the event no two of the arbitrators shall render a concurrent determination, then the determination of the third arbitrator designated pursuant to this Article shall be final and binding upon Landlord and Tenant, whether or not a judgment shall be entered in any court. Each party shall pay its own counsel fees and expenses, if any, in connection with any arbitration under this Article, including the expenses and fees of any arbitrator selected by it in accordance with the provisions of this Article, and the parties shall otherwise share all other expenses and fees of any such arbitration. The arbitrators shall be bound by the provisions of this Lease, and shall not add to, subtract from or otherwise modify such provisions. The provisions of this article shall only be applicable in the event of the circumstances described in the first sentence hereof. (i) Tenant agrees that Article 86 of the Lease is amended as follows: "Tenant's voice and data lines shall be used exclusively by Tenant in connection with the operation of its business." (j) The Commencement date of the Lease is November 11, 1999. (k) Faxed signatures shall be the equivalent of original signatures. Very truly yours, 406 REALTY LLC By: /s/ Johny Melohn ------------------------- Name: Johny Melohn Title: Member AGREED TO AND ACCEPTED BY HOTJOBS.COM, LTD. By: /s/ Stephen W. Ellis ---------------------------- Name: Stephen W. Ellis Title: Chief Financial Officer EX-10.19 3 EXHIBIT 10.19 Exhibit 10.19 FIRST LOAN MODIFICATION AGREEMENT THIS FIRST LOAN MODIFICATION AGREEMENT IS ENTERED INTO AS OF NOVEMBER 22, 1999, BY AND BETWEEN HOTJOBS.COM, LTD., A DELAWARE CORPORATION WITH ITS CHIEF EXECUTIVE OFFICE LOCATED AT 24 WEST 40TH STREET, 14TH FLOOR, NEW YORK, NEW YORK 10018 ("BORROWER") AND SILICON VALLEY BANK, A CALIFORNIA-CHARTERED BANK ("BANK"), WITH ITS PRINCIPAL PLACE OF BUSINESS AT 3003 TASMAN DRIVE, SANTA CLARA, CA 95054 AND WITH A LOAN PRODUCTION OFFICE LOCATED AT WELLESLEY OFFICE PARK, 40 WILLIAM STREET, SUITE 350, WELLESLEY, MA 02481, DOING BUSINESS UNDER THE NAME "SILICON VALLEY EAST". 1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated September 16, 1999, evidenced by, among other documents, a certain Loan and Security Agreement dated as of September 16, 1999 between Borrower and Bank ("Loan Agreement"). The Loan Agreement established in favor of the Borrower: (i) a working capital line of credit in the maximum principal amount of Four Million Dollars ($4,000,000.00) (the "Committed Revolving Line"), and (ii) an equipment line of credit in the maximum principal amount of One Million Dollars ($1,000,000.00) (the "Committed Equipment Line"). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness". 2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement (together with any other collateral security granted to Bank, the "Security Documents"). Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. 1. MODIFICATION(S) TO LOAN AGREEMENT. 1. The Loan Agreement shall be amended by deleting the following text appearing as paragraph (a) of Section 2.1.1 entitled "Revolving Advances": "(a) Bank will make Advances not exceeding the Committed Revolving Line or the Borrowing Base, whichever is less. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement." and inserting in lieu thereof the following: "(a) Bank will make Advances not exceeding: (i) the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the Letter of Credit Exposure. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement." 2. The Loan Agreement shall be amended by incorporating immediately after Section 2.1.2 thereof the following new section entitled "Letters of Credit": "2.1.3 LETTERS OF CREDIT. (a) Bank shall issue from time to time one or more Letters of Credit for Borrower's account not exceeding: (i) the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the outstanding principal balance of the Advances, PROVIDED that the Letter of Credit Exposure shall not exceed Two Million Five Hundred Thousand Dollars ($2,500,000.00). Each Letter of Credit shall expire no later than 180 days after the Revolving Maturity Date provided Borrower's Letter of Credit reimbursement obligation is secured by cash on terms acceptable to Bank at any time after the Revolving Maturity Date if the term of this Agreement is not extended by Bank. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions acceptable to the Bank. (b) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit, other than as a result of the Bank's gross negligence or willful misconduct. (c) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. (d) Upon the issuance of any Letter of Credit payable in a currency other than United States Dollars, Bank shall create a reserve (the "Letter of Credit Reserve") under the Committed Revolving Line for letters of credit against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such letter of credit. The amount of such reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Revolving Line shall be reduced by the amount of such reserve for so long as such Letter of Credit remains outstanding." 3. The Loan Agreement shall be amended by deleting the following text appearing as Section 2.2 thereof entitled "Overadvances": "2.2 OVERADVANCES. Notwithstanding the Equipment Advances, if Borrower's Obligations under Section 2.1.1 exceed the lesser of the Committed Revolving Line or the Borrowing Base, Borrower must pay in cash to Bank the excess within one (1) Business Day after receiving notice from Bank." and inserting in lieu thereof the following: 2- "2.2 OVERADVANCES. Notwithstanding the Equipment Advances, if Borrower's Obligations under Section 2.1.1 exceed: (i) the Committed Revolving Line or the Borrowing Base, whichever is less, MINUS (ii) the Letters of Credit Exposure, Borrower must pay in cash to Bank the excess within one (1) Business Day after receiving notice from Bank." 4. The Loan Agreement shall be amended by incorporating into Section 9.1 entitled "Rights and Remedies" the following text to appear immediately after paragraph (g) thereof: "(h) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit." 5. The Loan Agreement shall be amended by deleting the following definition appearing in Section 13.1 thereof: ""Credit Extension" is each Advance, Equipment Advance, or any other extension of credit by Bank for Borrower's benefit." and inserting in lieu thereof the following: ""Credit Extension" is each Advance, Equipment Advance, Letter of Credit, or any other extension of credit by Bank for Borrower's benefit." 6. The Loan Agreement shall be amended by incorporating into Section 13.1 the following definitions: "Letter of Credit" is a letter of credit (including, without limitation, irrevocable, documentary and standby letters of credit) or similar undertaking issued by Bank pursuant to Section 2.1.3. "Letter of Credit Reserve" has the meaning set forth in Section 2.1.3. "Letter of Credit Exposure" is, at any date, the sum of (a) the aggregate face amount of all drafts that may then or thereafter be presented by beneficiaries pursuant to issued but undrawn Letters of Credit, plus (b) the aggregate face amount of all drafts that the Bank has accepted under Letters of Credit but has not been reimbursed by the Borrower. 7. The Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of the Negative Pledge Agreement dated as of September 16, 1999 between Borrower and Bank, and acknowledges, confirms and agrees that said Negative Pledge Agreement shall remain in full force and effect. 3- 8. The Schedule of Permitted Indebtedness attached to the Loan Agreement is hereby amended and restated with the Schedule of Permitted Indebtedness attached hereto as EXHIBIT C. 9. The Borrowing Base Certificate appearing as EXHIBIT C to the Loan Agreement is hereby replaced with the Borrowing Base Certificate attached as EXHIBIT A hereto. 10. The Compliance Certificate appearing as EXHIBIT D to the Loan Agreement is hereby replaced with the Compliance Certificate attached as EXHIBIT B hereto. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Indebtedness. 6. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement. 8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the non-exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. 9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank (provided, however, in no event shall this Loan Modification Agreement become effective until signed by an officer of Bank in California). 4- This Loan Modification Agreement is executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first written above. BORROWER: BANK: HOTJOBS.COM, LTD. SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By: /s/ Stephen W. Ellis By: /s/ Pamela Braren --------------------------- ------------------------------ Name: Stephen W. Ellis Name: Pamela Braren ------------------------- ---------------------------- Title: CFO Title: AVP ------------------------ --------------------------- SILICON VALLEY BANK By: /s/ Maggie Garcia ------------------------------ Name: Maggie Garcia ---------------------------- Title: Loan Documentation Officer ---------------------------- (signed in Santa Clara County, California) 5- EXHIBIT A BORROWING BASE CERTIFICATE Borrower: HOTJOBS.COM, LTD. Bank: Silicon Valley Bank Commitment Amount: $4,000,000.00 ACCOUNTS RECEIVABLE 1) Accounts Receivable Book Value as of $ -------- ----------------------- 2) Additions (please explain on reverse) $ ----------------------- 3) TOTAL ACCOUNTS RECEIVABLE $ ----------------------- ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4) Amounts over 90 days due $ ----------------------- 5) Balance of 50% over 90 day accounts $ ----------------------- 6) Concentration Limits $ ----------------------- 7) Credit balances over 90 days $ ----------------------- 8) Foreign Accounts $ ----------------------- 9) Governmental Accounts $ ----------------------- 10) Contra Accounts $ ----------------------- 11) Promotion or Demo Accounts $ ----------------------- 12) Intercompany/Employee Accounts $ ----------------------- 13) Other (please explain on reverse) $ ----------------------- 14) TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ ----------------------- 15) Eligible Accounts (#3 minus #14) $ ----------------------- 16) LOAN VALUE OF ACCOUNTS (80.0% of #15) $ ----------------------- BALANCES 17) Maximum Loan Amount $ ----------------------- 18) Total Funds Available (Lesser of #17 or #16) $ ----------------------- 19) Present balance owing on Line of Credit $ ----------------------- 20) Outstanding under Sublimits (LofC)* $ 21) RESERVE POSITION (#18 minus #19 and #20) $ ----------------------- *In accordance with the terms of the Loan and Security Agreement, as amended THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THE FOREGOING IS TRUE, COMPLETE AND CORRECT, AND THAT THE INFORMATION REFLECTED IN THIS BORROWING BASE CERTIFICATE COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THE LOAN AND SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND SILICON VALLEY BANK. COMMENTS: - --------------------------- ------------------------------ ------------------------------ BANK USE ONLY ------------------------------ RECEIVED BY: ------------------------------ DATE: ------------------------------ REVIEWED BY: ------------------------------ COMPLIANCE STATUS: YES / NO ------------------------------ ------------------------------ By: ------------------------ Authorized Signer 6- EXHIBIT B COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: HOTJOBS.COM, LTD. The undersigned authorized officer of HOTJOBS.COM, LTD. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _____________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer expressly acknowledges that no borrowings may be requested by the Borrower at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that such compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- -------- Financial statements & CC Monthly within 25 days (if not borrowing, quarterly w/in 25 days subsequent to IPO) Yes No Annual (CPA Audited) FYE within 90 days Yes No 10-Q, 10-K and 8-K W/in 5 days after filing with SEC Yes No BBC & A/R Agings Monthly within 25 days when borrowing Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ -------- ------ -------- Maintain: Minimum Adjusted Quick Ratio* 1.25:1.0 Yes No Minimum Tangible Net Worth** *** $ Yes No
* Tested monthly (except that subsequent to an IPO, when not borrowing, tested quarterly) ** Tested monthly, changing to quarterly after IPO *** See Section 6.7 of Loan Agreement ------------------------------ ------------------------------ BANK USE ONLY ------------------------------ RECEIVED BY: ------------------------------ DATE: ------------------------------ REVIEWED BY: ------------------------------ COMPLIANCE STATUS: YES / NO ------------------------------ ------------------------------ COMMENTS REGARDING EXCEPTIONS: Sincerely, Date: - ------------------------- ------------------ SIGNATURE - ------------------------ TITLE 7- EXHIBIT C SCHEDULE OF PERMITTED INDEBTEDNESS Indebtedness of the Borrower from its Directors and Officers Indemnity Insurance Policy effective from July 20, 1999 to July 20, 2001 at a cash price of $601,247.00, of which $480,998.00 was financed by the Borrower pursuant to a Commercial Insurance Premium Finance and Security Agreement with Cananwill, Inc. 8- EX-23.1 4 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders of HotJobs.com, Ltd.: We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-86409) of HotJobs.com, Ltd. of our report dated February 7, 2000, relating to the consolidated balance sheets of HotJobs.com, Ltd. as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years ended December 31, 1999 and 1998 and for the period from February 20, 1997 (inception) to December 31, 1997, which appears in this Annual Report on Form 10-K. /s/ KPMG LLP New York, New York March 22, 2000 EX-23.2 5 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholders of HotJobs.com, Ltd.: The audit referred to in our report dated February 7, 2000, included the related financial statement schedule as of and for the year ended December 31, 1999, included in the Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ KPMG LLP New York, New York March 22, 2000 EX-27.1 6 EXHIBIT 27.1
5 U.S. DOLLARS 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 88,373 49,897 7,258 802 0 147,470 5,456 884 152,541 16,270 0 0 0 313 135,215 152,541 20,674 20,674 3,491 3,491 36,296 0 159 (17,816) 0 (17,816) 0 0 0 (17,816) (1.46) (1.46)
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