-----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, BA9UTsv5+kOHhec06GM6IIfUWxn0HcJPaHUKpNEJbmUliU5/q16ncJRuGGRV4iu4 x2EVFkmjmToO6eqpVj7dvQ== 0001005477-00-002723.txt : 20000331 0001005477-00-002723.hdr.sgml : 20000331 ACCESSION NUMBER: 0001005477-00-002723 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROMOTIONS COM INC CENTRAL INDEX KEY: 0001088024 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 1338989 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27411 FILM NUMBER: 588817 BUSINESS ADDRESS: STREET 1: 11 WEST 19TH STREET CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124813600 MAIL ADDRESS: STREET 1: 11 WEST 19TH STREET CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: WEBSTAKES COM INC DATE OF NAME CHANGE: 19990616 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 Commission File No.: 000-27411 Promotions.com, Inc. (Exact name of registrant as specified in its charter) Delaware 13-3898912 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 11 West 19th Street New York, New York 10011 (Address of principal executive offices) (Zip Code) (212) 242-8800 (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, par value $.001 per share 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes: |X| No:|_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |_|. Aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on March 1, 2000: $ 116,642,832* Common Stock outstanding at March 1, 2000: 14,241,244 Documents Incorporated by Reference The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held in 2000, which definitive proxy statements shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. *Includes voting stock held by third parties which may be deemed to be beneficially owned by affiliates, but for which such affiliates have disclaimed beneficial ownership. - -------------------------------------------------------------------------------- 1 Promotions.com, Inc. (Formerly Webstakes.com, Inc.) 1999 Annual Report on Form 10-K TABLE OF CONTENTS PART I Item 1. Business ......................................................... 3 Item 2. Properties........................................................ 12 Item 3. Legal Proceedings ................................................ 12 Item 4. Submission of Matters to a Vote of Security Holders............... 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................... 13 Item 6. Selected Financial Data .......................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 15 Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................................................... 25 Item 8. Financial Statements and Supplementary Data ...................... 25 Item 9. Changes in and Disagreements with Accountants and Accounting and Financial Disclosure .......................... 42 PART III Item 10. Directors and Executive Officers of the Registrant ............... 42 Item 11. Executive Compensation ........................................... 42 Item 12. Security Ownership of Certain Beneficial Owners and Management ... 42 Item 13. Certain Relationships and Related Transactions.................... 42 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 42 SIGNATURES .................................................................. 44 2 PART I ITEM 1. BUSINESS OVERVIEW Promotions.com, Inc. is a leading provider of technology-driven direct marketing and promotion solutions to advertisers, agencies, Web publishers and e-commerce merchants worldwide. We provide a broad range of promotion, technology and data products and services. Our products and services are designed to increase brand awareness, stimulate sales and enhance the effectiveness of our customers promotion and marketing campaigns on the Internet and through other media. Our patent-pending iDIALOG(TM) technology is the platform for most of our solutions and enables our customers to use preselected criteria to deliver targeted offers to consumers during a promotion. During the year ended December 31, 1999, we served promotions and offers for more than 220 customers. Our revenues are derived from three principal sources as follows: PROMOTIONS.COM CUSTOM SOLUTIONS. Promotions.com CUSTOM SOLUTIONS provides the infrastructure, technology and creative solutions enabling customers to run integrated Internet promotions under their own brand name on their own Web sites. Customers include NBC, The Sharper Image, Road Runner and Compaq Computer Corporation, among others. WEBSTAKES.COM. WEBSTAKES.COM is a leading media property and promotion portal that offers advertising and promotion solutions to marketers, including ESPN.COM, Disney, Freeshop and Lifeminders, among others. WEBSTAKES.COM offers hundreds of promotions and offers in 16 targeted interest categories. Each category is designed to appeal to consumers with a specific interest and includes prizes and offers related to the theme of the interest category. We deliver targeted promotional offers on WEBSTAKES.COM while consumers are entering our promotions using our iDIALOG(TM) technology. PROMOTIONS.COM DIRECT. Promotions.com DIRECT, is a leading provider of opt-in promotion email products and permission email marketing services. We have developed a comprehensive database of more than 4 million demographic profiles. We use our proprietary database and our iDIALOG(TM) technology to generate leads, increase response rates and help our customers profit from their email marketing campaigns. The Internet has emerged as an attractive medium for promotions due to the rapid growth in the number of Web users, the amount of time such Web users spend on the Web, the increase in electronic commerce, the interactive nature of the Web, the Web's global reach and a variety of other factors. Promotions and direct marketing are used by marketers to stimulate consumer spending. Promotions are designed to stimulate an immediate action and could include a product purchase, a request for further information or a visit to a place of business for the purchase of a specific product or service. American businesses spent $85.4 billion on promotion marketing in 1998, a 7.6% increase over 1997, according to PROMO Magazine. Promotions include sweepstakes, premium incentives, product samples, coupons, points and loyalty programs, rebates (cash incentives paid upon a purchase), games, contests, and promotional research. Forrester Research, Inc. estimates that Internet promotions are three to five times more effective than traditional promotions. Forrester estimates that 50% to 70% of total Internet marketing budgets will be spent on promotions over the next five years, compared to less than 15% of Internet marketing budgets currently being spent on promotions. We believe that in addition to the tremendous growth potential of the domestic promotion market, markets outside the U.S. will become an increasingly important component of Internet promotions. 3 iDIALOG(TM) TECHNOLOGY OVERVIEW Many of our products and services are powered by our patent-pending iDIALOG(TM) technology, which enables centralized offer delivery, consumer lead generation, and reporting. We use our unique iDIALOG(TM) technology to deliver promotional offers to consumers as they participate in our promotions. We direct a customer's offer to consumers based on the consumer's demographic profile or their responses to personalized questions generated in earlier promotions by our iDIALOG(TM) technology. The following steps illustrate how consumers utilize our iDIALOG(TM) technology when participating in promotions: 1. Web user enters a promotion utilizing the Company's iDIALOG(TM) technology. 2. Web user selects the prize incentive they are interested in winning. 3. iDIALOG(TM) receives the request and checks if the Web user has already voluntarily registered in our database. 4. If the Web user has not completed the initial voluntary registration in our database, they are presented with a registration form to complete. Upon completion of the registration form, the Web user's browser requests a targeted offer from a Promotions.com server. 5. If the Web user is already registered in our database, the Web user's browser requests a targeted offer from a Promotions.com server. 6. Promotions.com iDIALOG (TM) then compares the Web user's profile with the targeting criteria of the hundreds of offers available in its database and instantly delivers a dynamically targeted offer. The Web user can 'opt-in' or 'pass' on the targeted offer. 7. Our servers then direct the Web user's browser to the marketers desired targeted destination. Our iDIALOG(TM) technology dynamically targets and delivers offers to Web users based on pre-selected criteria, including the promotion category, age, gender, time of day and regional geographic location. Because iDIALOG(TM) technology is Web-based, continuous enhancements to the technology can be made without the need for our customers to upgrade or purchase new equipment or software upgrades. We continue to enhance and develop our patent-pending iDIALOG(TM) technology platform. Enhancements of the iDIALOG(TM) technology have allowed for the development of additional features, including (i) instant win games, (ii) promotional email and (iii) iDIALOG(TM) KIDSAFE technology which provides marketers with the ability to run promotions compliant with the Children's Privacy Act of 2000. PROMOTIONS.COM CUSTOM SOLUTIONS Promotions.com CUSTOM SOLUTIONS provides customers the opportunity to run a promotion on the customer's own Web site under its own brand name with an appearance that is unique and consistent with its own Web site design, while using our infrastructure and proprietary technology. Our custom solutions are designed to integrate the online and offline promotional objectives of our customers to maximize a campaign's effectiveness. Our custom solutions provide marketers with a portfolio of targeting products and services, in-depth consumer profiles and comprehensive reporting to develop customized solutions, which create accountability and greater returns for their promotional spending. Promotions.com CUSTOM SOLUTIONS utilizes iDIALOG(TM) technology to facilitate and support its Internet promotions. Marketers benefit from the iDIALOG(TM) technology by improving the effectiveness of the promotion on their Web sites and allowing them to make targeted offers to Web users as they are participating in their promotions. Our Custom Solutions services range from simple syndications of pre-existing promotions produced by Promotions.com to custom promotions 4 that require development efforts and ongoing technical services. A client can choose a complete promotion package or any one or a combination of specific services. We guide custom solutions customers through the promotion-creation process and allow customers to choose those features appropriate for their promotion. Customers generally select their own prizes or offers for the promotion, and we tailor the other aspects of the promotion to help them meet their goals and objectives. Custom promotions often include lead generation through email campaigns and management reports. Web users entering Custom Solution promotions register for prizes through our technology and registration process. This enables our Custom Solution customers to use our technology to offer our one-time lifetime registration, which makes it easier for their visitors to enter our sweepstakes or a series of promotions run by our customers. Customers of Promotions.com CUSTOM SOLUTIONS have included Autobytel.com, Hyundai, NBC, Netscape, Panasonic, The Sharper Image, Toshiba and Universal Studios, among others. We provide the technological, business and creative infrastructure necessary to effectively produce and conduct online promotions on a cost-effective basis. These capabilities include the following: Creative Services o Theme, naming and concept development of promotions--create appropriate prize interest categories; create theme-based and custom solution promotions o Promotion design and production--create and produce visually attractive, easy-to-use promotions Automation of Process o Collection and maintenance of demographic information--manage data provided by member registration, prize selection and other member activity o Promotion research--measure effectiveness of promotions; suggest alternatives to better satisfy client goals o Winner selection, notification and affidavit collection--select winners in compliance with sweepstakes laws; collect affidavits; verify accuracy of information provided by winner o Customer service--respond to email questions o Promotion support services--handle postal entries; provide lists of winners o Legal compliance services--distribute IRS Form 1099's as required; create and provide official rules Fulfillment o Prize selection and acquisition--select appropriate prizes; acquire prizes from suppliers o Prize fulfillment--arrange for shipment of prizes WEBSTAKES.COM PROMOTIONS PORTAL WEBSTAKES.COM is a media property and promotions portal organized by categories of interest to consumers. WEBSTAKES.COM enables marketers to benefit from the dynamic offer matching, targeting and delivering functionality provided by our iDIALOG(TM) technology. As a result, marketers can customize their opt-in offer delivery on WEBSTAKES.COM within specific categories of interest, within specific promotions, or by targeting based on a variety of factors including user interest and user geographical location. We generate revenues from the sale of sponsorships and advertising on WEBSTAKES.COM. To capitalize on the global reach of the Internet, we intend to establish WEBSTAKES.COM internationally. Every time a consumer enters a promotion on WEBSTAKES.COM, our iDIALOG(TM) technology enables our customers to present them with an offer for products or services and requests permission to send them follow-up information relating to such offers. Our iDIALOG(TM) technology targets these opt-in offers based upon our members' demographic profiles and interests. Responses to these questions are stored in our database, and we send follow-up emails to our members if we have been granted permission to do so. Each time a member enters a promotion or answers or responds to a iDIALOG(TM) question, our database is updated to include such information. 5 WEBSTAKES.COM services are most typically sold in sponsorship packages, each of which includes a combination of WEBSTAKES.COM services tailored to satisfy a customer's objectives. The choice and level of services included in a sponsorship package is determined by the level of sponsorship selected by the customer. Our sponsorship packages vary by: o the number of interest categories in which a customer's logo appears; o the size of the customer's logo, and whether a text message accompanies the logo; o the number of guaranteed impressions or visitors delivered to a customer's logo, advertisement or Web site; o the number of times a customer's offer appears in the Webstakes Update newsletter; and o the number of email campaigns. We display the banners and logos of our sponsors on various pages throughout WEBSTAKES.COM. After a consumer completes an entry in one of our promotions, we typically deliver them to a page from one of our sponsor's Web sites which effects a click-through to our customer's Web site. Webstakes.com features promotions produced and created by Promotions.com in addition to a listing of promotions created by other companies. These promotions offer consumers the opportunity to win products and cash prizes, free travel, gift certificates and to receive coupons for discounts on purchases from leading merchants 24 hours a day, seven days a week. When they participate in our promotions, consumers may also request to receive offers and information about our customers' products through our iDIALOG(TM) technology. iDIALOG(TM) allows us to target offers based on the consumer's demographic profile and interests. Since its inception in 1996, WEBSTAKES.COM has offered consumers a chance to receive offers and win prizes in different interest categories. Each category is designed to appeal to consumers' specific interests and includes promotional offers and prizes related to the theme of the interest category. Presently, there are 16 Prize Club interest categories: o Auto o Books & Music o Business & Finance o Campus o Computing Products o Family & Kids o Fashion & Beauty o Games & Casino o Gifts, Flowers & Food o Home Sweet Home o House & Home o Mind Your Business o Sports & Health o Travel & Outdoors o TV, Movies & Video o Webstakes@The Movies In addition, several special promotions run at different times throughout the year on WEBSTAKES.COM. These include promotions designed around holidays such as Mother's Day and Christmas and events such as the Super Bowl, movie premiers and the Academy Awards. At any given time, there are typically sweepstakes for over 100 prizes available on WEBSTAKES.COM. We have recently introduced a variety of new information and features on WEBSTAKES.COM, including interactive content and comprehensive listings about a broad array of online promotions. For example, we recently introduced an instant win game on WEBSTAKES.COM. After entering their email address and/or registering to become a WEBSTAKES.COM member (if not already a member) they receive a game card that can be "scratched-off" by moving their mouse back and forth to expose images that determine whether they have won a prize. We have also introduced a variety of other interactive games and contests, an extensive listings of coupon offers, free samples and other promotions available online. 6 Membership Registration and Newsletter Subscriptions Visitors to WEBSTAKES.COM must register as members to participate in our promotions and receive targeted opt-in offers. Visitors become members by completing our one-time registration form that requires them to provide certain demographic information. Once this information is provided, a visitor becomes a lifetime member and never has to provide the registration information again, other than to update any changed information, to enter any other promotion on WEBSTAKES.COM. Many of our members choose to subscribe to our WEBSTAKES.COM newsletter. We publish both a weekly edition, the Webstakes Update, which currently has more than 2.1 million subscribers, and a daily edition, the Daily Reminder, which currently has more than 850,000 subscribers. These newsletters are 100% opt-in meaning that they are only distributed to members who have specifically requested to receive them, either during our registration process, through an iDIALOG(TM) offer or some other venue. The newsletters provide an important means for us to communicate with our members and to provide them with information about our promotions and about special offers from our customers. Affiliate Program Our Affiliate Program allows a member to put a free link to the WEBSTAKES.COM Affiliate Program sweepstakes on their personal home page. Members with their own personal Web site can request the information necessary to feature a WEBSTAKES.COM banner on their Web page. We have received more than 23,000 requests for this information. A visitor to a member's personal home page can click on the WEBSTAKES.COM banner, register as a WEBSTAKES.COM member and enter a monthly $1,000 sweepstakes run exclusively for the Affiliate Program. After entering the special sweepstakes, the visitor is taken to the WEBSTAKES.COM home page and can then enter other WEBSTAKES.COM promotions. Every affiliate is automatically entered into a special monthly $500 sweepstakes we conduct to encourage participation in the Affiliate Program. This program can make personal home pages more fun while at the same time increasing the exposure of WEBSTAKES.COM. Tell-A-Friend We also promote awareness of WEBSTAKES.COM and its promotions through our Tell-a-Friend Program, which enables recipients of our email and Webstakes Update, as well as visitors to WEBSTAKES.COM, to forward any promotion to friends and family via email, and provides incentives to members who tell others about WEBSTAKES.COM. PROMOTIONS.COM DIRECT Our third revenue source, Promotions.com DIRECT was launched in January 2000 and provides marketers with access to the company's database of opt-in consumers. DIRECT provides comprehensive direct marketing services including email campaign management and lead generation. Our services enable marketers to target their products and services to consumers who have opted-in to receive such offers. These consumers can opt-out, or unsubscribe from receiving such offers, at any time. We provide access to our opt-in list, email delivery services and promotional tools to enhance email results as follows: EMAIL ADDRESS LIST RENTAL. We provide marketers a solution to reach consumers fitting their targeted criteria to help achieve maximum response rates to their offers. Promotions.com manages email campaigns on behalf of direct marketers enabling them to precisely target emails based on the full demographic profiling available in our database. We support more than 20 different selection criteria. Our direct marketing staff can provide assistance with email address list recommendations. Full creative services are available including copywriting and design of html email messages. TRACKING AND REPORTING. Through our systems, we can provide real-time email campaign results to our customers. PROMOTIONAL ENHANCEMENTS. We have developed several techniques for improving the response rates of our customers' email marketing campaigns through the inclusion of promotional tools in their marketing messages. Essentially, we can include a simple sweepstakes offer or instant win game card as part of any direct marketing campaign. 7 Opt-in email offers three key advantages to businesses as compared to direct mail marketing and online banner advertising: SPEED. Opt-in email campaigns can be prepared and sent out within hours, unlike direct mail campaigns that can take weeks to produce at printers and lettershops. Email campaign results begin within moments of transmission, with most responses received in 2-3 days. Direct mail campaigns can take weeks to accumulate responses. RESPONSIVENESS. Opt-in email campaigns typically generate higher response rates than direct mail or online banner campaigns. Forrester Research estimates that opt-in email campaigns generated click-through rates of between 14.0-22.0% (March 1999). These click-through rates greatly exceed both online banner response rates of between .5 - 1.0% and direct mail response rates of between 1.0-2.0%. We also believe that our ability to add promotional components into our email campaigns results in our list generating higher response rates than other email lists on the market. COST. Opt-in email campaigns are less expensive than direct mail campaigns. Forrester Research estimates that the typical cost for email campaigns per email message sent (including list rental and transmission) is 20-25 cents. This compares to an average cost of 60 cents per delivery for a direct mail campaign, including list rental, printing, postage and processing fees. While banner ads may cost less than email campaigns on a CPM (cost per thousand) basis, banner campaigns often end up costing more due to low response rates. We have only recently begun offering customers the opportunity to send emails to our database as part of stand alone marketing efforts where we will charge on a CPM basis. However, based on the feedback we have received to date, we believe there is sufficient demand in the marketplace to warrant this type of service. Forrester estimates that by 2004, US marketers will send 200 billion emails generating a $1.6 billion opportunity for list owners. In the short time that we have offered this service, our customers include Hewlett Packard, Bell South, eNews and Buildscape, among others. Our service allows demographic selection of email addresses based on the self-reported data provided by our members when they initially registered with us. Selection is also based on behavior of consumers while on WEBSTAKES.COM including category and prize affinity, answers to survey questions and response to direct marketing offers. By maximizing the demographic information that we receive from our members, we can effectively target offers to consumers for our customers. Our Promotions.com DIRECT opt-in database offers marketers the opportunity to reach more than 2.3 million consumers via email. We provide leading marketers and e-commerce retailers the opportunity to access a selection of targeted email lists designed to achieve maximum response to their offers. The goal of Promotions.com DIRECT is to become a leader in opt-in direct marketing promotion solutions on the Internet and to provide promotional tools that can be used to enhance online direct marketing efforts for ourselves, our direct marketing customers, as well as other direct marketing service providers. Key elements of our strategy include the following: ENRICH OUR DATABASE WITH TRANSACTIONAL DATA. We can learn more about our members every time they visit our Web site, WEBSTAKES.COM. Every time one of our members registers to win a prize, this information enhances our knowledge about the types of products and services they are interested in. Our members are also continually responding to direct marketing offers through our iDIALOG(TM) direct marketing system, which provides us with further understanding of their interests. We intend to offer marketers the opportunity to make selections from our membership database based on these additional criteria. DEVELOP NEW INTERNET MARKETING PRODUCTS AND SERVICES. We intend to expand our direct marketing services to enable direct marketing emails to include incentive programs and other promotional tools such as sweepstakes and instant win games. The tools that we offer will work in the context of emails we distribute to our members under the WEBSTAKES.COM brand, and they will also work with third party mailings sent by our marketing customers under their own brand names as well as mailings sent by other Internet direct marketing companies. EXPAND OUR SALES CHANNELS. We have recently entered into an arrangement with a list manager pursuant to which they will be marketing our opt-in email list to the list brokerage community. This arrangement facilitates our access to traditional direct marketers seeking to run email campaigns. We will also continue to engage in direct sales to our customer base. 8 OUR TECHNOLOGY PLATFORM Promotions.com proprietary iDIALOG(TM) technology serves as the enabling platform for all of our solutions. This centralized promotion management technology, resident on our servers, is linked to every promotion and instantaneously completes the dynamic offer matching, targeting and delivering functions. In 1999, our iDIALOG(TM) technology generated approximately 3.7 million leads worldwide. iDIALOG(TM) is a promotion tracking and reporting tool. Detailed daily online performance reports allow marketers to actively monitor and react to the success of particular promotions, marketing campaigns and Web site traffic patterns. We have leveraged the iDIALOG(TM) technology to develop additional promotional products including (i) instant win games, (ii) tell-a-friend, (iii) match and win and (iv) promotional email and (v) iDIALOG(TM) KIDSAFE technology which provides marketers with the ability to run promotions compliant with the Children's Privacy Act. Our operating infrastructure is designed to support the creation and delivery of millions of page views each day. This infrastructure currently uses hundreds of application, Web and database servers to provide timely and efficient delivery of our services to customers and members. Our servers run on Sun Solaris and Linux. Our standard database system is Oracle. We have developed a broad array of information systems to perform site management, Web user interaction, tracking, searching, transaction processing and fulfillment functions. When available, our systems use third-party licensed technologies to augment internally developed software. We focus our development efforts on improving and enhancing our specialized tools with the goal of automating as many processes as possible to increase member and customer satisfaction. Our iDIALOG(TM) technology consists of three integrated systems: a publishing system, an Internet promotion engine and a data processing system, all of which are supported by relational databases and multi-dimensional data warehousing systems. Publishing System The publishing system contains the relevant information about our promotions, including prizes, interest categories and customers. Once a customer's offer or advertisement has been designed, each component, such as color, text and graphics, is published as data objects in our Oracle relational database management systems. Various combinations of these data objects are accessed and published to the promotion. Internet Promotion Engine When a member visits a promotion, the Internet promotion engine creates a Web page of various data objects by accessing the online Oracle databases. The components of each Web page are dynamically generated based on the demographic characteristics and preferences of the member, The Internet promotion engine also deploys email campaigns to members on an opt-in basis based on information stored in the Oracle databases. The online promotion engine uses a combination of Java, Linux and Netscape and Apache Webservers as the vehicle to interact with the Oracle databases. This software handles all transactional events and queries, updates the Oracle databases and manages WEBSTAKES.COM, which is designed to give members a convenient and safe environment to register for offers. Data Processing System Our data processing system retrieves member demographic data from our Oracle databases through the Internet promotion engine, processes the data, creates and issues offers to members and manages all winner selections. The system was designed to give employees and customers instant online access to information related to specific promotions. Our salespeople can access member profiles to search and analyze demographics and usage patterns to suggest promotions and offers to customers. Generally, only aggregate data, and not individual member profiles, is available to our customers. Members decide whether their data may be used by third parties. The structure of our hardware and software is designed to allow for rapid expansion while maintaining our desired Web user performance standards. In the rapidly changing Internet environment, we believe that the ability to update an application to stay current with new technologies is important. Our system design allows for the additional, modification or replacement of applications in a cost-efficient and expeditious manner. We continually evaluate emerging technologies and new developments in Web technologies with the objective of optimizing our member and customer interfaces, Web site features and operational systems. 9 Our Internet connectivity is provided by Frontier GlobalCenter. We have entered into an Internet-hosting agreement with Frontier to maintain all of our production servers at Frontier's New York and California data centers. Frontier provides comprehensive facilities management services, including human and technical monitoring of all production servers 24 hours per day, seven days per week. Frontier provides unlimited bandwidth and redundant connectivity for our servers to communicate with the end users. The facility has two independent uninterruptible power supplies, as well as two independent diesel generators designed to provide power to the systems within seconds in the event of a power outage. We safeguard our information using large RAID devices. We have backup copies of all of our programs and data at an offsite location. OUR STRATEGY Our objective is to be the leading provider of global Internet promotion solutions. Key elements of our strategy are to: PROVIDE THE MOST COMPREHENSIVE INTERNET PROMOTION SOLUTIONS. We intend to leverage the information aggregated from the millions of individual Web users that visit our promotions on WEBSTAKES.COM and the Web sites of marketers using the CUSTOM SOLUTIONS service to further enhance our existing solutions and facilitate the development of additional solutions. We believe that our proprietary iDIALOG(TM) technology and the experience and knowledge gained through the delivery of thousands of Internet promotions provide us with a significant competitive advantage over other Internet promotion solutions providers. We intend to leverage our technology, our demographic profile database and promotion expertise to continue to develop new solutions and technological capabilities that meet the needs of marketers. In addition, we intend to continue to add new features and functionality to our iDIALOG(TM) technology. INCREASE THE SIZE OF OUR DATABASE OF DEMOGRAPHIC PROFILES. We seek to continually expand the size of our profile database and deepen our proprietary database to provide a large audience to our marketers and the ability to more accurately target messages for our customers. To increase the size of our database, we use a variety of approaches, including online advertising, offline acquisitions programs, referrals, strategic partnerships and Custom Solutions. We increase the depth of our database each time a person enters a promotion created by Promotions.com from which we collect demographic and behavioral data. As more people enter our promotions, and with each additional contact with each person, the extent and precision of our information continues to grow. We intend to use our growing database and our knowledge and experience to assist customers to tailor offers and encourage future participation in Internet promotions. ENHANCE AND EXPAND WEBSTAKES.COM. By enhancing and expanding WEBSTAKES.COM, we believe that it will become a leading solution for marketers worldwide. We intend to expand WEBSTAKES.COM by continuously adding additional promotions, new categories of interest and a full array of promotion tools. Any such additions will be required to meet the strict inclusion and maintenance criteria in order to ensure that they will continue to provide the desired audiences for marketers. We also plan to continue to enhance WEBSTAKES.COM by introducing additional promotional tools. EXPAND CUSTOM SOLUTIONS & DIRECT SERVICES. We provide promotion services to marketers that need full-service promotion solutions. We intend to continue to focus on identifying appropriate marketers that may be interested in utilizing our Promotion solutions. EXPAND SALES AND MARKETING. We believe that a strong sales and marketing organization is essential to effectively sell and market Internet promotion solutions. We intend to continue to expand our sales and marketing efforts. We believe that brand awareness of Promotions.com and its solutions is critical to its success given the emerging nature of the Internet promotion market. As a result, we are targeting our efforts to marketers in order to establish and expand the recognition of its corporate identity and service offerings through its Web site, advertisements within trade publications, direct mail, promotional activities, trade show participation and other media events. From January 1, 1999 to December 31, 1999, our sales and marketing organization increased from 17 people to 62 people. We have entered into an agreement with Excite to market our promotions on Excite.com, MatchLogic and with NBC to advertise on national television and NBC.com. EXTEND GLOBAL PRESENCE. We are developing our products and services internationally. We believe that our products and technology can both help U.S.-based businesses to reach international consumers and help international businesses to reach U.S. and international consumers. We intend to open sales offices in selected foreign countries and to employ non-exclusive sales agents to expand international sales. We also intend to create foreign language promotion services to increase foreign sales. 10 SALES AND MARKETING UNITED STATES We sell our promotion and direct marketing solutions in the United States through a sales and marketing organization that consisted of 62 employees as of December 31, 1999. These employees are located at our headquarters in New York, NY and in our office in San Francisco, CA. Our sales organization is divided into dedicated groups that separately sell our services and product offerings, and within these groups, our sales representatives are further divided into separate teams to serve the needs of our diverse client base. We have created sales subgroups for each of the industry categories we serve. Salespeople are assigned to a particular industry category in order to develop an in-depth understanding of the evolving needs of a particular category and the marketers within such category. This expertise allows us to more effectively manage existing categories and take advantage of opportunities to expand into additional categories. To support our direct sales efforts and to actively promote the Promotions.com brand, we conduct comprehensive marketing programs, including public relations, print advertisements, online advertisements, trade shows and ongoing customer communications programs. INTERNATIONAL Promotions.com is in the process of expanding its operations worldwide through the creation of strategic business relationships. Such relationships enable us to leverage the local marketplace knowledge of our business partners. As we continue to expand internationally, we intend to expand our direct sales and marketing capabilities to create direct sales organizations in certain international markets and, in other markets, to enter into strategic business relationships with companies having knowledge of the particular marketplace. CUSTOMERS We served approximately 220 customers in 1999 and approximately 125 customers in 1998. In 1999, our five largest customers accounted for approximately 17% of our revenues. PRIVACY We believe that it is important to build and maintain the trust of the consumers in our database. We are committed to maintaining the privacy of the consumers in our database and their personally identifiable information. We are a member of TRUSTe, an independent, non-profit initiative whose mission is to build Web users' trust and confidence in the Internet by promoting the principles of disclosure and informed consent. As a member of TRUSTe, we disclose our information practices on WEBSTAKES.COM and in our promotions, and we comply with specified information disclosure practices. During the registration process and thereafter, WEBSTAKES.COM visitors must grant us permission to send them the Webstakes Update and email offers from us and/or our customers. If Web users do not specifically authorize us to send them information, they will not receive email from us or our customers. We seek to ensure that our privacy policy satisfies consumer expectations and evolving Internet practices. Promotions.com continues to promote the advancement of key privacy standards and is working with the Privacy Council, one of the nation's leading privacy consultancy groups to ensure the highest privacy standards on the Internet. Promotions.com has always valued the trust of its members, which has been a key to the Company's growth over the past four years. The Company maintains a 100% opt-in policy to ensure that the consumer always decides what type of marketing messages they receive from the Company. The Federal Trade Commission, or FTC, adopted regulations effective April 21, 2000, regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. These regulations also include enforcement and redress provisions. The Company is implementing programs to ensure full compliance with the FTC regulations. 11 COMPETITION Competition in the Internet promotion services market is intense. We expect competition in our market to continue to intensify as a result of increasing market size, greater visibility of the market opportunity for Internet promotion services and minimal barriers to entry. Competition may also increase as a result of industry consolidation, particularly among narrowly-focused promotion companies. We believe that our ability to compete depends on many factors both within and beyond our control, including the following: o the success of the sales and marketing efforts of us and our competitors; o the ease of use, performance, price and reliability of promotions developed by us and our competitors; and o the timing and market acceptance of new services developed by us and our competitors. The online promotion services market is highly fragmented, with many companies focusing generally on only one aspect of the promotions market. We also compete with offline promotion companies, large Internet publishers, search engines and other portal companies, a variety of Internet advertising networks and other companies that facilitate the marketing of products and services on the Internet. Please see "Risk Factors - We face significant competition, and we may not be able to compete successfully" for a more detailed description of the risks of our competition. Employees As of December 31, 1999, we employed 121 people including 62 in sales and marketing, 45 in engineering and product development and 14 in finance, human resources, business operations and administration. We are not subject to any collective bargaining agreements and believe that our relationship with our employees is good. CORPORATE INFORMATION We were incorporated in New York on January 8, 1996 as Webstakes, Inc. We reincorporated in Delaware as Netstakes, Inc. on June 5, 1996 and we continued doing business under the name Webstakes. We changed our name to Webstakes.com, Inc. on June 11, 1999. On September 24, 1999, we completed our initial public offering of common stock, receiving net proceeds of approximately $44.9 million. On January 27, 2000, we changed our name to Promotions.com, Inc. Our principal executive offices are located at 11 West 19th Street, 10th Floor, New York, New York 10011. Our telephone number at that location is (212) 242-8800. ITEM 2. PROPERTIES As of December 31, 1999, our principal offices were located in two separate facilities in New York, New York. These facilities consist of a total of approximately 12,850 square feet and are under leases, which expire in August 2000 and February 2002. We intend to consolidate our principal offices in the third quarter of 2000 to a larger facility and in January 2000 entered into a ten year lease for approximately 36,000 square feet of office space in New York, New York. This space is currently under construction to provide for the expansion of personnel and facilities. While this construction is ongoing, the Company is occupying temporary space of approximately 4,800 square feet. We also lease approximately 2,400 square feet of space for our sales and marketing efforts in San Francisco, California. We are continually evaluating our facilities requirements and believe, to the extent additional space will be required, such space will be available at market rates. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1999. 12 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS We have not declared or paid any dividends on our capital stock since our inception and do not anticipate paying dividends in the foreseeable future. Our current policy is to retain earnings, if any, to finance the expansion of our business. The future payment of dividends will depend on the results of operations, financial condition, capital expenditure plans and other factors that we deem relevant and will be at the sole discretion of our board of directors. Market Information Since our initial public offering on September 24, 1999, our common stock has been traded on the Nasdaq National Market. From September 24, 1999 through February 1, 2000, our stock traded under the symbol "IWIN" and since February 2, 2000, our stock trades under the symbol "PRMO." The following table sets forth the high and low closing prices of the common stock, for the periods indicated, as reported by the Nasdaq National Market. High Low ---- --- Year Ended December 31, 1999 Third Quarter (commencing September 24, 1999)........... $11.50 $8.88 Fourth Quarter.......................................... $26.19 $6.28 The market price of our common stock is highly volatile and fluctuates in response to a wide variety of factors. See "Risk Factors- Our Common Stock Price is Likely to be Highly Volatile." Holders On March 1, 2000, we had approximately 52 holders of record of common stock. This does not reflect persons or entities who hold their stock in nominee or "street" names through various brokerage firms. Use of Proceeds From IPO Pursuant to Rule 701 of Regulation S-K, the use of proceeds from the Company's offering of common stock which commenced on September 24, 1999, is as follows as of December 31, 1999: Shares registered: 3,575,000 Aggregate price of offering amount registered: $50,050,000 Shares sold: 3,575,000 Aggregate price of offering amount sold $50,050,000 Director or indirect payments to directors, officers, general partners of the issuer or their associates, to persons owning ten percent or more of any class of equity securities of the issuer and to affiliates of the issuer: $-0- Direct or indirect payments to others: $5,070,641 Net offering proceeds to the issuer after deducting expenses: $44,979,359 Detail uses to date:* $10,331,729 Working capital reserves: $-0- Temporary investments in cash and cash equivalents: $34,647,630 * As of December 31, 1999, the proceeds used from our initial public offering were used towards payments due to Excite and Matchlogic and for working capital and general corporate purposes. 13 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read together with the financial statements and the notes to those statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7. The statement of operations for the years ended December 31, 1999, 1998 and 1997, and the balance sheet data as of December 31, 1999 and 1998, are derived from our audited financial statements included in this annual report. The statement of operations data for the period from January 8, 1996 (inception) through December 31, 1996 and the balance sheet data as of December 31, 1997 and 1996 has been derived from our audited financial statements not included in this annual report.
Year Ended December 31, January 8, 1996 ------------------------------------------ (Inception) to 1999 1998 1997 December 31, 1996 ---- ---- ---- ----------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Statement of Operations Data: Revenues ................................... $ 10,456 $ 4,799 $ 1,618 $ 80 Loss from operations ....................... (19,023) (1,338) (190) (213) Net loss ................................... (18,371) (1,414) (227) (221) Net loss attributable to common stockholders ............................. $ (27,083) $ (1,414) $ (227) $ (221) =========== =========== =========== =========== Basic and diluted net loss per share attributable to common stockholders ............................. $ (3.61) $ (0.27) $ (0.05) $ (0.06) =========== =========== =========== =========== Weighted average shares of common stock used in computing basic and diluted net loss per share ........................... 7,502,575 5,181,356 4,278,916 3,999,576 =========== =========== =========== ===========
The following table is a summary of our balance sheet as of December 31, 1999, 1998, 1997 and 1996.
As of December 31, ------------------ 1999 1998 1997 1996 ---- ---- ---- ---- (IN THOUSANDS) Balance Sheet Data: Cash ............................................ $34,648 $ 18 $ 85 $ 24 Working Capital ................................. 41,605 (1,124) (149) (249) Total Assets .................................... 53,725 1,196 476 134 Notes payable (excluding current portion) ........................................ -- 67 -- -- Total stockholders' equity (deficit) ....................................... 47,856 (753) 125 (191)
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of Promotions.com contains forward-looking statements relating to the future events and the future events and the future performance of Promotions.com within the meaning of section 27A of the Securities Exchange Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Stockholders are cautioned that such statements involve risks and uncertainties. Promotions.com's actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this report and in Promotions.com's other public filings on file with the Securities & Exchange Commission. OVERVIEW During 1999, revenue was generated primarily by promotion services. Principally all of the company's historical revenues have been derived from the sale of promotion services. We expect to derive substantially all of our revenues from the sale of promotion services for the foreseeable future. We recognize revenues from promotion services ratably over the period during which we provide promotion services, provided that no significant obligations remain and collection of the resulting receivable is reasonably assured. Payments received from customers prior to providing promotion services are recorded as deferred revenue and are recognized as revenue ratably as the services are provided. With respect to revenue generated from our promotions portal, WEBSTAKES.COM, we generally guarantee a minimum number of impressions, or times that the customer's name, logo or other identifier appears in pages viewed by visitors to WEBSTAKES.COM, and/or times that our visitors are delivered to our customer's web site. To the extent that these minimum guarantees are not met, we defer recognition of the corresponding revenues until the guaranteed levels are achieved. Promotion.com CUSTOM SOLUTIONS services provides custom turnkey solutions to create and manage promotions on a customer's own web site. Revenues are derived principally from contracts in which the company typically provides services for the administration and implementation of the promotion. The contracts typically include cancellation clauses ranging from 30 to 60 days. Since there are significant up front customized design work incurred before a promotion begins, the company recognizes the portion of revenue related to the customized design work at the time the work is performed. The remaining revenue is recognized ratably in the period in which the promotion is run, provided that no significant company obligations remain. Revenues include revenues from barter transactions in which we exchange promotion services for advertising and prizes. Revenues from these barter transactions are recorded as promotion revenues at the lower of the estimated fair value of the goods or services received or delivered and are recognized when we deliver the promotion services. Advertising expenses related to barter are recognized when our advertisements are run on the reciprocal web site, which is typically in the same period as the corresponding barter revenues are recognized. Prize expenses related to barter are recognized when prizes are awarded. In 1999, barter revenues were 20% of our total revenues. We expect that, as our cash revenues grow, barter as a percentage of our revenues will decrease. The period-to-period comparisons of our historical operating results should not be relied upon as indicative of future performance. Our annual report should be considered in light of the risks, expenses and difficulties encountered by companies in the early stages of development, particularly companies in the rapidly evolving stages of the Internet market. Although we have experienced revenue growth in recent periods, we anticipate that we will incur operating losses for the foreseeable future due to a high level of planned operating and capital expenditures. In particular, we expect to increase our operating expenses in order to expand our sales force and marketing personnel and to develop, integrate and scale our technology. 15 RESULTS OF OPERATIONS YEARS ENDED DECEMBER 1999, 1998, and 1997 Revenues. Revenues primarily result from the sale of promotion services. Revenues were approximately $10.5 million for 1999, $4.8 million for 1998 and $1.6 million for 1997. We recorded barter revenues of approximately $2.1 million during 1999, $2.0 million during 1998 and $485,000 during 1997, representing approximately 20%, 42% and 30% of total revenues during those periods. The period-to-period growth in revenues was primarily attributable to the increasing number of marketers purchasing promotional services on the Company's on-line media property and purchasing CUSTOM SOLUTIONS as well as larger longer-term purchases by certain marketers. Approximately 220 customers purchased promotional services during 1999 as compared to approximately 125 in 1998 and 67 in 1997. No one customer accounted for more than 10% of total revenues or net accounts receivable for the years ended December 31, 1999 and 1998, and one customer accounted for 35% of total revenues for the year ended December 31, 1997. In 1999, 1998 and 1997, revenues from the Company's five largest customers accounted for 17%, 24% and 53% of total revenues, respectively. There can be no assurances that the online promotion market will grow, customers will continue to purchase promotional services, that customers will not make smaller and shorter term purchases, or that market prices for Web-based promotional services will not decrease due to competitive or other factors. Product Development Expenses. Product development expenses include the personnel costs associated with the design and development of WEBSTAKES.COM, our promotions infrastructure and technology, as well as software licensing costs. Product development expenses were approximately $2.1 million or 20% of total revenues for 1999, $549,000 for 1998, or 11.4% of total revenues and $181,000 for 1997, or 11.2% of total revenues. The year-to-year increases in absolute dollars are primarily attributable to increases in the number of engineers that develop and enhance the features and functionality of WEBSTAKES.COM and, in 1999, the Company's increased focus on Promotions.com CUSTOM SOLUTIONS services and the roll-out of new products. Historically, we expensed our product development costs as incurred. However, in the first quarter of 1999, we began to capitalize the labor costs of improvements and betterments to our software under Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Such improvements and betterments include improving the functionality and navigability of WEBSTAKES.COM. Therefore, we have capitalized $196,000 of product development expenses for the year ended December 31, 1999 and are amortizing these costs over three years. We believe that timely deployment of new and enhanced products and technology is critical to attaining our strategic objectives. Accordingly, we intend to continue recruiting and hiring experienced product development personnel and to make additional investments in product development. Consequently, the Company expects to incur increased product development expenditures in absolute dollars in future periods. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of advertising costs, salaries and commissions of sales and marketing personnel, costs of trade shows, conventions and marketing materials and other marketing expenses. Sales and marketing expenses were approximately $19.9 million for 1999 or 190% of total revenues, $3.6 million for 1998, or 75.4% of total revenues and $1.1 million for 1997, or 67.4% of total revenues. The period-to-period increases in sales and marketing expenses reflect the growth of the Company and are due to increases in advertising costs, compensation expense associated with the growth of the Company's sales force and marketing personnel and an increase in sales commission associated with the increase in revenues. In 1999, the increase was primarily attributed to an increase in advertising costs associated with the Company's aggressive marketing strategy. The Company anticipates that sales and marketing expenses in absolute dollars will increase in future periods as it continues to pursue an aggressive marketing strategy through advertising and continues to expand its international operations, and continues to build its sales force. General and Administrative Expenses. General and administrative expenses consist primarily of services and related costs of general corporate functions, including finance, accounting costs and facilities. General and administrative expenses were approximately $6.7 million for 1999, or 64% of total revenues, $2.0 million for 1998, or 41.0% of total revenues and $536,000 for 1997, or 33.1% of total revenues. The increases in general and administrative expenses were primarily attributable to increased salaries and related expenses associated with hiring additional personnel, and increased professional fees and facility expenses to support the growth of our operations. In addition, we incurred bonus expenses of $435,000 in 1999 related to the initial public offering. The increase was also due in part to an increase in allowance for doubtful accounts. This increase in the allowance for doubtful accounts was the result of an increase in cash revenues, an increase in the percentage of cash revenues reserved for doubtful accounts and the establishment of a reserve for one account for which collection is in doubt. We expect to incur additional general and administrative expenses as we hire additional personnel and incur additional costs related to the growth of our business and operation as a public company. We expect these expenses to include facilities expansion, investor relations programs and professional service fees. Accordingly, we anticipate that general and administrative expenses will continue to increase in absolute dollars. We 16 expect that general and administrative expenses will follow the pattern for a growth company, increasing initially and then, once a certain revenue base is achieved, decreasing, as a percentage of revenue. Interest Income, Net. Interest income, net of expense, consists primarily of interest earned on our cash balance and the interest expense on our outstanding debt. We recognized net interest income of approximately $652,000 for 1999, and net interest expense of $76,000 for 1998 and $37,000 for 1997. The increase was primarily attributable to a higher average cash balance, principally due to proceeds received from a private placement and initial public offering during 1999. Interest income in future periods is likely to go down as a result of a reduction in average cash balances maintained by the Company and changes in the market rates of its investments. Income Taxes. No income tax benefit is reflected in the financial statements as a valuation allowance was provided for deferred tax assets relating to net operating losses. As of December 31, 1999, we had approximately $28.5 million of federal net operating loss carryforwards for tax reporting purposes to offset future taxable income. Our federal net operating loss carry forwards expire in the years 2012 through 2019. Liquidity and Capital Resources Since inception, we have financed our operations primarily through the private and public placement of equity securities and the incurrence of indebtedness. On September 24, 1999, we completed the initial public offering of 3,575,000 shares of common stock for gross proceeds of $50.1 million and net proceeds of $44.9 million, after deducting expenses of the offering. Net cash used in operating activities was approximately $21.7 million (net of $5.7 million of MatchLogic & Excite expenses) for 1999, compared to approximately $1.5 million for 1998 and $125,000 for 1997. The increase in cash used in operating activities for 1999 was primarily due to the net loss of $18.3 million during the period which resulted from costs incurred to support the Company's sales and marketing efforts and the increased personnel required to manage the Company's growing operations combined with higher levels of accounts receivable resulting from increased revenues which was partially offset by increases in accounts payable and accrued expenses. Net cash used in investing activities was approximately $2.3 million for 1999, $301,000 for 1998 and $203,000 for 1997. As of December 31, 1999, our principal capital commitments consisted of obligations outstanding under operating and capital leases. All net cash used in investing activities was used for capital expenditures, primarily the acquisition of equipment. We estimate that our capital expenditures will be approximately $8.0 million for 2000. We currently expect that our principal capital expenditures through 2000 will relate to improvements to our technical infrastructure and expansion of our headquarters. Net cash provided by financing activities were approximately $64.4 million for 1999, $1.7 million for 1998 and $390,000 for 1997. Net cash provided by financing activities in 1999 was primarily attributable to our private placements and initial public offering. Net cash provided by financing activities in 1998 was primarily attributable to incurrence of indebtedness and, to a lesser extent, borrowings under a secured credit facility related to equipment financing. We borrowed $200,000 available under a credit facility in December 1997 to purchase equipment. To date, we have made all payments due under this equipment loan. We have a financing agreement with a leasing company for the leasing of equipment in an amount up to $1.0 million in operating and/or capital leases, secured by certain accounts receivable and the equipment purchased pursuant to the agreement. To date, we have leased approximately $840,000 of equipment under the agreement. The leases have terms of up to three years and the interest rates under the leases range from 8 1/2% to 13%. We are required to make monthly payments of interest and principal under the leases. We have a two-year sponsorship agreement with Excite under which Excite agreed to promote WEBSTAKES.COM through ad banner placements and links to WEBSTAKES.COM and its promotions on Excite.com, WebCrawler.com and Classified2000.com. We have prepaid Excite $5.6 million during 1999 for this two year agreement. At Home Corporation, the parent company of Excite, is one of our principal stockholders. Each quarter we recognize approximately $683,000 of expense related to this agreement. We have a service agreement with MatchLogic, a wholly owned subsidiary of Excite, pursuant to which MatchLogic will provide ad serving and targeting, data processing, analysis, enhancement and other services to Promotions.com. The term of the agreement is two years. We have prepaid MatchLogic $13.1 million, during 1999 for this two-year agreement. Each quarter we recognize approximately $1.5 million of expense related to this agreement. 17 In June 1999, we redeemed all outstanding shares of class A mandatorily redeemable convertible preferred stock and 1,714,608 shares of common stock for an aggregate amount of $24.0 million. To finance the redemption and to provide working capital, we issued shares of new class B mandatorily redeemable convertible preferred stock to a group of investors, including among others, At Home Corporation, XL Ventures, a subsidiary of Big Flower Holdings, and Travelers, for an aggregate purchase price of $40.0 million. Upon completion of the initial public offering, the class B mandatorily redeemable convertible preferred stock automatically converted into 6,666,668 shares of common stock. The class A mandatorily redeemable convertible preferred stock and class B mandatorily redeemable convertible preferred stock are not be available for reissue. The excess of the consideration paid to the holders of the class A mandatorily redeemable convertible preferred stock over the carrying amount of the class A mandatorily redeemable convertible preferred stock represents a deemed dividend or return to the holders of the class A mandatorily redeemable convertible preferred stock of $8.7 million. Our capital requirements depend on numerous factors, including the amount of resources the Company devotes to advertising and marketing our brand, the resources the Company devotes to expanding our sales and marketing capabilities, resources devoted to acquire or invest in complementary businesses, technologies, products or services or to invest in geographic expansion. Management believes that our cash on hand as of December 31, 1999 of $34.6 million together with cash flows will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for our existing business for the next 12 months based on our current rate of cash use. However, we will need to raise additional funds during 2000 in order to fund more rapid expansion, adopt a more aggressive marketing strategy or in response to competitive pressures. There can be no assurances that any required additional financing will be available on terms favorable to us, or will be available at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand name, develop or enhance our services, respond to competitive pressures or take advantage of acquisition opportunities. Any of these events could have a material adverse effect on our business, results of operations or financial condition. 18 RISK FACTORS An investment in our Company involves a high degree of risk. You should consider carefully the risks below, together with the other information contained in this annual report, before you decide to invest in our Company. If any of the following risks actually occur, our business, results of operations and financial condition could be harmed, the trading price of our common stock could decline and you could lose all or part of your investment. RISKS RELATING TO OUR COMPANY AND OUR BUSINESS OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT. We were incorporated, and launched our first promotion, in January 1996. Accordingly, we have a limited operating history upon which to evaluate our operations and future prospects. In addition, our revenue model is evolving and relies substantially upon the growth of promotion spending on the Internet and our ability to become a full-service Internet promotion company. As an early stage company in a new and rapidly evolving market, we face risks and uncertainties relating to our ability to successfully implement our business plan, which are described in more detail below. We may not successfully address these risks. WE HAVE NOT BEEN PROFITABLE AND MAY NOT BECOME PROFITABLE, IN WHICH EVENT OUR BUSINESS AND STOCK PRICE WOULD BE ADVERSELY AFFECTED. To date, we have not been profitable. We may never be profitable, or, if we become profitable, we may be unable to sustain profitability. We expect to continue to incur losses for the foreseeable future because we expect to continue to spend significant resources to expand our business. Although we have experienced revenue growth in recent periods, these growth rates may not be sustainable or indicative of future growth. We reported a loss of $18.4 million for the year ended December 31, 1999. As of December 31, 1999, our accumulated deficit was approximately $20.2 million. For us to make a profit, our revenues will need to increase sufficiently to cover our costs and expenses. A SIGNIFICANT PORTION OF OUR REVENUES HAVE BEEN DERIVED FROM BARTER TRANSACTIONS, AND WE MAY NOT BE SUCCESSFUL IN GENERATING SUFFICIENT CASH REVENUES TO COVER OUR COSTS AND EXPENSES IN THE FUTURE. For the year ended December 31, 1999, approximately 20% of our revenues were derived from the trading of promotion services for advertising and prizes. We do not receive cash for sales involving barter agreements. We expect that barter agreements will continue to account for a significant portion of our revenues in the future and we may not generate sufficient cash to pay our cash expenses. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECREASE. We expect our operating results to vary significantly from quarter to quarter due to many factors discussed in this Risk Factors section, some of which are beyond our control. It is possible that in future periods our results of operations will be below the expectations of public market analysts and investors. In this event, the price of our common stock would likely decrease. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. The rapidly evolving market in which we operate and potential seasonal fluctuations in promotional spending and Internet use make it difficult to forecast our revenues accurately. Our operating expenses are based on our expectations of future revenues and are relatively fixed in the short term. Accordingly, we may not be able to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. If we have a shortfall in revenues in relation to our expenses, or if our expenses precede expected revenues, then our results of operations and financial condition would be materially adversely affected. 19 IF THE DEMAND FOR INTERNET PROMOTION SERVICES DOES NOT INCREASE, OUR BUSINESS WILL BE HARMED. Our success depends in part on the increased acceptance of online promotion services. The market for Internet promotion services has only recently begun to develop and is evolving rapidly. Most businesses have little or no experience using the Internet for promotion purposes. As a result, many businesses have allocated only a limited portion of their marketing budgets to Internet promotion spending. An increase in the demand for these services is dependent in part on the effectiveness of the promotions and the recognition of this effectiveness by customers and potential customers. The market for Internet promotion services may not grow and any growth may not be sustained. IF WE ARE UNABLE TO ATTRACT VISITORS TO WEBSTAKES.COM AND THE WEB SITES OF OUR CUSTOMERS, THE EFFECTIVENESS OF OUR PROMOTIONS WOULD BE REDUCED, AND OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD BE MATERIALLY ADVERSELY AFFECTED. Our future success depends upon our ability to continue to attract and retain visitors with demographic characteristics desired by our clients to WEBSTAKES.COM and the web sites of our customers. In addition, we guarantee our clients that visitors will view their pages and/or link to their web sites a minimum number of times. If we are unable to meet these minimum guarantees, we will be required to defer recognition of the related revenues until the guaranteed minimum is achieved. In addition, we will be required to provide services to the customer for free until we are able to meet our guaranteed minimum, which may reduce our promotion inventory in future periods. IF WE ARE UNSUCCESSFUL IN BROADENING OUR PRODUCT OFFERINGS, OUR REVENUE GROWTH WILL BE LIMITED. To date, substantially all of our revenues have been derived from conducting sweepstakes on the Internet. Our growth is largely dependent upon our ability to leverage our sweepstakes expertise to become a full-service Internet promotion company. In the event that we are unable to successfully implement our growth strategy, our business, results of operations and financial condition would be materially adversely affected. WE FACE SIGNIFICANT COMPETITION, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY. The market for Internet promotion services is intensely competitive. We expect competition in our market to continue to intensify as a result of increasing market size, greater visibility of the market opportunity for Internet promotion services and minimal barriers to entry. Industry consolidation may also increase competition. We compete with many types of companies, including both online and offline promotion companies, large Internet publishers, search engine and other Internet portal companies, a variety of Internet-based advertising networks and other companies that facilitate the marketing of products and services on the Internet. Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger customers bases and significantly greater financial, technical and marketing resources than we do. This may allow them to compete more effectively and be more responsive to industry and technological change than us. We may not be able to compete successfully and competitive pressures may reduce our revenues and result in increased losses or reduced profits. Our ability to compete depends on many factors both within and beyond our control. These factors include: o the success of the sales and marketing efforts of us and our competitors; o the ease of use, performance, price and reliability of promotions offered by us and our competitors; and o the timing and market acceptance of new promotion services developed by us and our competitors. IF OUR CUSTOMERS DO NOT RENEW THEIR AGREEMENTS OR TERMINATE THEM PRIOR TO THEIR SCHEDULED EXPIRATIONS, OUR REVENUES WILL BE REDUCED. Our agreements with customers generally have terms ranging from one to 12 months. In addition, substantially all of our agreements permit our customers to terminate their relationships with us on relatively short notice. Our customers may not remain customers for the full term of their agreements or renew such agreements when they expire. 20 OUR BRAND MAY NOT ACHIEVE THE RECOGNITION NECESSARY TO INCREASE OUR MEMBERSHIP BASE AND ATTRACT CUSTOMERS. To be successful, we must continue to build our brand identity. We believe that the importance of brand recognition will increase as more companies enter our market. We may not be successful in our marketing efforts or in increasing our brand awareness. SWEEPSTAKES REGULATIONS MAY LIMIT OUR ABILITY TO CONDUCT SWEEPSTAKES OR LIMIT PARTICIPATION IN OUR SWEEPSTAKES, WHICH COULD ADVERSELY AFFECT OUR BUSINESS. The sweepstakes industry is subject to extensive regulation on the local, state and national levels, regardless of whether promotions are conducted online or offline. Congress and many state attorneys general and legislatures recently have announced regulatory initiatives aimed at the sweepstakes industry due to recently reported deceptive industry practices. The publicity generated by these initiatives may adversely affect demand for our services. Although we believe that additional laws and regulations are likely to be enacted, we cannot predict what they will be. Any new sweepstakes regulations may have a material adverse affect on our business, results of operations and financial condition. Additionally, the Internet is a new medium for sweepstakes, and it is difficult to predict how existing laws and regulations will be interpreted. OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD ADVERSELY AFFECT OUR BUSINESS. In order to successfully implement our business plan, we must grow significantly. Our anticipated future growth will likely place a significant strain on our management resources and systems. To manage our growth effectively, we will need to continue to improve our operational, financial and managerial controls and reporting systems and procedures, and we will need to continue to expand, train and manage our workforce. If we do not manage our growth effectively, our business, results of operations and financial condition would be materially adversely affected. WE MAY BE UNABLE TO INCREASE OUR SALES FORCE, WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE GROWTH OF OUR BUSINESS. We need to substantially expand our sales force to increase market awareness and sales of our promotion services. Competition for qualified sales personnel is intense, and we might not be able to hire the quality and number of sales personnel we require. New hires require extensive training and typically take several months to achieve productivity. If we fail to effectively increase our sales force, our business, results of operations and financial condition would be materially adversely affected. OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL. Our future success is substantially dependent upon the continued service of our founders, Steven H. Krein, Chief Executive Officer, and Daniel J. Feldman, President, and other executive officers. The loss of the services of any of our executive officers could have a material adverse affect on our business. Many of our executive officers have only been employed by us for a short time, including our Chief Financial Officer, who joined us in April 1999 and our Chief Operating Officer, who joined us in December 1999. We do not currently have "key person" life insurance policies on any of our employees. We have employment agreements only with Messrs. Krein and Feldman. Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel. THE INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND ANY INFRINGEMENT ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION. Third parties may infringe or misappropriate our patents, trademarks or other intellectual property rights, which could have a material adverse effect on our business, results of operations or financial condition. The actions we take to protect our trademarks and other proprietary rights may not be adequate. In addition, the validity, enforceability and scope of protection of proprietary rights in Internet-related industries are uncertain and still evolving. Although we have patent and trademark applications pending, none have been granted to date. 21 Third parties may assert infringement claims against us. Any claims and any resulting litigation, should they occur, could subject us to significant liability for damages. In addition, even if we prevail, litigation could be time-consuming and expensive to defend, and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into contractual arrangements with the third parties making these claims, which arrangements may not be available on commercially reasonable terms. WE MAY REQUIRE ADDITIONAL FINANCING TO EXPAND OUR BUSINESS, AND WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING. We may need to raise additional funds in the future in order to fund more aggressive brand promotion or more rapid expansion, to develop new or enhanced services, to respond to competitive pressures or to make acquisitions. Additional financing may not be available on terms favorable to us, and may not be available at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand, take advantage of acquisition opportunities, develop or enhance services or respond to competitive pressures, any of which could have a material adverse effect on our business, results of operations and financial condition. If additional funds are raised by our issuing equity securities, stockholders may experience dilution of their ownership interest and the newly issued securities may have rights superior to those of the common stock. If additional funds are raised by our issuing debt, we may be subject to limitations on our operations, including limitations on the payment of dividends. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR PRODUCTS GIVEN AS PRIZES IN OUR PROMOTIONS AND FOR PRODUCTS SOLD BY OUR CUSTOMERS OVER THE INTERNET. Consumers may sue us if any of the products we give as prizes are defective, fail to perform properly or injure the user. We may also be sued by consumers who purchase products that are offered or marketed through WEBSTAKES.COM. Although our agreements with our customers typically contain provisions intended to limit our exposure to these product liability claims, these limitations may not eliminate our liability. Liability claims could require us to spend significant time and money in litigation or pay significant damages. We do not carry product liability insurance. As a result, any of these claims, whether or not successful, could have a material adverse effect on our business, results of operations and financial condition. PRIVACY AND SECURITY CONCERNS MAY CAUSE CONSUMERS NOT TO PARTICIPATE IN OUR PROMOTIONS, WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. An important feature of the services we provide our customers is our ability to develop and maintain demographic and other information about consumers participating in our promotions. Privacy and other security concerns may cause consumers to resist providing us with personal data, which would reduce the value of our services. Moreover, privacy and security concerns may inhibit consumer acceptance of the Internet as a means of commerce. If privacy and other security concerns of consumers are not adequately addressed, our business would be materially adversely affected. OUR GROWTH WILL DEPEND ON THE GROWTH OF INTERNET USAGE. We depend on continued growth in the use of the Internet by businesses and consumers. If electronic commerce does not grow or grows more slowly than expected, the use of the Internet by businesses may decline or grow more slowly than anticipated. In addition, the acceptance and growth in the use of the Internet by consumers could be negatively affected by consumer concerns about the security of electronic commerce transactions and privacy. Even if Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it and its performance or reliability may decline. WE MAY BE UNABLE TO RESPOND TO TECHNOLOGICAL CHANGE EFFECTIVELY. Our industry is characterized by rapid technological change, frequent new service introductions, changing consumer demands and evolving industry standards and practices. Our inability to anticipate and effectively respond to these changes on a timely basis would materially adversely affect our business, results of operations and financial condition. Our future success will depend, in part, on our ability to cost-effectively adapt to rapidly changing technologies, to enhance existing services and to develop and introduce a variety of new services to address changing demands of consumers and our clients on a timely basis. 22 THE FAILURE OF OUR COMPUTER OR COMMUNICATIONS SYSTEMS MAY ADVERSELY AFFECT OUR BUSINESS. Our business depends on the efficient and uninterrupted operation of our computer and communications systems. Any system failure, including network, software or hardware failure, that causes an interruption in our service or decreases the responsiveness of WEBSTAKES.COM or the web sites of our customers could materially adversely affect our business. WEBSTAKES.COM could also be affected by computer viruses, electronic break-ins or other similar disruptions. Our insurance policies have coverage limits of $775,000 per occurrence and therefore may not adequately compensate us for any losses that may occur due to any interruptions in our service. Frontier GlobalCenter, Inc. maintains all of our production servers at their Manhattan Data Center. Our operations depend on Frontier's ability to protect its own systems and our systems against damage from fire, power loss, water, telecommunications failures, vandalism and other malicious acts, and similar unexpected adverse events. Any disruption in the Internet access provided by Frontier could have a material adverse effect on our business, results of operations and financial condition. WE DEPEND ON THE CONTINUED VIABILITY OF THE INTERNET INFRASTRUCTURE. Our success depends upon the development and maintenance of a viable Internet infrastructure. The current Internet infrastructure may be unable to support an increased number of web users. The timely development of products such as high-speed modems and communications equipment will be necessary to continue reliable Internet access. Furthermore, the Internet has experienced outages and delays as a result of damage to portions of its infrastructure. Such outages and delays could adversely affect WEBSTAKES.COM and the level of traffic on our customers' web sites. The effectiveness of the Internet may decline due to delays in the development or adoption of new standards and protocols designed to support increased levels of activity. If such new infrastructure, standards or protocols are developed, we may be required to incur substantial expenditures to adapt our services to the new technologies. LAWS AND REGULATIONS PERTAINING TO THE INTERNET MAY ADVERSELY AFFECT OUR BUSINESS. There are an increasing number of laws and regulations pertaining to the Internet. These laws and/or regulations may relate to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and the quality of products and services. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing. Any new law or regulation pertaining to the Internet, or the application or interpretation of existing laws, could decrease the demand for our promotion services, increase our cost of doing business or otherwise have a material adverse effect on our business, results of operations and financial condition. Please see "Business--Government Regulation and Legal Uncertainties." CHANGES IN THE LAWS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE PRIVACY OF INTERNET USERS AND OTHER INDIVIDIUALS COULD HARM OUR BUSINESS The U.S. federal and various state governments have recently proposed limitations on the collection and use of information regarding Internet users. In addition, in October 1998, the European Union adopted a directive that could limit our ability to collect and use information regarding Internet users in Europe. Since many of the proposed laws or regulations are just being developed, we cannot yet determine the impact these regulations may have on our business. 23 In addition, growing public concern about privacy and the collection, distribution and use of information about individuals has led to self-regulation of these practices by the direct marketing industry and to increased federal and state regulation. The Direct Marketing Association, or DMA, the leading trade association of direct marketers, has adopted guidelines regarding the fair use of this information which it recommends participants, such as us, should use. We are also subject to various federal and state regulations concerning the collection, distribution and use of information regarding individuals. As a consequence of government legislation or regulation or enforcement efforts or evolving standards of fair information collection practices, we may be required to make changes to our business in ways that could diminish the effectiveness of our business or its attractiveness to potential customers. Although our compliance with the DMA's guidelines and applicable federal and state laws and regulations has not had a material adverse effect on us, we cannot assure you that the DMA will not adopt additional, more burdensome guidelines or that additional, more burdensome federal or state laws or regulations, including antitrust, consumer privacy and fair collection laws, will not be enacted or applied to us or our customers, which could materially and adversely affect our business, financial condition and results of operations. OUR OFFICERS AND DIRECTORS MAY CONTROL US. Our executive officers and directors in the aggregate, beneficially own approximately 40.6% of our common stock. These stockholders may be able to effectively exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of us, which could have a material adverse effect on our stock price. THE SALE OF SHARES ELIGIBLE FOR FUTURE SALE IN THE OPEN MARKET COULD DEPRESS OUR STOCK PRICE Sales of significant amounts of common stock in the public market in the future or the perception that sales will occur could materially and adversely affect the market price of the common stock or our future ability to raise capital through an offering of our equity securities. There are approximately 10,641,000 shares of common stock held by our stockholders that are "restricted securities," as that term is defined in Rule 144 of the Securities Act of 1933. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption for registration under Rules 144, 144(k), or 701 under the Securities Act. Currently, approximately 472,000 shares of the restricted securities are eligible for sale in the public market under Rule 144 without volume limitations or further registration under the Securities Act, not including approximately 3,528,000 shares held by our "affiliates," within the meaning of the Securities Act. These 3,528,000 shares are eligible for public sale subject to volume limitations. After June 14, 2000, approximately 6,667,000 additional shares of restricted securities will be eligible for sale in the public market under Rule 144 subject to volume limitations. The holders of these shares are entitled to require us to register their shares for public sale. There are outstanding options to purchase 2,025,290 shares of common stock which are eligible for sale in the public market from time to time depending on vesting. In addition, there are outstanding warrants to purchase up to 221,683 shares of common stock upon exercise. The securities issued upon the exercise of such warrants will be "restricted securities," as that term is defined in Rule 144 of the Securities Act, however, will be eligible for sale in the public market pursuant to Rule 144 subject to volume limitations. OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE The market price of our common stock has been and will likely continue to be highly volatile. The stock market has experienced significant price and volume fluctuations and the market prices of securities of technology companies, particularly Internet-related companies, have been highly volatile. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against the company issuing the securities. This type of litigation could result in substantial costs and a diversion of our management's attention and resources. 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Currency Rate Fluctuations. Promotions.com's results of operations, financial position and cash flows are not materially affected by changes in the relative values of non-U.S. currencies to the U.S. dollar. Market Risks. Our accounts receivable are subject, in the normal cause of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result, Promotions.com does not anticipate any material losses in this area. Interest Rate Risk. Our investments are classified as cash and cash equivalents with original maturities of three months or less. Therefore, changes in the market's interest rates do not affect the value of the investments as recorded by Promotions.com. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Independent Accountants Report 26 Balance Sheets as of December 31, 1999 and 1998 27 Statements of Operations for each of the three years in the period ended December 31, 1999 28 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1999 29 Statements of Cash Flows for each of the three years in the period ended December 31, 1999 30 Notes to Financial Statements 31 Financial Statement Schedules: I - Computation of loss per share Exhibit 11.1 II - Valuation and qualifying Accounts for each of the three years in the period ended December 31, 1999 Exhibit 99.1 All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto. 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Promotions.com, Inc.: In our opinion the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Promotions.com, Inc. (formerly Webstakes.com, Inc.) at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP New York, New York January 28, 2000 26 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) BALANCE SHEETS
December 31, ------------ 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents ..................................................... $ 34,647,630 $ 17,573 Accounts receivable, less allowance for bad debts of $574,876 and $125,000 .................................................................. 2,396,853 615,230 Prepaid expenses and other current assets , principally related party in 1999 ......................................................... 9,976,198 125,174 ------------ ------------ Total current assets ........................................................ 47,020,681 757,977 ------------ ------------ Fixed assets, net .................................................................. 3,089,311 437,759 Other assets ....................................................................... 3,615,465 -- ------------ ------------ Total assets ................................................................ $ 53,725,457 $ 1,195,736 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable .............................................................. $ 1,754,255 $ 221,745 Accrued liabilities ........................................................... 2,821,005 169,136 Deferred revenues ............................................................. 483,366 117,297 Capital lease obligation ...................................................... 290,640 31,764 Notes payable - related party, current portion ................................ 66,667 1,342,222 ------------ ------------ Total current liabilities ................................................... 5,415,933 1,882,164 ------------ ------------ Capital lease obligation, net of current portion .............................. 436,424 -- Deferred gain on sale of assets ............................................... 17,531 -- Notes payable - related party, net of current portion ....................................................................... -- 66,667 ------------ ------------ Total liabilities ........................................................... 5,869,888 1,948,831 ------------ ------------ Stockholders' equity (deficit): Common stock---par value $.01, 50,000,000 shares authorized, 14,241,244 and 5,714,184 shares issued and outstanding at December 31, 1999 and 1998, respectively ................................................... 142,412 57,142 Additional paid-in capital .................................................... 67,969,343 1,140,624 Accumulated deficit ........................................................... (20,233,041) (1,861,977) Deferred compensation ......................................................... (23,145) (88,884) ------------ ------------ Total stockholders' equity (deficit) ................................... 47,855,569 (753,095) ------------ ------------ Total liabilities and stockholders' equity ............................. $ 53,725,457 $ 1,195,736 ============ ============
The accompanying notes are an integral part of these financial statements 27 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) STATEMENTS OF OPERATIONS
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Revenues ................................................................ $ 10,456,199 $ 4,798,893 $ 1,618,277 Operating expenses: Product development ................................................ 2,130,134 548,818 181,260 Sales and marketing ................................................ 19,856,609 3,618,557 1,090,721 General and administrative exclusive of the non-cash financial advisory services of $796,691 ................................... 6,695,332 1,969,214 535,963 Non-cash financial advisory services ......................................................... 796,691 -- -- ------------ ------------ ------------ Total operating expenses ......................................... 29,478,766 6,136,589 1,807,944 ------------ ------------ ------------ Loss from operations ............................................... (19,022,567) (1,337,696) (189,667) Interest income (expense), net .......................................... 651,503 (76,347) (37,172) ------------ ------------ ------------ Net loss ................................................................ $(18,371,064) $ (1,414,043) $ (226,839) Deemed dividend on redemption of class A mandatorily redeemable convertible preferred stock .................................................. (8,712,352) -- -- ------------ ------------ ------------ Net loss attributable to common stockholders ..................................................... $(27,083,416) $ (1,414,043) $ (226,839) ============ ============ ============ Basic and diluted net loss per share attributable to common stockholders ..................................................... $ (3.61) $ (0.27) $ (.05) ============ ============ ============ Weighted average shares of common stock used in computing basic and diluted net loss per share attributable to common stockholders .............................................. 7,502,575 5,181,356 4,278,916 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 28 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock ------------ Additional Deferred Accumulated Shares Amount Paid-In-Capital Compensation Deficit Total ------ ------ --------------- ------------ ------- ----- Balance January 1, 1997 .................. 3,999,576 $ 39,996 $ (9,967) $ (221,095) $ (191,066) Debt to equity conversion at book value plus interest ............................ 999,600 9,996 533,256 543,252 Stock options to non-employees ........... 3,625 $ (3,625) -- Net and comprehensive loss ............... (226,839) (226,839) ------------ ------------ ------------ ------------ ------------ ------------ Balance December 31, 1997 ................ 4,999,176 49,992 526,914 (3,625) (447,934) 125,347 ============ ============ ============ ============ ============ ============ Debt to equity conversion at book value plus interest ............................ 715,008 7,150 524,826 531,976 Amortization of deferred compensation ............................. 3,625 3,625 Stock options to non-employees ........... 88,884 (88,884) -- Net and comprehensive loss ............... (1,414,043) (1,414,043) ------------ ------------ ------------ ------------ ------------ ------------ Balance December 31, 1998 ................ 5,714,184 57,142 1,140,624 (88,884) (1,861,977) (753,095) ============ ============ ============ ============ ============ ============ Repurchase of common stock ............... (1,714,608) (17,146) (10,270,502) (10,287,648) Issuance of common stock ................. 3,575,000 35,750 44,943,609 44,979,359 Conversion of Class B mandatorily Redeemable convertible preferred stock ... 6,666,668 66,666 39,933,334 40,000,000 Deemed dividend on redemption of Class A mandatorily redeemable convertible preferred stock .......................... (8,712,352) (8,712,352) Adjustment of deferred compensation to non-employees to current fair value ...... 140,840 (140,840) -- Stock options to non-employees ........... 793,790 (793,790) -- Amortization of deferred compensation .... 1,000,369 1,000,369 Net and comprehensive loss ............... (18,371,064) (18,371,064) ------------ ------------ ------------ ------------ ------------ ------------ Balance December 31, 1999 ................ 14,241,244 $ 142,412 $ 67,969,343 $ (23,145) $(20,233,041) $ 47,855,569 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 29 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net loss ............................................................ $(18,371,064) $ (1,414,043) $ (226,839) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of fixed assets and patents ........................................................ 597,311 147,515 37,661 Amortization of deferred compensation expense .................. 203,678 -- -- Bad debt expense ............................................... 606,932 208,604 11,829 Gain on sale of assets ......................................... (4,542) -- -- Non-cash financial advisory services expense ................... 796,691 3,625 -- Interest payable converted into common stock ................... 35,000 24,826 33,256 Changes in operating assets and liabilities: Increase in accounts receivable ................................ (2,388,440) (710,498) (72,184) (Increase) in prepaid expenses and other current assets, principally related party in 1999 ............ (9,851,024) (122,423) (2,751) (Increase) decrease in other assets ............................ (3,615,465) 41,708 (41,708) Increase in accounts payable ................................... 1,532,510 66,488 107,096 Increase in accrued liabilities ................................ 2,651,869 147,055 5,147 Increase in deferred revenue ................................... 366,069 93,964 23,333 ------------ ------------ ------------ Net cash used in operating activities ............................... (27,440,475) (1,513,179) (125,160) ------------ ------------ ------------ Cash flows from investing activity: Purchase of fixed assets ......................................... (2,498,014) (301,444) (203,060) Proceeds from sale of fixed assets ............................... 157,294 ------------ ------------ ------------ Net cash used in investing activity ................................. (2,340,720) (301,444) (203,060) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of notes payable .......................... 120,000 1,820,000 390,000 Principal payments on notes payable-related party ................ (72,222) (61,111) -- Proceeds from issuance of common stock, net ...................... 44,979,359 -- -- Principal payments on capital lease obligations .................. (190,885) (12,058) -- Proceeds from issuance of class A mandatorily redeemable convertible preferred stock ......................... 3,575,000 -- -- Proceeds from issuance of class B mandatorily redeemable convertible preferred stock ......................... 40,000,000 -- -- Redemption of class A mandatorily redeemable convertible preferred stock and repurchase of common stock ................................................... (24,000,000) ------------ ------------ ------------ Net cash provided by financing activities ........................... 64,411,252 1,746,831 390,000 ------------ ------------ ------------ Net increase (decrease) in cash for the period ...................... 34,630,057 (67,792) 61,780 Cash and cash equivalents, beginning of period ...................... 17,573 85,365 23,585 ------------ ------------ ------------ Cash and cash equivalents, end of period ............................ $ 34,647,630 $ 17,573 $ 85,365 ------------ ============ ============ Cash paid during the period for interest ............................ $ 56,562 $ 18,530 $ -- ============ ============ ============ Supplemental disclosure of non-cash investing, financing and other activities: 1999 1998 1997 ---- ---- ---- Notes payable converted into common and preferred stock .................................................. $ 1,390,000 $ 521,956 -- Preferred stock converted into common stock ................................................ $ 40,000,000 -- -- Equipment acquired under capital leases ............................................. $ 840,000 $ 43,822 -- Barter transactions ................................................. $ 2,083,657 $ 2,039,144 $ 484,844
The accompanying notes are an integral part of these financial statements. 30 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION Promotions.com, Inc. (the "Company"), was incorporated and commenced operations in the state of New York on January 8, 1996 as Webstakes, Inc. and was reincorporated in the State of Delaware on June 5, 1996 as Netstakes, Inc. On June 11, 1999, the Company changed its name to Webstakes.com, Inc. On January 27, 2000, the Company changed its name to Promotions.com, Inc. Promotions.com, Inc. is a global Internet promotion solutions company. Combining technology, data and promotions expertise, the Company provides promotion solutions to help companies achieve their overall marketing and business objectives. The company generates revenues through WEBSTAKES.COM., a web site dedicated to Internet sweepstakes and promotions; Promotions.com DIRECT, which offers targeted email and lead generation; and Promotions.com CUSTOM SOLUTIONS, a full service integrated Internet promotion services group. The Company has a limited operating history and its prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for Internet products and services. These risks include the failure to develop and extend the Company's online service brand, the rejection of the Company's services by web consumers, vendors and/or advertisers, the inability of the Company to maintain and increase the levels of traffic on its online service, as well as other risks and uncertainties. In the event that the Company does not successfully implement its business plan, certain assets may not be recoverable. 2. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION PROMOTION SERVICES During 1999, revenue was generated primarily by promotion services and promotion custom solutions services. Principally all of the Company's historical revenues have been derived from promotion services. Promotion services revenues are derived principally from contracts in which the Company typically guarantees a minimum number of impressions, or times that the customers name, logo or other identifier appears in pages viewed by visitors to WEBSTAKES.COM, and/or times that visitors are delivered to the customer's web site, over a specified period of time for a fixed fee. The contracts typically include cancellation clauses ranging from 30 to 60 days. Promotion services revenues are recognized ratably in the period in which the promotion is run, provided that no significant Company obligations remain. To the extent that minimum guarantees are not met, the Company defers recognition of the corresponding revenues until the guaranteed minimums are achieved and the customers receive credits or refunds for the guaranteed services not provided. Promotion services revenues were approximately 89%, 93% and 96% of total revenues for the years ended December 31, 1999, 1998 and 1997, respectively. PROMOTION CUSTOM SOLUTIONS SERVICES Promotion CUSTOM SOLUTIONS services provides custom turnkey solutions to create and manage promotions on a customers own web site. Revenues are derived principally from contracts in which the company typically provides services for the administration and implementation of the promotion. The contracts typically include cancellation clauses ranging from 30 to 60 days. Since there are significant up front customized design work incurred before a promotion begins, the company recognizes the portion of revenue related to the customized design work at the time the work is performed. The remaining revenue is recognized ratably in the period in which the promotion is run, provided that no significant company obligations remain. Promotion CUSTOM SOLUTIONS services revenues were approximately 11%, 7%, and 4% of total revenues for the years ended December 31, 1999, 1998 and 1997, respectively. Included in revenues are barter revenues from the exchange by the Company with counterparties of promotion services for reciprocal advertising, or applicable goods and services. Barter revenues are recorded as promotion service revenues at the lower of the estimated fair value of goods and services received or promotion services provided, and are recognized when the counterparty's promotions are run by the Company. The fair value of promotional services provided and received is determined based on the value of similar services sold and purchased for cash by the Company. Barter revenues represented 20%, 42% and 30% of total revenues for the years ended December 31, 1999, 1998 and 1997, respectively. Barter expenses is recognized when the Company's promotions are run on the counterparty's web sites, which is typically in the same period the related barter revenue is recognized. 31 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) CONCENTRATION OF CREDIT RISK In 1999 and 1998, no one customer accounted for greater than 10% of total revenues or 10% of net accounts receivable. One customer accounted for 35% of total revenues in 1997. In 1999, 1998, and 1997, revenues from the Company's five largest customers accounted for 17%, 24% and 53% of total revenues, respectively. FIXED ASSETS Fixed assets are stated at costs. Fixed assets under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or the leased assets at the inception of the lease. The cost of additions and betterment's are capitalized, and repairs and maintenance costs are charged to operations in the periods incurred. Depreciation of computer and office equipment and furniture and fixtures is provided for using the straight-line method over their estimated useful lives of three years to five years. Amortization of leasehold improvements is provided for over the lesser of the term of the related lease or the estimated useful life of the improvement. Accumulated amoritization includes the amortization of assets recorded under capital leases. Depreciation and amortization expense has been included in general and administrative expense. The Company recognizes gains or losses on the sale or disposal of fixed assets in the period of disposal. As required by Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," management reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. This evaluation is based on a number of factors including expectations for operating income and undiscounted cash flows that will result from the use of such assets. The Company has not identified any such impairments. INCOME TAXES The Company recognizes deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when it is more likely than not that deferred tax assets will not be realized. CASH AND CASH EQUIVALENTS Cash and cash equivalents include money market accounts and all highly liquid investments purchased with original maturities of three months or less. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their short maturities. The carrying amount of the Company's note payable approximates the fair value of such instruments based upon management's best estimate of interest rates that would be available to the Company for similar debt obligations at December 31, 1999 and 1998. 32 STOCK-BASED EMPLOYEE COMPENSATION The accompanying financial position and results of operations of the Company have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, generally no compensation expense is recognized in connection with the awarding of stock option grants to employees, provided that, as of the grant date, all terms associated with the award are fixed and the quoted market price of the Company's stock as of the grant date is equal to or less than the option exercise price. Disclosure required by Statement of Financial Accounting Standards No. 123,"Accounting for Stock-Based Compensation" ("SFAS No. 123"), including proforma operating results had the Company prepared its financial statements in accordance with the fair value based method of accounting for stock-based compensation, has been included in Note 6. The fair value of options and warrants granted to non-employees for goods or services are included in the financial statements and expensed as the goods are utilized or the services performed. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates and assumptions made by the Company include those related to the useful lives and recoverability of fixed assets, recoverability of deferred tax assets, allowance for doubtful accounts and the fair value of products and services exchanged in barter transactions. NET LOSS PER SHARE Basic loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted-average number of common and common stock equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation if their effect is antidilutive. As the Company reported net losses for the years ended December 31, 1999, 1998, and 1997 all 2,025,290, 114,009 and 66,228 of the options outstanding at December 31, 1999, 1998 and 1997, respectively, were antidilutive and therefore, there were no reconciling items between basic and diluted loss per share for the years then ended. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," requires the presentation and disclosure of all changes in equity from non-owner sources as "Comprehensive Income". The Company had no items of Comprehensive Income in years ended December 31, 1999, 1998 and 1997. RECLASSIFICATIONS Certain prior years' balances have been reclassified to conform with the current year's presentation. ADVERTISING COSTS Advertising production costs are recorded as expense the first time an advertisement appears. All other advertising costs are expensed as incurred. Advertising expense totaled approximately $14.0 million, $2.3 million, and $524,000 for 1999, 1998, and 1997, respectively. SEGMENTS The Company adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", in 1998. This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that it does not have any separately reportable business segments as of December 31, 1999. 33 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. FIXED ASSETS Fixed assets consist of the following: DECEMBER 31, ------------ 1999 1998 ---- ---- Computer and office equipment .................... $ 2,660,857 $ 542,144 Computer software costs .......................... 196,190 -- Furniture and fixtures ........................... 95,525 34,307 Leasehold improvements ........................... 10,133 10,133 Capital leases ................................... 839,475 43,822 ----------- ----------- 3,802,180 630,406 Less accumulated depreciation and amortization ... (712,869) (192,647) ----------- ----------- $ 3,089,311 $ 437,759 =========== =========== Depreciation and amortization of fixed assets was approximately $597,311, $147,515 and $37,661 for the years ended December 31, 1999, 1998 and 1997 respectively. Computer Software Costs In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company adopted SOP 98-1 during the first quarter of 1999. Costs incurred during the preliminary project stage are expensed as incurred. Computer software costs incurred during the application development stage are capitalized. Typically, these costs relate to internal payroll costs of employees directly associated with the development of the internal use computer software. Amortization commences once the software is ready for its intended use and is amortized by the straight-line method over the estimated useful life, typically twelve to eighteen months. Amortization expense for computer costs totaled approximately $78,000 for 1999 and unamortized computer software costs totaled approximately $118,000 as of December 31, 1999. 4. ACCRUED LIABILITIES Accrued liabilities consist of the following: DECEMBER 31, ------------ 1999 1998 ---- ---- Compensation and related expenses ............ $ 422,610 $ 18,194 Sales and marketing .......................... 1,581,749 -- Professional services ........................ 314,045 -- Other ........................................ 502,601 150,942 ---------- ---------- $2,821,005 $ 169,136 ========== ========== 5. RELATED-PARTY TRANSACTIONS (SEE ALSO NOTES 9 and 12) The Company entered into advertising transactions with a stockholder in the amounts of $0, $35,070 and $81,239, for the years 1999, 1998 and 1997, respectively. 34 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. STOCK OPTION PLAN: 1997 Stock Option Plan In 1997, the Company's Board of Directors and stockholders adopted the Company's Stock Option Plan (the "Plan"). The Plan provides for the granting, at the discretion of the Stock Option Committee of the Board of Directors (the "SOC"), of: (i) options that are intended to qualify as incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, as amended (the "Code"), to employees and (ii) options not intended to so qualify to employees, officers, consultants and directors. Amended in April 1999, the total number of shares of common stock for which options may be granted under the Plan is 450,000. The exercise price of all stock options granted under the Plan is determined by the SOC at the time of grant. The maximum term of each option granted under the Plan is 10 years from the date of grant. Options generally vest ratably over a four year period. As of December 31, 1999 and 1998, an aggregate of -0- and 135,991 shares were available for future grants under the Plan, respectively. 1999 Equity Compensation Plan In June 1999, the Company's Board of Directors and stockholders adopted the Company's Equity Compensation Plan (the "1999 Plan"). The 1999 Plan provides for the granting, at the discretion of a committee of the board of: (i) options that are intended to qualify as incentive stock options, within the meaning of Section 422 of the Code, to employees and (ii) options not intended to so qualify to employees, officers, consultants and directors. The Company has 2,000,000 shares of common stock authorized for grants under the 1999 Plan. The exercise price of all stock options granted under the 1999 Plan is determined by the committee of the board at the time of the grant. The maximum term of each option granted under the 1999 Plan is 10 years from the date of grant. Options generally vest ratably over a four year period. As of December 31, 1999, an aggregate of 424,710 were available for future grants under the plan. Stock-Based Compensation The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock--Issued to Employees" ("APB 25") and related interpretations in accounting for its stock option issuances. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", whereby compensation expense is recognized ratably over the vesting period. Had compensation cost for the Company's stock options issued at the fair value of the Company's stock been determined based on the fair value of the stock options at the grant date for awards in 1999 and 1998 consistent with the provisions of SFAS No. 123, the Company's net loss would have been adjusted to the pro forma amounts indicated below: DECEMBER 31, ------------ 1999 1998 ---- ---- Net loss As reported .......................... $27,083,416 $1,414,043 Pro Forma ............................ $32,736,442 $1,426,552 Net loss per share As reported--basic and diluted ...... $(3.61) $(0.27) Pro forma--basic and diluted ........ $(4.36) $(0.28) 35 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. STOCK OPTION PLAN - (CONTINUED): The fair value of each option granted in 1999 after the initial public offering was estimated using the Black-Scholes option-pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends, and the risk free interest rate for the expected term of the option. The fair value of each option granted in 1999 prior to the initial public offering and in 1998 was estimated using the minimum value method of the Black-Scholes option pricing model which assumes no volatility. The values were obtained using assumptions which were derived using information supplied by the Company. Changes in the information would affect the assumptions and the option prices derived from those assumptions. The weighted average assumptions used for grants made in 1999 and 1998 were as follows: 1999 1998 ---- ---- Risk free interest rate........................... 6.7 5.69 Expected option life (years)...................... 7 7 Expected future dividend yield.................... 0.0% 0.0% Expected volatility............................... 59% 0.0% As the fiscal year 1997 option grants were made on December 31, 1997, no compensation cost would have resulted for the fiscal year. In December 1997, the Company issued options to non-employee consultants to purchase up to 27,028 shares of the Company's common stock, which vest ratably over two years. During 1999, the Company issued options to non-employee consultants to purchase up to 69,972 shares of the Company's common stock, which vested on the date of grant. In accordance with Emerging Issues Task Force Abstract No. 96-18, "Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", the Company is recording the value of the services being received based on the fair value of the options provided or the services received which ever is more reliably measured. The fair value of these options has been estimated using the Black-Scholes pricing model and has been recorded as deferred compensation and is being amortized as service expense over the vesting period. Final measurement will occur on the vesting date. The following table summarizes the activity in options under both plans: WEIGHTED AVERAGE FAIR VALUE/EXCERISE OPTIONS / PRICE PER SHARES OPTION/PER SHARE ------ ---------------- Outstanding, January 1, 1997 ................ -- -- Granted ..................................... 66,228 $1.16 Outstanding, December 31, 1997 .............. 66,228 $1.16 Granted ..................................... 73,081 $3.02 Forfeited ................................... (25,300) $2.82 Outstanding, December 31, 1998 .............. 114,009 $1.98 Granted ..................................... 1,974,059 $9.97 Forfeited ................................... (62,778) $10.48 Outstanding, December 31, 1999 .............. 2,025,290 $9.57 36 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. STOCK OPTION PLAN - (CONTINUED): As of December 31, 1999 and 1998, 234,114 and 23,566 options were exercisable with a weighted average per share fair value/exercise price of $7.45 and $1.19. No options were exercisable at December 31, 1997. At December 31, 1999, 1998 and 1997, the weighted average remaining contractual life of the options outstanding was approximately 9.51 years, 9.47 years and 10.00 years, respectively. 7. DEFINED CONTRIBUTION PLAN The Company began sponsoring a defined contribution plan for its employees which was effective January 1, 1998. Under the 401(K) Savings Plan (the "Plan"), employees are allowed to contribute up to 15% of their salary to the Plan, as defined. The Company makes voluntary contributions to the Plan matching 50% of the first 6% of employee contributions, which vest over a period of 4 years at 25% per year starting in the second year of service. The total Company contributions in 1999 and 1998 were $44,808 and $24,556, respectively. 8. COMMITMENTS LEASES: The Company leases office space in New York and California under non-cancelable operating leases expiring at various dates through 2002. The following is a schedule of future minimum lease payments under non-cancelable operating leases as of December 31, 1999: YEAR ENDING DECEMBER 31 2000.................................................... $267,663 2001.................................................... 142,191 2002.................................................... 19,792 -------- $429,646 ======== Rent expense was $388,267, $90,693 and $16,439 for the periods ended December 31, 1999, 1998 and 1997, respectively. LEASE AGREEMENT In March 1999, the Company entered into a secured financing agreement with a leasing company for the leasing of equipment in an amount up to $1 million. The lease has a one-year availability period and a term of 36 months, with interest and principal payable monthly. At December 31, 1999, the Company has leased approximately $840,000 of equipment under the lease. These items have been accounted for as a capital lease. The future minimum lease payments due under capital leases, together with the present value of such payments is $809,589 less $82,525 representing interest. 9. CONVERTIBLE NOTES AND EQUIPMENT LOAN--RELATED PARTY In July 1996, the Company entered into a promissory note agreement with a former holder of class A mandatorily redeemable convertible preferred stock (the "Class A") (the "holder"). Under the agreement, the Company received $260,000 during 1996 and an additional $240,000 during 1997. At the time of issuance, the note was equal to the fair value of shares received upon conversion. This note, and the interest related thereto, was converted into 999,600 shares of common stock at $.54 per share in September 1997. 37 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. CONVERTIBLE NOTES AND EQUIPMENT LOAN--RELATED PARTY-(CONTINUED): In September 1997, the Company entered into a promissory note agreement with the holder. Under the agreement, the Company received $150,000 during 1997 and an additional $350,000 during 1998. At the time of issuance, the note was equal to the fair value of shares received upon conversion. This note, and the interest related thereto, was converted into 715,008 shares of common stock at $.73 per share in September 1998. In December 1997, the Company entered into a promissory note agreement with the holder. Under this agreement, the Company received $200,000 during 1998. The terms of the agreement call for 36 equal monthly payments of principal and accrued interest. At December 31 1999, minimum future payments due under notes payable were $66,667 for the year 2000. In July 1998, the Company entered into an agreement with the holder under which the holder agreed to purchase at a future date 50,000 shares of class A. During the course of 1998, and in January 1999, the holder advanced the Company $1,270,000 and $120,000, respectively, at an interest rate of prime plus 3%. At the time of issuance, the face amount of the note was equal to the fair value of shares to be received upon conversion. On January 20, 1999, the outstanding principal balance of $1,390,000 plus interest was converted into the agreed upon 50,000 class A and the Company received additional cash of $3,575,000 for the remaining class A. See Note 10, below. 10. CAPITAL STOCK At December 31, 1999, the authorized capital stock of the Company consisted of 50,000,000 shares of common stock, $.01 par value per share. The Board of Directors (the "Board") of the Company has the authority to issue preferred stock in classes with rights and privileges determined by the Board. Upon formation of the Company, 3,999,576 shares of $.01 par value common stock were issued to the founders. In June 1999, the Company's board of directors and stockholders amended the Company's Certificate of Incorporation to create the class B, $.01 par value and authorized 6,700,000 shares of the class B. The previously existing class B preferred stock became the class C preferred stock, no par value. Additionally, the number of authorized shares of common stock was increased to 50,000,000 shares. In 1997, the Board approved a 1 for 1,176 common stock split, which has been retroactively restated to the inception date. However, the retroactive restatement of the common stock, $.01 par value, at inception exceeded the beginning capital infusion of $30,000, resulting in negative additional paid-in capital at January 1, 1997 of $9,967. PREFERRED STOCK In January 1999, the Company issued 50,000 shares of the class A through a private placement, in consideration for net proceeds of approximately $5,000,000, inclusive of the conversion of $1,390,000 of advances plus interest. The holders of the class A were entitled to receive cumulative or noncumulative dividends when and if declared by the Board. The preferred shares were redeemable at the option of the holders at any time after August 1, 2003 for $100 per share (par value), plus accrued and unpaid dividends at the redemption date. 38 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 10. CAPITAL STOCK-(CONTINUED): PRIVATE PLACEMENT In June 1999, the Company completed a private placement and issued 6,666,668 shares of class B, in consideration for net proceeds of $40,000,000. Subsequently, the Company repurchased all 50,000 shares of class A and 1,714,608 shares of common stock for $24,000,000. The repurchased class A was cancelled. In accordance with EITF D-42 "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock," the excess of the consideration paid to the holders of the class A in the redemption of the 50,000 shares over the carrying amount of class A represents a deemed dividend or return to the holders of the class A of $8,712,352. Each share of the class B is convertible into one share of common stock and automatically converted, on terms as defined, at this one for one ratio upon completion of the Company's IPO. As the Class B was only convertible upon closing of the Company's IPO, which was outside the control of the holder, in accordance with EITF D-60 "Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable Conversion Feature," the Company looked to the commitment date as the measurement date in determining whether the issuance of the Class B included a beneficial conversion feature. It was determined that as the issuance price equaled the common stock fair value on that date, no beneficial conversion feature existed. WARRANTS In March 1999, the Company issued to Allen & Co. warrants to purchase 168,350 shares of the Company's common stock (which was increased in June 1999 to a total of 221,683 shares of common stock), for financial advisory services provided plus three payments of $100,000 due on June 30, 1999, 2000 and 2001 in exchange for financial advisory services to be provided from non-employee consultants. The Company has recorded the value of the services being received by valuing the warrants using the Black-Scholes pricing model and such cost is being expensed over the vesting period. Final measurement will occur on the vesting date. As the warrants vested upon issuance, all of the expense was recognized as non-cash financial advisory services expense in the year ended December 31, 1999. 39 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 11. INCOME TAXES There is no current provision for corporate income taxes as the Company generated a net operating loss for tax purposes. The difference between the provision for income taxes computed at the statutory rate and the reported amount of tax expense attributable to income before income taxes for the years ended December 31, 1999, 1998 and 1997 are as follows:
December 31, ------------ 1999 1998 1997 ---- ---- ---- Tax benefit at statutory rates ............................. $(6,429,872) $(494,915) $(79,394) State and local income taxes, net of federal income tax benefit ............................................. (2,020,817) (155,545) (24,952) Other net .................................................. (25,799) 11,113 7,000 Valuation allowance adjustment ............................. 8,476,488 639,347 97,346 ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
The components of the net deferred tax asset as of December 31, 1999, 1998 and 1997 consist of the following:
December 31, ------------ 1999 1998 1997 ---- ---- ---- Deferred tax assets: Operating loss carryforward ................................... $9,207,795 $757,574 $206,169 Allowance for doubtful accounts ............................... 264,439 57,500 5,842 Accrued expenses .............................................. -- 33,120 -- Other ......................................................... 15,717 3,450 -- ---------- ---------- ---------- Total deferred tax assets ................................... 9,487,951 851,644 212,011 Deferred tax liabilities: Capitalized software costs ....................................... 54,214 -- -- Depreciation and amortization .................................... 119,759 14,155 13,869 ---------- ---------- ---------- Total deferred tax liabilities ........................... 173,973 14,155 13,869 ---------- ---------- ---------- Net deferred tax asset ........................................... 9,313,977 837,489 198,142 Less: valuation allowance ........................................ 9,313,977 837,489 198,142 ---------- ---------- ---------- Deferred tax asset ............................................... $ -- $ -- $ -- ========== ========== ==========
The net deferred tax asset has been fully reserved due to the uncertainty of the Company's ability to realize this asset in the future. As of December 31, 1999, the Company had available for federal income tax purposes net operating loss carryforwards of approximately $20.0 million which expire in the years 2012 through 2019. 40 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 12. PREPAID EXPENSES-RELATED PARTY In June 1999, the Company entered into a two-year sponsorship agreement with Excite under which Excite agreed to promote WEBSTAKES.COM through ad banner placements and links to WEBSTAKES.COM and its promotions on Excite.com., Web Crawler.com and Classified 2000.com. The Company prepaid Excite $5.6 million during 1999 for this two-year agreement. At December 31, 1999, the total prepaid expense related to this agreement was $4.1 million of which $2.8 million is recorded in prepaid expenses and other current assets and $1.3 million is recorded in other assets. Amounts are being amortized ratably over the two year term of the contract. At Home Corporation, the parent company of Excite, is a principal stockholder of the Company. In June 1999, the Company entered into a two-year service agreement with MatchLogic, Inc., a wholly owned subsidiary of Excite, pursuant to which MatchLogic will provide ad serving and targeting, data processing analysis, enhancement and other services to Promotions.com. The Company prepaid MatchLogic $13.1 million during 1999 for this two-year agreement. At December 31, 1999, the total prepaid expenses related to this agreement was $8.9 million of which $6.6 million is recorded in prepaid expenses and other current assets and $2.3 million is recorded in other assets. Amounts are being amortized ratably over the two year term of the contract. 13. SUBSEQUENT EVENTS (UNAUDITED) LEASE In January 2000, the Company entered into an agreement to lease an additional 36,000 square feet of office space in New York City. In lieu of a cash security deposit, the Company delivered to the landlord an irrevocable, unconditional and transferable letter of credit in the amount of $1,600,000. 41 PROMOTIONS.COM, INC. (FORMERLY WEBSTAKES.COM, INC.) ITEM 9. Changes in and Disagreements with Accounts and Accounting Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Incorporated by reference from the information in our proxy statement for the 2000 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. Item 11. Executive Compensation Incorporated by reference from the information in our proxy statement for the 2000 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference from the information in our proxy statement for the 2000 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. Item 13. Certain Relationships and Related Transactions Incorporated by reference from the information in our proxy statement for the 2000 Annual Meeting of Stockholders which we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on form 8-K (a) The following documents are filed as part of this report: (1) Financial Statements: See Index to Financial Statements at Item 8 on page 25 of this report. (2) Financial Statement Schedule: See Index to Financial Statements at Item 8 on page 25 of this report. 42 (a)(3) Exhibits The following is a list of exhibits filed as part of this report on Form 10-K. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous is indicated parenthetically except for those situations where the exhibit number was the same as set forth below.
Exhibit Number Description - ------ ----------- 3.1(1) - Certificate of Incorporation 3.2(1) - Certificate of Amendment to the Certificate of Incorporation, dated February 23, 1999 3.3(1) - Certificate of Amendment to the Certificate of Incorporation dated January 17, 1999 3.4(1) - Certificate of Amendment to the Certificate of Incorporation, dated June 11, 1999 3.5(1) - Amended and Restated Bylaws 3.6(3) - Amended and Restated Bylaws dated September 29, 1999 3.7* - Certificate of Ownership and Merger dated January 26, 2000 10.1(1)(2) - Netstakes, Inc. Stock Option Plan 10.2(1)(2) - 1999 Equity Compensation Plan 10.3(1) - Master Lease Agreement No.L6731 with Leasing Technologies International, Inc. dated November 19, 1999 10.4(1) - Master Service Agreement between Registrant and Frontier Global Center dated February 8, 1999 10.5(1)(2) - Letter Agreement between Registrant and Steven H. Krein, dated June 11, 1999 10.6(1)(2) - Letter Agreement between Registrant and Daniel Feldman, dated June 11, 1999 10.7(1) - Stock Purchase Agreement dated June 11, 1999 10.8* - Master Lease Agreement between Registrant and 450 Westside Partners, LLC dated January 12, 2000 11.1* - Statement regarding computation of per share earnings 23.1* - Consent of PricewaterhouseCoopers LLP. 27.1* - Financial data schedule 99.1* - Valuation and Qualifying Accounts.
* Filed herewith. (1) Filed as an exhibit to the Registrants Registration Statement on Form S-1 (Registration No. 333-80593) filed with the Commission on June 14, 1999, amended and incorporated herein by reference. (2) Compensatory plans and arrangements for executives and others. (3) Filed as an exhibit on Form 10-Q filed on November 15, 1999 and incorporated herein by reference. (b) Reports on form 8-K No reports on Form 8-K were filed or required to be filed for the last quarter of the fiscal year. 43 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. Dated: March 30, 2000 Promotions.com, Inc. By /s/ Steven H. Krein ------------------------------- Steven H. Krein Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated this 30th day of March, 2000. /s/ Daniel J. Feldman - ----------------------------- Daniel J. Feldman President and Director /s/ Thomas E. Brophy - ----------------------------- Thomas E. Brophy Chief Financial Officer (Chief Accounting Officer) /s/ Dirk A. Hall - ----------------------------- Dirk A. Hall Director /s/ Kristopher A. Wood - ----------------------------- Kristopher A. Wood Director /s/ Arnold Greenberg - ----------------------------- Arnold Greenberg Director 44 EX-3.7 2 CERTIFICATE OF OWNERSHIP AND MERGER EXHIBIT 3.7 CERTIFICATE OF OWNERSHIP AND MERGER MERGING PROMOTIONS.COM, INC. INTO WEBSTAKES.COM, INC. Webstakes.com, Inc., a corporation organized and existing under the laws of Delaware, does hereby certify: FIRST: That this corporation was incorporated on the 6th day of June, 1996, pursuant to the General Corporation Law of the State of Delaware. SECOND: That this corporation owns all of the outstanding shares of the stock of Promotions.com, Inc., a corporation incorporated on the 17th day of December 1999, pursuant to the General Corporation Law of the State of Delaware. THIRD: That this corporation, by the following resolutions of its Board of Directors, duly adopted by the unanimous written consent of its members, filed with the minutes of the Board on the 19th day of January, 2000 determined to and did merge into itself said Promotions.com, Inc.: RESOLVED, that Promotions.com, Inc. be merged with and into the Company and that the Company be the surviving corporation in such merger. FURTHER RESOLVED, that the merger shall be effective January 31, 2000; FURTHER RESOLVED, that upon the effectiveness of the merger, the Company shall assume all of the liabilities and obligations of Promotions.com, Inc.; FURTHER RESOLVED, that the proper officers of this corporation be and he or she are hereby authorized to make and execute a Certificate of Ownership and Merger and to cause the same to be filed with the Secretary of State and to do all acts and to execute, sign, verify, acknowledge, deliver, file and record all such other instruments, returns and documents, in the name and on behalf of Webstakes.com, Inc. and under its corporate seal or otherwise, as they in their judgment shall deem necessary, proper or advisable in order to affect said merger; and FURTHER RESOLVED, that upon the effectiveness of the merger, the name of the Company shall be changed to "Promotions.com, Inc." by amending Article I of the Certificate of Incorporation of this Company to read as follows: Article I The name of the corporation is Promotions.com, Inc. FOURTH: Anything herein or elsewhere to the contrary notwithstanding, this merger may be amended or terminated and abandoned by the Board of Directors of Webstakes.com, Inc. at any time prior to the time that this merger being filed with the Secretary of State becomes effective. FIFTH: Article I of the Certificate of Incorporation of the Company is hereby amended, effective January 31, 2000, to read as follows: Article I The name of the corporation is Promotions.com, Inc. IN WITNESS WHEREOF, Webstakes.com, Inc. has caused this Certificate of Merger to be signed by Daniel J. Feldman, its President, this 26th day of January, 2000. WEBSTAKES.COM, INC. By: ----------------------------- Name: Daniel J. Feldman Title: President -2- EX-10.8 3 MASTER LEASE AGREEMENT BES:PAL 1169800060 110599 V1 121099 V2 122199 V3 EXHIBIT 10.8 LEASE 450 WESTSIDE PARTNERS, LLC, Landlord TO WEBSTAKES.COM, INC. Tenant - -------------------------------------------------------------------------------- Premises: A portion of the Seventh (7th) floor at 450 West 33rd Street, New York, New York 10001 - -------------------------------------------------------------------------------- TABLE OF CONTENTS CAPTION PAGE ---- ARTICLE 1 Demise, Premises, Term, Rents....................................1 ARTICLE 2 Use..............................................................3 ARTICLE 3 Failure To Give Possession.......................................4 ARTICLE 4 Preparation of the Demised Premises..............................5 ARTICLE 5 Adjustments Of Rent.............................................11 ARTICLE 6 Security Deposit................................................20 ARTICLE 7 Subordination, Notice To Lessors And Mortgagees.................23 ARTICLE 8 Quiet Enjoyment.................................................25 ARTICLE 9 Assignment And Subletting.......................................25 ARTICLE 10 Compliance With Laws And Requirements Of Public Authorities....33 ARTICLE 11 Insurance......................................................36 ARTICLE 12 Rules And Regulations..........................................39 ARTICLE 13 Tenant's Changes...............................................40 ARTICLE 14 Tenant's Property..............................................43 ARTICLE 15 Repairs And Maintenance........................................45 ARTICLE 16 Electricity....................................................46 ARTICLE 17 Heat, Ventilating And Air-Conditioning.........................49 ARTICLE 18 Landlord's Other Services......................................51 ARTICLE 19 Access, Changes In Building Facilities, Name...................53 ARTICLE 20 Notice Of Accidents............................................55 ARTICLE 21 Non-Liability And Indemnification..............................55 ARTICLE 22 Destruction Or Damage..........................................57 ARTICLE 23 Eminent Domain.................................................59 ARTICLE 24 Surrender; Holdover............................................60 ARTICLE 25 Conditions Of Limitation.......................................61 ARTICLE 26 Re-Entry By Landlord...........................................63 ARTICLE 27 Damages........................................................64 ARTICLE 28 Waiver.........................................................66 ARTICLE 29 No Other Waivers Or Modifications..............................67 ARTICLE 30 Curing Tenant's Defaults, Additional Rent......................68 ARTICLE 31 Broker.........................................................69 ARTICLE 32 Notices........................................................69 ARTICLE 33 Estoppel Certificate...........................................70 2 ARTICLE 34 Arbitration....................................................70 ARTICLE 35 No Other Representations, Construction, Governing Law, Consents ......................................................71 ARTICLE 36 Parties Bound..................................................72 ARTICLE 37 Certain Definitions And Construction...........................72 ARTICLE 38 Adjacent Excavation And Construction; Shoring; Vaults..........73 ARTICLE 39 Renewal Option.................................................73 ARTICLE 40 Temporary Space................................................76 Testimonium and Signatures......................................71 Acknowledgments.................................................72 EXHIBIT A DESCRIPTION....................................................79 EXHIBIT B FLOOR PLAN.....................................................80 EXHIBIT C TEMPORARY SPACE................................................81 EXHIBIT D RULES AND REGULATIONS..........................................82 EXHIBIT E DEFINITIONS....................................................86 EXHIBIT F CERTIFICATE OF OCCUPANCY.......................................89 - ------------------------- This Index is included only as a matter of convenience of reference and shall not be deemed or construed in any way to define or limit the scope of the following lease or the intent of any provision thereof. 3 LEASE LEASE dated as of January 12, 2000, between 450 WESTSIDE PARTNERS, LLC, a Delaware limited liability company, having an office at 230 Park Avenue, New York, New York 10169 (hereinafter referred to as "Landlord") and WEBSTAKES.COM, INC., a Delaware corporation having an office at 220 East 23rd Street, Suite 607, New York, New York 10010 (hereinafter referred to as "Tenant"). WITNESSETH: ARTICLE 1.. Demise, Premises, Term, Rents 1.01 Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the premises hereinafter described, in the building located at 450 West 33rd Street, in the Borough of Manhattan, City, County and State of New York (hereinafter referred to as the "Building"), on the parcel of land more particularly described in Exhibit A (hereinafter referred to as the "Land"), for the term hereinafter stated, for the rents hereinafter reserved and upon and subject to the conditions (including limitations, restrictions and reservations) and covenants hereinafter provided. Each party hereby expressly covenants and agrees to observe and perform all of the conditions and covenants herein contained on its part to be observed and performed. 1.02 The premises hereby leased to Tenant are a portion of the seventh (7th) floor of the Building, as shown on the floor plan annexed hereto as Exhibit B. Said premises together with all fixtures and equipment which at the commencement, or during the term, of this lease are thereto attached (except items not deemed to be included therein and removable by 4 Tenant as provided in Article 14) constitute and are hereinafter referred to as the "Demised Premises". 1.03 The term of this lease, for which the Demised Premises are hereby leased, shall commence on a date (herein referred to as the "Commencement Date") which shall be (i) the day on which the portions of "Landlord's Work" (as defined in Article 4) set forth in subsection 4.02(a) and (b) have been substantially completed (as set forth in Section 4.04) and Landlord shall have given Tenant at least three (3) days prior notice thereof (which notice, notwithstanding anything in this lease to the contrary, may be hand-delivered) or (ii) the day Tenant, or anyone claiming under or through Tenant, first occupies the Demised Premises for business, whichever occurs earlier, and shall end at 11:59 p.m. of the last day of the calendar month in which occurs the day preceding the fifteenth (15th) anniversary of the Rent Commencement Date (as defined in Section 1.08), which ending date is hereinafter referred to as the "Expiration Date", or shall end on such earlier date upon which said term may expire or be cancelled or terminated pursuant to any of the conditions or covenants of this lease or pursuant to law. Promptly following the Commencement Date the parties hereto (hereinafter sometimes referred to as the "parties" and individually as a "party") shall enter into a recordable supplementary agreement setting forth the dates of the Commencement Date and the Expiration Date and if they cannot agree thereon within fifteen (15) days after either party's request therefor, such dates shall be determined by arbitration in the manner provided in Article 34. Notwithstanding the foregoing, the failure of the parties to execute such agreement shall not defer the Commencement Date or otherwise invalidate this lease. 1.04 The "rents" reserved under this lease, for the term thereof, shall be and consist of: (a) "fixed rent" as follows: (i) $1,232,230.50 per annum ($102,685.88 per month) from the Rent Commencement Date (as hereafter defined) through the day next preceding the fifth (5th) anniversary of the Rent Commencement Date, both dates inclusive; and (ii) $1,342,579.50 per annum ($111,881.63 per month) from the fifth (5th) anniversary of the Rent Commencement Date through the day next preceding the tenth (10th) anniversary of the Rent Commencement Date, both dates inclusive; and (iii) $1,452,928.50 per annum ($121,077.38 per month) from the tenth (10th) anniversary of the Rent Commencement Date and continuing thereafter throughout the remainder of the term of this lease, all of which shall be 5 payable in equal monthly installments in advance on the first day of each and every calendar month during the term of this lease (except that Tenant shall pay, upon the execution and delivery of this lease by Tenant, the sum of $102,685.88, to be applied against the first rents becoming due under this lease), and (b) "additional rent" consisting of all such other sums of money as shall become due from and payable by Tenant to Landlord hereunder (for default in payment of which Landlord shall have the same remedies as for a default in payment of fixed rent), all to be paid to Landlord at its office, or such other place, or to such agent and at such place, as Landlord may designate by written notice to Tenant given at least ten (10) business days prior to the due date thereof, in lawful money of the United States of America. 1.05 Tenant shall pay the fixed rent and additional rent herein reserved promptly as and when the same shall become due and payable, without demand therefor and without any abatement, deduction or setoff whatsoever except as expressly provided in this lease. 1.06 If the Rent Commencement Date occurs on a day other than the first day of a calendar month, the fixed rent for such calendar month shall be prorated and the balance of the first month's fixed rent theretofore paid shall be credited against the next monthly installment of fixed rent. 1.07 Tenant acknowledges that it has no rights to any development rights, "air rights" or comparable rights appurtenant to the Land and Building, and consents, without further consideration, to any utilization of such rights by Landlord and agrees to promptly execute and deliver any instruments which may be reasonably requested by Landlord, including instruments merging zoning lots, evidencing such acknowledgment and consent. The provisions of this Section l.07 shall be deemed to be and shall be construed as an express waiver by Tenant of any interest Tenant may have as a "party in interest" (as such quoted term is defined in Section 12-10 Zoning Lot of the Zoning Resolution of the City of New York) in the Land and Building. 1.08 For purposes of this lease, the term Rent Commencement Date shall mean the date which is the six (6) month anniversary of the Commencement Date, it being agreed and understood that Tenant shall have no obligation to pay any fixed rent during the period from the Commencement Date to the Rent Commencement Date. ARTICLE 2. Use 2.01 (a) Tenant shall use and occupy the Demised Premises for executive and general offices and for no other purpose. 6 (b) Notwithstanding anything to the contrary contained above or elsewhere in this Lease, portions of the Demised Premises may be used for the following: (i) installation and operation of one or more pantry areas for warming or reheating but not for cooking, including microwave oven, dwyer unit, one or more refrigerators and other similar equipment and machines for the preparation and storage of food and beverages for Tenant's officers and directors, employees, staff and business visitors; (ii) sale in the Demised Premises for Tenant's officers and directors, employees, staff and business visitors, by vending machines of any item the sale of which is not prohibited by law, whether by Tenant or third parties; (iii) use of an area of the Demised Premises as a lunchroom for consumption of food and beverages by Tenant's officers and directors, employees, staff and business visitors; (iv) installation and operation in the Demised Premises of general office equipment, including electronic data, and word processing equipment, computers and business machines and printing and other reproducing equipment and (v) installation and operation of communication equipment (including, without limitation, telecommunication equipment) (telecopiers, telex and video conferencing equipment and other similar equipment as are now, or in the future, typically installed in a business office). 2.02 If any governmental license or permit, other than a Certificate of Occupancy or other license or permit required for the mere occupancy of the Demised Premises for the purposes set forth in Section 2.01(a), 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 for inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit. Upon Tenant's request and at Tenant's expense, Landlord shall join in the application for any licenses, permits, approvals and authorizations (except for an application to change the Certificate of Occupancy) whenever such joining by Landlord shall be required by any governmental agency having jurisdiction. 2.03 Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Demised Premises, or do or permit anything to be done in the Demised Premises, in violation of the Certificate of Occupancy for the Demised Premises or for the Building, a true and complete copy of which is annexed hereto as Exhibit F. ARTICLE 3. Failure To Give Possession 3.01 (a) If the Demised Premises or any additional space to be included within the Demised Premises shall not be available for occupancy by Tenant on the 7 specific date hereinbefore designated for the commencement of the term of this lease or for the inclusion of such space for any reason whatsoever, then this lease shall not be affected thereby but, in such case, said specific date shall be deemed to be postponed until the date when the Demised Premises or the additional space, as the case may be, shall be available for occupancy by Tenant, and Tenant shall not be entitled to possession of the Demised Premises or the additional space until the same are available for occupancy by Tenant; provided, however, Tenant shall have no claim against Landlord, and Landlord shall have no liability to Tenant by reason of any such postponement of said specific date, and the parties hereto further agree that any failure to have the Demised Premises or such additional space available for occupancy by Tenant on said specific date or on the Commencement Date shall in no way affect the obligations of Tenant hereunder nor shall the same be construed in any way to extend the term of this lease. This Section 3.01 shall be deemed to be an express provision to the contrary of Section 223-a of the Real Property Law of the State of New York and any other law of like import now or hereafter in force. (b) Notwithstanding anything hereinabove or in this lease to the contrary, in the event that the items (a) - (f) of Landlord's Work (as set forth in Section 4.02) have not been substantially completed (as set forth in Section 4.04) by April 1, 2000 (hereinafter referred to as the "Outside Date"), Tenant shall be entitled to terminate this Lease by notice (hereinafter referred to as the "Termination Notice") to Landlord sent within ten (10) days after the Outside Date (hereinafter referred to as the "Notice Date") which Termination Notice shall set forth a date (hereinafter referred to as the "Termination Date") upon which this lease shall terminate and which Termination Date shall be at least fifteen (15) business days after the Notice Date. In the event Tenant sends the Termination Notice as set forth above and items (a)-(f) of Landlord's Work shall not have been substantially completed by the Termination Date, this lease shall terminate, Landlord shall return to Tenant all pre-paid fixed rent and security previously paid to Landlord hereunder and neither party shall have any further rights or obligations hereunder and said right of termination shall be Tenant's sole remedy for the failure of items (a)-(f) of Landlord's Work to have been substantially completed by the Termination Date. The Outside Date, the Notice Date and the Termination Date shall each be postponed by one (1) day for each day that items (a)-(f) of Landlord's Work have not been substantially completed by reason of (x) any willful or negligent act or omission by Tenant or any of its agents, employees, contractors or invitees or (y) any of the occurrences set forth in Section 21.03 of this lease. ARTICLE 4. Preparation of the Demised Premises 4.01 Tenant has fully inspected the Demised Premises and is satisfied with the condition thereof and except for Landlord's performance of "Landlord's Work" as hereinafter 8 defined, Tenant agrees to accept possession of the Demised Premises in their "as is" condition (except for latent defects). 4.02 Landlord agrees that it shall perform the following items of work, at its expense, as "Landlord's Work" (items 4.02(c)-(g) of which shall be performed contemporaneously with the performance by or on behalf of Tenant of "Tenant's Work" as defined in Section 4.03 and which items shall be substantially completed (as set forth in Section 4.04) on or before the date that Tenant substantially completes Tenant's Work ); (a) Demolish the present installation in the Demised Premises except for the sprinkler system, and, to the extent not presently installed, install any demising walls necessary to provide a perimeter of the Demised Premises and to separate the Demised Premises from the balance of the seventh (7th) floor and deliver same vacant and in broom clean condition. (b) Deliver to Tenant an ACP-5 Certificate. (c) Provide a connection point to the Building sprinkler system (connection and distribution to be performed by Tenant). (d) Provide a central point of connection to the Building Class E fire system. (e) Place all perimeter heating units in the Demised Premises in good working order. (f) Flash patch and level major imperfections in floor surface as necessary. (g) Furnish and install not more than two (2) building standard water cooled air-conditioning units having an aggregate capacity of one hundred (100) tons (ductwork to be provided by Tenant, at its expense) and construct two (2) enclosures within the Demised Premises to house said air-conditioning units using Building standard dry wall partitioning. Tenant shall on or before March 1, 2000 deliver to Landlord plans and specifications (hereinafter collectively referred to as the "Plans") indicating the location of the two (2) enclosures and the capacities of each of the two (2) aforesaid air-conditioning units, which shall not exceed an aggregate of one hundred (100) tons. Landlord shall within fifteen (15) days of receipt thereof either approve or disapprove the Plans (which approval shall not be unreasonably withheld, conditioned or delayed). If Landlord disapproves the Plans, Tenant will revise same in accordance with Landlord's comments and will resubmit them within ten (10) days from receipt of Landlord's disapproval. Once the Plans are approved as aforesaid, Landlord shall construct such enclosures and provide such air-conditioning units within sixteen (16) weeks 9 from the date of Landlord's approval of the Plans, which sixteen (16) week period is subject to extension by reason of (x) any willful or negligent act or omission by Tenant or any of its agents, employees, contractors or invitees (including, without limitation, any failure of Tenant to submit or resubmit the above-mentioned Plans by the dates required) or (y) any of the occurrences set forth in Section 21.03 of this lease. Any work performed, installations made or access permitted by Landlord pursuant to this Article 4 or elsewhere in this lease shall be made with reasonable diligence and in a manner designed to minimize interference with, or disruption of, Tenant's normal business operations, provided, however, that, Landlord shall not be obligated to employ contractors or labor at so-called overtime or other premium pay rates or to incur any other overtime costs or expenses whatsoever unless Tenant shall agree to pay solely overtime costs or expenses. Landlord shall promptly repair any damage to the Demised Premises or Tenant's property caused by such work or installations and all such work shall be performed in a first class manner. Any pipes, ducts, or conduits installed in or through the Demised Premises pursuant to this Article 4 shall be concealed behind, beneath or within partitioning, columns, ceilings or floors located or to be located in the Demised Premises, or completely furred at points immediately adjacent to partitioning columns or ceilings located or to be located in the Demised Premises, provided that the installation of such pipes, ducts, or conduits, when completed, shall not reduce the usable area of the Demised Premises (except to a de minimis extent). 4.03 Any other installations, materials or work which may be undertaken by or for the account of Tenant to equip, decorate or furnish the Demised Premises for Tenant's occupancy (hereinafter referred to as "Tenant's Work") shall be performed by Tenant, at its sole cost and expense, in accordance with all the terms, covenants and conditions of this lease, including without limitation, Articles 13 and 14 hereof, as if such Tenant's Work was a "Tenant's Change" as defined in Article 13. Tenant's Work shall include the construction of a unisex lavatory which complies with the requirements of The Americans with Disabilities Act of 1990, as amended. 4.04 Landlord's Work shall be deemed substantially complete notwithstanding the fact that minor or insubstantial details of construction, mechanical adjustment, or decoration remain to the performed, the noncompletion of which does not materially interfere with Tenant's use of the Demised Premises. Landlord shall promptly commence and thereafter diligently pursue such items to completion. 4.05 If and when Tenant shall take actual possession of the Demised Premises to prepare the same for Tenant's occupancy, it shall be conclusively presumed that the same were in satisfactory condition (except for latent defects and completion of any punch list item) as of the date of such taking of possession, unless within sixty (60) days after the Commencement 10 Date Tenant shall give Landlord notice specifying the respects in which the Demised Premises were not in satisfactory condition. 4.06 (a) Landlord agrees to pay to Tenant, as hereinafter provided, after the Termination Date has occurred without Tenant having terminated this lease pursuant to Section 3.01(b), an amount (hereinafter referred to as the "Construction Reimbursement") equal to $932,075.00 to be applied to the costs actually paid by Tenant to perform or cause the performance of, in accordance with, and subject to, all of the terms, covenants and conditions of this lease, all Tenant's Work (which may include architect's fees, engineering fees, space planning fees and filing fees and expenses and other typical "soft costs" (hereinafter collectively referred to as the "Soft Costs") provided Soft Costs may not exceed fifteen (15%) percent of the aggregate Construction Reimbursement), other than the cost of Tenant's Property (as herein defined) and any other item which constitutes Tenant's personal property and which is removable by Tenant from the Demised Premises on the Expiration Date, provided that at the time the Construction Reimbursement (or any portion thereof) is otherwise payable to Tenant hereunder, Tenant is not in default of any of the terms, covenants and conditions of this lease on Tenant's part to observe, perform or comply with which default continues after notice and the expiration of any applicable cure period. In the event that any portion of the Construction Reimbursement has not been expended upon the completed performance of Tenant's Work, Tenant shall be allowed a credit in the amount of the unexpended balance of the Construction Reimbursement against the fixed rent otherwise next becoming due pursuant to the provisions of Section 1.04(a) of this lease. (b) Subject to the provisions of paragraph (c) hereof, the Construction Reimbursement (or the outstanding balance thereof, as the case may be) shall be paid by Landlord to Tenant within thirty (30) days after the following conditions have been met, provided Tenant is not then in default of any of the terms, covenants and conditions of this lease on Tenant's part to observe, perform or comply with which default continues after notice and the expiration of any applicable cure period: (i) Tenant's Work has been performed and substantially completed in substantial accordance with the plans and specifications theretofore approved by Landlord, and otherwise in accordance with, and subject to, all of the applicable provisions of this lease and there are no violations or liens pending as a result of Tenant's Work; and (ii) Tenant shall have submitted to Landlord, upon such completion of all Tenant's Work, the following: 11 (w) copies of contractors' paid receipted invoices or paid receipts for deposits for all work done and all supplies furnished in connection with Tenant's Work; (x) a written statement from Tenant's architect certifying that Tenant's Work has been substantially completed, and, to architect's knowledge, was performed and completed substantially in accordance with the plans and specifications theretofore approved by Landlord; (y) lien waivers and general releases from each contractor, subcontractor and supplier to the extent of the total amount to be paid to such parties for the portions of Tenant's Work performed or supplied by such parties; and (z) a requisition (herein referred to as the "Final Request") for the Construction Reimbursement (or the outstanding balance thereof, as the case may be). (c) Notwithstanding anything to the contrary hereinbefore set forth, but provided Tenant is not then in default of any of the terms, covenants or conditions of this lease on Tenant's part to observe, perform or comply with which default continues after notice and the expiration of any applicable cure period, Landlord hereby agrees to make periodic payments of portions of the Construction Reimbursement to Tenant, or, at Landlord's or Tenant's option, directly to Tenant's contractor, as Tenant's Work progresses, in accordance with the terms and conditions hereinafter set forth: (i) Tenant shall submit to Landlord from time to time, but not more often than once per month requisitions (each being herein referred to as a "Tenant's Request") for such periodic payment with respect to the portion(s) of Tenant's Work performed subsequent to the immediately preceding Tenant's Request, together with the following: (w) copies of invoices or paid receipts for deposits from the contractors, subcontractors or suppliers performing, or supplying materials for, the portions of Tenant's Work referred to in such Tenant's Request; and (x) a certificate from Tenant's architect setting forth such architect's good faith estimate of the total cost of Tenant's Work (including, without limitation, the Soft Costs) (hereinafter referred to as the "Total Cost") which Total Cost shall be subject to Landlord's verification thereof and which Total Cost shall be adjusted from time to time as such Total Cost changes; 12 (y) except with respect to disbursements made for soft costs, a certificate from Tenant's architect that, to architect's knowledge, such portion of Tenant's Work has been performed substantially in accordance with the plans and specifications theretofore approved by Landlord, and otherwise substantially in accordance with, and subject to, all of the applicable provisions of this lease; and (z) lien waivers and general releases from each contractor, subcontractor and supplier to the extent of the amount to be paid to such parties as provided in such Tenant's Request provided, however, that Landlord shall not be entitled to refuse to make a payment requested in such Tenant's Request solely because Tenant has not delivered such lien waivers or general releases, provided that the aggregate amount of such work and supplies for which lien waivers and general releases were not delivered, together with work and supplies in previous Tenant's Requests for which lien waivers and general releases were not delivered, do not exceed Fifty Thousand and 00/100 ($50,000.00) Dollars.; (ii) Landlord shall have the right, from time to time, to enter the Demised Premises for the purpose of verifying that the portion of Tenant's Work covered by Tenant's Request or the Final Request, as the case may be, has been performed in accordance with said plans and specifications, either by Landlord's architect or by an independent architect retained by Landlord at Landlord's sole cost and expense, or to otherwise inspect any or all aspects of Tenant's Work. Provided the portion of Tenant's Work with respect to which a Tenant's Request (or, with respect to a Final Request, all of Tenant's Work) shall have been completed in accordance with the applicable provisions of this lease and Tenant shall otherwise have complied with the provisions of this Section 4.06, then within thirty (30) days after Landlord's receipt of Tenant's Request or the Final Request, as the case may be, together with the accompanying documentation, Landlord shall pay to Tenant the "Percentage Payment" (as such term is hereinafter defined) with respect to the amounts shown on such Tenant's Request or the Final Request, as the case may be, for the portions of Tenant's Work reflected thereon. For purposes hereof, the "Percentage Payment" shall mean ninety (90%) percent of the product of (x) amounts shown on such Tenant's Request or the Final Request, as the case may be, for portions of Tenant's Work reflected thereon and (y) a fraction, the numerator of which is the amount of the Construction Reimbursement and the denominator of which is the Total Cost, as certified by Tenant's architect, as aforesaid (but in no event shall such fraction be greater than one (1)). The balance of the Construction Reimbursement, if any, after the completion of Tenant's Work, shall be paid to Tenant in accordance with the terms and conditions set forth in Paragraph (b) above, and after full satisfaction of such conditions. Notwithstanding anything contained herein to the contrary, in no event shall the sum of all Percentage Payments exceed the amount of the Construction Reimbursement. 13 (iii) Notwithstanding anything to the contrary, in no event shall the Construction Reimbursement, or the aggregate of all Percentage Payments, exceed $932,075.00. ARTICLE 5 Adjustments Of Rent 5.01 Tax Escalation. For the purpose of Sections 5.01-5.06: (a) "Taxes" shall mean the real estate taxes and assessments and special assessments imposed upon the Building and the Land including, without limitation, any assessments for public improvement or benefit to the Building or Land, or the locality in which the Land is situated, such as Business Improvement District taxes and assessments. 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 in lieu of or as an addition to or as a substitute for the whole or any part of the taxes, assessments, levies, impositions or 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, or (ii) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon the Demised Premises and imposed upon Landlord, or (iii) a license fee measured by the rents payable by Tenant to Landlord, then all such taxes, assessments, levies, impositions or charges, or the part thereof so measured or based, shall be deemed to be included within the term "Taxes" for the purposes hereof; The term "Taxes" shall not include any income, franchise, transfer, inheritance, capital stock or other similar tax imposed on Landlord unless, due to a future change in the method of taxation, an income, franchise, transfer, inheritance, capital stock or other tax shall be levied against Landlord in substitution for any tax or increase therein which would otherwise constitute "Taxes", as defined in the first sentence of paragraph (a), in which event such income, franchise, transfer, inheritance, capital stock or other tax shall be deemed to be included in the term "Taxes" but any such income or similar tax shall be computed as if the Building and the Land were the only property of Landlord. If, by law, any assessment may be paid in installments, then, for the purposes hereof (i) such assessment shall be deemed to have been payable in the maximum number of installments permitted by law and (ii) there shall be included in Taxes, for each Tax Year in which such installments may be paid, the installments of such assessment so becoming payable during such Tax Year, together with any interest thereon payable during such Tax Year. 14 (b) "Base Tax Year" shall mean fiscal year July 1, 1999 to June 30, 2000, inclusive; (c) "Base Tax Rate" shall mean the Taxes, as finally determined, for the Base Tax Year; (d) "Tax Year" shall mean the fiscal year for which Taxes are levied by the governmental authority; (e) "Tenant's Proportionate Share" shall mean for purposes of this lease and all calculations in connection herewith 2.62%, which has been computed on the basis of a fraction, the numerator of which is the agreed rentable square foot area of the Demised Premises as set forth below (which rentable square foot area is hereinafter sometimes referred to as the "Multiplication Factor") and the denominator of which is the agreed rentable square foot area of the Building as set forth below. The parties agree that the rentable square foot area of the Demised Premises shall be deemed to be 36,783 square feet and that the agreed rentable square foot area of the Building shall be deemed to be 1,405,000 square feet (hereinafter referred to as the "Building Area"). (f) "Tenant's Projected Share of Taxes" shall mean the Tax Payment (as hereinafter defined), if any, payable by Tenant for the immediately prior Tax Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent. 5.02 If the Taxes for any Tax Year shall be more than the Base Tax Rate, Tenant shall pay, as additional rent for such Tax Year, an amount equal to Tenant's Proportionate Share of the amount by which the Taxes for such Tax Year are greater than the Base Tax Rate. (The amount payable by Tenant is hereinafter referred to as the "Tax Payment".) The Tax Payment and the Base Tax Rate shall be appropriately prorated, if necessary, to correspond with that portion of a Tax Year occurring within the Term of this lease. The Tax Payment shall be payable by Tenant within thirty (30) days after receipt of a demand (hereinafter referred to as a "Tax Statement") from Landlord therefor but in no event more than thirty (30) days prior to the date such Taxes are due to the applicable governmental authority, which Tax Statement shall be accompanied by a copy of the tax bill together with Landlord's computation of the Tax Payment. If the Taxes for any Tax Year are payable to the taxing authority on an installment basis, the Tax Payment for such Tax Year shall be payable by Tenant, on a corresponding installment basis. 5.03 Notwithstanding the fact that the increase in rent is measured by an increase in Taxes, such increase is additional rent and shall be paid by Tenant as provided herein regardless of the fact that Tenant may be exempt, in whole or in part, from the payment of any 15 taxes by reason of Tenant's diplomatic or other tax exempt status or for any other reason whatsoever. 5.04 Only Landlord shall be eligible to institute tax reduction or other proceedings to reduce the assessed valuation of the Land and Building. Should Landlord be successful in any such reduction proceedings and obtain a rebate or a reduction in assessment for periods during which Tenant has paid or is obligated to pay Tenant's Proportionate Share of increases in Taxes then either (a) Landlord shall, in the event a rebate is obtained, return Tenant's Proportionate Share of such rebate to Tenant after deducting Landlord's actual out-of-pocket expenses, including without limitation, reasonable attorneys' fees and disbursements in connection with such rebate (such expenses incurred with respect to a rebate or reduction in assessment being hereinafter referred to as "Tax Expenses"), or, (b) if a reduction in assessment is obtained prior to the date Tenant would be required to pay Tenant's Proportionate Share of such increase in Taxes, Tenant shall pay to Landlord, upon written request, Tenant's Proportionate Share of such Tax Expenses. 5.05 Commencing with the first Tax Year after Landlord shall be entitled to receive a Tax Payment, Tenant shall pay to Landlord, as additional rent for the then Tax Year, Tenant's Projected Share of Taxes. Upon each date that a Tax Payment or an installment on account thereof shall be due from Tenant pursuant to the terms of Section 5.02 hereof, Landlord shall apply the aggregate of the installments of Tenant's Projected Share of Taxes then on account with Landlord against the Tax Payment or installment thereof then due from Tenant. In the event that such aggregate amount shall be insufficient to discharge such Tax Payment or installment, Landlord shall so notify Tenant in a demand served upon Tenant pursuant to the terms of Section 5.02, and the amount of Tenant's payment obligation with respect to such Tax Payment or installment pursuant to Section 5.02 shall be equal to the amount of the insufficiency. If, however, such aggregate amount shall be greater than the Tax Payment or installment, Landlord shall forthwith, at Tenant's option, either (a) pay the amount of excess directly to Tenant concurrently with the notice or (b) permit Tenant to credit the amount of such excess against the next monthly installment of fixed rent due hereunder and, if the credit of such payment is not sufficient to liquidate the entire amount of such excess, Landlord shall then pay the amount of any difference to Tenant within thirty (30) days of receipt of such determination. 5.06 (a) Anything in this Article 5 to the contrary notwithstanding, in the event that the holder of any superior mortgage or the lessor of any superior lease (as such terms are defined in Section 7.01 hereof) shall require advance payments from Landlord on account of Taxes, then Tenant will pay Tenant's Proportionate Share of any amounts required to be paid in advance by Landlord with the holder of the superior mortgage or the lessor of the superior lease to the extent that such payments made by Landlord exceed the 16 Base Tax Rate. Any payments to be made by Tenant under this Section 5.06(a) shall be made ten (10) days prior to the date Landlord is required to make such payments to the holder of the superior mortgage or the lessor of the superior lease; (b) Anything in Sections 5.01 through 5.06 to the contrary notwithstanding, in no event whatsoever shall the fixed rent be reduced below the fixed rent initially set forth in Section 1.04(a) hereof as same may be increased by provisions of this lease other than Sections 5.01 through 5.06. 5.07 Expense Escalation. For purposes of Sections 5.07 - 5.12: (a) "Operating Expenses" shall mean any or all expenses incurred by Landlord in connection with the operation of the Building including all expenses incurred as a result of Landlord's compliance with any of its obligations hereunder and such expenses shall include: (i) salaries, wages, medical, surgical and general welfare benefits (including group life insurance), pension payments and other fringe benefits of employees of Landlord at a level of Building Manager or below engaged in the operation and maintenance of the Building (the salaries and other benefits aforesaid of such employees servicing the Building shall be comparable to those of employees servicing buildings similar to the Building, located in the Borough of Manhattan); (ii) payroll taxes, worker's compensation, uniforms and dry cleaning for the employees referred to in subdivision (i); (iii) the cost of all charges for steam, heat, ventilation, air conditioning and water (including sewer rental) furnished to the public portions of the Building and/or used in the operation of all of the service facilities of the Building and the cost of all charges for electricity furnished to the public and service areas of the Building and/or used in the operation of all of the service facilities of the Building including any taxes on any of such utilities; (iv) the cost of all charges for rent, casualty, war risk insurance (if obtainable from the United States government) and of liability insurance for the Building to the extent that such insurance is required to be carried by Landlord under any superior lease or superior mortgage or if not required under any superior lease or superior mortgage then to the extent such insurance is carried by owners of buildings comparable to the Building; (v) the cost of all building and cleaning supplies for the common areas of the Building and charges for telephone for the Building; (vi) the cost of all charges for management, security, cleaning and service contracts for the Building (if no managing agent is employed by Landlord, there shall be included in Operating Expenses a sum equal to 2.5% of all rents and other charges collected from tenants or other permitted occupants of the Building); (vii) the cost of rentals of capital equipment designed to result in savings or reductions in Operating Expenses which costs shall not exceed the savings realized; (viii) the cost incurred , which are non-capital expenditures, in connection with the maintenance and repair of the Building; and (ix) expenditures for capital improvements (l) which under generally accepted accounting principles as applied to real estate practice are expensed or regarded as deferred expenses and (2) which are required by any law enacted after the date of this lease or any amendment enacted after the date of this lease of any existing law and (3) which are 17 designed to result in a saving in the amount of Operating Expenses, in any of such cases the cost thereof shall be included in Operating Expenses for the Operational Year in which the costs are incurred and subsequent Operational Years, amortized on a straight line basis, over the useful life thereof as determined in accordance with generally accepted accounting principles consistently applied, (except that, with respect to a capital improvement which is of the type specified in clause (3), such cost shall be amortized over such period of time as Landlord reasonably estimates such savings in Operating Expenses will equal Landlord's cost for such capital improvement but in no event in excess of the amount of savings actually realized in any Operational Year), with an interest factor in any of such cases equal to two (2%) percent above the prime rate (hereinafter referred to as the "Base Rate") of The Chase Manhattan Bank, N.A. (or Citibank, N.A. if The Chase Manhattan Bank, N.A. shall not then have an established prime rate; or the prime rate of any major banking institution doing business in New York City, as selected by Landlord, if none of the aforementioned banks shall be in existence or have an established prime rate) at the time of Landlord's having incurred said expenditure. Landlord may use related or affiliated entities to provide services or furnish materials for the Building provided that the rates or fees charged by such entities are reasonably competitive with those charged by unrelated or unaffiliated entities in the same area in the Borough of Manhattan as the Building, for the same services or materials. Provision in this lease for an expense to be Landlord's expense or at Landlord's expense shall not affect the inclusion thereof, to the extent provided above, in Operating Expenses. Operating Expenses shall exclude or have deducted from them, as the case may be, and as shall be appropriate: 1. leasing and brokerage commissions in connection with leases of space in the Building; 2. salaries, fringe benefits and other compensation of personnel above the grade of building manager; 3. the cost of any electricity furnished to the Demised Premises or any other space leased or available for lease in the Building; 4. except as otherwise hereinabove provided, the cost of any repair or replacement, alteration, addition or change or expenses of any kind or nature whatsoever which is a capital expenditure under generally accepted accounting principles consistently applied; 5. the cost of items, including overtime HVAC and insurance premiums, for which Landlord is directly compensated or is entitled to be compensated by payment by tenants, or any other party including this Tenant (except pursuant to provisions 18 similar in intent to Sections 5.07-5.11 for the payment of a share of the costs of operating the Building), which are not included in fixed rent; 6. the cost of repairs or replacements incurred by reason of insured fire or other casualty, or condemnation; 7. advertising and promotional expenditures and any other expense incurred in connection with the renting of space; 8. legal and other professional or consulting fees incurred in disputes with tenants, and legal, arbitration and auditing fees other than legal, arbitration and auditing fees reasonably incurred (a) in connection with the maintenance and operation of the Building or (b) in connection with the preparation of statements required pursuant to rental escalation provisions; 9. depreciation of the Building, equipment or other improvements; 10. mortgage or other interest and/or debt service; ground rents or any other payments under any superior leases; 11. any initial construction work performed by Landlord for tenants, and tenant alteration work or change work, including any utilities, fees or services incurred in connection with the performance of such work; 12. painting and decorating of areas to be occupied by tenants or licensees; special services (i.e., beyond the normal repair, maintenance and operating of the Building) provided without extra charge, beyond fixed rent, to some but not all tenants in the Building; 13. Taxes; 14. lease takeover costs and related expenses; 15. any wages, salaries, fringe benefits and other compensation of Landlord's employees (except as set forth in Section 5.07(a)(i) and (ii) above) or any general and administrative overhead of Landlord; 16. costs incurred with respect to a sale of all or any portion of the Building or any interest therein or in connection with the purchase or sale of any air or development rights; 17. any interest, fine, penalty or other late charges payable by Landlord; 19 18. the cost of removing, encapsulating or otherwise abating any asbestos or other hazardous materials in the Building except with respect to any materials which are determined to be hazardous after the date of this lease; 19. franchise, income, transfer, gains, inheritance, personal property or other tax imposed on Landlord, the Building or the Land, subject to the provisions of Sections 5.01-5.06, inclusive of this lease; 20. the cost of the acquisition or installation of any sculpture, paintings or other objects of art in excess of amounts typically spent for such items in comparable buildings in the vicinity of the Building; 21. the cost of performing work or furnishing services to or for any tenant including Tenant, at Landlord's expense, to the extent such work or service is in excess of any work or service Landlord is obligated to provide to Tenant or generally to other tenants in the Building at Landlord's expense; 22. the cost of any items or services for which Landlord is reimbursed, or is entitled to be reimbursed by insurance or otherwise (including reimbursement by any tenant) or would have been reimbursed if Landlord would have obtained the insurance required under this Lease; 23. the cost of furnishing and installing replacement light bulbs and ballasts in tenanted areas of the Building; 24. any fee for the management of the Building other than the fees specified in Section 5.07(a)(vi); 25. any rent, additional rent or other charge under any lease or sublease to be assumed, directly or indirectly, by Landlord; 26. the cost of any work or service performed for any property other than the Building and the Land; and 27. payments to Landlord or entities affiliated with Landlord to the extent they are materially in excess of amounts that would have been paid to third parties for the same item or service. If during all or part of the Base Operational Year (as hereinafter defined) or any other Operational Year, Landlord shall not furnish any particular item(s) of work or service (which would otherwise constitute an Operating Expense hereunder) to office portions of the Building due to the fact that (i) such portions are not occupied or leased, (ii) such item of work or 20 service is not required or desired by the tenant of such portion, or (iii) such tenant is itself obtaining and providing such item of work or service, then, for the purposes of computing Operating Expenses, the amount for such item and for such period shall be deemed to be increased by an amount equal to the additional costs and expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such item of work or services to such portion of the Building or to such tenant. (b) "Operational Year" shall mean each calendar year during the Term hereof. (c) "Base Operational Year" shall be calendar year 2000; (d) "Operating Expense Base" shall mean Operating Expenses for the Base Operational Year; (e) "Tenant's Projected Share of Operating Expenses" shall mean Tenant's Operating Expense Payment (as hereinafter defined), if any, for the prior Operational Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent. 5.08 After the expiration of the Base Operational Year, Landlord shall furnish Tenant a statement setting forth the aggregate amount of the Operating Expenses for the Base Operational Year. After the expiration of each Operational Year after the Base Operational Year, Landlord shall furnish Tenant a statement setting forth the aggregate amount of the Operating Expenses for such Operational Year. The statement furnished under this Section 5.08 is hereinafter referred to as an "Operating Statement". 5.09 If the Operating Expenses for any Operational Year shall be more than the Operating Expense Base, Tenant shall pay, as additional rent for such Operational Year, an amount equal to Tenant's Proportionate Share of the amount by which the Operating Expenses for such Operational Year are greater than the Operating Expense Base. (The amount payable by Tenant is hereinafter referred to as the "Operating Expense Payment".) The Operating Expense Payment shall be prorated, if necessary, to correspond with that portion of an Operational Year occurring within the Term of this lease. The Operating Expense Payment shall be payable by Tenant within thirty (30) days after receipt of the Operating Statement. 5.10 Commencing with the first Operational Year after Landlord shall be entitled to receive an Operating Expense Payment, Tenant shall pay to Landlord as additional rent for the then Operational Year, Tenant's Projected Share of Operating Expenses. If the Operating Statement furnished by Landlord to Tenant at the end of then Operational Year shall 21 indicate that Tenant's Projected Share of Operating Expenses exceeded the Operating Expense Payment, Landlord shall forthwith, at Tenant's option, either (a) pay the amount of excess directly to Tenant concurrently with the notice or (b) permit Tenant to credit the amount of such excess against the subsequent payment of fixed rent due hereunder; if such Operating Statement furnished by Landlord to Tenant hereunder shall indicate that the Operating Expense Payment exceeded Tenant's Projected Share of Operating Expenses for the then Operational Year, Tenant shall, within thirty (30) days of Landlord's written demand therefor, pay the amount of such excess to Landlord. 5.11 Every Operating Statement given by Landlord pursuant to Section 5.08 shall be conclusive and binding upon Tenant unless (i) within sixty (60) days after the receipt of such Operating Statement Tenant shall notify Landlord that it disputes the correctness of the Operating Statement, specifying the particular respects in which the Operating Statement is claimed to be incorrect, and (ii) if such dispute shall not have been settled by agreement, shall submit the dispute to arbitration within one hundred fifty (150) days after receipt of the Operating Statement. Pending the determination of such dispute by agreement or arbitration as aforesaid, Tenant shall within thirty (30) days after receipt of such Operating Statement, pay additional rent, if due, in accordance with the Operating Statement and such payment shall be without prejudice to Tenant's position. If the dispute shall be determined in Tenant's favor, Landlord shall, on demand, pay Tenant the amount of Tenant's overpayment of rents, if any, resulting from compliance with the Operating Statement. Upon Tenant's request sent within the sixty (60) day period set forth in (i) above, Landlord agrees to grant Tenant, or its certified public accountant, reasonable access to Landlord's books and records for the purpose of verifying Operating Expenses incurred by Landlord and to have and make copies of any and all bills and vouchers relating thereto and subject to reimbursement by Tenant for the cost of such copies. Tenant agrees that all information with respect to Operating Expenses to which Tenant , or its certified public accountant, is given access shall be held in confidence and Tenant shall require that any agent, or its certified public accountant, or outside party it may retain shall agree, in writing, to hold such information in confidence. 5.12 Landlord's failure during the lease term to prepare and deliver any of the tax bills, statements, notice or bills set forth in this Article 5, or Landlord's failure to make a demand, shall not in any way cause Landlord to forfeit or surrender its rights to collect any of the foregoing items of additional rent which may have become due during the term of this lease. Landlord's and Tenant's liability for the amounts due under this Article 5 shall survive for twenty-four (24) months after the expiration of the term of this lease. 22 ARTICLE 6 Security Deposit 6.01 Tenant has deposited with Landlord the sum of $1,600,000.00 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 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, which default continues after any required notice and the expiration of any applicable cure period, Landlord may use, apply or retain the whole or any part of the security so deposited or the proceeds of the Letter of Credit (as set forth in Section 6.02 hereof) 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 Landlord 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 accrued before or after summary proceedings or other re-entry by Landlord. The security shall be deposited in a separate interest bearing account segregated from Landlord's funds, in a bank selected by Landlord and any interest earned thereon (less any administrative fee to which Landlord may be entitled pursuant to applicable law) shall be paid to Tenant annually provided Tenant is not then in default in the observance or performance of any of its obligations under this lease which continues after notice and the expiration of any applicable cure period. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be promptly returned to Tenant after the date fixed as the end of the lease and after delivery of entire possession of the Demised Premises to Landlord. In the event Landlord applies or retains any portion or all of the security deposited, Tenant shall forthwith restore the amount so applied or retained so that, subject to the provisions of Sections 6.07 and 6.08, at all times the amount deposited shall be $1,600,000.00. 6.02 In lieu of a cash deposit, Tenant may deliver to Landlord a clean, irrevocable, unconditional and transferable (without cost to the beneficiary thereof) letter of credit (hereinafter referred to as the "Letter of Credit") issued by and drawn upon any commercial bank which is a member of the New York Clearing House Association (hereinafter referred to as the "Issuing Bank") with offices for banking purposes in the City of New York and having a net worth of not less than Five Hundred Million and 00/100 ($500,000,000.00) Dollars, which Letter of Credit shall have a term of not less than one year, be in form and content satisfactory to Landlord, be for the account of Landlord and be in the amount of $1,600,000.00. The Letter of Credit shall provide that: (i) 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; 23 (ii) The Letter of Credit shall be deemed to be automatically renewed, without amendment, for consecutive periods of one year each during the term of this lease, unless the Issuing Bank sends written notice (hereinafter referred to as the "Non-Renewal Notice") to Landlord by certified or registered mail, return receipt requested, not less than thirty (30) days next preceding the then expiration date of the Letter of Credit, that it elects not to have such Letter of Credit renewed; (iii) Landlord, within twenty (20) days of its receipt of the Non-Renewal Notice, shall have the right, exercisable by a sight draft, to receive the monies represented by the Letter of Credit (which moneys shall be held by Landlord as a cash deposit pursuant to the terms of this Article 6 pending the replacement of such Letter of Credit or Tenant's default hereunder); and (iv) Upon Landlord's sale of Landlord's interest in the Land and the Building, the Letter of Credit shall be transferable by Landlord as provided in Section 6.03 hereof. 6.03 In the event of a sale of Landlord's interest in the Land and the Building, Landlord shall have the right to transfer the cash security or Letter of Credit, as the case may be, deposited hereunder to the vendee or lessee, and Landlord shall thereupon be released by Tenant from all liability for the return of such cash security or Letter of Credit. In such event, Tenant agrees to look solely to the new Landlord for the return of said cash security or Letter of Credit. It is agreed that the provisions hereof shall apply to every transfer or assignment made of said cash security or Letter of Credit to a new Landlord. 6.04 Tenant covenants that it will not assign or encumber, or attempt to assign or encumber, the monies or Letter of Credit deposited hereunder as security, and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment, or attempted encumbrance. 6.05 Landlord agrees that it will not draw down the proceeds of the Letter of Credit except in the event of a default by Tenant hereunder which continues after any required notice and the expiration of any applicable cure period or the non-renewal of such Letter of Credit by the Issuing Bank. 6.06 In the event that at any time during the term of this lease Landlord, in Landlord's reasonable opinion, believes (a) that the net worth of the Issuing Bank shall be less than the minimum amount specified in Section 6.02, or (b) that circumstances have occurred indicating that the Issuing Bank may be incapable of, unable to, or prohibited from honoring the then existing Letter of Credit (hereinafter referred to as the "Existing L/C") in accordance with the terms thereof, then, upon the happening of either of the foregoing, Landlord may send written 24 notice to Tenant (hereinafter referred to as the "Replacement Notice") requiring Tenant within ten (10) days to replace the Existing L/C with a new letter of credit (hereinafter referred to as the "Replacement L/C") from an Issuing Bank meeting the qualifications described in Section 6.02. Upon receipt of a Replacement L/C meeting the qualifications of Section 6.02, Landlord shall forthwith return the Existing L/C to Tenant. In the event that (i) a Replacement L/C meeting the qualifications of Section 6.02 is not received by Landlord within the time specified or (ii) Landlord reasonably believes an emergency exists, then in either event, the Existing L/C may be presented for payment by Landlord and the proceeds thereof shall be held by Landlord in accordance with Section 6.01 subject, however, to Tenant's right, at any time thereafter prior to a Tenant's default hereunder, to replace such cash security with a new letter of credit meeting the qualifications of Section 6.02. 6.07 Notwithstanding anything in this Article 6 to the contrary, subject to the provisions of 6.08 hereof, Tenant may, upon notice to Landlord (hereinafter referred to as the "Security Reduction Notice") request that Landlord return to Tenant portions of the cash security deposited by Tenant pursuant to Section 6.01 so as to reduce the cash security to the amounts set forth in Section 6.08(b) during the periods set forth in Section 6.08(b) or, if Tenant has provided a Letter of Credit, exchange the then existing Letter of Credit for a new Letter of Credit or provide an amendment of the then existing Letter of Credit reasonably acceptable to Landlord in the amounts set forth in Section 6.08(b) and otherwise meeting the requirements of Section 6.02. 6.08 (a) Provided Tenant is not in default under this lease, which default continues after notice and the expiration of any applicable cure period, both on the date Landlord receives the Security Reduction Notice and on the date reimbursement is to be made to Tenant or the existing Letter of Credit is to be exchanged or the amendment is to be delivered to and accepted by Landlord, and Landlord has not previously applied any such security in accordance with the provisions of this Article 6 which has not been restored by Tenant, Landlord will return to Tenant portions of the cash security so as to reduce the cash security to the amounts set forth in such Section (b) below during the periods set forth therein, or exchange the then existing Letter of Credit for the new Letter of Credit or accept an amendment of such existing Letter of Credit (which acceptance must be evidenced in writing by Landlord) as set forth in Section 6.07(a). (b) PERIOD AMOUNT OF SECURITY From the fifth (5th) anniversary of the Rent Commencement Date to the day next preceding the seventh (7th) anniversary of the Rent Commencement Date, both dates 25 inclusive.................................................$1,200,000.00 From the seventh (7th) anniversary of the Rent Commencement Date to the day next preceding the ninth (9th) anniversary of the Rent Commencement Date, both dates inclusive.................................................$ 800,000.00 From the ninth (9th) anniversary of the Rent Commencement Date and thereafter.....................$ 400,000.00 ARTICLE 7 Subordination, Notice To Lessors And Mortgagees 7.01 This lease, and all rights of Tenant hereunder, are and shall be subject and subordinate in all respects to all ground leases, overriding leases and underlying leases of the Land and/or the Building now or hereafter existing and to all mortgages which may now or hereafter affect the Land and/or the Building and/or any of such leases, whether or not such mortgages shall also cover other lands and/or buildings, to each and every advance made or hereafter to be made under such mortgages, and to all renewals, modifications, replacements and extensions of such leases and such mortgages and spreaders and consolidations of such mortgages. This Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute and deliver the then standard form of instrument that the lessor of any such lease or the holder of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination. In the event Tenant fails to execute and deliver to Landlord such instrument within twenty (20) days of request therefor, Landlord may, but shall not be obligated to, execute such instrument for and on behalf of Tenant as its attorneys-in-fact. In acknowledgment thereof, Tenant hereby appoints Landlord as its irrevocable attorney-in-fact coupled with an interest solely to execute and deliver any instruments required to carry out the intent of this Section 7.01 on behalf of Tenant. The leases to which this lease is, at the time referred to, subject and subordinate pursuant to this Article are hereinafter sometimes referred to as "superior leases" and the mortgages to which this lease is, at the time referred to, subject and subordinate are hereinafter sometimes referred to as "superior mortgages" and the lessor of a superior lease or its successor in interest at the time referred to is sometimes hereinafter referred to as a "lessor". 7.02 In the event of any act or omission of Landlord which would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this lease, or to claim a partial or total eviction, Tenant shall not exercise such right (i) until it has given written notice of such act or omission to the holder of each superior mortgage and the lessor of each superior lease whose name and address shall previously have been furnished to Tenant in 26 writing, and (ii) unless such act or omission shall be one which is not capable of being remedied by Landlord or such mortgage holder or lessor within a reasonable period of time, until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such holder or lessor shall have become entitled under such superior mortgage or superior lease, as the case may be, to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this lease or otherwise, after similar notice, to effect such remedy), provided such holder or lessor shall with due diligence give Tenant written notice of intention to, and promptly commence and diligently continue to remedy such act or omission. 7.03 If the lessor of a superior lease or the holder of a superior mortgage shall succeed to the rights of Landlord under this lease, whether through possession or foreclosure action or delivery of a new lease or deed, then at the request of such party so succeeding to Landlord's rights (herein sometimes referred to as "successor landlord") and upon successor landlord's written agreement to accept Tenant's attornment, Tenant shall attorn to and recognize such successor landlord as Tenant's landlord under this lease, and shall promptly execute and deliver the then standard form of instrument that such successor landlord may reasonably request to evidence such attornment. Upon such attornment this lease shall continue in full force and effect as, or as if it were, a direct lease between the successor landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this lease and shall be applicable after such attornment except that the successor landlord shall not be: (a) liable for any previous act or omission of Landlord (or its predecessor in interest) under this lease; (b) bound by any previous modification of this lease, not expressly provided for in this lease, or by any previous prepayment of more than one month's fixed rent, unless such modification or prepayment shall have been expressly approved in writing by the lessor of the superior lease or the holder of the superior mortgage through or by reason of which the successor landlord shall have succeeded to the rights of Landlord under this lease; (c) responsible for any monies owing by Landlord to the credit of Tenant except as expressly provided for under the terms of this lease; (d) subject to any credits, offsets, claims, counterclaims, demands or defenses which Tenant may have against Landlord (or its predecessors in interest); (e) bound by any covenant to undertake or complete any construction of the Demised Premises or any portion thereof or pay for or reimburse Tenant for any costs incurred in connection with such construction; 27 (f) required to account for any security deposit other than any security deposit actually delivered to the successor landlord; (g) bound by any obligation to make any payment to Tenant or grant or be subject to any credits except as expressly provided for under this lease and except for services, repairs, maintenance and restoration provided for under this lease to be performed after the date of attornment, it being expressly understood, however, that the successor landlord shall not be bound by an obligation to make payment to Tenant with respect to construction performed by or on behalf of Tenant at the Demised Premises. 7.04 If, in connection with obtaining financing or refinancing for the Building of which the Demised Premises form a part, or Landlord's estate and interest therein, a lender shall request reasonable modifications to this lease as a condition to such financing or refinancing, Tenant will not withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant or decrease Tenant's rights hereunder (except, perhaps, to the extent that Tenant may be required to give notices of any defaults by Landlord to such lender and/or permit the curing of such defaults by such lender together with the granting of such additional time for such curing as may be reasonably required for such lender to get possession of the Building or Landlord's interest therein) or, except to a deminimus extent, adversely affect the leasehold interest hereby created. In no event shall a requirement that the consent of any such lender be given for any modification of this lease or, subject to the provisions of this lease for any assignment or sublease, be deemed to materially adversely affect the leasehold interest hereby created. ARTICLE 8 Quiet Enjoyment 8.01 So long as Tenant pays all of the fixed rent and additional rent due hereunder and performs all of Tenant's other obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy the Demised Premises subject, nevertheless, to the obligations of this lease and, as provided in Article 7, to the superior leases and the superior mortgages. ARTICLE 9 Assignment And Subletting 9.01 Except as otherwise expressly set forth in this Article 9, 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, nor suffer, nor permit the Demised Premises or any part thereof to be used or occupied by others, without the prior written consent of Landlord in each instance. If this lease be assigned, or if the Demised Premises or any part thereof be underlet or occupied by anybody other than Tenant, 28 Landlord may, after default by Tenant, collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved, but no assignment, underletting, occupancy or collection shall be deemed a waiver of the provisions hereof, the acceptance of the assignee, undertenant 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 Landlord to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or underletting. In no event shall any permitted sublessee assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without Landlord's prior written consent in each instance. 9.02 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 Demised Premises, Tenant shall give notice thereof to Landlord, which notice shall be accompanied by (a) a detailed term sheet with respect to the proposed assignment or sublease, the effective or commencement date of which shall be not less than sixty (60) nor more than one hundred eighty (180) days after the giving of such notice, (b) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Demised Premises, and (c) current financial information with respect to the proposed assignee or subtenant, including, without limitation, its most recent financial report. Except for any notice with respect to a proposed assignment or sublease to any entity for which Landlord's consent is not required pursuant to Section 9.11, such Tenant's notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) may, at its option (hereinafter referred to as "Landlord's Option"), (i) sublease such space (hereinafter referred to as the "Leaseback Space") from Tenant upon the terms and conditions hereinafter set forth (if the proposed transaction is a sublease of all or part of the Demised Premises), (ii) terminate this lease (if the proposed transaction is an assignment or a sublease of all or substantially all of the Demised Premises), or (iii) terminate this lease with respect to the Leaseback Space (if the proposed transaction is a sublease of part of the Demised Premises for a term expiring within the last year of the term of this lease). Landlord's Option may be exercised by Landlord by notice to Tenant at any time within thirty (30) days after such notice has been given by Tenant to Landlord; and during such thirty (30) day period Tenant shall not assign this lease nor sublet such space to any person. 9.03 If Landlord exercises Landlord's Option to terminate this lease in the case where Tenant desires either to assign this lease or sublet all or substantially all of the Demised Premises, then, this lease shall end and expire on the date that such assignment or sublet was to be effective or commence, as the case may be, and the fixed rent and additional rent shall be paid and apportioned to such date. 9.04 If Landlord exercises Landlord's Option to terminate this lease in part in any case where Tenant desires to sublet part of the Demised Premises for a term expiring within 29 the last year of the term of this lease, then, (a) this lease shall end and expire with respect to such part of the Demised Premises on the date that the proposed sublease was to commence; (b) from and after such date the fixed rent and additional rent shall be adjusted, based upon the proportion that the rentable area of the Demised Premises remaining bears to the total rentable area of the Demised Premises; and (c) Tenant shall pay to Landlord, upon demand, the actual out-of-pocket costs incurred by Landlord in physically separating such part of the Demised Premises from the balance of the Demised Premises and in complying with any laws and requirements of any public authorities relating to such separation but only to the extent Tenant was obligated to perform such work pursuant to the provisions of the term sheet set forth in Section 9.02; otherwise such costs shall be at Landlord's expense. 9.05 If Landlord exercises Landlord's Option to sublet the Leaseback Space, such sublease to Landlord or its designee (as subtenant) shall be at the rentals set forth in the proposed sublease, and shall be for the same term as that of the proposed subletting, and such sublease shall: (a) be expressly subject to all of the covenants, agreements, terms, provisions and conditions of this lease except such as are irrelevant or inapplicable, and except as otherwise expressly set forth to the contrary in this Section; (b) be upon the same terms and conditions as those contained in the proposed sublease, except such as are irrelevant or inapplicable and except as otherwise expressly set forth to the contrary in this Section; (c) give the sublessee the unqualified and unrestricted right, without Tenant's permission, to assign such sublease or any interest therein and/or to sublet the Leaseback Space or any part or parts of the Leaseback Space and to make any and all changes, alterations, and improvements in the space covered by such sublease and if the proposed sublease will result in all or substantially all of the Demised Premises being sublet, grant Landlord or its designee the option to extend the term of such sublease for the balance of the term of this lease less one (1) day; (d) provide that any assignee or further subtenant, of Landlord or its designee, may, at the election of Landlord, be permitted to make alterations, decorations and installations in the Leaseback Space or any part thereof and shall also provide in substance that any such alterations, decorations and installations in the Leaseback Space therein made by any assignee or subtenant of Landlord or its designee may be removed, in whole or in part, by such assignee or subtenant, at its option, prior to or upon the expiration or other termination of such sublease provided that such assignee or subtenant, at its expense, shall repair any damage and injury to that portion of the Leaseback Space so sublet caused by such removal provided that Tenant shall have no obligation to deliver the Leaseback Space to Landlord at the 30 end of the term in any better condition than same was returned to Tenant by Landlord at the expiration or sooner termination of the applicable sublease or sub-sublease; and (e) also provide that (i) the parties to such sublease expressly negate any intention that any estate created under such sublease be merged with any other estate held by either of said parties, (ii) any assignment or subletting by Landlord or its designee (as the subtenant) may be for any purpose or purposes that Landlord, in Landlord's reasonable discretion, shall deem suitable or appropriate, (iii) Tenant, at Tenant's expense, shall and will at all times provide and permit reasonably appropriate means of ingress to and egress from the Leaseback Space so sublet by Tenant to Landlord or its designee, (iv) Landlord, at Tenant's expense, may make such alterations as may be required or deemed necessary by Landlord to physically separate the Leaseback Space from the balance of the Demised Premises and to comply with any laws and requirements of public authorities relating to such separation to but only to the extent Tenant was obligated to perform such work pursuant to the provisions of the term sheet set forth in Section 9.02 or pursuant to this lease; otherwise such costs shall be at Landlord's expense, and (v) that, subject to the provisions of Section 9.05(d), at the expiration of the term of such sublease, Tenant will accept the space covered by such sublease in its then existing condition, subject to the obligations of the sublessee to make such repairs thereto as may be necessary to preserve the premises demised by such sublease in good order and condition, reasonable wear and tear and casualty excepted. 9.06 (a) If Landlord exercises Landlord's Option to sublet the Leaseback Space, Landlord shall indemnify, defend and save Tenant harmless from all obligations under this lease as to the Leaseback Space during the period of time it is so sublet to Landlord; (b) Performance by Landlord, or its designee, under a sublease of the Leaseback Space shall be deemed performance by Tenant of any similar obligation under this lease and any default under any such sublease shall not give rise to a default under a similar obligation contained in this Lease, nor shall Tenant be liable for any default under this lease or deemed to be in default hereunder if such default is occasioned by or arises from any act or omission of the tenant under such sublease or is occasioned by or arises from any act or omission of any occupant holding under or pursuant to any such sublease; (c) Tenant shall have no obligation, at the expiration or earlier termination of the term of this lease, to remove any alteration, installation or improvement made in the Leaseback Space by Landlord or its designee or anyone claiming under Landlord or such designee. 31 9.07 In the event Landlord does not exercise Landlord's Option pursuant to Section 9.02 and providing that Tenant is not in default of any of Tenant's obligations under this lease after notice and the expiration of any applicable grace period, Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld, conditioned or delayed and shall be granted or denied within the thirty (30) day period set forth in Section 9.02, provided and upon condition that: (a) Tenant shall have complied with the provisions of Section 9.02 and Landlord shall not have exercised Landlord's Option under said Section 9.02 within the time permitted therefor; (b) In Landlord's reasonable judgment the proposed assignee or subtenant is engaged in a business and the Demised Premises, or the relevant part thereof, will be used in a manner which (i) is in keeping with the then standards of the Building, (ii) is limited to the uses permitted under this lease, and (iii) will not violate any negative covenant as to use contained in any other lease of space in the Building, Landlord agreeing to advise Tenant of any such negative covenants promptly upon request; (c) The proposed assignee or subtenant has sufficient financial worth considering the responsibility involved, and Landlord has been furnished with reasonable proof thereof; (d) Provided Landlord then has comparably sized space available for at least a comparable term, neither (i) the proposed assignee or sublessee nor (ii) any person which, directly or indirectly, controls, is controlled by, or is under common control with, the proposed assignee or sublessee or any person who controls the proposed assignee or sublessee, is then an occupant of any part of the Building; (e) Provided Landlord then has comparably sized space available for at least a comparable term, the proposed assignee or sublessee is not a person with whom Landlord is then negotiating to lease space in the Building; (f) The form of the proposed sublease shall comply with the applicable provisions of this Article; (g) There shall not be more than four (4) entities (excluding Landlord or its designee or their sub-subtenants) occupying the Demised Premises at any time; 32 (h) The rental and other terms and conditions of the sublease are substantially the same as those contained in the term sheet furnished to Landlord pursuant to Section 9.02; (i) Tenant shall reimburse Landlord on demand for any reasonable out-of-pocket costs that may be incurred by Landlord in connection with said assignment or sublease, including, without limitation, the reasonable costs of making investigations as to the acceptability of the proposed assignee or subtenant and reasonable legal costs incurred in connection with the review of any term sheet, proposed assignment or sublease or any documentation in connection therewith and in the preparation of any documentation in connection with any request for consent whether or not granted; (j) Tenant shall not have advertised or publicized to the public in any way the availability of the Demised Premises without prior notice to and approval by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, nor shall any advertisement state the name (as distinguished from the address) of the Building or the proposed rental, but Tenant may list the Demised Premises or the portion thereof to be subleased and the terms of any proposed subletting or assignment with a licensed real estate broker; and (k) The sublease shall not allow the use of the Demised Premises or any part thereof (i) for the preparation and/or sale of food for off premises consumption or (ii) for use by a foreign or domestic government or governmental agency. Except for any subletting by Tenant to Landlord or its designee pursuant to the provisions of this Article (which shall be subject to the terms and conditions of Section 9.05), each subletting pursuant to this Article shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this lease. Notwithstanding any such subletting to Landlord or any such subletting to any other subtenant 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 rent and additional rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this lease on the part of Tenant to be performed and all acts and omissions of any licensee or subtenant or anyone claiming under or through any subtenant which 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 Demised Premises by Tenant or any person claiming through or under Tenant (except as provided in Section 9.05) 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, or if Landlord shall exercise Landlord's Option under Section 9.02, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all loss, liability, damages, costs and expenses (including reasonable counsel fees) resulting from any claims that may be made 33 against Landlord by the proposed assignee or sublessee or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. 9.08 In the event that (a) Landlord fails to exercise Landlord's Option under Section 9.02 and consents to a proposed assignment or sublease, and (b) Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within one hundred eighty (180) days after the giving of such consent, then, Tenant shall again comply with all of the provisions and conditions of Section 9.02 before assigning this lease or subletting all or part of the Demised Premises. 9.09 With respect to each and every sublease or subletting authorized by Landlord or where Landlord's consent is not required, in each case under the provisions of this lease, it is further agreed: (a) no subletting shall be for a term ending later than one day prior to the expiration date of this lease; (b) no sublease shall be valid, and no subtenant shall take possession of the Demised Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord; (c) 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, re-entry or dispossess by Landlord under this lease Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, 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 (i) be liable for any previous act or omission of Tenant under such sublease, (ii) be subject to any offset, not expressly provided in such sublease, which theretofore accrued to such subtenant against Tenant, or (iii) be bound by any previous modification of such sublease or by any previous prepayment of more than one month's rent. 9.10 If Landlord shall give its consent to any assignment of this lease or to any sublease, Tenant shall in consideration therefor, pay to Landlord, as additional rent: (a) in the case of an assignment, an amount equal to 50% of all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property, less, in the case of a sale thereof, the then fair market value thereof) and less the reasonable costs (hereinafter referred 34 to as the "Assignment Expenses") paid by Tenant for alteration costs (or contributions in lieu thereof), advertising, brokerage or consulting fees or commissions and legal fees in connection with such assignment; and (b) in the case of a sublease, an amount equal to 50% of any rents, additional charge or other consideration payable under the sublease to Tenant by the subtenant which is in excess of the fixed rent and additional rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof (including, but not limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture or other personal property, less, in the case of the sale thereof, the then fair market value thereof) and less the reasonable costs (hereinafter referred to as the "Subletting Expenses") paid by Tenant for alteration costs (or contributions in lieu thereof), advertising, brokerage or consulting fees or commissions and legal fees in connection with such subletting. The sums payable under Sections 9.10(a) and (b) shall be paid to Landlord as and when paid by the assignee or subtenant, as the case may be, to Tenant and upon the execution and delivery of such assignment or sublease, as the case may be, Tenant shall provide to Landlord a statement of the Assignment Expenses or Subletting Expenses, as the case may be, certified as correct by an officer or principal of Tenant. In the event of any dispute with respect to the Assignment Expenses or the Subletting Expenses, such dispute shall be determined by arbitration in accordance with the provisions of Article 34 hereof. 9.11 If Tenant is a corporation other than a corporation whose stock is listed and traded on a nationally recognized stock exchange, the provisions of Section 9.01 shall apply to a transfer (however accomplished, whether in a single transaction or in a series of related or unrelated transactions) of stock (or any other mechanism such as, by way of example, the issuance of additional stock, a stock voting agreement or change in class(es) of stock) which results in a change of control of Tenant as if such transfer of stock (or other mechanism) which results in a change of control of Tenant were an assignment of this lease, and if Tenant is a partnership or joint venture or other entity, said provisions shall apply with respect to a transfer (by one or more transfers) of an interest in the distributions of profits and losses of such partnership or joint venture or other entity (or other mechanism, such as, by way of example, the creation of additional general partnership or limited partnership interests) which results in a change of control of such partnership or joint venture or other entity, as if such transfer of an interest in the distributions of profits and losses of such partnership or joint venture or other entity which results in a change of control of such partnership or joint venture or other entity were an assignment of this lease; but the provisions of the first sentence of Section 9.01, Landlord's Option, Section 9.07(a)-(e), (h) and (j), and Section 9.10 shall not apply to transactions (including, without limitation, subleases) with a corporation into or with which Tenant is merged or consolidated or to which all or substantially all of Tenant's assets are transferred (provided that the purpose for which such assets are transferred is a valid business 35 purpose and not merely to transfer this lease) or to any corporation which controls or is controlled by Tenant or is under common control with Tenant, provided that in the event of such merger, consolidation or transfer of all or substantially all of Tenant's assets (i) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the net worth of Tenant herein named on the date of this lease, and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least 10 days prior to the effective date of any such transaction. 9.12 Any assignment or transfer, whether made with Landlord's consent pursuant to Section 9.01 or without Landlord's consent pursuant to Section 9.11, 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 satisfactory to Landlord whereby the assignee shall assume the obligations of this lease on the part of Tenant to be performed or observed and whereby the assignee shall agree that the provisions in Section 9.01 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 the fixed rent and additional rent and for the other obligations of this lease on the part of Tenant to be performed or observed. In no event shall this lease be assigned to a foreign or domestic government or governmental agency. 9.13 The joint and several liability of Tenant and any immediate or remote successor in interest of 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. 9.14 The listing of any name other than that of Tenant, whether on the doors of the Demised Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this lease or in the Demised Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this lease or to any sublease of the Demised Premises or to the use or occupancy thereof by others. ARTICLE 10 Compliance With Laws And Requirements Of Public Authorities 10.01 Tenant shall give prompt notice to Landlord of any notice it receives of the violation of any law or requirement of public authority, and Tenant, at its expense, shall comply 36 with all laws and requirements of public authorities which shall, with respect to the Demised Premises or the use and occupation thereof, or the abatement of any nuisance, impose any violation, order or duty on Landlord or Tenant, arising from (i) Tenant's use of the Demised Premises, (ii) the manner of conduct of Tenant's business or operation of its installations, equipment or other property therein, (iii) any cause or condition created by or at the instance of Tenant, other than by Landlord's performance of any work for or on behalf of Tenant, or (iv) breach of any of Tenant's obligations hereunder. However, Tenant shall not be so required to make any structural or other substantial change in the Demised Premises unless the requirement arises from Tenant's manner of use of the Demised Premises as distinguished from the mere use thereof for office purposes or from a cause or condition referred to in clause (ii), (iii) or (iv) above. Furthermore, Tenant need not comply with any such law or requirement of public authority so long as Tenant shall be contesting the validity thereof, or the applicability thereof to the Demised Premises, in accordance with Section 10.02. Landlord, at its expense, shall comply with all other such laws and requirements of public authorities as shall affect the Demised Premises and the Building to the extent that the failure to do so would (x) unreasonably restrict Tenant's access to, or use of, the Demised Premises, (y) cause injury or damage to persons or property in or about the Demised Premises, or (z) prevent Tenant from being able to obtain any required permit for any approved Tenant's Work or Tenant's Changes, but may similarly contest the same subject to conditions reciprocal to Subsections (a), (b) and (d) of Section 10.02. 10.02 Tenant may, at its expense (and if necessary, in the name of but without expense to Landlord) contest, by appropriate proceedings prosecuted diligently and in good faith, the validity, or applicability to the Demised Premises, of any law or requirement of public authority, and Landlord shall cooperate with Tenant in such proceedings, provided that: (a) Landlord shall not be subject to criminal penalty or to prosecution for a crime nor shall the Demised Premises or any part thereof be subject to being condemned or vacated, by reason of non-compliance or otherwise by reason of such contest; (b) Tenant shall defend, indemnify and hold harmless Landlord against all liability, loss or damage which Landlord shall suffer by reason of such non-compliance or contest, including reasonable attorney's fees and other expenses reasonably incurred by Landlord; (c) such non-compliance or contest shall not constitute or result in any violation of any superior lease or superior mortgage, or if such superior lease and/or superior mortgage shall permit such non-compliance or contest on condition of the taking of action or furnishing of security by Landlord, such action shall be taken and such security shall be furnished at the expense of Tenant; and 37 (d) Tenant shall keep Landlord advised as to the status of such proceedings. Without limiting the application of Subsection (a) above thereto, Landlord shall be deemed subject to prosecution for a crime within the meaning of said Subsection, if Landlord, or any officer of Landlord individually, is charged with a crime of any kind or degree whatever, whether by service of a summons or otherwise, unless such charge is withdrawn before Landlord or such officer (as the case may be) is required to plead or answer thereto. 10.03 Tenant shall not cause or permit "Hazardous Materials" (as defined below) to be used, transported, stored, released, handled, produced or installed in, on or from, the Demised Premises or the Building. The term "Hazardous Materials" shall, for the purposes hereof, mean any flammable 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. The parties agree that nothing contained in this Section 10.03 shall prohibit, and Landlord herewith consents to, Tenant's use and maintenance in the Demised Premises of limited quantities of substances reasonably necessary in the ordinary operation and maintenance of office equipment, provided such substances are used, transported, stored, released, handled, and maintained within the Demised Premises in accordance with all applicable laws and regulations. In the event any asbestos containing material is exposed during any of Tenant's Work or Tenant's Changes (as defined in Article 13) which exposure results from the entry (whether or not authorized by Landlord) by Tenant into any column(s) located in the Demised Premises in which vertical pipes and/or shaftways pass through the Demised Premises, or other core areas of the Demised Premises and which exposure, but for such entry, would not occur), Tenant will remove same as required by applicable law at its sole cost and expense. Upon completion of Tenant's Work or Tenant's Changes, Tenant shall provide Landlord with a written certification from Tenant's general contractor or architect to the effect that no Hazardous Materials have been incorporated into the Demised Premises by reason of Tenant's Work or Tenant's Changes in violation of applicable law and rules of governmental authorities. In the event of a breach of the provisions of this Section 10.03, Landlord shall, in addition to all of its rights and remedies under this lease and pursuant to law, require Tenant to remove any such Hazardous Materials from the Demised Premises in the manner prescribed for such removal by the applicable law, ordinance, rule or regulation. The provisions of this Section 10.03 shall survive the Expiration Date or sooner termination of this lease. Landlord hereby agrees to promptly remove or cause the removal of any Hazardous Material from the Building as required by applicable law except with respect to Hazardous Materials required to be removed by Tenant pursuant to this lease. 38 ARTICLE 11 Insurance 11.01 Tenant shall not violate, or permit the violation of, any condition imposed by the standard fire insurance policy then issued for office buildings in the Borough of Manhattan, City of New York, and shall not do, or permit anything to be done, or keep or permit anything to be kept in the Demised Premises which would subject Landlord to any liability or responsibility for personal injury or death or property damage, or which would increase the fire or other casualty insurance rate on the Building or the property therein over the rate which would otherwise then be in effect (unless Tenant pays the resulting premium as provided in Section 11.04) or which would result in insurance companies of good standing refusing to insure the Building or any of such property in amounts reasonably satisfactory to Landlord. 11.02 Tenant covenants to provide on or before the earlier to occur of (i) the Commencement Date and (ii) ten (10) days from the date of this lease and to keep in force during the term hereof the following insurance coverage which coverage shall be effective on the Commencement Date: (a) A policy of commercial general liability insurance naming Landlord, Max AG 450 LLC and Max Capital Management Corp. as additional insureds, protecting such parties and Tenant against any liability whatsoever occasioned by accident on or about the Demised Premises or any appurtenances thereto. Such policy shall have limits of liability of not less than Five Million ($5,000,000.00) Dollars combined single limit coverage on a per occurrence basis, including property damage. Such policy shall contain a contractual liability coverage endorsement with respect to Tenant's indemnification obligations under this lease. Such insurance may be carried under a blanket policy covering the Demised Premises and other locations of Tenant, if any, provided such policy contains an endorsement providing a separate limit available for the Demised Premises equal to the limits of liability required under this lease; (b) Intentionally Omitted. (c) Fire and extended coverage in an amount adequate to cover the cost of replacement of all personal property, fixtures, furnishings, valuable papers and documents, data, leasehold improvements and equipment, including Tenant's Work and Tenant's Changes located in the Demised Premises. The provisions of the last sentence of Section 11.02(a) shall apply with respect to such fire and extended insurance coverage. All such policies shall be issued by companies of recognized responsibility licensed to do business in New York State and rated by Best's Insurance Reports or any successor publication of comparable standing and carrying a rating of A- VIII or better or the then equivalent of such 39 rating, and all such policies shall contain a provision whereby the same cannot be cancelled or modified unless Landlord and any additional insureds are given at least thirty (30) days prior written notice of such cancellation or modification. Prior to the time such insurance is first required to be carried by Tenant and thereafter, at least fifteen (15) days prior to the expiration of any such policies, Tenant shall deliver to Landlord either duplicate originals of the aforesaid policies or certificates evidencing such insurance including a certified copy of the endorsement naming Landlord as an additional insured, together with evidence of payment for the policy. Such certificates shall also verify the primary nature of the coverage and note the waiver of subrogation in favor of Landlord, Max AG 450 LLC and Max Capital Management Corp. If Tenant delivers certificates as aforesaid, Tenant upon reasonable prior notice from Landlord, shall make available to Landlord, at the Demised Premises, duplicate originals of such policies from which Landlord may make copies thereof, at Landlord's cost. Tenant's failure to provide and keep in force the aforementioned insurance shall be regarded as a material default hereunder, entitling Landlord to exercise any or all of the remedies as provided in this lease in the event of Tenant's default. In addition in the event Tenant fails to provide and keep in force the insurance required by this lease, at the times and for the durations specified in this lease, Landlord shall have the right, but not the obligation, at any time and from time to time, and without notice, to procure such insurance and or pay the premiums for such insurance in which event Tenant shall repay Landlord within five (5) days after demand by Landlord, as additional rent, all sums so paid by Landlord and any costs or expenses incurred by Landlord in connection therewith without prejudice to any other rights and remedies of Landlord under this lease. 11.03 Landlord and Tenant shall each secure an appropriate clause in, or an endorsement upon, each property fire or extended coverage policy obtained by it and covering the Building, the Demised Premises, Tenant's Work and Tenant's Changes (as hereinafter defined) or the personal property, fixtures, furnishings, valuable papers and documents, data, leasehold improvements and equipment located therein or thereon, pursuant to which the respective insurance companies waive subrogation or permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party. The waiver of subrogation or permission for waiver of any claim hereinbefore referred to shall extend to the agents of each party and its employees. Evidence of such renewal or replacement of a policy shall be delivered by each party to the other at least twenty (20) days prior to the expiration of such policy. If and to the extent that such waiver or permission can be obtained only upon payment of an additional charge then, the party benefiting from the waiver or permission shall pay such charge upon demand, 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 permission. Tenant shall provide Landlord with a certificate of insurance verifying this waiver in favor of Landlord, Max AG 450 LLC, Max Capital Management Corp. and their respective employees and agents. 40 Subject to the foregoing provisions of this Section 11.03, and insofar as may be permitted by the terms of the insurance policies carried by it, each party and their respective employees and agents hereby releases the other with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damages or destruction with respect to its property by fire or other casualty (including rental value or business interruption, as the case may be) occurring during the term of this lease or during the move into and out of the Demised Premises. 11.04 If, by reason of a failure of Tenant to comply with the provisions of Section 10.01 or Section 11.01, the rate of fire insurance with extended coverage on the Building or equipment or other property of Landlord shall be higher than it otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of the premiums for fire insurance and extended coverage paid by Landlord because of such failure on the part of Tenant. 11.05 Landlord may, from time to time, require that the amount of the insurance to be provided and maintained by Tenant under Section 11.02 hereof be increased so that the amount thereof, in Landlord's reasonable determination, adequately protects Landlord's interest but in no event in excess of the amount that would be required by other tenants occupying similarly sized space in first-class office buildings in the borough of Manhattan for office use. 11.06 If any dispute shall arise between Landlord and Tenant with respect to the incurring or the amount of any additional insurance premium referred to in Section 11.03 or the increase in amount of insurance referred to in Section 11.05, the dispute shall be determined by arbitration. 11.07 A schedule or make up of rates for the Building or the Demised Premises, as the case may be, issued by the New York Fire Insurance Rating Organization or other similar body making rates for fire insurance and extended coverage for the premises concerned, shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rate with extended coverage then applicable to such premises. 11.08 Each policy evidencing the insurance to be carried by Tenant under this lease shall contain a clause that such policy and the coverage evidenced thereby shall be primary with respect to any policies carried by Landlord, and that any coverage carried by Landlord shall be excess insurance. 11.09 Landlord shall from and after the date of this lease through the last day of the term hereof, procure and maintain (or cause to be procured or maintained) fire and extended coverage insurance, in good and solvent insurance companies authorized to do business in the State of New York, on the Building (exclusive of foundations and footings) in an amount equal to the full replacement value thereof. Such insurance may be carried under a blanket policy 41 covering the Building and any other buildings or other properties of Landlord, provided that the required amount of coverage is expressly reserved and allocated to the Building, and may contain commercially reasonable deductibles. Notwithstanding anything contained in this Section 11.09 to the contrary, if at any time an "institutional lender" (as such term is hereinafter defined) shall succeed to the rights of Landlord under this lease whether through sale, exchange, lease, possession, foreclosure action, deed in lieu thereof, or otherwise, the obligations of Landlord set forth in this Section 11.09 shall not apply to such institutional lender. For the purposes of this Section 11.09, an "institutional lender" shall mean any bank, savings and loan association, trust company, insurance company, pension fund or similar institutional lender, which in the ordinary course of its business, owns or operates first-class office buildings and, in connection with such ownership or operation, is self-insured with respect to fire and extended coverage and which has a "Standard & Poor's" or "Moody's" (or any successor rating service or substitute rating service (if either of the "Standard & Poor's" and "Moody's" services are not then available)) "claims paying ability rating" or "debt rating" of AA or Aa (or better) or a "Best's Insurance" (or any successor rating service or substitute rating service, if "Best's insurance" is not then available) rating of A (or better). If the rating scales of any of such rating services (or their successors or substitutes) are changed, then the required rating shall be that rating which is most nearly comparable to the current rating of "AA" (for Standard & Poor's), "Aa" (for Moody's) or "A" (for Best's Insurance). ARTICLE 12 Rules And Regulations 12.01 Tenant and its employees and agents shall faithfully observe and comply with the Rules and Regulations annexed hereto as Exhibit D, and such reasonable changes therein (whether by modification, elimination or addition) as Landlord at any time or times hereafter may make and communicate in writing to Tenant, which do not unreasonably affect the conduct of Tenant's business in the Demised Premises except as required by any governmental law, rule, regulation, ordinance or similar decree; provided, however, that in case of any conflict or inconsistency between the provisions of this lease and any of the Rules and Regulations as originally promulgated or as changed, the provisions of this lease shall control. 12.02 Nothing in this lease contained shall be construed to impose upon Landlord any duty or obligation to Tenant to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease, as against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant or its employees, agents or visitors. However, Landlord shall not enforce any of the Rules and Regulations in such manner as to discriminate against Tenant or anyone claiming under or through Tenant. 42 ARTICLE 13 Tenant's Changes 13.01 Tenant may from time to time during the term of this lease, at its expense, make such other alterations, additions, installations, substitutions, improvements and decorations (hereinafter collectively referred to as "changes" and, as applied to changes provided for in this Article, "Tenant's Changes") in and to the Demised Premises, excluding structural changes, as Tenant may reasonably consider necessary for the conduct of its business in the Demised Premises, on the following conditions: (a) the outside appearance or the strength of the Building or of any of its structural parts shall not be affected; (b) no part of the Building outside of the Demised Premises shall be physically affected and in no event may Tenant install or maintain any window air-conditioning unit; (c) the proper functioning of any of the mechanical, electrical, sanitary and other service systems of the Building shall not be adversely affected or the usage of such systems by Tenant shall not be increased; (d) in performing the work involved in making such changes, Tenant shall be bound by and observe all of the conditions and covenants contained in the following Sections of this Article; (e) before proceeding with any Tenant's Changes, Tenant will advise Landlord thereof and shall submit to Landlord proof reasonably satisfactory of the cost thereof and the name of the contractor who will be performing Tenant's Changes for Landlord's approval, which approval shall not be unreasonably withheld, conditioned or delayed. In selecting a contractor, Tenant will allow a contractor selected by Landlord to bid on the job but nothing herein shall be deemed to require Tenant to select such contractor. Additionally, before proceeding with any Tenant's Changes other than those of a decorative nature such as painting, wall coverings and floor coverings, Tenant shall submit to Landlord plans and specifications and all changes and revisions thereto, for the work to be done for Landlord's approval (which approval shall not be unreasonably withheld, conditioned or delayed except in connection with Tenant's Changes which relate to items set forth in Section 13.01(a)-(c)) above and Tenant shall, upon demand of Landlord, pay to Landlord the reasonable and actual out-of-pocket costs incurred by Landlord for the review of such plans and specifications and all changes and revisions thereto by its architect, engineer and other consultants. Tenant agrees that any review or approval by Landlord of any plans and specifications is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant with respect to the adequacy, 43 correctness or efficiency thereof or otherwise. The granting by Landlord of its approval to such plans and specifications shall in no manner constitute or be deemed to constitute a judgment or acknowledgment by Landlord as to their legality or compliance with laws and/or requirements of public authorities. Landlord may as a condition of its approval require Tenant to make revisions in and to the plans and specifications and to post a bond or other security reasonably satisfactory to Landlord to insure the completion of such change. Notwithstanding anything contained in this Lease to the contrary, Landlord's consent shall not be required with respect to any nonstructural Tenant's Changes (i) which do not affect the Building systems or any part of the Building (including the exterior thereof) other than the Demised Premises, (ii) which do not result in a violation of the Certificate of Occupancy, (iii) the estimated cost of the labor and materials of which do not exceed One Hundred Thousand Dollars ($100,000,000), either individually or in the aggregate with other non-structural Tenant's Changes (for which Landlords' consent is not required pursuant to the terms set forth herein) constructed within any twelve (12) month period and (iv) which does not require a building permit from the New York City Department of Buildings or other approval by any governmental authority having jurisdiction; provided, however, that not less than ten (10) days prior to making any such nonstructural Tenant's Changes, Tenant shall submit to Landlord the plans and specifications for such Tenant's Changes (or if plans and specifications are not required pursuant to any applicable laws or requirements of public authorities thereto, such plans and specifications, design drawings or sketches that Tenant has prepared in connection therewith which, at a minimum, shall include sketches and attendant commentary which, together, constitute a reasonably accurate description of the non-structural Tenant's Changes to be performed. Any such Tenant's Changes shall otherwise be performed in compliance with the applicable provisions of this lease, including, without limitation, this Article 13. 13.02 Tenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of Tenant's Changes and for final approval thereof upon completion and shall furnish copies thereof to Landlord, and shall cause Tenant's Changes to be performed in compliance therewith and with all applicable laws and requirements of public authorities, and with all applicable requirements of insurance bodies, and in good and workmanlike manner, using first-class materials and equipment. Landlord agrees to cooperate with Tenant in connection with obtaining such necessary governmental permits and certificates by signing any applications, which are properly completed by Tenant, to the extent Landlord's signature is required. Tenant's Changes shall be performed in such manner as not to unreasonably interfere with or delay and (unless Tenant shall indemnify Landlord therefor to the latter's reasonable satisfaction) as not to impose any additional expense upon, Landlord in the renovation, maintenance or operation of the Building or any portion thereof. Throughout the performance of Tenant's Changes, Tenant, at its expense, shall carry, or cause to be carried, worker's compensation insurance in statutory limits with a waiver of subrogation in favor of Landlord, Max AG 450 LLC and Max Capital Management Corp. and otherwise as set forth in 44 Section 11.02(b) and commercial general liability insurance for any occurrence in or about the Building with limits and otherwise as set forth in Section 11.02(a) hereof. Tenant shall furnish Landlord with satisfactory evidence that such insurance is in effect at or before the commencement of Tenant's Changes and, on request, at reasonable intervals thereafter during the continuance of Tenant's Changes. If any of Tenant's Changes shall involve the removal of any fixtures, equipment or other property in the Demised Premises which are not Tenant's Property (as defined in Article 14), such fixtures, equipment or other property shall be promptly replaced, at Tenant's expense, with first-class fixtures, equipment or other property (as the case may be) of like utility and of comparable value unless Landlord shall otherwise expressly consent in writing and Tenant shall, upon Landlord's request, deliver any such fixtures, equipment or property so removed to Landlord. All electrical and plumbing work in connection with Tenant's Changes shall be performed by contractors or subcontractors licensed therefor by all governmental agencies having or asserting jurisdiction. Upon the completion of Tenant's Changes, Tenant shall furnish to Landlord a complete set of "as-built" plans and specifications. 13.03 Tenant, at its expense, and with diligence and dispatch, shall procure the cancellation or discharge of all notices of violation arising from or otherwise connected with Tenant's Changes which shall be issued by the Department of Buildings or any other public or quasi-public authority having or asserting jurisdiction. Tenant shall defend, indemnify and save harmless Landlord against any and all 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 Demised Premises and against all costs, expense and liabilities incurred in connection with any such lien, security interest, conditional sale or chattel mortgage or any action or proceeding brought thereon. Tenant, at its expense, shall procure the satisfaction or discharge of all such liens within fifteen (15) days after Landlord makes written demand therefor. However, nothing herein contained shall prevent Tenant from contesting, in good faith and at its own expense, any such notice of violation, provided that Tenant shall comply with the provisions of Section 10.02. 13.04 Tenant agrees that the exercise of its rights pursuant to the provisions of this Article 13 or any other provision of this lease shall not be done in a manner which would actually create any work stoppage, picketing, labor disruption or dispute or violate Landlord's union contracts affecting the Land and/or Building nor interference with the business of Landlord or any Tenant or occupant of the Building. In the event of the actual occurrence of any condition described above arising from the exercise by Tenant of its right pursuant to the provisions of this Article 13 or any other provision of this lease, Tenant shall, immediately upon notice from Landlord, cease the manner of exercise of such right giving rise to such condition. The parties agree that in such instance, Landlord will suffer irreparable harm for which money damages will be an insufficient remedy. For that reason, in the event Tenant fails to cease such manner of exercise of its rights as aforesaid, Landlord, in addition to any rights otherwise available to it under this lease and pursuant to law and equity, shall have the right to a court order granting an 45 injunction against Tenant's manner of exercise of its rights as aforesaid, application for such injunction to be made without notice. With respect to Tenant's Changes, Tenant shall make all arrangements for, and pay all expenses incurred in connection with use of the freight elevators servicing the Demised Premises. Freight elevator service shall be provided on a "first come, first served" basis. There shall be no charge for freight elevator service on "business days" (as defined in Section 17.01) between the hours of 8:00 a.m. to 5:30 p.m. Notwithstanding anything herein to the contrary, all construction deliveries shall be made on business days prior to 8:00 a.m. or after 5:30 p.m. or on days other than business days. Landlord will make available to Tenant the use of the freight elevators in the Building on business days prior to 8:00 a.m. or after 5:30 p.m. or on days other than business days, upon not less than 24 hours notice from Tenant to Landlord in each instance provided, however, that Tenant shall pay to Landlord Landlord's then Building rate with respect to such use which presently is $100.00 per hour with a one (1) hour minimum on business days if the use of such freight elevator is scheduled to commence at 5:30 p.m. and a four (4) hour minimum on days other than business days or on a business day if the use of such freight elevator on a business day is scheduled to commence after 5:30 p.m. Use of such after hours freight elevator facilities may not be exclusive and Tenant may be required to share such after hours use with other tenants who have requested such after hours use at the same time, on a non-discriminatory basis, but in such event the other tenants using the same shall share the costs and expenses in connection with such use. The present Building rate is subject to increase as Landlord's costs to provide such service increases. ARTICLE 14 Tenant's Property 14.01 All fixtures, equipment, improvements and appurtenances attached to or built into the Demised Premises at the commencement of or during the term of this lease, whether or not by or at the expense of Tenant, shall be and remain a part of the Demised Premises, shall be deemed the property of Landlord and shall not be removed by Tenant, except as hereinafter in this Article expressly provided. 14.02 All business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to or built into the Demised Premises, excluding all wiring and control panels, which are installed in the Demised Premises by or for the account of Tenant, without expense to Landlord, and can be removed without permanent structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Demised Premises, (all of which are sometimes referred to as "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by it at any time during the term of this lease; provided that if any of Tenant's Property is removed, Tenant or any party or person entitled to remove same shall repair or pay the cost of repairing any damage to the Demised Premises or to the Building resulting from such removal. Any equipment or other property other than Tenant's 46 Property for which Landlord shall have granted any allowance or credit to Tenant or which has replaced such items originally provided by Landlord at Landlord's expense shall not be deemed to have been installed by or for the account of Tenant, without expense to Landlord, and shall not be considered Tenant's Property. 14.03 At or before the Expiration Date, or the date of any earlier termination of this lease, or as promptly as practicable after such an earlier termination date, Tenant at its expense, shall remove from the Demised Premises all of Tenant's Property which is not attached to, or built into, the Demised Premises except such items thereof as Tenant shall have expressly agreed in writing with Landlord were to remain and to become the property of Landlord, and shall fully repair any damage to the Demised Premises or the Building resulting from such removal, provided, that, except as set forth in Section 14.05, nothing in this lease shall be deemed to obligate Tenant to remove any of Tenant's Changes or Tenant's Work consented to, or approved by Landlord, at the time of Tenant's installation thereof. . Tenant's obligation herein shall survive the termination of the lease. 14.04 Any other items of Tenant's Property (except money, securities and other like valuables) which shall remain in the Demised Premises after the Expiration Date or after a period of thirty (30) days following an earlier termination date, may, at the option of Landlord, be deemed to have been abandoned, and in such case either may be retained by Landlord as its property or may be disposed of, without accountability, at Tenant's expense in such manner as Landlord may see fit. 14.05 (a) For purposes of this lease, "Specialty Installation(s)" shall mean installations consisting of executive bathrooms, raised computers floors, computer installations, communication installations, security systems, fire detection and suppression systems, vaults, internal staircases, pneumatic tubes, horizontal transportation systems and other installations of similar character or nature that are above and beyond standard or typical office installations. Unless otherwise expressly advised in writing by Landlord to the contrary, on or before the Expiration Date or sooner termination of this lease, Tenant shall, at its sole cost and expense, remove all Specialty Installation(s) from the Demised Premises and restore all slab and wall penetrations to the condition that existed prior to such penetrations (such removal and repair work being hereinafter referred to as the "Restoration Work"). (b) Tenant's obligation and liability with respect to the removal of Specialty Installation(s) and the performance of the Restoration Work shall survive the Expiration Date (as same may be extended) or sooner expiration or termination of this lease. 47 14.06 Notwithstanding anything set forth in this Lease to the contrary, in no event shall Tenant be required to remove any installation in place in the Demised Premises prior to the Commencement Date or to restore the Demised Premises to the condition that existed prior to the Commencement Date. ARTICLE 15 Repairs And Maintenance 15.01 Tenant shall take good care of the Demised Premises. Tenant, at its expense, shall promptly make all repairs, ordinary or extraordinary, interior or exterior, structural or otherwise, in and about the Demised Premises and the Building, as shall be required by reason of (i) the performance or existence of Tenant's Work or Tenant's Changes, (ii) the installation, use or operation of Tenant's Property in the Demised Premises, (iii) the moving of Tenant's Property in or out of the Building, or (iv) the negligence or willful act of Tenant or any of its employees, agents or contractors; but Tenant shall not be responsible for any of such repairs as are required by reason of Landlord's negligence or other fault in the manner of performing any of Tenant's Work or Tenant's Changes which may be undertaken by Landlord for Tenant's account or are otherwise required by reason of negligence or other fault of Landlord or its employees, agents or contractors. Except if required by the negligence or other fault of Landlord or its employees, agents or contractors, Tenant, at its expense, shall replace all scratched, damaged or other glass in or about the Demised Premises and shall be responsible for all repairs, maintenance and replacement of interior doors and wall and floor coverings in the Demised Premises and, for the repair and maintenance of all lighting fixtures therein. All repairs, except for emergency repairs, made by Tenant as provided herein shall be performed by contractors or subcontractors reasonably approved in writing by Landlord prior to commencement of such repairs, which approval shall not be unreasonably withheld, conditioned or delayed. 15.02 Landlord, at its expense, shall keep and maintain the Building and its systems and facilities serving the Demised Premises, in good working order, condition and repair and shall make all repairs, structural and otherwise, interior and exterior, as and when needed in or about the Demised Premises, except for those repairs for which Tenant is responsible pursuant to any other provisions of this lease. 15.03 Except as expressly otherwise provided in this lease, Landlord shall have no liability to Tenant by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord, Tenant or others making or failing to make any repairs or changes which, with respect to Landlord, Landlord is required or permitted by this lease, or required by law to make, in or to any portion of the Building or the Demised Premises, or in or to the fixtures, equipment or appurtenances of the Building or the Demised Premises, provided that Landlord shall use due diligence in making any repairs and shall perform such repair work, 48 except in case of emergency, at times reasonably convenient to Tenant and otherwise in such manner as will not materially interfere with Tenant's use of the Demised Premises. ARTICLE 16 Electricity 16.01 (a) The Building is equipped with risers, feeders and wiring to furnish electric service to the Demised Premises with a capacity of not less than eight (8) watts per usable square foot connected load, exclusive of the Building's heating, ventilating and air-conditioning system which electrical service shall be brought into an electrical closet in the Demised Premises with distribution therefrom to be performed by Tenant, at its sole cost and expense, in accordance with the applicable provisions of this lease. A meter or meters measures the amount of "Usage" (as defined in Section 16.02(a)) solely to the Demised Premises. Where more than one meter measures the amount of Usage, Usage through each meter shall be completed and billed separately in accordance with the provisions of this Article 16; (b) Any additional risers, feeders or other equipment or service proper or necessary to supply Tenant's electrical requirements, will, upon written request of Tenant, and subject to availability, be installed by Landlord, at the sole cost and expense of Tenant, if in Landlord's reasonable judgment, the same will not cause permanent damage or injury to the Building or the Demised Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other tenants or occupants. Tenant shall pay to Landlord an amount equal to $350.00 (hereinafter referred to as the "AE Rate") per additional amp of additional electrical service requested by Tenant and furnished by Landlord, which AE Rate shall increase as Landlord's actual costs to furnish additional electrical service increases. Rigid conduit only will be allowed. 16.02 For purposes of Sections 16.02 and 16.03: (a) "Usage" shall mean Tenant's actual usage of electricity in the Demised Premises as measured by the aforesaid meter(s) for each calendar month or such other period as Landlord shall determine during the term of this lease and shall include the quantity and peak demand (kilowatt hours and kilowatts) and all applicable taxes, surcharges, demand charges, energy charges, fuel adjustment charges, and other adjustments made from time to time by the public utility company supplying electric current to the Building or any governmental authority having jurisdiction; 49 (b) "Landlord's Rate" shall mean the service classification SC4-I (Non Time of Day) (including all applicable taxes, surcharges, demand charges, energy charges, fuel adjustment charges, and other sums payable in respect thereof); (c) "Basic Cost" shall mean the product of (i) Usage multiplied by (ii) Landlord's Rate. (d) "Tenant's Cost" shall mean an amount equal to the sum of (i) the Basic Cost plus (ii) eight (8%) percent of the Basic Cost for Landlord's overhead and expenses in connection with submetering. 16.03 Landlord shall, from time to time but not more often than monthly, furnish Tenant with an invoice indicating the period during which the Usage was measured and the amount of Tenant's Cost payable by Tenant to Landlord for such period. Within thirty (30) days after receipt of each such invoice, Tenant shall pay the amount of Tenant's Cost set forth thereon to Landlord as additional rent. In addition, if any tax is imposed upon Landlord by any municipal, state or federal agency or subdivision with respect to the purchase, sale or resale of electrical energy supplied to Tenant hereunder, Tenant covenants and agrees that, where permitted by law, Tenant's Proportionate Share of such taxes shall be passed on to Tenant and included in the bill to, and paid by, Tenant to Landlord, as additional rent. 16.04 Landlord shall not in anywise be liable or responsible to Tenant for any loss or damage or expense which Tenant may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for Tenant's requirements. 16.05 In no event shall Tenant use or install any fixtures, equipment or machines the use of which in conjunction with other fixtures, equipment and machines in the Demised Premises would result in an overload of the electrical circuits servicing the Demised Premises. 16.06 Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of the then existing feeders to the Building or the risers or wiring installation. Tenant shall furnish, install and replace, as required, all lighting tubes, lamps, bulbs and ballasts required in the Demised Premises, at Tenant's sole cost and expense. All lighting tubes, lamps, bulbs and ballasts so installed shall become Landlord's property upon the expiration or sooner termination of this lease. Additionally, all fixtures, if same do not conform to the description set forth hereafter, shall be lamped and ballasted (or relamped and reballasted) throughout the Demised Premises by Tenant at its expense as follows: fluorescent fixtures shall be lamped with F40WW energy saving type lamps and ballasted with energy saving type ballasts; and incandescent fixtures shall be lamped with ER50W and ER75W type lamps. 50 16.07 In the event the meter(s) installed in the Demised Premises for the measurement of electricity consumption in the Demised Premises or any alternative submetering system installed by Landlord at a later date, becomes prohibited from use, then Landlord, at its expense, may cause an independent electrical engineer chosen by Landlord or an electrical consulting firm selected by Landlord (hereinafter referred to as the "Electrical Consultant") to survey and determine Usage in, and Basic Cost for, the Demised Premises from time to time, at least once per twelve (12) month period, and the Electrical Consultant shall make such determination using criteria generally accepted in the Metropolitan New York City area and Landlord's Rate in effect at the time, and shall include the quantity and peak demand, for all electricity consumed by Tenant, plus eight (8%) percent of the Basic Cost for Landlord's expenses and administration fees. The determination made by the Electrical Consultant shall be binding on both Landlord and Tenant and such amount shall be deemed Tenant's Cost. 16.08 Notwithstanding anything in Section 16.07 to the contrary, Tenant shall have the right as hereinafter provided, to contest any amounts determined by the Electrical Consultant pursuant to Section 16.07 as shall be due to Landlord as a result of any such survey. In the event that Tenant fails to send a written notice (hereinafter referred to as an "Objection Notice") to Landlord within thirty (30) days after the date of the Electrical Consultant's notice containing said Usage and Basic Cost, such notice shall become conclusive and binding upon Tenant. If Tenant disputes any such notice by sending an Objection Notice within the time and in the manner hereinbefore provided, then Tenant shall, at its sole cost and expense, have the right to engage an electrical engineer or electrical consulting firm (hereinafter referred to as "Tenant's Consultant") who shall promptly make a survey (hereinafter referred to as the "Disputing Survey") indicating Tenant's electrical usage in the Demised Premises. In the event that Landlord and Tenant are unable to agree on the amount of Usage and Basic Cost within thirty (30) days after the date Tenant furnishes Landlord with a copy of the Disputing Survey, then the Electrical Consultant and Tenant's Consultant shall select a mutually acceptable electrical engineer or electrical consulting firm (hereinafter referred to as the "Third Consultant") within ten (10) days after the expiration of such thirty (30) day period. The Electrical Consultant and Tenant's Consultant shall submit the dispute to the Third Consultant and the determination by the Third Consultant shall be conclusive and binding upon Landlord and Tenant. During the pendency of any such dispute, Tenant shall pay to Landlord the amount set forth in the Electrical Consultant's notice until the dispute is finally determined in accordance with the provisions of this Section and, in the event that such final determination is less than the amount set forth in the Electrical Consultant's notice, Landlord shall, at Tenant's election, refund to Tenant the amount of such excess payment or credit any such excess against any amounts then due or becoming due to Landlord under this lease. The cost of the Third Consultant shall be borne equally by Landlord and Tenant. 16.09 Landlord shall, at no cost to Tenant, provide reasonably sufficient space in the shafts of the Building, the approximate location of which shall be reasonably acceptable to 51 Landlord and Tenant and which location shall be subject to availability, to allow Tenant, at Tenant's sole cost and expense, to run telephone communication feeders and cables, in conduit, from the telephone frame room in the basement of the Building to the Demised Premises. Such installation shall be performed in accordance with, and subject to, the applicable provisions of this lease, including, without limitation, Article 13 hereof. ARTICLE 17 Heat, Ventilating And Air-Conditioning 17.01 Landlord, at its expense, shall maintain and operate the perimeter heating system (hereafter referred to as the "heating system") and, subject to energy conservation requirements of governmental authorities, shall furnish heat (hereinafter collectively referred to as the "heating service") in the Demised Premises through the heating system, as may be required for reasonably comfortable occupancy of the Demised Premises 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 herein to mean all days except Saturdays, Sundays and days (hereinafter referred to as "holidays") observed by the Federal or New York State government as legal holidays or the building service employees' union holidays) during the heating season which is on or about October 15 to on or about April 15. If Tenant shall require heating service at any other time (hereinafter referred to as "after hours") during the heating season, Landlord shall furnish such after hours service upon reasonable advance notice from Tenant, and Tenant shall pay on demand Landlord's building standard cost therefor which is presently $50.00 per hour, which amount is subject to increase as Landlord's actual out-of-pocket costs to provide such after hours service increases. In the event the after hours service is shared by other tenants, the cost thereof shall be prorated among all such tenants. 17.02 Air-conditioning and interior heating shall be provided to the Demised Premises by means of either (a) any packaged air-conditioning system being installed by Landlord as part of Landlord's Work, if any, and/or (b) any packaged air-conditioning system being installed by Tenant as part of Tenant's Work, if any. Landlord agrees that Tenant may install at Tenant's own cost and expense, an air-conditioning system (which together with any air-conditioning system set forth in 17.02(a) and (b) above is hereinafter collectively referred to as the "Air-Conditioning System") to enable Tenant to receive, at any one time, through the Air-Conditioning System not more than an aggregate of one hundred (100) tons of air-conditioning for the Demised Premises. The costs of installation (including, without limitation, connection to any condenser water and steam sources), maintenance, repair and operation of the Air- Conditioning System shall be borne by Tenant. The connection to the Building condenser water and steam sources shall be performed by Landlord's Building contractors provided that Landlord's Building contractor shall perform such connection at a competitive rate and, if not, such connection may be performed by a contractor selected by Tenant and approved by Landlord, which approval shall not be unreasonably withheld, 52 conditioned or delayed. Tenant shall pay Landlord a one-time tap-in charge, in the amount of $2,000.00 per each point of tap-in for such Air-Conditioning System to the extent such tap-in is a "dry" tap-in, but no tap-in charge shall be payable by Tenant in connection with a "wet" tap-in. If Landlord's Building contractor performs such connection, the connection charge shall be payable by Tenant, as additional rent within fifteen (15) days of Landlord's demand and does not include the costs for any labor, materials or services furnished to Tenant in connecting the Air-Conditioning System to the Building condenser water and steam sources. Tenant, at its sole cost and expense, shall enter into and maintain, during the term of this lease, a maintenance and service contract with respect to the Air-Conditioning System with an air-conditioning contractor approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. 17.03 Landlord shall furnish (a) steam to the Air-Conditioning System during regular hours of business days during the heating season as set forth in Section 17.01 and (b) condenser water to the Air-Conditioning System during regular hours of business days, in each case, at no charge to Tenant and in sufficient capacity to operate the Air Conditioning System. In the event Tenant requires steam or condenser water on an after hours basis, Landlord upon reasonable prior notice by Tenant, will furnish same to Tenant and Tenant covenants and agrees to pay Landlord for such furnishing of (i) steam at the rate of $50.00 per hour (hereinafter referred to as the "Steam Rate") for each hour requested by Tenant and (ii) condenser water at the rate of $0.072 (hereinafter referred to as the "Base Rate") per hour per rated ton of cooling capacity of the Air-Conditioning System as measured by a clock or similar measuring device to be installed by Tenant on the Air-Conditioning System. The Steam Rate and the Base Rate shall be subject to proportionate adjustment for increases in the actual out-of-pocket cost to Landlord in connection with the creating and furnishing of steam and/or condenser water, as the case may be, over the costs which exist as of the date hereof. All payments due under this Section shall be payable by Tenant within fifteen (15) business days after demand from Landlord therefor. Tenant may, at its sole cost and expense connect to Landlord's Building waste lines and the manner of such connection shall be subject to Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed. All facilities, machinery and equipment related to the Air-Conditioning System shall be connected by Tenant and operated and maintained by Tenant solely at Tenant's cost and expense. All such facilities shall be solely within the Demised Premises. Tenant's blowers, chilling equipment, heating coils, fans and other facilities, equipment and machinery used in connection with the Air-Conditioning System shall operate on electricity purchased by Tenant in accordance with the provisions of Article 16 of this lease. All facilities, equipment, machinery and ducts installed by Tenant in connection with the Air-Conditioning System shall (x) be subject to Landlord's prior written approval which approval shall not be unreasonably withheld or delayed, (y) comply with Landlord's reasonable requirements as to installation, maintenance and operation, and (z) comply with all other terms, covenants and conditions of this lease applicable thereto. 53 17.04 (a) Notwithstanding anything in this Article 17 to the contrary, Landlord agrees that Tenant may install, at Tenant's sole cost and expense and in accordance with the applicable provisions of this lease, including, without limitation, Section 17.02 hereof, a supplemental air-conditioning system (hereinafter referred to as the "Supplemental System") to enable Tenant to receive, at any one time, not more than an additional five (5) tons of supplemental air-conditioning in the Demised Premises. The cost of installation (including, without limitation, connection to the condenser water source), maintenance and operation of the Supplemental System shall be borne by Tenant. (b) Landlord shall furnish condenser water to the Supplemental System in accordance with the provisions of Section 17.03, provided, however, that with respect to the Supplemental System, Tenant shall pay for such condenser water during regular hours of business days and on an after hours basis or on days other than business days at the Base Rate, as same may increase pursuant to the provisions of Section 17.03 of the Lease. Tenant shall install a clock or similar measuring device on the Supplemental System, at its sole cost and expense, of the type set forth in Section 17.03 with respect to the Air-Conditioning System. 17.05 In connection with Tenant's obligation to maintain and repair the Air-Conditioning System and the Supplemental System, Tenant shall enter into a maintenance contract with a licensed air-conditioning maintenance company reasonably satisfactory to Landlord to provide such maintenance and repair services. To the extent the Air-Conditioning System, or any portion thereof, is installed by Landlord as part of Landlord's Work, Tenant shall be entitled to the benefits of any guaranty or warranty given to Landlord in connection with such Air-Conditioning System. ARTICLE 18 Landlord's Other Services 18.01 Landlord, at its expense, shall provide public elevator service, passenger and freight, by elevators serving the floor on which the Demised Premises are situated during regular hours of business days, and shall have at least one passenger elevator subject to call 24 hours per day, 7 days per week, 365 days per year. 18.02 Tenant shall, at its sole cost and expense, cause the Demised Premises to be cleaned in a manner reasonably satisfactory to Landlord utilizing a cleaning contractor approved by Landlord (which approval shall not be unreasonably withheld or delayed). Tenant shall, at its sole cost and expense, store, receive and transport all refuse and rubbish from the Demised Premises in compliance with all present and future laws, orders, rules and regulations of 54 any governmental or quasi-governmental authority having jurisdiction thereof and shall deposit such refuse and rubbish on a daily basis in a location in the Building designated by Landlord. Additionally, Tenant shall, at its sole cost and expense, cause an extermination contractor, approved by Landlord (which approval shall not be unreasonably withheld or delayed) to treat the Demised Premises, on a periodic basis, to prevent the Demised Premises from infestation by vermin or to exterminate any vermin therein. Such treatment shall be in compliance with all present and future laws, orders, rules and regulations of any governmental or quasi-governmental authority having jurisdiction. Additionally, Tenant shall, at its sole cost and expense, cause the windows in the Demised Premises, both inside and outside, to be cleaned at least one time per calendar quarter by a contractor approved by Landlord, which approval shall not be unreasonably withheld or delayed, and which window cleaning shall be performed in compliance with all present and future laws, orders, rules and regulations of any governmental or quasi-governmental authority having jurisdiction. 18.03 Landlord, at its expense, shall furnish cold water to the floor(s) on which the Demised Premises are located through the existing wet columns for drinking, lavatory and cleaning purposes. If Tenant uses water for any other purpose Landlord, at Tenant's expense, may install meters to measure Tenant's consumption of cold water for such other purposes, as the case may be. Tenant shall pay for the quantities of cold water shown on such meters, at Landlord's cost thereof, within ten (10) days of the rendition of Landlord's bills therefor. Hot water shall be furnished to the public lavatories on the floor(s) on which the Demised Premises are located. 18.04 Landlord, at its expense, shall maintain the listing on the Building directory of the names of Tenant and its permitted assignees and sublessees, and the names of any of their respective officers and employees, in Building standard lettering provided that the names so listed shall not take up more than six (6) lines on the Building directory. In the event Tenant shall require additional listing on the Building directory, Landlord shall, to the extent space for such additional listing is available, maintain such listings and Tenant shall pay to Landlord the then Building standard charge for each such additional listing or any substitute listings. 18.05 (a) Landlord reserves the right, without any liability to Tenant, except as otherwise expressly provided in this lease, to stop service of any of the heating, ventilating, air conditioning, electric, sanitary, elevator or other Building systems serving the Demised Premises, or 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 accidents, emergencies, strikes or the making of repairs or changes which Landlord is required by this lease or by law to make or in good faith deems necessary, by reason of difficulty in securing proper supplies of fuel, steam, 55 water, electricity, labor or supplies, or by reason of any other cause beyond Landlord's reasonable control. Landlord shall take reasonable steps to minimize any inconvenience to Tenant in connection with such stoppage. (b) Notwithstanding anything to the contrary contained in this lease, if, as a result of (i) Landlord's failure to provide any service under this lease which is required to be provided by Landlord, or (ii) Landlord's failure to make or complete repairs to the Demised Premises and/or the Building which it is required to make and complete pursuant to the provisions of this lease or, (iii) in connection with making any such repair, Landlord materially interferes with Tenant's use of the Demised Premises, in each case resulting from causes other than the act, omission or negligence of Tenant, or its agents, employees, contractors or invitees, or, with respect to items (i) and (ii) above, of any public utility company serving the Building, Tenant is unable to use all or any portion of the Demised Premises in the normal course of its business and does not use all or such portion of the Demised Premises for a period in excess of fifteen (15) consecutive business days by reason of such failure, then Tenant shall be entitled to an abatement of fixed rent from and after the sixteenth (16th) business day through the day when such service is restored or repairs are completed based upon the ratio that the rentable square foot area of the Demised Premises not used by Tenant bears to the rentable square foot area of the Demised Premises. The foregoing provisions shall not apply in the event the Demised Premises are damaged in whole or part as a result of fire or other casualty, which is dealt with in other provisions of this lease. 18.06 Landlord shall, at no cost to Tenant, provide reasonably sufficient space in the shafts of the Building, the approximate location of which shall be reasonably acceptable to Landlord and Tenant and which location shall be subject to availability, to allow Tenant, at Tenant's sole cost and expense, to run telephone communication feeders and cables, in conduit, from the telephone frame room in the basement of the Building to the Demised Premises. Such installation shall be performed in accordance with, and subject to, the applicable provisions of this lease, including, without limitation, Article 13 hereof. ARTICLE 19 Access, Changes In Building Facilities, Name 19.01 All except the inside surfaces of all walls, windows and doors bounding the Demised Premises (including exterior Building walls, core corridor walls and doors and any core corridor entrance) and any space in or adjacent to the Demised Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof, as well as access thereto through the Demised Premises for the purpose of operation, maintenance, decoration and repair, are reserved to Landlord. 56 19.02 Tenant shall permit Landlord to install, use, replace and maintain pipes, ducts and conduits within the demising walls, bearing columns and ceilings of the Demised Premises. 19.03 Landlord or Landlord's agent shall have the right, upon reasonable advance request (except in emergency as hereafter provided where no request need be made) to enter and/or pass through the Demised Premises or any part thereof, except for areas that Tenant has identified to Landlord in writing where money or other valuables are kept (hereinafter referred to as "security areas") at reasonable times during reasonable hours, (i) to examine the Demised Premises and to show them to the fee owners, lessors of superior leases, holders of superior mortgages, or prospective purchasers, mortgagees or lessees of the Building as an entirety, and (ii) for the purpose of making such repairs or changes in or to the Demised Premises or in or its facilities, as may be provided for by this lease or as may be mutually agreed upon by the parties or as Landlord may be required to make by law or in order to repair and maintain said structure or its fixtures or facilities. Landlord shall be allowed to take all materials into and upon the Demised Premises that may be reasonably required for such repairs, changes, repainting or maintenance to the Demised Premises only, without liability to Tenant, but Landlord shall not unreasonably interfere with Tenant's use of the Demised Premises and shall not store same overnight in the Demised Premises in an amount in excess of that which is necessary to continue such work the next day. Landlord shall also have the right to enter on and/or pass through the Demised Premises, or any part thereof, at such times as such entry shall be required by circumstances of emergency affecting the Demised Premises or the Building. In such circumstances of emergency, a policeman or fireman shall accompany Landlord's entry into any security area whenever possible and Landlord will endeavor to give Tenant notice prior to such entry and if Landlord is unable to notify Tenant at or prior to such entry, Landlord will give Tenant prompt notice after such entry. 19.04 During the period of twelve (12) months prior to the Expiration Date Landlord may, upon reasonable advance notice, exhibit the Demised Premises to prospective tenants. 19.05 Landlord reserves the right, at any time, without incurring any liability to Tenant therefor, and without it constituting an actual or constructive eviction, to make such changes in or to the Building and the fixtures and equipment thereof, as well as in or to the size, composition, number, arrangement or location of the public entrances, doors, doorways, halls, passages, elevators, escalators and stairways and other public portions thereof, as it may deem necessary or desirable, provided that (a) the services required to be provided to Tenant pursuant to the provisions of this lease shall not be adversely affected, and (b) the size of the Demised Premises shall not be reduced and (c) Tenant shall, at all times, have ingress and egress to and from the Building and the Demised Premises and (d) such changes will not materially interfere with Tenant's business within the Demised Premises. 57 19.06 Landlord may adopt any name for the Building. Landlord reserves the right to change the name or address of the Building at any time. 19.07 For the purposes of Article 19, the term "Landlord" shall include lessors of leases and the holders of mortgages to which this lease is subject and subordinate as provided in Article 7. 19.08 Any reservation in this lease of a right by Landlord to enter upon the Demised Premises and to make or perform any repairs, alterations or other work in, to or about the Demised Premises which, in the first instance, is the obligation of Tenant pursuant to this lease shall not be deemed to: (i) impose any obligation on Landlord to do so, (ii) render Landlord liable (to Tenant or any third party) for the failure to do so, or (iii) relieve Tenant from any obligations to indemnify Landlord as otherwise provided elsewhere in this lease 19.09 Landlord agrees that, subject to the provisions of Section 21.03, access to the Demised Premises and the Building will be available to Tenant 24 hours per day, 7 days per week, 365 days per year, subject to Landlord's reasonable security measures for the Building. A lobby desk shall be located in the Building lobby and shall be staffed 24 hours per day, 7 days per week. ARTICLE 20 Notice Of Accidents 20.01 Tenant shall give notice to Landlord, promptly after Tenant learns thereof, of (i) any accident in or about the Demised Premises for which Landlord might be liable, (ii) all fires in the Demised Premises, (iii) all damages to or defects in the Demised Premises, including the fixtures, equipment and appurtenances thereof, for the repair of which Landlord might be responsible, and (iv) all damage to or defects in any parts or appurtenances of the Building's sanitary, electrical, heating, ventilating, air- conditioning, elevator and other systems located in or passing through the Demised Premises or any part thereof. ARTICLE 21 Non-Liability And Indemnification 21.01 Neither Landlord nor any agent or employee of Landlord shall be liable to Tenant for any injury or damage to Tenant or to any other person or for any damage to, or loss (by theft or otherwise) of, any property of Tenant or of any other person, irrespective of the cause of such injury, damage or loss, it being understood that no property, other than such as might normally be brought upon or kept in the Demised Premises as an incident to the reasonable use of the Demised Premises for the purpose herein permitted, will be brought upon or be kept in the Demised Premises. 58 21.02 (a) Tenant shall indemnify and save harmless Landlord and its members. employees, officers, directors, agents against and from (i) any and all claims (x) arising from (A) the conduct or management of the Demised Premises or of any business therein, or (B) any work done, or any condition created (other than by Landlord for Landlord's or Tenant's account) in or about the Demised Premises during the term of this lease or during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Demised Premises, or (y) arising from any negligent or otherwise wrongful act or omission of Tenant or any of its subtenants or licensees or its or their employees, agents or contractors even if the claims described in (x) or (y) above arise out of the concurrent negligence of Landlord, and (ii) all reasonable costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including, without limitation, reasonable attorneys' fees and expenses. In case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding by attorneys reasonably acceptable to Landlord, Landlord agreeing that the attorneys for the insurance company providing Tenant's insurance are acceptable. (b) Landlord shall indemnify and save harmless Tenant and its partners, directors, officers, employees and agents against and from (i) any and all claims (x) arising from (A) the conduct or management of the Building (other than the Demised Premises) or of any business therein, or (B) any work or thing whatsoever done, or any condition created (other than by Tenant) in or about the Building (other than the Demised Premises) during the term of this lease, or (y) arising from any negligent or otherwise wrongful act or omission of Landlord or any of its tenants or licensees or its or their employees, agents or contractors if, and only if, the claims described in (x) or (y) above arise out of the sole negligence, gross negligence or willful misconduct of Landlord or its agents and employees, and (ii) all reasonable costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including, without limitation, reasonable attorneys' fees and expenses.. In case any action or proceeding be brought against Tenant by reason of any such claim, Landlord, upon notice from Tenant, shall resist and defend such action or proceeding by attorneys reasonably acceptable to Tenant, Tenant agreeing that the attorneys for the insurance company providing Landlord's insurance are acceptable. 21.03 Except as otherwise expressly provided in this lease, this lease and the obligations of Tenant hereunder shall be in no wise affected, impaired or excused because Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this lease by reason of strike, other labor trouble, governmental pre-emption or priorities or other controls in connection with a national or other public emergency or shortages of fuel, supplies or labor resulting therefrom, acts of God or other like cause beyond Landlord's reasonable control. 59 ARTICLE 22 Destruction Or Damage 22.01 If the Building or the Demised Premises shall be damaged or destroyed by fire or other cause, Landlord, within ninety (90) days after such damage or destruction, shall deliver to Tenant an estimate of the time (hereinafter referred to as the "Estimated Time") required to repair or restore the damage or destruction, prepared by an independent contractor or architect (such estimate being hereinafter referred to as the "Estimate"). If the Building or the Demised Premises shall be partially damaged or partially destroyed by fire or other cause, the rents payable hereunder shall be abated to the extent that the Demised Premises shall have been rendered untenantable and for the period from the date of such damage or destruction to the date the damage shall be repaired or restored in accordance with the provisions of Section 22.03. If the Demised Premises or a major part thereof shall be totally (which shall be deemed to include substantially totally) damaged or destroyed or rendered completely (which shall be deemed to include substantially completely) untenantable or inaccessible on account of fire or other cause, the rents shall abate as of the date of the damage or destruction and until Landlord shall repair, restore and rebuild the Building and the Demised Premises, provided, however, that should Tenant reoccupy a portion of the Demised Premises for the conduct of its business during the period the restoration work is taking place and prior to the date that the same are made completely tenantable, rents allocable to such portion shall be payable by Tenant from the date of such occupancy. 22.02 If the Building or the Demised Premises shall be totally damaged or destroyed by fire or other cause, or if the Building shall be so damaged or destroyed by fire or other cause (whether or not the Demised Premises are damaged or destroyed) as to require a reasonably estimated expenditure of more than 40% of the full insurable value of the Building immediately prior to the casualty, then in either such case Landlord may terminate this lease by giving Tenant notice to such effect within one hundred-eighty (180) days after the date of the casualty. In case of any damage or destruction mentioned in this Article Tenant may terminate this lease, (a) by notice to Landlord sent within thirty (30) days after receipt of the Estimate if the Estimated Time exceeds twelve (12) months or, (b) if Landlord has not completed the making of the required repairs and restored and rebuilt the Building and the Demised Premises within twelve (12) months from the date of such damage or destruction, or within such period after such date (not exceeding three (3) months) as shall equal the aggregate period Landlord may have been delayed in doing so by adjustment of insurance, labor trouble, governmental controls, act of God, or any other cause beyond Landlord's reasonable control, by notice to Landlord sent within thirty (30) days after such twelve (12) month period (as same may be extended pursuant to the provisions of Section 22.02(b)) or (c) by notice to Landlord sent within thirty (30) days of receipt of the Estimate if such damage or destruction occurs during the last two (2) years of the term hereof and the Estimated Time exceeds nine (9) months, or (d) if such damage or destruction occurs during the last two (2) years of the term hereof if Landlord shall not have completed 60 making the required repairs and restoration and rebuilt the Building and Demised Premises within nine (9) months from the date of such damage or destruction, by notice to Landlord sent within thirty (30) days after such nine (9) month period. 22.03 If the Building or the Demised Premises shall be partially or totally damaged or destroyed by fire or other cause, then, whether or not the damage or destruction shall have resulted from the fault or neglect of Tenant, or its employees, agents or visitors (and if this lease shall not have been terminated as in this Article provided), Landlord shall repair the damage and restore and rebuild the Building and/or the Demised Premises, at its expense, with reasonable dispatch after notice to it of the damage or destruction; provided, however, that Landlord shall not be required to repair or replace any of Tenant's Property nor to restore any Tenant's Work or Tenant's Changes. 22.04 No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Building pursuant to this Article. Landlord shall use its best efforts to effect such repair or restoration promptly and in such manner as to not unreasonably interfere with Tenant's use and occupancy. 22.05 Notwithstanding any of the foregoing provisions of this Article, if Landlord or the lessor of any superior lease or the holder of any superior mortgage shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the Demised Premises or the Building by fire or other cause, by reason of some action or inaction on the part of Tenant or any of its employees, agents or contractors, then, without prejudice to any other remedies which may be available against Tenant, there shall be no abatement of Tenant's rents, but the total amount of such rents not abated (which would otherwise have been abated) shall not exceed the amount of the uncollected insurance proceeds. 22.06 Landlord will not carry insurance of any kind on Tenant's Property, Tenant's Changes or Tenant's Work, and, except as provided by law or by reason of its fault or its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same. 22.07 The provisions of this Article shall be considered an express agreement governing any case of damage or destruction of the Demised Premises by fire or other casualty, and Section 227 of the Real Property Law of the State of New York, providing for such a contingency in the absence of an express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case. 61 ARTICLE 23 Eminent Domain 23.01 If the whole of the Building shall be lawfully taken by condemnation or in any other manner for any public or quasi-public use or purpose, this lease and the term and estate hereby granted shall forthwith terminate as of the date of vesting of title in such taking (which date is hereinafter also referred to as the "date of the taking"), and the rents shall be prorated and adjusted as of such date. 23.02 If only a part of the Building shall be so taken, this lease shall be unaffected by such taking, except that Tenant may elect to terminate this lease in the event of a partial taking of the Demised Premises if the remaining area of the Demised Premises shall not be reasonably sufficient for Tenant to continue feasible operation of its business. Tenant shall give notice of such election to Landlord not later than thirty (30) days after (i) notice of such taking is given by Landlord to Tenant, or (ii) the date of such taking, whichever occurs sooner. Upon the giving of such notice by Tenant this lease shall terminate on the date of such taking and the rents shall be prorated as of such termination date. Upon such partial taking and this lease continuing in force as to any part of the Demised Premises, the rents apportioned to the part taken shall be prorated and adjusted as of the date of taking and from such date the fixed rent for the Demised Premises and additional rent payable pursuant to Article 5 shall be appropriately adjusted according to the rentable area remaining. 23.03 Landlord shall be entitled to receive the entire award in any proceeding with respect to any taking provided for in this Article without deduction therefrom for any estate vested in Tenant by this lease and Tenant shall receive no part of such award, except as hereinafter expressly provided in this Article. Tenant hereby expressly assigns to Landlord all of its right, title and interest in or to every such award. Notwithstanding anything herein to the contrary, Tenant may, at its sole cost and expense, make a claim with the condemning authority for Tenant's moving expenses, the value of Tenant's fixtures or Tenant's Changes which do not become part of the Building or property of Landlord, provided however that Landlord's award is not thereby reduced or otherwise adversely affected. 23.04 If the temporary use or occupancy of all or any part of the Demised Premises shall be lawfully taken by condemnation or in any other manner for any public or quasi-public use or purpose during the term of this lease, Tenant shall be entitled, except as hereinafter set forth, to receive that portion of the award for such taking which represents compensation for the use and occupancy of the Demised Premises and, if so awarded, for the taking of Tenant's Property and for moving expenses, and Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoration of the Demised Premises. This lease shall be and remain unaffected by such taking and Tenant shall continue responsible for all of its obligations hereunder insofar as such obligations are not affected by such taking and 62 shall continue to pay in full the fixed rent and additional rent when due. If the period of temporary use or occupancy shall extend beyond the Expiration Date, that part of the award which represents compensation for the use or occupancy of the Demised Premises (or a part thereof) shall be divided between Landlord and Tenant so that Tenant shall receive so much thereof as represents the period prior to the Expiration Date and Landlord shall receive so much thereof as represents the period subsequent to the Expiration Date. All moneys received by Tenant as, or as part of, an award for temporary use and occupancy for a period beyond the date to which the rents hereunder have been paid by Tenant shall be received, held and applied by Tenant as a trust fund for payment of the rents falling due hereunder. 23.05 In the event of any taking of less than the whole of the Building which does not result in a termination of this lease, or in the event of a taking for a temporary use or occupancy of all or any part of the Demised Premises which does not extend beyond the Expiration Date, Landlord, at its expense, and to the extent any award or awards shall be sufficient for the purpose, shall proceed with reasonable diligence to repair, alter and restore the remaining parts of the Building and the Demised Premises to substantially the condition existing prior to such taking to the extent that the same may be feasible and so as to constitute a complete and tenantable Building and Demised Premises. 23.06 Should any part of the Demised Premises be taken to effect compliance with any law or requirement of public authority other than in the manner hereinabove provided in this Article, then (i) if such compliance is the obligation of Tenant under this lease, Tenant shall not be entitled to any diminution or abatement of rent or other compensation from Landlord therefor, but (ii) if such compliance is the obligation of Landlord under this lease, the fixed rent hereunder shall be reduced and additional rents under Article 5 shall be adjusted in the same manner as is provided in Section 23.02 according to the reduction in rentable area of the Demised Premises resulting from such taking. 23.07 Any dispute which may arise between the parties with respect to the meaning or application of any of the provisions of this Article shall be determined by arbitration in the manner provided in Article 34. ARTICLE 24 Surrender; Holdover 24.01 On the last day of the term of this lease, or upon any earlier termination of this lease, or upon any re-entry by Landlord upon the Demised Premises, Tenant shall quit and surrender the Demised Premises to Landlord in good order and in broom clean condition, except for ordinary wear and tear and Tenant shall remove all of Tenant's Property therefrom except as otherwise expressly provided in this lease and shall restore the Demised Premises wherever such removal results in damage thereto. 63 24.02 (a) In the event this lease is not renewed or extended or a new lease is not entered into between the parties, and if Tenant shall then hold over after the expiration of the term of this lease, and if Landlord shall then not proceed to remove Tenant from the Demised Premises in the manner permitted by law (or shall not have given written notice to Tenant that Tenant must vacate the Demised Premises) irrespective of whether or not Landlord accepts rent from Tenant for a period beyond the Expiration Date, the parties hereby agree that Tenant's occupancy of the Demised Premises after the expiration of the term shall be under a month-to-month tenancy commencing on the first day after the expiration of the term, which tenancy shall be upon all of the terms set forth in this lease except Tenant shall pay on the first day of each month of the holdover period as fixed rent, an amount equal to two (2) times one-twelfth of the fixed rent and additional rent payable by Tenant during the last year of the term of this lease (i.e., the year immediately prior to the holdover period). Further, Landlord shall not be required to perform any work, furnish any materials or make any repairs within the Demised Premises during the holdover period. It is further stipulated and agreed that if Landlord shall, at any time after the expiration of the original term or after the expiration of any term created thereafter, proceed to remove Tenant from the Demised Premises as a holdover, the fixed rent for the use and occupancy of the Demised Premises during any holdover period shall be calculated in the same manner as set forth above. In addition to the foregoing, Landlord shall be entitled to recover from Tenant any losses or damages arising from such holdover. (b) Notwithstanding anything to the contrary contained in this lease, the acceptance of any rent paid by Tenant pursuant to subsection 24.02(a) above shall not preclude Landlord from commencing and prosecuting a holdover or summary eviction proceeding, and the preceding sentence shall be deemed to be an "agreement expressly providing otherwise" within the meaning of Section 232-c of the Real Property Law of the State of New York. (c) All damages to Landlord by reason of holding over by Tenant may be of the subject of a separate action and need not be asserted by Landlord in any summary proceedings against Tenant. ARTICLE 25 Conditions Of Limitation 25.01 To the extent permitted by applicable law this lease and the term and estate hereby granted are subject to the limitation that whenever Tenant shall make an assignment of all or substantially all of the property of Tenant for the benefit of creditors, or shall file a voluntary petition under any bankruptcy or insolvency law, or an involuntary petition alleging an act of bankruptcy or insolvency shall be filed against Tenant under any bankruptcy or 64 insolvency law, or whenever a petition shall be filed against Tenant under the reorganization provisions of the United States Bankruptcy Act or under the provisions of any law of like import, or whenever a petition shall be filed by Tenant under the arrangement provisions of the United States Bankruptcy Act or under the provisions of any law of like import, or whenever a permanent receiver of Tenant or of or for the property of Tenant shall be appointed, then, Landlord, (a) at any time after receipt of notice of the occurrence of any such event, or (b) if such event occurs without the acquiescence of Tenant, at any time after the event continues unstayed for one hundred twenty (120) days, Landlord may give Tenant a notice of intention to end the term of this lease at the expiration of five (5) days from the date of service of such notice of intention, and upon the expiration of said five (5) day period this lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 27. 25.02 This lease and the term and estate hereby granted are subject to the further limitation that: (a) whenever Tenant shall default in the payment of any installment of fixed rent, or in the payment of any additional rent or any other charge payable by Tenant to Landlord, on any day upon which the same ought to be paid, and such default shall continue for five (5) business days after Landlord shall have given Tenant a notice specifying such default; or (b) whenever Tenant shall do or permit anything to be done, whether by action or inaction, contrary to any of Tenant's obligations hereunder, and if such situation shall continue and shall not be remedied by Tenant within thirty (30) days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a happening or default which cannot with due diligence be cured within a period of thirty (30) days and the continuance of which for the period required for cure will not subject Landlord to the risk of criminal liability (as more particularly described in Section 10.02) or termination of any superior lease or foreclosure of any superior mortgage, if Tenant shall not, (i) within said thirty (30) day period advise Landlord of Tenant's intention to duly institute all steps necessary to remedy such situation, (ii) duly institute within said thirty (30) day period, and thereafter diligently prosecute to completion all steps necessary to remedy the same and (iii) complete such remedy within such time after the date of the giving of said notice of Landlord as shall reasonably be necessary; or (c) whenever any event shall occur or any contingency shall arise whereby this lease or the estate hereby granted or the unexpired balance of the term hereof would, by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Article 9; or 65 (d) whenever Tenant shall abandon the Demised Premises (unless as a result of a casualty) unless Tenant provides, at its sole cost and expense, reasonable security measures to prevent unauthorized access to the Demised Premises, or (e) when Tenant shall be in default in the observance or performance of its obligations under any other lease in the Building, then in any of said cases set forth in the foregoing Subsections (a), (b), (c) (d) and (e), Landlord may give to Tenant a notice of intention to end the term of this lease at the expiration of five (5) days from the date of the service of such notice of intention, and upon the expiration of said five (5) days this lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 27. ARTICLE 26 Re-Entry By Landlord 26.01 If Tenant shall default in the payment of any installment of fixed rent, or of any additional rent, on any date upon which the same ought to be paid, and if such default shall continue for five (5) business days after Landlord shall have given to Tenant a notice specifying such default, or if this lease shall expire as in Article 25 provided, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the Demised Premises, or any part thereof, in the name of the whole, either by summary dispossess proceedings or by any suitable action or proceeding at law, or by any lawful measures, without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any persons therefrom, to the end that Landlord may have, hold and enjoy the Demised Premises again as and of its first estate and interest therein. The word re-enter, as herein used, is not restricted to its technical legal meaning. In the event of any termination of this lease under the provisions of Article 25 or if Landlord shall re-enter the Demised Premises under the provisions of this Article or in the event of the termination of this lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the fixed rent and additional rent payable by Tenant to Landlord up to the time of such termination of this lease, or of such recovery of possession of the Demised Premises by Landlord, as the case may be, and shall also pay to Landlord damages as provided in Article 27. 26.02 In the event of a breach or threatened breach by Tenant of any of its obligations under this lease, Landlord shall also have the right of injunction. The special remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled 66 at any time and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 26.03 If this lease shall terminate under the provisions of Article 25, or if Landlord shall re-enter the Demised Premises under the provisions of this Article, or in the event of the termination of this lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as advance rent, security or otherwise, but such moneys shall be credited by Landlord against any fixed rent or additional rent due from Tenant at the time of such termination or re-entry or, at Landlord's option, against any damages payable by Tenant under Article 27 or pursuant to law. ARTICLE 27 Damages 27.01 If this lease is terminated under the provisions of Article 25, or if Landlord shall re-enter the Demised Premises under the provisions of Article 26, or in the event of the termination of this lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the election of Landlord, either: (a) a sum which at the time of such termination of this lease or at the time of any such re-entry by Landlord, as the case may be, represents the then value of the excess, if any, discounted to present value at the rate of six (6%) percent per annum, of: 1. the aggregate of the fixed rent and the additional rent payable hereunder which would have been payable by Tenant (conclusively presuming the additional rent to be the same as was payable for the year immediately preceding such termination) for the period commencing with such earlier termination of this lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, had this lease not so terminated or had Landlord not so re-entered the Demised Premises; over 2. the aggregate rental value of the Demised Premises for the same period; or (b) sums equal to the fixed rent and the additional rent (as above presumed) payable hereunder which would have been payable by Tenant had this lease not so terminated, or had Landlord not so re-entered the Demised Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the 67 Expiration Date, provided, however, that if Landlord shall relet the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this lease or in re-entering the Demised Premises and in securing possession thereof, as well as the expenses of reletting, including altering and preparing the Demised Premises for new tenants, brokers' commissions, and all other expenses properly chargeable against the Demised Premises and the rental therefrom; it being understood that any such reletting may be for a period shorter or longer than the remaining term of this lease; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this Subsection to a credit in respect of any net rents from a reletting, except to the extent that such net rents are actually received by Landlord. If the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis (for equivalent space) shall be made of the rent received from such reletting and of the expenses of reletting. If the Demised Premises or any part thereof be relet by Landlord for the unexpired portion of the term of this lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall, prima facie, be the fair and reasonable rental value for the Demised Premises, or part thereof, so relet during the term of the reletting. 27.02 Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the term of this lease would have expired if it had not been so terminated under the provisions of Article 25, or under any provision of law, or had Landlord not re- entered the Demised Premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to prove for and obtain as liquidated damages by reason of the termination of this lease or re-entry on the Demised Premises for the default of Tenant under this lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved whether or not such amount be greater, equal to, or less than any of the sums referred to in Section 27.01. 68 ARTICLE 28 Waiver 28.01 Tenant, for Tenant, and on behalf of any and all persons claiming through or under Tenant, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this lease for the term hereby demised after being dispossessed or ejected therefrom by process of law or under the terms of this lease or after the termination of this lease as herein provided. 28.02 In the event that Tenant is in arrears in payment of fixed rent or additional rent hereunder, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. 28.03 Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Demised Premises, including any claim of injury or damage, or any emergency or other statutory remedy with respect thereto. 28.04 The provisions of Articles 17 and 18 shall be considered expressed agreements governing the services to be furnished by Landlord, and Tenant agrees that any laws and/or requirements of public authorities, now or hereafter in force, shall have no application in connection with any enlargement of Landlord's obligations with respect to such services unless Tenant agrees, in writing, to pay to Landlord, as additional rent, Landlord's reasonable charges for any additional services provided. 28.05 If, at any time during the term of this lease, any requirement of public authority shall have the effect of limiting, for any period of time, the amount of the rents payable by Tenant, or receivable by Landlord, under this lease, and the maximum rents so permitted to be paid by Tenant, or received by Landlord, hereunder shall be less than the rents herein reserved, then: (a) throughout the period of limitation, Tenant shall remain liable for the maximum amount of rents that is lawfully payable; and 69 (b) if and when the period of limitation ends, the requirement of public authority imposing such limitation is repealed, or such limitation is restrained or rendered unenforceable by any order or ruling of a court of appropriate jurisdiction: (i) to the extent that the same is not prohibited by any requirement of public authority, Tenant shall pay to Landlord, on demand, all amounts that would have been due from Tenant to Landlord during the period of limitation, but that were not paid because of the requirements of public authorities; and (ii) thereafter, to the extent permitted by applicable law, Tenant shall pay to Landlord all of the rents reserved under this lease, all of which shall be calculated as if there had been no intervening period of limitation. ARTICLE 29 No Other Waivers Or Modifications 29.01 The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. No executory agreement hereafter made between Landlord and Tenant shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this lease, in whole or in part, unless such executory agreement is in writing, refers expressly to this lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge or termination or effectuation of the abandonment is sought. 29.02 The following specific provisions of this Section shall not be deemed to limit the generality of any of the foregoing provisions of this Article: (a) no agreement to accept a surrender of all or any part of the Demised 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 Demised Premises. If Tenant shall at any time request Landlord to sublet the Demised 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. 70 (b) 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; (c) no payment by Tenant or receipt by Landlord of a lesser amount than the correct fixed rent or additional rent due hereunder shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying 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. ARTICLE 30 Curing Tenant's Defaults, Additional Rent 30.01 (a) if Tenant shall default in the performance of any of Tenant's obligations under this lease, Landlord, without thereby waiving such default, may (but shall not be obligated to) perform the same for the account and at the expense of Tenant, without notice, in a case of emergency, and in any other case, only if such default continues after the expiration of (i) five (5) business days from the date Landlord gives Tenant notice of intention so to do, or (ii) the applicable grace period provided in Section 25.02 or elsewhere in this lease for cure of such default, whichever occurs later; (b) if Tenant is late in making any payment due to Landlord from Tenant under this lease for seven (7) or more days, then interest shall become due and owing to Landlord on such payment from the date when it was due computed at the rate of four (4%) percent per annum over the Base Rate but in no event in excess of the maximum legal rate of interest chargeable to corporations in the State of New York. 71 30.02 Bills for any expenses incurred by Landlord in connection with any such performance by it for the account of Tenant, and bills for all costs, expenses and disbursements of every kind and nature whatsoever, including reasonable and actual out-of-pocket counsel fees, involved in collecting or endeavoring to collect the fixed rent or additional rent or any part thereof or enforcing or endeavoring to enforce any rights against Tenant, under or in connection with this lease, or pursuant to law, including any such cost, expense and disbursement involved in instituting and prosecuting summary proceedings, as well as bills for any property, material, labor or services provided, furnished, or rendered, by Landlord or at its instance to Tenant, may be sent by Landlord to Tenant monthly, or immediately, at Landlord's option, and, shall be due and payable in accordance with the terms of such bills. ARTICLE 31 Broker 31.01 Landlord and Tenant covenant, warrant and represent to each other that they have not dealt with any broker or finder except Insignia/ESG, Inc., the rental agent for the Building (hereinafter referred to as the "Broker") concerning the renting of the Demised Premises to Tenant. Landlord and Tenant agree to hold the other harmless against any claims for a brokerage commission arising out of any assertion by any broker or finder except the Broker that it dealt with such indemnifying party with respect to the renting of the Demised Premises to Tenant. Landlord agrees to pay any fee or commission owing to the Broker pursuant to separate agreement made by Landlord and Broker. ARTICLE 32 Notices 32.01 Except for rent bills and emergency repair notices (which may be hand-delivered or sent via facsimile machine and shall be deemed given upon receipt) any notice, statement, demand or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this lease or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this lease) and shall be deemed to have been properly given, rendered or made, if sent by registered or certified mail, return receipt requested, addressed to the other party at the address hereinabove set forth (except that after the Commencement Date, Tenant's address, unless Tenant shall give notice to the contrary, shall be the Building), or sent via nationally recognized overnight courier providing for receipted delivery and shall be deemed to have been given, rendered or made (a) if so mailed, three (3) days after the day so mailed, and (b) if sent via nationally recognized overnight courier, on the date of receipt or rejection. Copies of notices to Tenant of Tenant's default shall be sent to Reid, Smith, Shaw & McClay LLP, 375 Park Avenue, New York, New York 10152, attention: Joseph M. Marger, Esq. Either party may, by notice as aforesaid, 72 designate a different address or addresses for notices, statements, demands or other communications intended for it. ARTICLE 33 Estoppel Certificate 33.01 Each party agrees, at any time and from time to time, as requested by the other party, upon not less than twenty (20) days' prior notice, to execute and deliver to the other a statement certifying (a) that this lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications) and whether any options granted to Tenant pursuant to the provisions of this lease have been exercised, (b) certifying the dates to which the fixed rent and additional rent have been paid and the amounts thereof, and stating whether or not, to the best knowledge of the signer, the other party is in default in performance of any of its obligations under this lease, and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant hereto may be relied upon by others with whom the party requesting such certificate may be dealing. Additionally, Tenant's Statement shall contain such other information as shall be reasonably required by the holder or proposed holder of any superior mortgage or the lessor or proposed lessor under any superior lease. ARTICLE 34 Arbitration 34.01 Either party may request arbitration of any matter in dispute wherein arbitration is expressly provided in this lease as the appropriate remedy. The party requesting arbitration shall do so by giving notice to that effect to the other party, and both parties shall promptly thereafter jointly apply to the American Arbitration Association (or any organization successor thereto) in the City and County of New York for the appointment of a single arbitrator. 34.02 The arbitration shall be conducted in accordance with the then prevailing rules of the American Arbitration Association (or any organization successor thereto) in the City and County of New York. In rendering such decision and award, the arbitrator shall not add to, subtract from or otherwise modify the provisions of this lease. 34.03 If for any reason whatsoever a written decision and award of the arbitrator shall not be rendered within ninety (90) days after the appointment of such arbitrator, then at any time thereafter before such decision and award shall have been rendered either party may apply to the Supreme Court of the State of New York or to any other court having jurisdiction and exercising the functions similar to those now exercised by such court, by action, proceeding or otherwise (but not by a new arbitration proceeding) as may be proper to determine the question in dispute consistently with the provisions of this lease. 73 34.04 All the expenses of the arbitration shall be borne by the parties equally except that each party shall be responsible for the payment of its own legal fees and disbursements and expert witness fees. ARTICLE 35 No Other Representations, Construction, Governing Law, Consents 35.01 Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this lease or in any other written agreement which may be made between the parties concurrently with the execution and delivery of this lease and shall expressly refer to this lease. This lease and said other written agreement(s) made concurrently herewith are hereinafter referred to as the "lease documents". It is understood and agreed that all understandings and agreements heretofore had between the parties are merged in the lease documents, which alone fully and completely express their agreements and that the same are entered into after full investigation, neither party relying upon any statement or representation not embodied in the lease documents, made by the other. 35.02 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. 35.03 This lease shall be governed in all respects by the laws of the State of New York. 35.04 Wherever in this lease Landlord's consent or approval is required, if Landlord shall refuse such consent or approval, Tenant in no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent or approval. Tenant's sole remedy shall be an action or proceeding to enforce any such provision, for specific performance, injunction or declaratory judgment or for a determination as to whether Landlord reasonably withheld its consent pursuant to either (a) the Simplified Procedure For Court Determination of Disputes as set forth in the CPLR ss.3031 et seq. (or any successor thereto), or (b) arbitration under the Expedited Procedures provisions (presently Rules 53 through 57, as same may be amended from time to time) of the American Arbitration Association (or successor thereto) in the City of New York (and the fees and 74 expenses of such arbitration shall be borne by the unsuccessful party), and, if Tenant elects either (a) or (b) above, the decision shall be final and conclusive on the parties. ARTICLE 36 Parties Bound 36.01 The obligations of this lease shall bind and benefit the successors and assigns of the parties with the same effect as if mentioned in each instance where a party is named or referred to, except that no violation of the provisions of Article 9 shall operate to vest any rights in any successor or assignee of Tenant and that the provisions of this Article shall not be construed as modifying the conditions of limitation contained in Article 25. However, the obligations of Landlord under this lease shall not be binding upon Landlord herein named with respect to any period subsequent to the transfer of its interest in the Building as owner or lessee thereof and in event of such transfer said obligations shall thereafter be binding upon each transferee of the interest of Landlord herein named as such owner or lessee of the Building, but only with respect to the period ending with a subsequent transfer within the meaning of this Article. 36.02 Tenant shall look only to Landlord's estate and property in the Building (or the rental proceeds thereof or the proceeds derived from the sale of the Building and/or the Land) and, where expressly so provided in this lease, to offset against the rents payable under this lease, 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 such Landlord 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 Landlord and Tenant hereunder or Tenant's use or occupancy of the Demised Premises. ARTICLE 37 Certain Definitions And Construction 37.01 For the purposes of this lease and all agreements supplemental to this lease, unless the context otherwise requires the definitions set forth in Exhibit E annexed hereto shall be utilized. 37.02 The various terms which are bolded or underlined and defined in other Articles of this lease or are defined in Exhibits annexed hereto, shall have the meanings specified in such other Articles and such Exhibits for all purposes of this lease and all agreements supplemental thereto, unless the context shall otherwise require. 75 ARTICLE 38 Adjacent Excavation And Construction; Shoring; Vaults 38.01 If an excavation or other substructure work shall be made upon land adjacent to the Demised Premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the Demised Premises for the purpose of doing such work as shall be reasonably necessary to preserve the wall of or the Building from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Landlord, or diminution or abatement or rent. 38.02 No vaults, vault space or area, whether or not enclosed or covered, not within the property line of the Building is leased hereunder, anything contained in or indicated on any sketch, blue print or plan or anything contained elsewhere in this lease to the contrary notwithstanding. Landlord makes no representation as to the location of the property line of the Building. All vaults and vault space and all such areas not within the property line of the Building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. ARTICLE 39 Renewal Option 39.01 (a) Provided that this lease shall be in full force and effect without a default on the part of Tenant under this lease, on the date Tenant exercises the "Renewal Option" (as hereinafter defined) which default continues after notice and the expiration of any applicable cure period, Tenant shall have the option (hereinafter referred to as the "Renewal Option") to renew this lease for a renewal term (hereinafter referred to as the "Renewal Term") of five (5) years, to commence on the day (hereinafter referred to as the "Renewal Term Commencement Date") next succeeding the Expiration Date and to expire on the day (herein referred to as the Renewal Term Expiration Date") which shall be the fifth (5th) anniversary of the Expiration Date. (b) Tenant shall exercise the Renewal Option by sending written notice thereof (which notice is hereinafter referred to as the "Renewal Notice") 76 to Landlord by registered or certified mail, return receipt requested, on or before the day which shall be twelve (12) months next preceding the Expiration Date. If Tenant shall send the Renewal Notice within the time and in the manner hereinbefore provided, this lease shall be deemed renewed for the Renewal Term upon the terms, covenants and conditions hereinafter contained. If Tenant shall fail to send the Renewal Notice within the time and in the manner hereinbefore provided, the Renewal Option shall cease and terminate, and Tenant shall have no further option to renew this lease. 39.02 The Renewal Term, if any, shall be upon, and subject to, all of the terms, covenants and conditions provided in this lease for the original term hereof, except that: (a) Any terms, covenants, or conditions hereof that are expressly or by their nature inapplicable to the Renewal Term (including, without limitation, Articles 3 and 4 hereof) shall not apply during the Renewal Term; and (b) The annual fixed rent payable by Tenant during the Renewal Term (hereinafter referred to as the "Renewal Rent"), subject to adjustment as otherwise in this lease provided, shall be an amount equal to the fair market rental value of the Demised Premises, to be determined as provided in Section 39.03 hereof and to be calculated as of the "Determination Date" (as defined in Section 39.03) on the basis of a five (5) year letting of the Demised Premises. 39.03 In the event that Tenant shall exercise the Renewal Option as provided in Section 39.01 hereof, the Renewal Rent shall be determined jointly by Landlord and Tenant, and such determination shall be confirmed in a writing (hereinafter referred to as the "Rental Agreement") to be executed in recordable form by Landlord and Tenant not later than the day (hereinafter referred to as the "Determination Date") which shall be ninety (90) days next preceeding the Expiration Date. In the event that Landlord and Tenant shall have failed to join in executing the Rental Agreement on or before the Determination Date because of their failure to agree upon the Renewal Rent then the Renewal Rent shall be determined by arbitration as follows: (a) Landlord and Tenant shall each appoint an arbitrator by written notice given to the other party hereto not later than thirty (30) days after the Determination Date. If either Landlord or Tenant shall have failed to appoint an arbitrator within such period of time and thereafter shall have failed to do so by written notice given within a period of five (5) days after notice by the other party requesting the appointment of such arbitrator, then such arbitrator shall be appointed by the American Arbitration Association or its successor (the branch office of which is located in or closest to the City and State of New York), upon request of either Landlord or Tenant, as the case may be; 77 (b) The two (2) arbitrators appointed as above provided shall attempt to reach an agreement as to the rental for the Renewal Term and in the event they are unable to do so within thirty (30) days after their joint appointment, then they shall appoint a third (3rd) arbitrator by written notice given to both Landlord and Tenant, and, if they fail to do so by written notice given within sixty (60) days after their appointment, such third (3rd) arbitrator shall be appointed as above provided for the appointment of an arbitrator in the event either party fails to do so; (c) All of such arbitrators shall be real estate appraisers having not less than ten (10) years experience in appraising the value of leasehold interests in real estate similar to the Building located within the City of New York and who are members of M.A.I. or S.R.E.A.; (d) The three arbitrators, selected as aforesaid, forthwith shall convene and render their decision in accordance with the then applicable rules of the American Arbitration Association or its successor, which decision shall be strictly limited to a determination of the Renewal Rent within twenty (20) days after the appointment of the third (3rd) arbitrator. The decision of such arbitrators shall be in writing and such decision shall be the average of the two arbitrators' determinations coming closest to each other and, insofar as the same is in compliance with the provisions and conditions of this Section 39.03 hereof shall, be binding upon Landlord and Tenant. Duplicate original counterparts of such decision shall be sent forthwith by the arbitrators by certified mail, return receipt requested, to both Landlord and Tenant. The arbitrators, in arriving at their decision, shall be entitled to consider all testimony and documentary evidence that may be presented at any hearing, as well as facts and data which the arbitrators may discover by investigation and inquiry outside such hearings. If, for any reason whatsoever, a written decision of the arbitrators shall not be rendered within twenty (20) days after the appointment of the third (3rd) arbitrator, then, at any time thereafter before such decision shall have been rendered, either party may apply to the Supreme Court of the State of New York or to any other court having jurisdiction and exercising the functions similar to those now exercised by such court, by action, proceeding or otherwise (but not by a new arbitration proceeding) as may be proper, to determine the question in dispute consistently with the provisions of this lease. The cost and expense of such arbitration, action, proceeding, or otherwise shall be borne equally by Landlord and Tenant. 39.04 In the event that Tenant shall exercise the Renewal Option and the Renewal Rent shall not be finally determined pursuant to the terms of Section 39.03 hereof on or before the Renewal Term Commencement Date then: (a) The annual fixed rent payable by Tenant during the Renewal Term until the Renewal Rent shall be so finally determined shall, subject to adjustment as herein provided, be equal to the fixed rent on a per square foot basis payable during the last 78 year of the initial term of this lease multiplied by the then rentable square footage of the Demised Premises (hereinafter referred to as the "Interim Renewal Minimum Rent"), and (b) In the event that the Renewal Rent as finally determined pursuant to the terms of Section 39.03 hereof, shall be greater or less than the Interim Renewal Minimum Rent (i) the annual fixed rent payable by Tenant for the balance of the Renewal Term shall be and become the Renewal Rent as finally determined, and (ii) Tenant shall forthwith pay to Landlord, or Landlord shall repay to Tenant, as the case may be, an amount equal to the difference between (x) the sum of the actual rental payments paid to Landlord during the Renewal Term before such final determination and (y) the sum of the rental payments that Tenant would have paid to Landlord if the Renewal Rent were finally determined prior to the Renewal Term Commencement Date. ARTICLE 40 Temporary Space 40.01 During the period (hereinafter referred to as the "Temporary Period") commencing on the later to occur of (a) January 1, 2000 and (b) the date which shall be fifteen (15) days after the date of mutual execution and delivery of this lease and continuing until the date that shall be the earlier to occur of (a) the six (6) month anniversary of the Commencement Date and (b) the date Tenant commences business in the Demised Premises (such date being hereinafter referred to as the "Temporary Space Expiration Date"), Landlord shall make available to Tenant the space set forth on Exhibit C annexed hereto and made a part hereof (hereinafter referred to as the "Temporary Space") which Landlord and Tenant agree shall be deemed to consist of 4,750 rentable square feet, for temporary occupancy by Tenant during such period that Tenant is performing Tenant's Work. Tenant shall pay Landlord on account of its use of the Temporary Space, as additional rent, the amount (hereinafter referred to as the "Temporary Space Rent") of $126,817.50 per annum ($10,568.13 per month) payable on the first day of each calendar month during the Temporary Period, which Temporary Space Rent includes $12,567.50 per annum ($1,047.29 per month) on account of electricity furnished to the Temporary Space by Landlord. 40.02 Such occupancy shall be upon all of the terms, covenants and conditions of this Lease except that the provisions of Sections 1.03, 1.04, 1.08, 16.01, 16.02, 16.07 and 1608 and Articles 4, 5, 31 and 39 shall not apply to the Temporary Space. 40.03 Tenant shall accept the Temporary Space in "as is" condition. 40.04 Notwithstanding anything herein to the foregoing, in the event Tenant fails to surrender vacant possession of the entire Temporary Space to Landlord on or before the Temporary Space Expiration Date, then from and after the Temporary Space Expiration Date, up 79 to and including the date Tenant surrenders vacant possession of the entire Temporary Space to Landlord, the reference in Section 24.02(a) to "fixed rent and additional rent payable by Tenant under this lease" shall be deemed to refer to the Temporary Space Rent and the provisions of Section 24.02(b) and (c) shall apply with respect thereto with the reference in Section 24.02(b) to "any rent paid by Tenant pursuant to Section 24.02(a) above" being deemed to refer to the Temporary Space Rent. 40.05 Nothing herein shall be deemed an agreement of, or consent by, Landlord to allow Tenant to remain in possession of the Temporary Space, or any portion thereof, beyond the Temporary Space Expiration Date and if Tenant does not surrender vacant possession of the entire Temporary Space to Landlord by the Temporary Space Expiration Date, Landlord shall be entitled to exercise all rights available to it at law, in equity and/or under this lease for a holdover by Tenant with respect to the Temporary Space. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this lease as of the day and year first above written. LANDLORD: 450 WESTSIDE PARTNERS, LLC, a Delaware limited liability company By: MAX AG 450, LLC, By: Max Capital Management Corp., a Member By ----------------------------------------- Title: TENANT WEBSTAKES, INC. By ----------------------------------------- Tenant's Employer Identification No. -------------------------------------------- 80 STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) On the _____ day of ___________, in the year ______ before me, the undersigned, a Notary Public in and for said State, personally appeared _____________________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. -------------------------- Notary Public STATE OF NEW YORK ) )ss:: COUNTY OF NEW YORK ) On the _____ day of ___________, in the year ______ before me, the undersigned, a Notary Public in and for said State, personally appeared _____________________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. -------------------------- Notary Public 81 - - - - - - - - - - - - - - - - - - - EXHIBIT A DESCRIPTION - - - - - - - - - - - - - - - - - - - ALL that certain plot, piece or parcel of land, situate, lying and being in the Borough of Manhattan, County of New York, City and State of New York, bounded and described as follows: ALL that certain plot, piece or parcel of land, situate, lying and being in the Borough of Manhattan, County of New York, City and State of New York, bounded and described as follows: BEGINNING at a point at the corner formed by the intersection of the easterly side of 10th Avenue and the northerly side of West 31st Street; RUNNING THENCE, northerly along the easterly side of 10th Avenue, North 62 degrees 05 minutes 13 seconds East, 455 feet to the corner formed by the intersection of the easterly side of 10th Avenue and the southerly side of West 33rd Street; THENCE, easterly along the southerly side of West 33rd Street, South 27 degrees 54 minutes 47 seconds East 302 feet; THENCE, southerly and parallel with the easterly side of 10th Avenue, South 62 degrees 05 minutes 13 seconds West 455 feet to the northerly side of West 31st Street; THENCE, westerly along the northerly side of West 31st Street, North 27 degrees 54 minutes 47 seconds West 302 feet to the point or place of BEGINNING. 82 - - - - - - - - - - - - - - - - - - - EXHIBIT B FLOOR PLAN - - - - - - - - - - - - - - - - - - - (Follows immediately on next page) 83 - - - - - - - - - - - - - - - - - - - EXHIBIT C TEMPORARY SPACE - - - - - - - - - - - - - - - - - - - (Follows immediately on next page) 84 - - - - - - - - - - - - - - - - - - - EXHIBIT D RULES AND REGULATIONS - - - - - - - - - - - - - - - - - - - 1. The rights of tenants in the entrances, corridors and elevators of the Building are limited to ingress to and egress from the tenants' premises for the tenants and their employees, licensees and invitees, and no tenant shall use, or permit the use of, the entrances, corridors, or elevators for any other purpose. No tenant shall invite to the tenant's premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the entrances, corridors, elevators and other facilities of the Building by other tenants. Fire exits and stairways are for emergency use only, and they shall not be used for any other purpose by the tenants, their employees, licensees or invitees. No tenant shall encumber or obstruct, or permit the encumbrance or obstruction of any of the sidewalks, entrances, corridors, elevators, fire exits or stairways of 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. 2. Landlord may refuse admission to the Building outside of ordinary business hours to any person not known to the watchman in charge or not having a pass issued by Landlord or the tenant whose premises are to be entered or not otherwise properly identified, and may require all persons admitted to or leaving the Building outside of ordinary business hours to register. Any person whose presence in the Building at any time shall, in the judgment of Landlord, be prejudicial to the safety, character, reputation and interests of the Building or of its tenants may be denied access to the Building or may be ejected therefrom. In case of invasion, riot, public excitement or other commotion, Landlord may prevent all access to the Building during the continuance of the same, by closing the doors or otherwise, for the safety of the tenants and protection of property in the Building. Landlord may require any person leaving the Building with any package or other object to exhibit a pass from the tenant from whose premises the package or object is being removed, but the establishment and enforcement of such requirement shall not impose any responsibility on Landlord for the protection of any tenant against the removal of property from the premises of the tenant. Landlord shall, in no way, be liable to any tenant for damages or loss arising from the admission, exclusion or ejection of any person to or from the tenant's premises or the Building under the provisions of this rule. Canvassing, soliciting or peddling in the Building is prohibited and every tenant shall co-operate to prevent the same. 85 3. No tenant shall obtain or accept for use in its premises towel, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services from any persons not authorized by Landlord in writing to furnish such services, provided that the charges for such services by persons authorized by Landlord are not excessive. Such services shall be furnished only at such hours, in such places within the tenant's premises and under such reasonable regulations as may be fixed by Landlord and applied in a non-discriminatory manner. 4. No lettering, sign, advertisement, notice or object shall be displayed in or on the windows or doors, or on the outside of any tenant's premises, or at any point inside any tenant's premises where the same might be visible outside of such premises, except that the name of the tenant may be displayed on the entrance door of the tenant's premises, and in the elevator lobbies of the floors which are occupied entirely by any tenant, subject to the approval of Landlord as to the size, color and style of such display except that Landlord's consent shall not be required with respect to Tenant's standard logo or color scheme. The inscription of the name of the tenant on the door of the tenant's premises shall be done by Landlord at the expense of the tenant. Listing of the name of the tenant on the directory boards in the Building shall be done by Landlord at its expense; any other listings shall be in the discretion of Landlord. 5. No awnings or other projections over or around the windows shall be installed by any tenant, and only such window blinds as are supplied or permitted by Landlord shall be used in a tenant's premises. Linoleum, tile or other floor covering shall be laid in a tenant's premises only in a manner approved by Landlord. 6. Landlord shall have the right to prescribe the weight and position of safes and other objects of excessive weight, and no safe or other object whose weight exceeds the lawful load for the area upon which it would stand shall be brought into or kept upon a tenant's premises. If, in the judgment of Landlord, it is necessary to distribute the concentrated weight of any heavy object, the work involved in such distribution shall be done at the expense of Tenant and in such manner as Landlord shall determine. The moving of safes and other heavy objects shall take place only outside of ordinary business hours upon previous notice to Landlord, and the persons employed to move the same in and out of the Building shall be reasonably acceptable to Landlord and, if so required by law, shall hold a Master Rigger's license. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only in the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Landlord. Arrangements will be made by Landlord with any tenant for moving large quantities of furniture and equipment into or out of the building. 7. No machines or mechanical equipment of any kind, other than typewriters and other ordinary portable business machines and similar typical office equipment, may be installed or operated in any tenant's premises without Landlord's prior written consent, and in no 86 case (even where the same are of a type so excepted or as so consented to by Landlord) shall any machines or mechanical equipment be so placed or operated as to disturb other tenants but machines and mechanical equipment which may be permitted to be installed and used in a tenant's premises shall be so equipped, installed and maintained by such tenant as to prevent any disturbing noise, vibration or electrical or other interference from being transmitted from such premises to any other area of the Building. 8. No noise, including the playing of any musical instruments, radio or television, which, in the reasonably judgment of Landlord, might disturb other tenants in the Building, shall be made or permitted by any tenant, and no cooking shall be done in the tenant's premises, except as expressly approved by Landlord or as otherwise expressly permitted pursuant to the terms of this lease. Nothing shall be done or permitted in any tenant's premises, and nothing shall be brought into or kept in any tenant's premises, which would impair or interfere with any of the Building services or the proper and economic heating, cleaning or other servicing of the Building or the premises, or the use or enjoyment by any other tenant of any other premises, nor shall there be installed by any tenant any ventilating, air conditioning, electrical or other equipment of any kind which, in the judgment of Landlord, might cause any such impairment or interference. No dangerous, inflammable, combustible or explosive object or material shall be brought into the Building by any tenant or with the permission of any tenant. 9. No acids, vapors, paper towels or other materials shall be discharged or permitted to be discharged into the waste lines, vents or flues of the Building which may damage them. The water and wash closets and other plumbing fixtures in or serving any tenant's premises shall not be used for any purpose other than the purposes for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. 10. No additional locks or bolts of any kind shall be placed upon any of the doors or windows in any tenant's premises and no lock on any door therein shall be changed or altered in any respect. Additional keys for a tenant's premises and toilet rooms shall be procured only from Landlord, which may make a reasonable charge therefor. Upon the termination of a tenant's lease, all keys of the tenant's premises and toilet rooms shall be delivered to Landlord. 11. All entrance doors in each tenant's premises shall be left locked and all windows shall be left closed by the tenant when the tenant's premises are not in use. Entrance doors shall not be left open at any time. 12. Hand trucks not equipped with rubber tires and side guards shall not be used within the Building. 87 13. All windows in each tenant's premises shall be kept closed and all blinds therein, if any, above the ground floor shall be lowered when and as reasonably required because of the position of the sun, during the operation of the Building air-conditioning system to cool or ventilate the tenant's premises. 14. Landlord reserves the right, upon reasonable advance notice to Tenant, to rescind, alter or waive any rule or regulation at any time prescribed for the Building when, in its reasonable judgment, it deems it necessary, desirable or proper for its best interest and for the best interests of the tenants, and no alteration or waiver of any rule or regulation in favor of one tenant shall operate as an alteration or waiver in favor of any other tenant. Landlord shall not be responsible to any tenant for the non-observance or violation by any other tenant of any of the rules and regulations at any time prescribed for the Building. 88 - - - - - - - - - - - - - - - - - - - EXHIBIT E DEFINITIONS - - - - - - - - - - - - - - - - - - - (a) The term mortgage shall include an indenture of mortgage and deed of trust to a trustee to secure an issue of bonds, and the term mortgagee shall include such a trustee. (b) The terms include, including and such as shall each be construed as if followed by the phrase "without being limited to". (c) The term obligations of this lease, and words of like import, shall mean the covenants to pay rent and additional rent under this lease and all of the other covenants and conditions contained in this lease. Any provision in this lease that one party or the other or both shall do or not do or shall cause or permit or not cause or permit a particular act, condition, or circumstance shall be deemed to mean that such party so covenants or both parties so covenant, as the case may be. (d) The term Tenant's obligations hereunder, and words of like import, and the term Landlord's obligations hereunder, and words of like import, shall mean the obligations of this lease which are to be performed or observed by Tenant, or by Landlord, as the case may be. Reference to performance of either party's obligations under this lease shall be construed as "performance and observance". (e) Reference to Tenant being or not being in default hereunder, or words of like import, shall mean that Tenant is in default in the performance of one or more of Tenant's obligations hereunder, or that Tenant is not in default in the performance of any of Tenant's obligations hereunder, or that a condition of the character described in Section 25.01 has occurred and continues or has not occurred or does not continue, as the case may be. (f) References to Landlord as having no liability to Tenant or being without liability to Tenant, shall mean that Tenant is not entitled to terminate this lease, or to claim actual or constructive eviction, partial or total, or to receive any abatement or diminution of rent except as otherwise expressly permitted pursuant to the terms of this lease, or to be relieved in any manner of any of its other obligations hereunder, or to be compensated for loss or injury suffered or to enforce any other kind of liability whatsoever against Landlord under or with respect to this lease or with respect to Tenant's use or occupancy of the Demised Premises. 89 (g) The term laws and/or requirements of public authorities and words of like import shall mean laws and ordinances of any or all of the Federal, state, city, county and borough governments and rules, regulations, orders and/or directives of any or all departments, subdivisions, bureaus, agencies or offices thereof, or of any other governmental, public or quasi-public authorities, having jurisdiction in the premises, and/or the direction of any public officer pursuant to law. (h) The term requirements of insurance bodies and words of like import shall mean rules, regulations, orders and other requirements of the New York Board of Fire Underwriters and/or the New York Fire Insurance Rating Organization and/or any other similar body performing the same or similar functions and having jurisdiction or cognizance of the Building and/or the Demised Premises. (i) The term repair shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition. (j) Reference to termination of this lease includes expiration or earlier termination of the term of this lease or cancellation of this lease pursuant to any of the provisions of this lease or to law. Upon a termination of this lease, the term and estate granted by this lease shall end at noon of the date of termination as if such date were the date of expiration of the term of this lease and neither party shall have any further obligation or liability to the other after such termination (i) except as shall be expressly provided for in this lease, or (ii) except for such obligation as by its nature or under the circumstances can only be, or by the provisions of this lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this lease. (k) The term in full force and effect when herein used in reference to this lease as a condition to the existence or exercise of a right on the part of Tenant shall be construed in each instance as including the further condition that at the time in question no default on the part of Tenant exists, and no event has occurred which has continued to exist for such period of time (after the notice, if any, required by this lease), as would entitle Landlord to terminate this lease or to dispossess Tenant. (l) The term Tenant shall mean Tenant herein named or any assignee or other successor in interest (immediate or remote) of Tenant herein named, while such Tenant or such assignee or other successor in interest, as the case may be, is in possession of the Demised Premises as owner of Tenant's estate and interest granted by this lease and also, if Tenant is not an individual or a corporation, all of the persons, firms and corporations then comprising Tenant. 90 (m) Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. (n) The rule of ejusdem generis shall not be applicable to limit a general statement following or referable to an enumeration of specific matters to matters similar to the matters specifically mentioned. (o) All references in this lease to numbered Articles, numbered Sections and lettered Exhibits are references to Articles and Sections of this lease, and Exhibits annexed to (and thereby made part of) this lease, as the case may be, unless expressly otherwise designated in the context. (p) The term "control" shall mean ownership of more than fifty (50%) percent of all the voting stock of a corporation or more than fifty (50%) percent of all the legal and equitable interest in any other entity. (q) The term "Base Rate" shall mean the prime rate of The Chase Manhattan Bank (or Citibank, N.A. if The Chase Manhattan Bank shall not then have an established prime rate; or the prime rate of any major banking institution doing business in New York City, as selected by Landlord, if none of the aforementioned banks shall be in existence or have an established prime rate) at the time of in question. 91 - - - - - - - - - - - - - - - - - - - EXHIBIT F CERTIFICATE OF OCCUPANCY - - - - - - - - - - - - - - - - - - - (Follows immediately on next page) 92 i EX-11.1 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 Computation of Loss Per Share
Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Basic: Net Loss ...................................................... $(18,371,064) $(1,414,043) $(226,839) Deemed dividend ............................................... $ (8,712,352) -- -- ------------ Net Loss applicable to common stockholders ........................................... $(27,083,416) $(1,414,043) $(226,839) ------------ ------------ ------------ Basic weighted average shares outstanding ............................................ 7,502,575 5,181,356 4,278,916 ------------ ------------ ------------ Basic loss per common share ................................... $ (3.61) $ (.27) $ (.05) ------------ ------------ ------------ Diluted: Net Loss applicable to common stockholders ........................................... $(27,083,416) $(1,414,043) $(226,839) ------------ ------------ ------------ Basic weighted average shares outstanding ..................... 7,502,575 5,181,356 4,278,916 ------------ ------------ ------------ Net effect of dilutive securities .................................................... -- -- -- Diluted weighted average shares outstanding ................... $ (3.61) $ (.27) $ (.05) ------------ ------------ ------------
EX-23.1 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP. Exhibit 23.1 - CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.: 333-31000) of Promotions.com, Inc. (formerly Webstakes.com, Inc.) of our report dated January 28, 2000 relating to the financial statements and financial statement schedules , which appear in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 29, 2000 EX-99.1 6 VALUATION AND QUALIFYING ACCOUNTS Exhibit 99.1- Allowance for Doubtful Accounts VALUATION AND QUALIFYING ACCOUNTS
Balance at Beginning of Charged to Costs and Balance at End of Period Expenses Deductions Period ------ -------- ---------- ------ For the year ended December 31, 1997: Provision for doubtful accounts .............. $2,499 $10,880 $679 $12,700 ======= ======== ======= ======== For the year ended December 31, 1998: Provisions for doubtful accounts ............. $12,700 $208,604 $96,304 $125,000 ======= ======== ======= ======== For the year ended December 31, 1999: Provisions for doubtful accounts ............. $125,000 $606,932 $157,056 $574,876 ======== ======== ======== ========
EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the December 31, 1999 Form 10-K and is qualified in its entirety by reference to such financial statement. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 34,647,630 0 2,971,729 574,876 0 47,020,681 3,802,180 518,978 53,725,457 5,415,933 0 0 0 142,412 47,713,157 53,725,457 10,456,199 10,456,199 0 0 29,478,766 0 56,316 (18,371,064) 0 (18,371,064) 0 0 0 (18,371,064) (3.61) (3.61)
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