-----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, Ta6GaKh0iSkRpMPr3yK5wfibBk3w+I2MAiTgw7E1IxAM4RsVCn7MXRkY29avNeyi e62AhILRyjDssoSELGnJtA== 0000912057-99-010346.txt : 19991223 0000912057-99-010346.hdr.sgml : 19991223 ACCESSION NUMBER: 0000912057-99-010346 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19991222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECT HIT TECHNOLOGIES INC CENTRAL INDEX KEY: 0001092756 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 043417999 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-93377 FILM NUMBER: 99778949 BUSINESS ADDRESS: STREET 1: 888 WORCHESTER STREET STREET 2: SUITE 340 CITY: WELLESLEY STATE: MA ZIP: 02181 BUSINESS PHONE: 7812357570 MAIL ADDRESS: STREET 1: 888 WORCESTER STREET STREET 2: SUITE 340 CITY: WELLESLEY STATE: MA ZIP: 02482 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- DIRECT HIT TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7375 04-3417999 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
-------------------------- DIRECT HIT TECHNOLOGIES, INC. 888 WORCESTER STREET, SUITE 340 WELLESLEY, MASSACHUSETTS 02482 (781) 235-7570 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------------------- MICHAEL CASSIDY, PRESIDENT AND CHIEF EXECUTIVE OFFICER DIRECT HIT TECHNOLOGIES, INC. 888 WORCESTER STREET, SUITE 340 WELLESLEY, MASSACHUSETTS 02482 (781) 235-7570 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------------------- COPIES TO: MARK J. MACENKA, ESQ. MARK L. JOHNSON, ESQ. JOHN M. MUTKOSKI, ESQ. RICHARD G. COSTELLO, ESQ. DANIEL L. FURMAN, ESQ. FOLEY, HOAG & ELIOT LLP TESTA, HURWITZ & THIBEAULT, LLP ONE POST OFFICE SQUARE 125 HIGH STREET BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110 (617) 832-1000 (617) 248-7000
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE Common Stock, $.001 par value............................... $57,500,000.00 $15,180.00
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price attributable to shares that the underwriters have the option to purchase from the registrant solely to cover over-allotments, if any. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This registration statement contains two forms of prospectus: (a) one prospectus to be used in connection with an offering in the United States and Canada and (b) one prospectus to be used in connection with a concurrent offering outside of the United States and Canada. The U.S. prospectus and the international prospectus are identical in all respects except for the front cover page and the "Underwriting" section. The front cover page and the "Underwriting" section of the international prospectus are included immediately before Part II of this registration statement. 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED DECEMBER 22, 1999 [DIRECT HIT TECHNOLOGIES, INC. LOGO] SHARES COMMON STOCK Direct Hit Technologies, Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "DHIT." We anticipate that the initial public offering price will be between $ and $ per share. ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ---------------------
PER SHARE TOTAL --------- --------- Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to Direct Hit...................................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to an additional shares of common stock to cover over-allotments. ------------------------ ROBERTSON STEPHENS THOMAS WEISEL PARTNERS LLC SOUNDVIEW TECHNOLOGY GROUP WIT CAPITAL CORPORATION The date of this prospectus is , 2000 [DESCRIPTION OF ARTWORK] [Inside front cover of prospectus: The inside front cover includes a graphic representing our OEM customers. Our logo appears in the center of the graphic. Emanating from our logo are the logos of our OEM customers.] [Inside gatefold: The inside gatefold includes a graphic representing our technology and its application. The graphic is comprised of a symbol depicting our Popularity Engine with symbols for our three product categories layered above the Popularity Engine. These three product categories are our Popularity-based Search product, our Popularity-based Shopping product, and other products. Within our Popularity-based Search product are depicted our Internet Search Engine, Related Searches, Personalized Search, and Directory-based Search. A graphic of the Web and Web users is depicted above the product categories. We show a continuous circle of popularity data emanating from the Web and feeding back to our Popularity Engine. One statement appears with the graphic as follows: Our Popularity Engine, which is the core of our solution, anonymously compiles and automatically captures and processes the activity of online users. We use our popularity-based technology to aggregate and organize online content to enable users to quickly find relevant and accurate information. We have targeted Internet search as the first application of our Popularity Engine. We have launched a Popularity-based Search product, including our Internet Search Engine, Related Searches, Personalized Search and Directory-based Search components, and a Popularity-based Shopping product. Our content-independent technology is well suited to provide accurate and relevant information to users of large, dynamic collections of information, such as the World Wide Web, and we intend to deploy our technology across other applications as well.] YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS, "DIRECT HIT," "WE," "US" AND "OUR" REFER TO DIRECT HIT TECHNOLOGIES, INC. ------------------------ TABLE OF CONTENTS
PAGE -------- Summary..................................................... 1 Risk Factors................................................ 5 Use of Proceeds............................................. 14 Dividend Policy............................................. 14 Capitalization.............................................. 15 Dilution.................................................... 16 Selected Financial Data..................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 Business.................................................... 24 Management.................................................. 36 Certain Transactions........................................ 42 Principal Stockholders...................................... 44 Description of Capital Stock................................ 46 Shares Eligible for Future Sale............................. 49 Underwriting................................................ 51 Legal Matters............................................... 53 Experts..................................................... 53 Additional Information...................................... 54 Index to Financial Statements............................... F-1
------------------------ Direct Hit, Personalized Search, Popularity-based Search, Popularity-based Shopping, Popularity Engine, Related Searches, our slogan "One Search Engine. Millions of Minds." and our logo are our trademarks. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. i SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION AND REFLECTS THE CONVERSION OF ALL OF OUR OUTSTANDING PREFERRED STOCK INTO COMMON STOCK, WHICH WILL OCCUR UPON THE CLOSING OF THIS OFFERING. DIRECT HIT TECHNOLOGIES OUR BUSINESS Founded on April 27, 1998, Direct Hit is a leading provider of technology that aggregates and organizes online content to enable users to quickly find relevant and accurate information, products and services. The core of our solution, which we call our Popularity Engine, anonymously compiles information collected from the online activity of users. By automatically capturing the experience of online users and applying our popularity-based technology, our solution provides users with a list of information, products or services ranked according to the preferences of previous users. From online product catalogs to the World Wide Web, our proprietary technologies can be applied to a variety of online data sets either as stand-alone solutions or as core complements to existing technology. We have targeted Internet search as our first application for the Popularity Engine and we have launched an e-commerce product based on the Popularity Engine. We intend to expand the application of our popularity-based technology into such areas as corporate online databases, news feeds and yellow pages. OUR MARKET While the Internet is attracting new users at a rapid pace, the volume and diversity of information, products and services available over the Internet is also increasing dramatically. International Data Corporation predicts that the number of Web pages will grow from 925 million in 1998 to 13 billion by 2003, including separate Web pages within individual Web sites. At the same time, Internet users are increasingly seeking information from multiple online sources such as e-commerce sites, news sites, corporate sites, archives and specialty vertical sites. As a result, users are now spending more time at Web search sites than at almost any other Web site category. According to Media Metrix, the average Internet user spent approximately 90 minutes at search engine sites in October 1999, second to 110 minutes at news, information and entertainment sites. Traditional methods for aggregating and organizing online information for user navigation often fail to meet users' needs. Word-matching techniques, which generally compare the keywords in the search request with words found in a database, often yield an overwhelming volume of irrelevant search results and are subject to manipulation by Web site authors. Editor-based methods, which require a staff of editors to manually review and categorize online content in a database, often result in incomplete and outdated information covering only a small portion of the content available online. Even when used in tandem, these methods often generate an unmanageably large set of irrelevant results or incomplete and outdated information. 1 OUR PRODUCTS We provide a popularity-based solution that enables users of online content to find more relevant information, products and services more easily across a wide variety of sources. Each of our products is powered by our proprietary Popularity Engine to determine the relevancy ranking of online content. Our Popularity Engine is: - extremely responsive to new and changing information, keeping listings current based on changing user preferences; - content independent, enabling our products to organize many types of data, including multiple languages, still images, video and music; - scalable to accommodate large collections of online information and millions of users; - capable of reflecting user preferences based on age, gender and geographic location; and - easy to use, since it does not require users to acquire any new skills or employ complex query techniques. Our Popularity-based Search product was selected as FORBES' Favorite Search Engine in September 1999. Our products have also earned recognition in industry awards received by our OEM customers, including CNET 1999 Editors' Choice awarded to HotBot in April 1999 and PC MAGAZINE 1999 Editors' Choice awarded to HotBot in September 1999. OUR CUSTOMERS Our popularity-based solution may be found on our OEM customers' Web sites and on our Web site. The following is a list of our 22 OEM customers as of November 30, 1999: About.com Apple Computer AT&T WorldNet Catcha.com GeneralSearch.com Go2Net HotBot (Wired Digital/Lycos) ICQ (AOL) Infoseek InfoSpace.com LookSmart Lycos mainCampus.com Microsoft (MSN) Pinault-Printemps-Redoute Punto (Portal Srl) SavvySearch Scandinavia Online SimpleSearch UKMax.com (Hollinger Digital) Zap ZDNet OUR ADDRESS Our executive offices are located at 888 Worcester Street, Suite 340, Wellesley, Massachusetts 02482, and our telephone number is (781) 235-7570. Our Web site is located at WWW.DIRECTHIT.COM. The information on our Web site is not part of this prospectus. 2 THE OFFERING Common stock offered by Direct Hit........ shares Common stock to be outstanding after the offering................................ shares Use of proceeds........................... For sales and marketing and research and development expenditures, and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.... DHIT
The number of shares of common stock outstanding after this offering is based on shares of common stock outstanding as of November 30, 1999. This calculation: - includes 10,942,676 shares of common stock to be issued upon the conversion of our shares of preferred stock outstanding as of November 30, 1999; and - excludes 1,252,646 shares of common stock issuable upon exercise of all options outstanding under our 1998-A Stock Option Plan as of November 30, 1999 with a weighted average exercise price of $1.60 per share. 3 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables set forth summary financial data for our company. The summary balance sheet data as of September 30, 1999 are presented on: - an actual basis, - on a pro forma basis to give effect to the conversion of our preferred stock upon completion of this offering, and - on a pro forma as adjusted basis to give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
PERIOD FROM INCEPTION (APRIL 27, 1998) NINE MONTHS THROUGH ENDED DECEMBER 31, 1998 SEPTEMBER 30, 1999 ----------------- ------------------ STATEMENT OF OPERATIONS DATA: Revenues: OEM....................................................... $ 175 $ 805 Advertising............................................... -- 57 Total revenues........................................ 175 862 Gross profit.............................................. 124 501 Operating loss............................................ (820) (3,189) Net loss.................................................. (792) (2,930) Basic and diluted net loss per common share............... $(0.45) $ (0.88) Shares used to compute basic and diluted net loss per common share............................................ 1,773 3,330 Pro forma basic and diluted net loss per common share..... $(0.12) $ (0.26) Shares used to compute pro forma basic and diluted net loss per common share................................... 6,705 11,092
SEPTEMBER 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................... $16,427 $16,427 Working capital............................................. 25,869 25,869 Total assets................................................ 28,049 28,049 Total convertible preferred stock........................... 29,651 -- Total stockholders' equity.................................. 27,037 27,037
4 RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE, AND COULD CAUSE YOU TO LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK. RISKS RELATED TO OUR BUSINESS OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND FACE DIFFICULTIES ENCOUNTERED BY EARLY STAGE COMPANIES. We were organized in April 1998 and first sold our products in August 1998. Our limited operating history makes it difficult for investors to evaluate our future prospects. Additionally, investors must consider the challenges, risks and uncertainties frequently encountered by early-stage companies using new and unproven business models in new and rapidly evolving markets. These challenges include our ability to: - generate sufficient revenues to achieve and maintain profitability; - manage growth in our operations; - attract and retain customers cost-effectively; - attract and retain key personnel; - develop and renew strategic relationships; - access additional capital when required; and - increase brand recognition. We cannot be certain that we will successfully address these and other challenges, risks and uncertainties or that our business model will be successful. WE ANTICIPATE OUR HISTORY OF LOSSES WILL CONTINUE, WHICH MAY DECREASE THE VALUE OF OUR COMMON STOCK. Since we began operations, we have incurred substantial operating losses in every fiscal period. We believe that we will continue to incur operating losses for the foreseeable future and that the rate at which we will incur such losses will increase significantly from current levels. As of September 30, 1999, we had an accumulated deficit of $3.7 million. We incurred net losses of $2.9 million for the nine months ended September 30, 1999. We intend to substantially increase our costs and operating expenses related to: - employing additional personnel as our business expands; - researching and developing new products; - developing new and expanding existing customer relationships; and - intensifying our brand development efforts through advertising and other marketing activities. Because we will spend these amounts before we receive any incremental revenues from these efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive or less effective than we currently anticipate, which would further increase our losses. 5 DISAPPOINTING QUARTERLY REVENUES OR OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO FALL. Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. If our quarterly revenues or operating results fall below the expectations of securities analysts or investors, the price of our common stock could fall substantially. Our quarterly revenues and operating results have fluctuated significantly in the past and may fluctuate significantly in the future due to a variety of factors, including: - fluctuations in the number of visitors to the Web sites of our customers and our Web site; - the uncertainty and timing of closing major new accounts; - the timing and effectiveness of our advertising and promotions; - the amount and timing of our operating costs and capital expenditures; - introductions by our competitors of new or enhanced products, services or Web sites; and - changes in our management team and key personnel. Most of our expenses, including employee salaries and rent, are relatively fixed. In addition, our expense levels are based, in part, on our expectations of future revenue increases. As a result, any shortfall in revenues in relation to our expectations could cause a significant decline in our operating results from quarter to quarter. OUR CURRENT AND EXPECTED METHODS OF GENERATING REVENUES ARE RELATIVELY NEW AND LARGELY UNTESTED. Substantially all of our total revenues for the period from inception (April 27, 1998) through December 31, 1998, and 93% of our total revenues for the nine months ended September 30, 1999, were generated through revenues from OEM customers, which include per-query fees and advertising revenue sharing arrangements with OEM customers. In addition, although we have not generated any revenues through the facilitation of e-commerce, we expect to generate a portion of our future revenues through the facilitation of e-commerce. We facilitate e-commerce by directing shoppers to e-commerce merchants, some of whom compensate us for the referral. These methods of revenue generation are new and untested. Revenues from Internet advertising will make up a significant amount of our revenues for the foreseeable future. Since the Internet advertising market is new and rapidly evolving, we cannot yet gauge its effectiveness as compared to traditional advertising media. Advertisers that have traditionally relied on other advertising media may be reluctant to advertise on the Internet if they believe that Internet advertising is less effective than traditional advertising media for promoting their products and services. Consequently, they may allocate only limited portions of their advertising budgets to Internet advertising. Our business could be materially harmed if Internet advertising does not continue to grow or if we are unsuccessful in increasing our advertising revenues. WE MAY FAIL TO COMPETE EFFECTIVELY IN OUR MARKETS, WHICH COULD RESULT IN LOWER REVENUES OR LOSS OF MARKET SHARE. Our markets are new, rapidly evolving and intensely competitive, and we expect competition to intensify in the future. If we fail to compete effectively, our revenues could decline, we could lose market share and the price of our stock could decline. Our ability to compete depends on many factors, many of which are outside of our control. These factors include the ease of use and performance of online services, the timing and market acceptance of new and enhanced online services, and sales and marketing efforts by us and our competitors. Many of our existing competitors, as well as potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may engage in more extensive research and 6 development, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees, customers, advertisers and e-commerce merchants and consumers. A more detailed discussion regarding the competition we face is included in this prospectus under the heading "Business--Competition." IF WE DO NOT MANAGE GROWTH EFFECTIVELY, OUR BUSINESS WILL BE MATERIALLY HARMED. We have experienced and may continue to experience rapid growth, which has placed, and could continue to place, a significant strain on our managerial, financial and operational resources. If we do not manage growth effectively, our business will be materially harmed. The number of our employees increased from 9 on December 31, 1998 to 51 on November 30, 1999. We expect that the number of our employees will continue to increase for the foreseeable future. We must continue to improve our operations, financial systems and managerial controls and procedures, and we will need to continue to expand, train and manage our workforce. We cannot assure you that our systems, procedures or controls will be adequate to support our operations or that we will be able to manage any growth effectively. IF WE ARE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE, OUR CUSTOMERS MAY FOREGO THE USE OF OUR PRODUCTS AND USE THOSE OF OUR COMPETITORS. To remain competitive, we must continue to enhance and improve the functionality and features of our products. If our competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our products that are based on our existing proprietary technology may be rendered obsolete. Our future success will depend on our ability to: - enhance our existing products; - internally develop or license from third parties new products, services and technologies; and - respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. OUR ABILITY TO INCREASE OUR CUSTOMER BASE AND OUR REVENUES DEPENDS ON THE CONTINUING CONTRIBUTION OF OUR KEY PERSONNEL. If we were to lose the services of any of our executive officers or key employees, many of whom joined us in 1999, we might not be able to increase our customer base and our revenues. Any executive officer can terminate his or her relationship with us at any time. We also do not have "key person" life insurance policies covering any of our employees. OUR ABILITY TO INCREASE OUR CUSTOMER BASE AND OUR REVENUES DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN OTHER QUALIFIED EMPLOYEES IN THE FUTURE. Competition for personnel is intense, and qualified technical personnel are likely to remain a limited resource for the foreseeable future. Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be costly and difficult. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to provide higher compensation to such personnel than we currently anticipate. If we fail to attract and retain sufficient numbers of highly skilled employees, we may be unable to attract customers and increase our revenues. OUR FAILURE TO EXPAND OUR SALES FORCE AND THE NUMBER OF OUR OEM CUSTOMERS WOULD ADVERSELY AFFECT OUR REVENUE GROWTH AND FINANCIAL CONDITION. To increase our revenues, we must increase the size of our sales force and the number of our OEM customers. We may be unable to increase the number of our OEM customers. In addition, there is intense competition for sales personnel in our business, and we cannot assure you that we will be 7 successful in attracting, integrating, motivating and retaining new sales personnel. Moreover, we may need to resolve potential conflicts arising from competition between our advertising sales force and those of our OEM customers. If we fail to increase the size of our sales force or the number of our OEM customers, or if we fail to adequately resolve conflicts between our advertising sales force and those of our OEM customers, our revenues and our stock price could decline. THE LOSS OF OUR RELATIONSHIP WITH LYCOS OR ANY OTHER CUSTOMER THAT ACCOUNTS FOR A SIGNIFICANT PORTION OF OUR REVENUES COULD ADVERSELY AFFECT OUR BUSINESS AND CAUSE OUR STOCK PRICE TO DECLINE. For the nine months ended September 30, 1999, Lycos, including its subsidiary, HotBot, accounted for approximately 70% of our total revenues. In addition, Lycos recently invested in Fast Search and Transfer, a provider of Internet search technology. Our agreements with Lycos and our other OEM customers are generally terminable upon short notice. A significant decline in sales to Lycos or any other customer that accounts for a significant portion of our revenues could adversely affect our business and cause our stock price to decline. IF OUR BRAND DOES NOT RAPIDLY ACHIEVE BROAD RECOGNITION, WE MAY LOSE THE OPPORTUNITY TO BUILD A CRITICAL MASS OF INTERNET USERS NECESSARY TO ACHIEVE INCREASED MARKET SHARE. We believe that increasing the recognition of the Direct Hit brand is important to our success. Accordingly, we have invested and intend to continue to invest in our brand-enhancement strategy, which includes advertising, promotional programs and public relations activities. Our brand promotion efforts may not be successful or may not sufficiently increase our revenues to cover our advertising and promotional expenses. WE MAY EXPERIENCE LOST OR DELAYED SALES IF OUR SALES CYCLE LENGTHENS. Our customers' purchasing decisions may be subject to delays over which we may have little or no control, including budgeting constraints and internal purchase approval review procedures. A longer sales cycle reduces our ability to forecast revenue levels and may result in lost sales. Any delay or loss in sales of our products could have a material adverse effect on our business, operating results and financial condition, and could cause our operating results to vary significantly from quarter to quarter. EXPANSION OF OUR BUSINESS INTO INTERNATIONAL MARKETS COULD ADVERSELY AFFECT OUR BUSINESS AND CAUSE OUR STOCK PRICE TO DECLINE. As we continue to expand our business into international markets, we face the risks associated with international operations, including unexpected changes in regulatory requirements and tariffs, exchange rate fluctuations, difficulties in staffing and managing foreign operations, potentially longer payment cycles and problems in collecting accounts receivable. If we are unable to manage these risks effectively, our revenues and our stock price could decline. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY ADEQUATELY, WE COULD LOSE OUR COMPETITIVE ADVANTAGE. Our trademarks, copyrights, trade secrets and similar intellectual property are critical to our success. Our failure to protect our intellectual property could materially harm our business. The infringement or misappropriation of our trademarks or other intellectual property could diminish the value of our proprietary rights or goodwill. We rely upon a combination of trademark, patent and copyright law, trade secret protection and confidentiality or license agreements with our employees, affiliates and others to protect our proprietary rights. Effective patent, trademark, copyright and trade secret protection may not be available, and the steps we have taken and may take in the future to protect our proprietary rights may not be adequate. Gary Culliss, our co-founder and Chief Technology Officer, owns the rights to one patent and three patent applications relating to aspects of our core 8 technology, as to each of which we have an exclusive license. We have also filed applications to register our trademarks and logos. However, we cannot assure you that the one issued patent, or any patents or registered trademarks, if any, that are issued under our current or any future applications, will be of sufficient scope and strength to provide meaningful protection of our technology or any commercial advantage to us, or that any such patents or trademarks will not be challenged, invalidated or circumvented by our competitors. In addition, we license our trademarks and other intellectual property to third parties, and we cannot be certain that such licensees will not take actions that harm the value of our proprietary rights. CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD FORCE US TO REDESIGN OUR PRODUCTS OR OTHERWISE HURT OUR BUSINESS AND FINANCIAL CONDITION. If we were to discover that any of our products violated third-party proprietary rights, we cannot assure you that we would be able to reengineer the product or to obtain a license on commercially reasonable terms, if at all, to continue offering the product. We do not conduct comprehensive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly developing technology environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from running our business. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products or cause our customers to stop using our products. IF WE ARE UNABLE TO PREVENT THIRD PARTIES FROM ACQUIRING DOMAIN NAMES THAT ARE SIMILAR TO, INFRINGE UPON OR OTHERWISE DECREASE THE VALUE OF OUR DOMAIN NAMES, WE COULD LOSE OUR COMPETITIVE ADVANTAGE. We currently hold several Web domain names relating to our brand, including DIRECTHIT.COM. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. The regulation of domain names in the United States and abroad is expected to change in the near future. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business and other parties may use domain names similar to ours. IF OUR EXISTING TECHNICAL AND OPERATIONAL SYSTEMS FAIL, WE COULD EXPERIENCE INTERRUPTIONS OR DELAYS IN OUR SERVICE OR DATA LOSS. We have experienced periodic systems interruptions which we believe may continue to occur. Our systems and operations are vulnerable to damage or interruption from telecommunications failure, power loss, break-ins, vandalism, fire, flood, earthquakes and similar events. Substantially all of our information management systems are in leased facilities in Massachusetts. In addition, substantially all of our computer and communications hardware systems are located at third-party facilities in California, Massachusetts, New York, Virginia and the United Kingdom. We have no formal disaster recovery plans, and our insurance may not adequately compensate us for losses that may occur. The occurrence of a natural disaster or other unanticipated problems at our facilities in Massachusetts, or at the third-party facilities described above, could cause interruptions or delays in the service provided by our products or data loss. In addition, any failure by the third-party facilities to provide the data communications capacity we require could result in interruptions in the service provided by our products. 9 WE FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OF COMPLEMENTARY COMPANIES, PRODUCTS OR TECHNOLOGIES. We may make investments in or acquire complementary companies, products or technologies. We may not realize the anticipated benefits of these investments or acquisitions, and these transactions could be detrimental to our business. If we buy a business, we could have difficulty assimilating its personnel and operations, or the key personnel of the acquired business may decide not to work for us. We could also have difficulty assimilating acquired technology or products into our operations. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Furthermore, to pay for any future acquisitions or investments, we may have to incur debt or issue equity securities, the issuance of which could be dilutive to our existing stockholders. WE ARE LIKELY TO REQUIRE ADDITIONAL FINANCING AND MAY NOT BE ABLE TO RAISE ADDITIONAL FINANCING ON FAVORABLE TERMS OR AT ALL. We currently anticipate that the net proceeds of this offering, together with current cash and cash equivalents, will be sufficient to meet our anticipated needs through the next 12 months. However, we may need additional financing sooner to execute on our business model if we need to respond to business contingencies. Such contingencies may include the need to: - fund additional advertising and marketing expenditures; - hire additional sales personnel; - develop new or enhance existing products, site features or services; - enhance our operating infrastructure; - respond to competitive pressures; or - acquire complementary businesses or necessary technologies. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, site features or services, or otherwise respond to competitive pressures would be significantly limited. MANY MEMBERS OF OUR CURRENT MANAGEMENT TEAM DO NOT HAVE EXPERIENCE MANAGING A PUBLIC COMPANY. Many members of our management team do not have experience managing a public company. We cannot assure you that the management team as currently configured will be able to successfully handle the additional burdens of public company status. The failure of the management team to adequately handle this challenge could materially harm our business and could cause the market price of our common stock to decline. WE DO NOT EXPECT TO PAY DIVIDENDS, AND INVESTORS SHOULD NOT BUY OUR COMMON STOCK EXPECTING TO RECEIVE DIVIDENDS. We have never declared or paid any cash dividends on our capital stock. We presently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. Consequently, you only will realize an economic gain on your investment in our common stock if the price appreciates. You should not purchase our common stock with the expectation of receiving cash dividends. 10 WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CHARTER, BYLAWS AND DELAWARE LAW THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Certain provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Because of these provisions, you might not be able to receive a premium on your investment. For additional information on these anti-takeover provisions, please refer to the information in this prospectus under the heading "Description of Capital Stock." RISKS OF DOING BUSINESS OVER THE INTERNET IF USE OF THE INTERNET AND GROWTH OF ONLINE SEARCH SERVICES AND ELECTRONIC COMMERCE DO NOT CONTINUE TO INCREASE, WE MAY NOT ACHIEVE THE CRITICAL MASS OF CUSTOMERS NECESSARY FOR SUSTAINING REVENUES AND ACHIEVING PROFITABLE OPERATIONS. Our future revenues and profits, if any, substantially depend upon the widespread acceptance and use of the Internet as an effective medium for information retrieval, business and commerce. Rapid growth in the use of and interest in the Internet has occurred only recently. As a result, acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not use the Internet and other communications networks. In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including inadequate development of necessary network infrastructure or delayed development of enabling technologies and performance improvements. Our continued growth will depend, in large part, upon third parties maintaining and developing the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. WE FACE POTENTIAL LIABILITY FOR INFORMATION RETRIEVED FROM THE INTERNET. Because we link users to information which is downloaded, indexed and distributed from Web pages published by content providers outside of our control, we face potential claims on theories such as defamation, negligence, copyright or trademark infringement, distribution of obscene, lascivious or indecent communications or other theories of liability based on the nature and content of such materials. Such claims have been brought, and sometimes successfully pressed, against online services in the past. Additionally, claims could be made against us for copyright infringement based on the improper dissemination of information. Although we carry general liability insurance, our insurance may not cover potential claims of this type, or may not be adequate to indemnify us for all liability that may be imposed. PRIVACY CONCERNS MAY LIMIT THE INFORMATION WE CAN GATHER, WHICH COULD LIMIT THE EFFECTIVENESS OF OUR PRODUCTS AND CAUSE US TO INCUR SIGNIFICANT ADDITIONAL EXPENSES. Web sites typically place software files, called cookies, on a user's hard drive without the user's knowledge or consent. Although some companies refuse to use cookies, we use them for a variety of reasons, such as the storage of anonymous demographic data. We use this demographic data for the Personalized Search component of our Popularity-based Search product to provide more accurate and relevant search results. Accordingly, any reduction or limitation in the use of cookies could limit our ability to provide accurate and relevant search results. Most currently available Web browsers allow users to remove cookies at any time or to prevent cookies from being stored on their hard drives. In addition, some commentators, privacy advocates and governmental bodies have suggested limiting or eliminating the use of cookies. For example, the European Union recently adopted a directive addressing data privacy that may limit the collection and use of certain information regarding Internet users. This directive may limit our ability to collect and use information in certain European countries. In addition, the Federal Trade Commission and several state governments have investigated the use by certain Internet companies of personal information. We could lose significant market share or incur 11 significant additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION OF THE INTERNET AND OTHER LEGAL UNCERTAINTIES WHICH COULD PREVENT OUR BUSINESS FROM GROWING OR EXPOSE US TO UNANTICIPATED LIABILITIES. Existing or future legislation could limit growth in use of the Internet, which would curtail our revenue growth. Statutes and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Congress recently passed laws regarding children's online privacy, copyrights and taxation. The law remains largely unsettled, even in areas where there has been legislative action. It may take years to determine whether and how existing laws governing intellectual property, privacy, libel and taxation apply to the Internet, e-commerce and online advertising. In addition, the growth and development of e-commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. RISKS ASSOCIATED WITH THIS OFFERING OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING. Presently, we intend to use the proceeds from this offering for increased sales and marketing and research and development expenditures, and for working capital and other general corporate purposes. We also may use a portion of the proceeds to expand our business through strategic alliances and acquisitions. We have not yet determined the amount of net proceeds to be used specifically for any of the foregoing purposes. As a result, investors in this offering will be relying on management's judgment with only limited information about its specific intentions regarding the use of proceeds. We cannot assure you that the proceeds will be invested to yield a favorable return. OUR OFFICERS AND DIRECTORS WILL CONTROL % OF OUR COMMON STOCK AND WILL BE ABLE TO CONTROL CORPORATE ACTIONS. After this offering, our executive officers, directors and entities affiliated with them will control approximately % of our common stock. As a result, these stockholders, acting together, will be able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership may have the effect of delaying or preventing a change of control of our company, and might hurt the market price of our common stock. THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND YOU MAY NOT BE ABLE TO RESELL SHARES OF OUR COMMON STOCK FOR A PROFIT. There has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active, liquid trading market. Active trading markets generally result in a more efficient execution of buy and sell orders for investors. The initial public offering price for the shares of common stock offered by us will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of the common stock may decline below the initial public offering price. MARKET PRICES OF EMERGING INTERNET COMPANIES HAVE BEEN HIGHLY VOLATILE, AND THE MARKET FOR OUR STOCK MAY EXHIBIT VOLATILITY AS WELL. The stock market has experienced significant price and trading volume fluctuations, and the market prices of technology companies, particularly Internet companies, have been extremely volatile. Recent initial public offerings by Internet companies have been accompanied by exceptional share price and trading volume changes in the first days and weeks after the public offering. Investors may not be 12 able to resell their shares at or above the initial public offering price. In the past, following periods of volatility in the market price of a public company's securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial costs and a diversion of management's attention and resources. THE RELIABILITY OF THE MARKET DATA INCLUDED IN THIS PROSPECTUS IS UNCERTAIN. Since we are a relatively new company and operate in a new and rapidly changing market, we have included market data in this prospectus from industry publications, including International Data Corporation and Media Metrix. These data include projections that are based on a number of assumptions, including increasing worldwide business use of the Internet, the growth in the number of Web access devices per user, the absence of any failure of the Internet and the continued improvement of security on the Internet. Industry publications generally state that the information contained in these publications has been obtained from sources believed to be reliable, but that its accuracy and completeness is not guaranteed. Although we believe market data used in this prospectus is reliable, it has not been independently verified and we cannot assure you of its reliability. The Internet related markets may not grow at rates projected by International Data Corporation. The failure of these markets to grow at projected rates may seriously harm our business and may cause the price of our common stock to decline. NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THEIR SHARES. We expect the initial public offering price to be substantially higher than the net tangible book value per share of the common stock. Therefore, you will incur immediate dilution in net tangible book value of $ per share, assuming an initial public offering price of $ per share. You may incur additional dilution if holders of stock options exercise their options to purchase common stock. THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE TO DECLINE. The market price of our common stock could decline as a result of market sales by our existing stockholders of a large number of shares of our common stock after this offering or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. Please see the information in this prospectus under the heading "Shares Eligible for Future Sale" for a description of sales that may occur in the future. FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS MAY NOT BE REALIZED. This prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are often accompanied by words such as "anticipate," "believe," "could," "expect," "future," "intend," "plan" and similar expressions. These statements include assertions about our business strategy, competition and expected expense levels. You should consider any forward-looking statements we make in this prospectus in light of the risk factors described above. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described above and elsewhere in this prospectus. 13 USE OF PROCEEDS Our net proceeds from the sale of shares of common stock offered by us are estimated to be $ million, assuming an initial public offering price of $ per share, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be $ million. We intend to use the proceeds from this offering for sales and marketing and research and development expenditures, and for working capital and other general corporate purposes. We believe opportunities may exist from time to time to expand our current business through strategic alliances or acquisitions with complementary companies, products or technologies. We may use a portion of the proceeds for these purposes. We have not yet determined the amount of net proceeds to be used specifically for any of the foregoing purposes. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. Pending any use, as described above, we intend to invest the net proceeds in high-quality, short-term, interest-bearing securities. DIVIDEND POLICY We have not declared or paid any cash dividends on our capital stock since inception (April 27, 1998) and do not expect to pay any cash dividends for the foreseeable future. We intend to use future earnings, if any, to finance expansion of our business for the foreseeable future. Investors should not purchase our common stock with the expectation of receiving cash dividends. 14 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999: - on an actual basis; - on a pro forma basis to give effect to the conversion of our preferred stock upon completion of this offering; and - on a pro forma as adjusted basis to give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and our financial statements and the notes to those statements appearing elsewhere in this prospectus.
SEPTEMBER 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Preferred stock, $0.001 par value: Series A--5,187,501 shares authorized; 5,187,501 shares issued and outstanding actual; no shares issued and outstanding pro forma and pro forma as adjusted........... $ 1,378 -- $ Series B--1,323,912 shares authorized; 1,323,912 shares issued and outstanding actual; no shares issued and outstanding pro forma and pro forma as adjusted........... 1,993 -- -- Series C--4,431,265 shares authorized; 4,431,263 shares issued and outstanding actual; no shares issued and outstanding pro forma and pro forma as adjusted........... 26,280 -- -- Common stock, $0.001 par value: 35,000,000 shares authorized; 9,722,048 shares issued and outstanding actual; 20,664,724 shares issued and outstanding pro forma; and shares issued and outstanding pro forma as adjusted............................................... 10 $ 21 Additional paid-in capital.................................. 5,602 35,242 Deferred compensation....................................... (4,504) (4,504) Accumulated deficit......................................... (3,722) (3,722) ------- ------- --------- Total capitalization.................................... $27,037 $27,037 $ ======= ======= =========
15 DILUTION Our pro forma net tangible book value as of September 30, 1999 was $27.0 million, or $1.31 per share of common stock. Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding, after giving effect to the conversion of our preferred stock upon completion of this offering. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of September 30, 1999 would have been $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of September 30, 1999...................................... $1.31 Increase per share attributable to this offering.......... -------- Pro forma net tangible book value per share after this offering.................................................. -------- Net tangible book value dilution per share to new investors in this offering.......................................... $ ========
The following table summarizes, on a pro forma basis as of September 30, 1999, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering:
SHARES PURCHASED TOTAL CONSIDERATION -------------------------------------- ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------------------------- -------- -------------- -------- ------------- Existing stockholders.............. 20,664,724 % $29,734,912.55 % $1.44 New investors...................... --------------------------- ------ -------------- ------ Total.......................... 100.0% 100.0% =========================== ====== ============== ======
The foregoing tables and calculations are based on shares outstanding on September 30, 1999 and: - include 10,942,676 shares of common stock issuable upon the conversion of all of our outstanding preferred stock as of September 30, 1999; and - exclude 1,204,646 shares of common stock issuable upon exercise of all options outstanding under our 1998-A Stock Option Plan as of September 30, 1999 with a weighted average exercise price of $1.43 per share. 16 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our financial statements and the notes to those satements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the period from inception (April 27, 1998) through December 31, 1998 and the balance sheet data at December 31, 1998 are derived from our financial statements which have been audited by Deloitte & Touche LLP, our independent auditors, and are included in this prospectus. The statement of operations data for the nine months ended September 30, 1999 and the balance sheet data at September 30, 1999 have been derived from our unaudited financial statements included elsewhere in this prospectus that include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, that we consider necessary for the fair presentation of our financial position and results of operations for that period. The historical results are not necessarily indicative of the operating results to be expected in the future.
PERIOD FROM INCEPTION (APRIL 27, 1998) NINE MONTHS THROUGH ENDED DECEMBER 31, 1998 SEPTEMBER 30, 1999 ----------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: OEM....................................................... $ 175 $ 805 Advertising............................................... -- 57 ------- ------- Total revenues.......................................... 175 862 Cost of revenues............................................ 51 361 ------- ------- Gross profit................................................ 124 501 ------- ------- Operating expenses: Sales and marketing....................................... 90 948 Research and development.................................. 472 1,502 General and administrative................................ 150 413 Equity-related compensation............................... 232 827 ------- ------- Total operating expenses................................ 944 3,690 ------- ------- Operating loss.............................................. (820) (3,189) Interest income............................................. 28 259 ------- ------- Net loss.................................................... $ (792) $(2,930) ======= ======= Pro forma basic and diluted net loss per share.............. $(0.12) $(0.26) ======= ======= Weighted average shares outstanding used in computing pro forma basic and diluted net loss per common share..................................................... 6,705 11,092 ======= =======
DECEMBER 31, 1998 SEPTEMBER 30, 1999 ----------------- ------------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $2,558 $16,427 Working capital............................................. 2,641 25,869 Total assets................................................ 2,924 28,049 Total convertible preferred stock........................... 3,371 29,651 Total stockholders' equity.................................. 2,823 27,037
17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OUR COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OVERVIEW Direct Hit is a leading provider of solutions that aggregate and organize online content to enable users to quickly find relevant and accurate information, products and services. We were incorporated in April 1998, and sold our Popularity-based Search product to our first customer in August 1998. Revenues are comprised of OEM revenues and advertising revenues. Through September 30, 1999, substantially all of our OEM revenues have been derived from our Popularity-based Search product. OEM revenues are generated through a variety of contractual arrangements, which include per-query fees and advertising revenue sharing arrangements with OEM customers. Per-query fees are recognized in the period earned, and revenues from advertising revenue sharing arrangements are recognized in the period that the advertisement is displayed through the OEM customer's Web site. When the OEM contract calls for payments based on per-query fees, revenues are recognized based on the number of Web pages accessed as reported by the OEM customer or as determined by us, depending on the contract. When the OEM contract provides for minimum monthly fees, such fees are recognized monthly as earned. Advertising revenues are derived principally from arrangements with third parties in which we provide advertising on our Web site. The advertising contracts are primarily sold as: (1) "run-of-site" contracts in which a customer purchases the right to advertise within rotation through our entire Web site and some of our customers' sites for all categories and non-specific keywords; (2) "run-of-category" contracts in which a customer purchases the right to advertise in connection with a specific category (e.g., sports, music, news, education, etc.); (3) "keyword" contracts in which a customer purchases the right to advertise in connection with specified word searches; and (4) text sponsorships in which a customer purchases link descriptions based on a bid system and rotation is based on the highest bid. We are still developing the business model for our Popularity-based Shopping product and anticipate that revenues will be generated by revenue sharing arrangements with online merchants, and by per-query fees and advertising fees from Internet portals and other Web site customers. We also anticipate that we will generate revenues at our Web site from our Popularity-based Shopping product through advertising and revenue sharing arrangements with online merchants. However, we cannot assure you that we will generate any revenues from our Popularity-based Shopping product. Cost of revenues consist primarily of expenses associated with the ongoing maintenance and support of our products, including compensation and employee-related expenses, consulting fees, equipment costs, networking, bandwidth and other related indirect costs. Sales and marketing expenses consist primarily of advertising and other marketing-related expenses, compensation and employee-related expenses, sales commissions and travel costs. Research and development expenses consist primarily of compensation and employee-related expenses, equipment costs, and fees for professional services related to the continued development and enhancement of our product offerings. General and administrative expenses consist primarily of compensation and employee-related expenses, fees for professional services and other general corporate overhead costs. Interest income is derived primarily from interest earned on our cash balances and short-term investments. We will incur a non-cash expense over the vesting period of certain outstanding options, generally four years, for the amortization of unearned stock-based compensation resulting from granting stock options to employees since the inception of our company. These deferred compensation costs represent 18 the difference between the exercise price of the options and the deemed fair market value of the underlying common stock at the time of grant of the options. We have experienced substantial losses in each fiscal period since our inception (April 27, 1998). As of September 30, 1999, we had an accumulated deficit of $3.7 million. These losses and our accumulated deficit have resulted from our lack of substantial revenues, as well as the significant costs incurred in the development of our products and in the preliminary establishment of our infrastructure. We expect to increase our expenditures in all areas in order to execute our business plan, particularly in sales and marketing and research and development. The planned increase in sales and marketing and research and development expenses will result principally from the hiring of additional personnel and from marketing programs. Accordingly, we expect to experience additional losses for the foreseeable future. Although we have experienced revenue growth in recent periods, our recent rate of revenue growth may not be sustainable. We may not be able to continue to increase our revenues or to attain profitability and, if we do achieve profitability, we may not be able to sustain profitability for any period. We believe that period-to-period comparisons of our historical operating results may not be meaningful, and you should not rely upon them as an indication of our future financial performance. Since inception, we have financed our operations primarily from the proceeds of the sale of equity securities. Net proceeds from inception through September 30, 1999 totaled approximately $29.7 million. In May 1998, Draper Fisher Jurvetson and high net worth individuals provided us initial equity capital of $1.4 million. In November 1998, an additional $2.0 million was invested by Draper Fisher Jurvetson, Mosaic Venture Partners and a high net worth individual. In July 1999, we received approximately $26.3 million in financing from investors including Commonwealth Capital, Cornerstone Capital Group, Draper Fisher Jurvetson, Hikari Tsushin, McCloskey, Mercury Investors, Mosaic Venture Partners, TA Associates and Viventures Partners. RESULTS OF OPERATIONS The following table sets forth operating data expressed as a percentage of total revenues for each period indicated. We were organized in April 1998 and first sold our products in August 1998. Accordingly, comparisons with prior periods are not meaningful.
PERIOD FROM INCEPTION (APRIL 27, 1998) THROUGH NINE MONTHS DECEMBER 31, ENDED 1998 SEPTEMBER 30, 1999 ---------------- ------------------ STATEMENT OF OPERATIONS DATA: Revenues: OEM....................................................... 100% 93% Advertising............................................... -- 7 ----- ----- Total revenues.......................................... 100 100 Cost of revenues............................................ 29 42 ----- ----- Gross margin................................................ 71 58 ----- ----- Operating expenses: Sales and marketing....................................... 51 110 Research and development.................................. 269 174 General and administrative................................ 86 48 Equity-related compensation............................... 132 96 ----- ----- Total operating expenses................................ 538 428 ----- ----- Operating loss.............................................. (467) (370) Interest income............................................. 16 30 ----- ----- Net loss.................................................... (451)% (340)% ===== =====
19 NINE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES Total revenues for the nine months ended September 30, 1999 were $862,000. OEM revenues were $805,000, or 93% of total revenues. Advertising revenues were $57,000, or 7% of total revenues. COST OF REVENUES. Cost of revenues for the nine months ended September 30, 1999 totaled $361,000, or 42% of total revenues. SALES AND MARKETING. Sales and marketing expenses for the nine months ended September 30, 1999 totaled $948,000, or 110% of total revenues. RESEARCH AND DEVELOPMENT. Research and development expenses for the nine months ended September 30, 1999 totaled $1.5 million, or 174% of total revenues. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the nine months ended September 30, 1999 totaled $413,000, or 48% of total revenues. EQUITY-RELATED COMPENSATION. Equity-related compensation expense for the nine months ended September 30, 1999 totaled $827,000, including $602,000 of amortization of deferred stock-based compensation relating primarily to stock options and restricted stock issued to employees and independent consultants. Deferred stock-based compensation is amortized on a straight-line basis over the vesting period based on either the difference between the fair value of our stock on the date of grant and the exercise price or the value of a particular grant as determined by a Black-Scholes model. Also included in equity-related compensation expense for the nine months ended September 30, 1999 is a $225,000 charge representing the fair value of the stock contributed to us by one of the founders and then reissued by us to other employees. As of September 30, 1999, we have recorded approximately $4.5 million in deferred compensation. As our stock option plan has a four-year vesting requirement, the remaining deferred compensation cost will be amortized ratably through the fourth quarter of 2003. Stock-based compensation is a non-cash expense. INTEREST INCOME. Interest income for the nine months ended September 30, 1999 totaled $259,000 and was derived primarily from interest earned on our cash balances and short-term investments. INCOME TAXES. We have not recorded an income tax expense or benefit because we have incurred net operating losses since inception. PERIOD FROM INCEPTION (APRIL 27, 1998) THROUGH DECEMBER 31, 1998 REVENUES Total revenues for the period from inception (April 27, 1998) through December 31, 1998 were $175,000. Revenues were derived solely from OEM revenues. In August 1998, we recognized revenues from our first OEM customer contracts. COST OF REVENUES. Cost of revenues for the period from inception (April 27, 1998) through December 31, 1998 totaled $51,000, or 29% of total revenues. SALES AND MARKETING. Sales and marketing expenses for the period from inception (April 27, 1998) through December 31, 1998 totaled $90,000, or 51% of total revenues. RESEARCH AND DEVELOPMENT. Research and development expenses for the period from inception (April 27, 1998) through December 31, 1998 totaled $472,000, or 269% of total revenues. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the period from inception (April 27, 1998) through December 31, 1998 totaled $150,000, or 86% of total revenues. 20 EQUITY-RELATED COMPENSATION. Equity-related compensation expense for the period from inception (April 27, 1998) through December 31, 1998 totaled $232,000 of amortization of deferred stock-based compensation relating primarily to stock options and restricted stock issued to employees and independent consultants. INTEREST INCOME. Interest income for the period from inception (April 27, 1998) through December 31, 1998 totaled $28,000 and was derived primarily from interest earned on our cash balances. QUARTERLY RESULTS OF OPERATIONS The following tables set forth unaudited quarterly statements of operations data in dollars for the period from inception (April 27, 1998) through June 30, 1998 and for each of the five quarters from July 1, 1998 through September 30, 1999, and as a percentage of total revenues for each of the four quarters ended September 30, 1999. The percentage of revenues analysis for the period from inception (April 27, 1998) through September 30, 1998 is not presented since revenues during this period were insignificant. This unaudited quarterly information has been derived from our unaudited financial statements but, in the opinion of management, includes all adjustments necessary for a fair presentation of such information. Results for any quarter are not necessarily indicative of the operating results for any future period.
PERIOD FROM INCEPTION (APRIL 27, 1998) THREE MONTHS ENDED THROUGH --------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1998 1998 1998 1999 1999 1999 ----------- --------- --------- --------- --------- --------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues: OEM............................ -- $ 7 $ 168 $ 224 $ 225 $ 356 Advertising.................... -- -- -- -- -- 57 ----- ----- ----- ----- ----- ------- Total revenues............... -- 7 168 224 225 413 Cost of revenues................. -- 23 28 80 100 181 ----- ----- ----- ----- ----- ------- Gross profit..................... -- (16) 140 144 125 232 ----- ----- ----- ----- ----- ------- Operating expenses: Sales and marketing............ $ 7 29 54 176 151 621 Research and development....... 94 184 194 340 453 709 General and administrative..... 32 47 71 83 72 258 Equity-related compensation.... 145 42 45 78 126 623 ----- ----- ----- ----- ----- ------- Total operating expenses..... 278 302 364 677 802 2,211 ----- ----- ----- ----- ----- ------- Operating loss................... (278) (318) (224) (533) (677) (1,979) Interest income.................. -- 14 14 34 27 198 ----- ----- ----- ----- ----- ------- Net loss......................... $(278) $(304) $(210) $(499) $(650) $(1,781) ===== ===== ===== ===== ===== =======
21
THREE MONTHS ENDED ------------------------------------------ DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1998 1999 1999 1999 -------- -------- -------- --------- AS A PERCENTAGE OF TOTAL REVENUES: Revenues: OEM..................................................... 100% 100% 100% 86% Advertising............................................. -- -- -- 14 ---- ---- ---- ---- Total revenues........................................ 100 100 100 100 Cost of revenues.......................................... 17 36 45 44 ---- ---- ---- ---- Gross margin.............................................. 83 64 55 56 ---- ---- ---- ---- Operating expenses: Sales and marketing..................................... 32 78 67 150 Research and development................................ 115 152 201 172 General and administrative.............................. 42 37 32 62 Equity-related compensation............................. 27 35 56 151 ---- ---- ---- ---- Total operating expenses.............................. 216 302 356 535 ---- ---- ---- ---- Operating loss............................................ (133) (238) (301) (479) Interest income........................................... 8 15 12 48 ---- ---- ---- ---- Net loss.................................................. (125)% (223)% (289)% (431)% ==== ==== ==== ====
We expect operating results to fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. See "Risk Factors--Disappointing quarterly revenues or operating results could cause our stock price to fall." LIQUIDITY AND CAPITAL RESOURCES Since our inception on April 27, 1998, we have financed our operations primarily from the proceeds of the sale of equity securities. As of September 30, 1999, cash and cash equivalents were $16.4 million. For the nine months ended September 30, 1999, net cash used in operating activities was $1.3 million, primarily attributable to net losses. Net cash used in investing activities was $11.2 million, primarily related to the purchase of short-term investments and other capital expenditures. Net cash provided by financing activities was $26.3 million, resulting primarily from our sale of series C preferred stock on July 16, 1999. Our capital expenditures were $943,000 for the nine months ended September 30, 1999. We anticipate that we will experience an increase in capital expenditures consistent with future growth, if any, in operations, infrastructure and personnel. We currently anticipate that the net proceeds from this offering, together with current cash and cash equivalents and marketable securities will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. However, we may need additional financing sooner to execute our business plan if we need to respond to business contingencies such as those identified in "Risk Factors--We are likely to require additional financing and may not be able to raise additional financing on favorable terms or at all." If we raise additional funds through the issuance of equity or convertible debt securities, the percentage of ownership of our stockholders would be diluted. We cannot assure you that we will be able to obtain additional financing when needed on favorable terms or at all. 22 YEAR 2000 READINESS We have evaluated the Year 2000 readiness of our hardware and software products (including products currently under development), the information technology systems used in our operations ("IT Systems"), and our non-IT Systems, such as voice mail and other systems. Our evaluation covered the following phases: - identification of all products, IT Systems, and non-IT Systems; - assessment of repair or replacement requirements; - repair or replacement; - testing; and - contingency planning in the event of Year 2000 failures. Based on our evaluation, we believe that all of our products (including products currently under development) will record, store, process and calculate and present calendar dates falling on and after January 1, 2000, and will calculate any information dependent on or relating to such dates in the same manner and with the same functionality, data integrity and performance as the products record, store, process, calculate and present calendar dates on or before December 31, 1999, or calculate any information dependent on or relating to such dates. To our knowledge, none of our material products will lose functionality with respect to the introduction of records containing dates falling on or after January 1, 2000 and all of our internal computer systems are Year 2000 compliant. However, the assessment of whether a complete system or device in which our product is embedded will operate correctly for an end-user depends in large part on the Year 2000 compliance of the product's or system's other components, many of which are supplied by parties other than us. The supplier of our current financial and accounting software has informed us that such software is Year 2000 compliant. Further, we rely upon various vendors, utility companies, telecommunications service companies and other service providers who are outside of our control. There can be no assurance that such parties will not suffer a Year 2000 business disruption, which could have a material adverse effect on our financial condition and results of operations. To date, we have not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues. We have not developed a Year 2000-specific contingency plan. If Year 2000 compliance issues are discovered, we will at that time evaluate the need for contingency plans relating to such issues. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Statement, as amended, is effective for fiscal years beginning after June 15, 2000. The Company has evaluated the impact of adopting SFAS No. 133 and, based on its current business activities, believes that it will not have a material effect on its financial statements. 23 BUSINESS OVERVIEW Direct Hit is a leading provider of technology that aggregates and organizes online content to enable users to quickly find relevant and accurate information, products and services. Our Popularity Engine, which is the core of our solution, anonymously compiles information collected from the activity of users, automatically capturing and processing the selections made by online users to organize online information. Our technology is well suited to provide accurate and relevant information to users of large, dynamic collections of information such as the World Wide Web. We have targeted Internet search as the first application of our Popularity Engine and we have launched an e-commerce product based on the Popularity Engine. We intend to expand the application of our popularity-based technology into such areas as corporate online databases, news feeds and yellow pages. As of November 30, 1999, we had 22 OEM customers, including AT&T WorldNet, HotBot, Lycos, Scandinavia Online and ZDNet. INDUSTRY BACKGROUND The emergence of the Internet has enabled millions of people worldwide to obtain information, conduct commerce and communicate online. The number of Internet users is expected to increase from approximately 142 million at the end of 1998 to approximately 502 million by the end of 2002, according to International Data Corporation. While the Internet is attracting new users at a rapid pace, the volume and diversity of information, products and services available over the Internet is also increasing dramatically. IDC predicts that the number of Web pages will grow from 925 million in 1998 to 13 billion by 2003, including separate Web pages within individual Web sites. The Internet's accessibility and growth make it an attractive resource to users for a wide variety of information, products and services in areas as diverse as e-commerce, complex corporate sites and special-interest informational sites. For example, IDC estimates that business-to-business and business-to-consumer e-commerce will collectively grow from approximately $51 billion in 1998 to $1.4 trillion by 2003. Internet users are increasingly seeking specific information, products and services from multiple sources such as e-commerce sites, news sites, corporate sites, archives and specialty vertical sites. As a result, users are now spending more time at Web search sites than at almost any other category of Web sites. According to Media Metrix, the average Internet user spent approximately 90 minutes at search engine sites in October 1999, second to 110 minutes at news, information and entertainment sites. Effective online navigation, however, does not end with finding a desired Web site. Once a Web site is located, users are still faced with the difficult task of locating relevant information within a Web site which may contain thousands of pages. The growing complexity of the Internet in terms of both the volume and the diversity of information, products and services available, combined with users' increasing reliance on these sources for their diverse needs, has heightened the importance of effective solutions for aggregating and organizing online information to aid users in identifying the best information, products and services. TRADITIONAL METHODS FOR AGGREGATING AND ORGANIZING ONLINE INFORMATION FOR USERS Users have typically relied on products and services such as search engines and directories to locate online information. Companies that provide these navigation capabilities to users have traditionally used word-matching and editor-based methods for aggregating and organizing online information. Techniques which rely on word-matching methods search for keywords in a database to 24 locate potentially relevant information. Editor-based methods generally rely on a staff of human editors to manually review and categorize online information. WORD-MATCHING TECHNIQUES Word-matching techniques generally compare the keywords in the search request with words found in a database. For a collection of information as vast as the World Wide Web, the word-matching techniques rely on computers to spider Web sites from link to link, feeding information into a database. A user's keywords are then matched to words found in the database to generate a list of Web sites on which those keywords appear. Typical word-matching search engines prioritize results found in connection with a particular search according to the number of times the search terms occur in each document, the position of the search terms within the document or the number of links pointing to the document and the text surrounding those links. Although word-matching techniques may be used to aggregate and organize a large amount of online information, such as that found on the Internet, they often yield an overwhelming volume of irrelevant search results. Many collections of information, such as proprietary online databases, online product catalogs and the World Wide Web, share similar words that confuse word-matching search technology. Moreover, the word-matching method is not well suited to the complexity of meaning and context in human language. A user who searches for the word "bond" may be looking for information about corporate bonds, savings bonds or James Bond. Word-matching techniques do not differentiate among these different meanings. In addition, word-matching search engines deployed on the Internet often rely on invisible Web site descriptions, called meta-tags. Web site authors place meta-tags on their sites, in some cases using misleading search terms to attract user attention to the site. This problem is exacerbated when the user is searching for types of online information which do not typically contain textual elements, such as still images, video and music, because of the word-matching method's increased reliance on meta-tags to locate relevant content. EDITOR-BASED METHODS Editor-based methods require a staff of editors to manually review and categorize online content in a database. To facilitate accessibility to particular content found within the database, an editor will typically assign keywords which the editor believes are most relevant to that content. Ranking algorithms will then utilize the assigned keywords to promote relevant content to the top of a search results list, mitigating the efforts of content authors to mislead searchers by placing hidden keywords within the content. Because of their manual nature, editor-based directories often have incomplete and outdated information covering only a small portion of the content available online. Editor-based directories have generally catalogued less than 1% of Web pages, and the review process for submission of a site can take up to several months. Moreover, the process of assembling a directory is time-consuming and expensive. For a collection of information as vast as the Web, some directory providers have assigned nearly 200 editors to the task. The fundamental drawback of editor-based directories is that they are difficult to scale to accommodate growing and dynamic collections of information like the Web and large corporate and e-commerce databases. Increasingly, due to the shortcomings of editor-based directories, substantially all Internet directories rely upon word-matching search techniques to provide users with the ability to search beyond the Web sites covered by the directories. While this hybrid solution overcomes some of the failings of the editor-based directory method, it brings with it the problems typically associated with word-matching techniques. For example, while editor-based directories by themselves may reduce the ability of content authors to mislead users through meta-tagging, editor-based directories which are 25 supplemented with word-matching techniques nevertheless often generate a large number of irrelevant results. THE NEED FOR A BETTER METHOD OF AGGREGATING AND ORGANIZING ONLINE INFORMATION FOR USERS Traditional methods for aggregating and organizing online information often fail to meet users' needs. These methods, even when used in tandem, often generate an unmanageably large set of irrelevant results or incomplete and outdated information. As the amount and diversity of information available online continues to expand, users continue to demand easier, more effective access to more relevant content, products and services. In the rapidly evolving and increasingly complex online environment, an effective solution must be equipped to capture a high percentage of available content and prioritize information in accordance with users' needs to enable users to quickly find relevant and accurate information, products and services. THE DIRECT HIT SOLUTION Direct Hit provides a popularity-based solution that enables users of online content to find more relevant information, products and services more easily across a wide variety of sources. The core of our solution, which we call our Popularity Engine, anonymously compiles and uses information collected from the activity of users, automatically capturing and processing the selections made by online users to organize online information. From online product catalogs to live news feeds, and from proprietary corporate databases to the World Wide Web, our proprietary technologies for organizing information according to its popularity with users can be applied to a variety of online data sets. We have targeted Internet search as our first application for the Popularity Engine. In this context, our Popularity Engine is used to track the Web sites that Internet searchers actually select from various lists of search results, the amount of time searchers spend at these sites and a number of other user activity-based metrics. The Popularity Engine uses this data and our proprietary algorithms to rank search results according to the experiences of previous Internet searchers. Our database of over one billion Internet user relevancy records serves as the foundation of our Popularity-based Search product. The database is currently growing at the rate of over 100 million user searches per month, allowing our Popularity-based Search product to provide increasingly accurate and relevant results. The key benefits of our popularity-based solution are as follows: MORE ACCURATE AND RELEVANT INFORMATION. By automatically capturing the experience of Internet users and their satisfaction or dissatisfaction with online content, our solution provides users with a list of information, products or services ranked according to the preferences of previous users. As a result, users can find what they want quickly and easily. The Popularity Engine is extremely responsive to new and changing information, keeping listings current based on changing user preferences. CONTENT INDEPENDENCE AND FLEXIBILITY. The Popularity Engine can organize many types of data, including still images, video and music. Today, the Popularity Engine is organizing Internet search results in many different languages, and is also organizing product and merchant databases through our Popularity-based Shopping product. The Popularity Engine can be readily deployed to work with other data, such as multi-media content and corporate site-specific data. The Popularity Engine's modular architecture also simplifies deployment as either a stand-alone solution or as a core complement to existing technology. SCALABILITY. Through our robust proprietary architecture, the Popularity Engine can scale to accommodate large and expanding collections of information like the Internet and millions of users. For example, our Popularity-based Search product is currently answering over 100 million Internet search requests each month. As a result, the Popularity Engine is able to organize a greater amount of online information than editor-based directories that are dependent upon a staff of human editors. 26 RESPONSIVENESS TO DEMOGRAPHIC PREFERENCES. The Popularity Engine can collect and use anonymous, demographic information voluntarily submitted by users to provide results that are based on information collected from users sharing similar demographic traits. Today, our solution can reflect user preferences based on age, gender and geographic location. The ability to reflect demographic preferences enhances the ability of the Popularity Engine to provide more accurate and relevant information. EASE OF USE. Our solution does not require users to acquire any new skills or employ complex search techniques such as Boolean queries to generate highly relevant and accurate search results. THE DIRECT HIT STRATEGY Our objective is to be the leading provider of solutions that aggregate and organize online content to enable users to quickly find relevant and accurate information, products and services. Key elements of our strategy include the following: BECOME THE TECHNOLOGY STANDARD FOR INTERNET SEARCH. We believe that we can leverage our Popularity Engine to establish our Popularity-based Search product as the standard for Internet search. To date, we have 22 OEM customers, including companies such as AT&T WorldNet, HotBot, Lycos and ZDNet, who have elected to use our Popularity-based Search product, either as a stand-alone solution or as a core complement to their current search engine. We intend to continue to increase the number of Web sites which use our Popularity-based Search product. EXTEND OUR TECHNICAL LEADERSHIP. We intend to continue to devote significant resources to the development of new and innovative products, capitalizing on our extensive experience with popularity-based technology and our understanding of customer needs. We believe that we are the first company to introduce popularity-based technology for aggregating and organizing online content, products and services. As use of online information continues to expand and evolve, we intend to continue to develop new technologies to enable users to find what they need online. CONTINUE TO BUILD OUR E-COMMERCE SOLUTION. We believe that we can capitalize on the growth of e-commerce by using our popularity-based technology to better meet the needs of online merchants and shoppers. By applying our core technology solution to e-commerce, we believe we will be able to improve users' shopping experiences by providing access to more relevant product listings than those achieved by traditional methods. We are currently supplying shopping technology to AT&T WorldNet and are managing a growing online commerce database spanning more than one million products from merchants across the Internet. We intend to further leverage our Popularity Engine and integrate complementary services and products into our shopping solution to establish it as a complete resource for shopping online. LEVERAGE CORE TECHNOLOGY TO DEVELOP ADDITIONAL APPLICATIONS. As the volume and breadth of information available online grows, we continue to explore new applications for our core technology. For example, we are currently supplying a product based on our Popularity Engine to ZDNet to facilitate accurate searches of its proprietary database of news and feature articles. Future potential product applications incorporating our Popularity Engine may include products for other corporate online databases, news feeds and yellow pages. The content-independence and flexibility of our core technology allows us to facilitate development of additional applications and promote rapid response to marketplace changes. We intend to leverage our proprietary technology and skilled personnel to develop dynamic, new products. BUILD THE DIRECT HIT BRAND. We believe that establishing Direct Hit as the best available technology will help us expand our market share in the Internet search and e-commerce search markets and support the introduction of additional applications based on our Popularity Engine. To foster 27 awareness and demand for our Popularity Engine among Internet users, merchants and potential customer Web sites, we are pursuing a brand development campaign through targeted advertising and marketing. EXPAND OUR INTERNATIONAL PRESENCE. We intend to leverage our leadership position in aggregation, organization and navigation solutions to further penetrate the global marketplace. We believe that the scalable and flexible features of our solution, including its ability to accommodate foreign languages, will facilitate our global expansion. Having developed customer relationships with international Internet portals such as Catcha.com (Asia), UKMax.com (UK), Punto (Italy) and Scandinavia Online (Denmark, Norway and Sweden), we intend to leverage the strength of our technology to widen our presence in major international markets. PRODUCTS Our products today consist of our Popularity-based Search product and our Popularity-based Shopping product. Our Popularity-based Search product is comprised of separate components, including our Internet Search Engine, Related Searches, Personalized Search and Directory-based Search. These products and components are powered by our proprietary Popularity Engine to determine the relevancy ranking of online content. Our Popularity-based Shopping product and many of the components comprising our Popularity-based Search product may be found deployed on the Internet on our OEM customers' Web sites, and all of our products and components are available on our Web site. Our Popularity-based Search product was selected as FORBES' Favorite Search Engine in September 1999. In addition, our products have also earned recognition in industry awards received by our OEM customers, including CNET 1999 Editors' Choice awarded to HotBot in April 1999 and PC MAGAZINE 1999 Editors' Choice awarded to HotBot in September 1999. POPULARITY-BASED SEARCH PRODUCT INTERNET SEARCH ENGINE Our scalable Internet Search Engine, utilizing our core technology, anonymously and transparently compiles information collected from the searching activity of millions of Internet users, automatically capturing and processing the selections made by previous Internet searchers to determine the ranking of search results. To date, we have processed more than one billion relevancy records from Internet searches. The Internet Search Engine consists of a word-matching spider, our Popularity Engine and search engine servers. The spider, which we can deploy with the Popularity-based Search product as an option for customers, is capable of spidering, indexing or refreshing millions of Web sites per day. The Internet Search Engine runs our Popularity Engine across a database that is growing at the rate of over 100 million Internet user relevancy records per month, allowing our Popularity Engine to provide increasingly accurate and relevant results. RELATED SEARCHES Related Searches help users narrow or broaden their search by presenting a list of relevant search terms related to the original search request. These related terms are key words that previous searchers have found helpful in refining or enlarging similar search requests. For example, a user who types "California wine" may be presented with such related terms as "Wine," "California Red Wine" and "California Wine Tours." Users may easily explore a related search topic by clicking on the related search term. 28 PERSONALIZED SEARCH Personalized Search refines the ranking of search results by prioritizing results according to their relevancy as determined by previous searchers who share similar demographic traits. To enable Personalized Search, we solicit anonymous demographic information such as the age, gender, and geographic location of searchers. If the searcher elects to supply this information, it is then used by our Popularity Engine to further improve upon the relevancy of search results for that user and subsequent users who share similar demographic traits. For example, a person located in the Boston area searching on the topic of restaurants could receive popularity-based results selected by other Boston-area users, while a person located in the San Francisco area could receive popularity-based results selected by other Bay Area users. Personalized Search is currently available for certain search topics on our Web site, and we expect to continue to expand the breadth of its coverage. DIRECTORY-BASED SEARCH Directory-based Search leverages our Popularity Engine to provide a highly scalable Internet directory that provides categorized listings of Web sites. Unlike many editor-based directories, category listings generated by Directory-based Search can be ranked according to their popularity with previous users. In addition, Directory-based Search can also rank Web sites presented within categories by their popularity with previous users in addition to presenting the sites alphabetically. Although currently deployed only for Internet applications, Directory-based Search can be readily applied to any online directory data set. As a default data set for our Internet application of the product, we use the open-source Web site data provided by Netscape Communications called Open Directory. Open Directory is a publicly available database currently comprising over one million sites, classified into over 140,000 categories and updated by over 15,000 volunteer editors. POPULARITY-BASED SHOPPING PRODUCT Popularity-based Shopping allows online consumers to leverage the experience of previous shoppers looking for similar products. Powered by our Popularity Engine, our Popularity-based Shopping product automatically captures and processes the selections made by previous shoppers to prioritize products according to user demand. Our Popularity-based Shopping product, now in an early stage of release, currently aggregates over one million products from online merchants across the Web to facilitate comparison shopping. Online shoppers utilizing Popularity-based Shopping are able to organize product listings in the manner best suited to their needs, by relevancy, category, price or merchant. The Popularity-based Shopping product's scalable architecture easily accommodates new products and category listings. We update our database of products by spidering and indexing merchant sites or by receiving periodic updates of product listings directly from the merchants. Regular product updates ensure that such information as pricing, product descriptions and availability remains current. In addition to providing more relevant and accurate product listings, popularity-based rankings for products may also: - IDENTIFY CONSUMER TRENDS. For similar products, those experiencing the greatest consumer demand are prioritized higher. - ACT AS IMPLIED PRODUCT RECOMMENDATIONS. Shoppers may view popularity-based rankings as implicit recommendations from fellow shoppers and may feel more comfortable with their buying decision. 29 - REFLECT CONSUMER SATISFACTION WITH THE ONLINE MERCHANT. An important factor for consumers in buying over the Internet is the reputation of the merchant. For similar products from different merchants, the merchants experiencing the greatest consumer demand are prioritized higher. TECHNOLOGY Our Popularity Engine technology and proprietary software, which we call our Bifurcated-Systems architecture, have been designed to serve as the foundation for a variety of scalable information organization and aggregation applications. The Popularity Engine can be readily deployed to work with various data, such as multi-media content and corporate site-specific data. Our Popularity-based Search product anonymously monitors the activity of millions of daily Internet users to systematically organize large volumes of information according to user demand. Our Bifurcated-Systems architecture enables large volumes of data to be processed in the background on a cluster of dedicated processing servers. The data is then compressed into highly scalable applications supported on separate and geographically dispersed clusters of distribution servers available to users via the Internet. The Popularity Engine's modularity simplifies deployment as either a stand-alone solution or as a core complement to existing technology. Our Popularity Engine technology provides a foundation for building applications that leverage the activity of users to systematically organize large volumes of data according to user demand. The Popularity Engine captures and processes the anonymous activity of users as they locate and access information, products or services. To deploy the service, our OEM customers utilize a software utility provided by us which tags universal resource locators, or URLs, with a special redirect code. The redirect code operates to create a data file of relevancy records identifying the information, products or services that users found useful in satisfying their requests for information. Our systems process these relevancy records and use our proprietary mathematical algorithms to rank the information, products or services according to user demand. These rankings are then incorporated into the Popularity Engine and utilized in satisfying requests of subsequent users. Our Bifurcated-Systems architecture is a two-part system employing a dedicated cluster of "processing servers" that utilize sophisticated data mining techniques to analyze the millions of relevancy records we process each day. This cluster of processing servers applies our proprietary mathematical algorithms and compresses the data into highly scalable data files. These files are then propagated to geographically-dispersed clusters of "distribution servers" that operate to resolve customer requests. The distribution server clusters comprise redundant arrays of inexpensive servers that cooperate to provide incrementally scalable support for OEM customer traffic loads. By adding servers to each cluster, we can quickly and efficiently increase capacity for our own Web site and our OEM customer sites. 30 CUSTOMERS Our popularity-based solution may be found at our Web site and at our OEM customers' Web sites. The following is a list of our 22 OEM customers as of November 30, 1999: About.com Lycos Apple Computer mainCampus.com AT&T WorldNet Microsoft (MSN) Catcha.com Pinault-Printemps-Redoute GeneralSearch.com Punto (Portal Srl) Go2Net SavvySearch HotBot (Wired Digital/Lycos) Scandinavia Online ICQ (AOL) SimpleSearch Infoseek UKMax.com (Hollinger Digital) InfoSpace.com Zap LookSmart ZDNet
For the nine months ended September 30, 1999, Lycos, including its subsidiary HotBot, accounted for approximately 70% of our total revenues. A significant decline in sales to Lycos or any other customer that accounts for a significant portion of our revenues could adversely affect our business and cause our stock price to decline. CASE STUDIES The following are customer case studies that describe the various ways in which our OEM customers use our products. AT&T WORLDNET AT&T WorldNet is an Internet service provider that delivers reliable, easy Internet access, email addresses, chat, free Web space, online communities and games. The AT&T WorldNet Web site, located at WWW.ATT.NET, is the default page for nearly 1.7 million AT&T WorldNet customers and is the 47th most visited Web site on the Internet with more than four million unique visitors in October 1999, according to Media Metrix. AT&T WorldNet required a new, user-friendly search technology which would enable customers to navigate more effectively from the AT&T WorldNet site to find the information they were looking for. AT&T WorldNet saw this as a crucial step in order to increase customer satisfaction and loyalty, as well as to reduce customer help desk costs for the users on the site who could not easily find information. At the same time, AT&T WorldNet was also looking for an integrated technology solution that could be applied across its many applications within its Web site, including corporate information, Internet search and e-commerce. In October 1999, AT&T WorldNet launched our Popularity-based Search product as its default search technology, and subsequently added our Popularity-based Shopping product as a complement to its existing e-commerce offerings. Our technology is deployed across the portal site and AT&T WorldNet's various applications to provide accurate and relevant information for AT&T WorldNet customers and employees. ZDNET ZDNet is a leading technology content network and source for computing and Internet content and commerce. ZDNet combines interactive technology and its own editorial team with Ziff-Davis' worldwide network of journalists to produce original content and create communities of common interests in computing. ZDNet sought a technology that could organize search results of its proprietary 31 data and online content according to previous user preferences, as well as provide relevant and accurate search results from across the entire Web. ZDNet began using our Popularity-based Search product in April 1999, including our Internet Search Engine. A link to our popularity-based search results appears at the top of every ZDNet search results page, allowing visitors to view the top 10 most visited pages for the search term they have requested. The ZDNet search service provides visitors with relevant and accurate results from across ZDNet and the entire Web. PUNTO Punto is a new Italian Web portal which features a local Italian perspective, with a focus on lifestyle, ease-of-use and quality content. It provides multiple services to its users including directories, chat and online merchants' special offers, as well as daily news and weather reports for 360 Italian cities. Punto seeks to make the Internet experience easier and more useful for the millions of users connecting to the Internet in Italy, and was looking for a search product that could accommodate multiple languages. Punto launched its portal site in October 1999 featuring components of our Popularity-based Search product, including our Internet Search Engine and Related Searches. Punto features both our general results as well as results tailored to the Italian market. We are also collecting relevancy-results data for the Italian market. SALES AND MARKETING Our Popularity-based Search product is accessible at our OEM customers' Web sites and at our Web site. Popularity-based search results that we provide at our OEM customers' Web sites generally have the look and feel of the host site, but include results ranked by our Popularity Engine. We deploy our Popularity-based Search product on customer sites usually through either our default model, where we usually provide the first page view or first set of search results for the user's request, or our button model, where we provide a hyperlinked option by which users can select the ten most popular results for their search query. Our default model may be found at a number of sites including AT&T WorldNet, HotBot, Lycos, SimpleSearch and Zap. Our button model can be found at such Web sites as AOL's ICQ, LookSmart and MSN. We have a sales team dedicated to marketing our products to OEM customers. Our OEM sales team targets highly trafficked Web sites including portals and destination sites. The sales cycle for OEM sales usually takes approximately one to three months. Our OEM sales team also participates in sales support and account management for our OEM customers. We have one OEM sales person, located in Paris, who is dedicated to the international market. In addition, we have personnel targeting online merchant acquisition for our Popularity-based Shopping product. We also have a direct sales force that sells advertising. Our internal advertising sales force generates the majority of advertising sales on our own Web site. We also offer self-service text sponsorship advertising on our Web site that allows advertisers to create keyword targeted text ads using our automated auction-based system. This advertising initiative targets small to medium advertisers since sponsorship accounts can be created for as little as $25. Advertisements, which appear next to search results, are sold on an impression basis. Our self-service text sponsorship product leverages our popularity data to help with better ad placement, making it easy for vendors to advertise on search results pages for exact keywords that best fit their target audience. We believe that a brand promotion campaign will increase usage of our products. All of our current OEM customer relationships allow us to co-brand our products with the our OEM customer. 32 To further build the Direct Hit brand, we currently focus on reaching Internet users through advertising media, as well as through an active public relations campaign. Our sales and marketing organization consisted of 13 individuals as of November 30, 1999. RESEARCH AND DEVELOPMENT We believe that strong research and development capabilities are essential to maintaining the competitiveness of our product offerings, enhancing our core technology and developing additional applications incorporating that technology. We have actively recruited key engineers and software developers with expertise in the areas of information retrieval and massively scalable databases. In addition, we strive to create and maintain an environment of rapid innovation and product release. Since inception, we have focused our research and development efforts on developing and enhancing our core technologies, and on applying these technologies to our Internet Search Engine and our Popularity-based Shopping product. We are currently working to add features and new functionality to our existing products and to develop new products and services. Our research and development expenses totaled $1.5 million for the nine months ended September 30, 1999 and $472,000 for the period from inception (April 27, 1998) through December 31, 1998. As of November 30, 1999, we had 24 individuals engaged in research and development. BOARD OF ADVISORS We have assembled a Board of Advisors comprised of experts in the fields of information retrieval and networking technology. Members of our Board of Advisors provide guidance to our management about technology developments and marketplace needs to assist us with our business strategy. Periodically, we seek feedback and guidance on technology applications and business market focus. The members of the Board of Advisors are: - Louis Monier, former Chief Technology Officer of AltaVista and the creator of its technology; - Mark Nitzberg, a co-founder of Viaweb and current managing director of Twine, a venture capital firm; - David Douglas, the former Director of Advanced Hardware of Thinking Machines and currently Chief Technologist of the Network Service Provider division at Sun Microsystems; and - Ilene Lang, former Chief Executive Officer of AltaVista and current Chief Executive Officer of Individual.com. COMPETITION The markets we compete in are new, rapidly evolving and intensely competitive, and we expect competition to intensify in the future. Many of our current and potential competitors have significantly greater financial, technical, marketing and other resources than we do. In the market for private-labeled search engine solutions, we compete on the basis of results relevancy, performance, scalability, speed of deployment, ease-of-use and price. We believe we compete favorably on these factors. We compete primarily against companies such as Inktomi. We also are aware of smaller companies that are focusing resources on developing and marketing products and services that may compete with our Popularity-based Search product. In the market for consumer-direct search services, we compete on the basis of results relevancy, performance and ease-of-use. We believe we compete favorably on these factors. We compete primarily with companies offering search-specific Internet sites directly to consumers. 33 In the market for providing shopping engine solutions, we expect to compete on the basis of results relevancy, number of merchants, number of products, performance, scalability, speed of deployment, ease-of-use and price. We expect to compete favorably on these factors. We compete with a number of companies to provide product shopping engine services, many of whom have operated services in the market for a longer period, have greater financial resources, have established marketing relationships with leading on-line services and advertisers, and have secured greater presence in distribution channels. Competitors who offer shopping engine services include Inktomi and mySimon. We also are aware of smaller companies that are focusing resources on developing and marketing products and services that may compete with our Popularity-based Shopping product. We cannot assure you that we will be able to compete successfully against current and future competitors. Any inability to compete successfully could have a material adverse effect on our business, financial condition and results of operations. INTELLECTUAL PROPERTY Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely on a combination of patent, copyright, trademark, and trade secret laws and confidentiality and license agreements with our employees, customers, partners and third parties to protect our proprietary rights. These legal protections afford only limited protection for our technology. We have applied for the registration of certain of our trademarks and service marks in the United States and internationally. We cannot predict whether any registered trademarks or service marks will issue from these applications, or, if issued, whether such registered trademarks or service marks will provide any meaningful protection. Gary Culliss, our co-founder, Chief Technology Officer and Chairman, is the owner of one patent covering certain of our technology. Mr. Culliss also has filed, and is the owner of, three U.S. patent applications covering certain of our technology. To date, Mr. Culliss has received notices of allowance on two of these patent applications. We have entered into a patent license agreement with Mr. Culliss pursuant to which we have been given exclusive and fully paid-up rights to all of the technology covered by Mr. Culliss' patent and patent applications. Other parties to the agreement include entities affiliated with our directors Rob Chandra, Jonathan Goldstein, Vernon Lobo and Warren Packard; such entities have no current rights in the patent or patent applications, but will be granted certain rights by Mr. Culliss if we file for bankruptcy or cease to do business for sixty days. We cannot predict whether any patents will issue from Mr. Culliss' patent applications. In addition, we cannot predict whether the issued patent or any subsequently issued patents will provide any meaningful protection. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks, technology or copyrighted material, to third parties. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our rights under Mr. Culliss' patent and any subsequently issued patents, and our copyrights, trademarks and trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating 34 results and financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure by us to meaningfully protect our property could have a material adverse effect on our business, operating results and financial condition. EMPLOYEES As of November 30, 1999, we had a total of 51 full-time employees. We also employ independent contractors to support our operations. Our future success will depend, in part, on our ability to continue to attract, integrate, retain and motivate highly qualified technical and managerial personnel, for whom competition is intense. We have never had a work stoppage and our employees are not represented by any collective bargaining unit. We consider our relations with our employees to be good. FACILITIES Our headquarters are currently located in approximately 10,000 square feet of leased office space in Wellesley, Massachusetts. The lease expires on December 31, 2001. We have entered into a lease for approximately 22,000 square feet of space located in Natick, Massachusetts. We plan to relocate our entire office and operations to the new location. The lease commenced in November 1999 and expires on October 31, 2002. We have begun efforts to sublease the Wellesley office space. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. 35 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names, ages and positions of our executive officers and directors as of November 30, 1999:
NAME AGE POSITION - ---- -------- ------------------------------------------------------- Michael Cassidy............. 36 Chief Executive Officer, President and Director Gary Culliss................ 29 Chief Technology Officer, Secretary and Chairman John McDonough.............. 39 Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer David Andre................. 39 Vice President of Engineering Maurice Casey............... 42 Vice President of Sales Tom Harrison................ 37 Vice President of Product Development Meredith McPherron.......... 32 Vice President of Marketing David Parker................ 36 Vice President of Business Development Rob Chandra................. 33 Director Jonathan Goldstein(1)(2).... 38 Director Vernon Lobo(1).............. 34 Director Warren Packard(2)........... 32 Director Michael Santullo(2)......... 38 Director
- ------------------------ (1) Member of the audit committee. (2) Member of the compensation committee. MICHAEL CASSIDY, a co-founder of our company, has served as our Chief Executive Officer, President and a member of the board of directors since April 1998. From May 1997 to December 1997, Mr. Cassidy studied at the Berklee College of Music. From 1991 to February 1996, Mr. Cassidy was Chief Executive Officer of Stylus Innovation, a telephony software company he co-founded. Stylus was acquired by Artisoft, a computer telephony and communications software company, in February 1996. After Stylus' acquisition by Artisoft, Mr. Cassidy served as a Senior Vice President at Artisoft from February 1996 to December 1996. Mr. Cassidy holds a B.S. and M.S. in aerospace engineering from MIT and an M.B.A. from Harvard University. GARY CULLISS, a co-founder of our company, has served as our Chief Technology Officer, Secretary and Chairman of our board of directors since April 1998. Before co-founding Direct Hit, Mr. Culliss attended Harvard Law School, graduating in May 1998. During law school Mr. Culliss worked with the law firms Sullivan & Cromwell and Kaye, Scholer, Fierman, Hays & Handler, LLP. From 1993 to September 1995, Mr. Culliss was a registered Patent Agent and worked with the Law Office of Michael J. Colitz, Jr. Mr. Culliss holds his B.S. in mechanical engineering from the University of South Florida and received his J.D. from Harvard University. Mr. Culliss has been registered to practice before the United States Patent and Trademark Office since 1993. JOHN MCDONOUGH has served as our Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer since September 1999. From June 1997 to September 1999, Mr. McDonough was President and Chief Executive Officer of Workgroup Technology Corporation, a software development company. From June 1995 to June 1997, Mr. McDonough was a consultant to several start-up technology companies. From 1985 to June 1995, Mr. McDonough held several positions with Easel Corporation, a client/server software tools company, where he served as Chief Financial Officer and Senior Vice President, Operations from 1986 to 1992, Chief Operating Officer from 1992 to 1994, and Chief Executive Officer from 1994 to June 1995. Mr. McDonough holds his B.S. in business administration, MAGNA CUM LAUDE, from Stonehill College and is a CPA. 36 DAVID ANDRE has served as our Vice President of Engineering since October 1999. From March 1997 to October 1999, Mr. Andre was first Director of Product Development, then Vice President of Engineering, at Lycos. From November 1995 to March 1997, Mr. Andre was Director of Internet Development at SQA, a test automation software company. From 1990 to November 1995, Mr. Andre was Product Line Manager at Object Design, an object-oriented database software company. Mr. Andre holds his B.S.E.E. from MIT and his M.S.C.S. from the University of Maryland. MAURICE CASEY has served as our Vice President of Sales since September 1999. From July 1997 to September 1999, Mr. Casey was first a Vice President, Eastern Sales Director, then Vice President, National Sales Director, at Switchboard.com, a yellow pages and white pages directory on the Web. From October 1996 to July 1997, Mr. Casey was New York Regional Manager with the NewsPage division of Individual, an information services company. From 1989 to October 1996, Mr. Casey held sales and sales management positions with the Smithsonian Institution for its Smithsonian Magazine and its Air and Space Magazine. TOM HARRISON has served as our Vice President of Product Development since May 1998. From May 1997 to May 1998, Mr. Harrison was the Director of Software Development at Cambridge Systematics, a planning, policy and management solutions consulting company. From 1993 to May 1997, Mr. Harrison was President of Sublime Software, a consulting firm specializing in large-scale client server architecture, distributed database design and early Internet applications development. Mr. Harrison holds his B.A. in economics from Princeton University. MEREDITH MCPHERRON has served as our Vice President of Marketing since August 1999. From July 1997 to August 1999, Ms. McPherron served as a senior marketing manager and then a director for Guinness Import Company. From January 1997 through June 1997, Ms. McPherron worked as a private consultant. From 1993 to December 1996, Ms. McPherron held a variety of brand management positions at General Mills within the cereal and yogurt categories. Ms. McPherron holds her B.A. and M.B.A. from Harvard University. DAVID PARKER has served as our Vice President of Business Development since August 1998. From July 1997 to August 1998, Mr. Parker was the General Manager of the New Media Group at Viaweb, a company providing software and reporting tools for building and operating online commerce Web sites. From October 1995 to July 1997, Mr. Parker was Vice President, Marketing for Delphi Inc./Knowledge Factory, a business information company. From 1993 to October 1995, Mr. Parker was Vice President, Circulation for Community Newspaper Company, an owner and operator of regional newspapers. Mr. Parker holds his B.A. and M.B.A. from Harvard University. ROB CHANDRA joined our board of directors in July 1999. Mr. Chandra is a General Partner with Commonwealth Capital, a venture capital firm that he joined in January 1996. From 1993 to December 1995, Mr. Chandra was a consultant with McKinsey. Mr. Chandra holds his B.A. from University of California at Berkeley and his M.B.A. from Harvard University. JONATHAN GOLDSTEIN joined our board of directors in July 1999. Mr. Goldstein has been with TA Associates, a venture capital firm, since 1986, serving as Vice President from September 1990 to December 1996 and as a Principal since January 1997. Mr. Goldstein currently serves on the board of directors of Andover.net. Mr. Goldstein holds his B.S. in biology, his B.S. in chemical engineering and his M.S. in biochemical engineering from MIT, and his M.B.A. from Harvard University. VERNON LOBO joined our board of directors in November 1998. Since October 1997, Mr. Lobo has been a Managing Director of Mosaic Venture Partners, a venture capital firm he co-founded. Mr. Lobo is also currently Chairman of CYBERplex, a professional service organization focused on developing electronic commerce solutions for the Internet. From September 1995 to September 1997, Mr. Lobo was a partner with Quorum Growth, a venture capital firm. From 1991 to August 1995, Mr. Lobo was a 37 consultant with McKinsey. Mr. Lobo holds his B.A.Sc. in engineering from the University of Waterloo, and his M.B.A. from Harvard University, where he was a Baker Scholar. WARREN PACKARD joined our board of directors in May 1998. Since June 1997, Mr. Packard has been with Draper Fisher Jurvetson, a venture capital firm, most recently serving as Director. From January 1996 until June 1997, Mr. Packard was Vice President of Business Development of Angara Database Systems, a main-memory database technology company which he co-founded. From June 1996 to January 1997, Mr. Packard was an Associate at Institutional Venture Partners, a venture capital firm. From 1991 to August 1995, Mr. Packard served as a Senior Principal Engineer in the New Business and Advanced Product Development Group at Baxter International. He currently serves as a director of Digital Impact and FogDog Sports. Mr. Packard is a Phi Beta Kappa graduate of Stanford University and holds a B.S. and M.S. in mechanical engineering. He also holds his M.B.A. from Stanford University, where he was an Arjay Miller Scholar. MICHAEL SANTULLO joined our board of directors in November 1998. Since April 1998, Mr. Santullo has been an active investor with and advisor to early stage Internet companies. From 1994 to October 1997, Mr. Santullo was the Chief Executive Officer of Four11, an email and white pages directory on the Web which he co-founded. Four11 was acquired by Yahoo! in October 1997. After Four11's acquisition by Yahoo!, Mr. Santullo served as Vice President at Yahoo! from October 1997 to April 1998. Mr. Santullo holds his B.S. in electrical engineering from MIT. BOARD COMMITTEES The board of directors has established an audit committee and a compensation committee. The audit committee reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the selection and performance of our independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, and our internal accounting and financial control policies and procedures. The members of the audit committee are presently Messrs. Goldstein and Lobo. The compensation committee has the power to create our executive compensation policy and determines the salaries and benefits for our employees, consultants, directors and other individuals compensated by us. The committee also administers our stock option and stock purchase plans. The members of the compensation committee are presently Messrs. Goldstein, Packard and Santullo. DIRECTOR COMPENSATION Directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors and for meetings of any committees of the board of directors on which they serve. No director employed by us will receive separate compensation for services rendered as a director. Directors are also eligible for participation in our 2000 Stock Option and Incentive Plan. See the description of that plan under the section of this prospectus called "Management--Stock Plans." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No interlocking relationship exists between the board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid to our Chief Executive Officer for services rendered in all capacities from inception (April 27, 1998) through December 31, 1998. We may refer to this officer as our named executive officer in other parts of this 38 prospectus. No other executive officer or employee had compensation in excess of $100,000 during 1998. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION NUMBER OF ----------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($) - --------------------------- ---------- --------- ---------------- ------------ ---------------- Michael Cassidy, Chief Executive Officer and President.................. $ 51,173 $ 10,000 -- -- --
OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth specified information regarding options granted to the named executive officer during 1998. We have not granted any stock appreciation rights. The options listed were granted under our 1998-A Stock Option Plan. In general, options granted under the plan vest over four years, with 25% of the option shares granted vesting on the one-year anniversary of the grant date and the remainder vesting in 36 equal monthly installments, and expire on the tenth anniversary of the date of grant, subject to earlier termination in certain situations related to resignation or termination of employment. The percentage of total options granted to employees in 1998 shown in the table below is based on options to purchase an aggregate of 1,824,696 shares of common stock granted during 1998. Potential realizable values are net of exercise prices and before taxes, and are based on an assumed initial public offering price of $ per share and the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the option term. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect our projection or estimate of future stock price growth. The amounts shown in this table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. Actual gains, if any, on stock option exercises will depend on the future performance of the common stock, the optionholders' continued employment through the option period and the date on which the options are exercised.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ---------------------------- ANNUAL RATES OF NUMBER OF STOCK SECURITIES % OF TOTAL PRICE APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ----------------------- NAME GRANTED 1998 SHARE DATE 5% 10% - ---- ---------- --------------- --------- ---------- ---------- ---------- Michael Cassidy...................... -- -- -- -- -- --
1998 OPTION EXERCISES AND YEAR-END OPTION VALUES The following table sets forth certain information concerning the number and value of options exercised by the named executive officer as of December 31, 1998 and the number and value of any unexercised options held by the named executive officer at December 31, 1998. The value of unexercised in-the-money options represents the total gain which would be realized if all in-the-money options held at December 31, 1998 were exercised, determined by multiplying the number of shares underlying the options by the difference between an assumed initial public offering price of $ 39 per share and the per share option exercise price. An option is in-the-money if the fair market value of the underlying shares exceeds the exercise price of the option.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998 NUMBER OF ----------------------------- --------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- --------------- -------- ------------ -------------- ----------- ------------- Michael Cassidy............ -- -- -- -- -- --
STOCK PLANS 1998-A STOCK PLAN. Our board of directors and stockholders adopted the Direct Hit Technologies, Inc. 1998-A Stock Plan in June 1998. The aggregate number of shares of common stock which may be issued under the 1998-A plan is 2,462,815. Under the 1998-A plan, we are authorized to grant incentive stock options and non-qualified stock options, as well as awards of common stock and opportunities to make direct purchases of common stock to employees, consultants, directors and officers. The 1998-A plan is administered by the board of directors and the compensation committee. The 1998-A plan provides that the board of directors and the compensation committee has the authority to select the participants and determine the terms of the stock options granted under the plan. An incentive stock option is not transferable by the recipient except by will or by the laws of descent and distribution. Non-qualified stock options and other awards are transferable only to the extent provided in the agreement relating to such option or award or in response to a valid domestic relations order. Generally, no incentive stock options may be exercised more than thirty days following termination of employment. However, in the event that termination is due to death or disability, the stock option is exercisable for a maximum of six months after such termination. As of November 30, 1999, we had outstanding under the 1998-A plan incentive stock options exercisable for 1,166,146 shares of common stock and non-qualified stock options exercisable for 86,500 shares of common stock. 2000 STOCK OPTION AND INCENTIVE PLAN. Our 2000 Stock Option and Incentive Plan was adopted by our board of directors in December 1999 and has not yet been approved by our stockholders. The 2000 plan provides for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors to our company and our subsidiaries, including incentive stock options and non-qualified stock options and other equity-based awards. Incentive stock options may be granted only to our employees. A total of 2,000,000 shares of common stock may be issued upon the exercise of options or other awards granted under the 2000 plan. The maximum number of shares that may be granted to any employee under the 2000 plan shall not exceed 1,000,000 shares of common stock during any calendar year. The 2000 plan is administered by the board of directors and the compensation committee. The 2000 plan provides that the board of directors and the compensation committee have the authority to select the persons to whom awards are granted and determine the terms of each award, including the number of shares of common stock to be granted. Payment of the exercise price of an award may be made in cash, shares of common stock, a combination of cash or stock or by any other method approved by the board or compensation committee, consistent with Section 422 of the Internal Revenue Code and Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Unless otherwise permitted by us, awards are not assignable or transferable except by will or the laws of descent and distribution. The board of directors or the compensation committee may amend, modify or terminate any award granted or made under the 2000 plan, so long as such amendment, modification or termination would not materially and adversely affect the participant. The board of directors or the compensation committee may also accelerate or extend the date or dates on which all or any particular option or 40 options granted under the 2000 plan may be exercised. No options or other equity-based awards have been granted to date under the 2000 plan. 2000 EMPLOYEE STOCK PURCHASE PLAN. The 2000 Employee Stock Purchase Plan was adopted by our board of directors in December 1999 and has not yet been approved by our stockholders. The 2000 purchase plan provides for the issuance of a maximum of 500,000 shares of common stock. The 2000 purchase plan is administered by the board of directors and the compensation committee. All of our employees whose customary employment is for more than 20 hours per week and for more than three months in any calendar year and who have completed more than 90 days of employment with us on or before the first day of any six-month payment period are eligible to participate in the 2000 purchase plan. Outside directors and employees who would own 5% or more of the total combined voting power or value of our stock immediately after the grant may not participate in the 2000 purchase plan. To participate in the 2000 purchase plan, an employee must authorize us to deduct an amount not less than one percent nor more than 10 percent of a participant's total cash compensation from his or her pay during each six-month payment period. The first payment period will commence on a date to be determined by the board of directors and end on December 31, 2000. Thereafter, the payment periods will commence on the first day of January and July and end on the last day of the following June and December, respectively, of each year, but in no case shall an employee be entitled to purchase more than 500 shares in any one payment period. The exercise price for the option granted in each payment period is 85% of the lesser of the average market price of the common stock on the first or last business day of the payment period, in either event rounded up to the nearest cent. If an employee is not a participant on the last day of the payment period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions will be refunded. Options granted under the 2000 purchase plan may not be transferred or assigned. An employee's rights under the 2000 purchase plan terminate upon his or her voluntary withdrawal from the plan at any time or upon termination of employment. No options have been granted to date under the 2000 purchase plan. 41 CERTAIN TRANSACTIONS We believe that all of the transactions set forth below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. We intend that all future transactions between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of the board of directors, including a majority of the independent and disinterested members of the board of directors, and be on terms no less favorable to us than those that could be obtained from unaffiliated third parties. SALES OF STOCK SERIES A PREFERRED STOCK FINANCING. In May 1998, we issued and sold an aggregate of 5,187,501 shares of series A preferred stock at a price of $0.2667 per share. Investors who participated in this transaction include:
INVESTOR NUMBER OF SHARES - -------- ---------------- Draper Fisher Associates Fund IV, L.P....................... 4,475,625 Draper Fisher Partners IV, LLC.............................. 336,876 Michael Santullo............................................ 187,500
Warren Packard, one of our directors, is a director of Draper Fisher Associates Fund IV, L.P. and Draper Fisher Partners IV, LLC. Michael Santullo is one of our directors. SERIES B PREFERRED STOCK FINANCING. In November 1998, we issued and sold an aggregate of 1,323,912 shares of series B preferred stock at a price of $1.51067 per share. Investors who participated in this transaction include:
INVESTOR NUMBER OF SHARES - -------- ---------------- Mosaic Venture Partners, LP I............................... 866,061 Draper Fisher Associates Fund IV, L.P....................... 395,022 Draper Fisher Partners IV, LLC.............................. 29,733 Michael Santullo............................................ 16,548
Vernon Lobo, one of our directors, is a managing director of Mosaic Venture Partners, LP I. SERIES C PREFERRED STOCK FINANCING. In July 1999, we issued and sold an aggregate of 4,431,263 shares of series C preferred stock at a price of $5.9351 per share. Investors who participated in this transaction include:
INVESTOR NUMBER OF SHARES - -------- ---------------- Entities associated with TA Associates...................... 1,684,892 Draper Fisher Associates Fund IV, L.P....................... 313,389 Draper Fisher Partners IV, LLC.............................. 23,588 Entities associated with Commonwealth Capital Ventures...... 336,979 Mosaic Venture Partners, LP I............................... 168,488
Jonathan Goldstein, one of our directors, is a principal of each of the entities associated with TA Associates. Rob Chandra, one of our directors, is a general partner of each of the entities associated with Commonwealth Capital Ventures. In connection with the sale of the series C preferred stock, we entered into a voting agreement with the holders of our preferred stock and our founders which requires these stockholders and our 42 founders to elect the following directors: the President or Chief Executive Officer; a nominee designated by the common stockholders, initially Michael Santullo; a nominee designated by TA Associates, initially Jonathan Goldstein; a nominee designated by Gary Culliss, initially Gary Culliss; a nominee designated by Draper Fisher Jurvetson, initially Warren Packard; and a nominee designated by Mosaic Venture Partners, initially Vernon Lobo. The voting agreement will terminate upon the closing of this offering. REGISTRATION RIGHTS. In connection with the preferred stock financings, we granted registration rights to the preferred stockholders. For a description of these registration rights, see "Description of Capital Stock--Registration Rights." NON-COMPETITION AGREEMENTS We have entered into noncompetition agreements with each of Michael Cassidy, Gary Culliss and David Parker. Each agreement imposes a prohibition on competing with us for 12 months following termination of employment. PATENT LICENSE We have entered into an exclusive patent license agreement with Gary Culliss. Other parties to the agreement include entities affiliated with our directors Rob Chandra, Jonathan Goldstein, Vernon Lobo and Warren Packard. Under the license agreement, we have been given rights to all technology covered by one patent and three patent applications owned by Mr. Culliss. For a description of this patent license, see "Business--Intellectual Property." 43 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of our common stock as of November 30, 1999, and as adjusted to reflect the sale of the shares of common stock offered in this prospectus, by: - our named executive officer; - each of our directors; - each person known by us to be the beneficial owner of more than 5% of our common stock; and - all executive officers and directors as a group. Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o Direct Hit Technologies, Inc., 888 Worcester Street, Suite 340, Wellesley, Massachusetts 02482, and each beneficial owner has sole voting and investment power over the shares shown as beneficially owned except to the extent authority is shared by spouses under applicable law and except as set forth in the footnotes to the table. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Shares of common stock issuable by us to a person or entity listed in the table pursuant to options that may be exercised within 60 days after November 30, 1999 are deemed to be beneficially owned and outstanding for purposes of calculating the number of shares and the percentage beneficially owned by that person or entity. However, these shares are not deemed to be outstanding for purposes of computing the percentage beneficially owned by any other person or entity. For purposes of calculating the percentage of common stock beneficially owned by any person, the number of shares deemed outstanding before the offering gives effect to the conversion of our outstanding preferred stock into 10,942,676 shares of common stock that will occur upon the closing of this offering.
PERCENTAGE OF COMMON NUMBER OF STOCK OUTSTANDING SHARES --------------------------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING - ------------------------------------ ------------ -------- ------------------- EXECUTIVE OFFICERS AND DIRECTORS: Gary Culliss............................................. 4,840,248 23.4% Michael Cassidy.......................................... 2,943,750 14.2 Rob Chandra(1)........................................... 336,979 1.6 Vernon Lobo(2)........................................... 1,030,549 5.0 Jonathan Goldstein(3).................................... 1,684,892 8.2 Warren Packard(4)........................................ 5,574,233 27.0 Michael Santullo......................................... 204,048 * All executive officers and directors as a group (13 persons)(5)............................................ 17,791,574 83.9 OTHER FIVE PERCENT STOCKHOLDERS: Entities affiliated with Draper Fisher Jurvetson(6)...... 5,574,233 27.0 400 Seaport Court, Suite 250 Redwood City, CA 94063 Entities associated with TA Associates(7)................ 1,684,892 8.2 High Street Tower, Suite 2500 125 High Street Boston, MA 02110
- ------------------------ * Less than 1% (1) Consists of 321,104 shares held by Commonwealth Capital Ventures II L.P. and 15,875 shares held by CCV II Associates L.P. Mr. Chandra is a General Partner of Commonwealth Capital Ventures II L.P. and CCV II Associates L.P. and may be deemed to share voting and investment power with respect to all shares held by Commonwealth Capital Ventures II L.P. and by CCV II Associates L.P. Mr. Chandra disclaims beneficial ownership of such shares. 44 (2) Consists of 1,030,549 shares held by Mosaic Venture Partners, LP I. Mr. Lobo is a Managing Director of Mosaic Venture Partners, LP I and may be deemed to share voting and investment power with respect to all shares held by Mosaic Venture Partners, LP I. Mr. Lobo disclaims beneficial ownership of such shares. (3) Consists of 1,123,318 shares held by TA/Advent VIII L.P., 22,409 shares held by TA Investors LLC, 21,398 shares held by TA Executives Fund LLC and 517,767 shares held by Advent Atlantic and Pacific III Limited Partners. Mr. Goldstein is a Managing Director of TA/Advent VIII L.P., TA Investors LLC, TA Executives Fund LLC and Advent Atlantic and Pacific III Limited Partners and may be deemed to share voting and investment power with respect to all shares held by those entities. Mr. Goldstein disclaims beneficial ownership of such shares, except to the extent of 4,996 shares of preferred stock which he owns through TA Investors LLC. (4) Consists of 5,184,036 shares held by Draper Fisher Associates Fund IV, LP, and 390,197 held by Draper Fisher Partners IV, LLC. Mr. Packard is a Director for Draper Fisher Associates Fund IV, LP and Draper Fisher Partners IV, LLC and may be deemed to share voting and investment power with respect to all shares held by those entities. Mr. Packard disclaims beneficial ownership of such shares. (5) Includes 535,000 shares subject to options exercisable within 60 days of November 30, 1999. Also includes 8,621,657 shares deemed to be beneficially owned by certain of our directors, and as to which such directors disclaim beneficial ownership. See notes 1, 2, 3 and 4 above. (6) Consists of 5,184,036 shares held by Draper Fisher Associates Fund IV, LP, and 390,197 shares held by Draper Fisher Partners IV, LLC. (7) Consists of 1,123,318 shares held by TA/Advent VIII L.P., 517,767 shares held by Advent Atlantic & Pacific III L.P., 22,409 shares held by TA Investors LLC and 21,398 shares held by TA Executives Fund LLC. 45 DESCRIPTION OF CAPITAL STOCK The following description of our capital stock and certain provisions of our restated certificate of incorporation and bylaws are summaries. Copies of these documents have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering. Upon the closing of this offering, our authorized capital stock will consist of 60,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share. COMMON STOCK As of November 30, 1999, there were 20,796,568 shares of common stock outstanding and held of record by 49 stockholders, assuming conversion of all outstanding shares of preferred stock. The holders of common stock are entitled to one vote for each share of common stock held of record on our books for the election of directors and on all matters submitted to a vote of stockholders. The holders of common stock are entitled to receive ratably dividends, if any, when, as and if declared by the board of directors out of assets legally available therefor, subject to any preferential dividend rights of any outstanding preferred stock. Upon our dissolution, liquidation or winding up, the holders of common stock are entitled to receive ratably our net assets available after the payment of all debts and other liabilities, subject to the preferential rights of any outstanding preferred stock. Holders of the common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. PREFERRED STOCK Upon the closing of this offering, the board of directors will be authorized, without further vote or action by the stockholders, to issue from time to time up to an aggregate of 1,000,000 shares of preferred stock in one or more series and to fix or alter the designations, rights, preferences and privileges and any qualifications, limitations or restrictions of the shares of each such series of preferred stock, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series, any or all of which may be greater than the rights of common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control. We have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Pursuant to the terms of a rights agreement, after this offering, the holders of approximately 18,726,674 shares of common stock, including 7,783,998 shares of common stock owned by our founders, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of the rights agreement, if we propose to register any of our securities under the Securities Act for our own account, the holders, including the founders, are entitled to notice of such registration and are entitled to include shares of their common stock therein. If we propose to register any of our securities under the Securities Act for the account of our non-founder security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of their common stock therein. Additionally, the non-founder holders are also 46 entitled to certain demand registration rights pursuant to which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect that registration. We are not required to effect more than four of these demand registrations. In addition, the non-founder holders are entitled to demand registration rights pursuant to which they may require us to file a registration statement under the Securities Act on Form S-3 at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect that registration. We are not required to effect more than three of these Form S-3 demand registrations in any twelve-month period. All of these registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in such registration and our right not to effect a requested registration within six months following any offering of our securities, including this offering. In addition, our obligation to register shares of common stock terminates immediately with respect to any security holder, provided that all shares held by the holder may be publicly sold within a three-month period pursuant to the Securities Act. In any event, all registration rights terminate five years from the date of this prospectus. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A "business combination" is defined as a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. Subject to various exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within the past three years did own, 15% or more of a corporation's voting stock. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. In addition, some provisions of our restated certificate of incorporation and restated bylaws may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might deem to be in his or her best interest. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include: STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. The restated certificate of incorporation provides that stockholders may not take action by written consent, but only at a duly called annual or special meeting of stockholders. The certificate of incorporation further provides that special meetings of our stockholders may be called only by the chairman of the board of directors, and in no event may the stockholders call a special meeting. Thus, without approval by the board of directors or chairman, stockholders may take no action between meetings. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The restated bylaws provide that a stockholder seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice of this intention in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices not less than 120 days prior to the first anniversary of the date of our notice of annual meeting provided with respect to the previous year's annual meeting of stockholders. However, if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days from the time contemplated at the time of the previous year's proxy statement, then a proposal shall be received no later than the close of business on the 10(th) day following the date on 47 which notice of the date of the meeting was mailed or a public announcement was made, whichever first occurs. The restated bylaws also include a similar requirement for making nominations at special meetings and specify requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual or special meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to certain limitations imposed by the Nasdaq National Market. These additional shares may be utilized for a variety of corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. SUPER-MAJORITY VOTING. Delaware law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, require a greater percentage. We have provisions in our certificate of incorporation and bylaws which require a super-majority vote of the stockholders to amend, revise or repeal anti-takeover provisions. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our restated certificate of incorporation provides that, to the extent permitted by Delaware law, our directors shall not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director. Under Delaware law, the directors have a fiduciary duty to us that is not eliminated by this provision of the certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under Delaware law for breach of the director's duty of loyalty to us, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or that involve intentional misconduct or knowing violations of law, for action leading to improper personal benefit to the director and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect the directors' responsibilities under any other laws, such as the federal securities laws. Our restated certificate of incorporation further provides for the indemnification of our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, provided that this provision shall not eliminate or limit the liability of a director: - for any breach of the director's duty of loyalty to the corporation or its stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - arising under Section 174 of the Delaware General Corporation Law; or - for any transaction from which the director derived an improper personal benefit. TRANSFER AGENT AND REGISTRAR Upon the closing of this offering, the transfer agent and registrar for our common stock will be American Stock Transfer and Trust Company. 48 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has not been any public market for our common stock, and we make no prediction as to the effect, if any, that market sales of shares of common stock or the availability of shares of common stock for sale will have on the market price of the common stock prevailing from time to time. Nevertheless, sales of substantial amounts of common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of the common stock and could impair our future ability to raise capital through the sale of equity securities. Upon the closing of this offering, we will have an aggregate of shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares purchased by "affiliates" (as that term is defined in Rule 144 under the Securities Act), may only be sold in compliance with the limitations described below. The remaining 20,796,568 shares of common stock will be deemed "restricted securities" as defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144, including Rule 144(k), or Rule 701 promulgated under the Securities Act, which rules are summarized below. Giving effect to the lock-up agreements described below and the provisions of Rule 144, including Rule 144(k), and Rule 701, 20,796,568 shares will be available for sale in the public market as follows:
NUMBER OF SHARES DATE ---------------- ---- 180 days from the date of this prospectus (subject in some cases to volume limitations) At various times after 180 days from the date of this prospectus (subject to vesting provisions)
In general, under Rule 144, as currently in effect, a person, or persons whose shares are required to be aggregated, including an affiliate of ours, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock, approximately shares immediately after this offering, or the average weekly trading volume in the common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to restrictions. In addition, a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from an affiliate of ours, such person's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. All of our directors, officers and stockholders have agreed that they will not offer, sell or agree to sell, directly or indirectly, or otherwise dispose of any shares of common stock without the prior written consent of FleetBoston Robertson Stephens Inc. for a period of 180 days from the date of this prospectus. Any of our employees or consultants who purchased his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this prospectus. As of November 30, 1999, the holders of options exercisable for approximately 1,318,646 shares of common stock, all of whom are bound by a 180-day 49 lock-up obligation, will be eligible to sell their shares on the expiration of the 180-day lock-up period, subject in some cases to vesting of the shares underlying such options. We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock options and common stock issued or issuable under our stock plans. We expect to file a registration statement covering shares offered pursuant to the 1998-A Stock Plan, the 2000 Stock Option and Incentive Plan and the 2000 Employee Stock Purchase Plan 180 days after the date of this prospectus, permitting the resale of such shares by nonaffiliates in the public market without restriction under the Securities Act. We have agreed not to sell or otherwise dispose of any shares of common stock during the 180-day period following the date of the prospectus, except that we may issue, and grant options to purchase, shares of common stock under the 1998-A Stock Plan, the 2000 Stock Option and Incentive Plan and the 2000 Employee Stock Purchase Plan. In addition, we may issue shares of common stock in connection with any acquisition of another company if the terms of issuance provide that such common stock shall not be resold prior to the expiration of the 180-day period referenced in the preceding sentence. Following this offering, holders of 18,726,674 shares of outstanding common stock will have demand registration rights with respect to their shares of common stock, subject to the 180-day lock-up arrangement described above, to require us to register their shares in any future registration of our securities. See "Description of Capital Stock--Registration Rights." 50 UNDERWRITING UNDERWRITING AGREEMENT The underwriters named below, acting through their representatives, FleetBoston Robertson Stephens Inc., Thomas Weisel Partners LLC, SoundView Technology Group, Inc. and Wit Capital Corporation, have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth below opposite their respective names. The underwriters are committed to purchase and pay for all shares if any are purchased.
NUMBER UNDERWRITER OF SHARES - ----------- --------- FleetBoston Robertson Stephens Inc.......................... Thomas Weisel Partners LLC.................................. SoundView Technology Group, Inc............................. Wit Capital Corporation..................................... Total..................................................... ===
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No reduction in the price will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. OVER-ALLOTMENT OPTION. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to additional shares of common stock at the same price per share as we will receive for the shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the shares offered by this prospectus. If purchased, the additional shares will be sold by the underwriters on the same terms as those on which the shares are being sold. We will be obligated, under this option, to sell shares to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock offered by this prospectus. UNDERWRITING DISCOUNTS AND COMMISSIONS. The following table shows the estimated per share and total underwriting discounts and commissions to be paid by us to the underwriters. This information is 51 presented assuming either no exercise or full exercise by the underwriters of their over-allotment option.
WITHOUT WITH PER OVER-ALLOTMENT OVER-ALLOTMENT SHARE OPTION OPTION -------- -------------- -------------- Assumed public offering price............. Estimated underwriting discounts and commissions............................. Estimated proceeds, before expenses, to us......................................
The expenses of the offering payable by us are estimated at $ . FleetBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 2000. NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus has been determined through negotiations among the representatives and us. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. INDEMNITY. The underwriting agreement contains covenants of indemnity among the underwriters and us against civil liabilities, including liabilities under the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. FUTURE SALES. All of our executive officers, directors and stockholders have agreed, during the period of 180 days after the date of this prospectus, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the securities subject to lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of FleetBoston Robertson Stephens Inc., subject to certain exceptions, consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, the issuance of our common stock upon the exercise of outstanding options or warrants, and the issuance of options under existing stock option and incentive plans. See "Shares Eligible for Future Sale." LISTING. We have applied for approval for the quotation of our common stock on the Nasdaq National Market under the symbol "DHIT." DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up to five percent of the common stock to be issued by us and offered for sale in this offering, at the initial public offering price, to directors, officers, employees, business associates and persons otherwise connected to us. The 52 number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase reserved shares. Any reserved shares which are not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this offering. STABILIZATION. The representatives have advised us that, pursuant to Regulation M under the Securities Act of 1933, some persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. SERIES C PREFERRED STOCK INVESTMENT. On July 16, 1999, two limited partnerships affiliated with FleetBoston Robertson Stephens Inc. purchased an aggregate of 84,245 shares of our series C preferred stock for aggregate consideration of $500,003. Each share of series C preferred stock will convert into one share of our common stock upon completion of this offering. THOMAS WEISEL PARTNERS LLC. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners LLC has been named as a lead-manager or co-manager on 100 filed public offerings of equity securities, of which 79 have been completed, and has acted as a syndicate member in an additional 54 public offerings of equity securities. Thomas Weisel Partners LLC does not have any material relationship with us or any of our officers, directors or controlling persons, except with respect to its contractual relationship with us under the underwriting agreement entered into in connection with this offering. WIT CAPITAL CORPORATION. Wit Capital Corporation, a member of the National Association of Securities Dealers, Inc., will participate in the offering as one of the underwriters. The National Association of Securities Dealers, Inc. approved the membership of Wit Capital on September 4, 1997. Since that time, Wit Capital has acted as an underwriter, e-Manager or selected dealer in over 170 public offerings. Except for its participation as a manager in this offering, Wit Capital has no relationship with us or any of our founders or significant stockholders. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Legal matters in connection with this offering will be passed upon for the underwriters by Foley, Hoag & Eliot LLP, Boston, Massachusetts. EXPERTS The financial statements as of December 31, 1998 and for the period from inception (April 27, 1998) through December 31, 1998 included in this prospectus and elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report 53 appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. In February 1999 our board of directors approved a change in accountants and our former accountants were dismissed. We subsequently engaged the independent accounting firm of Deloitte & Touche LLP. The former accountants' review report on our financial statements for the fiscal period ended December 31, 1998 did not contain an adverse opinion or disclaimer opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. In addition, we had no disagreements with our former accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure during the fiscal period ended December 31, 1998 and subsequent interim periods. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under the Securities Act with respect to the shares of common stock to be sold in this offering. As permitted by the Securities Exchange Commission's rules and regulations, this prospectus does not contain all the information set forth in the registration statement. For further information regarding our company and the shares of common stock to be sold in this offering, please refer to the registration statement and the contracts, agreements and other documents filed as exhibits to the registration statement. You may read and copy all or any portion of the registration statement or any other information that we file at the Securities Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities Exchange Commission. Please call the SEC at 1-800-732-0330 for further information on the operation of the public reference rooms. Our SEC filings, including the registration statement, are also available to you on the Securities Exchange Commission's Web site WWW.SEC.GOV. As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act used above, and, in accordance therewith, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. We intend to furnish to our stockholders annual reports containing financial statements audited by an independent public accounting firm. 54 DIRECT HIT TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS
PAGE -------- Report of Independent Auditors.............................. F-2 Balance Sheets as of December 31, 1998 and September 30, 1999 (unaudited).......................................... F-3 Statements of Operations for the Period from Inception (April 27, 1998) through December 31, 1998 and the Nine Months Ended September 30, 1999 (unaudited)............... F-4 Statements of Stockholders' Equity for the Period from Inception (April 27, 1998) through December 31, 1998 and the Nine Months Ended September 30, 1999 (unaudited)...... F-5 Statements of Cash Flows for the Period from Inception (April 27, 1998) through December 31, 1998 and the Nine Months Ended September 30, 1999 (unaudited)............... F-6 Notes to Financial Statements............................... F-7
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Direct Hit Technologies, Inc. Wellesley, Massachusetts We have audited the accompanying balance sheet of Direct Hit Technologies, Inc. (the "Company") as of December 31, 1998 and the related statements of operations, stockholders' equity, and cash flows for the period from inception (April 27, 1998) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1998, and the results of its operations and its cash flows for the period from inception (April 27, 1998) to December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Boston, Massachusetts December 17, 1999 F-2 DIRECT HIT TECHNOLOGIES, INC. BALANCE SHEETS
PRO FORMA DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1999 ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents............................ $2,557,673 $16,427,389 Short term investments............................... -- 10,059,351 Accounts receivable, less allowances of $5,100 in 1998 and $44,100 in 1999........................... 162,846 357,238 Prepaid expenses and other current assets............ 20,830 37,311 ---------- ----------- Total current assets............................. 2,741,349 26,881,289 ---------- ----------- Property and equipment, Net............................ 170,046 991,475 Restricted cash........................................ -- 150,000 Other assets........................................... 12,535 26,610 ---------- ----------- Total Assets........................................... $2,923,930 $28,049,374 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable..................................... $ 7,558 $ 150,377 Accrued expenses..................................... -- 166,661 Accrued professional fees............................ 31,805 55,907 Accrued compensation................................. 28,646 357,176 Other liabilities.................................... -- 37,445 Deferred revenue..................................... 32,500 245,135 ---------- ----------- Total current liabilities........................ 100,509 1,012,701 ---------- ----------- Commitments (Note 3) Stockholders' Equity: Convertible Preferred Stock: Series C $.001 par value, 4,431,265 shares authorized, 4,431,263 shares issued and outstanding (liquidation preference, $26,299,980).............. -- 26,279,468 -- Series B $.001 par value, 1,323,912 shares authorized, issued and outstanding (liquidation preference, $2,000,000)............................ 1,993,110 1,993,110 -- Series A $.001 par value, 5,187,501 shares authorized, issued and outstanding (liquidation preference, $1,383,334)............................ 1,378,334 1,378,334 -- Common stock, $.001 par value, 35,000,000 shares authorized, 9,624,684 and 9,722,048 shares issued and outstanding; 20,664,724 pro forma.............. 9,625 9,722 20,665 Additional paid-in capital........................... 733,319 5,602,058 35,242,027 Deferred compensation................................ (498,727) (4,504,145) (4,504,145) Accumulated deficit.................................. (792,240) (3,721,874) (3,721,874) ---------- ----------- ----------- Total stockholders' equity....................... 2,823,421 27,036,673 $27,036,673 ---------- ----------- =========== Total Liabilities and Stockholders' Equity............. $2,923,930 $28,049,374 ========== ===========
See notes to financial statements. F-3 DIRECT HIT TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION (APRIL 27, 1998) NINE MONTHS THROUGH ENDED DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) Revenues: OEM....................................................... $ 175,420 $ 805,044 Advertising............................................... -- 57,159 ---------- ----------- Total revenues........................................ 175,420 862,203 Cost of revenues.......................................... 51,595 360,524 ---------- ----------- Gross profit.............................................. 123,825 501,679 ---------- ----------- Operating expenses: Sales and marketing....................................... 90,332 948,123 Research and development.................................. 471,598 1,502,224 General and administrative................................ 150,260 412,855 Equity-related compensation............................... 231,775 826,927 ---------- ----------- Total operating expenses................................ 943,965 3,690,129 ---------- ----------- Operating loss.............................................. (820,140) (3,188,450) Interest income............................................. 27,900 258,816 ---------- ----------- Net loss.................................................... $ (792,240) $(2,929,634) ========== =========== Net loss per share--basic and diluted....................... $ (0.45) $ (0.88) ========== =========== Shares used in per share calculation--basic and diluted..... 1,772,864 3,330,290 ========== =========== Net loss per share--pro forma basic and diluted (unaudited)............................................... $ (0.12) $ (0.26) ========== =========== Shares used in per share calculation--pro forma basic and diluted (unaudited)....................................... 6,705,378 11,091,546 ========== ===========
See notes to financial statements. F-4 DIRECT HIT TECHNOLOGIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (APRIL 27, 1998) THROUGH DECEMBER 31, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------------ ----------------------- PAID-IN DEFERRED ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ---------- ----------- ---------- ---------- ---------- ------------- ------------ BALANCE AT INCEPTION (APRIL 27, 1998).............................. -- -- -- -- -- -- -- Issuance of common stock to founders....................... -- -- 7,849,998 $7,850 $542,150 $(550,000) -- Issuance of Series A preferred stock, net of issuance costs of $5,000......................... 5,187,501 $1,378,334 -- -- -- -- -- Issuance of Series B preferred stock, net of issuance costs of $6,890......................... 1,323,912 1,993,110 -- -- -- -- -- Exercise of stock options........ -- -- 1,774,686 1,775 10,667 -- -- Deferred compensation related to grant of stock options......... -- -- -- -- 180,502 (180,502) -- Amortization of deferred compensation................... -- -- -- -- -- 231,775 -- Net loss......................... -- -- -- -- -- -- $(792,240) ---------- ----------- ---------- ---------- ---------- ------------ ----------- BALANCE, DECEMBER 31, 1998......... 6,511,413 3,371,444 9,624,684 9,625 733,319 (498,727) (792,240) UNAUDITED: Repurchase and retirement of common stock, net.............. -- -- (22,500) (23) (577) -- -- Exercise of stock options........ -- -- 119,864 120 36,971 -- -- Issuance of Series C preferred stock, net of issuance costs of $20,512........................ 4,431,263 26,279,468 -- -- -- -- -- Deferred compensation related to grant of stock options......... -- -- -- -- 4,607,345 (4,607,345) -- Transfer of shares to employees...................... -- -- -- -- 225,000 -- -- Amortization of deferred compensation................... -- -- -- -- -- 601,927 -- Net loss......................... -- -- -- -- -- -- (2,929,634) ---------- ----------- ---------- ---------- ---------- ------------ ----------- BALANCE, SEPTEMBER 30, 1999 (Unaudited)........................ 10,942,676 $29,650,912 9,722,048 $9,722 $5,602,058 $(4,504,145) $(3,721,874) ========== =========== ========== ========== ========== ============ =========== TOTAL STOCKHOLDERS' EQUITY ------------- BALANCE AT INCEPTION (APRIL 27, 1998).............................. -- Issuance of common stock to founders....................... -- Issuance of Series A preferred stock, net of issuance costs of $5,000......................... $1,378,334 Issuance of Series B preferred stock, net of issuance costs of $6,890......................... 1,993,110 Exercise of stock options........ 12,442 Deferred compensation related to grant of stock options......... -- Amortization of deferred compensation................... 231,775 Net loss......................... (792,240) ----------- BALANCE, DECEMBER 31, 1998......... 2,823,421 UNAUDITED: Repurchase and retirement of common stock, net.............. (600) Exercise of stock options........ 37,091 Issuance of Series C preferred stock, net of issuance costs of $20,512........................ 26,279,468 Deferred compensation related to grant of stock options......... -- Transfer of shares to employees...................... 225,000 Amortization of deferred compensation................... 601,927 Net loss......................... (2,929,634) ----------- BALANCE, SEPTEMBER 30, 1999 (Unaudited)........................ $27,036,673 ===========
See notes to financial statements. F-5 DIRECT HIT TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION (APRIL 27, 1998) NINE MONTHS THROUGH ENDED DECEMBER 31, SEPTEMBER 30, 1998 1999 ---------------- ------------- (UNAUDITED) Cash flows from operating activities: Net loss.................................................. $ (792,240) $ (2,929,634) ----------- ------------ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 21,665 121,390 Equity-related compensation............................. 231,775 826,927 Changes in operating assets and liabilities: Accounts receivable................................... (162,846) (194,392) Prepaid expenses and other current assets............. (20,830) (16,481) Accounts payable and accrued expenses................. 68,009 699,557 Deferred revenue...................................... 32,500 212,635 ----------- ------------ Total adjustments................................... 170,273 1,649,636 ----------- ------------ Net cash used in operating activities............... (621,967) (1,279,998) ----------- ------------ Cash flows from investing activities: Increase in other assets.................................. (12,535) (14,075) Purchase of short term investments........................ -- (10,059,351) Restricted cash deposits.................................. -- (150,000) Purchases of property and equipment....................... (191,711) (942,819) ----------- ------------ Net cash used in investing activities............... (204,246) (11,166,245) ----------- ------------ Cash flows from financing activities: Issuance of common stock upon exercise of stock options... 12,442 37,091 Repurchase and retirement of common stock................. -- (600) Issuance of Series A preferred stock...................... 1,278,334 -- Issuance of Series B preferred stock...................... 1,993,110 -- Issuance of Series C preferred stock...................... -- 26,279,468 Proceeds from issuance of note payable.................... 100,000 -- ----------- ------------ Net cash provided by financing activities........... 3,383,886 26,315,959 ----------- ------------ Increase in cash and cash equivalents....................... 2,557,673 13,869,716 Cash and cash equivalents, beginning of period.............. -- 2,557,673 ----------- ------------ Cash and cash equivalents, end of period.................... $ 2,557,673 $ 16,427,389 =========== ============ Supplemental cash flow information Conversion of note payable to Series A preferred stock.... $ 100,000 $ -- =========== ============
See notes to financial statements. F-6 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS--Direct Hit Technologies, Inc. (the "Company") provides technology that aggregates and organizes online content to enable users to quickly find relevant and accurate information, products and services. The Company was incorporated on April 27, 1998. The Company has a single operating segment, aggregation and organization of online content. The Company has no organizational structure dictated by product lines, geography or customer type. Revenues have been primarily derived from popularity-based search products. The Company has experienced net losses since its inception and, as of September 30, 1999, had an accumulated deficit of approximately $3.7 million. Such losses and accumulated deficit resulted from both the Company's lack of substantial revenue and costs incurred in the development of the Company's service and in the establishment of the Company's Web site. For the foreseeable future, the Company expects to continue to experience significant growth in its operating expenses in order to execute its current business plan, particularly those related to sales and marketing and research and development. INTERIM FINANCIAL STATEMENTS (UNAUDITED)-- The financial statements as of September 30, 1999 and for the nine months then ended are unaudited. In the opinion of management, such unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations for interim periods are not necessarily indicative of the results which may be expected for any other interim period or for the full year. PRO FORMA BALANCE SHEET (UNAUDITED)--Upon the closing of the Company's public offering, all of the outstanding shares of convertible preferred stock as of September 30, 1999, will automatically convert into approximately 10,942,676 shares of common stock. The unaudited pro forma presentation of the balance sheet has been prepared assuming the conversion of all shares of convertible preferred stock into common stock at September 30, 1999. All references to pro forma information in the notes to the financial statements are unaudited. STOCK SPLIT--On July 9, 1999, prior to the Series C investment, the Company's Board of Directors approved a three-for-one stock split of the Company's common and preferred stock. Shareholders of record on July 14, 1999 (the record date) received two additional shares for every share held on that date. All share and per share amounts in these financial statements and notes hereto for all periods presented have been adjusted to reflect the three-for-one stock split. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES--The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS--The Company invests its cash in money market accounts and in debt securities of U.S. Government agencies and commercial paper from high quality corporate issuers. All highly liquid instruments with an original maturity of ninety days or less are considered cash equivalents and those with original maturities greater than ninety days and less than F-7 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) one year are considered short term investments. The Company's short term investments in marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, if any, net of tax, recorded in stockholders' equity. Such unrealized gains and losses to date have been immaterial. Realized gains or losses and permanent declines in value, if any, on available-for-sale securities will be reported in income as incurred. At September 30, 1999, all of the Company's available-for-sale debt securities mature within one year. RESTRICTED CASH--The Company is required to maintain a $150,000 compensating balance with a bank to support an outstanding letter of credit which is issued in favor of the Company's landlord in lieu of a deposit on leased office space. REVENUE RECOGNITION--Revenues are comprised of OEM revenues and advertising revenues. OEM revenues are generated through a variety of contractual arrangements, which include per-query fees and advertising revenue sharing arrangements with OEM customers. Per-query fees are recognized in the period earned, and revenues from advertising revenue sharing arrangements are recognized in the period that the advertisement is displayed through the OEM customer's Web site. When the OEM contract calls for payments based on per-query fees, revenues are recognized based on the number of Web pages accessed as reported by the OEM customer or as determined by the Company, depending on the contract. When the OEM contract provides for minimum monthly fees, such fees are recognized monthly as earned. Advertising revenues are derived primarily from the sale of banner advertisements on Web pages. Revenues are recognized over the term the advertisements are displayed. Deferred revenue is primarily comprised of payments and billings in excess of recognized revenue relating to customer contracts. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, short term investments and accounts receivable. Substantially all of the Company's cash and cash equivalents are managed by two financial institutions. At December 31, 1998 and September 30, 1999, the Company had cash balances at certain financial institutions in excess of federally insured limits. However, the Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers. The Company maintains an allowance for potential credit losses. Accordingly, the Company has provided for $5,100 and $39,000 for such allowances in 1998 and 1999, respectively. The Company has not recorded any write-offs in 1998 or 1999. For the period from inception (April 27, 1998) through December 31, 1998, two customers accounted for 78% and 22% of total revenues and 82% and 18% of total receivables, at December 31, 1998, respectively. One customer accounted for 70% of total revenues for the nine months ended September 30, 1999. Three customers accounted for 69%, 13% and 13% of total receivables at September 30, 1999, respectively. F-8 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION AND AMORTIZATION--Property and equipment, including leasehold improvements, are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The Company periodically evaluates the recoverability of its long-lived assets based on expected undiscounted cash flows and recognizes impairments, if any, based on expected discounted future cash flows. INCOME TAXES--Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on currently available evidence, are not expected to be realized. COST OF REVENUES--Cost of revenues consist primarily of expenses associated with the ongoing maintenance and support of our products, including compensation and employee-related expenses, consulting fees, equipment costs, networking, bandwidth and other related indirect costs. The Company enters into contracts for bandwidth with third-party network providers. RESEARCH AND DEVELOPMENT--Research and development expenses consist primarily of compensation and employee-related expenses, equipment costs, and fees for professional services related to the continued development and enhancement of our product offerings. Costs incurred in the engineering and development of the Company's product are expensed as incurred, except for certain software development costs. Costs associated with the development of computer software are expensed prior to the establishment of technological feasibility (as defined by SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed") and capitalized thereafter. The Company also has incurred expenditures on software used to both facilitate internal processes and create and maintain its Web site. The Company has adopted Statement of Position ("SOP") 98-1, which requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs eligible for, and capitalized under SFAS No. 86 and SOP 98-1, have been insignificant to date. ADVERTISING COSTS--Advertising costs are recorded as sales and marketing expense as incurred. Advertising expenses for the period from inception (April 27, 1998) through December 31, 1998 and for the nine months ended September 30, 1999 were $0 and $183,696, respectively. STOCK-BASED COMPENSATION--The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost is recognized on a straight line basis over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company's stock and the exercise price. EARNINGS PER SHARE--Basic net loss per share is computed using the weighted average number of common shares outstanding during the period adjusted for those restricted shares that are contingently returnable. Diluted net loss per share is computed using the weighted average number of common F-9 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of convertible preferred stock, restricted common stock that is contingently returnable, and stock options. For the period from inception (April 27, 1998) to December 31, 1998 and for the nine months ended September 30, 1999, options to purchase 72,510 and 1,204,646 shares of common stock, respectively, restricted common stock of 7,071,093 and 5,498,565 shares, respectively, that is contingently returnable and preferred stock convertible into 6,511,413 and 10,942,676 shares of common stock, respectively, were excluded from the calculation since their inclusion would be antidilutive. Pro forma basic and diluted net loss per share have been calculated assuming the conversion of all outstanding shares of preferred stock into common stock, as if the shares had converted immediately upon their issuance. The following is a calculation of pro forma net loss per share (unaudited):
PERIOD FROM INCEPTION NINE MONTHS (APRIL 27, 1998) ENDED THROUGH DECEMBER 31, SEPTEMBER 30, 1998 1999 -------------------- ------------- Basic and diluted: Net loss..................................... $ (792,240) $ (2,929,634) ========== ============ Weighted average number of common shares..... 1,772,864 3,330,290 Weighted average assumed number of common shares upon conversion of preferred stock...................................... 4,932,514 7,761,256 ---------- ------------ Total weighted average number of shares used in computing pro forma net loss per share..... 6,705,378 11,091,546 ========== ============ Basic and diluted pro forma net loss per common share............................... $ (0.12) $ (0.26) ========== ============
FINANCIAL INSTRUMENTS--The Company's financial instruments include cash, accounts receivable, accounts payable and accrued expenses. At December 31, 1998 and September 30, 1999, the fair values of these instruments approximated their financial statement carrying amounts. COMPREHENSIVE INCOME--Comprehensive loss is the same as net loss for all periods presented. NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Statement, as amended, is effective for fiscal years beginning after June 15, 2000. The Company has evaluated the impact of adopting SFAS No. 133 and, based on its current business activities, believes that it will not have a material effect on its financial statements. F-10 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 2. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
ESTIMATED USEFUL DECEMBER 31, SEPTEMBER 30, LIVES 1998 1999 ---------- ------------ ------------- Property and equipment: Computer equipment and software....... 3 years $149,298 $1,010,172 Furniture and fixtures................ 7 years 39,788 82,907 Office equipment...................... 5 years 2,625 28,163 Leasehold improvements................ lease term -- 13,288 ---------- -------- ---------- Total............................... 191,711 1,134,530 Less accumulated depreciation........... (21,665) (143,055) -------- ---------- Property and equipment, net............. $170,046 $ 991,475 ======== ==========
3. COMMITMENTS The Company leases office space under operating leases expiring through October 2002. Certain of the leases contain renewal options. Some of the leases provide for increasing rents over the terms of the leases; total rent under these leases is being spread ratably over the lease terms. The Company has sublet certain office space over the remainder of its lease term at an amount that approximates the Company's obligation under the lease. Total rent expense was $32,417 for the period from inception (April 27, 1998) through December 31, 1998, and $154,421 for the nine months ended September 30, 1999. Rental income from the sublease amounted to $15,424 for the nine months ended September 30, 1999 and is recorded, net of expense, in general and administrative expense. Future minimum annual lease payments under noncancelable operating leases, net of sublease income, as of September 30, 1999 are as follows: 1999 (Remainder of year).................................... $119,986 2000........................................................ 747,173 2001........................................................ 752,846 2002........................................................ 406,195
4. PREFERRED STOCK CONVERTIBLE PREFERRED STOCK--The authorized preferred stock of the Company consists of 10,942,678 shares of preferred stock with a par value of $0.001, of which 5,187,501 shares are designated as Series A convertible preferred stock ("Series A preferred stock"), 1,323,912 shares are designated as Series B convertible preferred stock ("Series B preferred stock"), and 4,431,265 shares are designated as Series C convertible preferred stock ("Series C preferred stock"). F-11 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 4. PREFERRED STOCK (CONTINUED) SERIES A CONVERTIBLE PREFERRED STOCK--On May 22, 1998, the Company issued 5,187,501 shares of Series A preferred stock at $0.2667 per share to investors for total consideration, including the conversion of two 8% promissory notes amounting to $100,000, of $1,378,334 (net of offering costs of $5,000). The Series A preferred stock is convertible into common stock, on a one-for-one basis, at any time by the holders. The holders of the Series A preferred stock have voting rights equivalent to the number of shares of common stock into which their shares of Series A preferred stock convert. The Series A preferred stock earns non-cumulative dividends when and if declared in the amount of $0.0213 per share. Upon liquidation, after setting apart or paying in full the preferential amounts due the holders of Series C preferred stock, holders of Series A preferred stock are entitled to receive, out of funds then generally available, in conjunction with holders of Series B preferred stock and prior to any payment with respect to the holders of common stock, $0.2667 per share, plus any declared and unpaid dividends thereon. Following payment to holders of all other classes of preferred stock to which the Series A preferred stock is subordinate, holders of Series A preferred stock are then entitled to share in remaining available funds on an "as-if converted" basis with holders of common stock. SERIES B CONVERTIBLE PREFERRED STOCK--On November 12, 1998, the Company issued 1,323,912 shares of Series B preferred stock at $1.51067 per share to investors for total consideration of $1,993,110 (net of offering costs of $6,890). The Series B preferred stock is convertible into common stock, on a one-for-one basis, at any time by the holders. The holders of the Series B preferred stock have voting rights equivalent to the number of shares of common stock into which their shares of Series B preferred stock convert. The Series B preferred stock earns non-cumulative dividends when and if declared in the amount of $0.121 per share. Upon liquidation, after setting apart or paying in full the preferential amounts due the holders of Series C preferred stock, holders of Series B preferred stock are entitled to receive, out of funds then generally available, in conjunction with holders of Series A preferred stock and prior to any payment with respect to the holders of common stock, $1.51067 per share, plus any declared and unpaid dividends thereon. Following payment to holders of all other classes of preferred stock to which the Series B preferred stock is subordinate, holders of Series B preferred stock are then entitled to share in remaining available funds on an "as-if converted" basis with holders of common stock. In addition, as long as any shares of Series B preferred stock are outstanding, the Company shall not, without first obtaining approval by vote or written consent of the holders of at least a majority of the total number of shares of Series B preferred stock outstanding, voting together as a class, undertake or effect any reorganization event (as defined) in which the value of the consideration to be received per share of Series B preferred stock in such transaction is less than 150% percent of the original Series B issue price of $1.51067 per share. SERIES C CONVERTIBLE PREFERRED STOCK--On July 16, 1999, the Company issued 4,431,263 shares of Series C preferred stock at $5.9351 per share to investors for total consideration of $26,279,468 (net of offering costs of $20,512). The Series C preferred stock is convertible into common stock, on a one-for-one basis, at any time by the holders. The holders of the Series C preferred stock have voting rights equivalent to the number of shares of common stock into which their shares of Series C preferred stock convert. The Series C preferred stock earns non-cumulative dividends when declared in the amount of $0.4748 per share. Upon liquidation, holders of Series C preferred stock are entitled to receive, out of funds then generally available, dividends previously declared or accrued and a per share F-12 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 4. PREFERRED STOCK (CONTINUED) amount as follows: i) $8.90265 per share if the consideration received in a liquidation is $2.99 per fully diluted share of common stock or less; ii) $10.386425 per share if the consideration received in a liquidation is between $3.00 and $8.96 per fully diluted share of common stock; iii) $11.8702 per share if the consideration received in a liquidation is between $8.97 and $11.96 per fully diluted share of common stock or; iv) $5.9351 per share if the consideration received in a liquidation is over $11.96 per fully diluted share of common stock. AUTOMATIC CONVERSION--The preferred stock will automatically be converted into shares of common stock upon the closing of a public offering of common stock at an offering price of at least $11.8702 per share that values the Company at not less than $253 million and results in gross proceeds to the Company of at least $20 million. 5. COMMON STOCK The Company's Certificate of Incorporation was amended on July 14, 1999 to increase the number of authorized shares of common stock from 10,000,000 to 35,000,000 shares. The Company's Certificate of Incorporation precludes the payment of dividends to shareholders of common stock so long as any shares of Series A, B or C preferred stock are issued and outstanding. FOUNDERS SHARES--On April 28, 1998, the Company issued to the two founders of the Company 2,943,750 and 4,906,248 shares of restricted common stock (the "Founders Shares"), respectively, at a per share price of $0.0003. The Founder Stock Purchase Agreement relating to 2,943,750 shares of common stock provided for vesting of 10% of the shares upon the issuance of the Series A Preferred Stock and the remaining 90% vest ratably over four years. The Founder Stock Purchase Agreement relating to 4,906,248 shares of common stock were issued to a founder as part of the initial capitalization of the Company including his contribution and development of certain technology pursuant to the terms of an Exclusive Patent License Agreement. Upon issuance of the Series A Preferred Stock 25% of his shares became immediately vested. The remaining balance of these Founders Shares vest ratably over four years. On July 6, 1999, the founder transferred 60,000 of his restricted Founders Shares to two employees for past services rendered. The fair value of these shares, approximating $225,000, was charged to expense. The Company has determined that the measurement date for the Founders Shares coincided with the issuance of the Series A preferred stock. The Company has recognized deferred compensation of $550,000, based on the fair value of the common shares on that day, to be amortized over the vesting period. Accordingly, the Company has recorded compensation expense of approximately $174,000 and $83,000 for the period from inception (April 27, 1998) through December 31, 1998 and the nine months ended September 30, 1999, respectively. The Company has the right to repurchase unvested shares at the amount paid. The Company's right to repurchase the unvested shares terminates if the founder is terminated by the Company without cause, upon a change in control or upon the effectiveness of the Company's initial public offering. F-13 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 5. COMMON STOCK (CONTINUED) Restricted shares include the Founders Shares and shares purchased pursuant to the Company's 1998 and 1998-A Stock Option Plans (the "Option Plans"). Restricted shares activity since inception follows:
WEIGHTED AVERAGE NUMBER OF PURCHASE SHARES PRICE ---------- -------- Outstanding at inception (April 27, 1998).............. -- -- Issued for Founders Shares and stock option exercises.......................................... 9,624,684 $0.001 Repurchased.......................................... -- -- Lapse of restriction due to vesting.................. (2,553,591) 0.001 ---------- Outstanding at December 31, 1998....................... 7,071,093 0.001 Issued for stock option exercises.................... 119,864 0.291 Repurchased.......................................... (45,000) (0.027) Issued from treasury shares.......................... 22,500 0.027 Lapse of restriction due to vesting.................. (1,669,892) 0.003 ---------- Outstanding at September 30, 1999...................... 5,498,565 $0.005 ========== ======
STOCK OPTIONS--The Company's Option Plans initially provided for the granting of stock options to purchase up to 1,962,501 shares of the Company's common stock. In 1998, the Company's shareholders ratified and approved to increase the number of shares available for grant by 225,000 to a total of 2,187,501 for the Option Plans. In 1999 the Company's shareholders ratified and approved to increase the number of shares available for grant by 1,600,000, to a total of 3,787,501 for the Option Plans. Options may be granted to employees, officers, directors and consultants of the Company with terms of up to 10 years. The options can be granted at such prices and vesting schedules as the Board of Directors (the "Board") may determine; however ISO's cannot be granted at less than 100% and nonqualified options cannot be granted at less than 85% of the stock's fair market value at the date of grant. Options generally vest over 48 months as follows: (i) 25% 12 months from the date of grant and (ii) the remaining 75% thereafter at 2.0833% per month. In the event of a change of control of the Company (as defined in the Option Plan), the vesting of 25% of the remaining unvested shares will automatically be accelerated. Generally, the Option Plans provide that the Option holders may exercise their stock options immediately. Shares issued upon exercise of such options are restricted and continue to vest under the terms of the option agreement. F-14 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 5. COMMON STOCK (CONTINUED) Stock option activity since inception is as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ---------- -------- Outstanding at inception............................... -- -- Granted.............................................. 1,929,373 $0.02 Exercised............................................ (1,774,687) 0.01 Canceled, forfeited or expired....................... (82,176) 0.27 ---------- ----- Outstanding and exercisable, December 31, 1998......... 72,510 0.10 Granted.............................................. 1,274,500 1.37 Exercised............................................ (142,364) 0.25 Canceled, forfeited or expired....................... -- -- ---------- ----- Outstanding and exercisable, September 30, 1999........ 1,204,646 $1.43 ========== =====
Included in options granted for the period from inception (April 27, 1998) through December 31, 1998, and the nine months ended September 30, 1999 are 109,062 and 86,000 options, respectively, granted to consultants. Compensation expense is being recognized over the vesting period based on fair value pursuant to SFAS No. 123 and EITF No. 96-18. Total expense for the period from inception (April 27, 1998) through December 31, 1998, and the nine months ended September 30, 1999 related to these options is approximately $36,000 and $322,000, respectively. For financial reporting purposes, the deemed fair value of the common stock at the dates of stock option grants to employees resulted in deferred compensation of approximately $122,000 for the period from inception (April 27, 1998) through December 31, 1998 and approximately $3,789,000 for the nine months ended September 30, 1999. These charges are being recognized ratably over the vesting period. Compensation expense for options to employees was approximately $22,000 for the period from inception (April 27, 1998) through December 31, 1998 and approximately $197,000 for the nine months ended September 30, 1999. The weighted average fair value of options granted for the period from inception (April 27, 1998) through December 31, 1998 and the nine months ended September 30, 1999 was $0.07 and $2.85, respectively. F-15 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 5. COMMON STOCK (CONTINUED) The following table summarized information about stock options outstanding at September 30, 1999:
VESTED WEIGHTED ------------------------- AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE AVERAGE EXERCISE OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE OF OPTIONS PRICE ----------------- ----------- ----------- -------- ---------- -------- $0.03 3,000 8.76 $0.03 3,000 $0.03 0.17 229,500 9.36 0.17 4,835 0.17 0.30 112,500 9.59 0.30 -- -- 0.45 108,000 9.76 0.45 -- -- 1.78 325,646 9.85 1.78 8,135 1.78 2.30 338,000 9.92 2.30 -- -- 2.82 88,000 9.96 2.82 -- -- ----------------- --------- ------- ------- ------- ------- $0.03--2.82 1,204,646 9.75 $1.43 15,970 $0.96 ================= ========= ======= ======= ======= =======
The weighted average remaining contractual life of the options at December 31, 1998 was 9.75 years. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models. For purposes of determining the disclosure required by SFAS No. 123, the minimum value method was used with the following assumptions: expected life, 5 years and a risk-free rate of return of 5.5%. If the computed fair values of the 1999 and 1998 awards had been amortized to expense over the vesting period, pro forma net loss would have been as follows:
PERIOD FROM INCEPTION (APRIL 27, 1998) NINE MONTHS THROUGH ENDED DECEMBER 31, SEPTEMBER 30, 1998 1999 ---------------- ------------- Net loss as reported.............................. $(792,240) $(2,929,634) Net loss pro forma................................ $(811,187) $(3,071,890)
F-16 DIRECT HIT TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.) 6. INCOME TAXES The components of the Company's net deferred tax assets consisted of the following:
DECEMBER 31, 1998 ------------ Current assets: Deferred compensation..................................... $ 95,028 Research and development credits.......................... 30,553 --------- 125,581 --------- Long-term assets (liabilities): Net operating loss carryforwards.......................... 319,035 Depreciation.............................................. (2,499) --------- 316,536 --------- Net deferred tax assets before valuation allowance.......... 442,117 Less: valuation allowance................................... (442,117) --------- Net deferred tax assets..................................... $ -- =========
A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Accordingly, because of the Company's limited operating history, management has provided a valuation allowance for the full amount of the deferred tax asset due to the uncertainty of realization. The Company has available for future periods federal and state tax net operating loss carryforwards and research and development credits of approximately $792,000 and $31,000, respectively, as of December 31, 1998. The net operating loss carryforwards expire beginning in 2013 and 2003 for federal and state tax purposes, respectively. The federal research and development credits begin to expire in 2013. The Company did not pay any income taxes in 1998. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may have limited, or may limit in the future, the amount of net operating loss carryforwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based upon the Company's value prior to an ownership change. 7. BENEFIT PLAN The Company maintains a 401(k) Profit Sharing Plan (the "Plan") for its full-time employees. Each participant in the Plan may elect to contribute from 1% to 20% of his or her annual compensation to the Plan. The Company does not match employee contributions. Under the Plan, all participants are fully vested and all benefits and accounts can not be forfeited for any reason. * * * * * F-17 [DESCRIPTION OF ARTWORK] [Inside back cover of Prospectus: The inside back cover includes a number of screen shots depicting the application of our products and services at our OEM customer Web sites and at our own destination site at www.directhit.com. Screen shot of default popularity-based search results at an OEM customer Web site highlighting the default popularity-based, Direct Hit-branded search results. Screen shot of button-model popularity-based search results at an OEM customer Web site highlighting the Direct Hit-branded "Top 10 Results" link. Screen shot of Related Searches at an OEM customer Web site highlighting the Direct Hit-branded Related Searches. Screen shot of Personalized Search at our own destination site. Screen shot of Directory-based Search at an OEM customer Web site highlighting the Direct Hit-branded Directory-based Search. Screen shot of our Popularity-based Shopping Product at an OEM customer Web site highlighting the Direct Hit-branded Popularity-based Shopping Product.] [Logo outside back cover of prospectus: Company logo.] DIRECT HIT TECHNOLOGIES, INC. (LOGO) UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED DECEMBER 22, 1999 [DIRECT HIT TECHNOLOGIES, INC. LOGO] SHARES COMMON STOCK Direct Hit Technologies, Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "DHIT." We anticipate that the initial public offering price will be between $ and $ per share. ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ---------------------
PER SHARE TOTAL --------- --------- Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to Direct Hit...................................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to an additional shares of common stock to cover over-allotments. ------------------------ ROBERTSON STEPHENS INTERNATIONAL THOMAS WEISEL PARTNERS LLC SOUNDVIEW TECHNOLOGY GROUP WIT CAPITAL CORPORATION The date of this prospectus is , 2000 UNDERWRITING UNDERWRITING AGREEMENT The underwriters named below, acting through their representatives, FleetBoston Robertson Stephens Inc., Thomas Weisel Partners LLC, SoundView Technology Group, Inc. and Wit Capital Corporation, have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth below opposite their respective names. The underwriters are committed to purchase and pay for all shares if any are purchased.
NUMBER U.S. UNDERWRITERS OF SHARES - ----------------- --------- FleetBoston Robertson Stephens Inc.......................... Thomas Weisel Partners LLC.................................. SoundView Technology Group, Inc............................. Wit Capital Corporation..................................... INTERNATIONAL UNDERWRITERS BancBoston Robertson Stephens International Limited......... Thomas Weisel Partners LLC.................................. SoundView Technology Group, Inc............................. Wit Capital Corporation..................................... Total..................................................... =======
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No reduction in the price will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. OVER-ALLOTMENT OPTION. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to additional shares of common stock at the same price per share as we will receive for the shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the shares offered by this prospectus. If purchased, the additional shares will be sold by the underwriters on the same terms as those on which the shares are being sold. We will be obligated, under this option, to sell shares to the extent the option is exercised. The 52 underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock offered by this prospectus. UNDERWRITING DISCOUNTS AND COMMISSIONS. The following table shows the estimated per share and total underwriting discounts and commissions to be paid by us to the underwriters. This information is presented assuming either no exercise or full exercise by the underwriters of their over-allotment option.
WITHOUT WITH PER OVER-ALLOTMENT OVER-ALLOTMENT SHARE OPTION OPTION -------- -------------- -------------- Assumed public offering price............. Estimated underwriting discounts and commissions............................. Estimated proceeds, before expenses, to us......................................
The expenses of the offering payable by us are estimated at $ . FleetBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 2000. NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus has been determined through negotiations among the representatives and us. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. INDEMNITY. The underwriting agreement contains covenants of indemnity among the underwriters and us against civil liabilities, including liabilities under the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. FUTURE SALES. All of our executive officers, directors and stockholders have agreed, during the period of 180 days after the date of this prospectus, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the securities subject to lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of FleetBoston Robertson Stephens Inc., subject to certain exceptions, consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, the issuance of our common stock upon the exercise of outstanding options or warrants, and the issuance of options under existing stock option and incentive plans. See "Shares Eligible for Future Sale." 53 LISTING. We have applied for approval for the quotation of our common stock on the Nasdaq National Market under the symbol "DHIT." DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up to five percent of the common stock to be issued by us and offered for sale in this offering, at the initial public offering price, to directors, officers, employees, business associates and persons otherwise connected to Direct Hit. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase reserved shares. Any reserved shares which are not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this offering. STABILIZATION. The representatives have advised us that, pursuant to Regulation M under the Securities Act of 1933, some persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. SERIES C PREFERRED STOCK INVESTMENT. On July 16, 1998, two limited partnerships affiliated with FleetBoston Robertson Stephens, Inc. purchased an aggregate of 84,245 shares of our series C preferred stock for aggregate consideration of $500,003. Each share of series C preferred stock will convert into one share of our common stock upon completion of this offering. THOMAS WEISEL PARTNERS LLC. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners LLC has been named as a lead-manager or co-manager on 100 filed public offerings of equity securities, of which 79 have been completed, and has acted as a syndicate member in an additional 54 public offerings of equity securities. Thomas Weisel Partners LLC does not have any material relationship with us or any of our officers, directors or controlling persons, except with respect to its contractual relationship with us under the underwriting agreement entered into in connection with this offering. WIT CAPITAL CORPORATION. Wit Capital Corporation, a member of the National Association of Securities Dealers, Inc., will participate in the offering as one of the underwriters. The National Association of Securities Dealers, Inc. approved the membership of Wit Capital on September 4, 1997. Since that time, Wit Capital has acted as an underwriter, e-Manager or selected dealer in over 170 public offerings. Except for its participation as a manager in this offering, Wit Capital has no relationship with us or any of our founders or significant stockholders. 54 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Estimated expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of the common stock being registered under this registration statement are as follows: SEC registration fee........................................ $ 15,180* NASD filing fee............................................. 6,250* Nasdaq National Market listing fee.......................... 75,000* Printing and engraving expenses............................. 125,000* Legal fees and expenses..................................... 400,000* Accounting fees and expenses................................ 275,000* Blue Sky fees and expenses (including legal fees)........... 10,000* Transfer agent and registrar fees and expenses.............. 10,000* Miscellaneous............................................... 83,570* ---------- Total................................................... $1,000,000* ----------
- ------------------------ * Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Delaware General Corporation Law and our charter and bylaws provide for indemnification of our directors and officers for liabilities and expenses that they may incur in such capacities. In general directors and officers are indemnified with respect to actions taken in good faith in a manner reasonably believed to be in, or not opposed to, our best interests and, with respect to any criminal action or proceeding, actions that the indemnitee had no reasonable cause to believe were unlawful. Reference is made to our charter and bylaws filed as Exhibits 3.1 through 3.4 to this registration statement. The underwriting agreement provides that the underwriters are obligated, under certain circumstances, to indemnify our directors, officers and controlling persons against certain liabilities, including liabilities under the Securities Act. Reference is made to the form of underwriting agreement filed as Exhibit 1.1 to this registration statement. In addition, we have an existing directors and officers liability insurance policy. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since our inception on April 27, 1998, we have issued the following securities that were not registered under the Securities Act: (A) ISSUANCES OF CAPITAL STOCK. In April 1998, we issued and sold 7,849,998 shares of common stock to two investors for an aggregate purchase price of $2,617. In May 1998, we issued and sold 5,187,501 shares of series A preferred stock to four investors for an aggregate purchase price of $1,383,334. In November 1998, we issued and sold 1,323,912 shares of series B preferred stock to five investors for an aggregate purchase price of $1,999,997. II-1 In July 1999, we issued and sold 4,431,263 shares of series C preferred stock to 20 investors for an aggregate purchase price of $26,299,981. No underwriters were used in the foregoing transactions. All sales of securities described above were made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act (and/or Regulation D promulgated thereunder) for transactions by an issuer not involving a public offering. (B) GRANTS AND EXERCISES OF STOCK OPTIONS. Since the inception of our company on April 27, 1998, we have granted stock options to purchase 3,345,696 shares of common stock with exercise prices ranging from $0.001 to $3.34 per share, to employees, directors and consultants pursuant to our 1998 Stock Option Plan and 1998-A Stock Option Plan. Of these options, 1,996,894 have been exercised for an aggregate consideration of $335,737.56 as of November 30, 1999. The issuance of common stock upon exercise of the options was exempt either pursuant to Rule 701, as a transaction pursuant to a compensatory benefit plan, or pursuant to Section 4(2), as a transaction by an issuer not involving a public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS:
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant (currently in effect). 3.2* Form of Third Amended and Restated Certificate of Incorporation of the Registrant (to be filed upon the closing of the offering). 3.3 Amended and Restated Bylaws of the Registrant (currently in effect). 3.4 Form of Second Amended and Restated Bylaws of the Registrant (to take effect as of the effective date of the registration statement). 4.1* Specimen Certificate for shares of the Registrant's Common Stock. 4.2 Description of Capital Stock (contained in the Certificate of Incorporation filed as Exhibits 3.1 and 3.2). 5.1* Legal Opinion of Testa, Hurwitz & Thibeault, LLP. 10.1+ 1998-A Stock Option Plan. 10.2*+ 2000 Stock Option and Incentive Plan. 10.3*+ 2000 Employee Stock Purchase Plan. 10.4 Lease Agreement dated April 30, 1998 with Wellplay Associates Limited Partnership or office space located at 386 Washington Street, 2(nd) Floor, Wellesley, Massachusetts. 10.5 Lease Agreement dated October 3, 1998 with Wayne Realty Trust for office space located at 888 Worcester Street, Wellesley, Massachusetts. 10.6 Sublease Agreement with The Mathworks, Inc. dated November 5, 1999, for office space located at 24 Prime Parkway, Natick, Massachusetts. 10.7 Second Amended and Restated Rights Agreement dated as of July 16, 1999. 10.8 Exclusive Patent License Agreement with Gary Culliss and Draper Fisher Associates Fund IV, LP dated May 22, 1998. 10.9 First Amendment, dated November 11, 1998, to the Exclusive Patent License Agreement with Gary Culliss and Draper Fisher Associates Fund IV, LP dated May 22, 1998.
II-2
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.10 Second Amendment, dated July 16, 1999, to the Exclusive Patent License Agreement with Gary Culliss and Draper Fisher Associates Fund IV, LP dated May 22, 1998. 10.11 Noncompetition Agreement with Michael Cassidy dated as of July 16, 1999. 10.12 Noncompetition Agreement with Gary Culliss dated as of July 16, 1999. 10.13 Noncompetition Agreement with David Parker dated as of July 16, 1999. 23.1* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 5.1). 23.2 Consent of Deloitte & Touche LLP. 24.1 Power of Attorney (contained on page II-4). 27.1 Financial Data Schedule.
- ------------------------ * TO BE FILED BY AMENDMENT. + INDICATES A MANAGEMENT CONTRACT OR ANY COMPENSATORY PLAN, CONTRACT OR ARRANGEMENT. (B) FINANCIAL STATEMENT SCHEDULES. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes (1) to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Wellesley, Massachusetts on December 22, 1999. DIRECT HIT TECHNOLOGIES, INC. By: /s/ MICHAEL CASSIDY ----------------------------------------- Michael Cassidy PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
POWER OF ATTORNEY We, the undersigned officers and directors of Direct Hit Technologies, Inc. (the "Company"), hereby severally constitute and appoint Michael Cassidy and John McDonough, and each of them individually, with full powers of substitution and resubstitution, our true and lawful attorneys, with full powers to them and each of them to sign for us, in our names and in the capacities indicated below, the registration statement on Form S-1 filed with the Securities and Exchange Commission, and any and all amendments to said registration statement (including post-effective amendments), and any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in connection with the registration under the Securities Act of 1933, as amended, of equity securities of the Company, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below:
SIGNATURE TITLE DATE --------- ----- ---- /s/ MICHAEL CASSIDY President, Chief Executive Officer - ------------------------------------ and Director December 22, 1999 Michael Cassidy /s/ JOHN MCDONOUGH Executive Vice President, Chief - ------------------------------------ Operating Officer, Chief December 22, 1999 John McDonough Financial Officer, and Treasurer /s/ GARY CULLISS Chief Technology Officer, - ------------------------------------ Secretary and Chairman December 22, 1999 Gary Culliss
II-4
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROB CHANDRA Director - ------------------------------------ December 22, 1999 Rob Chandra /s/ JONATHAN GOLDSTEIN Director - ------------------------------------ December 22, 1999 Jonathan Goldstein /s/ VERNON LOBO Director - ------------------------------------ December 20, 1999 Vernon Lobo /s/ WARREN PACKARD Director - ------------------------------------ December 19, 1999 Warren Packard /s/ MICHAEL SANTULLO Director - ------------------------------------ December 20, 1999 Michael Santullo
II-5 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant (currently in effect). 3.2* Form of Third Amended and Restated Certificate of Incorporation of the Registrant (to be filed upon the closing of the offering). 3.3 Amended and Restated Bylaws of the Registrant (currently in effect). 3.4 Form of Second Amended and Restated Bylaws of the Registrant (to take effect as of the effective date of the registration statement). 4.1* Specimen Certificate for shares of the Registrant's Common Stock. 4.2 Description of Capital Stock (contained in the Certificate of Incorporation filed as Exhibits 3.1 and 3.2). 5.1* Legal Opinion of Testa, Hurwitz & Thibeault, LLP. 10.1+ 1998-A Stock Option Plan. 10.2*+ 2000 Stock Option and Incentive Plan. 10.3*+ 2000 Employee Stock Purchase Plan. 10.4 Lease Agreement dated April 30, 1998 with Wellplay Associates Limited Partnership or office space located at 386 Washington Street, 2(nd) Floor, Wellesley, Massachusetts. 10.5 Lease Agreement dated October 3, 1998 with Wayne Realty Trust for office space located at 888 Worcester Street, Wellesley, Massachusetts. 10.6 Sublease Agreement with The Mathworks, Inc. dated November 5, 1999, for office space located at 24 Prime Parkway, Natick, Massachusetts. 10.7 Second Amended and Restated Rights Agreement dated as of July 16, 1999. 10.8 Exclusive Patent License Agreement with Gary Culliss and Draper Fisher Associates Fund IV, LP dated May 22, 1998. 10.9 First Amendment, dated November 11, 1998, to the Exclusive Patent License Agreement with Gary Culliss and Draper Fisher Associates Fund IV, LP dated May 22, 1998. 10.10 Second Amendment, dated July 16, 1999, to the Exclusive Patent License Agreement with Gary Culliss and Draper Fisher Associates Fund IV, LP dated May 22, 1998. 10.11 Noncompetition Agreement with Michael Cassidy dated as of July 16, 1999. 10.12 Noncompetition Agreement with Gary Culliss dated as of July 16, 1999. 10.13 Noncompetition Agreement with David Parker dated as of July 16, 1999. 23.1* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 5.1). 23.2 Consent of Deloitte & Touche LLP. 24.1 Power of Attorney (contained on page II-4). 27.1 Financial Data Schedule.
- ------------------------ * TO BE FILED BY AMENDMENT. + INDICATES A MANAGEMENT CONTRACT OR ANY COMPENSATORY PLAN, CONTRACT OR ARRANGEMENT. EX-3.1 2 EXHIBIT 3.1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 07/14/1999 991287979 - 2889367 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF DIRECT HIT TECHNOLOGIES, INC. Direct Hit Technologies, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is Direct Hit Technologies, Inc. 2. The date of filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was April 27, 1998. 3. The date of filing of its First Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware was November 12, 1998. 4. This Second Amended and Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of this Corporation as herein set forth in full: ARTICLE I NAME The name of the corporation (hereinafter called the "Corporation") is Direct Hit Technologies, Inc. ARTICLE II REGISTERED OFFICE The address of the registered office of the Corporation in the State of Delaware is 15 East North Street, City of Dover, County of Kent, and the name of the registered agent of the Corporation in the State of Delaware at such address is the Incorporating Services, Ltd. ARTICLE III PURPOSES The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be ordered under the General Corporation Law of the State of Delaware. ARTICLE IV CAPITAL STOCK 1. AUTHORIZED STOCK. The Corporation is authorized to issue two classes of shares to be designated respectively "Preferred Stock" par value $0.001 per share and "Common Stock," par value $0.001 per share. The total number of shares of Preferred Stock authorized is 10,942,678. The total number of shares of Common Stock authorized is 35,000,000. The shares of Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series. Effective upon filing this Second Amended and Restated Certificate of Incorporation, each outstanding share of Common Stock and each outstanding share of Preferred Stock shall be split into three (3) shares of Common Stock, $0.001 par value per share, and three (3) shares of Preferred Stock, $0.001 par value per share, respectively. All references to the number of shares of Common Stock and Preferred Stock herein shall be on a post-split basis, unless otherwise indicated. 2. PREFERRED STOCK. The Preferred Stock may be divided into such number of series as the Board of Directors may determine. The Board of Directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. The first series of Preferred Stock shall be comprised of 5,187,501 shares designated as "Series A Preferred Stock." The second series of Preferred Stock shall be comprised of 1,323,912 shares designated as "Series B Preferred Stock." The third series of Preferred Stock shall be comprised of 4,431,265 shares designated as "Series C Preferred Stock." The relative rights, preferences, restrictions and other matters relating to the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock (collectively, the "Preferred Stock") are as follows: (a) DIVIDENDS. The holders of outstanding Preferred Stock shall be entitled to receive in any fiscal year, when as and if declared by the Board of Directors, out of any assets at the time legally available therefor, non-cumulative dividends in cash at the rate equal to $0.0213, $0.121 and $0.4748 per share of Series A Preferred Stock, Series B Preferred Stock and Series C 2 Preferred Stock, respectively, as adjusted for any consolidations, combinations, stock distributions, stock dividends, stock splits or similar events (collectively a "Recapitalization Event"), per annum. The right to dividends on Preferred Stock shall not be cumulative, unless otherwise declared to be cumulative by the Board of Directors, and no right shall accrue to holders of Preferred Stock by reason of the fact that distributions on said shares are not declared in any prior year, nor shall any undeclared or unpaid distribution bear or accrue interest. No dividend will be paid on the Common Stock, and no share of Common Stock will be repurchased by the Corporation except for purchases of unvested shares repurchased from former employees at their original purchase price. (b) PREFERENCE ON LIQUIDATION. (1) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets and funds of the Corporation available for distribution to stockholders shall be distributed as follows: (i) The holders of Series C Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made in respect of the Corporation's Series A Preferred Stock, Series B Preferred Stock or Common Stock, the amount of (A) $8.90265 per share of Series C Preferred Stock (as adjusted for any Recapitalization Event) if the consideration received in a liquidation is $2.99 per fully diluted share of Common Stock or less, (B) $10.386425 per share of Series C Preferred Stock (as adjusted for any Recapitalization Event) if the consideration received in a liquidation is between $3.00 and $8.96 per fully diluted share of Common Stock, (C) $11.8702 per share of Series C Preferred Stock (as adjusted for any Recapitalization Event) if the consideration received in a liquidation is between $8.97 and $11.96 per fully diluted share of Common Stock, or (D) $5.9351 per share of Series C Preferred Stock (as adjusted for any Recapitalization Event) if the consideration received in a liquidation is over $11.96 per fully diluted share of Common Stock, plus all declared or accrued and unpaid dividends thereon to the date fixed for such distributions. If upon liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of the Series C Preferred Stock the full amounts to which they respectively shall be entitled, the holders of the Series C Preferred Stock shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. (ii) After setting apart or paying in full the preferential amounts due to the holders of Series C Preferred Stock the holders of Series B Preferred Stock and Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made in respect of the Corporation's Common Stock, the amount of (A) $0.2667 per share of Series A Preferred Stock (the "Original Series A Issue Price") and $1.51067 per share of Series B Preferred Stock (the "Original Series B Issue Price") (each as adjusted for any Recapitalization Event), and (B) all declared or accrued and unpaid dividends thereon to the date fixed for such distribution. If, after setting apart or 3 paying in full the preferential amounts due the holders of Series C Preferred Stock as set forth in Section 2(b)(1)(i) above, upon liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of the Series A and Series B Preferred Stock the full amounts to which they respectively shall be entitled, the holders of the Series A and Series B Preferred Stock shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. (iii) After setting apart or paying in full the preferential amounts due the holders of Preferred Stock as set forth in Sections 2(b)(1)(i) and (ii) above, the remaining assets of the Corporation available for distribution to its stockholders, if any, shall be distributed ratably to the holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock then held by them, with each share of Series A Preferred Stock and Series B Preferred Stock treated as the number of shares of Common Stock into which such shares of Series A Preferred Stock and Series B Preferred Stock are then convertible (which includes amounts paid pursuant to paragraph 2(b)(1)(ii) above and as adjusted for any Recapitalization Event with respect to such shares), PROVIDED, THAT a holder of Series A Preferred Stock or Series B Preferred Stock shall cease to participate from a distribution pursuant to this paragraph 2(b)(1)(iii) after April 27, 2001. The merger or consolidation of the Corporation into or with another corporation, entity or person, or the issuance by the Corporation of voting securities to another corporation, entity or person, in either case pursuant to which the stockholders of this Corporation shall own less than fifty percent (50%) of the voting securities of the surviving or other corporation, entity or person, or the sale, transfer or other disposition (but not including a transfer or disposition by pledge or mortgage to a bona fide lender) of all or substantially all of the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation as those terms are used in this Section 2(b). Any of the foregoing events deemed to constitute a liquidation, dissolution or winding up of the Corporation shall be deemed to so constitute such an event whether accomplished in a single transaction or a series of transactions. (2) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the Corporation shall, within ten (10) days after the date the Board of Directors approves such action, or twenty (20) days prior to any stockholders' meeting called to approve such action, or twenty (20) days after the commencement of any involuntary proceeding whichever is earlier, give each holder of shares of Preferred Stock written notice of the proposed action. Such written notice shall describe the material terms and conditions of such proposed action, including a description of the stock, cash and property to be received by the holders of shares of Preferred Stock upon consummation of the proposed action and the date of delivery thereof If any material change in the facts set forth in the initial notice shall occur, the Corporation shall promptly give written notice to each holder of shares of Preferred Stock of such material change. 4 (3) The Corporation shall not consummate any voluntary or involuntary liquidation, dissolution or winding up of the Corporation before the expiration of thirty (30) days after the mailing of the initial written notice or ten (10) days after the mailing of any subsequent written notice, whichever is later; PROVIDED, THAT any such thirty (30) day or ten (10) day period may be shortened upon the written consent of the holders of a majority of the outstanding shares of Preferred Stock. (4) In the event of any voluntary or involuntary liquidation dissolution or winding up of the Corporation which will involve the distribution of assets other than cash, the Corporation shall promptly engage competent independent appraisers to determine the value of the assets to be distributed to the holders of shares of Preferred Stock and the holders of shares of Common Stock (it being understood that with respect to the valuation of securities, the Corporation shall engage such appraiser as shall be approved by the holders of a majority of shares of the Corporation's outstanding Preferred Stock). The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice to each holder of shares of Preferred Stock of the appraiser's valuation. (c) VOTING. Except as otherwise required by law or as set forth herein, the shares of Preferred Stock shall be voted on an equal basis with the shares of the Corporation's Common Stock at any annual or special meeting of stockholders of the Corporation, or may act by written consent in the same manner as the Corporation's Common Stock, upon the following basis: each holder of shares of Preferred Stock shall be entitled to such number of votes for the Preferred Stock held by him on the record date fixed for such meeting, or on the effective date of such written consent as shall be equal to the number of shares of the Corporation's Common Stock into which all of his shares of Preferred Stock are convertible immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. (d) CONVERSION RIGHTS. The holders of Preferred Stock shall have conversion rights as follows: (1) OPTIONAL CONVERSION. Each share of Preferred Stock all be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock of the Corporation as it is then convertible in accordance with the terms hereof. The number of shares of Common Stock into which each share of Preferred Stock may be converted shall be determined by dividing $0.2667 for the Series A Preferred Stock, $1.51067 for the Series B Preferred Stock and $5.9351 per share of the Series C Preferred Stock by the appropriate Conversion Price in effect at the time of conversion. The Series A Conversion Price, Series B Conversion Price and Series C Conversion Price initially shall be $0.2667, $1.51067 and $5.9351, respectively, subject to adjustment as hereinafter provided. (2) AUTOMATIC CONVERSION. Each share of Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective Conversion Price, 5 upon the earlier of (i) the time the written consent or agreement to such conversion is obtained by both (A) the holders of at least seventy-five percent (75%) of the then outstanding Series C Preferred Stock and (B) the holders of at least fifty percent (50%) of the then outstanding Series A and Series B Preferred Stock or (ii) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement on Form S-1 (or a successor form) under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at an offering price of at least $11.8702 per share (as adjusted for any Recapitalization Event) that values the Corporation at not less than $253 million and results in gross proceeds to the Corporation of at least $20 million. In the event of such a public offering, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such public offering at which time the Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares arc surrendered to the Corporation or its transfer agent; PROVIDED, HOWEVER, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Preferred Stock being converted are either delivered to the Corporation or its transfer agent, as hereinafter provided, or the holder notifies the Corporation or any transfer agent, as hereinafter provided, that such certificates have been lost. stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. (3) The holder of any shares of Preferred Stock may exercise the conversion rights by delivering to the Corporation during regular business hours, at the office of any transfer agent of the Corporation for the Preferred Stock, or at the principal office of the Corporation or at such other place as may be designated by the Corporation, the certificate or certificates for the shares to be converted, duly endorsed for transfer to the Corporation (if required by it), accompanied or preceded by written notice stating that the holder elects to convert such shares into shares of Common Stock. Conversion shall be deemed to have been effected on the date when such delivery is made (the "Conversion Date"). As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the Corporation, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled. The holder shall be deemed to have become a stockholder of record of Conversion Stock on the applicable Conversion Date unless the transfer books of the Corporation are closed on the date, in which event it shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open, but the Conversion Price shall be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares of Preferred Stock represented by a certificate surrendered for conversion, the Corporation shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Preferred Stock representing the unconverted portion of the certificate so surrendered. (4) The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of 6 Preferred Stock pursuant hereto. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation that such tax has been paid. (5) The Corporation shall at all times reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Preferred Stock from time to time outstanding. The Corporation shall from time to time (subject to obtaining necessary board and stockholder approval), in accordance with the laws of the State of Delaware, increase the authorized amount of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Preferred Stock at the time outstanding. (6) If any shares of Common Stock to be reserved for the purpose of conversion of Shares of Preferred Stock require registration or listing with, or approval of, any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise, before such shares may be validly issued or delivered upon conversion, the Corporation will in good faith and as expeditiously as possible endeavor to secure such registration, listing or approval, as the case may be. (7) All shares of Common Stock which may be issued upon conversion of the sales of Preferred Stock will upon issuance by the Corporation be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. (8) In case: (i) the Corporation shall take a record of the holders of its capital stock for the purpose of entitling them to receive a dividend payable in cash or otherwise, or any other distribution, payable in cash of otherwise, or to subscribe for or purchase any shares of stock of any class or to receive any other rights; or (ii) of any capital reorganization of the Corporation, reclassification of the capital stock of the Corporation (other than a subdivision or combination of its outstanding shares of common stock), consolidation or merger of the Corporation with or into another corporation, the issuance of a controlling block of voting securities to a third party (or a group of third parties acting in concert with respect thereto) or conveyance of all or substantially all of the assets of the Corporation to another corporation; or (iii) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; 7 then, and in any such case, the Corporation shall cause to be mailed to the transfer agent for the Preferred Stock, and to the holders of record of the outstanding Preferred Stock at the address of record of such stockholder as set forth on the Corporation's books, at least thirty (30) days prior to the date hereinafter specified, a notice stating the material terms of the proposed transaction and the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, dissolution. liquidation or winding up is to take place and the date, if any is to be fixed. as of which holders of capital stock of record shall be entitled to exchange their shares of capital stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (e) ADJUSTMENT OF CONVERSION PRICE. The Conversion Price for any series of Preferred Stock from time to time in effect shall be subject to adjustment from time to time as follows: (1) In case the Corporation shall at any time subdivide the outstanding shares of Common Stock, or shall issue a stock dividend on its outstanding Common Stock. the Conversion Price in effect immediately prior to such subdivision or the issuance of such dividend shall be proportionately decreased, and in case the Corporation shall at any time combine the outstanding shares of Common Stock, the Conversion Price in effect immediately prior to such combination shall be proportionately increased, effective, at the close of business on the date of such subdivision, dividend or combination, as the case may be. (2) Upon the issuance by the Corporation of Equity Securities (as defined below) at a consideration per share less than the Conversion Price of such series of Preferred Stock in effect immediately prior to the time of such issue or sale other than an issuance of stock or securities pursuant to Section 2(e)(1) above or the issuance of shoes of Common Stock upon conversion of any shares of Preferred Stock, then forthwith upon such issue or sale, such Conversion Price shall be reduced to a price (calculated to the nearest hundredth of a cent) determined by dividing: (i) an amount equal to the sum of (x) the number of shares of Common Stock deemed outstanding immediately prior to such issue or sale multiplied by the Conversion Price in effect immediately prior to such adjustment, (y) the number of shares of Common Stock issuable upon conversion or exchange of any obligations or of any securities of the Corporation deemed outstanding immediately prior to such issue or sale multiplied by the Conversion Price in effect immediately prior to such adjustment, and (z) an amount equal to the aggregate "consideration actually received" by the Corporation upon such issue or sale; by (ii) the sum of the number of shares of Common Stock deemed outstanding immediately after such issue or sale and the number of shares of Common Stock issuable upon conversion or exchange of any obligations or of any securities of the Corporation deemed outstanding immediately after such issue or sale. For purposes of this Section 2(e)(2), the following provisions shall be applicable: 8 (A) The term "Equity Securities" as used in this Section 2(e)(2) shall mean any shares of Common Stock, or any obligation. any share of stock or other security of the Corporation convertible into or exchangeable for Common Stock except for (i) up to 2,487,501 shares of Common Stock or options to purchase Common Stock in the aggregate (as adjusted for any Recapitalization Event) issued or granted to officers, directors, employees or consultants of the Corporation and its subsidiaries pursuant to any stock plans heretofore approved by the Corporation's Board of Directors or (ii) shares issued in conjunction with an equipment lease financing, debt financing, licensing or acquisition transaction that is unanimously approved by all members of the Board of Directors. (B) In the case of an issue or sale for cash of shares of Common Stock, the "consideration actually received" by the Corporation therefor shall be deemed to be the amount of cash received, before deducting therefrom any commissions or expenses paid by the Corporation. (C) In case of the issuance (otherwise than upon conversion or exchange of obligations or shares of stock of the Corporation) of additional shares of Common Stock for a consideration other than cash or a consideration partly other dm cash, the amount of the consideration other than cash received by the Corporation for such shares shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors. (D) In case of the issuance by the Corporation in any manner of any rights to subscribe for or to purchase shares of Common Stock. or any options for the purchase of shares of Common Stock or stock convertible into Common Stock all shares of Common Stock or stock convertible into Common Stock to which the holders of such rights or options shall be entitled to subscribe for or purchase pursuant to such rights or options shall be deemed "outstanding" as of the date of the offering of such rights or the granting of such options, as the case may be, and the minimum aggregate consideration named in such rights or options for the shares of Common Stock or stock convertible into Common Stock covered thereby, plus the consideration, if any, received by the Corporation for such rights or options, shall be deemed to be the "consideration actually received" by the Corporation (as of the date of the offering of such rights or the granting of such options, as the case may be) for the issuance of such shares. (E) In case of the issuance or issuances by the Corporation in any manner of any obligations or of any shares of stock of the Corporation that shall be convertible into or exchangeable for Common Stock, all shares of Common Stock issuable upon the conversion or exchange of such obligations or shares shall be deemed issued as of the date such obligations or shares are issued, and the amount of the "consideration actually received" by the Corporation for such additional shares of Common Stock shall be deemed to be the total of (x) the amount of consideration received by the Corporation upon the issuance of such obligations or shares. as the case may be, plus (y) the minimum aggregate consideration, if any, other than such obligations or shares, receivable by the Corporation upon such conversion or exchange, except in adjustment of dividends. 9 (F) The amount of the "consideration actually received" by the Corporation upon the issuance of any rights or options referred to in subsection (D) above or upon the issuance of any obligations or shares which are convertible or exchangeable as described in subsection (E) above, and the amount of the consideration, if any, other than such obligations or shares so convertible or exchangeable, receivable by the Corporation upon the exercise, conversion or exchange thereof shall be determined in the same manner provided in subsections (B) and (c) above with respect to the consideration received by the Corporation in case of the issuance of additional shares of Common Stock, provided, however, that if such obligations or shares of stock so convertible or exchangeable are issued in payment or satisfaction of any dividend upon any stock of the Corporation other than Common Stock, the amount of the "consideration actually received" by the Corporation upon the original issuance of such obligations or shares or stock so convertible or exchangeable shall be deemed to be the value of such obligations or shares of stock, as of the date of the adoption of the resolution deciding such dividend, as determined by the Board of Directors at or as of that date. On the expiration of any rights or options referred to in subsection (D), or the termination of any right of conversion or exchange referred to in subsection (E), or any change in the number of shams of Common Stock deliverable upon exercise of such options or rights or upon conversion of or exchange of such convertible or exchangeable securities, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustments made upon the issuance of such option, right or convertible or exchangeable securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered or to be delivered upon the exercise of such rights or options or upon the conversion or exchange of such securities. (G) In the event this Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons or options or rights not referred to in this Section 2(e)(2), then, in each such case, the holders of the Preferred Stock shall be entitled to the distributions provided for in Section 2(a) above, and no adjustment to the Conversion Price provided for in this Section 2(e) shall be applicable. (3) Subject to the right of the Corporation to amend this Certificate of Incorporation upon obtaining necessary approvals required by this Certificate of Incorporation and applicable law, this Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 2(e) and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of Preferred Stock against impairment. (4) Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 2(e), this Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the thereof, and shall prepare and 10 furnish to each holder of Preferred Stock affected thereby a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This Corporation shall, upon the written request at any time of any holder of any series of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment or readjustment, (B) the Conversion Price of such series at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of his shares. (f) STATUS OF CONVERTED STOCK. In the event any shares of Preferred Stock shall be converted pursuant to Section 2(e) above or otherwise acquired by the Corporation, the shares so converted shall be cancelled and shall not be issuable by the Corporation, and the Certificate of Incorporation of this Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (g) PROTECTIVE PROVISIONS. So long as any shares of Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of (i) the holders of at least a majority of the total number of shares of Series A and Series B Preferred Stock outstanding. voting together as a class, and (it) at least a majority of the total number of shares of Series C Preferred Stock outstanding, voting separately as a class: (1) amend the Articles of Incorporation or Bylaws in a manner that would alter or change any of the powers, preferences, privileges or rights of the Preferred Stock; (2) increase or decrease the authorized number of shares of Preferred Stock; (3) amend the provisions of this Section 2(g); (4) liquidate or wind up the Corporation; (5) undertake or effect any consolidation or merger of the Corporation with or into another corporation (except into or with a wholly-owned subsidiary) or any acquisition by or the conveyance of all or substantially all of the assets of the Corporation to another person or effectuate any transaction or series of related transactions which results in the Corporation's shareholders immediately prior to such transaction not holding at least fifty percent (50%) of the voting power of the surviving or continuing entity (a "Reorganization Event"); PROVIDED, HOWEVER, that the consent of the holders of Preferred Stock shall not be required for the Corporation to take any of the actions set forth in this Section 2(g)(5) if the value of consideration to be received by a holder of any shares of Series C Preferred Stock equals or exceeds $8.90265 per share (as adjusted for any Recapitalization Event) pursuant to the consummation of such transaction; or 11 (6) authorize or issue any other equity security senior to or on a parity with the Preferred Stock as to dividend and redemption rights or liquidation preferences. (h) SERIES B PREFERRED STOCK PREFERENCE. So long as any shares of Series B Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of Series B Preferred Stock outstanding, voting together as a class, undertaken or effect any Reorganization Event in which the value of the consideration to be received per share of Series B Preferred Stock in such action is less than one hundred and fifty percent (150%) of the Original Series B Issue Price. (i) RESIDUAL RIGHTS. All rights accruing to the outstanding shares of the Corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. ARTICLE V BYLAWS In furtherance and not in limitation of the powers conferred by statute and except as provided herein, the Board of Directors shall have the power to adopt, amend, repeal or otherwise alter the bylaws without any action on the part of the stockholders; PROVIDED, HOWEVER, that any bylaws made by the Board of Directors and any and all powers conferred by any of said bylaws may be amended, altered or repealed by the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefits. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing provisions of this Article SIXTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. 12 ARTICLE VII ELECTION OF DIRECTORS The election of directors need not be by written ballot unless the bylaws of the Corporation shall so provide. 4. This Second Amended and Restated Certificate of Incorporation was duly adopted by written consent of the stockholders in accordance with the applicable provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, Direct Hit Technologies, Inc. has caused this Certificate to be signed by Michael Cassidy, its President, this 13th day of July, 1999. DIRECT HIT TECHNOLOGIES, INC. By: /s/ Michael Cassidy ----------------------------- Michael Cassidy, President 14 EX-3.3 3 EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF DIRECT HIT TECHNOLOGIES, INC. TABLE OF CONTENTS ARTICLE I - STOCKHOLDERS..........................................................................................1 Section 1.1. Annual Meeting...................................................................................1 Section 1.2. Special Meetings.................................................................................1 Section 1.3. Notice of Meetings...............................................................................1 Section 1.4. Quorum...........................................................................................1 Section 1.5. Organization.....................................................................................2 Section 1.6. Conduct of Business..............................................................................2 Section 1.7. Proxies and Voting...............................................................................2 Section 1.8. Stock List.......................................................................................3 Section 1.9. Stockholder Action by Written Consent............................................................3 ARTICLE II - BOARD OF DIRECTORS...................................................................................3 Section 2.1. Number and Term of Office........................................................................3 Section 2.2. Vacancies and Newly Created Directorships........................................................3 Section 2.3. Removal..........................................................................................4 Section 2.4. Regular Meetings.................................................................................4 Section 2.5. Special Meetings.................................................................................4 Section 2.6. Quorum...........................................................................................4 Section 2.7. Participation in Meetings by Conference Telephone................................................4 Section 2.8. Conduct of Business..............................................................................4 Section 2.9. Powers...........................................................................................5 Section 2.10. Compensation of Directors.......................................................................5 Section 2.11. Nomination of Director Candidates...............................................................5 ARTICLE III - COMMITTEES..........................................................................................6 Section 3.1. Committees of the Board of Directors.............................................................6 Section 3.2. Conduct of Business..............................................................................6 ARTICLE IV - OFFICERS.............................................................................................6 Section 4.1. Generally........................................................................................6 Section 4.2. Chairman of the Board............................................................................7 Section 4.3. President........................................................................................7 Section 4.4. Vice President...................................................................................7 Section 4.5. Chief Financial Officer..........................................................................7 Section 4.6. Secretary........................................................................................7 Section 4.7. Delegation of Authority..........................................................................8 Section 4.8. Removal..........................................................................................8 Section 4.9. Action With Respect to Securities of Other Corporations..........................................8 ARTICLE V - STOCK.................................................................................................8 Section 5.l. Certificates of Stock............................................................................8 Section 5.2. Transfers of Stock...............................................................................8 Section 5.3. Record Date......................................................................................8
Section 5.4. Lost, Stolen or Destroyed Certificates...........................................................9 Section 5.5. Regulations......................................................................................9 ARTICLE VI - NOTICES..............................................................................................9 Section 6.1. Notices..........................................................................................9 Section 6.2. Waivers..........................................................................................9 ARTICLE VII - MISCELLANEOUS.......................................................................................9 Section 7.1. Facsimile Signatures.............................................................................9 Section 7.2. Corporate Seal..................................................................................10 Section 7.3. Reliance Upon Books, Reports and Records........................................................10 Section 7.4. Fiscal Year.....................................................................................10 Section 7.5. Time Periods....................................................................................10 ARTICLE VIII.....................................................................................................10 Section 8.1. Right to Indemnification........................................................................10 Section 8.2. Right of Claimant to Bring Suit.................................................................11 Section 8.3. Non-Exclusivity of Rights.......................................................................12 Section 8.4. Indemnification Contracts.......................................................................12 Section 8.5. Insurance.......................................................................................12 Section 8.6. Effect of Amendment.............................................................................12 ARTICLE IX - AMENDMENTS..........................................................................................12
AMENDED AND RESTATED BYLAWS OF DIRECT HIT TECHNOLOGIES, INC. ARTICLE I STOCKHOLDERS Section 1.1. ANNUAL MEETING. An annual meeting of the stockholders of Direct Hit Technologies, Inc. (the "Corporation"), for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 1.2. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called by (1) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption), (2) the President or (3) the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as they shall fix. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice. Section 1.3. NOTICE OF MEETINGS. Written notice of the place, date, and time of all meetings of the stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 1.4. QUORUM. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law or by the Certificate of Incorporation or Bylaws of this Corporation. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 1.5. ORGANIZATION. Such person as the Board of Directors may have designated or, in the absence of such a person, the President of the Corporation or, in his absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 1.6. CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him in order. Section 1.7. PROXIES AND VOTING. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, except where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or these Bylaws, all other matters shall be determined by a majority of the votes cast. Section 1.8. STOCK LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the -2- examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. Section 1.9. STOCKHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the actions so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the secretary of the Corporation and shall be maintained in the corporate records. Prompt notice of the taking of a corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II BOARD OF DIRECTORS Section 2.1. NUMBER AND TERM OF OFFICE. The authorized number of directors shall be not less than three (3) nor more than seven (7) and the exact number of directors initially set at five (5), and, thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Each director shall hold office until his successor is elected and qualified or until his earlier death, resignation, retirement, disqualification or removal. Section 2.2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, or other cause (other then removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 2.3. REMOVAL. Subject to the limitations stated in the Certificate of Incorporation, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of stock of the Corporation entitled to -3- vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by (i) a majority of the directors then in office, though less than a quorum, or (ii) the stockholders at a special meeting of the stockholders properly called for that purpose, by the vote of the holders of a majority of the shares entitled to vote at such special meeting. Directors so chosen shall hold office until the next annual meeting of stockholders. Section 2.4. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 2.5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by a majority of the directors then in office by the chairman of the board or by the President and shall be held at such place, on such date, and at such time as they or he shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not less than five (5) days before the meeting (one (1) day before the meeting if delivered by an overnight courier service and two (2) days before the meeting if by overseas courier service) or by telephoning, telecopying, telegraphing or personally delivering the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 2.6. QUORUM. At any meeting of the Board of Directors, a majority of the total number of authorized directors shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 2.7. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors, or of any committee of the Board of Directors, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 2.8. CONDUCT OF BUSINESS. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.9. POWERS. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; -4- (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to pass on the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to point, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (8) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation's business and affairs. Section 2.10. COMPENSATION OF DIRECTORS. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 2.11. NOMINATION OF DIRECTOR CANDIDATES. Nominations for the election of directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors. ARTICLE III COMMITTEES Section 3.1. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the -5- committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt an agreement of merger or consolidation if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 3.2. CONDUCT OF BUSINESS. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the authorized members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV OFFICERS Section 4.1. GENERALLY. The officers of the Corporation shall consist of a President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person. Section 4.2. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or as provided by these Bylaws. Section 4.3. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and President of the Corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and officers of the Corporation. He shall preside at all meetings of the stockholders. He shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president -6- of a Corporation; and shall have such other powers and duties as may be prescribed by the Board of Directors or by these Bylaws. Section 4.4. VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Director, shall perform the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or these Bylaws. Section 4.5. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain or cause to be kept and maintained, adequate and correct books and records of account in written form or any other form capable of being converted into written form. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse all funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. Section 4.6. SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes in written form of the proceedings of the Board of Directors, committees of the Board, and stockholders. Such minutes shall include all waivers of notice, consents to the holding of meetings, or approvals of the minutes of meetings executed pursuant to these Bylaws or the Delaware General Corporation Law. The Secretary shall keep, or cause to be kept at the principal executive office or at the office of the Corporation's transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of shares held by each. The Secretary shall give or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these Bylaws or by law to be given, and shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. Section 4.7. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.8. REMOVAL. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. -7- Section 4.9. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V STOCK Section 5.l. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Chief Financial Officer, certifying the number of shares owned by him or her. Any of or all the signatures on the certificate may be facsimile. Section 5.2. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 5.4 of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 5.3. RECORD DATE. The Board of Directors may fix a record date, which shall not be more than sixty (60) nor fewer than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled: to notice of or to vote at any meeting of stockholders or any adjournment thereof; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. Section 5.4. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5.5. REGULATIONS. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICE Section 6.1. NOTICES. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall -8- be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram, telecopy or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice shall be deemed to be given shall be the time such notice is received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, if hand delivered, or the time such notice is dispatched, if delivered through the mails or by telegram, courier or mailgram. Section 6.2. WAIVERS. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. Attendance of a person at a meeting shall constitute a waiver of notice for such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE VII MISCELLANEOUS Section 7.1. FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 7.2. CORPORATE SEAL. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Chief Financial Officer or by an Assistant Secretary or other officer designated by the Board of Directors. Section 7.3. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser. Section 7.4. FISCAL YEAR. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 7.5. TIME PERIODS. In applying any provision of these Bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done -9- during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and amounts expended in seeking indemnification granted to such person under applicable law, this Bylaw or any agreement with the Corporation) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, except as provided in Section 8.2, the Corporation shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if (a) such indemnification is expressly required to be made by law, (b) the action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the Corporation, (c) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law, or (d) the action, suit or proceeding (or part thereof) is brought to establish or enforce a right to indemnification under an indemnity agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; PROVIDED, HOWEVER, that, if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it -10- should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. Section 8.2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 8.1 is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that a claimant has not met such applicable standard of conduct. Section 8.3. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by Sections 8.1 and 8.2 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 8.4. INDEMNIFICATION CONTRACTS. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VIII. Section 8.5. INSURANCE. The Corporation may maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Delaware General Corporation Law. Section 8.6. EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article VIII by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. -11- ARTICLE IX AMENDMENTS The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation, subject to the right of the stockholders to adopt, amend, alter or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. -12- EX-3.4 4 EXHIBIT 3.4 ---------------------------------------------------- SECOND AMENDED AND RESTATED BY-LAWS OF DIRECT HIT TECHNOLOGIES, INC. ---------------------------------------------------- BY-LAWS TABLE OF CONTENTS ARTICLE 1 - STOCKHOLDERS......................................................................................1 1.1 Place of Meetings....................................................................................1 1.2 Annual Meeting.......................................................................................1 1.3 Special Meetings.....................................................................................1 1.4 Notice of Meetings...................................................................................1 1.5 Voting List..........................................................................................1 1.6 Quorum...............................................................................................2 1.7 Adjournments.........................................................................................2 1.8 Voting and Proxies...................................................................................2 1.9 Action at Meeting....................................................................................3 1.10 Introduction of Business at Meetings.................................................................3 1.11 Action without Meeting...............................................................................5 ARTICLE 2 - DIRECTORS.........................................................................................6 2.1 General Powers.......................................................................................6 2.2 Number; Election and Qualification...................................................................6 2.3 Tenure...............................................................................................7 2.4 Vacancies............................................................................................7 2.5 Resignation..........................................................................................7 2.6 Regular Meetings.....................................................................................7 2.7 Special Meetings.....................................................................................7 2.8 Notice of Special Meetings...........................................................................7 2.9 Meetings by Telephone Conference Calls...............................................................8 2.10 Quorum...............................................................................................8 2.11 Action at Meeting....................................................................................8 2.12 Action by Written Consent............................................................................8 2.13 Removal..............................................................................................8 2.14 Committees...........................................................................................8 2.15 Compensation of Directors............................................................................9 2.16 Amendments to Article................................................................................9 ARTICLE 3 - OFFICERS..........................................................................................9 3.1 Enumeration..........................................................................................9 3.2 Election.............................................................................................9 3.3 Qualification........................................................................................9 3.4 Tenure...............................................................................................9
-ii- 3.5 Resignation and Removal..............................................................................9 3.6 Vacancies............................................................................................10 3.7 Chairman of the Board and Vice-Chairman of the Board.................................................10 3.8 President............................................................................................10 3.9 Vice Presidents......................................................................................10 3.10 Secretary and Assistant Secretaries..................................................................10 3.11 Treasurer and Assistant Treasurers...................................................................11 3.12 Salaries.............................................................................................11 3.13 Action with Respect to Securities of Other Corporations..............................................11 ARTICLE 4 - CAPITAL STOCK.....................................................................................11 4.1 Issuance of Stock....................................................................................12 4.2 Certificates of Stock................................................................................12 4.3 Transfers............................................................................................12 4.4 Lost, Stolen or Destroyed Certificates...............................................................12 4.5 Record Date..........................................................................................12 ARTICLE 5 - GENERAL PROVISIONS................................................................................13 5.1 Fiscal Year..........................................................................................13 5.2 Corporate Seal.......................................................................................13 5.3 Notices..............................................................................................13 5.4 Waiver of Notice.....................................................................................13 5.5 Evidence of Authority................................................................................13 5.6 Facsimile Signatures.................................................................................14 5.7 Reliance upon Books, Reports and Records.............................................................14 5.8 Time Periods.........................................................................................14 5.9 Certificate of Incorporation.........................................................................14 5.10 Transactions with Interested Parties.................................................................14 5.11 Severability.........................................................................................15 5.12 Pronouns.............................................................................................15 ARTICLE 6 - AMENDMENTS........................................................................................15 6.1 By the Board of Directors............................................................................15 6.2 By the Stockholders..................................................................................15 ARTICLE 7 - INDEMNIFICATION...................................................................................15 7.1 Actions Other Than by or in the Right of the Corporation.............................................15 7.2 Actions by or in the Right of the Corporation........................................................16 7.3 Success on the Merits................................................................................16 7.4. Authorization........................................................................................16 7.5 Expense Advance......................................................................................16
-iii- 7.6 Nonexclusivity.......................................................................................17 7.7 Insurance............................................................................................17 7.8 The Corporation......................................................................................17 7.9 Other Indemnification................................................................................17 7.10 Other Definitions....................................................................................17 7.11 Continuation of Indemnification......................................................................17
SECOND AMENDED AND RESTATED BY-LAWS OF DIRECT HIT TECHNOLOGIES, INC. (the "Corporation") ARTICLE 1 - STOCKHOLDERS 1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Chairman of the Board (if any), the board of directors of the Corporation (the "Board of Directors") or the President or, if not so designated, at the registered office of the Corporation. 1.2 ANNUAL MEETING. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Chairman of the Board (if any), Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Chairman of the Board, the Board of Directors or the President and stated in the notice of the meeting. 1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at any time by the Chairman of the Board (if any), a majority of the Board of Directors or the President and shall be held at such place, on such date and at such time as shall be fixed by the Board of Directors or the person calling the meeting. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the records of the Corporation. 1.5 VOTING LIST. The officer who has charge of the stock ledger of the Corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business -2- hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 1.6 QUORUM. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. Shares held by brokers which such brokers are prohibited from voting (pursuant to their discretionary authority on behalf of beneficial owners of such shares who have not submitted a proxy with respect to such shares) on some or all of the matters before the stockholders, but which shares would otherwise be entitled to vote at the meeting ("Broker Non-Votes") shall be counted, for the purpose of determining the presence or absence of a quorum, both (a) toward the total voting power of the shares of capital stock of the Corporation and (b) as being represented by proxy. If a quorum has been established for the purpose of conducting the meeting, a quorum shall be deemed to be present for the purpose of all votes to be conducted at such meeting, provided that where a separate vote by a class or classes, or series thereof, is required, a majority of the voting power of the shares of such class or classes, or series, present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the voting power of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. 1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these By-Laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. 1.8 VOTING AND PROXIES. At any meeting of the stockholders, each stockholder shall have one vote for each share of stock entitled to vote at such meeting held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting (to the extent not otherwise prohibited by the Certificate of Incorporation or these By-laws), may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for such stockholder by written proxy executed by such stockholder or his or her authorized agent or by a transmission permitted by law and delivered to the Secretary of the Corporation. No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 1.8 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, -3- provided that such copy, facsimile telecommunication or reproduction shall be a complete reproduction of the entire original writing or transmission. In the election of directors, voting shall be by written ballot, and for any other action, voting need not be by ballot. The Corporation may, and to the extent required by law or the Certificate of Incorporation, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at such meeting may, and to the extent required by law or the Certificate of Incorporation, shall, appoint one or more inspectors to act at such meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. 1.9 ACTION AT MEETING. When a quorum is present at any meeting of stockholders, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on such matter) shall decide any matter to be voted upon by the stockholders at such meeting (other than the election of directors), except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-Laws. Any election of directors by the stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at such election, except as otherwise provided by the Certificate of Incorporation. For the purposes of this paragraph, Broker Non-Votes represented at the meeting but not permitted to vote on a particular matter shall not be counted, with respect to the vote on such matter, in the number of (a) votes cast, (b) votes cast affirmatively, or (c) votes cast negatively. 1.10 INTRODUCTION OF BUSINESS AT MEETINGS. A. ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section 1.10, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.10. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 1.10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the one hundred -4- twentieth (120th) day nor earlier than the close of business on the one hundred fiftieth (150th) day prior to the first anniversary of the date of the proxy statement delivered to stockholders in connection with the preceding year's annual meeting; provided, however, that if either (i) the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such an anniversary date or (ii) no proxy statement was delivered to stockholders in connection with the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of capital stock of the Corporation that are owned beneficially and held of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 1.10 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy (70) days prior to such annual meeting), a stockholder's notice required by this Section 1.10 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be -5- entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.10. If the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 1.10 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting nor later than the later of (x) the close of business on the sixtieth (60th) day prior to such special meeting or (y) the close of business on the tenth (10th) day following the day on which public announcement is first made of the date of such special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. C. GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.10 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.10. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.10 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section 1.10, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 1.10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.10 shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. 1.11 ACTION WITHOUT MEETING. Stockholders of the Corporation may not take any action by written consent in lieu of a meeting. Notwithstanding any other provision of law, the Certificate of Incorporation or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all -6- the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 1.11. ARTICLE 2 - DIRECTORS 2.1 GENERAL POWERS. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the Corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law or the Certificate of Incorporation, may exercise the powers of the full Board of Directors until the vacancy is filled. Without limiting the foregoing, the Board of Directors may: (a) declare dividends from time to time in accordance with law; (b) purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (c) authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, to borrow funds and guarantee obligations, and to do all things necessary in connection therewith; (d) remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (e) confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (f) adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees, consultants and agents of the Corporation and its subsidiaries as it may determine; (g) adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees, consultants and agents of the Corporation and its subsidiaries as it may determine; and (h) adopt from time to time regulations, not inconsistent herewith, for the management of the Corporation's business and affairs. 2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of the Board of Directors, but in no event shall be less than three. The number of directors may be decreased at any time and from time to time by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders (or, if so determined by the Board of Directors pursuant to Section -7- 1.10 hereof, at a special meeting of stockholders), by such stockholders as have the right to vote on such election. Directors need not be stockholders of the Corporation. 2.3 TENURE. Notwithstanding any provisions to the contrary contained herein, each director shall hold office until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 2.4 VACANCIES. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement thereof, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office, if any, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next election of directors and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 2.5 RESIGNATION. Any director may resign by delivering his or her written resignation to the Corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 2.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. 2.7 SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board (if any), the President, two or more directors, or by one director in the event that there is only a single director in office. 2.8 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending a telegram or delivering written notice by facsimile transmission or by hand, to his or her last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his or her last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 2.9 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members of any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or such -8- committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall be deemed to constitute presence in person at such meeting. 2.10 QUORUM. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the total number of the whole Board of Directors constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 2.11 ACTION AT MEETING. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these By-Laws. 2.12 ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent to such action in writing, and the written consents are filed with the minutes of proceedings of the Board of Directors or committee. 2.13 REMOVAL. Unless otherwise provided in the Certificate of Incorporation, any one or more or all of the directors may be removed, only for cause, by the holders of at least seventy-five percent (75%) of the shares then entitled to vote at an election of directors. 2.14 COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members of such committee present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at such meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine or as provided herein, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-Laws for the Board of Directors. Adequate provisions shall be made for notice to members of all meeting of committees. One-third (1/3) of the members of any committee shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) -9- member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. 2.15 COMPENSATION OF DIRECTORS. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the Corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. 2.16 AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law, the Certificate of Incorporation or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of a least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article 2. ARTICLE 3 - OFFICERS 3.1 ENUMERATION. The officers of the Corporation shall consist of a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including, but not limited to, a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate. 3.2 ELECTION. The President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting. 3.3 QUALIFICATION. No officer need be a stockholder. Any two or more offices may be held by the same person. 3.4 TENURE. Except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws, each officer shall hold office until his or her successor is elected and qualified, unless a different term is specified in the vote choosing or appointing such officer, or until his or her earlier death, resignation or removal. 3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his or her written resignation to the Chairman of the Board (if any), to the Board of Directors at a meeting thereof, to the Corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period -10- following his or her resignation or removal, or any right to damages on account of such removal, whether his or her compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the Corporation. 3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. 3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and stockholders at which he or she is present and shall perform such duties and possess such powers as are designated by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he or she shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be designated by the Board of Directors. 3.8 PRESIDENT. The President shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the Corporation. Unless otherwise provided by the Board of Directors, and provided that there is no Chairman of the Board or that the Chairman and Vice-Chairman, if any, are not available, the President shall preside at all meetings of the stockholders, and, if a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated another officer as the Chief Executive Officer, the President shall be the Chief Executive Officer of the Corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. The President shall have the power to enter into contracts and otherwise bind the Corporation in matters arising in the ordinary course of the Corporation's business. 3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and, when so performing, shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. Unless otherwise determined by the Board of Directors, any Vice President shall have the power to enter into contracts and otherwise bind the Corporation in matters arising in the ordinary course of the Corporation's business. 3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of -11- Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the Corporation, to deposit funds of the Corporation in depositories selected in accordance with these By-Laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts for such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the Corporation. The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the President or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer. 3.12 SALARIES. Officers of the Corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. 3.13 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which the Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE 4 - CAPITAL STOCK 4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the Corporation or the whole or any part of any issued, authorized capital -12- stock of the Corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 CERTIFICATES OF STOCK. Every holder of stock of the Corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by such stockholder in the Corporation. Each such certificate shall be signed by, or in the name of the Corporation by, the Chairman or Vice-Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Any or all of the signatures on such certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the By-Laws, applicable securities laws or any agreement among any number of shareholders or among such holders and the Corporation shall have conspicuously noted on the face or back of such certificate either the full text of such restriction or a statement of the existence of such restriction. 4.3 TRANSFERS. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate representing such shares, properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the Corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-Laws. 4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the President may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the President may require for the protection of the Corporation or any transfer agent or registrar. 4.5 RECORD DATE. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or, to the extent permitted by the Certificate of Incorporation and these By-laws, to express consent (or dissent) to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates. -13- If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting (to the extent permitted by the Certificate of Incorporation and these By-laws) when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE 5 - GENERAL PROVISIONS 5.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall be approved by the Board of Directors. 5.3 NOTICES. Except as otherwise specifically provided herein or required by law or the Certificate of Incorporation, all notices required to be given to any stockholder, director, officer, employee or agent of the Corporation shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram or facsimile transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received shall be deemed to be the time of the giving of the notice. 5.4 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these By-Laws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by telegraph, facsimile transmission or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. 5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the Corporation shall, as to all persons who rely on the certificate in good faith, be conclusive evidence of such action. -14- 5.6 FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these By-Laws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. 5.7 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. 5.8 TIME PERIODS. In applying any provision of these By-Laws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. 5.9 CERTIFICATE OF INCORPORATION. All references in these By-Laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the Corporation, as amended and in effect from time to time. 5.10 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction between the Corporation and one or more of the directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because such director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his, her or their votes are counted for such purpose, if: (1) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (2) The material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. -15- 5.11 SEVERABILITY. Any determination that any provision of these By-Laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-Laws. 5.12 PRONOUNS. All pronouns used in these By-Laws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the persons or persons so designated may require. ARTICLE 6 - AMENDMENTS 6.1 BY THE BOARD OF DIRECTORS. Except as is otherwise set forth in these By-Laws, these By-Laws may be altered, amended or repealed, or new by-laws may be adopted, by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. 6.2 BY THE STOCKHOLDERS. Except as otherwise set forth in these By-Laws, these By-Laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of the holders of seventy-five percent (75%) of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting. ARTICLE 7 - INDEMNIFICATION 7.1 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is a party or is threatened to be made a party or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person, or a person for whom such person is the legal representative, is or was a director, trustee, partner, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity, against all liability, losses, expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that such person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. -16- 7.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, trustee, partner, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. 7.3 SUCCESS ON THE MERITS. To the extent that any person referred to in Sections 7.1 or 7.2 has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to therein, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. 7.4. AUTHORIZATION. Any indemnification under Sections 7.1, 7.2 or 7.3 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, partner, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 7.1 and 7.2. Such determination shall be made: (a) by the Board of Directors, by a majority vote of directors who are not parties to such action, suit or proceeding (whether or not a quorum), or (b) if there are no disinterested directors or if a majority of disinterested directors so directs, by independent legal counsel (who may be regular legal counsel to the corporation) in a written opinion, or (c) by the stockholders. 7.5 EXPENSE ADVANCE. Expenses (including attorneys' fees) incurred by an officer or director of the Corporation in defending any pending or threatened civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in Section 7.4 of this Article upon receipt of an undertaking by or on behalf of such officer or director to repay such amount, if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by other employees or agents of the Corporation may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. 7.6 NONEXCLUSIVITY. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this Article shall not be deemed exclusive of any other rights to which any person seeking indemnification or advancement of expenses may be entitled under any -17- statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 7.7 INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, partner, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity against any liability asserted against and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article or Section 145 of the Delaware General Corporation Law. 7.8 "THE CORPORATION". For the purposes of this Article, references to "the Corporation" shall include the resulting corporation and, to the extent that the Board of Directors of the resulting corporation so decides, all constituent corporations (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as director, trustee, partner, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. 7.9 OTHER INDEMNIFICATION. The Corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, trustee, partner, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust or other enterprise or non-profit entity or from insurance. 7.10 OTHER DEFINITIONS. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, trustee, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, trustee, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. 7.11 CONTINUATION OF INDEMNIFICATION. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or -18- ratified, continue as a person who has ceased to be a director, trustee, partner, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. EX-10.1 5 EXHIBIT 10.1 Exhibit 10.1 DIRECT HIT TECHNOLOGIES, INC. 1998-A STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 ESTABLISHMENT. The Direct Hit Technologies, Inc. 1998-A Stock Option Plan (the "PLAN") is hereby established effective as of June 24, 1998. 1.2 PURPOSE. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Options shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company. 2. DEFINITIONS AND CONSTRUCTION. 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "BOARD" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means Direct Hit Technologies, Inc., a Delaware corporation, or any successor corporation thereto. (e) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (h) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the WALL STREET JOURNAL or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse. (k) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. 2 (l) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (m) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (n) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (o) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. (p) "OPTIONEE" means a person who has been granted one or more Options. (q) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (r) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (s) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (t) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (u) "SECURITIES ACT" means the Securities Act of 1933, as amended. (v) "SERVICE" means an Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, an Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise 3 designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee's Option Agreement. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (w) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (x) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (y) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. 3.2 AUTHORITY OF OFFICERS. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.3 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 4 3.4 POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, cancel, renew, reprice or otherwise adjust the exercise price of, or grant a new Option in substitution for, any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; (g) to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of Service with the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take 5 such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent consistent with the Plan and applicable law. 4. SHARES SUBJECT TO PLAN. 4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be two hundred twelve thousand six hundred five (212,605) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Option for any reason expires or is terminated or canceled or if shares of Stock are acquired upon the exercise of an Option subject to a Company repurchase option and are repurchased by the Company at the Optionee's exercise price, the shares of Stock allocable to the unexercised portion of such Option or such repurchased shares of Stock shall again be available for issuance under the Plan. Notwithstanding the foregoing, at any such time as the offer and sale of securities pursuant to the Plan is subject to compliance with Section 260.140.45 of Title 10 of the California Code of Regulations ("SECTION 260.140.45"), the total number of shares of Stock issuable upon the exercise of all outstanding Options (together with options outstanding under any other stock option plan of the Company) and the total number of shares provided for under any stock bonus or similar plan of the Company shall not exceed thirty percent (30%) (or such other higher percentage limitation as may be approved by the stockholders of the Company pursuant to Section 260.140.45) of the then outstanding shares of the Company as calculated in accordance with the conditions and exclusions of Section 260.140.45. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. 5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to Employees, Consultants, and Directors. For purposes of the foregoing sentence, "Employees," 6 "Consultants" and "Directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of an employment or other service relationships with the Participating Company Group. Eligible persons may be granted more than one (1) Option. 5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences Service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1. 5.3 FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portions of such options which exceed such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 6.1 EXERCISE PRICE. The exercise price for each Option shall be established in the discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of 7 Stock on the effective date of grant of the Option, and (c) no Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.2 EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company, and (d) with the exception of an Option granted to an officer, Director or Consultant, no Option shall become exercisable at a rate less than twenty percent (20%) per year over a period of five (5) years from the effective date of grant of such Option, subject to the Optionee's continued Service. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of grant of the Option. 6.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved by the Company, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. 8 (b) LIMITATIONS ON FORMS OF CONSIDERATION. (i) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (ii) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (iii) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4 TAX WITHHOLDING. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as 9 determined by the Board in its discretion at the time the Option is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Optionee shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 6.6 EFFECT OF TERMINATION OF SERVICE. (a) OPTION EXERCISABILITY. Subject to earlier termination of the Option as otherwise provided herein, an Option shall be exercisable after an Optionee's termination of Service as follows: (i) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "OPTION EXPIRATION DATE"). (ii) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within thirty (30) days (or such longer period of time as determined by the Board, in its discretion) after the Optionee's termination of Service (other than for Cause (as defined below)). (iii) TERMINATION AFTER CHANGE IN CONTROL. If the Optionee's Service with the Participating Company Group ceases as a result of Termination After Change in Control (as defined below), then (1) the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months (or such longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date, and (2) the vesting of the Option shall be accelerated as to a number of shares of equal to twenty-five percent (25%) of the shares remaining unvested as of the date of the Optionee's 10 termination of Service (or as otherwise determined by the Board and set forth in the Option Agreement). (iv) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability, death or Termination After Change in Control, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within thirty (30) days (or such longer period of time as determined by the Board, in its discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.6(a) is prevented by the provisions of Section 11 below, the Option shall remain exercisable until thirty (30) days (or such longer period of time as determined by the Board, in its discretion) after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.6(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. (d) CERTAIN DEFINITIONS. (i) "TERMINATION AFTER CHANGE IN CONTROL" shall mean either of the following events: (1) a termination by the Participating Company Group of the Optionee's Service with the Participating Company Group for any reason other than for Cause (as defined below), which termination occurs within twelve (12) months after a Change in Control or immediately prior to such Change in Control; or (2) the Optionee's resignation for Good Reason (as defined below) from Service with the Participating Company Group within twelve (12) months after a Change in Control, which termination occurs within a reasonable period of time following the event constituting Good Reason. Notwithstanding any provision herein to the contrary, Termination After Change in Control shall not include any termination of the Optionee's Service with the Participating Company Group which (1) is for Cause (as defined below); (2) is a result of the Optionee's death or Disability; 11 (3) is a result of the Optionee's voluntary termination of Service other than for Good Reason; or (4) occurs prior to the effectiveness of a Change in Control (except as otherwise provided above). (ii) "CAUSE" shall mean any of the following: (1) the Optionee's theft, dishonesty, or falsification of any Participating Company documents or records; (2) the Optionee's improper use or disclosure of a Participating Company's confidential or proprietary information; (3) any action by the Optionee which has a detrimental effect on a Participating Company's reputation or business; (4) the Optionee's failure or inability to perform any reasonable assigned duties after written notice from the Participating Company Group of, and a reasonable opportunity to cure, such failure or inability; (5) any material breach by the Optionee of any employment agreement between the Optionee and the Participating Company Group, which breach is not cured pursuant to the terms of such agreement; or (6) the Optionee's conviction (including any plea of guilty or nolo contendere) of any criminal act which impairs the Optionee's ability to perform his or her duties with the Participating Company Group. (iii) "GOOD REASON" shall mean any one or more of the following: (1) without the Optionee's express written consent, the assignment to the Optionee of any duties, or any limitation of the Optionee's responsibilities, substantially inconsistent with the Optionee's positions, duties, responsibilities and status with the Participating Company Group immediately prior to the date of the Change in Control; (2) any failure by the Participating Company Group to pay, or any material reduction by the Participating Company Group of, (A) the Optionee's base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount and duration are concurrently made for all other employees of the Participating Company Group with responsibilities, organizational level and title comparable to the Optionee's), or (B) the Optionee's bonus compensation, if any, in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Optionee); or (3) any failure by the Participating Company Group to (A) continue to provide the Optionee with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any employee group which customarily includes a person holding the employment position or a comparable position with the Participating Company Group then held by the Optionee, in any benefit or compensation plans and programs, including, but not limited to, the Participating Company Group's life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans, if any, in which the Optionee was participating immediately prior to the date of the Change in Control, or their equivalent, or (B) provide the Optionee with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any employee group which customarily includes a person holding the employment position or a comparable position with the Participating Company Group then held by the Optionee. 12 7. STANDARD FORMS OF OPTION AGREEMENT. 7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as an "Incentive Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Incentive Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as a "Nonstatutory Stock Option" shall comply with and be subject to the terms and conditions set forth in the form of Nonstatutory Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.3 AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of any of the standard forms of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. 8. CHANGE IN CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, a "TRANSACTION") wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall 13 have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. For purposes of this Section 8.2, an Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its discretion. 8.3 ACCELERATION OF VESTING. If within twelve (12) months following a Change in Control, the principal place of the Optionee's employment is relocated to a location more than fifty (50) miles from the Optionee's principal place of employment immediately prior to the Change in Control and the Optionee continues to perform Service at such new location, the vesting of each Option held by such Optionee shall be accelerated as to a number of shares equal to twenty-five percent (25%) of the shares then remaining unvested and the remaining shares will vest in equal monthly increments over the remaining portion of the original vesting schedule. 14 9. PROVISION OF INFORMATION. At least annually, copies of the Company's balance sheet and income statement for the just completed fiscal year shall be made available to each Optionee and purchaser of shares of Stock upon the exercise of an Option. The Company shall not be required to provide such information to key employees whose duties in connection with the Company assure them access to equivalent information. 10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 11. COMPLIANCE WITH SECURITIES LAW. The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 12. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them 15 in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 13. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's stockholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 14. STOCKHOLDER APPROVAL. The Plan or any increase in the maximum aggregate number of shares of Stock issuable thereunder as provided in Section 4.1 (the "AUTHORIZED SHARES") shall be approved by the stockholders of the Company within twelve (12) months of the date of adoption thereof by the Board. Options granted prior to stockholder approval of the Plan or in excess of the Authorized Shares previously approved by the stockholders shall become exercisable no earlier than the date of stockholder approval of the Plan or such increase in the Authorized Shares, as the case may be. EX-10.4 6 EXHIBIT 10.4 LEASE This is a Lease in which Landlord and Tenant are the parties named below, and which relates to office spare located at Playhouse Square, Wellesley, Massachusetts as more fully described below. The parties to this instrument hereby agree with each other as follows: ARTICLE I BASIC LEASE PROVISIONS AND EXHIBITS 1.1 INTRODUCTION. The following sections of this Article set forth definitions and basic data, and list Exhibits. Each reference in this Lease to any of the titles or terms contained in this Article I shall be construed to incorporate the definitions or data stated under that title or term. 1.2 DEFINITIONS AND BASIC DATA. Date of Lease: April 30, 1998. Commencement Date: May 1, 1998. Landlord: Wellplay Associates Limited Partnership, which holds tide to the Center, hereinafter defined, through Playhouse Nominee Trust Landlord's Mailing Address: c/o FIC Management Incorporated 380 Washington Street Wellesley, MA 02181 Tenant: Direct Hit Technologies Inc. Tenant's Mailing Address: Prior to Commencement Date: 58 Donizetti Street Wellesley, MA 02181 After Commencement Date: 386 Washington Street Wellesley, MA 02181 Rentable Area: Approximately 2,285 rentable square feet which figure includes a common area factor. Leased Premises/Premises: The space known as 386 Washington Street, Second Floor, Suite I -1- shown as Office Space 1 on Exhibit B and labeled the "LEASED PREMISES". The building in which the Leased Premises is located is called the "Building" and the center in which it is located is called the "Center". The street address of the Leased Premises is 386 Washington Street, Wellesley, Massachusetts 02181. Lease Term: Forty -two (42) calendar months following, the Commencement Date ending on October 31, 2001. Minimum Rent: $45,700.00 per year ($3,808.33 per month). Pro Rata Share: 7.7% Additional Rent: Includes all sums (except Minimum Rent) payable by Tenant to Landlord under this Lease. Security Deposit: Three months' Minimum Rent and Additional Rent which amount initially shall be $11,425.00 (based on only the minimum Rent) and shall be adjusted from time to time during, the Term to reflect any increases in Minimum Rent and Additional Rent. Permitted Use: For general office use, and for no other purpose. Tenant's Required Liability $3,000,000 for injuries suffered in any Insurance: (See Section 9.4.) one accident $1,000,000 for injuries suffered by any one person $500,000 for injuries to property Broker (See Section 18.6): Equity Partners, Inc. Initial Payment: The first month's Minimum Rent of $3,808.33 plus the Security Deposit of $11,425.00, less $1,500.00 which has already been received by Landlord such that a total of $13,733.33 shall be paid by Tenant at Lease signing. 1.3 EXHIBITS. The following Exhibits, which are attached to this Lease, are a part of this Lease and are incorporated in it by this reference. Agreements or undertakings contained in the Exhibits are binding as if set forth in this Lease, and are subject to all the provisions (including, provisions regarding default) of this Lease. - ------------------------- -------------------------------------------------------------------------------------------- Exhibit A. Legal Description of the Center. - ------------------------- -------------------------------------------------------------------------------------------- Exhibit B. A Plan Showing the Location of The Leased Premises and the Common Areas of the Center. - ------------------------- -------------------------------------------------------------------------------------------- Exhibit C. Work by Landlord - ------------------------- --------------------------------------------------------------------------------------------
-2- - ------------------------- -------------------------------------------------------------------------------------------- Exhibit D. Description of Tenant's Work. - ------------------------- -------------------------------------------------------------------------------------------- Exhibit E. Playhouse Square Design Criteria. - ------------------------- -------------------------------------------------------------------------------------------- Exhibit F. Restrictions. - ------------------------- -------------------------------------------------------------------------------------------- Exhibit G. Rules and Regulations. - ------------------------- -------------------------------------------------------------------------------------------- Exhibit H. Use Restrictions. - ------------------------- --------------------------------------------------------------------------------------------
ARTICLE II LEASE OF PREMISES AND APPURTENANT RIGHTS 2. 1 LEASE OF PREMISES. Landlord hereby leases to Tenant. and Tenant hereby accepts from Landlord, the Leased Premises. 2.2 APPURTENANT RIGHTS IN COMMON AREAS. Tenant shall have the right, in common with others, to use the parking areas, elevators, driveways, entrances, exits, sidewalks, and passageways which Landlord may from time to time make available to the tenants of the Center, as further described and subject to the limitations set forth in Article VI. 2.3 EXCLUDED AREAS; RESERVATION OF RIGHTS. All perimeter walls (except the inner surface thereon and the floor (except the inner surface thereon are excluded from the Leased Premises, but the ceiling (which in the case of first floor space shall be the underside of the floor above and in the case of second floor space shall be the underside of the roof) is not so excluded and is a part of the Leased Premises for all purposes. Landlord hereby reserves a right of entry as more particularly set forth in Section 8.5. ARTICLE III COMMENCEMENT 3.1 COMMENCEMENT DATE AND TERM. This Lease shall be-in on the Commencement Date specified in Section 1.2. and shall be for the Lease Term specified in Section 1.2. 3.2 Intentionally Omitted. 3.3 Intentionally Omitted. 3.4 CONDITION OF THE PREMISES. The Premises shall be delivered "as is", and Landlord shall not be required to make any repairs, alterations, or improvements to the Premises. 3.5 TENANT'S WORK. Promptly after the Commencement Date, Tenant shall perform at its own cost and expense, all of Tenant's Work (if any) set forth in Exhibit D, and shall equip the Leased Premises with all trade fixtures and personal property suitable or appropriate to the regular and normal operation of the type of business in which Tenant is engaged. Tenant shall -3- open for business as soon after the Commencement Date possible. Tenant's Work and any other work permitted pursuant to Section 8.4 hereof shall be done in a good and workmanlike manner using first-class new materials and equipment and in accordance with the requirements of all applicable laws, ordinances, orders or regulations of any public authority or of any insurer, Board of Fire Underwriters, or similar insurance rating, bureau having jurisdiction over the Leased Premises. ARTICLE IV MINIMUM RENT 4.1 MINIMUM RENT. Tenant agrees to pay to Landlord, at Landlord's Mailing Address (or at such other place as Landlord shall from time to time designate by notice) monthly, in advance, on the Commencement Date and on the first day of each calendar month thereafter during the Lease Term, a sum equal to the Minimum Rent specified in Section 1.2, or as adjusted pursuant to Section 4.2. Minimum Rent for any partial month shall be pro rated based on the number of days in such month and paid by Tenant to Landlord at such rate. Tenant shall pay upon execution of this Lease the Initial Payment as set forth in Section 1.2. 4.2 4.8 Intentionally Omitted. 4.9 NO PARTNERSHIP. Notwithstanding any agreement herein, it is expressly understood and agreed that Landlord shall not be construed or held to be a partner or associate of Tenant in the conduct of Tenant's business. It is understood and agreed that the relationship between the parties hereto is and shall at all times remain that of landlord and tenant. 4.10 RENT TO BE NET TO LANDLORD. It is the intention of the parties that the rent payable hereunder shall be net to Landlord, so that this Lease shall yield to Landlord the net annual Minimum Rent herein during the Term of this Lease, and that all costs. expenses and obligations of every kind and nature whatsoever relating to the Leased Premises shall be paid by Tenant (except to the extent Landlord is specifically required to pay for same under this Lease) without any deduction or offset whatsoever unless expressly provided otherwise herein. ARTICLE V TAX RENT AND OPERATING COSTS RENT 5.1 TAX RENT. Tenant shall pay to Landlord, as Tax Rent, Tenant's Pro Rata Share of the amount by which taxes, assessments, sales or use taxes imposed with respect to rent, sewer entrance fees, and other public charges (together called "Taxes"), levied, assessed, or imposed at any time by any Governmental authority upon or against the Center including the buildings therein, the associated land and personalty or taxes in lieu thereof in any lease year or partial -4- lease year during the Term exceed Taxes for the period from July 1, 1997 to June 30, 1998; provided, however, that Taxes shall not include franchises, estate, inheritance, succession, transfer, income or excess profits taxes assessed on Landlord. Notwithstanding the foregoing, Tenant shall pay all real and personal property taxes attributable to its signs or personal property and all of any increase in Taxes on the Center which shall result from alteration, addition or improvement which Tenant shall make to the Leased Premises. 5.2 TIME AND MANNER OF PAYMENT OF TAX RENT. Tax Rent shall be paid monthly at the times and in the fashion provided herein for the payment of Minimum Rent. The amount so to be paid shall be the amount which Landlord estimates will represent Tenant's liability for Tax Rent when Taxes are finally determined. Landlord may, from time to time, make such revisions in its estimate as may, in the circumstances, be appropriate. Promptly after Landlord receives the bills for Taxes, Landlord shall advise Tenant of the amount thereof, and shall compute Tenant's Pro Rata Share for the tax period included within the Lease Year covered by such bill. If payments previously made for such period by Tenant exceed such Pro Rata Share, then Landlord shall refund to Tenant the amount of such excess; but if such Pro Rata Share is greater than payments made on account, Tenant shall pay to Landlord within fifteen (15) days of demand the amount of such deficiency. Tenant's monthly installment on account of its Pro Rata Share shall be adjusted promptly after receipt of each real estate tax bill, so that installments on account for the succeeding tax year shall be equal to one-twelfth (1/12) of Tenant's Pro Rata Share for the preceding, period. To the extent that tax years do not coincide with any Lease Year or Partial Lease Year, such taxes shall be pro rated on a per them basis. 5.3 DIFFERENT METHOD OF ASSESSMENT. If some method or type of taxation shall replace the current method or type of real estate taxation in whole or in part, or be added as a supplement thereto, the term "Taxes" shall be amended to reflect such change. Tenant agrees that it shall pay its equitable share of any such Taxes computed in a fashion consistent with the method of computation herein provided, to the end that Tenant's cost on account thereof shall be, to the maximum extent practicable, the same as Tenant would bear under the foregoing Sections of this Article. 5.4 ABATEMENTS. Tenant's Pro Rata Share of all Taxes as aforesaid shall be based upon such Taxes "as abated" or finally determined; out of any refund of such Taxes, there shall first be deducted and paid to Landlord, the cost of securing such refund (including but not limited to appraiser's fees and attorneys' fees); and Tenant shall be entitled to its pro rata share of the balance of such refund to the extent same is attributable to the excess Taxes which Tenant is obligated to pay and, which shall be computed in the same manner that Tenant's Pro Rata Share of Taxes for the year(s) to which such refund is attributable was computed. Landlord shall have sole control of all tax abatement proceedings. The pendency of an abatement proceeding or the withholding of any tax payments by Landlord shall in no way affect Tenant's obligation to pay Taxes as provided above, and Tenant shall only be entitled to its portion of the proceeds or -5- benefits of any abatement when such proceeds or benefits are finally determined and actually received by Landlord. 5.5 OPERATING COST RENT. Tenant shall pay to Landlord, as Operating Cost Rent, with respect to each Lease Year or Partial Lease Year, Tenant's Pro Rata Share of the amount by which "OPERATING COSTS" of the Center in any calendar year or partial calendar year exceed the Operating Costs for calendar year 1997. "OPERATING COSTS" shall include: (i) all costs and expenses of every kind and nature paid or incurred by Landlord (including payments to reasonable and appropriate reserves) in operating, managing, equipping, insuring, controlling traffic, policing (if and to the extent provided by Landlord), lighting, cleaning, maintaining, repairing, replacing, and restoring the Common Areas of the Center, including (to the extent Landlord has obligations with respect thereto) the parking, areas, the foundations, roofs, gutters, downspouts, marquees, structural columns, beams and exterior walls (excluding the interior surface thereof) of the buildings, all utility lines, pipes and conduits, HVAC, and all drainage or sewage systems which are not the responsibility of any tenant under a then existing lease. Such costs and expenses shall include, without limitation, payments or charges for all maintenance, repairs, replacements, utilities, landscaping and gardening, security systems and services, sweeping, snow plowing, sanding, refuse removal, accounting wages, unemployment taxes, Social security taxes, workmen's compensation insurance premiums, fees for required licenses and permits, supplies, operation of loudspeakers and any other equipment supplying music or public address to the Common Areas, reasonable depreciation of equipment used in maintenance or operation of the Common Areas (but there shall be excluded costs of equipment properly chargeable to capital account and depreciation of the original cost of construction of parking facilities and other Common Areas, buildings and building, systems); (ii) an allowance for depreciation over the useful life thereof of any items or improvements properly chargeable to capital account, (iii) all premiums for, or reasonable value of, comprehensive general public liability, property damage, casualty, rent loss, and other insurance maintained by Landlord with respect to all of the Center, including, the Common Areas and all buildings and improvements; and (iv) an administrative charge equal to fifteen percent (15%) of the allowable charges under subsections (i), (ii) and (iii) above. Any amounts payable with respect to less than a full calendar year shall be equitably pro rated on a daily basis. -6- 5.6. TIME AND MANNER OF PAYMENT OF OPERATING COST RENT. Tenant shall pay to Landlord monthly in the same manner as Minimum Rent is payable Landlord's estimate of Tenant's Operating Cost Rent. Within sixty (60) days after the end of each calendar year during the Term, Landlord shall furnish to Tenant a statement in reasonable detail setting forth the computation of such costs and expenses incurred during the preceding calendar year; provided. however, that the failure of Landlord to furnish a statement within the specified time frame shall not affect Tenant's obligation to pay Operating Cost Rent at such time as said statement is furnished. Thereupon, there shall be a prompt adjustment between the parties, with payment to, or repayment by, the parties, as the case may require, to the end that Tenant shall pay only its Pro Rata Share of the total of Operating Costs. At Landlord's election, however, Landlord may submit more frequent periodic statements with respect to said costs and expenses (rather than annual statements), and in such case any deficiency in the payments made by Tenant for any such period shall be paid to Landlord upon Tenant's receipt of the statement in question. Any payment due from Tenant on account of such annual or periodic statements shall be due within fifteen (15) days Tenant's receipt of the statement. 5.7 TERMINATION. In case of the expiration or termination of this Lease prior to the end of the Term by reason of Tenant's default, Tenant's obligation to make payments of Tax Rent and Operating Cost Rent under this Lease shall continue and shall cover all periods up to the natural expiration of the Term. Landlord shall have a reciprocal obligation to refund to Tenant or give Tenant credit for its portion of any tax abatement received after the expiration or termination of the Lease. ARTICLE VI COMMON AREAS Landlord shall maintain and keep reasonably free from snow and ice the parking areas, sidewalks, entrances and exits and the like (herein called "Common Areas") immediately adjacent to the Center as shown on Exhibit B. Landlord may without the consent of Tenant from time to time make changes in the location and nature of the Common Areas now or hereafter existing in the Center. Landlord shall not be liable for any inconvenience or interruption of business or other consequences resulting from the making of repairs, replacements, improvements, or alterations, or the doing of any other work in, to or on the Common Areas. Landlord shall have the right to tow any employee's vehicle not parked in the designated area, or terminate that employee's license to park in the Center, or fine the employee or Tenant an amount equal to the local fine for illegal parking. ARTICLE VII TENANT'S COVENANTS -7- 7. 1 AFFIRMATIVE COVENANTS OF TENANT. Tenant shall: (i) pay the Minimum Rent and Additional Rent and all other sums due from Tenant to Landlord at the time and in the manner provided for in this Lease, without offset, setoff or deduction for any reason whatsoever; (ii) procure all licenses and permits which may be required for any use made of the Leased Premises; (iii) comply with the Sign Requirements for Exterior Signs as set forth in Exhibit E; (iv) use one hundred percent (100%) of the Leased Premises solely for the purpose set forth in Section 1.2, and for no other purpose; and under no circumstance shall Tenant use or allow the Leased Premises to be used in violation of the restrictions set forth in Exhibit F or Exhibit H; (v) abide by reasonable rules and regulations made from time to time by Landlord for furthering the success of the Center after receipt of notice thereof; (vi) pay, as they become due and payable, all charges for utilities furnished to, or consumed upon, the Leased Premises, including without limitations charges for water, sewer, electricity, gas, and heating fuel, all of which Tenant shall contract for in its name; (vii) require its employees to park only in the area designated by Landlord for employee parking, and advise Landlord of the license plate registration numbers of Tenant's employee's cars in the Center; (viii) take all action necessary to comply with all laws applicable to the Leased Premises or the operation of Tenant's business including, without limitation, all environmental related laws and the Americans With Disabilities Act, and promptly provide Landlord with copies of all notices received or sent by Tenant in connection with the foregoing; and (ix) lock the access to the elevator at the close of business each day. 7.2 NEGATIVE COVENANTS OF TENANT. Tenant shall not: (i) use sidewalks outside the entrance to the Leased Premises to display or sell merchandise or otherwise obstruct the same; (ii) permit anything to be done about the Leased Premises which shall be unlawful, improper or contrary to any law, ordinance, regulation, or requirement of any -8- public authority or insurance inspection rating bureau, or similar organization, or which may be injurious to or adversely affect the general character of the Leased Premises or the Center, or without limiting the Generality of the foregoing, which would involve the sale, rental or use of pornographic merchandise or services, adult entertainment or any other use that would adversely impact the reputation of the Center as a shopping center suitable for families and children. (iii) use in or about the Leased Premises any advertising media that may be objectionable to Landlord or other tenants of the Center, such as but not limited to, loud speakers, phonographs or radio broadcasts that may be heard outside the Leased Premises; (iv) construct, maintain, use or operate within the Leased Premises or elsewhere in the Center (or on the outside of the Center) any facility, equipment or machinery which produces light, music, sound, noise, odor or vibration which is audible, visible or discernable beyond the interior of the Leased Premises if in Landlord's reasonable opinion same interferes with the operation of the Center or any occupant's use of the Center; nor shall Tenant permit any act or thing upon the Leased Premises, the effect of which shall be to disturb the normal sensibilities and peaceful occupancy of other tenants or their employees or invitees. (v) deliver or remove any freight except over service roadways and in accordance with such reasonable rules and regulations as may be made by Landlord; (vi) bum any trash on or near the Leased Premises, or permit any offensive odors to be emitted from the Leased Premises; (vii) overload, damage or deface the Leased Premises; (viii) place or permit the placing of any signs, awnings, aerials, flagpoles or the like on the exterior of the Leased Premises without on each occasion obtaining the prior written consent of Landlord; (ix) do, or suffer to be done, or keep, or suffer to be kept, or omit to do anything in, upon or about the Leased Premises which may prevent the obtaining of any insurance including but without limitation, fire, extended coverage, and public liability insurance, on the Leased Premises or any other premises in the Center or on any property therein, or which may make void or voidable such insurance or which may create any extra premiums for, or increase the rate of, any such insurance. If anything shall be done or kept, or omitted to be done, in, upon or about the Leased Premises which shall create any extra premiums for, or increase the rate of, any such insurance, Tenant will pay the increased cost of the same to Landlord upon demand; -9- (x) do, or suffer to be done, or keep or suffer to be kept, or omit to do anything, in, upon or about the Leased Premises which may prevent Landlord from obtaining or cause the revocation of, any government license, permit, certificate of right or authority, or other document, necessary for Landlord to operate the Center including, but not limited to, government requirements related to the capacity of the septic system in the Center. If as a direct or indirect result of Tenant's business, an addition to or change in the Center facilities shall be required by law, ordinance, by-law or other governmental regulation, the addition or chance shall be installed and paid for entirely by Tenant; (xi) cause any hazardous or toxic wastes, substances materials or oil, as same or any related term may be defined in any federal or state law or regulation (collectively. "HAZARDOUS MATERIALS") to be used, generated, stored or disposed of on, under or about, or transported to or from, the Premises (collectively, "HAZARDOUS MATERIALS ACTIVITIES") without first receiving, Landlord's written consent, which may be withheld for any reason, conditioned as Landlord deems appropriate, and revoked at any time. In no event shall Landlord be liable to Tenant in connection with any Hazardous Materials Activities by Tenant, Tenant's employees, agents, contractors, licensees of invitees, whether or not consented to by Landlord, nor shall Tenant be relieved of liability as a result of any such consent. Tenant shall indemnify, defend with counsel acceptable to Landlord and hold Landlord harmless from and against any claims, damages, costs and liabilities arising out of Tenant's Hazardous Materials Activities. Tenant shall immediately notify Landlord both by telephone and in writing, of any spill or unauthorized discharge of Hazardous Materials or of any condition constituting, an "imminent hazard" under applicable law. ARTICLE VIII MAINTENANCE AND REPAIRS 8. 1 LANDLORD'S OBLIGATIONS. Subject to the provisions of Sections 8.2, 10.1, 10.2 and 13.4, Landlord shall keep and maintain in good repair the following portions of the Center: foundation, roof, gutters, downspouts, marquee, structural columns and beams, and exterior walls (excluding the interior surface thereof). Tenant shall reimburse Landlord, upon demand, for repairs to any of the above described portions of the Center necessitated by act, default or negligence of Tenant's officers, agents or employees, sublessees, licensees, concessionaires or other occupants of the Leased Premises, or those who come upon the Center for the purpose of visiting or dealing with any of the foregoing. Landlord shall not be deemed to have committed a breach of any obligations to make repairs unless it shall have made such repairs negligent or unless it shall have received notice from Tenant in writing designating the particular repairs needed and shall have failed to commence such repairs within a reasonable time after the receipt -10- of such notice; Landlord's liability in either such case shall be limited to the cost of making the required repairs and in no event shall Landlord be liable for indirect or consequential damages. 8.2 TENANT'S OBLIGATIONS. (1) Tenant shall keep the Leased Premises in a neat, clean, sanitary condition and shall keep in good repair, excepting only damage caused by fire or other casualty or taking by eminent domain, the following portions of the Leased Premises: the entire interior of the Leased Premises including walls and ceilings; all plumbing, electrical, sewage, air conditioning, ventilating and heating equipment and the wiring, pipes, motors and fixtures used in connection therewith; the exterior and interior portions of all doors and windows, moldings and frames; any automatic door opening equipment; floor coverings; all interior and exterior signs; loading docks and loading areas, if any, used exclusively by the Leased Premises; and all appliances, meters, fixtures and equipment appurtenant to the Leased Premises. For purposes of this Section 8.2. repair shall be deemed to include replacement where necessary. Tenant agrees that it shall be responsible for providing cleaning services for the Leased Premises, and that Landlord shall have no obligation with respect thereto. (2) maintenance of the heating and air conditioning system serving the Leased Premises in accordance with the manufacturer's recommended procedures, including, at a minimum, the following: (1) quarterly inspections and cleaning of entire system; (2) regular replacement of filters as necessary; (3) service calls as needed; (4) repair and replacement of any part or component which proves defective during the term of the contract, provided, however, that the contract may exclude replacement of major parts or components, but in such event, replacement of such parts or of the entire system, if necessary, shall be the sole responsibility of Tenant. Said contract shall be assignable co Landlord and at the expiration or earlier termination of the term hereof, Tenant, at Landlord's request, shall assign said contract to Landlord. Upon request, Tenant shall provide Landlord with a copy of the contract evidencing these terms. (3) Tenant shall replace any glass which may be damaged or broken with class of the same quality, provided, however that Landlord shall make available to Tenant the benefit of any contractor's or manufacturer's guarantee which Landlord may have from time to time. (4) Tenant shall make alterations and repairs of whatever nature required by applicable laws, ordinances, orders or regulations of any public authority or of any insurer, Board of Fire Underwriters, or similar insurance rating bureau having jurisdiction over the Leased Premises. (5) Tenant shall pay for all maintenance, and repairs to and replacement of the plumbing, and sewerage system in the Center which, in the judgment of Landlord, are made necessary by Tenant's use of same. It shall be conclusively presumed that such maintenance, repair and/or replacement are made necessary if Tenant uses detrimental substances or non-biodegradable solid substances and discharges same into the sewerage system. -11- (6) Notwithstanding the above, Tenant shall not be required to make repairs necessitated by the default or cross negligence of Landlord, its employees, or contractors. 8.3 MANNER OF MAKING REPAIRS; INDEMNIFICATION. All repairs, alterations, and maintenance work shall be done in a good and workmanlike manner using first-class new materials and equipment and in accordance with the requirements of all laws, ordinances, orders or regulations of any public authority or of any insurer, Board of Fire Underwriters, or similar insurance rating bureau having jurisdiction over the Leased Premises. Tenant agrees to pay promptly when due all charges for labor and materials in connection with any work done by Tenant or anyone claiming under Tenant on the Leased Premises. Tenant agrees to save harmless from, and indemnify Landlord against, all claims for injury, loss or damages to person or property caused by or resulting from the doing of any such work. 8.4 ALTERATIONS AND ADDITIONS. Tenant shall make no structural alterations, improvements or additions to the Leased Premises. Tenant shall make no non-structural alterations, improvements or additions to the Leased Premises without first obtaining, on each occasion the prior written consent of Landlord, which shall not be unreasonably withheld. If Landlord consents, Tenant may make such alterations, additions or improvements, provided that the same shall neither injure the safety of the structure of the Leased Premises, nor diminish their value, and provided further that at the expiration or other termination of this Lease. Landlord may require Tenant either to restore (the Leased Premises to their condition prior to the making of such alterations, improvements or additions or to have the Leased Premises remain in their altered condition with all improvements and additions becoming the property of Landlord. 8.5 RIGHT TO ENTER. Tenant hereby grants Landlord and its agents a right to enter without charge or abatement of or reduction in rent or payment of damages for the following purposes: (i) to examine the Leased Premises at reasonable times and, from time to time, to show the Leased Premises to prospective purchasers, lenders and tenants; (ii) to put up "For Sale" or "For Rent" signs, which signs Tenant agrees not to move, remove, block or otherwise interfere with; (iii) to make such repairs, improvements, alterations or additions as may be required by this Lease or by any public authority having jurisdiction, or to facilitate making repairs or improvements to any other part of the Center, or (iv) to make repairs which Tenant may have failed promptly to make pursuant to Tenant's covenants, hereunder; or (v) to construct, install, repair or replace in the Leased Premises or the approaches thereto any utility or waste line or pipe or any agency for the transmission through the Leased Premises of electricity, heat, water, gas or power of any kind. Unless any such work is of an emergency nature, Landlord shall only enter after reasonable notice and shall use reasonable efforts to minimize interference with Tenant's operations. 8.6 FIXTURES. All signs, counters, shelving, equipment, and all other trade fixtures installed by or at the expense of Tenant shall remain the property of Tenant, and Tenant may remove the same at any time or times during the Lease Term, and shall remove the same at the -12- expiration or other termination of this Lease unless excused in writing by Landlord. Tenant shall, at its cost and expense, make any and all repairs to the Leased Premises and the floors and walls thereof as may become necessary by reason of such removal, including painting and patching where necessary. Tenant shall cap or otherwise suitably secure all utility lines left exposed or unconnected after such removal. In the event day of the Lease Term, Landlord shall have the right to effect such removal and to store Tenant's property in a public warehouse at Tenant's expense, and to make such repairs, and Tenant shall forthwith reimburse Landlord for its costs therefor as Additional Rent. 8.7 YIELD-UP: REMOVAL OF GOODS. Except as directed by Landlord in writing or as otherwise provided in this Article, upon the termination of this Lease, Tenant shall immediately remove its goods and effects and peaceably yield-up the Leased Premises, broom-clean and in the same good order, repair and condition as it is obligated to maintain the same under this Lease. Notwithstanding any provision of the Lease to the contrary, provided Tenant is not in default at the time Tenant yields-up the Premises and provided further that Tenant repairs all the resulting damage, Tenant may remove all track lighting, alarm systems and security doors installed by Tenant in the Leased Premises. ARTICLE IX INSURANCE 9.1 LANDLORD'S CASUALTY INSURANCE. Landlord shall keep the Leased Premises insured against loss or damage by fire and other hazards included within usual "all-risk" coverage, in such amounts and with such deductibles as Landlord deems appropriate. 9.2 TENANT'S CASUALTY INSURANCE. Tenant shall keep all of Tenant's fixtures, furniture, furnishings, equipment and stock in trade insured against loss or damage by fire and other hazards included so-called "all-risk" insurance in an amount not less than one hundred percent (100%) of the full insurable replacement thereof, without deduction for depreciation, but in any event in an amount sufficient to prevent Tenant from becoming a co-insurer under the applicable policies. Any deductible shall be only in amounts approved in writing by Landlord and Landlord hereby approves a $l,000.00 deductible. 9.3 WAIVER OF SUBROGATION. Landlord and Tenant hereby release each other and each other's officers, directors, employees and agents, from liability or responsibility for an loss or damage to their respective property covered by valid and collectible all-risk insurance, or which would have been covered but for a party's failure to comply with the provisions of Section 9.1 or 9.2 above. This release shall apply not only to liability and responsibility of the parties to each other, but shall also extend to liability and responsibility for any one claiming through or under the parties by way of subrogation or otherwise. This release shall apply even if the fire or other casualty shall have been caused by the fault or negligence of a party or anyone for whom a party may be responsible. However, this release shall apply only with respect to loss or damage -13- actually recovered from an insurance company, or which would have been recovered but for a party's failure to comply with the provisions of Section 9.1 or 9.2 above. This release shall be applicable and in force and effect only with respect to loss or damage occurring during such time as the releasor's policies shall contain a clause or endorsement to the effect that any such release shall not adversely affect or impair said policies or prejudice the right of the releasor to recover thereunder. Landlord and Tenant each hereby agrees that its policies will include such a clause or endorsement so long as the same shall be obtainable without extra cost, or if extra cost shall be charged therefor, so long as the other party pays such extra cost. If extra cost shall be charged therefor, each party shall advise the other of the amount of the extra cost, and the other party, at its election, may pay the same, but shall not be obligated to do so. 9.4 INDEMNITY AND LIABILITY INSURANCE. Tenant shall save Landlord harmless and indemnified, to the extent permitted by law, from and against any and all claims, actions, loss, damages, liability and expense in connection with loss of life, personal injury and/or damage to property arising out of or resulting from any occurrence in, upon or at the Leased Premises or the occupancy or use of the Leased Premises or any part thereof, or anywhere if caused wholly or in part by any act, neglect, failure to perform the obligations imposed by this Lease or any breach thereof, or omission of Tenant, its officers, agents, employees, sublessees, licensees, concessionaires, others occupying space in the Leased Premises or any customers and those doing business with Tenant. If Landlord shall be threatened with or made a party to any litigation commenced by or against Tenant or any of the aforementioned parties with respect to any matter described above, then Tenant shall protect and hold Landlord harmless and indemnified and shall defend Landlord with counsel reasonably acceptable to Landlord or, at Landlord's option, shall advance all costs, expenses and reasonable attorney's fees incurred or paid by Landlord in connection with such litigation; and this indemnity shall be valid and binding except as required by M.G.L Chapter 186, Section 15. Tenant shall maintain with respect to the Leased Premises and the Center comprehensive public liability insurance covering all of Tenant's obligations under this Section, in the minimum amounts set forth in Section 1.2. Such policies shall name Landlord and, if applicable, Landlord's mortgagee as named insureds, and shall contain a contractual liability endorsement making specific reference to this Lease. 9.5 NON-LIABILITY OF LANDLORD. Landlord shall not be responsible or liable to Tenant for any loss or damage caused by other tenants of the Center, or by their visitors, guests, invitees, employees, agents, contractors, or any other persons occupying or visiting any portion of the Center. Except as required by Chapter 186, Section 15 of the Massachusetts General Laws, or any successor statute, neither Landlord, its agents, or employees shall be liable for any injury or damage to persons or property resulting from leaks of steam, gas, electricity, water, or any other substance from pipes, wires or other conduits, or from the bursting or stoppage thereof; or from leaks of water, snow, or rain from the plumbing, roof, other parts of the Building, or any other place; or for wetness or dampness caused for any reason whatsoever. Tenant acknowledges that it shall be Tenant's responsibility to obtain insurance to protect it from any and all such hazards, -14- and Tenant acknowledges that Tenant's agreement to fully insure Tenant's property was, given the value of such property, a material inducement to Landlord and that Landlord would not have entered into this Lease but for such agreement. 9.6 THEFT LOSSES. Except as required in Chapter 186, Section 15 of the Massachusetts General Laws, or any successor statute, Landlord shall not be liable for any damage to, removal of, or loss of any property of Tenant occasioned by any theft, burglary, robbery, larceny, or vandalism of any kind (hereinafter called "Theft"). Tenant Shall carry sufficient insurance for its own protection and for the protection of the Leased Premises and adjacent portions of the Center in connection with damage or loss arising from any such Theft. Tenant shall repair at its own cost and expense any damage or loss caused to the Leased Premises and shall promptly reimburse Landlord for repairs to adjacent portions of the Center required as a result of any such Theft. A report of any such theft to police or other proper authorities shall be deemed conclusive evidence that such an event occurred or an attempt was made. 9.7 Intentionally Omitted. 9.8 WORKER'S COMPENSATION. Tenant shall maintain worker's compensation, disability and other similar insurance covering all persons employed in connection with Tenant's Work or by Tenant with respect to whom death or bodily injury claims could be asserted against Tenant or Landlord. 9.9 CERTIFICATES OF INSURANCE. Each policy of insurance which Tenant is required to maintain under the provisions of this Article IX shall be with companies qualified to do business in the Commonwealth of Massachusetts and reasonably acceptable to Landlord, and shall name Landlord, and if Landlord so requests, Landlord's mortgagee(s), as insured parties. Tenant shall deposit with Landlord certificates of such insurance on or prior to the Commencement Date and thereafter new certificates not later than thirty (30) days prior to the expiration of the policies. The policies shall provide (and the certificates shall evidence) that they shall not expire, be cancelled, or be materially modified without at least thirty (30) days prior written notice to Landlord and, if Landlord so requests, to Landlord's mortgagee(s). ARTICLE X FIRE AND OTHER CASUALTY 10.1 DAMAGE OR DESTRUCTION - TERMINATION RIGHTS. If the Leased Premises become untenantable in whole or in part by reason of damage or destruction by fire or other casualty covered by fire insurance policies required to be carried by Landlord pursuant to the provisions of Article IX, Tenant shall immediately give written notice thereof to Landlord and, unless this Lease be terminated as hereinafter provided, Landlord at its own expense shall repair or rebuild the same with reasonable dispatch so as to restore the Leased Premises to substantially the same condition required in Exhibit C hereof (subject, however, to rights of mortgagees, zoning, laws -15- and building codes then in existence); provided, however, that Landlord shall not be required to expend in such repair or rebuilding any amount in excess of the net insurance proceeds received by Landlord with respect to such damage. "Net insurance proceeds" shall mean the amount of the insurance proceeds less all costs and expenses, including adjustors and attorney's fees, of obtaining, the same. If Landlord repairs or rebuilds the Leased Premises to the extent required herein, Tenant thereafter shall complete the repair of the Leased Premises including the repair or replacement of Tenant's trade fixtures, furniture, inventory and personal property, and reopen for business as soon as possible. 10.2 DAMAGE OR DESTRUCTION - TERMINATION RIGHTS. If the Leased Premises or the Buildings comprising, the Center shall be damaged or destroyed to the extent of ten percent (10%) or more of its insurable value by any cause, or if the Leased Premises or Buildings comprising the Center are damaged or destroyed by a risk not covered by Landlord's insurance, or if any such damage or destruction (regardless of amount) occurs during the last year of the Lease Term, Landlord may elect by written notice to Tenant within thirty (30) days after the damage or destruction has occurred, either to terminate this Lease immediately or to repair or rebuild the Leased Premises (if the same shall have suffered any damage). If Landlord elects to repair or rebuild the Leased Premises, Landlord's obligation with respect to such repairing or rebuilding, shall in no event exceed the scope or expenses of repairing or restoring the Leased Premises to substantially the same condition as the Leased Premises were in on the Commencement Date or the amount of the net insurance proceeds with respect to the Leased Premises recovered by Landlord, whichever is less. ARTICLE XI EMINENT DOMAIN 11.1 DEFINITIONS. As used in this Lease, the following words have the following meanings: (a) "AWARD" means the award for or proceeds of any Taking less all expenses in connection therewith, including, reasonable attorney's fees. (b) "TAKING" means the taking of, or damage to, the Leased Premises or the Center or any portion thereof, as the case may be, as the result of the exercise of any power of eminent domain, condemnation, or purchase under threat thereof or In lieu thereof. (c) "TAKING DATE" means the date on which the condemning authority shall have the right to possession of the Leased Premises or the Center or any portion thereof, as the case may be. 11.2 TOTAL OR PARTIAL TAKING OF LEASED PREMISES. If all of the Leased Premises shall be taken, except for a Taking for temporary use, this Lease shall be cancelled automatically as of -16- the Taking Date. If a part amounting to twenty-five percent (25%) or more of either (i) the floor area of the Leased Premises or (ii) the floor area of the buildings comprising the Center or (iii) the land on which the Center is located, as described in Exhibit A, shall be taken, Landlord shall have the option to cancel this Lease. The option to cancel may be exercised within six months of the Taking Date by giving Tenant sixty days (60) written notice that the option has been exercised and the Lease shall terminate as of the Taking Date. 11.3 ABATEMENT AND RESTORATION. If a portion of the Leased Premises shall be taken, except for a Taking for temporary use, and this Lease shall not be cancelled under Section 11.2, the following shall apply: Minimum Rent and Tenant's Pro Rata Share shall be reduced in the proportion that the area of the Leased Premises so taken bears to the entire area of the Leased Premises. Landlord shall restore the remaining portion of the Leased Premises to substantially the same condition they were in on the Commencement Date, to the extent practical, to render it reasonably suitable for Tenant's use, provided, however, that Landlord shall not be obligated to expend an amount greater than the Award for the restoration, and subject to zoning laws and building codes then in existence. 11.4 TAKING FOR TEMPORARY USE. If there is a Taking of the Leased Premises for temporary use, this Lease shall continue in full force and effect, and Tenant shall continue to comply with Tenant's obligations under this Lease, except to the extent compliance shall be rendered impossible or impracticable by reason of the Taking. 11.5 DISPOSITION OF AWARDS. All Awards arising from a total or partial Taking of the Leased Premises or of Tenant's leasehold interest awarded to Landlord or Tenant shall belong to and be the property of Landlord without any participation by Tenant. Tenant hereby assigns to Landlord any share of such Award which may be awarded to Tenant, and hereby waives any rights it may have with respect to the loss of its leasehold interest in the Lease and the Leased Premises as a result of a Taking. Tenant agrees to execute such instruments as may be necessary to effectuate the foregoing assignment, and agrees to turn over to Landlord any Award which may be recovered by it. Notwithstanding the foregoing, Tenant shall be entitled to any separate award for loss of movable trade fixtures installed by it or for relocation expenses, but only if such award is made in addition to the award for loss of leasehold and for interests in the land and buildings. ARTICLE XII ASSIGNMENT AND SUBLETTING 12.1 PROHIBITION. Tenant shall not assign or encumber this Lease in whole or in part, nor sublet all or any part of the Leased Premises, nor grant any license, concessions or lease to operate any business or department in the Leased Premises without Landlord's consent which consent shall not be unreasonably withheld or delayed. In determining whether to grant its -17- consent, Landlord may consider such factors as Landlord deems appropriate in its sole discretion including, without limitation, the proposed transferee's reputation, credit worthiness, and business experience, and the compatibility of the business use of the Leased Premises by the proposed transferee with other uses in the Center and other occupants thereof. Any purported sublet assignment or other transfer without Landlord's prior written consent as set forth above shall be void and shall confer no rights upon any third person. If this Lease shall be assigned, or if the Leased Premises or any part thereof shall be underlet or occupied by anybody other than Tenant, whether with or without Landlord's consent. Landlord may collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of the within covenant, or an acceptance of the assignee. subtenant or occupant as tenant, or a release of Tenant from full performance hereunder. 12.2 SALE OF STOCK; MERGER. If Tenant or any direct or indirect owner of Tenant is a corporation, then Tenant agrees that if there shall be a sale of fifty percent (50%) or more of the stock in Tenant or any direct or indirect owner of Tenant (whether such sale occurs at one time or at intervals so that, in the aggregate, over the term of this Lease, such a transfer shall have occurred), or a merger by Tenant or any direct or indirect owner of Tenant with another corporation with the result that the controlling shareholders of Tenant or any direct or indirect owner of Tenant do not control the surviving corporation, the same shall be deemed an assignment and Landlord shall have the right to cancel and terminate this Lease by giving thirty (30) days written notice of Landlord's desire to do so at any time prior to the expiration of sixty (60) days after written notice from Tenant to Landlord of any such transfer, or within one (1) year after Landlord first learns of any transfer if no notice is given. Upon the effective date of Landlord's notice, this Lease shall terminate as if such date was the date originally set for the expiration of the Lease Term. The term "sale" shall include any transfer other than a transfer by operation of law upon the death of a stockholder and the devolution of the stock held by such stockholder to his heirs or legatees. 12.3 OTHER TRANSFERS. If Tenant or any direct or indirect owner of Tenant is a partnership, trust, or other entity, the provisions of Section 12.2 relative to transfer shall be applied if there is a transfer of fifty percent (50%) or more of the beneficial interest in such entity, other than a transfer by operation of law upon the death of an interest holder. ARTICLE XIII DEFAULTS AND REMEDIES 13.1 TENANT'S DEFAULT. The following conditions shall be considered a "Default" by Tenant: (a) failure to pay Minimum Rent, any item of Additional Rent, or any other charge as and when due under this Lease; -18- (b) if the estate hereby created shall be taken on execution by other process of law; or (c) if Tenant or any guarantor of Tenant's obligations hereunder shall be liquidated or dissolved, commit an act of bankruptcy or be declared bankrupt or insolvent according to law, or if any assignment shall be made of its property for the benefit of creditors, or if any proceedings, including, without limitation proceedings for reorganization or for an "arrangement," shall be commenced by or against Tenant, or any guarantor of Tenant's obligations hereunder, under any bankruptcy or insolvency law now or hereafter enacted and the same shall not be dismissed within thirty (30) days from the time of their commencement or if Tenant, or any guarantor of Tenant's obligations hereunder, shall commencement or if Tenant, or any guarantor of Tenant's obligations hereunder, shall admit in writing its inability to pay debts Generally as they become due; or (d) if a receiver, guardian, conservator, trustee or assignee, or any other similar officer or person shall be appointed to take chore of all or any part of Tenant's, property, or the property, of any Guarantor of Tenant's obligation hereunder; or (e) if any court shall enter an order with respect to Tenant, or any guarantor of Tenant's obligations hereunder, providing for the modification or alteration of the rights of creditors; or (f) if Tenant shall not commence Tenant's Work within ten (10) days after the receipt of the notice that the Leased Premises are available to Tenant; or (g) if Tenant shall fail to take possession of the Leased Premises and open for the conduct of business within sixty (60) days following the Commencement Date; or (h) if Tenant shall vacate the Leased Premises or close for business for an aggregate period exceeding thirty (30) days; or (i) if Tenant shall assign or sublet all or any part of the Leased Premises without Landlord's prior written consent; or (j) neglect or failure to perform or observe any of the other terms, provisions, conditions, or covenants contained in this Lease on Tenant's part to be performed or observed, for a period of thirty (30) days after the giving of notice of such neglect or failure. For purposes of this Section 13.1(a)-(j), all references to Tenant shall be deemed to read "or Guarantor". In the event of a Default (notwithstanding any license, or any former breach of covenant or waiver of the benefit thereof, or consent in a former instance), Landlord shall have the right, at its election, then or at any time thereafter during the continuance of the Default, -19- either (1) to give Tenant written notice of Landlord's intention to terminate this Lease on the date of such notice or on any later date specified therein, and on the date specified in such notice, Tenant's right to possession of the Leased Premises shall cease and this Lease shall thereupon be terminated, or (2) without demand or notice, to re-enter and take possession of the Leased Premises or any part thereof in the name of the whole and repossess the same as of Landlord's former estate and expel Tenant and those claiming through or under Tenant and remove the effects of both or either pursuant to an order from a court of competent Jurisdiction without being deemed guilty of any manner of trespass and without prejudice to any remedies for arrears of rent or preceding, breach of covenants. Tenant hereby waives all statutory rights (including without limitation rights of redemption, if any), to the extent such rights may be lawfully waived. Landlord, without notice to Tenant but may store Tenant's effects, and those of any person claiming through or under Tenant at the expense and risk of Tenant, and, if Landlord so elects, pursuant to an order from a court of competent jurisdiction, may sell such effects at public auction and apply the net proceeds to the payment of all sums due to Landlord from Tenant, if any, and pay over the balance, if any, to Tenant. Should Landlord elect to re-enter as herein provided or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for herein or by law, Landlord may either terminate this Lease or, without terminating this Lease, re-let the Leased Premises or any part thereof from time to time for such term or terms, which may be for a period extending beyond the term of this Lease and at such rental or rentals and upon such other terms and conditions as Landlord may deem advisable, with the right to make alterations and repairs to the Leased Premises. No such re-entry or taking of possession of the Leased Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction; nor shall Landlord's right to re-let from time to time constitute any obligation to do so or to otherwise mitigate damages. In addition, and notwithstanding any other provision of this Lease to the contrary or the termination of the Lease in connection with a default, Tenant shall reimburse Landlord for all expenses incurred by Landlord in connection with Tenant's default including,, without limitation, costs of collection, repossession costs, warehouse charges, brokerage commission, reasonable attorneys' fees, alteration costs and expenses in connection with reletting. 13.2 CURRENT DAMAGES. No termination or repossession provided for in this Article shall relieve Tenant of its liability and obligations under this Lease, all of which shall survive such termination or repossession. In the event of any such termination or repossession, Tenant shall pay the Minimum Rent and all Additional Rent and other sums as hereinbefore provided up to the time of such termination; and thereafter Tenant, until the end of what would have been the term of this Lease in the absence of such termination or repossession and whether or not the Leased Premises shall have been re-let, shall be liable to Landlord for and shall pay Landlord as liquidated current damages (i) an amount equal to Landlord's reasonable attorneys' fees and costs relating in any manner to Tenant's Default plus (ii) (a) the Minimum Rent and other charges which would be payable hereunder if such termination or repossession had not occurred less (b) the net proceeds, if any, of any reletting of the Leased Premises, after deducting all Landlord's expenses in connection with such reletting, including without implied limitation all repossession -20- costs, warehouse charges, brokerage commissions, reasonable attorneys' fees, salaries of employees, alteration costs, and expenses of preparation for such reletting. Tenant shall pay such current damages to Landlord on the days on which the Minimum Rent would have been payable hereunder if this Lease had not been terminated; and Landlord shall be entitled to receive the same from Tenant on each such day. 13.3 FINAL DAMAGES. At any time after any such termination or repossession, whether or not Landlord shall have collected any current damages, Landlord shall be entitled to recover from Tenant and Tenant shall pay to Landlord, on demand, as liquidated final damages and in lieu of all current damages beyond the date of payment of the final damages, a sum equal to (i) an amount equal to Landlord's reasonable attorneys' fees and costs relating in any manner to Tenant's Default plus (ii) the amount, if any, by which the rent and other charges which would be payable hereunder from the date of such payment (or, If it be earlier, the date to which Tenant shall have satisfied in full its obligation under this Article to pay current damages) for what would be the then unexpired term if the same has remained in effect shall exceed the then fair net rental value of the Leased Premises for the same period. If any statute or rule of law governing a proceeding in which such liquidated final damages are to be proved shall validly limit the amount thereof to an amount less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such statute or rule of law. For purposes of this Section, the rent reserved hereunder shall be deemed to be an amount equal to the highest of the total yearly Minimum and Additional Rentals paid by Tenant in any Lease Year preceding such termination or repossession. 13.4 LANDLORD'S SELF HELP. If Tenant shall Default in the performance or observance of any agreement or condition in this Lease other than an obligation to pay money to Landlord, and shall not cure such Default within thirty (30) days after notice from Landlord specifying the Default (or shall not within said period commence to cure such Default and thereafter prosecute the curing of such Default to completion with due diligence), Landlord may, at its option, without waiving its right to terminate this Lease and without waiving any claim for damages for breach of agreement, at any time thereafter, cure such Default for the account of Tenant, and any amount paid or contractual liability incurred by Landlord in so doing shall be deemed paid or incurred for the account of Tenant, and Tenant agrees to reimburse Landlord therefor, or save Landlord harmless therefrom; provided, however, Landlord may immediately cure any such Default if the curing of the same is necessary to protect the real estate or Landlord's interest therein, or to prevent injury or damages to persons or property. If Tenant shall fail to reimburse Landlord upon demand for any amount paid for the account of Tenant, such amount shall be added to and become a part of the next payment of rent due without the necessity of any further notice. 13.5 LANDLORD'S DEFAULT. Landlord shall not be deemed to be in default hereunder unless its default shall continue for thirty (30) days, or such additional time as is reasonably required to correct its default, after written notice thereof has been given by Tenant to Landlord specifying the nature of the alleged default. -21- The obligations of Landlord hereunder shall be binding upon Landlord and each succeeding owner of Landlord's interest hereunder only during the period of such ownership and Landlord and each succeeding owner shall have no liability whatsoever except for their obligations during each such respective period. Tenant hereby agrees for itself and each succeeding holder of Tenant's interest, or any portion thereof, hereunder, that any judgment, decree or award obtained against Landlord, or any succeeding owner of Landlord's interest, which is in any manner related to this Lease, the Leased Premises, or Tenant's use or occupancy of the Leased Premises or the Common Areas of the Center, whether at law or in equity, shall be satisfied out of Landlord's equity in the land and buildings then comprising the Center to the extent then owned by Landlord, or such succeeding owner, and further so agrees to look only to such assets and to no other assets of Landlord, or such succeeding owner, for satisfaction. In no event shall Landlord ever be liable to Tenant for any indirect or consequential damages for any reason whatsoever. ARTICLE XIV LANDLORD'S COVENANT OF QUIET ENJOYMENT Landlord agrees that upon Tenant's paying the rent and performing and observing the terms, provisions, conditions and covenants on its part to be performed and observed, Tenant shall, and may, peaceably and quietly have, hold and enjoy the Leased Premises and may use in common with others the common facilities of the Center, as herein provided, without any manner of hindrance or molestation from Landlord or anyone claiming under Landlord, subject, however, to the terms of this Lease and any instruments having priority thereto. ARTICLE XV ARRANGEMENTS WITH MORTGAGEE 15.1 LEASE SUPERIOR OR SUBORDINATE TO MORTGAGE. It is agreed that the rights and interests of Tenant under this Lease shall be (i) subject and subordinate to any mortgages that may hereafter be placed upon the Center, and to any and all advances to be made thereunder, and to the interest thereon, and all modifications, renewals, replacements, and extensions thereof, if the mortgagee named in said mortgages shall elect by written notice delivered to Tenant to subject and subordinate the rights and interest of Tenant under this Lease to the lien of its mortgage or (ii) prior to the lien of any present or future mortgagee, if the holder of such mortgage shall elect, by written notice to Tenant, to give the rights and interest of Tenant under this Lease priority over the lien of its mortgage. In the event of either such election and upon notification by such mortgagee to Tenant to that effect, the rights and interest of Tenant under this Lease shall be deemed to be subordinate to, or to have priority over, as the case may be, the -22- lien of said mortgage, whether this Lease is dated prior to or subsequent to the mortgage. Tenant further agrees to attorn to and recognize any successor landlords, whether through foreclosure or otherwise, as if such successor landlord were Landlord named herein. Tenant shall execute and deliver whatever instruments may be reasonably required for all of the above purposes. Tenant also agrees that if it shall fail at any time to execute, acknowledge, or deliver any such instrument requested by Landlord, Landlord may, in addition to any other remedies available to it, execute, acknowledge and deliver such instrument as the attorney-in-fact of Tenant and in Tenant's name; and Tenant hereby makes, constitutes and irrevocably appoints Landlord as its attorney-in-fact for that purpose. The word "mortgage" as used herein includes mortgages, deeds of trust, or other similar instruments, and modifications, consolidations, extensions, renewals, replacements and substitutes thereof. 15.2 SUBORDINATION TO OVERLEASE. If at any time during, the Lease Term or any extension thereof Landlord shall hold the Leased Premises and/or the Center as lessee or tenant from an person, firm or corporation owning the fee thereof, whether such leasehold or tenancy shall come or have come into existence before, after or simultaneously with the Commencement Date of the Lease Term, then this Lease and all of the terms, provisions and covenants herein contained shall be subject and subordinate to such Lease (the "Overlease") whereby Landlord holds the Leased Premises and/or Center; and Tenant covenants that it will not do or permit to be done on or with respect to the Leased Premises and the Center any act or thing whatsoever which may be a violation of the terms of the Overlease. 15.3 TENANT'S STATEMENT. Within ten (10) days after request therefor by Landlord, Tenant shall deliver to Landlord or to any prospective mortgagee or purchaser a certificate in recordable form stating (to the extent such is the case) that this Lease as originally executed (unless otherwise noted) is in full force and effect. Tenant is the tenant under this Lease, the Lease is subordinate to specified mortgages and that Tenant has no claim against Landlord or defense against any requirement under this Lease except those stated in the certificate. The delivery of such statement shall constitute an irrevocable waiver of all claims of whatever nature then known and accrued by Tenant against Landlord arising out of or in any way connected with this Lease, other than claims specified therein. 15.4 NOTICE TO MORTGAGEE. After receiving, written notice from any person, firm or other entity, that it holds a mortgage which includes as a part of the mortgaged premises the Leased Premises, Tenant shall, so long, as such mortgage is outstanding and if so requested by Landlord or mortgagee, be required to give such holder the same notice as is required to be given to Landlord under the terms of this Lease, but such notice may be given by Tenant to Landlord and such holder concurrently. It is further agreed that such holder shall have the same opportunity to cure any default and the same time plus an additional period of twenty (20) days within which to effect such curing as is available to Landlord, and, if necessary to cure such default, such holder shall have access to the Premises. -23- 15.5 REQUEST BY MORTGAGEE. In the event that the holder of any mortgage or prospective mortgage on the property of which the Leased Premises are a part shall request any modification of any of the provisions of this Lease not having a material adverse effect on Tenant's rights, Tenant agrees Tenant will enter into a written agreement in recordable form with such holder or prospective holder, which shall effect such modification and shall provide that such modification shall become effective and binding upon Tenant and shall have the same force as an amendment to this Lease in the event of a foreclosure or other similar action taken by such holder or prospective holder. A provision directly relating to the rents payable hereunder, the duration of time hereof, or the size, use, or location of the Leased Premises shall be deemed a provision having a material adverse effect on Tenant's rights. 15.6 ASSIGNMENT OF RENTS. With respect to any assignment by Landlord of Landlord's interest in this Lease, or the rents payable hereunder, conditional in nature or otherwise, which assignment is made to the holder of any mortgage on the Leased Premises. Tenant agrees that the execution thereof by Landlord, and the acceptance thereof by the holder of such mortgage shall never be deemed an assumption by such holder of any of the obligations of Landlord hereunder, unless such holder shall, by written notice sent to Tenant, specifically elect, or unless such holder shall foreclose the mortgage, take possession of the Leased Premises, and agree in writing to so assume Landlord's obligations. ARTICLE XVI RESERVED ARTICLE XVII SECURITY DEPOSIT Tenant agrees that the Security Deposit specified in Section 1.2 will be paid upon execution and delivery of this Lease, and that Landlord shall hold the same throughout the Lease Term as security for Tenant's performance of ail its obligations under this Lease. Landlord shall have the right from time to time without prejudice to any other remedy Landlord may have on account thereof, to apply such deposit, or any part thereof, to Landlord's damages arising from any default on the part of Tenant. If all or any part of the deposit is applied to an obligation of Tenant hereunder, Tenant shall immediately upon request by Landlord restore said deposit to its original amount. Landlord upon written request shall return the Security Deposit, or so much thereof as shall not have theretofore been applied in accordance with the team of this Article XVII, to Tenant on the expiration or earlier termination of the Lease Term and Tenant's surrender of possession of the Leased Premises to Landlord, so long as Tenant shall not then be in default. While Landlord holds the Security Deposit, it shall have no obligation to pay interest thereon (provided that at the end of the Term, so long as Tenant has not been in Default, Landlord shall pay Tenant interest on the Security Deposit calculated at the rate of 3% per annum simple interest) and Landlord shall have the right to commingle the same with Landlord's funds. -24- If Landlord conveys its interest under the Lease, the deposit, or any part thereof not previously applied may be turned over co the grantee, and Tenant agrees to look solely to such grantee for proper application of the deposit in accordance with the terms of this Article XVII, and the return thereof in accordance herewith. ARTICLE XVIII MISCELLANEOUS PROVISIONS 18.1 ADDITIONAL DEFINITIONS AND INTERPRETATIONS. (a) The words "LANDLORD" and "TENANT" and the pronouns referring thereto, as used in this Lease, shall mean, where the context requires or admits, the persons or entities named herein as Landlord and Tenant, respectively, and their respective heirs, legal representatives, successors and assigns, irrespective of whether singular or plural, masculine, feminine or neuter. Except as otherwise provided herein, the agreements and conditions in this Lease contained on the part of Landlord to be performed and observed shall be binding upon Landlord and its heirs, legal representatives, successors and assigns and shall inure to the benefit of Tenant and its heirs, legal representatives, successors and assigns; and the agreements and conditions on the part of Tenant to be performed and observed shall be binding upon Tenant and shall inure to the benefit of Landlord and its heirs, legal representatives, successors and assigns. (b) If Tenant shall consist of more than one person or entity, or if there shall be a guarantor of Tenant's obligation, then the liability of all such persons or entities, including the -guarantor, if any, shall be joint and several and the word "Tenant," as used in this Lease, including without implied limitations Sections 13.1 and 13.3, shall include such person or entities, including any guarantors. (c) It is understood that the word "Landlord" as used in this Lease means only the owner, or the lessee, if this Lease becomes subject to an Overlease, or the mortgagee in possession of the Leased Premises, for the time being, so that in the event of any sale or sales of the Leased Premises or of any lease thereof or if any mortgagee shall take possession of the Leased Premises, Landlord named herein shall be and hereby is entirely relieved and freed of all covenants and obligations of Landlord hereunder accruing thereafter. (d) Each term and each provision of this Lease to be performed by Tenant shall be construed to be both a covenant and a condition. The reference contained to successors and assigns of Tenant is not intended to constitute a consent to assignment by Tenant, but has reference only to those instances in which Landlord may later give written consent to a particular assignment; provided, however, that Tenant shall not have the right to assign this Lease or sublease any portion of the Premises and that Landlord may unreasonably withhold consent to an assignment or sublease for which Tenant requests Landlord's consent. If the entity which holds Landord's interest in this Lease shall be a trust, then the obligations of Landlord shall be binding -25- upon the trustees of said trust, as trustees and not individually, and shall be binding upon the trust estate. 18.2 ADDITIONAL RIGHTS OF LANDLORD. Landlord reserves the right at any time or times during the term of this Lease to use the roof, foundation or exterior walls, other than parts of the front of the Premises, for signs or in connection with additional construction. 18.3 COSTS AND EXPENSES. Wherever in this Lease provision is made for the doing of any act by Landlord or Tenant, it is understood and agreed that said acts shall be done by the party designated at its own cost and expense unless a contrary intent is expressed. 18.4 HOLDING OVER. If Tenant or anyone claiming under it shall remain in possession of the Leased Premises or any part thereof after the expiration of the Lease Term without written agreement between Landlord and Tenant, the party remaining in possession shall, prior to acceptance of rent by the Landlord, be deemed a tenant at sufferance, and, after acceptance of rent by Landlord, be deemed a tenant at will subject to the provisions of this Lease insofar as the same may be made applicable to a tenancy at will; provided, however, that the Minimum Rent for the period of such tenancy shall be one and one-half of the highest rate of Minimum Rent payable during the Lease Term and provided further that Tenant shall be liable for all damages resulting from or related to such holdover including delay damages payable to future tenants and damages resulting from the loss of prospective tenants. 18.5 MECHANICS LIEN. Tenant agrees immediately to discharge (by payment, by filing of any necessary bond or otherwise) any mechanic's, materialmen's or other lien against the Leased Premises and/or Landlord's interest therein which may arise out of any payment due for, or purported to be due for, any labor, services, materials, supplies, or equipment alleged to have been furnished to or for Tenant in, upon, or a bout the Leased Premises. 18.6 NO BROKERAGE. Landlord shall pay a commission In the amount of $6,626.50 to the Broker identified in Section 1.2. Tenant warrants and represents that it has dealt with no broker in connection with this Lease except the Broker identified in Section 1.2. In the event of any brokerage claim against Landlord predicated upon dealings with Tenant, except claims by the Broker identified in Section 1.2, Tenant agrees to defend the same and indemnify Landlord against any such claim. 18.7 NOTICES. Whenever, by the terms of this Lease any notice, consent, or other communication relating, to this Lease shall or may be given, such notice shall be given in writing and shall be mailed by registered or certified mail or overnight express mail such as "Federal Express", postage prepaid, to the other party at the address designated in Section 1.2 or to such other address or addresses as may from time to time hereafter be assigned by such party by like notice, and if to a mortgage under Article XV, to such address as the mortgagee shall designate. Notwithstanding, the foregoing, written notice addressed to Tenant delivered to the Leased Premises shall be deemed duly given. -26- 18.8 NO WAIVER. Failure of Landlord to complain of any act or omission on the part of Tenant, no matter how long, the same may continue, shall not be deemed to be a waiver by Landlord of any of its rights hereunder. No waiver by Landlord at any time, express or implied, of any breach of any provision of this Lease shall be deemed a waiver of a breach of any other provision of this Lease or a consent to any subsequent breach of the same or any other provision. If any action by Tenant shall require Landlord's consent or approval, Landlord's consent to or approval of such action on any one occasion shall not be deemed a consent to or approval of such action on any subsequent occasion or a consent to or approval of any other action on the same or any subsequent occasion. No payment by Tenant or acceptance by Landlord of a lesser amount than shall be due from Tenant to Landlord shall be deemed to be anything but payment on account and the acceptance by Landlord of a check for a lesser amount with an endorsement or statement thereon or upon a letter accompanying said check that said lesser amount is payment in full shall not be deemed an accord and satisfaction and Landlord may accept said check without prejudice to recover the balance due or pursue any other remedy. Any and all rights and remedies which Landlord may have under this Lease or by operation of law, either at law or in equity, upon any breach shall be distinct, separate and cumulative and shall not be deemed inconsistent with each other; and no one of them, whether exercised by Landlord or not, shall be deemed to be in exclusion of any other; and any two or more of such rights and remedies may be exercised at the same time. 18.9 FORCE MAJEURE. In the event that either party shall be delayed or hindered in or prevented from the performance of any act required hereunder, other than paying money, by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reasons of a like nature not the fault of the party delayed in performing work or doing acts required under the terms of this Lease, then performance of such act shall be excused for the period of the delay and the period for such party's performance of any such act shall be extended for a period equivalent to the period of such delay. The provisions of this Section shall in no event operate to excuse Tenant from the prompt payment of Minimum Rent, Additional Rent or any other payments required by this Lease. In any case where work is to be paid for out of insurance proceeds or condemnation awards, due allowance shall be made, both to the party required to perform such work and to the party required to make such payments, for delays in the collection of such proceeds or awards. 18.10 RECORDING. Tenant shall not record this Lease. Upon request by either party, the other party shall execute a notice of lease in statutory form setting forth the Commencement Date, Lease Term and Extension Options, if any, and such other information as may be required by Massachusetts General Laws Chapter 183, Section 4 or any successor statute. The notice of lease shall include a statement that it is not intended to and shall not alter the terms of the Lease. 18.11 WHEN LEASE BECOMES BINDING. Landlord's employees or agents have no authority to make or agree to make a lease or any other agreement or undertaking in connection -27- herewith. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the premises, and this document shall become effective and binding only upon the execution and delivery hereof by both Landlord and Tenant and the entry into an agreement by Landlord with the existing, tenant of the leased Premises for surrender thereof. All negotiations, considerations, representations, and understandings between Landlord and Tenant are incorporated herein and may be modified or altered only by the written agreement signed by Landlord and Tenant. No act or omission of any employee or agent of Landlord shall alter, change or modify any of the provisions hereof. 18.12 INTENTIONALLY OMITTED. 18.13 LATE CHARGES; INTEREST; BAD CHECKS. In the event (i) the Minimum Rent and/or any Additional Rent is not received by Landlord by the due date, or (ii) of a dishonored bank check from Tenant, and because actual damages for a late payment or for a dishonored check are extremely difficult to fix or ascertain, but recognizing that damages and Injury result therefrom, Tenant agrees to pay $500.00 as liquidated damages for each late payment and $150.00 as liquidated damages for each time a check is dishonored. In addition, Tenant agrees that Landlord may, at its option, charge interest from the initial due date at the rate of eighteen percent (18%) on all amounts not received by Landlord within five (5) business days of the due date therefor. In the event that the rate of interest so required to be paid plus the late payment exceeds the maximum rate lawfully chargeable, the rate of interest required to be paid herein shall be deemed amended to reduce it to the maximum rate which may be lawfully chargeable. In the event that two (2) or more of Tenant's checks are dishonored, Landlord shall have the right, in addition to all other rights under this Lease, to demand all future payments by certified or bank check or money order. 18.14 PARAGRAPH HEADINGS. The paragraph headings throughout this instrument are for convenience and reference only, and the words contained therein shall in no way be held to explain, modify, amplify or aid in the construction, interpretation or meaning of the provisions of this Lease. 18.15 GOVERNING LAW. This Lease and the performance thereof shall be governed, interpreted, construed and regulated by the laws of the Commonwealth of Massachusetts. 18.16 SEPARABILITY: CONSTRUCTION AND INTERPRETATION. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. It is the intention of the parties hereto that if any provision of this Lease is capable of two constructions, one of which would render the provision valid, then the provision shall have the meaning which renders it valid. -28- 18.17 ENTIRE AGREEMENT. This Lease shall constitute the only agreement between the parties relative to the Leased Premises. No oral statements and no prior or contemporaneous written matter, whether by the parties or their agents or any other person, which is not specifically incorporated herein shall be of any force or effect. In entering into this Lease, Tenant relies solely upon the representations and agreements contained herein. This Agreement shall not be modified except by writing executed by both parties. 18.18 EXECUTION. This Lease may be executed in any number of original counterparts. Each fully executed counterpart shall be deemed an original for all purposes. 18.19 CONTINGENT. Tenant acknowledges that the approval of Landlord's first mortgage holder is required before this Lease becomes effective. Landlord agrees to request such approval promptly and to notify Tenant of the response of the first mortgage holder upon receipt thereof. This Lease also is contingent upon Landlord entering into an agreement, acceptable to Landlord, with the existing tenant of the Leased Premises for surrender of such space and the termination of the lease therefor. -29- EXECUTED AS A SEALED INSTRUMEINT. LANDLORD: WELLPLAY ASSOCIATES LIMITED PARTNERSHIP By: WELLPLAY GP, INC. Attest/Witness: - --------------------------- By: ------------------------------ Print Name: Print Name: ---------------- ---------------------- Title: ---------------------------- TENANT: DIRECT HIT TECHNOLOGIES, INC. By: /s/ Michael Cassidy ------------------------------ Attest/Witness: - --------------------------- By: CEO ------------------------------ its hereunto duly authorized Print Name: ---------------- -30- PARCEL THREE A certain parcel of land situated in Wellesley, County of Norfolk, Massachusetts, bounded and described as follows: WESTERLY: by the Easterly line of Forest Street, two hundred eleven and 65/100 (211.65) feet; NORTHWESTERLY: one hundred forty-nine and 60/100 (149.60) feet; NORTHEASTERLY: fifty (50) feet, by land now or formerly of W. Leslie Bendslev et al, Trustees; SOUTHEASTERLY: sixty-four and 36/100 (64.36) feet; NORTHEASTERLY: one hundred eight and 97/100 (108.97) feet, by lot numbered 1, as indicated on plan hereinafter referred to; and SOUTHEASTERLY: by land now or formerly of The Commonwealth of Massachusetts Cochituate Aqueduct, two hundred twenty-one and 08/100 (221.08) feet. Said parcel is shown as Lot 2 on a plan entitled "Subdivision Plan of Land in Wellesley", prepared by Gleason Engineering Company, dated July 24, 1964, filed with the Land Registration Office as No. 21347C. -31- EXHIBIT B PLANS SHOWING THE LOCATION OF THE LEASED PREMISES AND THE COMMON AREAS OF THE CENTER SEE ATTACHED PLANS -32- EXHIBIT C WORK BY LANDLORD Tenant acknowledges that Landlord is delivering the Premises in "as is" condition, that Tenant has had the opportunity to inspect the Premises and is satisfied with the condition of same. If any of the following work is required in the Leased Premises, it will be accomplished by Landlord at Landlord's actual cost, plus fifteen percent (15%) for the cost of administration. Architectural or engineering fees incurred by Landlord as a result of Tenant requesting any of the below-mentioned items will be the responsibility of Tenant. Landlord will commence this work only upon receipt of a signed work order from Tenant. The cost of any such item of work will be payable to Landlord fifty percent (50%) upon return of signed work order from Tenant with balance to be payable upon completion or by the date on which Tenant opens for business, whichever is sooner. Items included in the above are as follows: 1. With Landlord's written permission, new or additional water service or relocation of water service. 2. With Landlord's written permission, new or additional sanitary sewer connection or relocation of sanitary sewer. 3. With Landlord's written permission, roof and wall openings for any purpose. Such openings as are provided will include supporting structures, curbs, flashing, ducts, vents and grilles. Landlord reserves the right to refuse to permit the furnishings of any openings which exceed the capability of the structural system or which in Landlord's opinion would have an appearance detrimental to the Building or Center. 4. Any Tenant equipment that requires mounting on the roof must be installed by Landlord. Landlord reserves the right to refuse to permit the installation of any roof or wall-mounted equipment if, in Landlord's opinion, the appearance of such equipment would be detrimental to the appearance of the Building or Center, or such equipment or installation would exceed the capacity of the structural system. 5. With Landlord's written permission, openings in demising partitions and exterior walls. -33- EXHIBIT D TENANT'S WORK GENERAL All work set forth in this Exhibit "D", and all other work which is necessary to complete the Leased Premises in accordance with Tenant's Final Plans and which is necessary for the Leased Premises to be ready to open for business with the public, in the manner set forth in the Lease, shall be done by Tenant at Tenant's own cost and expense, and is herein collectively referred to as "TENANT'S WORK". All work performed by Tenant or Tenant's contractors must be in compliance with all applicable codes, rules, laws and ordinances and be performed in a good, workman-line manner in accordance with all manufacturer's recommendations as well as published industry standards. Insurance Prior to the start of Tenant's Work and until final acceptance of Tenant's Work by Landlord, Tenant shall secure and maintain liability insurance in accordance with the following requirements. Cost of this insurance will be the responsibility of Tenant, and the insurance will be maintained in a company licensed to do business in Massachusetts. Liability insurance shall include all major divisions of coverage and be on a comprehensive general liability basis including: 1. General Premises-Operations (including- X-C-U) Independent contractor's protection Blanket contractual Owned, non-owned and hired motor vehicles Broad form coverage for property damage (including explosion, collapse and underground). 2. a. Workman's Compensation - Statutory b. Employer's Liability - $1,000,000. 3. Comprehensive General Liability a. Bodily Injury - including personal injury with employee exclusion deleted. -34- Each person - $1,000,000. Each occurrence - $ 1,000.00 Aggregate - $1,000,000. b. Property Damage Each occurrence - $500,000. Aggregate - $500,000. 4. Automobile Liability a. Bodily Injury Each person - $500,000. Each occurrence - $ 1,000,000. b. Property Damage - $500,000. 5. Independent Contractors - $1,000,000. 6. Products and completed operations - $1,000,000. 7. Blanket Contractual Liability - same limits as above. Tenant shall furnish Insurance Certificates which shall specifically set forth evidence of all coverage required above. The form of Certificate shall be AIA Document G705. Tenant shall furnish to Landlord copies of any endorsements that are subsequently issued which amend coverage or limits. Tenants Submission Requirements I. Preliminary Submission Requirements for preliminary approvals: A. One (1) set of prints B One (1) set of sepias 1. Drawings shall contain information sufficient to communicate Tenant's design including: materials, finishes, equipment, lighting and colors 2. Tenant's architect shall field verify all measurements within the Leased Premises. II. Final Submission Requirements -35- A. Three (3) sets of prints of complete Contract Drawings and Specifications B. One (1) set sepias of complete Contract Drawings and Specifications C. Contract Drawings shall contain: 1. Architectural Floor Plans (1/4" = 1'-0") 2. Interior Wall Elevations (1/4" = 1'-0") 3. Details and Sections (3/4" minimum) 4. Reflected Ceiling Plan (including lighting and HVAC) 5. Electrical Plan 6. Plumbing Plan 7. Specifications for items 1 through 6 8. Samples as requested by Tenant Coordinator D. Tenant's Work shall proceed only on the basis of approved drawings. E. Tenant is responsible for obtaining all necessary permits and approvals prior to construction. F. Tenant shall deliver to Tenant Coordinator all copies of insurance certificates and building permits prior to construction. G. Tenant Coordinator is the representative of Landlord and is the liaison between Tenant, its architect, designer and/or contractor, and Landlord, its architect, designer and contractor in coordinating the design, design review and construction process. III. A. Leased Premises The Leased Premises shall be designed and constructed in accordance with Exhibit "E", Playhouse Square Design Criteria, the requirements of Landlord's fire insurance under-writer and the requirements of any governmental authority having jurisdiction over the Center. Tenant may not install a mezzanine. The maximum floor load shall be 100 pounds per square foot. B. General The floor slab or subfloor shall be covered with floor finish materials approved by Landlord. Carpeting, shall be flamed resistant. All partitions shall be of sheetrock, taped and spackled on both sides. All concealed framing above ceilings or soffits shall be made of steel studs or other fire retardant materials. All Tenant constructions must be noncombustible. -36- C. Toilet Rooms The floor slab or subfloor shall be covered with a non-porous floor covering approved by Landlord. D. Painting and Decorating Exposed painted walls shall have a minimum of two coats of finish and all natural wood shall have a minimum of two sealers coats. The walls and dry wall ceilings of the toilet room shall have two coats of semi-gloss finish, the equivalent approved by Landlord. E. Fixture Supports All Tenant improvements, other than ceilings and lighting fixtures, shall be floor mounted unless written approval is obtained from Landlord. All wall mounted fixtures, if approved by Landlord, shall be supported by wood blocking. -37- EXHIBIT E PLAYHOUSE SQUARE DESIGN CRITERIA (BOTH BUILDINGS) I. Exterior: A. The exterior(s) and front entrance to be provided by Landlord in accordance with plans on file with the Wellesley building inspector. II. Design Control Area: A. The Design Control Area is the area within the Leased Premises that adjoins the exterior and Common Areas of the Center and/or affects the interior or exterior appearance of the Building. Within this Design Control Area, Landlord shall control all aspects of Tenant's design. No penetration or alteration of materials installed by Landlord in this Area is allowed. B. Tenant is advised that in specific locations identified on Landlord's reference plans, certain fixed base building electrical, mechanical and plumbing services passing through Leased Premises have been established. Tenant must accommodate these utilities within his design and insure that appropriate access, as indicated on the reference plans, is provided. Alterations to same will be at Tenant's expense. III. Lighting: A. Tenant shall provide a high level of incandescent illuminations within the Design Control Area. Light track shall be recessed in lengths as designated by Landlord. Fluorescent lighting shall not be allowed within the Design Control Area. B. All fixtures shall be of high standard and approved by Landlord. C. All illuminated signs or Graphics and incandescent lighting in the Design Control Area shall be on separate time clocks connected to Tenant's distribution panel. Hours for operating the signage, graphics and incandescent lighting within the Design Control Area shall be per Landlord's requirements. D. Tenants which require specific mood-type 11-hting shall obtain design concept approval from Landlord. -38- E. No exposed fluorescent fixtures will be allowed within the Leased Premises. Where allowed, fixtures shall be recessed or baffled. IV. Approved Finish Materials: A. Materials listed are to encourage variety in office and fixture design. Any other finish materials must be approved by Landlord. Tenant shall provide samples with its preliminary submission. B. Finish Materials: 1. Plastic Laminates Solid colors only 2. Metals Anodized aluminum Bronze Copper Brass, polished finish Duracron baked enamel coated material, color as approved by Landlord 3. Other opaque materials Silver/gold leaf 4. Wood Solid or wood veneer, natural finish 5. Glass Clear and opaque 6. Plexiglass 7. No irritation of wood grain or imitation of any other natural material will be accepted. Samples of materials should be provided with preliminary submission. C. Floor Finish Materials: 1. Wood 2. Ceramic Tile 3. Quarry Tile 4. Plus or Sisal Carpet 5. Solid Color Linoleum 6. Solid Color Rubber Tile 7. Solid Color Vinyl Tile or Sheet Stock D. Ceiling Treatment and Finish Materials: -39- 1. Non-combustible materials in accordance with applicable codes and Landlord's written approval. E. Wall Finish Materials: 1. Non-combustible materials in accordance with applicable codes and Landlord's written approval. V. Tenant Work Regulations: A. Purpose: In order to expedite the completion of all tenant spaces with the least amount of inconvenience to all concerned, the following rules and regulations will be applicable to all tenants upon starting their construction work. These regulations will be enforced to ensure no interruption by tenant contractors to other business or public movement. B. Security: Tenant will be entirely responsible for the security of the Leased Premises during construction and the rent-free fixtures period, and shall take all necessary steps to secure the same. Landlord shall have no liability for any loss or damage including theft of building materials, equipment, or supplies. C. Working Hours: Tenant's contractors and suppliers will be subject to restrictions which may be imposed by Landlord's general contractor and/or Landlord in regard to the hours of work and scheduling and coordination of work. D. Public Safety: It is the responsibility of Tenant to ensure that its contractors exercise all caution in matters relating to public safety and construction safety or standards established by authorities having jurisdiction. Landlord's general contractor or Landlord, through communication by Tenant coordinator, may from time to time issue instructions to Tenant's contractor regarding safety and these instructions must be strictly adhered to. All work is governed by the latest Construction Safety Act and Tenant's contractor must abide with Landlord's construction superintendent in these areas. -40- E. Temporary Service: Landlord, through its contractor when active on site, may provide for Tenant temporary service such as may be required during the construction phase, at Tenant's expense; otherwise Tenant shall provide such temporary service. F. Ceilings: Ceilings, where ceilings separate tenant from other tenant spaces, shall achieve one hour rating to adjacent retail tenant and two hour rating to adjacent office tenant; submit appropriate UL designations to Tenant Coordinator for approval. G. Work Area: Tenant to confirm all contractors, supplies and construction to work area defined by Tenant's leaseline. H. Access to Leased Premises: Access to the Leased Premises for both construction personnel and material handling will be restricted to such entrances as shall be designated for each tenant's use. Prior to commencing finishing work, Tenant must consult with Landlord's Contractor or Landlord's Tenant Coordinator to obtain the entrance locations and timing of material deliveries. Tenant agrees to allow Landlord and Landlord's Contractor access to the Leased Premises during the construction period. I. Drilling and Cutting: Under no circumstances shall Tenant or its contractors drill or cut chases or openings in roofs, floors, ceiling slab or any part of the structure. Any work of this type required by Tenant shall be performed by Landlord for Tenant's account. J. Design Loads: The following invitations shall be observed by Tenant in the conduct of Tenant's Work. 1. No suspended loads will be attached to the underside of the floor or roof structures without Landlord's written approval. 2. No wall mounted fixtures will be permitted other than those approved in writing, by Landlord. Tenant acknowledges that the stud and drywall demising walls are not designed to support wall mounted fixtures. -41- 3. No load shall be imposed upon any floor areas of the Leased Premises in excess of 100 pounds per square foot, maximum. K. Tenant Contractor - On Site: Tenant shall ensure that its contractor contains its work within the Leased Premises, at all times being, responsible for abiding by the rules and regulations defined herein or as may additionally be imposed by Landlord. VI. Tenant Signage Specification: 1. Approval of Tenant Signage: 1.1 Tenant shall submit drawings of proposed signage to Landlord and/or Landlord's representative for approval and receive written approval prior to applying, for a sign permit, and fabricating or installing the signage. 2. Compliance with Regulations: 2.1 Tenant signage shall comply in design and construction to the requirements of all applicable laws, codes and other regulations having jurisdiction over the project including, but not limited to, the sign regulations of the Town of Wellesley, MA, and the Commonwealth of Massachusetts State Building Code. 2.2 Tenant shall apply for and receive sign permits from the Town of Wellesley, MA prior to installation of signs. 2.3 Tenants signage shall comply with the stipulations of these criteria. 3. Tenant Signage Design Criteria: 3.1 Tenant's sign (one per tenant space) shall be located on the outside of the Building on supports provide by Landlord. Sign to be located at entrance to each tenant space, or in such other space, and of such other size, design and construction as may be designated by Landlord, notwithstanding any provision hereinafter to the contrary. 3.2 Tenant's sign shall be made of "Calabana Cloth" as manufactured by the Astrup Company. Color to be #6911, Emerald Green. Graphics to be white or as approve(Ad by Landlord. Installation on the renovated Playhouse Building shall be stretched over metal framework provided and installed on the Building by Landlord. Installation on the new Building shall be stretched over 1/2" sealed marine plywood provided and installed by Tenant in the sign strip provided on the new Building or by Landlord. -42- 3.3 Graphics may be applied to signage cloth in the following manner: - silk screening - hand painting, - spray painting - cut-out lettering - heat color transfer. 3.4 Signage lighting shall be provided by Landlord in the form of surface mounting fixtures lighting the signs from the front. Light fixtures for the renovated buildings are to be "goose neck" type, extending from face of building approximately 24". Signage lighting for the new Building shall be back lit. 3.5 Tenant signs shall be 24" high (see sketch) and of maximum length approved by Landlord and the Town. The sign shall incorporate re d accent stripe as shown on drawing and the color shall be specified by Landlord. 3.6 Signage lettering may be a maximum height of 16" for initial or first letter with remaining letters to be 12" maximum height (see sketch). The horizontal dimension of the letters may not exceed the maximum sign length less 6". 3.7 Letters and logo design shall be as per the wishes of each tenant subject to the following criteria: A. all colors shall be approved by Landlord. B. Signage shall be firmly attached to signage frame in manner approved by Landlord. C. Tenant shall be responsible for the installation of the signage. D. Tenant shall be responsible for all costs for the fabrication, erection and removal of sign. E. Tenant shall be responsible for all maintenance and maintenance costs of the sign. Tenant shall be responsible for cleaning of sign as well as all necessary repairs. Weathered/faded signs shall be replaced at the request of Landlord at the cost of Tenant. 4. General Requirements: A. No sign boxes of any type will be approved. B No chance card signs shall be affixed to front. -43- C. No promotional signs of any type will be allowed. D. For corner locations, where two front and rear exist, Tenant shall install additional signage on the other frontage, if and where designated Landlord and the Town. E. For locations with front and rear (exterior) front, Tenant shall install additional signage on the other frontage if and where designated by and with the written approval of Landlord and the Town. F. Signage shall confirm to all applicable codes. Fasteners, clips and sign company identifications shall be concealed. G . No signs shall be attached to wood entrance doors. -44- EXHIBIT F RESTRICTIONS CONTAINED IN THE RECORD TITLE OR PRIOR EXISTING LEASES WHICH AFFECT THE SHOPPING CENTER: 1. State of facts contained in a survey plan entitled "Plan of Land in Wellesley, Mass.", dated October 23, 1986, prepared by MacCarthy & Sullivan Engineering, Inc., and matters arising subsequent to May 8, 1987, which would be disclosed on an accurate survey of the insured premises. 2. Rights of others in so much of the insured premises as may lie within the bounds of a public way. 3. Easements set forth in a deed from the Inhabitants of the Town of Wellesley to Babson Institute Incorporated, dated July 24, 1920, and recorded with Norfolk Deeds in Book 1465, Page 91. 4. Restrictions set forth in two deeds, one eleven by The Boston and Albany Railroad to Babson Institute Incorporated, dated October 29, 1920, and recorded with Norfolk Deeds in Book 1474, Pace 12 1, and the other eleven by Babson Institute, Inc. to Babson Building, Company, Inc., dated April 13, 1921, and recorded with Norfolk Deeds in Book 1490, Page 287. 5. Sewer easements in Forest Street as set forth in a taking by the Town of Wellesley, dated February 21, 1922, and recorded with Norfolk Deeds in Book 1510, Page 84. 6. Special Permit issued by the Wellesley Zoning Board of Appeals in Case No. ZBA 87-17, and recorded with Norfolk Deeds in Book 7510, Page 50. 7. Parking Covenant from Anne Marie Naff, Trustee of Playhouse Nominee Trust, dated April 3, 1987, and recorded with Norfolk Deeds in Book 7510, Page 54. 8. Special Permit and Site Plan Approval issued by the Wellesley Zoning, Board of Appeals in Case No. ZBA 87-15, recorded with Norfolk Deeds in Book 7534, Page 429, and filed with the Norfolk Registry District of the Land Court as Document No. 520795, and related plan entitled "Plan of Land in Wellesley, Mass.", dated March 11, 1987, prepared by MacCarthy & Sullivan Engineering, Inc., and recorded with Norfolk Deeds in Plan Book 353, as Plan No. 597 of 1987. 9. Special Permit and Variance issued by the Wellesley Zoning, Board of Appeals in Case No. ZBA 87-16, and recorded with Norfolk Deeds in Book 7534, Page 435. 10. Utility easement granted to Town of Wellesley (to be recorded). -45- 11. Current Mortgages. -46- EXHIBIT G RULES AND REGULATIONS Tenant shall comply with such rules and regulations as Landlord may promulgate from time to time. -47- EXHIBIT H USE RESTRICTIONS The following use restrictions, which are specifically applicable to the Leased Premises, shall not be deemed to imply, or to grant to Tenant, any right to use the Leased Premises for other than the Permitted Use set forth in Section 1.2, nor shall same be deemed a prohibition against Landlord leasing space in the Center for such purposes. Tenant hereby confirms that the Leased Premises shall be used solely and exclusively for the Permitted Use, and shall not be used in whole or in part for any of the following, uses, and that Landlord has the right to lease space in the Center to such tenants and for such purposes as Landlord, in its sole judgment, deems appropriate. 1. The sale of juvenile furniture and juvenile linen. 2. The sale of food for on-site consumption or carry-out. 3. The sale of women's skirts, dresses, blouses or slacks. 4. The operation of a laundry or dry cleaning establishment or "drop off" or pick up" center. 5. Photocopying or copying services including, without limitation, the operation of an electronic graphics center, self-service or full service typesetting, terminal rentals, duplicating, copying, offset printing, bookbinding, or any related services. 6. The sale of art supplies or provision of framing, services, or the sale or distribution of artist's and draftsman's supplies and consumer art supplies including, but not limited to, oils, paints, brushes, canvases, easels and related supplies and accessories, on-site custom and ready-made frames, framed and unframed posters, and all kinds and types of artwork and graphics, and related gift items. 7. The operation of a hair styling salon or the sale of products customarily sold in a professional hair styling salon. 8. The sale of sporting goods (fishing) and related clothing and gifts. -48- EX-10.5 7 EXHIBIT 10.5 LEASE AGREEMENT This Lease Agreement (the "Lease") is entered into as of the 3rd day of October, 1998 by and between WAYNE REALTY TRUST, ("Landlord") established under Declaration of Trust, dated October 3, 1968, as Document No. 33672 in Book 4547, Page 146 ("Landlord") with principal place of business at 34 Washington Street, Suite DEC 7, Wellesley Hills, Massachusetts, 02481-1909, and DIRECT HIT TECHNOLOGIES, INC. ("Tenant") with a current address at 386 Washington Street, Playhouse Square, Wellesley Hills, Massachusetts 02481-6218 and after the commencement of the Lease term, with a business address at the Demised Premises (as defined below). WHEREAS, Landlord owns the office building located at 888 WORCESTER STREET, WELLESLEY, MASSACHUSETTS 02482 (the "Building"); and WHEREAS, Tenant, which is duly authorized to conduct business in the Commonwealth of Massachusetts, desires to lease the portion of the Building identified generally approximately 8,805 RENTABLE SQUARE FEET on the third floor (the common area factor within the Building is 15% rendering the suite 7,500 usable square feet), Suite 340, of the Building and outlined in red on the floor plan marked Exhibit "A" and attached hereto and made a part hereof. NOW THEREFORE, in consideration of the Premises and the mutual covenants set forth herein, Landlord hereby leases the portion of the Building (hereinafter referred to as the "Demised Premises") together with rights to certain common areas of the Building and of the land on which the Building is located (hereinafter the combination of the "Demised Premises" and common area will be referred to as the "Premises") pursuant to the following terms and conditions: I. TERM This Lease shall be for a term of Three (3) Years commencing on the 1st day of January, 1999 and ending on the 31st day of December, 2001. II. RENTAL Beginning on January 1, 1999, Tenant agrees to pay, without notice, offset, demand or deduction, rent according to the schedule below payable in advance in equal monthly installments on or before the first day of each and every calendar month during the term hereof, and at the same rate for any fraction of a month occurring at the beginning or end of the term hereof, at Landlord's address as set forth above, or to such other place as Landlord may designate in writing.
- ---------------------------------------- -------------------------------------- -------------------------------------- PERIOD ANNUAL MONTHLY - ---------------------------------------- -------------------------------------- -------------------------------------- January 1, 1999- March 31, 2000 $145,282.50 $12,106.88 - ---------------------------------------- -------------------------------------- -------------------------------------- April 1, 2000 - December 31, 2001 $202,515.00 $16,876.25 - ---------------------------------------- -------------------------------------- --------------------------------------
Upon execution of this Lease Tenant agrees to pay to Landlord, $12,106.88, representing rent for the period January 1, 1999 through January 31, 1999. SUBLEASE AGREEMENT AGREEMENT made as of the ____ day of March, 1999, by and between Direct Hit Technologies, Inc. ("Sublessor") and Capella, Inc. ("Sublessee") WITNESSETH: WHEREAS, Sublessor has leased from Wellplay Associated Limited Partnership ("Major Lessor") office space known as Suite 1, Second Floor, 386 Washington Street in Wellesley, Massachusetts (the "Premises"), under an indenture of lease dated April 30, 1998 (hereinafter referred to as the "the Major Lease"), copies of said indenture being attached hereto as Exhibit "A" and made a part hereof; and WHEREAS, Sublessee is desirous of subleasing the entire Premises demised under the Major Lease at a base rent of $18.00 per square foot from April 1, 1999 through March 31, 2000; $20.00 per square foot from April 1, 2000 through September 30, 2000; and $22.00 per square foot from October 1, 2000 through October 31, 2001 and otherwise on substantially the same terms and conditions as the major Lease; and WHEREAS, Sublessor is willing to sublet said area on that basis; NOW, THEREFORE, for good and valuable consideration the parties agree as follows: 1. Sublessor hereby sublets to Sublessee Suite 1 of the Second floor of the building numbered 386 on Washington Street in Wellesley, Massachusetts, shown outlined in red on Exhibit B of the Major Lease attached hereto and made a part hereof, containing approximately 2,285 rentable square feet, said figure including a common area factor, (the "Subleased Premises") for the term of 31 calendar months beginning at 12:01 a.m. E.S.T. on April 1, 1999 and expiring at 12 midnight E.S.T. on October 31, 2001. 2. Sublessee shall pay to Sublessor as base rent of (a) the annual amount of $41,130.00 Dollars, payable in advance in equal monthly installments of $3428.00 from April 1, 1999 through March 31, 2000; (b) the annual amount of $45,700.00, payable in advance in equal Monthly installments of $3808.33 from April 1, 2000 through September 30, 2000; and (c) the annual amount of $50,270.00 payable in advance in equal monthly installments of $4189.00 from October 1, 2000 through October 31, 2001, the first installments to be paid on the execution of this Sublease and regular monthly installments to be paid during the term of this Sublease on the first day of each month commencing May 1, 1999. Sublessee shall also pay as additional rent its share of any operating cost escalation as may become the responsibility of Sublessor in accordance with the provisions of the Major Lease to which this Sublease is subject, it being understood and agreed that Sublessee's share of such operating cost escalation shall be one hundred percent (100%) of the amount for which Sublessor is responsible. Sublessee shall pay the amounts of such additional rent within ten (10) days of the date Sublessor is required by the Major Lease to pay said amounts. Sublessee shall also pay directly to any utility company all sums due and owing for utility services provided to and used by sublessee at the Premises. 3. Sublessee shall also pay to Sublessor a security Deposit equal to two months rent calculated at $22.00 per square foot (or a total of $8378.00). This security deposit shall be paid on the execution of this Sublease. With respect tot he Security Deposit, all terms, conditions, and covenants of Article XVII of the Major Lease shall be made part hereof and should govern, with Sublessor herein being considered as Landlord and Sublessee herein being considered as Tenant. 4. With respect to the Premises, except for the provisions of paragraph 5 below, all terms, covenants and conditions of the Major Lease are made a part hereof, Sublessor herein being considered as Lessor and Sublessee herein being considered as Lessee, and subject to paragraph 5 below, this Sublease shall operate as though it were an assignment pro tanto. 5. Sublessee hereby accepts the Premises "as is" and in their present condition. 6. Notwithstanding the foregoing, it is agreed that the Premises shall be used by Sublessee for general office purposes and training classes and for no other purposes. 7. Major Lessor has agreed to provide certain services and to perform other obligations under the Major Lease and upon reasonable notice from Sublessee of the failure of Major Lessor to perform any such obligation or provide any such service, Sublessor will promptly and diligently undertake to enforce its rights under the major Lease; provided, however, that the method and manner of seeking enforcement thereof shall be solely within the judgement and determination of Sublessor. Notwithstanding anything herein to the contrary, Sublessor shall not be liable to Sublessee for money damages on account of the failure of Major Lessor to perform any such obligations or provide any such service, nor shall any such failure constitute a constructive eviction of Sublessee. 8. Sublessee shall not do or permit anything to be done which would cause the Major Lease to be terminated by Major Lessor or forfeited. Sublessee hereby indemnifies and holds Sublessor harmless from and against all damages of any kind which Sublessor may suffer by reason of any breach or default hereunder by Sublessee, including termination or forfeiture of the major Lease, and from and against all other liabilities, claims and damages arising during the term in the Premises or out of or in connection with the use and occupancy of the Premises by Sublessee, except to the extent Sublessor is indemnified by its insurance carriers or by Major Lessor for such liabilities, claims or damages. 9. Sublessee shall not sublet the Premises, in whole or in part, nor assign the Sublease nor permit any interest of Sublessee in this Sublease to become vested in any third party, without the prior written consent of Sublessor and Major Lessor in each instance. 10. Sublessee represents that with the exception of ______________, it has not dealt with a real estate broker with respect to the Premises and agrees to indemnify Sublessor from any claim for a brokerage commission in connection with this Sublease except for any commission to be paid to ______________. 11. All prior undertakings and agreements between the parties are merged within this Sublease, which alone fully and completely sets forth the understanding of the parties with respect to the Premises, and this Sublease may not be changed or terminated orally or in any manner other than by written agreements signed by the parties. 12. Any notice or demand from Sublessor to Sublessee or from Sublessee to Sublessor shall be deemed duly served if mailed by certified mail addressed, if to Sublessee, Capella Systems, 58 Waverly Avenue, Newton, Massachusetts 02158, attn: John Hubbard or if Sublessor, Direct Hit Technologies, Inc., 888 Worcester Road, Suite 340, Wellesley, Massachusetts 02482 or such place as Sublessor may designate in writing in the future, and the customary certified mail receipt shall be conclusive evidence of such service. WITNESS the execution in duplicate under seal the day and year first above written. - --------------------------------- Capella, Inc. by John Hubbard, President - --------------------------------- Direct Hit Technologies, Inc. by Michael Cassidy Foregoing Sublease consented to: By: II. RENTAL (CONTINUED) If Tenant fails to pay all or any part of the monthly rent provided for in this Article II within seven (7) days of the date on which it is due, Tenant shall also pay a late charge equal to four percent (4%) of the unpaid rent to cover administrative fees of collection; provided, however, that Tenant shall not be required to pay such late charge the first time in any lease year (a lease year being each consecutive 12-month period between the term of this Lease commencing on the commencement date of this Lease) that Rent is not paid on or before the date on which it is due as long as such late payment is made within fourteen (14) days after the date it was due. At the beginning of each month after such rent was due, if all or any part of the monthly rent is still unpaid, Tenant shall pay an additional late charge equal to four percent (4%) of the unpaid rent. Notwithstanding anything to the contrary, the monthly rent is due and payable in advance on or before the first day of each and every calendar month during the term hereof and the above noted seven day period before a late charge is assessed is not intended to be a grace period. Landlord's acceptance of a lesser sum than the Rent then due shall in no event be deemed to be other than a partial installment of such rent due, and an endorsement or statement on any check or any letter accompanying any check or payment as rent shall in no event be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in this Lease provided. III. USE OF PREMISES A. PERMITTED USES AND ACCESS. The Premises are to be used only for general office purposes. Landlord services are provided between the ordinary business hours of 7:00 AM and 6:00 PM, Monday through Friday, excluding holidays. Notwithstanding anything herein to the contrary, Tenant shall have use and access to the Premises on a seven day per week, twenty-four hour per day basis. Tenant agrees that Tenant shall be responsible for obtaining and maintaining all necessary licenses, permits and approvals to carry on the permitted uses described above. Tenant agrees that its density of occupation shall not exceed one employee per 200 square feet of floor space in any one given area. Total density of occupation for the total leased area shall not exceed five (5) people per 1000 square feet. Landlord acknowledges that Tenant may from time to time exceed the above density of occupation, and in the event this density of occupation is exceeded, Landlord can not warrant proper heating and cooling of the Demised Premises and can not warrant that there will be any additional parking spaces available for Tenant beyond the parking allocation described in Article VI of this Lease. Tenant shall not place a load upon any floor in the Demised Premises exceeding a floor load per square foot capacity of Seventy Five pounds per square foot (75 lbs./sq.ft.) of area; and not move any safe, vault or other heavy equipment in, about or out of the Demised Premises except in such manner and at such time as the Landlord shall in each instance authorize. Tenant's machines and mechanical equipment shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient to absorb or prevent vibration or noise that may be transmitted to the Building structure. Tenant further agrees not to use the Premises to carry on, or permit upon the Premises any offensive, noisy or dangerous trade, business manufacture or occupation, or any nuisance, or allow the Premises to be used for any purpose that will increase the rate of insurance thereon over the rate charged by reason of a use of the character herein permitted without Landlord's prior written consent and without compensating Landlord for such increase; and nothing in violation of any present or future federal, state or local law or ordinance regulating use of the Premises will be done or permitted by the Tenant in or upon said Premises or any part thereof Tenant shall not commit or permit any waste in or with respect to the Premises, nor generate, store or dispose of any oil, toxic substances, hazardous wastes, or hazardous materials (each a, "Hazardous Material"), or permit the same in or on the Premises or any parking areas provided for under this Lease. Tenant shall not dump, flush or in any way introduce any Hazardous Materials into septic, sewage or other waste disposal systems serving the Premises or any parking areas provided for under this Lease. Tenant will defend, hold harmless and indemnify Landlord and its successors and assigns against all claims, loss, cost, and expenses including attorneys' fees, incurred as a result of any contamination of the Premise with Hazardous Materials by Tenant or Tenant's contractors, licensees, invitees, agents, servants or employees. This provision shall survive the termination of this Lease. B. HEATING AND AIR CONDITIONING. During normal business days and hours of 7:00AM and 6:00PM, Monday through Friday, excluding holidays, Landlord shall provide a year round heating, ventilation and air conditioning ("HVAC") system capable of producing and maintaining the following conditions in areas where there are no more than one person for every two hundred square feet and no equipment employed by tenants which generates excessive temperatures: Summer: Provide a temperature drop of 20 degrees Fahrenheit and relative humidity of 50% when the outside conditions do not exceed 95 degrees Fahrenheit. Winter: Provide a temperature inside of 68 degrees Fahrenheit when the outside temperature does not fall below 0 degrees Fahrenheit with a greater than 15 MPH wind prevailing. The heating and air conditioning systems shall be thermostatically controlled and zoned so as to automatically maintain preset temperature. Temperatures within a zone shall not vary more than 4 degrees Fahrenheit from the thermostatic setting. If Tenant intends to use the Demised Premises during nights and/or weekends and desires additional HVAC service for said non-ordinary business hours, Tenant must make special arrangements for such additional HVAC service with the Landlord during ordinary business hours at least twenty four (24) hours in advance and Tenant agrees to pay a fee which reflects a reasonable estimate of the extraordinary consumption of utilities which may be occasioned thereby. As of the commencement date of this Lease, Landlord and Tenant agree that the current reasonable estimate for the extra HVAC service is thirty dollars ($30.00) per hour for a minimum period of six (6) hours. This estimated cost is subject to increases over the term of the Lease based upon increased cost for utilities. C. ELECTRICITY. Tenant's use of electrical energy in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Demised Premises. In order to insure that such capacity is not exceeded, and to avert possible adverse effect upon the Building, Tenant shall give notice to Landlord whenever it shall connect to the Building's electrical distribution system any fixtures, appliances or equipment other than a reasonable quantity of lamps, personal computers, printers, typewriters, copiers, fax machines and similar office machines for standard office type uses. Any additional feeders or risers to supply Tenant's electrical requirements other than those set forth in EXHIBIT "A", and all other equipment proper and necessary in connection with such feeders and risers shall be installed by Landlord upon Tenant's request, at the sole cost and expense of Tenant, provided that, in Landlord's reasonable judgment, such additional feeders, risers or dedicated circuits are permissible and will not cause or create danger or injury to the Building or cause or create a dangerous condition or unreasonably interfere with the other Tenants of the Building. D. RULES AND REGULATIONS. Tenant agrees to comply with all rules and regulations Promulgated by Landlord from time to time for the operation of the Building including, but not limited to, those currently adopted, as shown on Exhibit "C" attached hereto and uniformly enforced to all tenants in the building. IV. TAXES, UTILITIES AND JANITORIAL SERVICES A. LANDLORD'S RESPONSIBILITY. Except as provided in Article V hereof, Landlord agrees to pay all real estate taxes and assessments levied against the Premises, provided, however, Landlord's failure to make such payments shall not constitute a default by Landlord hereunder unless such failure causes Tenant to be no longer able to use the Premises for the Permitted Uses, and at its own cost and expense to furnish the following services and utilities during the ordinary business hours described above, in Article III: 1. Original (and replacement) installation of lamps, bulbs, ballasts, and starters in electrical light fixtures. 2. Upkeep of grounds and other common area, and removal of snow and ice from parking areas and sidewalks. 3. Janitorial services in accordance with Landlord's instruction sheet; a copy of which is attached hereto and made a part hereof and marked Exhibit "B". Tenant from time to time will have boxes from the delivery of office supplies (i.e., paper, files, etc.) which it will break down and Landlord will removed in addition to its nightly emptying of office waste receptacles. 4. Electric current for lights, ordinary business machines and air conditioning as detailed in Article III of the Lease, paid for by Tenant directly to the utility company as detailed in Article IV.B. of the Lease. 5. Heat of the Demised Premises as detailed in Article III of the Lease. 6. Water and Sewer for all bathrooms, kitchenettes and drinking fountains within the Building. Landlord does not warrant that any services supplied by Landlord will not be interrupted. Services may be interrupted because of accidents, repairs, alterations, improvements or any reason beyond the reasonable control of Landlord. Except as noted below, no interruption of service shall: a. Be considered an eviction or disturbance of Tenant's use and possession of the Demised Premises; b. Make Landlord liable to Tenant for damages; c. Entitle Tenant to an abatement of rent; or d. Relieve Tenant from performing Tenant's obligations under this Lease. B. TENANT'S RESPONSIBILITY. 1. It is understood that any cardboard boxes, large amounts of trash or other items not considered routine office trash will be promptly removed from the Premises by Tenant at Tenant's expense in accordance with all applicable legal requirements. Tenant shall not allow any large amounts of trash to accumulate. 2. Tenant agrees to assume complete financial responsibility for electric meter #84181286, under Tenant's name, representing charges for provided overheat lighting, wall plugs and supplementary air conditioning unit for the Demised Premises during the term hereof. 3. Personal Property Tax to city or town. V. ESCALATIONS A. OPERATING EXPENSES (EXCLUDING REAL ESTATE TAXES). The basic rental, outlined in Article II hereunder, includes the 1997 actual per-square-foot costs being paid by Landlord to operate the Building, of which the Demised Premises forms a part. The current per-square-foot costs are outlined in EXHIBIT "D" attached hereto. If during the term of this Lease, commencing January 1, 2000, the total of the per-square-foot operating costs increases over that set forth in EXHIBIT "D", Tenant agrees to pay its proportionate share of such increase (the "Operating Increase"). Tenant's proportionate share shall be determined by multiplying the Operating Increase by the Demised Premises Fraction (7,500/31,755). Landlord may make a reasonable estimate of the expected per-square-foot Operating Increase, and may bill Tenant for its proportionate share thereof as additional monthly rental hereunder. Landlord will render a yearly accounting of the actual square foot costs incurred, and Tenant agrees to pay any shortfall between Tenant's estimated payments made and the total square foot costs incurred by Landlord. In the event the total per-square-foot costs incurred by Landlord prove to be less than the amount estimated by Landlord and paid by Tenant, then Landlord shall refund any overpayment to Tenant by either applying, at Landlord's option, any overpayment to Tenant's future estimated payments or by lump sum refund. B. REAL ESTATE TAXES. The basic rental, outlined in Article II hereunder, includes the 1997 actual per-square-foot real estate taxes currently paid by the Landlord for the Building, of which the Demised Premises forms a part. This per-square-foot real estate tax is outlined in Exhibit "D". If, in any real estate tax billing period or portion thereof during the term of this Lease, commencing January 1, 2000, the real estate taxes levied against the Building, on an annual basis, increase over those shown on EXHIBIT "D" Tenant agrees to pay its proportionate share of the increase in said real estate taxes (the "Tax Increase"). Tenants proportionate share shall be determined by multiplying the Tax Increase by the Demised Premises Fraction (7,500/31,755), defined above. Landlord may make a reasonable estimate of the expected per-square-foot Tax Increase and may bill Tenant for its proportionate share as additional monthly rental hereunder. Landlord will render a yearly accounting of the actual per-square-foot real estate taxes incurred, and Tenant agrees to pay any shortfall between Tenant's estimated payments made and the real estate taxes incurred by Landlord. C. PAYMENT OF ESCALATIONS. Tenant is obligated to pay such estimated and actual cost increase referred to in Sections A and B above, upon receipt of Landlord's billing or notice of same. Landlord shall furnish Tenant with a statement which sets forth, in reasonable detail, the basis for escalation. VI. SIGNS AND PARKING Landlord agrees to supply and install identifying signs for Tenant similar to those employed for other Tenants in the Building, at the main entrances to the Building and to the Demised Premises. Tenant shall in no event place any signs on the exterior or interior of the Building, or within the Demised Premises which will be visible from the exterior of the Building. Tenant, its employees and visitors, shall be allowed to use the general parking areas designated for the Building in common with others entitled thereto, in accordance to the following parking ratio. The parking ratio for the Building is four (4) unassigned parking spaces per 1,000 square feet rented. VII. MAINTENANCE, REPAIR AND SURRENDER A. Landlord agrees to maintain in good condition and repair the roof, foundations, structural components, common areas, HVAC systems, plumbing in the common-non areas, and windows of the Premises. Landlord shall not be required to make any such repairs where same were caused or taken by any acts or omission or negligence of Tenant its agents, invitees, licensees, visitors, or contractors. B. Tenant agrees that during the initial term of this Lease or any extension thereof, and for such further time as Tenant may hold the Demised Premises or any part thereof, it will: a. Keep the Demised Premises and the improvements therein in such repair, order and condition as the same are in at the commencement of the term or may be put in during the continuation thereof, reasonable use and damage by fire or Other unavoidable casualty alone excepted; b. Not cause the Demised Premises to be overloaded, damaged or defaced, reasonable use and wear and damage by fire or other unavoidable casualty alone excepted; and c. At the expiration or other termination of the Lease, yield up the Demised Premises and all keys, lock, Landlord's fixtures connected therewith, and all erections and additions thereon made to or upon the Demised Premises with the consent of Landlord, unless otherwise directed by Landlord, broom clean in good repair, order and condition in all respects, reasonable wear and use thereof and damage by fire or other unavoidable casualty alone excepted. VIII. ACCESS Landlord shall have the right to enter into and upon the Demised Premises or any part thereof, at all reasonable hours, for the purposes of (a) examining the same, (b) making such repairs or alterations therein as may be necessary provided that reasonable efforts be made to avoid undue interference with the conduct of Tenant's business, (c) showing the Demised Premises to prospective purchasers, mortgagees and the like; and (d) during the final six (6) months of the term or any extension thereof, showing the Demised Premises to prospective tenants. As appurtenant to the Demised Premises, Tenant shall have the right to use all elevators, hallways, stairways and such other common areas as are necessary for entrance to and exit from the Demised Premises and the Premises, together with common driveways giving access to parking areas. IX SUBLEASE AND CHANGE OF AUTHORIZED SIGNATORY Tenant may sublet the Demised Premises, in whole or in part, only to any wholly-owned subsidiary, or to any corporation (a "parent corporation") of which Tenant is a wholly-owned subsidiary, or to any wholly-owned subsidiary of a parent corporation now or hereafter organized, provided that Tenant shall provide Landlord with prior written notice of such sublet and provided further that Tenant shall remain liable hereunder. If, however, Tenant desires to sublet the whole or any part of the Demised Premises to any other party, Tenant shall first: (a) pay Landlord, in advance, a nonrefundable processing fee for the review of the proposed sublet in the amount of TWO THOUSAND FIVE HUNDRED DOLLARS (S2,500.00) and (b) provide Landlord with written data pertaining to the proposed subtenant, including but not limited to the name of the proposed subtenant and its principle address and key officers, trustees or other persons holding control; financial statements for the proposed subtenant; a statement of the business activities of the proposed subtenant and its proposed use of the Demised Premises; proposed floor plans for the Demised Premises (if changes are requested); the proposed terms and form of the sublease agreement; the number of persons who will occupy the Demised Premises pursuant to the proposed sublease; and such other items as Landlord may reasonably request. Landlord shall have the option of (i) consenting to the proposed sublease in writing, (ii) rejecting such proposed sublease and providing Tenant with reasonable grounds therefor, or (iii) canceling this Lease in writing as it applies to the area proposed to be subleased and relieving Tenant of any further liability hereunder as to such area. Except for a written cancellation pursuant to item (iii) above, Tenant shall in all events remain fully liable under this Lease. Any subtenants shall also become directly liable to Landlord for all obligations of Tenant under this Lease without relieving Tenant of any liability; provided, however, that Landlord shall have the right to require that all payments made under this Lease continue to be made by Tenant. In no event shall Tenant have any right to assign, directly or indirectly, its rights or obligations under this Lease. Reasonable grounds for Landlord's rejection of a proposed sublease include, without implied limitations, the following: (a) the proposed subtenant's financial responsibility does not meet the same criteria Landlord used to select tenants for the Building, (b) the proposed subtenant's business is not suitable for the Building considering the businesses of other tenants in the Building and the Building's prestige or image, or (c) the proposed use is inconsistent with the permitted uses described in Article III hereof Consent to one sublease pursuant to the terms hereof shall not waive the requirements of this provision with respect to subsequent subleases, and all subsequent subleases shall be subject to all terms and provisions contained herein. If Landlord consents to the proposed sublease in writing and if the terms of the sublease are such that the subtenant is paying Tenant MORE RENT than the rent detailed in Article II of the primary Lease between Landlord and Tenant, then Tenant will be required to pay to Landlord as additional rent the difference between the rent the subtenant is paying to Tenant and the rent that Tenant is obligated to pay to Landlord under the terms of this Lease. If, during the term of this Lease, or any extension hereunder, Tenant shall, through sale or transfer, diminish or liquidate its ownership or authority to the extent that the authorized signatory becomes, or will become, invalid or null and void with respect to this Lease or any future agreement between Landlord and Tenant, then Tenant shall notify Landlord in writing of such sale or transfer and shall supply to Landlord information (including, but not limited to, financial statements, names of principals, nature of business, etc.) regarding the sale or transfer of Tenant's ownership or authority whereupon, Landlord and Tenant agree to amend said Lease to incorporate Tenant's change of ownership or authorized signatory. Should Tenant fail to provide said notice and information required by Landlord, then Landlord and Tenant agree that the provisions and rights outlined in this Article IX shall apply to any transfer or diminution of the ownership or authority of the authorized signatory of Tenant hereunder. X. SUBORDINATION TO MORTGAGES This Lease shall be subject and subordinate to the lien(s) of any current mortgage or mortgages of record and to any ground leases of the Premises, as well as any such mortgage or mortgages or ground leases which may hereafter be recorded, against the real estate of which the Demised Premises are a part, and the recording of any such mortgage or mortgages or ground leases shall be prior in lien and interest to this Lease irrespective of the date of recording. Tenant agrees to execute any instrument which Landlord or any mortgagee or ground lessor may deem necessary to further effect the subordination of this Lease to any such mortgage or mortgages or ground leases, provided, however, that this subordination is subject to the condition that notwithstanding any default in any such mortgage or ground lease or any foreclosure thereof or default or termination thereunder, this Lease shall remain in full force and effect and Tenant shall be permitted to remain in quiet and peaceful possession of the Demised Premises throughout the term hereof and any extension, so long as Tenant shall not be in default under this Lease. Tenant shall within ten (10) business days after receipt of written request therefor, execute and deliver to Landlord an Estoppel Certificate, certifying as to (i) the accuracy of the Lease, (ii) the commencement and termination dates of the Lease, (iii) the Lease being unmodified and in full effect, or in full effect as modified, stating the date and nature of any modification, (iv) whether Landlord is in default under the Lease or whether Tenant has any claims, demand, offsets or other rights against Landlord and, if so, specifying the default, claim, offset demand or right, and (v) any other reasonably ascertainable fact covered by the Lease. Such Estoppel Certificate may be relied upon by Landlord and any third party with which Landlord is dealing, and Tenant's failure to execute and deliver such Estoppel Certificate shall be a default hereunder. XI. INSURANCE AGAINST FIRE AND OTHER PERILS Landlord shall keep the Building in which the Demised Premises are located (including all improvements and alterations made thereto by Landlord or Tenant) insured against damage or destruction by fire, and other perils commonly covered under an extended coverage endorsement to the extent of the full insurable value thereof, subject to customary deductibles. Landlord shall be responsible for determining the amount of fire and extended coverage insurance to be maintained. Such insurance shall be maintained for the protection of both Landlord and Tenant and in case of loss or damage, the proceeds thereof shall be applied on account of the obligation of Landlord to repair and/or rebuild the Premises to the extent required under the provisions of Article XIV hereof. Landlord may maintain such insurance under a blanket policy or policies. Tenant shall insure its furnishing, fixtures, equipment and partitions against fire, vandalism and other perils with "all-risks" insurance in an amount equal to 100% of the replacement cost thereof. Tenant shall provide Landlord with a certificate evidencing such insurance and any renewals thereof XII. TENANT'S PUBLIC LIABILITY AND PROPERTY INSURANCE Tenant shall, at all times, while it occupies the Demised Premises keep in full force and effect, at its own cost, a policy or policies of general public liability and property damage insurance with respect to the Demised Premises, written by a company or companies qualified to do business in Massachusetts, in which the limits of (i) public liability shall be not less than $500,000/$500,000 and (ii) property damage liability shall be not less than $1,000,000. The policy or policies shall name Landlord and its property manager as additional insured and shall contain a clause that such insurance cannot be canceled or changed without first giving Landlord thirty (30) days prior written notice. Tenant may maintain such insurance under a blanket policy or policies. Tenant shall furnish Landlord with certificates evidencing such insurance and any renewals thereof. XIII. INDEMNIFICATION Tenant shall save Landlord harmless and indemnified from all injury, death, loss, claims or damage to any person or property while on the Premises (unless caused by the negligence or willful misconduct of Landlord, his employees, agents, licensees or contractors), and from and against all injury, death, loss, claim or damage to any person or property wherever occurring occasioned by any act, neglect or default of Tenant. In case Landlord shall, without fault on its part, be made a party to any litigation commenced by or against Tenant, then Tenant shall protect and hold Landlord harmless and pay all cost, expenses and reasonable attorney's fees and expenses that may be incurred or paid by Landlord in enforcing the covenants and agreements in this Lease. Tenant agrees that Landlord shall not be responsible or liable for any loss or damage to any personal property belonging to Tenant, its employees or invitees, unless such loss or damage is caused through the negligence or willful misconduct of Landlord, his employees, agents, licensees or contractors. XIV. FIRE, CASUALTY OR TAKING If the Premises or any part thereof are damaged or destroyed in whole or in part by fire or other casualty, or demolished by the order or action of any public authority, this Lease shall, except as other wise provided herein, remain in full force and effect and Landlord shall, to the extent of insurance proceeds actually received by Landlord on account of such casualty, promptly and with dispatch, repair and rebuild the Premises so as to restore them to their condition before such damage, destruction or demolition, provided that Landlord shall not be responsible for delays in such reconstruction and restoration for causes beyond Landlord's control. There shall be an abatement of rent equitably proportional to the loss of use of the Demised Premises because of such damage, destruction or demolition, and such abatement shall commence as of the time of the damage, destruction or demolition and continue until the completion of the reconstruction and restoration. If the Building of which the Demised Premises are a part is destroyed or damaged by fire or other casualty within the scope of Landlord's fire and extended coverage insurance so that more than forty percent (40%) of the Demised Premises are rendered untenantable, or if the Building is destroyed or damaged from any other cause so that more than sixty percent (60%) of the Building are rendered untenantable, either party may, at its own election, by written notice to the other party, within sixty (60) days after such destruction terminate this Lease. Notwithstanding the foregoing, Landlord shall have no obligation to restore the Premises following a casualty occurring in the last nine (9) months of the term of this Lease, or to incur restoration costs in excess of the actual amount of insurance proceeds made available to Landlord by its insurer and not retained by a mortgagee or ground lessor of Landlord. In the event Landlord reasonably determines that actual insurance proceeds will be insufficient to cover the cost of restoration, Landlord shall have the option of (a) terminating this Lease by 30 days written notice to Tenant or (b) giving Tenant the option of (x) paying for the uninsured portion of the restoration costs or (y) terminating this Lease by 30 days written notice to Landlord. If the whole of the Premises is taken by condemnation, then this Lease shall terminate as of the date of such taking. If forty percent (40%) or more of the Premises is taken by condemnation, Tenant may terminate this Lease by giving written notice to Landlord within thirty (30) days after receipt of notice of such taking. If the Lease is terminated by reason of taking or condemnation, the rent from the date of the taking shall totally abate; if the Lease is not so terminated, the rent shall abate proportionately according to the area of the floor space of the Demised Premises which is taken by condemnation, from the time Tenant vacates the condemned area. Tenant assigns and grants to Landlord all right, title and interest, present or prospective, in any award due or made because of a taking by condemnation, except any award expressly designated for relocation of Tenant. XV. ALTERATIONS Tenant shall have the right, at its own expense, to decorate and redecorate the Demised Premises and to make any nonstructural alterations and changes it shall deem expedient to the better conduct of its business, provided that (a) Tenant submits complete plans of such alterations and/or changes to Landlord for approval, such approval not to be unreasonably withheld, (b) such alterations and/or changes do not injure the structural safety of either the Demised Premises, the Premises or the Building, and in no way diminish the value of either, (c) such alterations and/or changes are to be completed by Landlord's managing agent, Haynes Management Inc., in a first class workmanlike manner, employing building standard materials of good quality and complying with all proper governmental requirements, (d) Tenant will save Landlord harmless from all claims or liabilities because of damage or injury to any person or property occasioned by or growing out of such change or alterations,. and (e) Tenant will preserve the Premises and the Building at all times free of liens for labor and materials'. At the termination of this Lease or any extension thereof, the alterations shall remain as the property of Landlord unless Landlord expressly requests Tenant to remove such alterations, in which case Tenant shall do so and repair any damage caused by such removal. XVI. DEFAULT If (a) Tenant shall neglect or fail to perform or observe any of the covenants or conditions contained herein and on its part to be performed or observed, and Tenant shall fail to cure said breach or default (i) within five (5) days after written notice of said breach or default with respect to rent or any other money payment or (ii) within twenty-five (25) days after written notice of any other breach or default unless such breach or default is not of the type which can be cured within twenty-five (25) days, in which case Tenant shall commence to cure such breach or default within twenty-five (25) days and shall pursue such cure to completion diligently, or (b) the estate hereby created shall be taken on execution or by other process of law, or (c) any assignment shall be made of Tenant's property for the benefit of creditors or otherwise, or (d) a receiver shall be appointed for any part of Tenant's property, or (e) any proceedings shall be commenced by or against Tenant under any bankruptcy or insolvency law now or hereafter enacted, then in any such case, Landlord and/or the agents of Landlord may immediately or at any time thereafter and without further demand or notice (x) physically enter into and upon the Demised Premises or any part thereof in the name of the whole and repossess the same, or (y) make an entry by written notice of same given to Tenant at the address listed herein or such other address as Landlord has been notified of, in writing, and Landlord may thereafter expel Tenant and those claiming through or under it and remove its effects, forcibly, if necessary, without being deemed guilty of any mariner of trespass and without prejudice to any remedies which might otherwise be used for arrearages of rent or antecedent breaches of covenant, and upon either such form of entry the Lease shall terminate. Tenant covenants that in case of any such termination it will indemnify Landlord against all loss of rent and other payments, including damages which Landlord may incur by reason of such termination (including any reasonable attorney's fees incurred by Landlord in enforcing its rights against Tenant, and pro-rata reimbursement for any brokerage fee paid in connection with Tenant's aborted tenancy) during the remainder of the term and any extension thereof, said payments to be made from time to time upon demand of Landlord. Notwithstanding anything in the foregoing to the contrary, if Tenant fails to make timely payment of any rental or other monetary payment required herein due on more than two occasions within any period of twelve consecutive months after notice as aforesaid, Tenant shall be deemed to have defaulted and to have forfeited any right to cure or remedy any subsequent default, and in such event Landlord shall immediately obtain the rights set forth in the preceding paragraph and shall not be required to furnish Tenant with any further notice with respect to such subsequent default; or, if Landlord does not so elect and Tenant has accumulated three months or more of rent in arrears, then Tenant agrees to be liable for any and all costs incurred by Landlord, including reasonable attorney's fees, in collecting same. Landlord shall have the right, but shall not be required, to pay such sums or do any act which requires the expenditure of monies which may be necessary or appropriate by reason of the failure or neglect of Tenant to perform any of the provisions of this Lease, and in the event of the exercise of such right by Landlord, Tenant agrees to pay to Landlord forthwith, upon demand, all such sums, together with interest thereon at a rate equal to five percent (5%) over the Prime Rate. Except as otherwise expressly provided for in this Lease, failure on the part of the Landlord to complain of any action or nonaction on the part of Tenant, no matter how long the same may continue, shall never be a waiver by Landlord of any rights hereunder. Further, no waiver at any time of any of the provisions hereof by Landlord shall be construed as a waiver of any of the other provisions hereof, and a waiver at any time of any of the provisions hereof shall not be construed as a waiver at any subsequent time of the same provisions. The consent or approval of Landlord to or of any action requiring such consent or approval shall not be construed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar act by the other. XVII. ARBITRATION The parties agree that any dispute which pertains to their respective rights and duties under this Lease or with regard to what either of them is obliged to do or not do with respect to the Premises or the Building itself, except for Landlord's entitlement to possession for non-payment of rent, shall be submitted to arbitration in accordance with the Rules of the American Arbitration Association, and any award or finding made shall be final and binding upon them and judgment thereon may be entered in any court having jurisdiction thereof. XVIII. LANDLORD EOUITY INTEREST Tenant agrees that in connection with any and all claims arising out of this Lease pertaining to the Demised Premises, it shall have recourse only to Landlord's interest in the Building and not the individual assets of Landlord. XIX. NOTICES Notices required to be given hereunder shall be in writing and shall be deemed to be duty given and effective as of the date of (i) when delivered personally, (ii) 72 hours after mailed by registered or certified mail, return receipt requested, (iii) via fax or (iv) the day after deposited with a recognized carrier who provides overnight delivery service and evidence of delivery or refusal (such as but not limited to FedEx, Purolator Courier, UPS, or U.S. Postal Service Overnight Delivery), addressed to Landlord at 34 Washington Street, Suite DEC 7, Wellesley Hills, Massachusetts 02481-1909 and to Tenant at the Demised Premises, or to such other addresses as either Landlord or Tenant may hereinafter furnish to the other in writing. Notices required hereunder may be given to the Landlord, his lawyer, or his managing agents. XX. ENTIRE AGREEMENT This Lease and the Exhibits attached hereto and made a part hereof constitute the entire agreement between Landlord and Tenant and incorporates all of the covenants, agreements, conditions and understanding concerning the Demised Premises to be performed by Landlord or Tenant during the term hereunder. Further, this Lease supersedes and renders void any promise, agreement or condition, whether expressed or implied between the parties hereto, their representatives, assigns and legal representatives. This agreement can only be amended in writing, and any such amendment is effective only when fully executed by all parties. XXI. BROKER Except for Spaulding & Slye and Neelon Associates, Inc., Landlord and Tenant represent and warrant to the other that it has not directly or indirectly dealt with any Broker, with respect to the leasing of the Building, or had its attention called to the Building, by any broker. Wayne Realty Trust shall be responsible for paying any brokerage commission payable to Spaulding & Slye and Neelon Associates, Inc. in connection with this Lease. Each party agrees to exonerate and save harmless and indemnify the other against any claims for a commission by any other broker, person, or firm, with whom such party has dealt in connection with the execution and delivery of this Lease. XXII. APPLICABLE LAW This Lease shall be governed by and construed in accordance with Massachusetts law. XXIII. SURRENDER OF PREMISES AND HOLDING OVER Tenant shall surrender possession of the Premises on the last day of the term hereof and Tenant waives the right to any notice of termination or notice to quit. Tenant covenants that upon the expiration or sooner termination of this Lease, it shall, without notice, deliver up and surrender possession of the Premises in the same condition in which the Tenant has agreed to keep the same during the continuance of this Lease and in accordance with the terms hereof, normal wear and tear excepted, first removing therefrom all goods and effects of Tenant that are not attached to the Premises. Upon the expiration of this Lease or if the Premises should be abandoned by Tenant, or this Lease should terminate for any cause, and at the time of such expiration, vacation, abandonment or termination, Tenant or Tenant's agents, subtenants or any other person should leave any property of any kind, or character, on or in the Premises, the fact of such leaving of property on or in the Premises shall be conclusive evidence of intent by Tenant, and individuals and entities deriving their rights through Tenant, to abandon such property so left in or upon the Premises, and such leaving shall constitute abandonment of the property. Landlord shall have the right and authority without notice to Tenant or anyone else, to remove and destroy, or to sell or authorize disposal of such property, or any part thereof, without being in any way liable to Tenant therefor and the proceeds thereof shall belong to Landlord and as compensation for the removal and disposition of such property. Tenant agrees to reimburse Landlord for any expenses Landlord may incur in the removal or disposal of Tenant's property, trash, or debris left in the Demised Premises after the expiration of this Lease. If Tenant fails to surrender possession of the Premises upon the expiration or sooner termination of this Lease, Tenant shall pay to Landlord, as rent for any period after the expiration or sooner termination of this Lease an amount equal to THREE (3) TIMES the monthly rent required to be paid under this Lease during the last year of term hereof. Acceptance by the Landlord of such payments shall not constitute a consent to a holdover hereunder or result in a renewal or extension of Tenant's rights of occupancy. Such payments shall be in addition to and shall not affect or limit the Landlord's right of re-entry, Landlord's right to collect such damages as may be available at law, or any other rights of the Landlord under this Lease or as provided by law. XXIV. SECURITY FOR TENANT'S PERFORMANCE As security to Landlord that Tenant will carry out the monetary obligations described in this Lease, the parties agree upon the following arrangement. Upon execution of this Lease Amendment, Tenant shall deposit with Landlord an IRREVOCABLE LETTER OF CREDIT in the face amount of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000.00) (the "Letter of Credit'), for the benefit of Landlord, its successors or assigns; similar to the sample Irrevocable Letter of Credit shown on EXHIBIT "F" attached hereto and made a part hereof. In the event of an uncured monetary default of Tenant under this Lease, or in the event of nonrenewal of the Letter of Credit by Tenant at least thirty (30) days prior to its stated expiration date, Landlord shall have the right to draw upon the Letter of Credit from time to time to cure any such default. The Letter of Credit shall be maintained and renewed by Tenant on an annual basis for the term of this Lease. In the event of an uncured monetary default hereunder or the failure of Tenant to deliver to Landlord a renewed or replacement Letter of Credit at least thirty (30) days prior to the stated expiration date of the Letter of Credit, Landlord may present a certificate to Lender certifying an uncured monetary default of Tenant under this Lease and requesting a specific draw on the Letter of Credit IN THE AMOUNT TO cure any such default. Tenant shall CAUSE THE LETTER OF CREDIT TO BE AMENDED OR REISSUED SO THAT the full $150,000.00 stated amount of the Letter of Credit shall be reinstated within fifteen (15) days following any such partial draw. If this Lease is terminated due to an uncured monetary default of Tenant, Landlord may elect to draw down the full stated amount of the Letter of Credit to satisfy existing or future Lease obligations of Tenant for unpaid rent or other monetary or maintenance obligations imposed on Tenant by this Lease. This provision shall in no way alter or diminish Landlord's obligation to mitigate its damages hereunder and any Letter of Credit funds held by Landlord in excess of Landlord's reasonable expenses to re-let the Demised Premises and to compensate Landlord for rent reserved or due from Tenant through the stated expiration date of this Lease, shall be refunded to Tenant. Tenant shall have the right to cure any monetary default under this Lease prior to a draw by Landlord under the Letter of Credit by paying to Landlord the principal amount of any such default, plus any accrued interest thereon pursuant to the applicable provisions of this Lease. Any such curing, on Tenant's part, however, shall not undermine or alter in any way Landlord's rights under this Lease. Landlord's resort to the Letter of Credit shall not alter or modify Landlord's remedies under this Lease including, without limitation, Landlord's right to terminate this Lease pursuant to the third paragraph of Article XVI if Tenant fails timely to make any rental or other monetary payment more than two (2) consecutive times within any period of twelve (12) consecutive months. AND IT IS MUTUALLY UNDERSTOOD AND AGREED that the covenants and agreements contained in this Lease shall be binding upon the parties hereto and upon their respective successors, assigns and legal representatives. IN WITNESS WHEREOF, the parties hereto have set their hands and seals to this Lease this 3rd day of October, 1998. LANDLORD: WAYNE REALTY TRUST TENANT: DIRECT HIT TECHNOLOGIES, INC. By: /s/ G. Arnold Haynes By: /s/ Michael Cassidy ------------------------------- ------------------------------ G. Arnold Haynes, Trustee Michael Cassidy, CEO EXHIBIT "B" JANITORIAL INSTRUCTION SHEET DAILY - CORE OF BUILDING GENERAL 1. Dust mop all floors and spot mop where necessary. 2. Empty waste receptacles. 3. Clean and sanitize water coolers. 4. Clean glass on entrance doors to building. S. Sweep/vacuum stairways. 6. Sweep (or mop) elevator floor. 7. Vacuum all carpeting. 8. Vacuum entrance mats. RESTROOMS 1. Sweep and mop floors with disinfectant. 2. Clean and sanitize all fixtures. 3. Clean and polish mirrors. 4. Refill dispensers. 5. Empty waste receptacles. 6. Wipe down with disinfectant all toilet partitions. WEEKLY - CORE OF BUILDING GENERAL 1. Mop/vacuum stair-ways. 2. Mop entrances 3. Mop elevator. DAILY - OFFICE AREAS 1. Empty waste receptacles. (normal office trash in waste baskets only). TWICE WEEKLY - OFFICE AREAS 1. Dust all horizontal surfaces provided that they have no loose papers on them. 2. Vacuum all carpeting. 3. Clean glass on entrance doors. 4. Wipe down all window sills. MONTHLY - CORE OF BUILDRNG 1. Wash and wax entrances - more frequently if needed. EXHIEBIT"C" RULES AND REGULATIONS 1. The entrance, lobbies, passages, corridors, elevators, and stairways shall not be encumbered or obstructed by Tenant, Tenant's agents, servants, employees, licensees or visitors or be used by them for any purpose other than for ingress and egress to and from the premises. The moving in and out of all safes, freight, furniture, or bulky matter of any description must take place during the hours which Landlord may determine from time to time. Landlord reserves the right to inspect all freight and bulky matter to be brought into the building and to exclude from the building all freight and bulky matter which violate any of these Rules and Regulations or the lease of which these Rules and Regulations are a part. 2. No curtains, blinds, shades, screens other than those furnished by Landlord shall be attached to, hung in, or used in connection with any window or door of the premises without the prior written consent of Landlord. Interior signs on doors shall be painted, or affixed for Tenant by Landlord or by sign painters first approved by Landlord, at the expense of Tenant, and shall be of a size, color and style acceptable to Landlord. 3. Canvassing, soliciting and peddling in the Building are prohibited and Tenant shall cooperate to prevent same. 4. Tenant shall comply with all security measures from time to time established by Landlord for the Building. 5. There shall be no overnight parking in the parking areas designated for the Building for which the Demised Premises is a part. 6. Upon the removal of any xerox or similar copy equipment from the Demised Premises, Tenant shall be responsible for removal of any stains on the carpet and/or walls within the Demised Premises caused by such copy equipment. 7. Tenant shall not have the right to make any lock changes or installation of burglar alarm systems, within the premises without first obtaining consent form Landlord, such consent not to be unreasonably withheld, it being understood that any lock changes shall be keyed to Landlord's master system and the cost of any such lock change shall be borne by Tenant. 8. Floor mats must be placed under all desk chairs with wheels or casters. 9. Tenant agrees to promptly report to Landlord or Haynes Management Inc., any problems relating to Landlord performing its duties hereunder. 10. Tenant shall submit to Landlord, plan(s) showing proposed location and method of installation of phone equipment including, but not limited to, relay terminals, phone lines, and services panels, for Landlord approval. All phone jacks shall be installed within three (3") inches above floor. 11. The moving in and out of all safes, freight, furniture, or bulky matter of any description must take place during the hours which Landlord may determine from time to time. Tenant agrees that should the elevator be needed, at the expiration of the Lease term, or at any time during the term hereof, for the moving in or out of furniture, etc., that Tenant will notify Landlord and will only use the elevator during the hours of 9:30AM and 4:00PM Monday through Friday, unless approved by Landlord in writing. EXHIBIT"C" RULES AND REGULATIONS (Continued) 12. The Building is a designated non-smoking facility, it is agreed that there will be no smoking in any portion. including the Demised Premises, of the Building and extends the smoke free zone to the entrances of the Building as outlined in red on the attached Exhibit "E" and made a part hereof. 13. Landlord reserves the right to assign parking stickers to tenants in the building in accordance to the parking ratio detailed in Article VI of the Lease and to enforce such parking allocations. 14. No Medical Laboratory Boxes are permitted in the common areas of the Building and should be kept inside the Demised Premises locked at all times. 15. Tenant agrees not to allow or permit either by the Tenant or its agents, employees, licensees, invitees or visitors, a pet (domestic or otherwise) on the Premises or in the Demised Premises, the exception being a "seeing-eye" dog. EXHIBIT "F" SAMPLE IRREVOCABLE LETTER OF CREDIT November 27, 1998 Wayne Realty Trust c/o: Haynes Management, Inc. 34 Washington Street; Suite DEC7 Wellesley Hills, MA 02481-1909 Re: IRREVOCABLE LETTER OF CREDIT Dear Sir/Madam: At the request and upon the instructions of DIRECT HIT TECHNOLOGIES, INC., with current place of business at 386 Washington Street, Playhouse Square, Wellesley Hills, MA 02481-6218, we hereby issue our Irrevocable Standby Letter of Credit No._______________ in your favor for the aggregate amount of ONE HUNDRED FIFTY THOUSAND & 00/100 US DOLLARS (USD$150,000.00) effective the date hereof and expiring on January 1, 2000, available by your draft(s) at sight drawn on (BANK), ___(ADDRESS)_______, Massachusetts (zip CODE) when accompanied by the following: 1. The original of this Letter of Credit, and 2. Your signed statement certifying that (1) an uncured default has occurred under a certain Lease dated December _____, 1998 between Wayne Realty Trust, as Landlord, and Direct Hit Technologies, Inc., as Tenant, covering certain Premises located at 888 Worcester Street, Wellesley, Massachusetts, 02482 AND THE AMOUNT DRAWN IS AN AMOUNT NECESSARY TO CURE SUCH DEFAULT or (2) said Letter of Credit is not extended for another twelve (12) month period at least thirty days prior to the expiration of this Letter of Credit. Each draft must bear upon its face the clause "Drawn under ____(BANK)_____ Irrevocable Standby Letter of Credit No. _______________. It is a condition of this Letter of Credit that it shall be deemed automatically extended without amendment for additional periods of one (1) year up until December 31, 2001, (being the final expiration date), from the present or each future expiration date hereof, unless, at least thirty (30) days prior to such date we have notified you in writing by registered, certified or express courier mail to the above address that we elect not to renew this Letter of Credit for any such additional period. This Letter of Credit sets forth in full the terms of our understanding and such undertaking shall not in any way be modified, amended or amplified by reference to any document, instrument or agreement referred to herein or in which this Letter of Credit is referred to or to which this Letter of Credit incorporate herein by reference any document, instrument or agreement. This Letter of Credit is subject to the Uniform Customs and Practice of Documentary Credits (1993 Revision), International Chamber of Commerce, Publication No. 500 (the "Uniform Customs") with the exceptions of Articles 48(f) and 48(g) thereof. This Letter of Credit shall, as to matters not governed by the Uniform Customs, be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. We hereby agree with you that all drafts drawn under and in compliance with the terms of this credit will be duly honored if presented to the undersigned on or before December 1, 1999 or as automatically extended to the final expiration date noted above.. __________(BANK)______________ By:_____________________________________ Authorized Signatory -------------------------------------- (Print Name & Title) EX-10.6 8 EXHIBIT 10.6 SUBLEASE THIS SUBLEASE AGREEMENT ("Sublease") is made on this 5th day of November, 1999, by and between THE MATHWORKS, INC., a Delaware corporation (hereinafter called "Sublandlord"), and DIRECT HIT TECHNOLOGIES, INC., a Delaware corporation (hereinafter called "Subtenant"). Reference is made to a Lease Agreement dated May 16, 1997, between Sublandlord, as tenant, and LMF Cochituate Corp., a Massachusetts corporation, as landlord (hereinafter called "Prime Landlord") as amended pursuant to (a) that certain First Amendment of Lease, dated May 29, 1998, between Sublandlord and Prime Landlord; (b) that certain Second Amendment to Lease, dated April 1, 1999, between Sublandlord and Prime Landlord; and (c) that certain Third Amendment of Lease, dated May 13, 1999, between Sublandlord and Prime Landlord (collectively referred to herein as the "Prime Lease") for approximately 102,398 square feet on the first, second, third, fourth, fifth and basement floors located in the building commonly known as Cochituate Place, 24 Prime Parkway, Natick, Massachusetts ("Building") together with the right to use in common with others the common areas of the Building and the common areas of the approximately 4.53 acre parcel of land thereunder (the "Lot"), all as more particularly described in the Prime Lease (hereinafter "Premises"). WHEREAS, the Sublandlord and Subtenant have agreed that Sublandlord will sublet to Subtenant a portion of the Premises consisting of approximately 22,032 square feet located on the fifth (5th) floor of the Building ("Subleased Premises") more particularly described in EXHIBIT A attached hereto and made a part hereof; and WHEREAS, Sublandlord and Subtenant hereby execute and deliver this Sublease upon the condition precedent of obtaining the Prime Landlord's written consent. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and for the mutual covenants contained herein, the parties agree as follows. 1. LEASE; COMMENCEMENT DATE; EXPIRATION DATE. Sublandlord leases to Subtenant, and Subtenant leases from Sublandlord, the Subleased Premises, together with any rights, privileges and easements appurtenant thereto, for the term commencing at noon on November 18, 1999 ("Commencement Date") and ending at noon on October 31, 2002 ("Expiration Date"). 2. LESSEE'S ACCESS TO PREMISES. The Building is open to the public from Monday through Friday from 8:00 A.M. to 6:00 P.M. and Saturday from 8:00 A.M. to 1:00 P.M. Sublessee shall have access to the Subleased Premises (24) hours per day, seven (7) days per week via a card-key access system. Subtenant shall pay all fees associated with its use of the card-key access system. 3. CONDITION OF THE SUBLEASED PREMISES. The Subleased Premises are leased to Subtenant in their condition on the date hereof and Sublandlord has made no representations, warranties or promises with respect to the Subleased Premises or the suitability thereof for the uses contemplated by this Sublease. Subtenant agrees to accept possession of the Subleased Premises on the Commencement Date "as is," in the same condition as it is on the date hereof except that (a) the Subleased Premises shall be delivered in broom clean condition free of all occupants; (b) to the best of Sublandlord's actual knowledge, all HVAC, electrical, plumbing and other systems serving the subleased Premises are in good and operational condition; and (c) Sublandlord shall make the repairs described on EXHIBIT B attached hereto and made a part hereof. The "Subleased Premises" shall include the furniture described on EXHIBIT C attached hereto and made a part hereof ("Furniture"). Provided that this Sublease is in full force and effect on the Expiration Date, and that Subtenant is not in default of any of the terms or conditions of this Sublease, title to the Furniture shall be transferred to Subtenant upon the Expiration Date and Sublandlord shall deliver a Bill of Sale for the same in the form attached hereto as EXHIBIT D. Sublandlord represents that it holds title to the Furniture and that the Furniture is not subject to any liens or security interests. The Furniture is and shall be provided to Subtenant in "as is" condition and SUBLANDLORD EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. 4. RENT. The annual base rent ("Base Rent") shall be $484,704.00 U.S. dollars per year (based on $22.00 per square foot for rent, drawn on a U.S. bank, payable in advance in equal monthly installments of $40,392.00 on the Rent Commencement Date (as defined below) and thereafter on the first day of each calendar month in advance. The cost of HVAC and nightly cleaning is included in the Additional Rent. Rent shall be prorated for any partial months at the beginning and end of the Lease term. Rent and all other charges due hereunder shall be payable without demand, notice, set-off, or counterclaim, except as allowed hereunder, at Sublandlord's address set forth above or at such other places as may be set forth in notices, from time to time, from Sublandlord to Subtenant. The "Rent Commencement Date" shall be December 15, 1999. 5. ADDITIONAL RENT. Subtenant agrees to pay as additional rent ("Additional Rent") to Sublandlord, its proportionate share of the amount by which real estate and personal property taxes levied or assessed or becoming payable for or in respect to the Lot on which the Building is located and the Building and other improvements located on the Lot for each tax period included in the term and any partial period at the beginning and end thereof exceed the tax base amount for Fiscal Year 2000 (July 1, 1999 - June 30, 2000). Subtenant also agrees to pay as additional rent to Sublandlord, its proportionate share of the Operating Costs (as defined in the Prime Lease) in excess of the Operating Costs incurred in the operation of the Building and Lot in calendar year 2000. Subtenant's proportionate share is equal to 20.6%. Any sums payable to Sublandlord under this Paragraph 5 shall be paid by Subtenant as required under the Prime Lease. Sublandlord shall provide Subtenant with copies of all bills, invoices, statements and reconciliations sent to Sublandlord relating to such taxes and/or Operating Costs. 6. ELECTRICITY. Subject to the provisions of this Section, in addition to Base Rent and Additional Rent, Subtenant shall pay a monthly sum of $3,873.96 (based on $2.11 per square foot per annum) for electricity to lights and plugs within the Subleased Premises. Subtenant shall have the right, at its expense, to perform an audit of electricity costs after October 31, 2000. Any such audit shall be performed by an independent accounting firm. If the audit demonstrates that electricity costs per rentable square foot is less than $2.11 per rentable square foot, then Sublandlord will request a refund from Prime Landlord equal to the amount by which rent paid for electricity exceeded the actual cost thereof, and upon receipt of such refunded from Prime Landlord, Sublandlord shall pay a proportionate, share of such refund to Subtenant. Sublandlord shall not be obligated to pay any electricity refund to Subtenant under this Section 5 unless Sublandlord actually receives a refund from Prime Landlord. Subtenant acknowledges and agrees that Prime Landlord is under no obligation to make such a refund and that Sublandlord is only obligated to request such a refund from Prime Landlord. 7. PERSONAL PROPERTY TAXES. Subtenant agrees to pay to local tax authorities and other governmental agencies throughout the term of this Sublease all personal property taxes which may be levied against Subtenant's merchandise, trade fixtures and other personal property in and about the Subleased Premises. 8. USE. The Subtenant shall use the Subleased Premises only as allowed under Section 3.8(a) of the Prime Lease. 9. SUBORDINATE TO PRIME LEASE. This Sublease and all of its terms, covenants, representations, warranties, agreements and conditions are in all respects subject and subordinate to the Prime Lease, which Prime Lease has been submitted to and examined by Subtenant. Subtenant acknowledges notice and full knowledge of all of the terms, covenants and conditions of the Prime Lease. Except as otherwise provided in Section 10, in the event of any inconsistency between the provisions of this Sublease and the Prime Lease, Subtenant agrees that it shall be bound by the stricter provision. A true copy of the Prime Lease is attached hereto as EXHIBIT E. Capitalized terms defined in the Prime Lease and not otherwise defined herein shall have the meanings as in the Prime Lease. Sublandlord shall not amend, modify or supplement the Prime Lease in any way which would materially reduce Subtenant's rights or the services due under the Prime Lease, or materially increase Subtenant's obligations or liabilities without obtaining Subtenant's prior written consent , which consent shall not be unreasonably withheld, conditioned or delayed. In the event Sublandlord requests in writing such consent from Subtenant and Subtenant fails to respond within five (5) business days after receipt of written request, Subtenant shall be deemed to have consented to any such agreement. 10. PRIME LEASE. With respect to the Subleased Premises, the terms and conditions of the Prime Lease are hereby incorporated by reference and made a part hereof, meaning that, as applicable, references to "Tenant" therein shall be deemed to be "Subtenant" hereunder, references to "Landlord" therein shall be deemed to be "Sublandlord" hereunder, references to "Premises" shall be deemed to be "Subleased Premises", references to "Commencement Date" shall be deemed to be "Commencement Date" (as defined herein), references to "Termination Date" shall be deemed to be "Expiration Date", references to "Lease" shall be deemed to be "Sublease", provided (i) Prime Landlord shall continue to have all rights set forth in the Prime Lease (notwithstanding the fact that Sublandlord shall also have the same rights under this Sublease), and (ii) Sublandlord shall not be deemed to have assumed any of the obligations of Prime Landlord as a result of the incorporation of the Prime Lease. Notwithstanding the foregoing, the following provisions of the Prime Lease are not incorporated herein: (a) the initial three unnumbered paragraphs of the Prime Lease; (b) Article I; (c) provisions in Article II which state the amount of Base Rent and Additional Rent; (d) the first three sentences of Section 3.3; (e) Section 3.8(b); (f) references in Section 5.1 to "Article II" shall be replaced with "Sections 4, 5, and 6"; (g) the phrase "the cost of the same to be borne by Tenant as an operating cost" in Section 6.2; (h) Section 7.4; (i) Article IX; (j) Article X; (k) Article XI; (l) Paragraphs 1, 2 and 3 of Rider A to the Prime Lease; (m) Exhibits A, B and D to the Prime Lease; and (n) the amendments to the Prime Lease. In addition, with respect to Section 4.1 as incorporated herein, Sublandlord shall not have the Prime Landlord's right to terminate this Sublease unless Prime Landlord exercises such right under the Prime Lease. Sublandlord shall use reasonable efforts to obtain the performance by Prime Landlord of its obligations under the Prime Lease upon the written request of Subtenant. 11. SUBTENANT OBLIGATIONS UNDER PRIME LEASE. For so long as the Prime Lease remains in full force and effect, Subtenant agrees to perform, fulfill, and observe all of the covenants, agreements, obligations, conditions, representations, warranties, terms and provisions imposed upon Sublandlord as tenant of the Subleased Premises under the Prime Lease, provided, however, that Subtenant shall not be obligated to perform any obligations of Sublandlord to the extent such obligations are inconsistent or in conflict with the terms of this Sublease. Subtenant agrees to indemnify and hold Sublandlord harmless from and against all claims, liabilities, losses and damages of any kind whatsoever which Sublandlord may incur by reason of Subtenant's failure to perform, fulfill or observe any of the covenants or agreements set forth herein or the applicable provisions set forth in the Prime Lease to the extent such are Subtenant's obligations hereunder. Sublandlord agrees to indemnify, defend and hold harmless Subtenant from and against all claims, liabilities, losses and damages of any kind whatsoever which Subtenant may incur by reason of Sublandlord's failure to perform , fulfill or observe any of the covenants or agreements set forth herein or its covenants or agreements under the Prime Lease. The foregoing shall survive the expiration or earlier termination of this Sublease. 12. TERMINATION. Sublandlord shall not voluntarily agree to a termination of the term of the Prime Lease prior to the Expiration Date. If the Prime Lease terminates as a result of the default or breach by Sublandlord or Subtenant under this Sublease and/or the Prime Lease, the defaulting party shall be liable to the non-defaulting party for damages suffered as a result of such termination. Notwithstanding the foregoing, if the Prime Landlord is prepared to enter into a direct lease with Subtenant on no less than the same economic terms as contained in this Sublease, Sublandlord shall not have liability to Subtenant as a result of any such termination of the Prime Lease. *reasonable and direct 13. ALTERATIONS. Notwithstanding the Prime Lease, Subtenant shall not make any structural alterations or additions to the Subleased Premises nor make any alterations or additions affecting basic building systems without (a) the prior written consent of Sublandlord, which consent shall not be unreasonably withheld, conditioned or delayed, and (b) the consent of Prime Landlord as provided in the Prime Lease. Any alterations made by Subtenant are subject to the terms and conditions set forth below: (a) All work shall be performed in accordance with plans and specifications and by mechanics reasonably acceptable to Prime Landlord and Sublandlord; (b) Subtenant shall cause such work to be completed in good and workmanlike manner and in compliance with any and all applicable federal, state or local laws, codes, ordinances, rules and regulations, including, but not limited to, any demolition, building, zoning, health and environmental laws, codes or ordinances, rules and regulations; (c) Subtenant shall at all times remain responsible for the actions of its consultants, representatives, employees, agents, contractors and subcontractors and any other parties responsible for any portion of the work; (d) Subtenant shall not create or suffer or permit any lien, charge or encumbrance to attach to or be filed against the Subleased Premises, including, but not limited to, any mechanics' lien, materialmen's lien or other claims for lien made by parties claiming to have provided labor or material to the Subleased Premises; (e) Subtenant shall indemnify and hold Sublandlord harmless from and against any and all losses, damages, costs (including costs of suits and attorneys' fees), liabilities or causes of action arising out of or relating to the work; (f) Subtenant shall remain in substantial compliance with all of the terms of this Sublease and shall not be in default hereunder, unless Subtenant has the right to and is proceeding to cure such default; and (g) Subtenant shall and does hereby indemnify and hold Sublandlord harmless from any and all claims, damages and liability to Prime Landlord in connection with or resulting from Subtenant's making, use, maintenance or removal of trade fixtures and trade equipment from the Subleased Premises to the extent permitted in the Prime Lease. 14. ASSIGNMENT AND SUBLETTING. Subtenant shall not assign or sublease this Sublease without the prior written consent of Sublandlord which consent shall not be unreasonably withheld, conditioned or delayed, and the prior written consent of Prime Landlord as provided in the Prime Lease. In addition, Subtenant shall reimburse Sublandlord and Prime Landlord promptly for reasonable legal expenses incurred by each of Sublandlord and Prime Landlord (not to exceed $1,500.00 each) in connection with any request by Subtenant for such consent. In the event of such assignment or subletting by Subtenant, one-half of any rent received by Subtenant in excess of that provided in this Sublease less the cost(s) chargeable to acquisition of a sub-subtenant shall be paid to Sublandlord as additional rent as and when received by Subtenant. 15. CASUALTY AND CONDEMNATION. Sublandlord shall have no obligation to repair or restore the Subleased Premises, whether in the event of fire or casualty or otherwise, and Sublandlord shall have no obligation to Subtenant if all or part of the Subleased Premises are taken in condemnation or by eminent domain proceedings. To the extent that Sublandlord obtains compensation from Prime Landlord in the event of condemnation or eminent domain proceedings, Subtenant shall be entitled to a proportionate share of such compensation based on the square footage of the Subleased Premises, and Subtenant shall have the same termination rights as Sublandlord would have under the Prime Lease as incorporated herein. 16. INSURANCE. Subtenant shall maintain, throughout the term hereof at its sole cost and expense, insurance identical in all respects to that required to be carried by Sublandlord under the Prime Lease. The aforesaid insurance shall (i) be written by companies licensed to do business in Massachusetts and reasonably acceptable to Sublandlord, (ii) not be subject to cancellation, amendment or modification except after at least thirty (30) days prior written notice to Sublandlord and (iii) name Sublandlord and Prime Landlord as additional insureds. The original insurance policies (or certificates of insurance reasonably satisfactory to Sublandlord) shall be deposited with Sublandlord prior to the commencement of the term of this Sublease and renewals thereof shall be deposited with Sublandlord not less than thirty (30) days prior to the end of the term of such coverage. 17. SIGNAGE. Subtenant shall have the right to place and maintain at its sole expense, signage on the entrance door to the Subleased Premises and the building directory, subject to Prime Landlord's and Sublandlord's reasonable consent as to size, design and shape. 18. PRIME LANDLORD'S CONSENT CONTINGENT. This Sublease is contingent upon obtaining Prime landlord's written consent to all of the terms and conditions of this Sublease. Sublandlord shall use diligent good-faith efforts to obtain the Prime Landlord's consent to this Sublease prior to the Commencement Date. In the event Prime Landlord's consent to the terms and conditions of this Sublease is not obtained within ten (10) business days of the execution of this Sublease, Subtenant shall have the right to terminate this Sublease by written notice to Sublandlord and, upon delivery of such notice, Sublandlord shall return the Security Deposit and this Sublease shall terminate. In no event shall the Rent Commencement Date occur until an executed copy of the Prime Landlord's consent is delivered to Subtenant. 19. HOLDING OVER. If Subtenant remains on the Subleased Premises after the expiration of the term of this Sublease or after any earlier termination provided for herein (unless due to a default of Sublandlord under the Prime Lease), then such holding over shall not be deemed to extend or renew the term of this Sublease or to create any tenancy at will, but such holding over shall be as a tenancy-at-sufferance only subject to all the provisions of this Sublease. In addition, Subtenant shall indemnify and hold harmless from and against all liability, damages, and claims incurred by in connection with the holding over of Subtenant including, without on, any liability of Sublandlord to Prime Landlord (unless due to a default of Sublandlord under the Prime Lease). Notwithstanding the foregoing, Sublandlord may, at its option, regain possession of the Subleased Premises or any part thereof by any and all means available to Sublandlord under this Sublease, the Prime Lease, or at law. 20. SECURITY DEPOSIT. Subtenant shall pay Sublandlord a security deposit of Eighty Eight Thousand Five Hundred Thirty One Dollars Ninety Two Cents ($88,531.92) concurrently with the execution of this Sublease. Provided that Subtenant is not in default at the time of payment of rent for the twenty-fifth month of the term of this Sublease, Forty-Four Thousand Two Hundred Sixty-Five Dollars and Ninety-Six Cents ($44,265.96) of the Security Deposit shall be applied toward Base Rent and Additional Rent then due. Upon the expiration or earlier termination of the term of this Sublease, the remaining balance of the Security Deposit shall be returned to Subtenant. 21. BROKERAGE REPRESENTATIONS. Sublandlord and Subtenant represent and warrant that they have had no dealings with any brokers in connection with this Sublease other than R. W. Holmes Realty Co., Inc. and Fallon, Hines & O'Connor and will indemnify and hold harmless each other from and against any loss or expense suffered by either party as a result of such dealings with any other broker or agent. Sublandlord shall pay a commission to R.W. Holmes Realty Co., Inc. pursuant to its listing agreement, said commission to be split 50%/50% with Fallon, Hines & O'Connor. 22. NOTICES. Any notice required hereunder shall be deemed to have been given if delivered Certified Mail, Return Receipt Requested, or by overnight courier such as Federal Express, to: If to Prime Landlord: LMF Cochituate Corp. 182 West Central Street Natick, Massachusetts 01760 Attention: Lou Franchi If to Sublandlord: The Mathworks, Inc. 3 Apple Hill Natick, Massachusetts 0 1 760 Attention: Jeanne O'Keefe With a copy to: Palmer & Dodge LLP One Beacon Street Boston, Massachusetts 02108 Attention: Jane Thomassen, Esq. If to Subtenant: Direct Hit 24 Prime Parkway 5th Floor Natick, Massachusetts 01760 Attention: John McDonough With a copy to: Testa, Hurwitz & Thibeault, LLP 125 High Street, High Street Tower Boston, Massachusetts 02110 Attention: Joseph R. Torpy Any party may change its address for notice by notifying the other parties as aforesaid. 23. NO PARTNERSHIP. Sublandlord shall not be held to be a partner, joint venturer, or associate of Subtenant in the conduct of its business, it being expressly understood and agreed that the relationship between the parties hereto is and at all times shall remain that of Sublandlord and Subtenant. 24. ENTIRE AGREEMENT. All prior understandings and agreements between the parties are merged within this Sublease, which alone fully and completely sets forth the understanding of the parties, and this Sublease may not be changed or terminated orally or in any manner other than by an agreement in writing and signed by the party against whom enforcement of the change or termination is sought. 25. BINDING EFFECT. The covenants and agreements herein contained shall bind and inure to the benefit of Sublandlord and Subtenant and their respective successors and assigns. 26. GOVERNING LAW. The Sublease and all rights and remedies thereunder shall be governed by the law of the Commonwealth of Massachusetts. 27. SUBTENANT'S REPRESENTATIONS AND WARRANTIES. Subtenant represents and warrants that the person executing this Sublease on behalf of Subtenant is authorized to do so on behalf of the Subtenant. 28. SUBLANDLORD'S REPRESENTATIONS AND WARRANTIES. Sublandlord represents, to its actual knowledge, and warrants and covenants, to its actual knowledge, as follows: (a) the copy of the Prime Lease attached hereto as Exhibit B is true, accurate and complete, and has not been modified, amended or terminated (as it applies to the Subleased Premises) and is in full force and effect; (b) the term of the Prime Lease as to the Subleased Premises expires after October 31, 2002; (c) Sublandlord is not in default under the Prime Lease, nor Sublandlord done or failed to do anything which with notice, the passage of time or both could ripen into a default; (d) Prime Landlord is not in default under the Prime Lease, nor has Prime Landlord done or failed to do anything which with notice, the passage of time or both could ripen into a default; (e) all Base Rent, Additional Rent and any other charges due and payable under the Prime Lease have been paid as billed or required in the normal course through the date of this Sublease; (f) all consents and approvals required to allow this Sublease to be valid and effective (other than Prime Landlord's consent) have been obtained; (g) the person executing this Sublease on behalf of Sublandlord is authorized to do so on behalf of the Sublandlord, and (h) Sublandlord will not extend the term of the Prime Lease with respect to the Subleased Premises. 29. CONSENTS. Sublandlord acknowledges and agrees that (i) in any case under this Sublease that requires the consent or approval of both Prime Landlord and Sublandlord, Sublandlord agrees to submit the matter to be so consented to or approved to Prime Landlord and (ii) in the event that the consent or approval of any matter is not required of Prime Landlord under the Prime Lease, no such consent or approval of Sublandlord shall be required hereunder, unless, pursuant to the express terms of this Sublease, Sublandlord's consent or approval is required, in which event Sublandlord agrees that it shall not unreasonably withhold or delay its consent or approval with respect thereto. In connection with any matter requiring the consent or approval of Prime Landlord under this Sublease, Sublandlord agrees to cooperate with and assist Subtenant in obtaining such Prime Landlord's consent or approval at Subtenant's sole cost and expense. SUBTENANT'S OPTION TO EXTEND Subtenant (Direct Hit) shall have the right, exercisable no more than one (1) time and provided Subtenant is not in default, beyond any applicable notice, grace or cure period, at either time of exercise or upon the original Termination Date to extend the Termination Date for the fifth floor premises of 22,032 rentable square, feet in the building commonly known as Cochituate Place, 24 Prime Parkway, Natick, Massachusetts for a period of five (5) additional years (November 1, 2002 - October 31, 2007) at the then Fair Market Rent, as determined below but in no event that $24.00 per rentable square foot. Subtenant must exercise their extension option in writing on or before November 1, 2001. Fair Market Rent shall be determined as follows: Landlord and Subtenant shall agree on the then prevailing Fair Market Rent within fifteen (15) days of Landlord's receipt of Subtenant's notice of extension. If the parties am unable to reach agreement on the then prevailing Fair Market Rent by such date then Subtenant shall have the right to rescind its notice of extension by delivering to Landlord within five (5) business days thereafter written notice or rescission of Subtenant's exercise of its option to extend. In the event Landlord and Subtenant can not agree upon the then prevailing Fair Market Rent, and Subtenant has not so rescinded its notice of extension, the following procedure shall be followed. Each will select an appraiser or commercial real estate broker with five or more years experience in the Natick rental market who will jointly determine the market rent. If the appraisers and/or brokers so selected cannot agree upon the market rent within twenty-one (21) days of their selection, the appraisers and/or brokers so named shall select a third similarly qualified appraiser or broker and the decision as to the market rent of any two of the appraisers and/or brokers so selected shall bind the parties. Both Subtenant and Landlord understand that the option to extend is subject to the following: 1) review of Subtenant's financials and a mutually agreeable security deposit, and 2) a mutually agreeable lease which must be executed by December 15, 2001. LANDLORD: LMF COCHITUATE CORP. By: /s/ Pasquale Franchi ----------------------------------- Pasquale Franchi, President SUBTENANT: DIRECT HIT By: /s/ Michael Cassidy ----------------------------------- Duly Authorized MATHWORKS, INC. SUBLEASE PUNCH LIST EXHIBIT B 1. ALL HOLES IN WALLS 1/2 DIAMETER OR LARGER WILL BE PATCHED AND MADE READY FOR PRIMER AND PAINT. 2. ALL WALL SCONCE LIGHTING WILL BE IN GOOD WORKING ORDER THROUGHOUT ENTIRE PREMISE 3. ALL FLUORESCENT LIGHTING WILL BE IN GOOD WORKING ORDER THROUGHOUT ENTIRE PREMISE 4. ALL RECESSED LIGHTING WILL BE IN GOOD WORKING ORDER THROUGHOUT THE ENTIRE PREMISE 5. ALL TRASH WILL BE REMOVED 6. ALL FURNITURE WILL REMAIN IN THE SPACE 7. ALL WHITEBOARDS WILL REMAIN THAT IS IN THE SPACE 8. ALL ATLAS WATER COOLERS WILL REMAIN 9. WINDOWS IN OFFICES AND WALL PANELS WILL BE CLEANED 10 A THOROUGH OFFICE CLEANING AND VACUUMING, RUG CLEANING WILL BE COMPLETED 11. ALL DAMAGED CEILING TILES WILL BE REPLACED THROUGHOUT THE ENTIRE PREMISE 12. ANY MISSING OFFICE WINDOW BLINDS WILL BE REPLACED 13. REPLACE ANY MISSING BASE MOLDING 14. GLUE ANY LOOSE BASE MOLDING 15. REMOVE DISHWASHER 16. REPAIR ALL WATER DAMAGE THROUGH ENTIRE PREMISE EXHIBIT C DESCRIPTION OF FURNITURE EXHIBIT D BILL OF SALE In consideration of $10.00 paid and other valuable consideration, the receipt of which is acknowledged, The Mathworks, Inc., a Delaware corporation (the "Seller"), hereby unconditionally and irrevocably sells, conveys, transfers and delivers to Direct Hit Technologies, Inc., a Delaware corporation (the "Buyer"), the property listed on Exhibit A attached to this Bill of Sale (the "Property"). Seller warrants to Buyer that Seller is the lawful owner of the Property, that there is no assignment, mortgage or pledge of, or other encumbrance upon, the Property, and that Seller has full right to sell the Property. EXECUTED under seal as of October 31, 2002. The MathWorks, Inc. By: ---------------------------- Name: Title: EXHIBIT E PRIME LEASE IN WITNESS WHEREOF the parties hereto set their hands and seals this 5th day of November, 1999. SUBLANDLORD: ATTEST: THE MATHWORKS, INC. - --------------------------- /s/ Mathworks, Inc. ------------------------------- SUBTENANT: ATTEST: DIRECT HIT - ----------------------- By: /s/ Michael Cassidy ------------------------------- Its: CEO ------------------------------- THE MATHWORKS 5TH FLOOR - JESPER FURNITURE NOVEMBER 2, 1999
-------------------------------------------------------------------------------------------------- DESKS QTY --- Corner Desk JESPER-1000 42" x 24" 1 Full Desk JESPER-1000 62" x 30" 93 Full Return JESPER-1000 62" x 24" 59 FILES 3 Drawer Pedestal JESPER-1000 18"w x 27"h x 19.5"d 4 2 Drawer Ped Attached JESPER-1000 27 BOOKCASES Tall JESPER-700 30"w x 69.5"h x 13"d 6 ACCESSORIES Whiteboards 37 Greyboards 38 -------------------------------------------------------------------------------------------------
EX-10.7 9 EXHIBIT 10.7 Exhibit 10.7 DIRECT HIT TECHNOLOGIES, INC. SECOND AMENDED AND RESTATED RIGHTS AGREEMENT This Second Amended and Restated Rights Agreement (the "Agreement") is entered into as of the 16th day of July, 1999, by and among Direct Hit Technologies, Inc., a Delaware corporation (the "Company"), the undersigned purchasers of Series C Preferred Stock of the Company (the "Purchasers") and the undersigned holders of Series B Preferred Stock and Series A Preferred Stock of the Company (collectively, the "Prior Purchasers") (Prior Purchasers and Purchasers may be collectively referred to as "Preferred Purchasers"), Gary Culliss and Michael Cassidy (collectively referred to as the "Founders" and singularly a "Founder") and David Parker ("Parker"). RECITALS A. The Prior Purchasers and the Founders are parties to that certain Amended and Restated Rights Agreement dated as of November 12, 1998 among the Company and such Prior Purchasers and Founders (the "Prior Agreement"). B. Concurrently herewith, the Purchasers and the Company are entering into a Series C Preferred Stock Purchase Agreement (the "Series C Agreement") pursuant to which the Purchasers are purchasing from the Company shares of its Series C Preferred Stock. C. The Prior Purchasers beneficially owning at least two-thirds of the Company's outstanding shares held by all Prior Purchasers which are subject to the Prior Agreement wish to amend the Prior Agreement to grant registration, information and co-sale rights to the Purchasers identical to the registration, information and co-sale rights of the Prior Purchasers. D. The Purchasers desire to become a party to the Prior Agreement as amended and restated hereby. E. By this Agreement, the Company, the Purchasers, Prior Purchasers, Founders and Parker desire to provide for certain registrations and other rights as set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties agree as follows: 1. REGISTRATION RIGHTS. 1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: 1 (a) "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act (as defined below). (b) "CONVERSION STOCK" means the Common Stock issued or issuable upon conversion of the Series A, Series B and Series C Preferred Stock (which shares of Series A, Series B and Series C Preferred Stock are referred to herein as the "Preferred Shares"). (c) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. (d) "HOLDER" shall mean any stockholder of the Company holding Registrable Securities (including Series A, Series B and Series C Preferred Stock) and any person holding Registrable Securities to whom the rights under this Section 1 have been transferred in accordance with Sections 1.11 and 4.3 hereof. (e) "INITIATING HOLDERS" shall mean any Series A or Series B Preferred Stock Holder or Holders of at least forty percent (40%) of the Series A or Series B Registrable Securities (adjusted after the original issuance thereof for stock splits, stock dividends, recapitalizations and the like). (f) "INITIATING PREFERRED C HOLDERS" shall mean any Series C Preferred Stock Holder or Holders of at least fifty percent (50%) of the Series C Registrable Securities (adjusted after the original issuance thereof for stock splits, stock dividends, recapitalizations and the like). (g) "QUALIFYING PUBLIC OFFERING" shall mean a firm commitment underwritten public offering pursuant to an effective registration statement on Form S-1 (or a successor form) under the Securities Act covering the offer and sale of Common Stock for the account of the Company to the public at an offering price of at least $11.87 per share (as adjusted for any combinations, stock splits, stock dividends, recapitalizations and the like) that values the Company at not less than $253 million and results in gross proceeds to the Company of at least $20 million. (h) "REGISTRABLE SECURITIES" means (i) the Conversion Stock; or (ii) stock issued in respect of the stock referred to in (i) as a result of a stock split, stock dividend, recapitalization or the like, which has not been sold to the public. Except for subsections 1.2, 1.4, 1.10, 2.1, 3.1, 3.2 and 4.4, Registrable Securities shall include shares of Common Stock of the Company issued or issuable to the Founders and to those officers and directors of the Company to whom the Board of Directors of the Company by unanimous vote extends the registration rights contained in subsection 1.3. (i) The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. 2 (j) "REGISTRATION EXPENSES" shall mean all expenses, except as otherwise stated below, incurred by the Company in complying with Sections 1.2, 1.3 and 1.4 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) and the reasonable fees and disbursements of one counsel for all Holders in the event of each registration provided for in Sections 1.2, 1.3 and 1.4 hereof. (k) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. (l) "SELLING EXPENSES" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set forth above, all reasonable fees and disbursements of counsel for the selling Holders. 1.2 REQUESTED REGISTRATION. (a) REQUEST FOR REGISTRATION. In case the Company shall receive from Initiating Holders or Initiating Preferred C Holders a written request that the Company effect any registration in either case with respect to at least twenty percent (20%) of their Registrable Securities, or any lesser percentage if the reasonably anticipated aggregate receipts to the Company, net of underwriting discounts and commissions, would exceed $2,000,000, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after receipt of such written notice from the Company; PROVIDED, HOWEVER, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 1.2: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; 3 (B) At any time prior to the earlier of (i) one hundred eighty days (180) after the effective date of the Company's initial public offering of its securities pursuant to a registration statement declared effective under the Securities Act or (ii) April 27, 2001; (C) Within ninety (90) days of the effective date of any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan); (D) After the Company has effected four (4) such registrations pursuant to this Section 1.2(a), and such registrations have been declared or ordered effective, at which time the Company will be deemed to have satisfied its obligations to register underlying Common Stock for purposes of this Section 1.2(a)(ii)(D)). Subject to the foregoing clauses (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. (b) UNDERWRITING. In the event that a registration pursuant to Section 1.2 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 1.2(a)(i). In such event, the right of any Holder to participate in such registration shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 1.2, and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders, but subject to the Company's reasonable approval. Notwithstanding any other provision of this Section 1.2, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all participating Holders and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities, and/or other securities so withdrawn shall also be withdrawn from registration, and such securities shall not be transferred in a public distribution prior to ninety (90) days after the effective date of such registration, or such other shorter period of time as the underwriters may require. 4 If the underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account (or for the account of other purchasers) in such registration if the managing underwriter so agrees and if the number of Registrable Securities that would otherwise have been included in such registration and underwriting will not thereby be limited. 1.3 COMPANY REGISTRATION. (a) NOTICE OF REGISTRATION. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Commission Rule 145 transaction or (iii) a registration effected pursuant to Sections 1.2 or 1.4 hereof, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after receipt of such written notice from the Company, by any Holder. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.3(a)(i). In such event the right of any Holder to registration pursuant to Section 1.3 shall be conditioned upon such Holder's participation in such underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company, but subject to the reasonable approval of Holders holding more than a majority of the Registrable Securities to be included in such registration. Notwithstanding any other provision of this Section 1.3, if the managing underwriter determines that marketing factors require limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration. The Company shall so advise all Holders and other holders distributing their securities through such underwriting and the number of shares of securities that may be included in the registration and underwriting (other than in behalf of the Company) shall be allocated among all Holders and such other holders (provided that such other holders have contractual rights to participate in such registration which are not subordinate to the Holders) in proportion, as nearly as practicable, to the respective amounts of Registrable Securities or other securities requested to be included in such registration by such Holders and such other holders; PROVIDED, HOWEVER, in no event shall the amount of Registrable Securities of the Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities in which case the Holders may be excluded entirely if the underwriters make the determination described above or the Holders holding a majority of the Registrable Securities consent in writing to such a reduction. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the 5 number of shares allocated to any Holder or holder to the nearest one hundred (100) shares. If any Holder or holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to ninety (90) days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require. (c) PARTICIPATION OF FOUNDERS, OFFICERS, DIRECTORS AND EMPLOYEES. Upon any sale by the Company of shares of its Common Stock to the public in a firmly underwritten public offering, the Founders and any other officer, director or employee designated by the Company's Board of Directors shall be entitled to include any of their shares of Common Stock in any registration by the Company under this subsection 1.3, if such persons who choose to include any of their securities in such registration shall continue to serve the Company as officer, director or employee on the effective date of such registration statement, and such persons agree to be bound by all other provisions of this Agreement and participate in any such registration on the same basis as each Holder in accordance with all applicable provisions of this Agreement (such persons are collectively referred to as "Employee-Holders"). Notwithstanding the foregoing, if the managing underwriter advises the Company that the inclusion of all shares requested to be registered would adversely affect the offering, the securities of the Company held by Employee-Holders shall be excluded from such registration and underwriting to the extent deemed advisable by the managing underwriter, and in any event, the securities of the Company held by any Preferred Purchaser or assignee thereof shall have priority for inclusion of such shares in such registration and underwriting and in respect of any underwriters cut-back of shares, ahead of any shares held by Employee-Holders. 1.4 REGISTRATION ON FORM S-3. (a) If any Holder or Holders holding in the aggregate not less than five percent (5%) of the then outstanding Registrable Securities request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $250,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as the Holder or Holders may reasonably request and the Company shall use its best efforts to keep such Form S-3 registration statement effective until the earlier of (i) one (1) year after the effective date of such registration statement or (ii) such time as the Registrable Securities can be sold without compliance with the Registration Requirements of the Securities Act; PROVIDED, HOWEVER, that the Company shall not be required to effect more than three (3) registrations pursuant to this Section 1.4 in any twelve (12) month period. The substantive provisions of Section 1.2(b) shall be applicable to each registration initiated under this Section 1.4. (b) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 1.4: 6 (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) if the Company, within ten (10) days of the receipt of the request of the Initiating Holders, gives notice of its bona fide intention to effect the filing of a registration statement with the Commission within sixty (60) days of receipt of such request (other than with respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not appropriate for the registration of Registrable Securities); or (iii) within one hundred eighty (180) days of the effective date of any registration referred to in Sections 1.2 and 1.3 above, PROVIDED, THAT the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective. 1.5 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date hereof, without the approval of the holders of a majority of the Registrable Securities, the Company shall not enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights superior to those of the Preferred Purchasers. Upon obtaining such approval, the Company will grant the Holders any rights of first refusal or registration rights granted to subsequent purchasers of the Company's equity securities to the extent such subsequent rights are superior, in the good faith judgment of the Company's Board of Directors, to those rights granted in connection with the issuance of the Series A, Series B and Series C Preferred Stock to the Preferred Purchasers. Nothing in this Section 1.5 shall be deemed to restrict the Company's right to permit individual Employee-Holders to participate in a public offering pursuant to Section 1.3(c) above. 1.6 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with all registrations pursuant to Sections 1.2, 1.3 and 1.4 shall be borne by the Company; PROVIDED, HOWEVER, that the expenses in excess of $15,000 of any special audit required in connection with a registration pursuant to Section 1.2 shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 1.7 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred eighty (180) days or until the distribution described in the registration statement has been completed; 7 (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (c) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (g) Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.8 INDEMNIFICATION. (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such person within the meaning of Section 15 8 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable to any such person in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission (or alleged untrue statement or omission), made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein or the preparation thereby. (b) Each Holder, severally and not jointly, will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein or the preparation thereby. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited to an amount equal to the initial public offering price of the shares sold by such Holder, unless such liability arises out of or is based on willful conduct by such Holder. 9 (c) Each party entitled to indemnification under this Section 1.8 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party a release from all liability in respect to such claim or litigation. 1.9 INFORMATION BY HOLDER. The Holders of securities included in any registration shall furnish to the Company such information regarding such Holders, the Registrable Securities held by them and the distribution proposed by such Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 1. 1.10 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) So long as a Preferred Purchaser owns any Registrable Securities, to furnish to the Preferred Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as 10 a Preferred Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing a Preferred Purchaser to sell any such securities without registration. 1.11 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted to the Preferred Purchasers under sections 1.2, 1.3 and 1.4 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities by a Preferred Purchaser provided that the transferor provides the Company with written notice of the proposed transfer and: (i) the transferee acquires all of the transferor's Registrable Securities not sold to the public; (ii) the transferee acquires at least two hundred thousand (200,000) shares of the transferor's Registrable Securities not sold to the public; or (iii) the transferee is a partner, shareholder or affiliate of the Holder and such transferee agrees to act through a single representative of all such transferees. The Company agrees that such transfer rights may be transferred by Mercury Investors, LLC to NeoCarta Ventures, L.P. or to another associated institutional investor, in one or more transfers. 1.12 STANDOFF AGREEMENT. Each Holder agrees in connection with the Company's initial public offering of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) for the period agreed to by the Company and the underwriters but which will in no event exceed one hundred eighty (180) days; PROVIDED, THAT the officers and directors of the Company who own stock of the Company and any stockholder holding more than five percent (5%) of the outstanding voting securities of the Company also agree to such restrictions. 1.13 TERMINATION. Any registration rights granted pursuant to this Section 1 shall terminate with respect to any Holder at such date, (i) five (5) years after the closing date of the Company's initial public offering or (ii) after the Company's initial registered public offering, when all remaining Registrable Securities held or entitled to be held by such Holder may be sold under Rule 144 during any three (3) month period. 2. RIGHT OF FIRST REFUSAL UPON ISSUANCE OF SECURITIES BY THE COMPANY. 2.1 RIGHT OF FIRST REFUSAL. The Company hereby grants to each Preferred Purchaser (provided such Preferred Purchaser is then a current holder of at least ten percent (10%) of the number of shares of Series A, Series B and Series C Preferred Stock (or Conversion Stock) originally purchased by such Preferred Purchaser) and each Founder (provided the Founder remains a director, officer or employee of the Company) (collectively, hereinafter, the "Rights Holders") the right of first refusal to purchase, pro rata, all or any part of New Securities (as defined in this Section 2.1) which the Company may, from time to time, propose to sell and issue. For purposes of this right of first refusal, a pro rata share for a Rights Holder is the ratio that the number of shares of Conversion Stock then held by each Rights Holder bears to the sum of the total number of shares of Conversion Stock and Common Stock held by all Rights Holders then outstanding. (a) "Equity Securities" shall mean any securities having voting rights in the election of the Board of Directors not contingent upon default, or any securities evidencing 11 an ownership interest in the Company, or any securities convertible into or exercisable for any shares of the foregoing, or any securities issuable pursuant to any agreement or commitment to issue any of the foregoing. (b) Except as set forth below, "New Securities" shall mean any Equity Securities, whether now authorized or not, and rights, options or warrants to purchase said Equity Securities. Notwithstanding the foregoing, "New Securities" does not include (i) Common Stock issued to employees, officers, consultants or directors of the Company pursuant to options granted at any time after the date of incorporation of the Company up to a total of 2,487,501 shares (plus any of such shares which are repurchased by the Company or as to which such options expire unexercised) or pursuant to a plan or agreement unanimously approved by the Company's Board of Directors; (ii) securities offered to the public generally pursuant to a registration statement under the Securities Act; (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of all or substantially all of the assets of the corporation or other reorganization; (iv) the Conversion Stock; (v) warrant or warrants for the purchase of shares of capital stock of the Company (and stock issued upon exercise of such warrant or warrants) which have been unanimously approved by the Board of Directors of the Company and issued in connection with an equipment lease, equipment financing or bank line financing from a conventional equipment leasing company; (vi) stock issued pursuant to any rights or agreements including, without limitation, convertible securities, options and warrants, PROVIDED, THAT the right of first refusal established by this Section 2 applies with respect to the initial sale or grant by the Company of such rights or agreements; or (vii) stock issued in connection with any stock split, stock dividend or recapitalization by the Company. (c) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, and the price and terms upon which the Company proposes to issue the same. Each Rights Holder shall have fifteen (15) days from the date of receipt of any such notice to agree to purchase up to its respective pro rata share of such New Securities for the price and upon the applicable terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) In the event a Rights Holder fails to exercise his or its pro rata share within said fifteen (15) day period, the Company will give the Rights Holders who did so agree (the "Electing Rights Holders") notice of the number of shares that were not subscribed for. Such notice may be by telephone if followed by written confirmation within two (2) days. The Electing Rights Holders shall have fifteen (15) business days from the date of such notice to agree to purchase pro rata (as defined in Section 2.1 above) all of the New Securities not purchased by the non-purchasing Rights Holders; PROVIDED, HOWEVER, that holders of Series C Preferred Stock shall have priority over any other Rights Holder with respect to any available shares originally offered to the Series C Preferred Holders as a group. (e) In the event a Rights Holder fails to exercise the right of first refusal within said fifteen (15) day period, the Company shall have ninety (90) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) to sell the New 12 Securities not elected to be purchased by Rights Holders at the price and upon terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period (or sold and issued New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities in the manner provided above. (f) The right of first refusal granted under this Agreement shall expire upon the closing of the Qualifying Public Offering. (g) The right of first refusal hereunder may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities provided that the transferor provides the Company with written notice of the proposed transfer and (i) the transferee acquires all of the transferor's Registrable Securities not sold to the public; (ii) the transferee acquires at least two hundred thousand (200,000) shares of the transferor's Registrable Securities not sold to the public; or (iii) the transferee is a partner, shareholder or affiliate of the Holder and such transferee agrees to act through a single representative of all such transferees. The Company agrees that such right of first refusal may be transferred by Mercury Investors, LLC to NeoCarta Ventures, L.P., or to another associated institutional investor, in one or more transfers. 3. RIGHTS UPON TRANSFER BY FOUNDERS OR PARKER. Parker and each Founder hereby agree as follows: 3.1 RIGHT OF CO-SALE. (a) THE RIGHT. To the extent the Company does not exercise any rights of first refusal pursuant to an agreement between the Company and a Founder or Parker, in the event that a Founder or Parker proposes to sell shares of Common Stock or other equity securities of the Company ("Transfer Equity Securities"), each Preferred Purchaser shall have the assignable right, exercisable upon written notice to the Founder or Parker, as applicable, within thirty (30) days after notice by the Company of such sale, to participate in such sale of securities pursuant to the specified terms and conditions of the notice, subject to the following limitations. The Company shall provide written notice to each Preferred Purchaser within thirty (30) days after receiving the notice of the proposed transfer from the Founder or Parker. The notice to the Preferred Purchaser shall state the terms of the proposed transfer and the date of expiration of the Preferred Purchasers' rights hereunder. Each participating Preferred Purchaser shall be entitled to sell up to that number of securities equal to the product obtained by multiplying (i) the number of shares to be transferred by the Founder or Parker by (ii) a fraction, (A) the numerator of which is the number of shares of Conversion Stock of the Company held by such Preferred Purchaser and (B) the denominator of which is the number of shares of Transfer Equity Securities held by Parker or the Founder proposing the transfer plus the number of shares of Conversion Stock held by all Preferred Purchasers. (b) PROHIBITED TRANSFERS. In the event a Founder or Parker should sell any Transfer Equity Securities in contravention of the participation rights of a Preferred Purchaser under this Section 3 (the "Prohibited Transfer"), each Preferred Purchaser shall have 13 the option (the "Put Option") to sell to the Founder or Parker, as applicable, a number of shares equal to the number of shares that such Preferred Purchaser would have had the right to sell in connection with the Prohibited Transfer, had such Founder or Parker complied with Section 3.1, subject to the following terms and conditions: (i) The price per share at which such shares are to be sold to the Founder or Parker shall be equal to the price per share paid by the third-party purchaser or purchasers. (ii) The Preferred Purchaser shall deliver to the Founder or Parker, as applicable, within ninety (90) days after it has received notice from such Founder or Parker or otherwise become aware of the Prohibited Transfer, the certificate or certificates representing the shares to be sold, each certificate to be properly endorsed for transfer. (iii) The Founder or Parker, as applicable, shall, upon receipt of the certificates for the repurchased shares, pay the aggregate purchase price therefor, by certified check or bank draft made payable to the order of the Preferred Purchaser and shall reimburse the Preferred Purchaser for any additional expenses, including legal fees and expenses, incurred in effecting such purchase and resale. (c) LIMITATIONS ON RIGHTS. Section 3.1 shall not apply to a sale, assignment or transfer of Transfer Equity Securities: (i) to the Founder's or Parker's spouse, parents, grandparents, children or grandchildren or other members of the Founder's or Parker's family (including relatives by marriage), or to a custodian, trustee or other fiduciary for the account of the Founder or Parker or members of his family; (ii) by way of bequest or inheritance upon death; (iii) to the Company or Preferred Purchasers pursuant to the exercise of any right of first refusal; or (iv) with respect to the right of co-sale, transfers up to five percent (5%) of the Transfer Equity Securities held by such Founder or Parker on a cumulative basis (for purposes of this subsection (iv), shares held and/or sold by the Founder or Parker shall include all shares held and/or sold by transferees of the Founder or Parker pursuant to subsection (i)); PROVIDED, HOWEVER, that any transferees pursuant to subsections (i) or (ii) above shall receive and hold such shares subject to the provisions of this Section 3.1 and there shall be no further transfer of such shares except in accordance herewith. 3.2 TERMINATION AND AMENDMENT. The right of co-sale described in Section 3.1 shall expire upon the earlier of (i) the effective date of the Qualifying Public Offering or (ii) July 16th, 2014. 3.3 STOCK LEGEND. All certificates representing shares of Common Stock of the Company held by the Founders or Parker and transferees described in Section 3.1 above shall bear the following legend: 14 "THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL AND CO-SALE SET FORTH IN A RIGHTS AGREEMENT AMONG THE COMPANY, THE HOLDERS HEREOF AND CERTAIN OTHER STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF THE CORPORATION." 4. MISCELLANEOUS. 4.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of Delaware as applied to transactions taking place between Delaware residents and wholly within the State of Delaware. 4.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any Preferred Purchaser and the closing of the transactions contemplated hereby. 4.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 4.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein. With the written consent of the record or beneficial holders of at least two-thirds (2/3) of each of the Series A, Series B and Series C Preferred Stock and the written consent of Founders holding at least two-thirds (2/3) of the total number of shares of Common Stock held by Founders subject to this Agreement, the obligations of the Company and the rights of the Holders of the Registrable Securities under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; PROVIDED, HOWEVER, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Series A, Series B and Series C Preferred Stock or Transfer Equity Securities held by Founders without the consent of all of the Preferred Purchasers or the Founders, as applicable; PROVIDED, FURTHER, HOWEVER, that if such amendment has the effect of affecting the Transfer Equity Securities held by Parker in a manner (i) materially different than the Transfer Equity Securities held by the Founders and (ii) materially adverse to the interests of Parker, then such amendment shall require the consent of Parker. Upon the effectuation of each such waiver, consent, agreement or amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this Section 4.4. 15 4.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to any Holder, Founder or Parker, at such Holder's, Founder's or Parker's address as set forth in the Company's records, or at such other address as such Holder, Founder or Parker shall have furnished to the Company in writing, or (b) if to the Company, at 888 Worcester Street, Wellesley, MA, 02482 or at such other address as the Company shall have furnished to the Holder in writing. 4.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 4.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 4.8 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason and to any extent be invalid or unenforceable the remainder of this Agreement and application of such provision to persons or circumstances shall be interpreted so as best to reasonably effect the intent of the parties hereto, the parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision which will achieve to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 4.9 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. [Signatures To Follow] 16 The foregoing agreement is hereby executed as of the date first above written. "COMPANY" DIRECT HIT TECHNOLOGIES, INC. By: /s/ Michael Cassidy ------------------------------------- Michael Cassidy, President 17 EX-10.8 10 EXHIBIT 10.8 Exhibit 10.8 EXCLUSIVE PATENT LICENSE AGREEMENT This Patent Agreement ("Agreement") is entered into by and between Gary Culliss ("CULLISS"), Direct Hit Technologies, Inc. ("DIRECT HIT"), a corporation of the State of Delaware having a principal place of business at 386 Washington St., Playhouse Sq., Wellesley, MA 02181 and Draper Fisher Associates Fund IV, LP ("DRAPER"), effective May 22, 1998. 1. BACKGROUND 1.1 CULLISS is the owner of all rights, title and interest in and to the CULLISS Patents, as hereinafter defined, and to inventions which are described or claimed in any of the CULLISS Patents. 1.2 DIRECT HIT desires to acquire exclusive rights under said CULLISS Patents. 1.3 DRAPER is providing funding to DIRECT HIT in consideration for an equity interest in DIRECT HIT. 2. DEFINITIONS 2.1 "CULLISS Patents" means the U.S. Patent Applications listed on Exhibit A of this Agreement, any United States Letters Patent issuing thereon, and any divisions, continuations-in-parts, continuations or reissues thereof, for a method for organizing information, and any foreign patents corresponding thereto. 2.2 "Licensed Product" means any product or part thereof which is disclosed or covered by said CULLISS Patents. 3. LICENSE GRANT 3.1 CULLISS hereby grants and DIRECT HIT hereby accepts an exclusive, irrevocable, transferable worldwide, perpetual, fully paid-up license to make, have made, use, sell, offer for sale and import Licensed Products and to practice any methods disclosed or claimed in the CULLISS Patents. The license and rights granted herein may be sublicensed. 4. PAYMENTS 4.1 As consideration for the license and rights granted herein, DIRECT HIT has transferred a predetermined number of shares of DIRECT HIT common stock to CULLISS pursuant to the terms of the Stock Purchase Agreement between DIRECT HIT AND CULLISS to be executed concurrently with this License Agreement. 5. REPRESENTATIONS AND WARRANTY 5.1 CULLISS hereby represents and warrants that the CULLISS Patents are not and have not been assigned or licensed to any third party and that CULLISS has the rights necessary to grant the exclusive license that he has granted to herein to DIRECT HIT. 5.2 Except as set forth in this Agreement, CULLISS MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF LICENSED PRODUCTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER RIGHT OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES. 6. TERM AND TERMINATION. 6.1 Unless terminated earlier pursuant to Sections 6.2 or 6.3, the Term of this Agreement shall be the last to expire of the CULLISS Patents. 6.2 TERMINATION FOR INSOLVENCY. Subject to cure or remedy of an event of breach listed below by DIRECT HIT, as described in Section 6.4 ("Right to Cure"), CULLISS shall have the right to terminate this Agreement and its further obligations hereunder if (i) DIRECT HIT files a petition in bankruptcy or insolvency, or (ii) upon or after the filing of any voluntary or involuntary petition or answer seeking reorganization, readjustment or arrangement of DIRECT HIT's business under any law relating to bankruptcy or insolvency, or (iii) upon or after the appointment of a receiver for all or substantially all of its property, or (iv) upon or after the making by DIRECT HIT of any assignment or attempted assignment for the benefit of creditors, or (v) upon or after the institution of any proceedings for the liquidation or winding up of DIRECT HIT's business or for the termination of its corporate charter. 6.3 TERMINATION. Subject to cure listed below by DIRECT HIT, as described in Section 6.4 ("Right to Cure"), CULLISS shall have the right to terminate this Agreement and its further obligations hereunder if DIRECT HIT ceases to do business for a period of sixty (60) days. 6.4 RIGHT TO CURE. Upon the occurrence of any event entitling CULLISS to terminate this Agreement pursuant to Sections 6.2 and 6.3, CULLISS may send notice of termination, specifying the nature of the breach, to DIRECT HIT. DIRECT HIT shall be allowed sixty (60) days following the date of such notice to cure the breach. Failure to cure the problem shall result in termination without further notice by the CULLISS, unless such CULLISS extends the cure period by written notice or withdraws the termination notice. 6.5 Surviving any termination of this Agreement is the following provision: (a) Any cause of action or claim of DIRECT HIT or CULLISS accrued or to accrue because of any breach or default by the other party. 6.6 RIGHTS UPON TERMINATION. In the event of a termination as set forth in Sections 6.2 and 6.3 above: -2- (a) DIRECT HIT agrees to transfer the license as set forth in Section 3 to DRAPER; (b) DRAPER agrees to transfer the license to CULLISS; and (c) CULLISS agrees to grant an undivided one-third interest in the CULLISS Patents to DRAPER so that CULLISS and DRAPER shall become joint owners of the CULLISS Patents. 7. U.S. PATENT OFFICE FILING The parties agree that the attached Confirmatory License may be recorded with the United States Patent and Trademark Office to provide notice of the exclusive license to DIRECT HIT. 8. NOTICES. All notices under this Agreement shall be deemed to have been fully given when done in writing and deposited in the United States mail, registered or certified, and addressed as follows: To CULLISS: Gary Culliss 3432-A Holmes Cambridge, MA 02138 To DIRECT HIT: Direct Hit Technologies, Inc. 386 Washington St., Playhouse Sq. Wellesley, MA 02181 Attn: ---------------------------- Either party may change its address for notification purposes upon written notice to the other party. 9. SEVERABILITY. If any term of this Agreement is held invalid or unenforceable for any reason, the remainder of the term shall be amended to achieve as closely as possible the economic effect of the original term and all other terms shall continue in full force and effect. 10. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of California applicable to agreements negotiated, executed and performed within California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate originals by their authorized officers or representatives. -3- GARY CULLISS /s/ Gary Culliss --------------------------------- Signature 5/22/98 --------------------------------- Date DIRECT HIT TECHNOLOGIES, INC. /s/ Michael Cassidy --------------------------------- Name CEO --------------------------------- Title 5/22/98 --------------------------------- Date DRAPER FISHER ASSOCIATES FUND IV, LP /s/ Warren Packard --------------------------------- Name Director --------------------------------- Title 5/22/98 --------------------------------- Date -4- EXHIBIT A - CULLISS PATENTS
- -------------------------------------------------------------------------------- U.S. Patent Application No. Filing Date Title - -------------------------------------------------------------------------------- 08/840,922 April 25, 1997 Method for Organizing Information - -------------------------------------------------------------------------------- 08/904,795 August 1, 1997 Method for Organizing Information - -------------------------------------------------------------------------------- 08/960,140 October 29, 1997 Method for Organizing Information - -------------------------------------------------------------------------------- 09/041,411 March 12, 1998 Method for Organizing Information - --------------------------------------------------------------------------------
-5- EX-10.9 11 EXHIBIT 10.9 Exhibit 10.9 FIRST AMENDMENT TO THE EXCLUSIVE PATENT LICENSE AGREEMENT BETWEEN DIRECT HIT TECHNOLOGIES, INC. AND GARY CULLISS AND DRAPER FISHER ASSOCIATES FUND IV, LP DATED MAY 22, 1998 This First Amendment to the Exclusive Patent License Agreement ("Agreement") between Direct Hit Technologies, Inc., a Delaware corporation ("Direct Hit"), Gary Culliss ("CULLISS") and Draper Fisher Associates Fund IV, LP ("Draper") is made and entered as of November 11, 1998. In the event of inconsistencies between the Agreement and this first Amendment, the terms and conditions of this First Amendment shall be controlling. Unless specifically modified or changed by the terms of this First Amendment, all terms and conditions of the Agreement shall remain in effect and shall apply fully as described and set forth in the Agreement. All defined terms used herein and not separately defined shall have the same meanings as set forth in the Agreement. NOW, THEREFORE, the parties agree to modify the Agreement as follows: 1. Section 6.6(C) is hereby amended and restated to read in its entirety as follows: (c) CULLISS agrees to grant (i) an undivided one-third interest in the CULLISS Patents to Draper and (ii) an undivided five and two-tenths percent (5.2%) interest in the CULLISS Patents to MOSAIC VENTURE PARTNERS, LP I ("MOSAIC") so that CULLISS, DRAPER and MOSAIC shall become joint-owners of the CULLISS patents. IN WITNESS WHEREOF, the parties have executed this First Amendment to the Agreement as of the date set forth above. All originally signed copies of this First Amendment shall be deemed originals. DIRECT HIT TECHNOLOGIES, INC. GARY CULLISS By: /s/ Michael Cassidy By: /s/ Gary Culliss -------------------------------------------------- -------------------------------------------------- Name: Michael Cassidy -------------------------------------------------- Title: President -------------------------------------------------- DRAPER FISHER ASSOCIATES FUND IV,LP MOSAIC VENTURE PARTNERS, LP I By: /s/ Warren Packard By: 1261489 Ontario Limited, -------------------------------------------------- -------------------------------------------------- its General Partner Name: Warren Packard Name: By /s/ Vernon Lobo -------------------------------------------------- -------------------------------------------------- Title: Director Title: Managing Director -------------------------------------------------- --------------------------------------------------
EX-10.10 12 EXHIBIT 10.10 Exhibit 10.10 SECOND AMENDMENT TO THE EXCLUSIVE PATENT LICENSE AGREEMENT BETWEEN DIRECT HIT TECHNOLOGIES, INC. AND GARY CULLISS AND DRAPER FISHER ASSOCIATES FUND IV, LP DATED MAY 22, 1998 This Second Amendment to the Exclusive Patent License Agreement ("Agreement") between Direct Hit Technologies, Inc., a Delaware corporation ("Direct Hit"), Gary Culliss ("Culliss") and Draper Fisher Associates Fund IV, LP ("Draper") dated May 22, 1998, as amended November 11, 1998, is made and entered into as of July 16, 1999. In the event of inconsistencies between the Agreement and this Second Amendment, the terms and conditions of this Second Amendment shall be controlling. Unless specifically modified or changed by the terms of this Second Amendment, all terms and conditions of the Agreement shall remain in effect and shall apply fully as described and set forth in the Agreement. All defined terms used herein and not separately defined shall have the same meanings as set forth in the Agreement. NOW, THEREFORE, the parties agree to modify the Agreement as follows: 1. Section 6.6(C) is hereby amended and restated to read in its entirety as follows: "(c) Culliss agrees to grant (i) an undivided 23.0% interest in the Culliss Patents to Draper, (ii) an undivided 4.7% interest in the Culliss Patents to Mosaic Venture partners, LP I ("Mosaic"), (iii) an undivided 7.9% interest in the Culliss Patents to TA Associates, Inc. ("TA"), (iv) an undivided 4.0% interest in the Culliss Patents to Hikari Tsushin, Inc. ("Hikari"), (v) an undivided 1.6% interest in the Culliss Patents to Viventures Partners ("Viventures"), (vi) an undivided 1.6% interest in the Culliss Patents to Mercury Investors, LLC ("Mercury"), (vii) an undivided 1.6% interest in the Culliss Patents to Commonwealth Capital Ventures II, L.P ("Commonwealth"), (viii) an undivided 0.4% interest in the Culliss Patents to Cornerstone Equities, LLC ("Cornerstone"), (ix) an undivided 0.4% interest in the Culliss Patents to McCloskey 1996 GRAT 5 ("McCloskey"), (x) an undivided 0.12% interest in the Culliss Patents to D-W Investments, L. P. ("D-W"), (xi) an undivided 0.12% interest in the Culliss Patents to P-J Investments ("P-J"), (xii) an undivided 0.4% interest in the Culliss Patents to Bayview 99 I, LP ("Bayview"), (xiii) an undivided 0.2% interest in the Culliss Patents to BV Middle East, Ltd. ("BV") and (xiv) an undivided 0.2% interest in the Culliss Patents to DS Capital, LLC ("DS') so that Culliss, Draper, Mosaic, TA, Hikari, Viventures, Mercury, Commonwealth, Cornerstone, McCloskey, D-W, P-J, Bayview, BV and DS shall become joint-owners of the Culliss Patents." This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. [Signatures to Follow] IN WITNESS WHEREOF, the parties have executed this Second Amendment to the Agreement as of the date set forth above. All originally signed copies of this Second Amendment to Agreement shall be deemed originals. DIRECT HIT TECHNOLOGIES, INC. By: /s/ Michael Cassidy ------------------------------ Michael Cassidy, President /s/ Gary Culliss ------------------------------- Gary Culliss COUNTERPART SIGNATURE PAGE SECOND AMENDMENT TO THE EXCLUSIVE PATENT LICENSE AGREEMENT DIRECT HIT TECHNOLOGIES, INC. If you are an individual, Name (Please Print) please sign and print your name to the right -------------------------------------- -------------------------------------- Signature If you are signing on behalf of Name of Organization an entity, please print the legal Draper Fisher Associates Fund IV, L.P. name of the entity and sign to -------------------------------------- the right, indicating your title Name (Please Print) /s/ Warren Packard -------------------------------------- Title: Director -------------------------------- EX-10.11 13 EXHIBIT 10.11 Exhibit 10.11 NONCOMPETITION AGREEMENT ------------------------ This Noncompetition Agreement is made and entered into by and between Direct Hit Technologies, Inc.( the "Company") and Michael Cassidy ("Employee") as of July 16, 1999. RECITALS -------- A. Concurrently herewith, the Company will issue to certain purchasers (the "Investors") shares of its Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement"). B. The obligations of the Company and the Investors under the Stock Purchase Agreement are conditioned, among other things, upon the execution and delivery of this Agreement by the Company and the Employee. C. Employee is currently an employee of the Company, holds a substantial amount of the outstanding securities of the Company and has special knowledge concerning the Direct Hit Business (as defined in APPENDIX 1 to this Agreement). Therefore, as an inducement to the Investors to enter into the Stock Purchase Agreement and purchase shares of the Company's Series C Preferred Stock, Employee has agreed to enter into this Agreement and refrain from competing with the Direct Hit Business for a reasonable period of time in order that the Investors may obtain the contemplated benefits from their investment in the Company. NOW, THEREFORE, in consideration of the mutual promises made in this Agreement, Employee and the Company agree as follows: AGREEMENT --------- 1. NON-COMPETITION AGREEMENT. Employee hereby agrees that during his employment with the Company and for a period of twelve (12) months after the date that his employment by the Company has terminated (the "Termination Date"), he will not directly or indirectly engage in any business (whether as a proprietor, partner, joint venture, employer, agent, employee, consultant, officer, or beneficial owner of any interest in any association (other than the Company or any of its subsidiaries)) or be connected in any manner with any business which is competitive with the Direct Hit Business. Notwithstanding the foregoing, Employee is permitted to own, individually, as a passive investor, up to one percent (1%) interest in any publicly traded company. It is the desire and intent of the parties to this Agreement that the terms and provisions of this Section 1 be enforced to the fullest extent permissible under the law and public policy applied by any jurisdiction in which enforcement is sought. Accordingly, if, and to the extent that, any portion of this Section 1 shall be adjudicated to be invalid or unenforceable, this Section 1 shall be deemed amended to delete therefrom or reform the portion thus adjudicated to be invalid or unenforceable, such deletion or reformation to apply only with respect to the operation of this Section 1 in the particular jurisdiction in which such adjudication is made. 2. AMENDMENT. No provision of this Agreement may be waived, altered or amended, except by a written instrument signed by all of the parties to this Agreement; PROVIDED, HOWEVER that the Board of Directors of the Company has the right to reasonably amend or modify the definition of the Direct Hit Business contained in Appendix 1 attached hereto without the consent of the Employee. Any such amendment or modification shall be deemed reasonable on its face if approved by 2/3rds of the disinterested members of the Board of Directors, and provided further that the absence of such super-majority vote shall not be presumed to indicate the unreasonableness of any amendment or modification approved by at least a majority of the Board of Directors. Upon the effectuation of such an amendment to this Agreement by the Board of Directors, the Company shall promptly give written notice thereof to the Employee. 3. INTERPRETATION. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of Delaware without giving effect to its conflict of laws provisions. 4. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. In view of the personal nature of the services to be performed under this Agreement by Employee, he shall not have the right to assign or transfer any of his rights, obligations or benefits under this Agreement, except as otherwise noted herein. 5. COUNTERPARTS. This Agreement may be executed in counterpart copies, all of which when taken together shall be deemed to constitute one and the same instrument. 6. NO REPRESENTATIONS. Employee acknowledges that he is not relying, and has not relied, on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 7. VALIDITY. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. EMPLOYEE DIRECT HIT TECHNOLOGIES, INC. /s/ Michael Cassidy By: /s/ Michael Cassidy - ---------------------------------- ------------------------------- Its: CEO ------------------------------ Date: 7/15/99 Date: 7/15/99 ----------------------------- -----------------------------
2 APPENDIX 1 ---------- DESCRIPTION OF DIRECT HIT BUSINESS Direct Hit Business is providing Internet search results to other firms and providing Interest shopping results to other firms. EX-10.12 14 EXHIBIT 10.12 Exhibit 10.12 NONCOMPETITION AGREEMENT ------------------------ This Noncompetition Agreement is made and entered into by and between Direct Hit Technologies, Inc.( the "Company") and Gary Culliss ("Employee") as of July 16, 1999. RECITALS -------- A. Concurrently herewith, the Company will issue to certain purchasers (the "Investors") shares of its Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement"). B. The obligations of the Company and the Investors under the Stock Purchase Agreement are conditioned, among other things, upon the execution and delivery of this Agreement by the Company and the Employee. C. Employee is currently an employee of the Company, holds a substantial amount of the outstanding securities of the Company and has special knowledge concerning the Direct Hit Business (as defined in APPENDIX 1 to this Agreement). Therefore, as an inducement to the Investors to enter into the Stock Purchase Agreement and purchase shares of the Company's Series C Preferred Stock, Employee has agreed to enter into this Agreement and refrain from competing with the Direct Hit Business for a reasonable period of time in order that the Investors may obtain the contemplated benefits from their investment in the Company. NOW, THEREFORE, in consideration of the mutual promises made in this Agreement, Employee and the Company agree as follows: AGREEMENT --------- 1. NON-COMPETITION AGREEMENT. Employee hereby agrees that during his employment with the Company and for a period of twelve (12) months after the date that his employment by the Company has terminated (the "Termination Date"), he will not directly or indirectly engage in any business (whether as a proprietor, partner, joint venture, employer, agent, employee, consultant, officer, or beneficial owner of any interest in any association (other than the Company or any of its subsidiaries)) or be connected in any manner with any business which is competitive with the Direct Hit Business. Notwithstanding the foregoing, Employee is permitted to own, individually, as a passive investor, up to one percent (1%) interest in any publicly traded company. It is the desire and intent of the parties to this Agreement that the terms and provisions of this Section 1 be enforced to the fullest extent permissible under the law and public policy applied by any jurisdiction in which enforcement is sought. Accordingly, if, and to the extent that, any portion of this Section 1 shall be adjudicated to be invalid or unenforceable, this Section 1 shall be deemed amended to delete therefrom or reform the portion thus adjudicated to be invalid or unenforceable, such deletion or reformation to apply only with respect to the operation of this Section 1 in the particular jurisdiction in which such adjudication is made. 2. AMENDMENT. No provision of this Agreement may be waived, altered or amended, except by a written instrument signed by all of the parties to this Agreement; PROVIDED, HOWEVER that the Board of Directors of the Company has the right to reasonably amend or modify the definition of the Direct Hit Business contained in Appendix 1 attached hereto without the consent of the Employee. Any such amendment or modification shall be deemed reasonable on its face if approved by 2/3rds of the disinterested members of the Board of Directors, and provided further that the absence of such super-majority vote shall not be presumed to indicate the unreasonableness of any amendment or modification approved by at least a majority of the Board of Directors. Upon the effectuation of such an amendment to this Agreement by the Board of Directors, the Company shall promptly give written notice thereof to the Employee. 3. INTERPRETATION. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of Delaware without giving effect to its conflict of laws provisions. 4. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. In view of the personal nature of the services to be performed under this Agreement by Employee, he shall not have the right to assign or transfer any of his rights, obligations or benefits under this Agreement, except as otherwise noted herein. 5. COUNTERPARTS. This Agreement may be executed in counterpart copies, all of which when taken together shall be deemed to constitute one and the same instrument. 6. NO REPRESENTATIONS. Employee acknowledges that he is not relying, and has not relied, on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 7. VALIDITY. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. EMPLOYEE DIRECT HIT TECHNOLOGIES, INC. /s/ Gary Culliss By: /s/ Michael Cassidy - ---------------------------------- ------------------------------- Its: CEO ------------------------------ Date: 7/15/99 Date: 7/15/99 ----------------------------- -----------------------------
2 APPENDIX 1 ---------- DESCRIPTION OF DIRECT HIT BUSINESS Direct Hit Business is providing Internet search results to other firms and providing Interest shopping results to other firms. EX-10.13 15 EXHIBIT 10.13 Exhibit 10.13 NONCOMPETITION AGREEMENT ------------------------ This Noncompetition Agreement is made and entered into by and between Direct Hit Technologies, Inc.( the "Company") and David Parker ("Employee") as of July 16, 1999. RECITALS -------- A. Concurrently herewith, the Company will issue to certain purchasers (the "Investors") shares of its Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement"). B. The obligations of the Company and the Investors under the Stock Purchase Agreement are conditioned, among other things, upon the execution and delivery of this Agreement by the Company and the Employee. C. Employee is currently an employee of the Company, holds a substantial amount of the outstanding securities of the Company and has special knowledge concerning the Direct Hit Business (as defined in APPENDIX 1 to this Agreement). Therefore, as an inducement to the Investors to enter into the Stock Purchase Agreement and purchase shares of the Company's Series C Preferred Stock, Employee has agreed to enter into this Agreement and refrain from competing with the Direct Hit Business for a reasonable period of time in order that the Investors may obtain the contemplated benefits from their investment in the Company. NOW, THEREFORE, in consideration of the mutual promises made in this Agreement, Employee and the Company agree as follows: AGREEMENT --------- 1. NON-COMPETITION AGREEMENT. Employee hereby agrees that during his employment with the Company and for a period of twelve (12) months after the date that his employment by the Company has terminated (the "Termination Date"), he will not directly or indirectly engage in any business (whether as a proprietor, partner, joint venture, employer, agent, employee, consultant, officer, or beneficial owner of any interest in any association (other than the Company or any of its subsidiaries)) or be connected in any manner with any business which is competitive with the Direct Hit Business. Notwithstanding the foregoing, Employee is permitted to own, individually, as a passive investor, up to one percent (1%) interest in any publicly traded company. It is the desire and intent of the parties to this Agreement that the terms and provisions of this Section 1 be enforced to the fullest extent permissible under the law and public policy applied by any jurisdiction in which enforcement is sought. Accordingly, if, and to the extent that, any portion of this Section 1 shall be adjudicated to be invalid or unenforceable, this Section 1 shall be deemed amended to delete therefrom or reform the portion thus adjudicated to be invalid or unenforceable, such deletion or reformation to apply only with respect to the operation of this Section 1 in the particular jurisdiction in which such adjudication is made. 2. AMENDMENT. No provision of this Agreement may be waived, altered or amended, except by a written instrument signed by all of the parties to this Agreement; PROVIDED, HOWEVER that the Board of Directors of the Company has the right to reasonably amend or modify the definition of the Direct Hit Business contained in Appendix 1 attached hereto without the consent of the Employee. Any such amendment or modification shall be deemed reasonable on its face if approved by 2/3rds of the disinterested members of the Board of Directors, and provided further that the absence of such super-majority vote shall not be presumed to indicate the unreasonableness of any amendment or modification approved by at least a majority of the Board of Directors. Upon the effectuation of such an amendment to this Agreement by the Board of Directors, the Company shall promptly give written notice thereof to the Employee. 3. INTERPRETATION. Employee and the Company agree that this Agreement shall be interpreted in accordance with and governed by the laws of the State of Delaware without giving effect to its conflict of laws provisions. 4. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. In view of the personal nature of the services to be performed under this Agreement by Employee, he shall not have the right to assign or transfer any of his rights, obligations or benefits under this Agreement, except as otherwise noted herein. 5. COUNTERPARTS. This Agreement may be executed in counterpart copies, all of which when taken together shall be deemed to constitute one and the same instrument. 6. NO REPRESENTATIONS. Employee acknowledges that he is not relying, and has not relied, on any promise, representation or statement made by or on behalf of the Company which is not set forth in this Agreement. 7. VALIDITY. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below. EMPLOYEE DIRECT HIT TECHNOLOGIES, INC. /s/ David Parker By: /s/ Michael Cassidy - ---------------------------------- ------------------------------- Its: CEO ------------------------------ Date: 7/15/99 Date: 7/15/99 ----------------------------- -----------------------------
2 APPENDIX 1 ---------- DESCRIPTION OF DIRECT HIT BUSINESS Direct Hit Business is providing Internet search results to other firms and providing Interest shopping results to other firms. EX-23.2 16 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Direct Hit Technologies, Inc. on Form S-1 of our report dated December 17, 1999, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Boston, Massachusetts December 22, 1999 EX-27.1 17 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFO. EXTRACTED FROM THE BAL. SHEETS AS OF 12-31-98 AND 9-30-99 AND THE STMTS. OF OPS. FOR THE PER. FROM INCEPTION (4-27-98) - 12-31-98 AND THE 9 MOS. ENDED 9-30-99 AND STMTS. OF CASH FLOWS FOR THE PER. FROM INCEPTION (4-27-98) - 12-31-98 AND THE 9 MOS. ENDED 9-30-99 AND NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FIN. STMTS. 1,000 U.S. DOLLAR OTHER 9-MOS DEC-31-1998 DEC-31-1999 APR-27-1998 JAN-01-1999 DEC-31-1998 SEP-30-1999 1 1 2558 16427 0 10059 168 401 (5) (44) 0 0 2741 26881 192 1134 22 143 2924 28049 101 1013 0 0 0 0 3371 29651 10 10 (558) (2624) 2924 28049 175 862 175 862 52 361 0 0 939 3651 5 39 0 0 (792) (2930) 0 0 (792) (2930) 0 0 0 0 0 0 (792) (2930) (0.45) (0.88) (0.12) (0.26)
-----END PRIVACY-ENHANCED MESSAGE-----