-----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, Op5xrX6GevOrIKwriegrlfxAlY66a+qk+Gtm2RZjR/f9kijb1QxbIypXdcwrB4Or PcYvYclFvIUnmHnpx1nrLg== 0000898430-00-000821.txt : 20000320 0000898430-00-000821.hdr.sgml : 20000320 ACCESSION NUMBER: 0000898430-00-000821 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SNOWBALL COM INC CENTRAL INDEX KEY: 0001101547 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 943316902 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-93487 FILM NUMBER: 572836 BUSINESS ADDRESS: STREET 1: 250 EXECUTIVE PARK BLVD STREET 2: SUITE 4000 CITY: SAN FRANCISCO STATE: CA ZIP: 94134 BUSINESS PHONE: 4155082000 MAIL ADDRESS: STREET 1: 250 EXECUTIVE PARK BLVD STREET 2: SUITE 4000 CITY: SAN FRANCISCO STATE: CA ZIP: 94134 S-1/A 1 AMENDMENT #4 TO FORM S-1 As filed with the Securities and Exchange Commission on March 17, 2000 Registration No. 333-93487 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------- Amendment No. 4 to FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- SNOWBALL.COM, INC. (Exact name of Registrant as specified in its charter) --------------- Delaware 7375 94-3316902 (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) Identification no.) 250 Executive Park Boulevard, Suite 4000 San Francisco, CA 94134 (415) 508-2000
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------- James R. Tolonen Chief Financial Officer Snowball.com, Inc. 250 Executive Park Boulevard, Suite 4000 San Francisco, CA 94134 (415) 508-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Laird H. Simons III, Esq. John T. Sheridan, Esq. Robert B. Dellenbach, Esq. Anthony Kikuta, Esq. Darren L. Nunn, Esq. WILSON SONSINI GOODRICH & ROSATI William L. Hughes, Esq. Professional Corporation FENWICK & WEST LLP 650 Page Mill Road 275 Battery Street Palo Alto, California 94304 San Francisco, California 94111 (650) 493-9300 (415) 875-2300
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. --------------- If 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, as amended (the "Securities Act"), please check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, 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, please check the following box. [_] --------------- 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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this preliminary prospectus is not complete and may be + +changed. These securities may not be sold until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +preliminary prospectus is not an offer to sell nor does it seek an offer to + +buy these securities in any jurisdiction where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion. Dated March 17, 2000. 6,250,000 Shares [SNOWBALL LOGO APPEARS HERE] Common Stock ---------- This is an initial public offering of shares of common stock of Snowball.com, Inc. All of the 6,250,000 shares of common stock are being sold by Snowball. Prior to this offering, there has been no public market for the common stock. Snowball anticipates that the initial public offering price will be between $10.00 and $12.00 per share. Snowball has applied for quotation of the common stock on the Nasdaq National Market under the symbol "SNOW". See "Risk Factors" beginning on page 7 to read about risks you should consider before buying shares of the common stock. ---------- Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. ----------
Per Share Total --------- ----- Initial public offering price................................... $ $ Underwriting discount........................................... $ $ Proceeds, before expenses, to Snowball.......................... $ $
To the extent that the underwriters sell more than 6,250,000 shares of common stock, the underwriters have the option to purchase up to an additional 937,500 shares from Snowball at the initial public offering price less the underwriting discount. ---------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. Goldman, Sachs & Co. Chase H&Q Robertson Stephens ---------- Prospectus dated , 2000. [The Snowball logo is displayed on the top left corner of the inside front cover, with the phrase "We are i" under the logo. The logos of the four Snowball networks, and a short description of each network, are staggered vertically down the right side of the page. The ChickClick network logo is at the top of the page, with the phrase "Girl Sites That Don't Fake It" to the right of the logo. The IGN network logo is beneath the ChickClick logo, with the phrase "Entertainment & Games Network" to the left of the logo. The InsideGuide network logo is beneath the IGN logo, with the phrase "For Students By Students" to the right of the logo. The PowerStudents network logo is beneath the InsideGuide logo, with the phrase "Maximize Your Student Experience" to the left of the logo.] PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. Unless otherwise indicated, all information contained in this prospectus assumes no exercise by the underwriters of their option to purchase additional shares of our common stock in the offering, reflects a three-for-two stock split of our common stock completed in October 1999, and reflects the conversion of all outstanding shares of preferred stock into common stock upon completion of this offering. Snowball.com, Inc. Snowball operates a network of destination web sites that offer content, community and commerce to the Internet generation, or Generation i. We view Generation i as individuals between the ages of 13 and 30 who consider the Internet to be an integral part of their daily lives. The United States Census Bureau estimates that there were 67.9 million individuals in this age group in 1999, and those individuals between the ages of 15 and 24 had an aggregate mean income of $302.4 billion in 1998. We serve this group by providing its members with current content, relevant services, a forum for interacting with one another and carefully selected merchandise. In addition to creating original content, we continuously work to expand the breadth and depth of our content offerings by selectively adding affiliated web sites to our network. Our network and affiliate business model enables us to add content and traffic to our network rapidly and cost-effectively, while keeping the content fresh and, we believe, compatible with the evolving tastes of Generation i. To attract and retain affiliates, we provide an integrated package of sales and marketing services, technical support and audience development opportunities. As of December 31, 1999, we were affiliated with more than 150 web sites and over 100 partner college destinations organized under four networks, each targeting a specific segment of Generation i: . ChickClick, which provides content, community and commerce features to Generation i women; . IGN, which provides information and entertainment to Generation i men; . InsideGuide, which offers student-generated information concerning individual colleges; and . PowerStudents, which provides students at all levels with information concerning college admissions, jobs and careers. Our networks attract a large and segmented audience by providing extensive information on a variety of narrowly focused subjects. By offering targeted access to a large audience with attractive demographic characteristics, we are able to generate marketing and advertising revenue in a variety of forms. These include promotions and sponsorships, fees for special placement of advertisements on our web sites (slotting) and lead-generation, and sales of various forms of banner, button and textlink advertising. We also generate merchandising revenue from the sale of carefully selected items within our online store, ChickShops. According to Media Metrix, our networks attracted over 5.9 million unique visitors in January 2000, making us one of the 30 highest-trafficked properties, or networks of affiliated web sites, on the Internet and, we believe, one of the leading online destinations for Generation i. Additionally, based on the same Media Metrix data, visitors spent more time per day during that period on our network than on all but 15 other properties among the top 50 properties. As of January 31, 2000, we had over three million registered users. 3 The Snowball Strategy Our goal is to be the preeminent network of content, community and commerce sites on the Internet by, for and about Generation i, by: . Building and developing our existing networks, while selectively adding new networks; . Continuing to leverage our network and affiliate business model to achieve cost-effective and viral growth of content and traffic; . Offering a range of value-added services to attract, retain and develop affiliated web sites; . Promoting affinity and community across all networks and affiliates to increase the amount of time that visitors spend on our Networks; . Being the premier partner for marketing, advertising and commerce directed at Generation i; and . Pursuing strategic alliances and acquisitions that increase content, traffic and revenue opportunities. Corporate Information From our inception in January 1997 through December 1998, we operated as a division of Imagine Media, Inc., a California corporation. We were incorporated as an independent company in Delaware in January 1999 as Affiliation, Inc. and changed our name to Affiliation Networks, Inc. in February 1999. We then changed our name to Snowball.com, Inc. in September 1999. References in this prospectus to "Snowball," "we," "our" and "us" collectively refer to Snowball.com, Inc., a Delaware corporation, and its predecessors and subsidiaries, and not to the underwriters. Our principal executive offices are located at 250 Executive Park Boulevard, Suite 4000, San Francisco, California 94134 and our telephone number is (415) 508-2000. Our World Wide Web address is "www.snowball.com." The information on our web site is not part of this prospectus. 4 The Offering Common stock offered by Snowball................ 6,250,000 shares Common stock to be outstanding after the offering....................................... 37,245,442 shares Use of proceeds................................. To promote our brand, expand sales and marketing, repay any debt that may be incurred under our credit facility and for working capital and general corporate purposes, including network expansion and content development, relocation of our offices and possible acquisitions of affiliates. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... "SNOW"
The number of shares of common stock to be outstanding after the offering includes: . 5,585,547 shares outstanding as of December 31, 1999; and . 25,409,895 shares of common stock to be issued upon the automatic conversion of all outstanding shares of preferred stock upon completion of this offering. The shares of common stock to be outstanding exclude: . 10,252,737 shares of common stock reserved for issuance under our stock option plans and a stock option agreement, including 5,500,000 shares of common stock available for future issuance under our 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan, each adopted in February 2000, of which 2,358,368 shares at a weighted-average exercise price of $2.02 per share were subject to outstanding options as of December 31, 1999; . 322,688 shares of common stock issuable upon exercise of outstanding warrants and conversion of the shares of preferred stock underlying those warrants as of December 31, 1999 at a weighted-average exercise price of $7.84 per share; and . 150,000 shares of Series C preferred stock issued in January 2000. 5 Summary Consolidated Financial Data (in thousands, except per share data)
Year ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- Consolidated Statements of Operations Data: Revenue........................................... $ 927 $ 3,256 $ 6,674 Cost of revenue................................... 171 1,322 4,316 ------- ------- -------- Gross margin...................................... 756 1,934 2,358 Total operating expenses.......................... 2,035 5,594 37,565 ------- ------- -------- Loss from operations.............................. (1,279) (3,660) (35,207) Interest and other income, net.................... -- -- 385 ------- ------- -------- Net loss.......................................... $(1,279) $(3,660) $(34,822) ======= ======= ======== Basic and diluted net loss per share.............. $(186.69) ======== Shares used in per share calculation.............. 187 ======== Pro forma basic and diluted net loss per share (unaudited)...................................... $ (1.93) ======== Shares used in pro forma per share calculation (unaudited)...................................... 18,022 ========
See Note 1 of our Notes to Consolidated Financial Statements for a description of the method that we used to compute our basic and diluted net loss per share. The following table presents a summary of our consolidated balance sheet data as of December 31, 1999: . on an actual basis; . on a pro forma basis to reflect the automatic conversion of all shares of preferred stock into common stock immediately prior to the closing of this offering and the issuance of 150,000 shares of Series C preferred stock in January 2000 at $10.00 per share; and . on a pro forma as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us. See "Capitalization."
December 31, 1999 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments.................................... $33,489 $34,989 $ 97,627 Working capital................................. 28,263 29,763 92,401 Total assets.................................... 46,718 48,218 110,856 Long-term obligations, less current portion..... 2,036 2,036 2,036 Stockholders' equity............................ 34,661 36,161 98,799
6 RISK FACTORS You should carefully consider the risks and uncertainties described below and the other information in this prospectus before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may impair our business operations. If any of the following risks actually occurs, our business, our financial condition and the results of our operations could be seriously harmed, the trading price of our common stock could decline and you might lose all or part of your investment. Risks Related to Our Business Our business model is unproven and may fail. We have a limited operating history upon which you can evaluate our business model and prospects and the merits of investing in our stock. If our business model proves to be unsuccessful, the trading price of our stock will fall. Our IGN, ChickClick and PowerStudents networks began operating as divisions of Imagine Media in March 1997, February 1998 and August 1998, respectively. We were incorporated in January 1999, and Imagine Media contributed the IGN, ChickClick and PowerStudents assets to us in February 1999. We launched our InsideGuide network in September 1999. Accordingly, our prospects and the merits of investing in our stock must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as Internet content and services. In particular, we are implementing an evolving and unpredictable business model. Our business model is unproven and may fail, which could harm our business and diminish the value of your investment. See "Business -- The Snowball Strategy" for more information about our business model. Our quarterly revenue and operating results may fluctuate in future periods and we may fail to meet expectations, which may reduce the trading price of our common stock. We cannot forecast our revenue and operating results with precision, particularly because our products and services are relatively new and our prospects uncertain. If revenue in a particular period does not meet expectations, it is likely that we will be unable to adjust our level of expenditures significantly for the period. If our operating results fail to meet expectations, the trading price of our common stock would decline. We believe that period-to-period comparisons are not meaningful and are not indicative of future performance. We anticipate that the results of our operations will fluctuate significantly in the future as a result of a variety of factors, including the long sales cycle we face selling advertising and promotions, seasonal trends in Internet usage, advertising placements and e- commerce and other factors discussed in this section. As a result, it is likely that in some future quarters or years our results of operations will fall below the expectations of securities analysts or investors, which would cause the trading price of our common stock to decline. We have a history of losses and expect to incur substantial net losses for the foreseeable future. We have incurred net losses since the formation of our business in January 1997. At December 31, 1999, we had an accumulated deficit of approximately $39.8 million. We plan to increase our operating expenses significantly to expand our affiliate base, develop additional networks, expand our sales and marketing operations, hire more salespersons, increase our marketing and promotional activities, develop and upgrade our technology and purchase equipment for our operations and network infrastructure. We also may incur costs relating to the acquisition of 7 content, other businesses or technologies. We may not generate sufficient revenue to offset these expenditures. As a result, we expect to incur significant operating losses on a quarterly basis for the foreseeable future, and may never be profitable. Even if we do achieve profitability, we might not be able to sustain profitability on a quarterly or annual basis in the future. If we fail to maintain our relationships with affiliates, or incorporate new affiliates into our networks on a timely basis, our revenue will decline. We derive revenue primarily from advertisers who pay us to advertise on our networks because our networks attract a large number of visitors. We rely upon our affiliates to generate a significant portion of the content that attracts visitors to our networks. If we lose these affiliates and cannot replace them with affiliates having comparable traffic patterns and user demographics, or if we fail to add new affiliates to our networks on a timely basis, we will lose revenue. We could lose an affiliate if it were to: . terminate or fail to renew its affiliate agreement with us; . be acquired by or otherwise form a relationship with one of our competitors; . demand from us a greater portion of revenue derived from advertisements placed on its web sites; or . seek to require us to make payments for access to its web sites. We lost 46 affiliates in 1999. Twenty-nine of these losses resulted from the expiration and nonrenewal of affiliate agreements. Seventeen losses resulted from the early termination of affiliate agreements--13 by mutual consent, two because we acquired the affiliate, one because the affiliate was acquired by a third party and one because the affiliate breached the agreement. The loss of these affiliates did not have a significant impact on our revenue because during the same period we entered into agreements with 102 new affiliates and renewed agreements with 44 existing affiliates. We cannot assure you, however, that we will not lose a major affiliate in the near future, which could cause our revenue to decline. We also must continue to identify potential new affiliates to ensure that we keep pace with the changing interests, styles, trends and preferences of Generation i. Web sites targeting Generation i might not continue to emerge at their current pace or at all. Moreover, we may be unable to identify potential new affiliates as they emerge or to negotiate affiliate agreements with potential new affiliates on a timely basis. In addition, we will likely face increasing competition for the content and services provided by possible affiliates. If we fail to continue to identify and enter agreements with potential new affiliates on a timely basis, our networks may lose their relevance to Generation i, we will lose advertising and promotional opportunities and our revenue will decline. We also must continue to identify potential new affiliates to ensure that we keep pace with the changing interests, styles, trends and preferences of Generation i. Web sites targeting Generation i might not continue to emerge at their current pace or at all. Moreover, we may be unable to identify potential new affiliates as they emerge or to negotiate affiliate agreements with potential new affiliates on a timely basis. In addition, we will likely face increasing competition for the content and services provided by possible affiliates. If we fail to continue to identify and enter agreements with potential new affiliates on a timely basis, our networks may lose their relevance to Generation i, we will lose advertising and promotional opportunities and our revenue will decline. If our IGN network is unsuccessful, our revenue will decline substantially. We rely upon IGN for a substantial portion of our traffic and advertising revenue. IGN is a network of web sites that provide information and entertainment to Generation i men. IGN accounted 8 for approximately 70% of our consolidated page views in January 2000, approximately 13% of our registered users as of January 31, 2000 and a substantial portion of our revenue for the year ended December 31, 1999. If we are unable to anticipate changes in the interests, styles, trends or preferences of the audience targeted by IGN, if we are unable to maintain our relationship with affiliates of IGN or incorporate new affiliates into the IGN network on a timely basis or if IGN otherwise loses traffic, our ability to generate advertising revenue would be impeded to an even greater extent than if any of those events occurred with respect to any of our other networks. If our advertising and marketing arrangements are terminated or are not renewed, our revenue will decline. To date, we have derived a substantial portion of our revenue from a small number of advertising and marketing customers. We expect that this will continue during the early stages of our development and may continue indefinitely. If our arrangements with these customers are terminated or are not renewed, our revenue will decline. In addition, many of our advertising and marketing customers enter into agreements with us that have a term of less than six months, and one or more of our material advertising agreements has a six-month term. As a result, our customers could cancel these agreements, change their advertising expenditures or buy advertising from our competitors on relatively short notice and without penalty. Because we expect to derive a large portion of our future revenue from advertising and marketing arrangements, these short-term agreements expose us to competitive pressures and potentially severe fluctuations in our financial results. If we fail to perform in accordance with the terms of our advertising agreements, we will lose revenue. Our advertising agreements typically provide for minimum performance levels, such as click-throughs by web users or impressions. If we fail to perform in accordance with these terms, we typically have to provide free advertising to the customer until the minimum level is met, causing us to lose revenue. In addition, we occasionally guarantee the availability of advertising space in connection with promotion arrangements and content agreements and often guarantee exclusive placement on our network for our largest customers, which precludes us from permitting certain competitors of these customers to offer products and services on our network that are similar to those offered by our exclusive customers. If we cannot fulfill the guarantees we make to our customers, or if we lose potential customers whose advertisements, sponsorships and promotions conflict with those of other customers, we will lose revenue and our future growth may be impeded. If we do not continue to attract and retain users we may not be able to compete successfully for advertisers, which would cause our revenue to decline. We currently derive substantially all of our revenue from advertisers who pay us to advertise on our networks, and our business model depends in part on increasing the amount of this revenue. The market for advertising revenue is highly competitive. We must continue to attract and retain users to compete successfully for advertising revenue. If we fail to attract and retain more users, our revenue will decline. Many of our current competitors, as well as a number of potential new competitors, have significantly greater editorial, financial, technical, marketing, sales and other resources than we do. Our competitors may develop content and service offerings that are superior to ours or achieve greater market acceptance than ours. Moreover, if our content and service offerings fail to achieve success in the short term, we could suffer an insurmountable loss in market share and brand acceptance. See "Business--Competition" for more detailed information about our competitors. 9 Technical problems with either our internal or our outsourced computer and communications systems could interrupt our service, resulting in decreased customer satisfaction, the possible loss of users and advertisers and a decline in revenue. Our operations depend on our ability to maintain our computer systems and equipment in effective working order. Our web sites must accommodate a high volume of traffic and deliver frequently updated information. Any sustained or repeated system failure or interruption would reduce the attractiveness of our web sites to customers and advertisers and could cause us to lose users and advertisers to our competitors. This would cause our revenue to decline. In addition, interruptions in our systems could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require. Unanticipated problems affecting our systems have caused from time to time in the past, and could cause in the future, slower response times and interruptions in our services. Our web sites reside on computer systems located in the San Francisco Bay area and in Columbia, South Carolina. Fire, earthquakes, hurricanes, power loss, water damage, telecommunications failures, vandalism and other malicious acts, and similar unexpected adverse events, may damage our computer systems and interrupt service. Our computer system's continuing and uninterrupted performance is critical to our success. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. If we lose key personnel or are unable to hire additional qualified personnel, or if our management team is unable to perform effectively, we will not be able to implement our business strategy or operate our business effectively. Our success depends upon the continued services of our senior management and other key personnel, many of whom would be difficult to replace. The loss of any of these individuals would adversely affect our ability to implement our business strategy and to operate our business effectively. In particular, the services of Mark Jung, our chief executive officer, would be difficult to replace. None of our officers or key employees is bound by an employment agreement, nor do we have "key person" life insurance policies covering any of these individuals. Our success also depends upon our ability to continue to attract, retain and motivate skilled employees. Competition for employees in our industry is intense, especially in the San Francisco Bay area. We believe that there are only a limited number of persons with the requisite skills to serve in many key positions and it is becoming increasingly difficult to hire, retain and motivate these persons. We have in the past experienced, and we expect to continue to experience, difficulty in hiring and retaining skilled employees with appropriate qualifications. Competitors and others have in the past attempted, and may in the future attempt, to recruit our employees. We believe that we will incur increasing salaries, benefits and recruiting expenses because of the difficulty in hiring and retaining employees. Finally, our success depends on the ability of our management to perform effectively, both individually and as a group. Our management team has been working together for less than one year. Moreover, James Tolonen, who was hired as our Chief Operating Officer and Chief Financial Officer in October 1999, and certain other members of our management team have only recently joined us. If our management is unable to operate effectively in their respective roles or as a team, we will not be able to implement our business strategy or operate our business effectively. Our failure to manage growth effectively could result in our inability to operate our business effectively. We have rapidly and significantly expanded our operations and anticipate that further expansion will be required to address potential market opportunities. If we fail to manage this expansion 10 effectively, we will be unable to operate our business effectively. During the year ended December 31, 1999, our business grew from 44 employees to 260 employees. This rapid growth has placed, and we expect it to continue to place, a significant strain on our management, operational and financial resources. As part of this growth, we will have to implement new operational and financial systems, procedures and controls. Our prospects for obtaining additional financing, if required, are uncertain and failure to obtain needed financing would limit our operations and might cause our business to fail. Our operating history is too brief for us to know with certainty whether our cash reserves and any cash flows from operations will be sufficient to finance our anticipated growth. We may need to raise additional funds if our estimates of revenue or our working capital and/or capital expenditure requirements change or prove inaccurate, if we are required to respond to unforeseen technological or marketing hurdles or if we choose to take advantage of unanticipated opportunities. If adequate funds are not available to satisfy either short- or long-term capital requirements, we might be required to limit our operations significantly and our business might fail. Additional financing might not be available when required. Our future capital requirements are dependent upon many factors, including: . the rate at which we expand our sales and marketing operations; . the amount and timing of fees paid to affiliates; . the extent to which we expand our content and service offerings; . the extent to which we develop and upgrade our technology and data network infrastructure; and . the response of competitors to our content and service offerings. Additional financings could disadvantage our existing stockholders and purchasers in this offering. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be reduced and the value of their investments might decline. In addition, any new securities issued might have rights, preferences or privileges senior to those securities held by our stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants. If we are unable to identify or successfully integrate potential acquisitions and investments, we may not grow as planned, our expenses may increase and our management's attention may be diverted from the operation of our business. Since our incorporation, we have acquired three businesses and the selected assets of two other businesses and our growth strategy includes acquiring or making investments in complementary businesses, products, services or technologies in the future. If we are unable to identify suitable acquisition or investment candidates we will not grow as planned. Even if we do identify suitable candidates, we might not be able to make acquisitions or investments on commercially acceptable terms and on a timely basis. If we buy a business, we could have difficulty in assimilating that company's personnel, operations, products, services or technologies into ours. We may have to litigate to protect our intellectual property rights, or to defend claims that we have infringed the rights of others, which could subject us to significant liability and be time consuming and expensive. Our success depends significantly upon our copyrights, trademarks, service marks, trade secrets, technology and other intellectual property rights. The steps we have taken to protect our 11 intellectual property may not be adequate and third parties may infringe or misappropriate our intellectual property. If this occurs, we may have to litigate to protect our intellectual property rights. These difficulties could disrupt our ongoing business, increase our expenses and distract our management's attention from the operation of our business. We have not applied for the registration of all of our trademarks and service marks, and effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our content, services and products are made available online. If we were prevented from using our trademarks, we would need to reimplement our web sites and rebuild our brand identity with our customers, users and affiliates. This would increase our operating expenses substantially. Companies frequently resort to litigation regarding intellectual property rights. From time to time, we have received, and we may in the future receive, notices of claims of infringement of other parties' proprietary rights. We may have to litigate to defend claims that we have infringed the intellectual properly rights of others. Any claims of this type could subject us to significant liability, be time-consuming and expensive, divert management's attention, require the change of our trademarks and the alteration of content, require us to redesign our web sites or services or require us to pay damages or enter into royalty or licensing agreements. These royalty or licensing agreements, if required, might not be available on acceptable terms or at all. If a successful claim of infringement were made against us and we could not develop non-infringing intellectual property or license the infringed or similar intellectual property on a timely and cost-effective basis, we might be unable to continue operating our business as planned. See "Business-- Proprietary Rights and Licensing" for more information about our intellectual property. We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company, even an acquisition that would be beneficial to our stockholders. After this offering, our board of directors will have the authority to issue up to 5,000,000 shares of preferred stock. Issuance of the preferred stock would make it more difficult for a third party to acquire a majority of our outstanding voting stock, even if doing so would be beneficial to our stockholders. Without any further vote or action on the part of the stockholders, the board of directors will have the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if issued, might have conversion rights and other preferences that work to the disadvantage of the holders of common stock. Our certificate of incorporation, bylaws and equity compensation plans include provisions that may deter an unsolicited offer to purchase Snowball. These provisions, coupled with the provisions of the Delaware General Corporation Law, may delay or impede a merger, tender offer or proxy contest involving Snowball. Furthermore, our board of directors will be divided into three classes, only one of which will be elected each year. Directors will only be removable by the affirmative vote of at least 66 2/3% of all classes of voting stock. These factors may further delay or prevent a change of control of Snowball and may be detrimental to our stockholders. See "Description of Capital Stock--Anti-takeover Provisions of Our Certificate of Incorporation, Bylaws and Delaware Law." Risks Related to Our Industry Since our revenue is derived primarily from selling advertisements, our revenue might decline and we might not grow if advertisers do not continue or increase their usage of the Internet as an advertising medium. In the past, we have derived, and we expect to continue to derive in the future, substantially all of our revenue from selling advertisements. However, the prospects for continued demand and market acceptance for Internet marketing solutions are uncertain. If advertisers do not continue or 12 increase their usage of the Internet, our revenue might decline or we might not grow. Most advertising agencies and potential advertisers, particularly local advertisers, have only limited experience advertising on the Internet and may not devote a significant portion of their advertising expenditures to Internet advertising. Moreover, advertisers that have traditionally relied on other advertising media may not advertise on the Internet. In addition, advertising on the Internet is at a much earlier stage of development in international markets than it is in the United States and may not fully develop in these markets. As the Internet evolves, advertisers may find Internet advertising to be a less attractive or effective means of promoting their products and services relative to traditional methods of advertising and may not continue to allocate funds for Internet advertising. Many historical predictions by industry analysts and others concerning the growth of the Internet as a commercial medium have overstated the growth of the Internet and should not be relied upon. This growth may not occur or may occur more slowly than estimated. In addition, if a large number of Internet users use filter software programs that limit or remove advertising from the user's monitor, advertisers may choose not to advertise on the Internet. Moreover, there are no widely accepted standards for the measurement of the effectiveness of Internet advertising, and standards may not develop sufficiently to support Internet advertising as a significant advertising medium. Our ability to implement our business strategy and our ultimate success depend on continued growth in the use of the Internet and the ability of the Internet infrastructure to support this growth. Our business strategy depends on continued growth in the use of the Internet and increasing the number of users who visit our networks. A decrease in the growth of web usage, particularly usage by Generation i, would impede our ability to implement our business strategy and our ultimate success. If the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet infrastructure might not be able to support the demands placed on it or the performance or reliability of the Internet might be adversely affected. Web sites have experienced interruptions in service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays occur frequently in the future, Internet usage, as well as the usage of our web sites, could grow more slowly than expected or decline. Security and privacy concerns may also slow growth. Because our revenues ultimately depend upon Internet usage generally as well as on our web sites, our business may suffer as a result of retarded or declining growth. We might have to expend significant capital or other resources to protect our networks from unauthorized access, computer viruses and other disruptive problems. Internet and online service providers have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. We might be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Nevertheless, security measures that we implement might be circumvented. Eliminating computer viruses and alleviating other security problems may also require interruptions, delays or cessation of service to users accessing web pages that deliver our content and services. In addition, a party who circumvents our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be sued regarding privacy concerns, subjecting us to significant liability and expense. If third parties were able to penetrate our network security or otherwise misappropriate our users' personal information or credit card information, we could be subject to significant liability and 13 expense. We may be liable for claims based on unauthorized purchases with credit card information, impersonation or other similar fraud claims. Claims could also be based on other misuses of personal information, such as unauthorized marketing purposes. These claims could result in costly litigation. The Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. In 1998, the United States Congress enacted the Children's Online Privacy Protection Act of 1998. We depend upon collecting personal information from our customers and the regulations promulgated under this act have made it more difficult for us to collect personal information from some of our customers. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. Furthermore, the European Union recently adopted a directive addressing data privacy that may limit the collection and use of information regarding Internet users. This directive and regulations enacted by other countries may limit our ability to target advertising or to collect and use information internationally. Information displayed on and communication through our networks could expose us to significant liability and expense. We face possible liability for defamation, negligence, copyright, patent or trademark infringement and other claims, such as product or service liability, based on the nature and content of the materials published on or downloaded from our web sites. These types of claims have been brought, sometimes successfully, against Internet companies and print publications in the past, and the potential liability associated with these claims is significant. We could also be subjected to claims based upon the online content that is accessible from our web sites through links to other web sites or through content and materials that may be posted in chat rooms or bulletin boards. We do not verify the accuracy of the information supplied by third-party content providers, including affiliates. We also offer email services which may subject us to potential risks, such as liabilities or claims resulting from unsolicited email, lost or misdirected messages, illegal or fraudulent use of email or interruptions or delays in email service. The law in these areas is unclear. Accordingly, we are unable to predict the potential extent of our liability. 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. Changes in regulation of domain names may result in the loss or change of our domain names, a reduction in brand awareness among our customers and a diminished ability to attract advertisers and generate revenue. We hold various domain names relating to our networks and brands. In the United States, the National Science Foundation has appointed a limited number of entities as the current exclusive registrars for the ".com," ".net" and ".org" generic top level domains. We expect future changes in the United States to include a transition from the current system to a system controlled by a non-profit corporation and the creation of additional top level domains. Requirements for holding domain names also are expected to be affected. These changes may result in the loss or change of our domain names, a reduction in brand awareness among our customers and a diminished ability to attract advertisers and generate revenue. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. In addition, we may lose our domain names to third parties with trademarks or other proprietary rights in those names or similar names. 14 Future regulation of the Internet may slow its growth, resulting in decreased demand for our services and increased costs of doing business. Although we are subject to regulations applicable to businesses generally, few laws or regulations exist that specifically regulate communications and commerce over the Internet. We expect more stringent laws and regulations relating to the Internet to be enacted due to the increasing popularity and use of the Internet and other online services. Future regulation of the Internet may slow its growth, resulting in decreased demand for our services and increased costs of doing business. New and existing laws and regulations are likely to address a variety of issues, including: . user privacy and expression; . taxation and pricing; . the rights and safety of children; . intellectual property; and . information security. Currently we may be subject to Sections 5 and 12 of the Federal Trade Commission Act, which regulate advertising in all media, including the Internet, and require advertisers to have substantiation for advertising claims before disseminating advertisements. The Federal Trade Commission recently brought several actions charging deceptive advertising via the Internet, and is actively seeking new cases involving advertising via the Internet. We also may be subject to the provisions of the recently enacted Communications Decency Act which, among other things, imposes substantial monetary fines and/or criminal penalties on anyone who distributes or displays certain prohibited material over the Internet or knowingly permits a telecommunications device under its control to be used for this purpose. In addition, several telecommunications companies and local telephone carriers have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees. If this were to occur, the cost of communicating on the Internet could increase substantially, potentially decreasing the use of the Internet. Finally, the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could also increase our costs of doing business, discourage Internet communications and reduce demand for our services. We may be subject to significant liability for products sold through our web sites. We introduced ChickShops, our first e-commerce initiative, in December 1999 and plan to develop a range of e-commerce activities. Consumers may sue us if any of the products sold through our web sites are defective, fail to perform properly or injure the user. Liability claims resulting from our sale of products could require us to spend significant time and money in litigation or to pay significant damages. 15 Risks Related to this Offering We expect to experience volatility in our stock price, which could negatively affect your investment. Our common stock has never been sold in a public market and an active trading market for our stock may not develop or be sustained. If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay. See "Underwriting." The trading price of our common stock is likely to be highly volatile in response to a number of factors, such as: . actual or anticipated variations in our quarterly results of operations; . the addition or loss of affiliates; . changes in the market valuations of other Internet content and service companies; . announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; . changes in financial estimates or recommendations by securities analysts; and . additions or departures of key personnel. In addition, broad market and industry factors may materially and adversely affect the market price of our common stock, regardless of our operating performance. The Nasdaq National Market, and the market for Internet and technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Further, the trading prices of the stocks of many Internet and technology companies are at or near historical highs and reflect price-earnings ratios substantially above those in other industries. If these trading prices and price earnings ratios are not sustained or if our stock does not trade at the same levels as other Internet or Internet-related company stock your investment will suffer. Class action litigation resulting from volatility of the trading price of our common stock would likely result in substantial costs and a diversion of management's attention and resources. Volatility in the trading price of our common stock could result in securities class action litigation. Any litigation would likely result in substantial costs and a diversion of management's attention and resources. We may apply the proceeds of this offering to uses that do not increase our operating results or the value of your investment. We will have broad discretion in how we use the proceeds from this offering, and we may spend these proceeds in ways that do not increase our operating results or the value of your investment. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions regarding how to use the proceeds from this offering. See "Use of Proceeds" for more detailed information about how we intend to use the proceeds of this offering. Pending any of these uses, we plan to invest the proceeds of this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return. 16 Should our stockholders sell a substantial number of shares of common stock in the public market, the price of our common stock could fall. Our current stockholders hold a substantial number of shares which they will be able to sell in the public market in the near future. Sales of a substantial number of shares after this offering could reduce the market price of our common stock. Even the perception that our current stockholders might sell shares of common stock could depress the trading price of the common stock. These sales, and the possibility of these sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. See "Shares Available for Future Sale." Holders of 25,559,895 shares of our common stock, which will represent approximately 68% of our outstanding stock after completion of this offering, have the right to require us to register their shares of common stock with the Securities and Exchange Commission. In addition, after this offering, we intend to register all shares of our common stock that we may issue under our stock option plans and employee stock purchase plan. Once we register these shares, they can be freely sold in the public market upon issuance, in some instances subject to the lock-up agreements described above. If these holders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise needed capital. Our officers and directors and their affiliates will exercise significant control over us, which could disadvantage other stockholders. Upon completion of this offering, our executive officers and directors and their affiliates together will own approximately 63% of our outstanding common stock. Christopher Anderson, the chairman of our board of directors, will own approximately 41% of our outstanding common stock alone. As a result, these stockholders will exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of control could disadvantage other stockholders with interests different from those of our officers, directors and their affiliates. For example our officers, directors and their affiliates could delay or prevent someone from acquiring or merging with us even if the transaction would benefit other stockholders. See "Principal Stockholders." Investors will experience immediate and substantial dilution in the book value of their investment. The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $8.45 in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $11.00 per share. The exercise of outstanding options and warrants may result in further dilution. See "Dilution." 17 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. All statements, other than statements of historical fact, included in this prospectus, regarding our strategy, future operations, financial position, estimated revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. Words such as "may," "will," "should," "anticipates," "projects," "predicts," "expects," "intends," "plans," "believes," "seeks" and "estimates," and variations of these words and similar expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are only predictions and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this prospectus. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this prospectus. Although we believe that the expectations reflected in the forward- looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any forward-looking statement after the date of this prospectus, whether as a result of new information, future events or otherwise, or to conform these statements to actual results. 18 USE OF PROCEEDS The net proceeds to us from the sale of the shares of common stock in this offering are estimated to be $62,637,500, after deducting the estimated underwriting discount and estimated offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that net proceeds will be $72,228,125. We presently intend to use approximately 25% of the net proceeds from this offering to advertise and promote our brands, 25% to expand our sales and marketing workforce and 5% to repay any debt that may be incurred under our credit facility. The balance of the net proceeds of this offering will be used for working capital and general corporate purposes, including network expansion and content development, relocation of our offices and possible acquisitions of affiliates. Pending such uses, we will invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. We believe opportunities may exist to expand our business through acquisitions of other businesses and technologies, and we may use a portion of the proceeds for this purpose. We are not currently a party to any contracts or letters of intent with respect to any acquisitions for which we will use the net proceeds from this offering. We cannot assure you that any of our expansion plans will be realized or, if realized, will prove profitable. DIVIDEND POLICY We have never declared or paid dividends on our capital stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. 19 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999: . on an actual basis; . on a pro forma basis to reflect the automatic conversion of all outstanding shares of preferred stock into common stock immediately prior to the closing of this offering and the sale of 150,000 shares of Series C preferred stock in January 2000 at $10.00 per share; and . on a pro forma as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share after deducting the estimated underwriting discount and estimated offering expenses payable by us.
December 31, 1999 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands, except per share data) Long-term obligations, less current portion.... $ 2,036 $ 2,036 $ 2,036 -------- -------- -------- Stockholders' equity: Convertible preferred stock, $0.001 par value, actual: 20,000 shares authorized, 18,066 shares outstanding; pro forma and pro forma as adjusted: 5,000 shares authorized, no shares outstanding....................... 18 -- -- Common stock, $0.001 par value, actual: 37,500 shares authorized, 5,586 shares outstanding; pro forma: 100,000 shares authorized, 31,145 shares outstanding; pro forma as adjusted: 100,000 shares authorized, 37,395 shares outstanding....... 6 31 37 Additional paid-in capital................... 88,662 90,155 152,787 Notes receivable from stockholders........... (1,301) (1,301) (1,301) Deferred stock compensation.................. (10,868) (10,868) (10,868) Prepaid marketing and distribution rights.... (2,095) (2,095) (2,095) Accumulated deficit.......................... (39,761) (39,761) (39,761) -------- -------- -------- Total stockholders' equity................. 34,661 36,161 98,799 -------- -------- -------- Total capitalization....................... $ 36,697 $ 38,197 $100,835 ======== ======== ========
The common stock information in the table above excludes the following shares: . 2,358,368 shares issuable upon exercise of outstanding options at a weighted-average exercise price of $2.02 per share as of December 31, 1999; . 322,688 shares issuable upon exercise and conversion of outstanding warrants at a weighted-average exercise price of $7.84 per share as of December 31, 1999; and . 7,894,369 shares available for future issuance under our stock plans, including 5,500,000 shares of common stock available for future issuance under our 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan, each adopted in February 2000, as of December 31, 1999. Please read this capitalization table together with the sections of this prospectus entitled "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and with the consolidated financial statements and related notes beginning on page F-1. 20 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering. Investors participating in this offering will incur immediate, substantial dilution. Our pro forma net tangible book value as of December 31, 1999 was $32.8 million or $1.05 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the total number of shares of common stock outstanding as of December 31, 1999 after giving effect to the conversion of all outstanding shares of preferred stock into 25,409,895 shares of common stock and the sale of 150,000 shares of Series C preferred stock in January 2000 at $10 per share. After giving effect to the issuance and sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 1999 would have been $95.4 million, or $2.55 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $1.50 per share to existing stockholders and an immediate dilution of $8.45 per share to new investors. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share.................. $11.00 Pro forma net tangible book value per share as of December 31, 1999.......................................................... $1.05 Increase per share attributable to this offering............... 1.50 ----- Pro forma as adjusted net tangible book value per share after this offering................................................... 2.55 ------ Dilution per share to new investors.............................. $ 8.45 ======
The following table summarizes on a pro forma as adjusted basis, as of December 31, 1999, after giving effect to the offering at an assumed initial public offering price of $11.00 per share and the sale of 150,000 shares of Series C preferred stock in January 2000 at $10 per share, the difference between the existing stockholders and the purchasers of shares of common stock in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price paid per share:
Shares Purchased Total Consideration Average ------------------ -------------------- Price Number Percent Amount Percent Per Share ---------- ------- ------------ ------- --------- Existing stockholders......... 31,145,442 83.3% $ 71,148,000 50.9% $ 2.28 New investors ................ 6,250,000 16.7 68,750,000 49.1 11.00 ---------- ----- ------------ ----- Total....................... 37,395,442 100.0% $139,898,000 100.0% ========== ===== ============ =====
In the preceding tables, the shares of common stock outstanding exclude: . 2,358,368 shares issuable upon exercise of outstanding options at a weighted-average exercise price of $2.02 per share as of December 31, 1999; . 322,688 shares issuable upon exercise of outstanding warrants for preferred stock at a weighted-average exercise price of $7.84 per share as of December 31, 1999 and conversion of the preferred stock into common stock; and . 7,894,369 shares available for future issuance under our stock plans, including 5,500,000 shares of common stock available for future issuance under our 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan, each adopted in February 2000, as of December 31, 1999. 21 If the outstanding options were to be exercised in full for cash, the pro forma net tangible book value per share after the offering would be $2.52, the increase per share attributable to new investors would be $1.40, and the dilution per share to new investors would be $8.48. See "Capitalization," "Management--Employee Benefit Plans," "Description of Capital Stock" and Notes 7 and 10 of our Notes to Consolidated Financial Statements. 22 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. The consolidated statement of operations data set forth below for the three years in the period ended December 31, 1999 and the balance sheet data as of December 31, 1998 and 1999 have been derived from our audited financial statements and those of our predecessor division of Imagine Media, Inc. included elsewhere in this prospectus, which have been audited by Ernst & Young LLP, independent auditors. The consolidated balance sheet data as of December 31, 1997 has been derived from audited financial statements of our predecessor division not included in this prospectus. The historical results are not necessarily indicative of results to be expected for any future period.
Year ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- (in thousands, except per share data) Consolidated Statements of Operations Data: Revenue........................................... $ 927 $ 3,256 $ 6,674 Cost of revenue................................... 171 1,322 4,316 ------- ------- -------- Gross margin..................................... 756 1,934 2,358 Operating expenses: Production and content........................... 628 1,599 6,610 Engineering and development...................... 65 329 5,084 Sales and marketing.............................. 836 2,592 20,393 General and administrative....................... 506 1,074 3,486 Stock-based compensation......................... -- -- 1,521 Amortization of goodwill and intangible assets... -- -- 471 ------- ------- -------- Total operating expenses...................... 2,035 5,594 37,565 ------- ------- -------- Loss from operations.............................. (1,279) (3,660) (35,207) Interest and other income, net.................... -- -- 385 ------- ------- -------- Net loss.......................................... $(1,279) $(3,660) $(34,822) ======= ======= ======== Basic and diluted net loss per share.............. $(186.69) ======== Shares used in per share calculation.............. 187 ======== Pro forma basic and diluted net loss per share (unaudited)...................................... $ (1.93) ======== Shares used in pro forma per share calculation (unaudited)...................................... 18,022 ======== December 31, -------------------------- 1997 1998 1999 ------- ------- -------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments...................................... $ -- $ -- $ 33,489 Working capital................................... 474 669 28,263 Total assets...................................... 763 1,161 46,718 Long-term debt, less current portion.............. -- -- 2,036 Stockholders' / division equity................... 502 762 34,661
See Note 1 of our Notes to Consolidated Financial Statements for a description of the method that we used to compute our basic and diluted net loss per share. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward- looking statements as a result of certain factors, including, but not limited to, those under "Risk Factors" and elsewhere in this prospectus. Overview From our inception in January 1997 through December 1998, we operated as an independent division of Imagine Media, Inc. During this period, we focused our operating activities primarily on the creation of our IGN, ChickClick and PowerStudents networks, the development of relationships with affiliates to expand our content and community offerings and the generation of revenue from advertising sales. Separate financial statements were maintained for the period prior to our incorporation as a separate entity in January 1999. In February 1999, we raised $3.3 million of initial capital, part of which was paid by a promissory note for $2.0 million, which has been paid in full. Imagine Media contributed the IGN, ChickClick and PowerStudents assets and related intellectual property to us, and we hired approximately 40 Imagine Media employees. During the summer and early fall of 1999, we raised approximately $30 million of additional capital (including equipment financing of $2.0 million) and began an aggressive expansion program, adding new employees to develop additional content and web sites, to recruit more third- party web sites into our networks and to expand our sales and marketing staff. In December 1999, we raised $33.8 million of additional capital to continue financing our expansion. In addition to the creation of our own web site content, our relationships with our affiliates are an important part of our business model. By adding new affiliates to our networks, we are able to gain new content and to increase the consolidated page views of our networks rapidly. We typically enter into agreements with affiliates for periods of between six months and five years under which we offer affiliates revenue opportunities and a package of integrated marketing services and support in exchange for the integration of their site into our network and the use of their site for advertising, promotions and sponsorships. Typically, we pay affiliates a portion of the revenue generated from advertising, promotions and sponsorships run on their pages. During 1999, we acquired the assets of several affiliates. We anticipate that we may acquire additional affiliates and selected assets of affiliates in the future. See Note 5 of our Notes to Consolidated Financial Statements. Our operating activities to date have been focused on developing the quality of our content and services; expanding our audience and the usage of our services; establishing relationships with our advertisers, users and affiliates; building sales momentum and marketing our network and Snowball brands; developing our computer software and hardware infrastructure; recruiting personnel; and raising capital. To date, we have derived revenue principally from short-term contracts for banner advertisements, buttons and textlinks. Under these contracts, we guarantee advertisers a minimum number of "impressions," or that a minimum number of users will view their advertisements, for which we receive a fixed fee. Advertising revenue is recognized at the lesser of the ratio of impressions delivered over total guaranteed impressions or the straight-line basis over the term of the contract, provided that we do not have any significant remaining obligations and collection of the resulting receivable is probable. To the extent that minimum guaranteed impression levels or other 24 obligations are not met, we defer recognition of the corresponding revenue until guaranteed levels are achieved. Revenue also includes fees from sponsorship, slotting and other marketing programs under contracts in which we commit to provide customers with promotional opportunities in addition to traditional banner advertising. These agreements typically provide for the delivery of advertising impressions on our web sites, exclusive placement on our networks, special content and promotional offers, the design and development of customized sites to enhance the promotional objectives of the advertiser and a fixed fee plus incremental payments for traffic driven to the advertiser's site. While these exclusive arrangements prohibit us from engaging in certain types of business with some of the competitors of our exclusive customers, we believe that we benefit more from a few exclusive relationships than from many non-exclusive relationships because our exclusive customers drive more traffic to our networks and pay substantially higher fees for our services than do non-exclusive customers. Moreover, we believe that offering users a greater variety of products and services within a particular market is more important to our business and future growth than offering them a greater number of vendors from which to select these products and services. The portion of revenue derived from these arrangements that is related to the delivery of impressions is recognized in the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable, at the lesser of the ratio of impressions delivered over total guaranteed impressions or the straight-line basis over the term of the contract. The portion of any up-front nonrefundable fee specified in the contract related to the up-front design work is also recognized at the lesser of the ratio of impressions delivered over total guaranteed impressions or the straight-line basis over the term of the contract. We anticipate that revenue from sponsorship, slotting and other marketing programs will represent an increasing percentage of our total revenue in the future. In December 1999, we introduced an online store through which we sell carefully selected products that are pertinent to the content contained on web sites within our ChickClick network. We recognize revenue from the sale of these products when a product is delivered. Revenue has increased each year since our inception, although we have never been profitable. We cannot assure you that our revenue will continue to grow or that we will ever achieve or maintain profitability. As of December 31, 1999, we had an accumulated deficit of $39.8 million. We anticipate that we will incur additional operating losses at least through the fourth quarter of 2000. Results of Operations Revenue Our revenue of $6.7 million for the year ended December 31, 1999 increased over revenue of $3.3 million recorded for the year ended December 31, 1998 and revenue of $0.9 million recorded for the year ended December 31, 1997. The increases in revenue reflect increases in advertising sold, due to both the expansion of our sales force and marketing efforts, as well as to increases in our available inventory of internal and affiliated page views. One customer accounted for over 10% of revenue in 1997. No customer accounted for over 10% of revenue for 1998 or 1999. Snowball derives the significant majority of its revenues from operations in the United States. Cost of Revenue Cost of revenue consists primarily of expenses related to hosting web sites, the costs and license fees of content and community tools and the portion of revenue owed to affiliates for advertisements placed on their web sites. These costs can vary depending upon a variety of factors, primarily the mix of advertisements and marketing programs placed on our web sites compared to 25 those placed on affiliate web sites. These costs can also vary from period to period as we acquire an affiliate or selected sites from an affiliate or as we expand the portion of our total sites that are represented by affiliates versus those that we own and operate directly. For example, after we acquire an affiliate, our cost of revenue will typically decrease because we no longer have to pay that affiliate the portion of revenue that otherwise would have been owed to the affiliate for advertisements placed on its site. Cost of revenue of $4.3 million for the year ended December 31, 1999 increased over the cost of revenue of $1.3 million recorded for the year ended December 31, 1998 and cost of revenue of $0.2 million recorded for the year ended December 31, 1997. These increases reflect the increased hosting costs of our expanding web site operations, expansion of our community tools, as well as increases in costs owed to affiliates for increases in revenue from advertisements placed on their web sites. Operating Expenses We categorize operating expenses into production and content, sales and marketing, engineering and development, general and administrative, stock-based compensation and amortization of intangible assets. Production and Content. Production and content expenses consist primarily of payroll and related expenses for editorial, artistic and production staff; payments to freelance writers and artists; and telecommunications and computer- related expenses for the creation of content for our web sites. These expenses can vary from period to period as we acquire an affiliate or selected sites from an affiliate or as we expand the portion of our total sites that are represented by affiliates versus those that we own and operate directly. For example, after we acquire an affiliate, our production and content expenses typically increase because we incur costs for additional staff, services and equipment associated with operating the new business. Production and content expenses of $6.6 million for the year ended December 31, 1999 increased over expenses of $1.6 million recorded for the year ended December 31, 1998 and expenses of $0.6 million recorded for the year ended December 31, 1997. These increases reflect salary and related costs associated with increases in personnel and freelance writers and artists for the creation and production of additional content for our web sites. Engineering and Development. Engineering and development expenses consist primarily of personnel and related costs, consultant and outside contractor costs, and software and hardware maintenance costs for our development and programming efforts, including internal information services costs. To date, all engineering and development expenses have been expensed as incurred. Engineering and development expenses of $5.1 million for the year ended December 31, 1999 increased over expenses of $0.3 million recorded for the year ended December 31, 1998 and expenses of $65,000 recorded for the year ended December 31, 1997. These increases resulted primarily from increases in salary and related costs, consultant fees and related costs and recruiting fees associated with expanding our development and programming efforts. Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related costs for our direct sales force, affiliate development group and marketing staff. In addition, these expenses include the costs of marketing programs such as advertisements, trade shows, promotional activities and media events. Sales and marketing expenses of $20.4 million for the year ended December 31, 1999 increased over expenses of $2.6 million recorded for the year ended December 31, 1998 and expenses of 26 $0.8 million recorded for the year ended December 31, 1997. These increases reflect increases in salary and related costs for expansion of our sales, affiliate development and marketing personnel, as well as increases in our advertising, marketing and branding expenses. General and Administrative. General and administrative expenses consist primarily of personnel and related costs for corporate functions including accounting and finance, human resources, facilities and legal. General and administrative expenses of $3.5 million for the year ended December 31, 1999 increased over expenses of $1.1 million recorded for the year ended December 31, 1998 and expenses of $0.5 million recorded for the year ended December 31, 1997. These increases resulted primarily from increases in salary and related costs associated with expansion of our accounting and finance, human resources and other administrative efforts, as well as from increased use of outside consulting services. Stock-based Compensation. Stock-based compensation represents the aggregate differences, at the dates of grant, between the respective exercise prices of stock options and issuance prices of common and preferred stock and the deemed fair values of the underlying stock. Stock-based compensation is amortized using the graded amortization method over the vesting period of the related options, which is generally four years. Through December 31, 1999, we recorded stock-based compensation of $1.5 million. This amount relates to the following cost and expense categories (in thousands): cost of revenue $7, production and content $407, engineering and development $263, sales and marketing $777, and general and administrative $67. The total unamortized deferred stock-based compensation recorded through December 31, 1999 is $10.9 million. This amount will be amortized as follows: $6.2 million for the year ending December 31, 2000; $2.9 million for the year ending December 31, 2001; $1.4 million for the year ending December 31, 2002; and $0.4 million for the year ending December 31, 2003. Subsequent terminations of stock and option holders may reduce future stock-based compensation. We did not grant any shares of our common stock prior to our incorporation in January 1999. Amortization of Goodwill and Intangible Assets. Amortization of goodwill and intangible assets represents the non-cash charges for the expensing, over the anticipated useful life, of intangible assets and goodwill. Amortization of goodwill and intangible assets was $0.5 million for the year ended December 31, 1999. $1.8 million of goodwill and intangible assets arose from the acquisition of Extreme Interactive Media and $1.7 million arose from the acquisition of Ameritrack and various web site assets that we purchased during 1999. See Note 5 of our Notes to Consolidated Financial Statements. As of December 31, 1999, goodwill and intangible assets of $3.4 million remained to be amortized. These assets are being amortized over a two- or three-year life with amortization expense of approximately $0.6 million per quarter through the third quarter of 2001 and $0.3 million per quarter thereafter through the fourth quarter of 2002. Interest and Other Income, Net Interest and other income, net, of $0.4 million for the year ended December 31, 1999 consisted primarily of interest received from the proceeds of equity financings completed during the year. Provision for Income Taxes No provision for federal and state income taxes was recorded through December 31, 1999 as we incurred net operating losses from inception through that date. As of December 31, 1999, we had approximately $31.8 million of federal net operating loss carry forwards which expire on various dates 27 through 2019. Due to the uncertainty regarding the ultimate use of the net operating loss carry forwards, we have not recorded any benefit for losses and a valuation allowance has been recorded for the entire amount of the net deferred tax asset. In addition, certain future changes in our share ownership, as defined in the Tax Reform Act of 1986, may further restrict our ability to use our net operating loss carry forwards. The net losses incurred for the years ended December 31, 1997 and 1998 are attributable to our operations as a division of Imagine Media and were included in the income tax returns filed by Imagine Media. Because the Company will not receive any benefit for its historical operating losses incurred through December 31, 1998, no income tax benefit has been reflected for those periods. Liquidity and Capital Resources During 1997 and 1998, we financed our operations through contributions from Imagine Media. Since our incorporation in January 1999, we have financed our operations primarily through private placements of preferred stock and borrowings under equipment lease lines and a credit facility. Cash, cash equivalents and short-term investments were $33.5 million at December 31, 1999. We raised $65.2 million in equity financing during 1999. During that period, we used $26.9 million in operating activities, and $5.6 million in acquiring property and equipment. In April and October 1999, we entered into lease lines of credit for $5.0 million. These credit facilities have terms of three years and bear interest at the rate of 7.5% per annum. In connection with these credit facilities, we issued warrants to the lessors to purchase 31,595 shares of our common stock at $3.165 per share and 21,097 shares of our common stock at $7.11 per share. These credit facilities do not include any financial covenants. In November 1999, we entered into a term loan agreement for up to an aggregate of $15.2 million. In connection with this loan agreement, we issued promissory notes, which bear interest at the rate of 11.0% per annum, and warrants to purchase 270,000 shares of our common stock at an exercise price of $8.44 per share. In December 1999, $12.0 million of the loan was repaid and the note holders cancelled $3.0 million of indebtedness under the notes in exchange for shares of our Series C preferred stock at $10.00 per share. Any outstanding balance under the notes will become due upon consummation of this offering. The note holders maintain a first position lien on all of our assets, excluding fixed assets. The loan agreement does not include any financial covenants. During 1999, we entered into several leases for our San Francisco headquarters and our sales offices, with terms ranging from month-to-month to three years. In connection with these short-term leases, we will make payments of approximately $350,000 in the year ending December 31, 2000. In November 1999, we entered into a lease for our new executive offices in Brisbane, California, which expires in 2012. In connection with the lease, we will make payments of $1.8 million in 2000, $4.4 million per year through 2004 and a total of $29.2 million thereafter until the expiration of the lease. In connection with this lease, we obtained a letter of credit for $4.4 million as a deposit for the facilities. See Note 9 of our Notes to Consolidated Financial Statements for more information on our lease commitments. Our capital requirements depend on numerous factors, including market acceptance of our services, the resources we allocate to developing our networks, our marketing and selling capabilities and our brand. We have experienced substantial increases in our expenditures since our inception consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase significantly for the foreseeable future. A significant percentage of the capital raised in this offering will be expensed over the next two years to advertise and promote our brands 28 and to expand our sales and marketing workforce. We estimate that approximately 40% to 50% of the proceeds of this offering will be expensed during the current fiscal year. We will continue to evaluate possible acquisitions of, or investments in, complementary businesses, technologies, services or products. We believe that our available cash, cash equivalents and short-term investments and cash flows from operations, combined with the net proceeds from this offering, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. We may need to raise additional funds, however, to fund expansion, including significant increases in personnel and office facilities, to develop new or enhance existing services or products, to respond to competitive pressures or to acquire or invest in complementary businesses, technologies, services or products. In addition, to meet our long term liquidity needs, we may need to raise additional funds, establish additional credit facilities or seek other financing arrangements. Additional funding may not be available on favorable terms, on a timely basis or at all. Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs or hardware that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Prior to January 1, 2000, many people were concerned that this could result in system failures or miscalculations, causing disruptions of operations for any company using such computer programs or hardware, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. Most reports to date indicate that computer systems are functioning normally and that compliance and remediation work accomplished before the end of 1999 was effective to prevent any problems. Computer experts have warned, however, that there still may be residual consequences. We cannot assure you that Year 2000 problems will not disrupt our service and thereby result in a decrease in revenue, an increase in allocation of resources to address Year 2000 problems or an increase in litigation costs. We designed our internal systems as well as our software, hardware and network architecture to be Year 2000 compliant, and we believe, based on our initial reports, that these systems are Year 2000 compliant. We have not incurred any significant expenses, and we do not anticipate that the total costs associated with Year 2000 remediation efforts, including both expenses incurred and any to be incurred in the future, will be material. Furthermore, we have not experienced any significant problems to date relating to the Year 2000 compliance of our major suppliers. It is impossible to determine with complete certainty, however, that all Year 2000 problems that may affect us have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, no one can accurately predict how many Year 2000 problem-related failures will occur or the severity, duration or financial consequences of these perhaps inevitable failures. Should these failures occur, we might experience, among other difficulties, operational inconveniences and inefficiencies that may divert management's time and attention from ordinary business activities. Based on our initial assessment of our Year 2000 readiness, we do not anticipate being required to implement any material aspects of a contingency plan to address Year 2000 readiness of our critical operations. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivatives and Hedging Activities," or SFAS 133, as amended by SFAS 137, which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. 29 Because we do not currently hold any derivative instruments and do not currently engage in hedging activities, we expect that the adoption of SFAS 133, as amended, will not have a material effect on our financial position or results of operations. We will be required to implement SFAS 133, as amended, for fiscal year 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101. SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. We believe that our current revenue recognition principles comply with SAB 101. Disclosures about Market Risk Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of interest rates in the United States, particularly since the majority of our investments are in short-term debt securities issued by corporations or divisions of the United States government. We place our investments with high quality issuers and limit the amount of credit exposure to any one issuer. Due to the nature of our short- term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency hedging or other derivative financial instruments as of December 31, 1999. 30 BUSINESS Snowball is an Internet media company that operates a network of destination web sites providing content, community and commerce to Generation i. We serve this group by providing its members with current content, relevant services such as email and instant messaging, a forum for interacting with one another and carefully selected merchandise. In addition to creating original content, we continuously work to expand the breadth and depth of our content offerings by selectively adding affiliated web sites to our network. We had more than 150 affiliated web sites and over 100 partner college destinations as of December 31, 1999. This network and affiliate business model allows us to build our traffic and brand rapidly and efficiently. To attract and retain affiliates, we provide an integrated package of sales and marketing services, technical support and audience development opportunities. We organize both our own web sites and affiliated web sites around networks that target different segments of the Generation i audience. Currently, our networks are: . ChickClick, which provides content, community and commerce features to Generation i women; . IGN, which provides information and entertainment to Generation i men; . PowerStudents, which provides students at all levels with information concerning college admissions, jobs and careers; and . InsideGuide, which offers student-generated information concerning individual colleges. By offering targeted access to a large and growing audience with attractive demographic characteristics, we are able to generate marketing and advertising revenue in a variety of forms. These include promotions and sponsorships with negotiated financial terms, slotting and lead-generation fees from merchants that seek preferential placement on our sites and in our online store, and sales of various forms of banner, button and textlink advertising, both traditional and contextual. We also generate merchandising revenue from the sale of carefully selected items within our online store, ChickShops. Based upon the number of unique visitors who visited our web sites, Media Metrix reported that we were the 29th highest-trafficked property on the Internet in January 2000. Moreover, Media Metrix reported that these visitors spent more time per day on our networks during that period than on all but 15 other properties among the top 50 properties. Industry Background The Internet has emerged as an important new medium for communication and commerce, providing companies with an effective channel for marketing and selling their products and services. International Data Corporation, or IDC, estimates that consumer e-commerce in the United States will grow from $12.4 billion in 1998 to $75.0 billion in 2003, representing a compound annual growth rate of 43%. Because the Internet enables companies to attract specific demographic groups to their web sites by offering focused content, services and products, it can be an effective medium for advertisers seeking targeted access to these groups. Furthermore, as customers interact with a company's web site, the company can gather valuable information on consumer preferences and buying patterns, thereby allowing advertisers and marketers to segment their audience further and increase the effectiveness of their spending. Jupiter Communications LLC estimates that spending on Internet advertising in the United States will grow from $2.1 billion in 1998 to $11.5 billion in 2003. 31 Consistent with this growth in Internet commerce and advertising, Internet content is growing at a rapid pace. A primary impetus behind the proliferation of content and the growing number of web sites has been the increasing use of the Internet for creating, sharing and searching for relevant information. IDC estimates that the number of web sites will grow from 925 million in 1998 to 13.1 billion in 2003. Online communities are also growing rapidly as new user groups migrate from traditional media onto the Internet. IDC estimates that the number of Internet users in the United States will grow from approximately 63 million in 1998 to approximately 177 million by the end of 2003. While older online users are generally accustomed to traditional media and adapt to the Internet gradually, many individuals within the Generation i age group have grown up using the Internet and view it as a primary source for information and medium for communication. According to the United States Census Bureau, individuals in this age group represented approximately 25% of the U.S. population in 1999. We believe that advertisers target this age group because its members have a large aggregate mean income and because advertisers anticipate a high lifetime return on their advertising dollars. Generation i is a large Internet audience that we believe desires community, entertainment and content focused on their particular needs. Because this generation is accustomed to numerous cable television channels and a wealth of entertainment choices, we believe its members expect a wide range of specialized content that is available on demand. In the context of the Internet, this translates into demand for web sites containing extensive information on a variety of specialized subjects. Major web sites offering standard content and services often fail to reach Generation i because these sites generally: . are designed to appeal to a broad audience and therefore do not provide an environment focused on the specific programming and service needs and buying habits of Generation i; . do not comprehensively address issues important to Generation i, such as peer, parental and school-related pressures, or issues revolving around friendship, sexuality and relationships; . do not provide a targeted forum for members of Generation i to express and share their views with one another; and . do not provide the kind of interactivity and services that we believe this group seeks, such as communication with their peers through instant messaging, chat and email, as well as news, online games and personalized home pages. While the number of web sites that serve Generation i with targeted content and community features continues to grow, these sites tend to be small, independent sites in the early stages of commercial development, and the individuals who operate these sites tend to have limited financial resources and managerial experience. As a result, it is difficult for any one of these sites to attract consistent traffic and premier advertisers. Furthermore, because this group of web sites is large and fragmented, advertisers generally have been unable to reach Generation i effectively through these individual sites. We believe that companies must advertise and promote their products and services in the context of demographically appropriate content rather than through traditional broad-based advertising to market more effectively to Generation i. Accordingly, we believe there is a need for a recognized online destination consisting of an integrated network of content, community and commerce targeting Generation i. 32 The Snowball Solution Snowball is a network of destination web sites providing fresh, up-to-date content created by, for and about Generation i. In addition to offering creative and current content, each of our networks provides an interactive community for users who share similar interests and passions, such as video games, college life or shopping. We believe this integrated package of content, community and commerce has helped to make us one of the most popular networks on the Internet. As a result, we believe we provide a compelling opportunity to our affiliates and potential affiliates as well as a large, targeted audience for advertisers. We focus on Generation i We provide content, community and commerce features focused on Generation i. To address the multiple audiences and tastes of Generation i, we have developed a network of company-owned web sites complemented by linked, third-party affiliate web sites that provide additional content. We have organized these sites within the overall Snowball network around individual networks targeting specific groups within Generation i: ChickClick provides content, community and commerce for Generation i women; IGN provides information and entertainment for Generation i men; InsideGuide develops individual web sites and guides for specific colleges; and PowerStudents provides high school, college and graduate students with information on careers, college admissions and jobs. The affiliate sites associated with these networks contribute to the amount of information available to users on our networks and also extend the reach of the networks to a broader audience. The content created by our editorial staff, our affiliates and the network users is edited and organized into networks to create a strong and consistent voice directed at Generation i. We also seek to promote the community participation of Generation i by encouraging members of this group to communicate with one another and with our network editors through message boards, chat sessions, instant messaging and email. The interactive features of our networks are designed to further enhance the online experience, to encourage frequent visits to our web sites and to lengthen the time users spend on our networks. For example, users can create personalized home pages that feature, among other things, targeted content, news feeds, horoscopes and information about television, movies and the weather. Users also have access to special features such as calendars, diaries, classifieds and trading services. Moreover, we have our own e-commerce boutique, ChickShops, which is accessible from many pages on the ChickClick network and offers hip fashion merchandise for young women. Collectively, the content, community and commerce features of our networks are designed to satisfy the many and varied interests of our multiple Generation i audiences. We provide significant benefits to advertisers Our network model of destination web sites attracts a large and segmented audience by providing extensive information on a variety of narrowly focused subjects. This allows advertisers and marketers to gain wide access to the Generation i audience as well as to target narrow segments of this audience. Additionally, the increased segmentation allows us to provide contextually linked advertising and commerce opportunities to a variety of merchants that want to advertise and gain preferential placement on our web sites and within our online stores. For example, we provide EBWorld.com, a leading online game store, with an integrated sponsorship package that includes preferential placement on our IGN network, promotion to users within our game newsletters, email marketing and targeted banner advertisements. In addition, we plan to open stores across all of our networks that will offer products to our users while providing a storefront that will attract promotional opportunities for other merchants or advertisers targeting the hard to reach demographic sub- groups of Generation i. 33 Our model benefits us and our affiliates Our network and affiliate business model allows us to benefit from the fresh content and traffic of affiliated sites without the up-front costs and risks associated with developing content for the rapidly changing tastes of Generation i. Many members of this generation are prolific producers of content and have a dynamic interest in sharing with the community. As a result, many of our users create content web sites and contact us to become part of our network. Our users also generate a stream of affiliation opportunities by referring us to other popular web sites. A selective screening process allows our editorial staff to identify affiliate content partners that appeal to the changing tastes of Generation i. This enables us to add content and traffic to our network while keeping the content fresh and, we believe, compatible with the evolving tastes of Generation i. To attract and retain identified affiliates, we offer them a package of integrated marketing services and support. Affiliates who join our networks often experience immediate growth in users and advertising revenue. Our network development strategy reinforces each network's brand identity, attracts users to our owned web sites, refers these users to affiliate sites and leads to viral growth as users of the network share their interests and opinions with others. The Snowball Strategy Our goal is to be the preeminent network of content, community and commerce sites on the Internet by, for and about Generation i, by: . Building and developing our existing networks, while selectively adding new networks. We will continue to develop our four existing networks by increasing the depth of content, services and product offerings arranged around the appropriate focus of each network. In addition, we intend to add new networks to appeal specifically to additional segments of Generation i. We intend to build each network's brand through online, offline and affiliate marketing programs with the goal of making each network the dominant destination within its targeted content segment. By expanding our existing networks and increasing the number of networks within the Snowball family, we intend to broaden our appeal to the members of Generation i and to be the leading destination on the Internet for this demographic group. . Continuing to leverage our network and affiliate business model to achieve cost-effective and viral growth of content and traffic. We will continue proactively to identify sites that meet our criteria for target demographics, quality of content and strategic fit with existing networks. By expanding our networks, we intend to keep our existing users engaged with extensive, up-to-date content while quickly and efficiently attracting new users. In cases where affiliate web sites do not exist around relevant content areas, we will selectively offer our services to help incubate web sites that provide the appropriate content. We believe our affiliate-driven network growth model and our reliance on word-of-mouth publicity within our targeted demographic group will allow us to build our traffic and brand rapidly and efficiently. . Offering a range of value-added services to attract, retain and develop affiliated web sites. We intend to continue to attract and retain select affiliates by identifying small and developing web sites early and by offering them a mutually beneficial agreement to increase their marketing capabilities and to expand their reach. To maximize affiliate retention, we have developed an integrated affiliate loyalty program that includes education and community tools and other support services. Additionally, we will continue to solicit and respond to affiliate and user feedback to refine the services we provide to affiliates. These services will assist us in incubating new web sites and networks to supplement our content and service offerings. 34 . Promoting affinity and community across all networks and affiliates to increase the amount of time that users spend on our networks. We intend to continue to develop the community tools and services we provide to increase the time that users spend on our sites, as well as increase the frequency of their visits. We will continue to incorporate services into our networks that appeal to Generation i, such as free email, instant messaging, chat rooms, bulletin boards, personalized home pages and polling, to keep them actively engaged in both content and communication. . Being the premier partner for marketing, advertising and commerce directed at Generation i. By creating a set of branded networks that focus on a variety of discrete subjects, and by remaining a premier online destination for Generation i, we intend to offer potential advertisers and vendors valuable opportunities to reach targeted segments of Generation i. By providing advertising banners, buttons, textlinks, promotions and sponsorships of specific categories and slotting opportunities, we can offer customized marketing programs for companies wanting to address this market. Additionally, we will continue to develop opportunities for merchants to sell selected merchandise through our own online stores. . Pursuing strategic alliances and acquisitions that increase content, traffic and revenue opportunities. We intend to selectively develop strategic alliances to incorporate relevant content on our networks, to derive additional traffic from the resulting co-branding effects and to drive new methods of revenue generation. For example, we have entered into a strategic relationship with New Line New Media that will provide us with offline marketing promotions in their products. In selecting our partners, we will strive to ensure the integrity of our own brand identities with Generation i. Additionally, where strategically appropriate, we intend to acquire selected web sites and affiliates that complement our existing networks. For example, we recently acquired High School Alumni, a former affiliate that provides various services to alumni of registered high schools. Networks Snowball is currently comprised of the following four networks of web sites: [LOGO OF CHICKCLICK] ChickClick is a destination for forward-thinking young women seeking community, commerce and "life tools." The ChickClick network consists of three channels that offer progressive features representing the interests of three groups within the female Generation i demographic. MissClick targets teenage girls between the ages of 13 and 17, EstroClick targets women between the ages of 18 and 26, and MamaClick targets Generation i mothers. ChickClick offers content on relevant subjects such as relationships, entertainment, style, news, sports, work and travel. ChickClick's community features include personalized homepages, Chickmail, chat rooms, message boards and auctions. In addition, ChickClick recently launched ChickShops, an e-commerce area that offers online shoppers a specialty boutique experience. Together with its affiliated websites, ChickClick had approximately 34 million consolidated page views in January 2000 and over 800,000 registered users as of January 31, 2000. According to the U.S. Census Bureau, women between the ages of 13 and 30 numbered 33.5 million in 1999. Media Metrix estimates that 14.5 million women between the ages of 12 and 34 used the Internet in January 2000. 35 The following table provides a brief description of ChickClick's affiliates as of December 31, 1999:
Web Site URL Description - -------------------------------------------------------- Beatboxbetty beatboxbetty.com show business news and reviews BoHos flypaperpress.com BoHos comic site Bust bust.com voice of the new girl Cherrysucker cherrysucker.com user-submitted fiction Crafty Lady getcrafty.com making art from everyday life Disgruntled disgruntledhousewife.com modern living Housewife and intersex relationships Fametracker fametracker.com celebrity almanac Fashion Icon fashion-icon.com fashion news Girlie Style girliestlye.com pertinent female-driven content Greasergrrls greasergrrls.com women motor enthusiasts Grrlgamer grrlgamer.com news and reviews from a girl's point of view Hellfire hellfire.com progressive creative writing Hipmama hipmama.com content and advice for hip moms Hissyfit hissyfit.com political and social essays Lookenpeepers gmetropolis.com creative and funny information
Web Site URL Description - ------------------------------------------------- Maxi maximag.com empowerment and information Mighty Big TV mightybigtv.com popular TV shows MissGirl missgirl.com teen advice and issues Out of order annie.newdream.net political and social essays Pencilbox pencilboxmag.com resource for college women Pop!sicle lickpopsicle.com political, social and comical essays Razzberry razzberry.com teen community Riotgrrl riotgrrl.com irreverant sassy content Rockrgrl rockrgrl.com women musicians Smile and smileandactnice.com progressive Act Nice women's content Spacegirl spacegirl.org societal commentary Squiffy Ether ethernaut.com/zine irreverent Jag fiction Swanky swanky.com progressive online community Teengrrl teengrrl.com alternative teen community Wench wench.com feminism, politics and culture Wired Woman wiredwoman.com women and technology Womengamers womengamers.com gaming for the educated woman
[LOGO OF IGN.COM] IGN is a network of web sites focusing on games and entertainment for Generation i men. IGN provides current editorial coverage of games, science fiction, movies and television. IGN targets three distinct interest groups through the following channels: IGN Games, IGN Sci-Fi and IGN for Men. IGN Games provides reviews and previews of games for personal computers and other video games; IGN Sci-Fi provides editorial content on science fiction, movies, television, books and toys; and IGN for Men offers content focusing on the lifestyles of young men. IGN offers numerous features and services to keep its users engaged, including free email, instant messaging, contests and promotions, weather, horoscopes and search capabilities. IGN also offers slots within branded commerce areas to partners seeking to sell products and services online. Together with its affiliated web sites, IGN had more than 198 million consolidated page views in January 2000 and approximately 400,000 registered users as of January 31, 2000. In July 1999, we acquired a popular former affiliate, The Vault, which had approximately nine million consolidated page views in January 2000. According to Media Metrix, males between the ages of 12 and 34 accounted for approximately 25% of all Internet users in the United States in January 2000. Media Metrix estimates that approximately 12% of all 12 to 34 year old males on the Internet and approximately 19% of all 12 to 17 year old males on the Internet visited our IGN network in January 2000. 36 The following table provides a brief description of IGN's affiliates as of December 31, 1999:
Web Site URL Description - ----------------------------------------------------------- 3Dportal 3dportal.com coverage of 3D games Allprowrestling.com allprowrestling.com independent wrestling Anime Links animelinks.com links to anime sites Anime News animenewsnetwork.com Anime news Network Arrgh arrgh.demon.co.uk early video games CheatElite cheat-elite.com multi-platform cheats and codes CheatersGuild cheaters-guild.com cheats and codes ComicFan comicfanmag.com comic portal Coming Attractions corona.bc.ca coming attractions and reviews of movies Coming Soon comingsoon.net movie trailers Daily Dementia dailydementia.com interviews with game industry specialists Daily Radar dailyradar.com entertainment and games Dark Horizons darkhorizons.com film and TV coverage DC Mania dcmania.com Sega Dreamcast coverage DC Swirl dcswirl.com Sega Dreamcast news and reviews Desktop Starships desktopstarships.com sci-fi desktop downloads DiabloII.net diabloii.net Information on the Diablo game DMG Ice dmgice.com Gameboy information Doctor Dreamcast doctordreamcast.com Sega Dreamcast news and reviews Drew's script-o-rama.com movie and TV Script-O-Rama scripts Dukeworld dukeworld.com information on Duke Nukem EAGB gameboy.s-one.net.sg/ Gameboy user information Echostation echostation.com Star Wars e-reality e-reality.com network of top game specific sites Evergreen milpool.com The Simpsons Terrace EX ex.org Anime and Manga FGN Online fgnonline.com news on the game industry Fusion Gaming fusion-gaming.com gaming forums Futurama nnyc.com Futurama Archive (animated show) GameFAQS gamefaqs.com answers to questions about video games Gamers Depot gamersdepot.com game hardware reviews GameSages gamesages.com codes for games Gaming Age gaming-age.com game industry news
Web Site URL Description - --------------------------------------------------------- Halflife.net halflife.net information, news and previews on Halflife IndyJones.net indyjones.net coverage on new Indiana Jones game JediKnight.Net jediknight.net Star Wars related games LucasGames lucasgames.com coverage of all LucasArts games MacGameNews macgamenews.com Macintosh games Magic Box come.to/magicbox console and Japanese games MeccaWorld meccaworld.com PC games MovieBloopers moviebloopers.com movie bloopers Moviefan Online moviefanonline.com movie news and reviews MovieSounds moviesounds.com movie sounds Mr. Cranky mrcranky.com honest movie reviews Mr. Hats mrhatshellhole.com South Park Hellhole MTGnews.com mtgnews.com Magic: The Gathering N64 Shooters n64shooters.com reviews of Nintendo 64 shooting games N64-Cheats n64-cheats.com Nintendo 64 cheats and codes NextGen Online next-generation.com new video games Nintendo nintendoexpress.com Nintendo systems Express Nintendojo nintendojo.com Nintendo 64 news and reviews NintendojoFR nintendojofr.com French coverage of Nintendo 64 Nintendorks nintendorks.com Nintendo 64 news and reviews Oh! The Humanity ohthehumanity.com coverage of bad movies Only Toons onlytoons.com cartoon news and reviews PC Accelerator pcxl.com action, adventure and sports games for PCs PC Gamer Online pcgamer.com gaming information PC Gameworld pcgameworld.com free demos Playstation 2 Unicom psx2unicom.com Playstation 2 news and information Playstation vidgames.com Playstation Galleria news, previews and strategies Pokegym pokegym.thedojo.com Pokemon information
37
Web Site URL Description - ---------------------------------------------------- Pokemon411 pokemon411.com Pokemon information PokemonAdobe pokemonadobe.com everything Pokemon PSM psmonline.com unbiased Playstation coverage PSX Nation psxnation.com Playstation news, early previews and reviews PSX2.com psx2.com Playstation 2 news PSXNetwork psxnetwork.com Playstation updates, news and interviews PSXtreme psxtreme.com Playstation information Psycomic psycomic.com comic book news and information RareNet rarenet.com coverage of rare games RivaZone rivazone.com 3D games and hardware Rogue Spear rsdatabase. comprehensive Database gamenation.com Rogue Spear site Scream-Trilogy scream-trilogy.com news and information on film trilogy Segadojo segadojo.com Sega gaming news, reviews, cheats SF Site analogsf.com printed sci-fi site SMG Fan smgfan.com Sarah Michelle Gellar fan site Spider-Man Hype spidermanhype.com news and information on upcoming Spiderman film(s) Stay Tooned staytooned.com animated entertainment news
PowerStudents provides students with targeted content, commerce and community features through three channels: High School, College and Jobs. PowerStudents provides editorial content on academics, college admissions, entertainment and student life. Community features and services include free email, instant messaging, contests, weather, television listings, classifieds, polls, forums, student diaries and expert Q&A. [LOGO OF POWER STUDENTS.COM] Together with its affiliated web sites, PowerStudents had approximately 42 million consolidated page views in January 2000 and approximately two million registered users as of January 31, 2000. High School Alumni, one of our owned sites within the PowerStudents network, accounted for approximately 30 million consolidated page views in January 2000 and approximately 1.8 million registered users as of the same date. According to eMarketer, 11.1 million individuals in the United States between the ages of 13 and 17 currently use the Internet. eMarketer also estimates that online spending by this group will increase from $160 million in 1999 to $1.4 billion in 2002.
Web Site URL Description --------------------------------------- Stomp Tokyo stomptokyo.com video reviews Video Review Stomped stomped.com gaming industry information Supercars supercars.net photos and information about powerful cars The Astounding bmonster.com B movies B Monster The Casual Otaku casualotaku.com Anime The Digital Bits thedigitalbits.com DVD information The Dojo thedojo.com Magic: The Gathering The Great RPG rpg-archive.com role playing Archive game archive The One Ring theonering.com J.R.R. Tolkien The Turnbuckle theturnbuckle.com professional wresting TheForce.net jedicouncil.net Star Wars Total RPG totalrpg.com role playing game reviews Total Video Games totalvideogames.com games Yakfaces Realm yakface.com Star Wars memorabilia Zelda HQ zhq.com comprehensive Zelda site
38 The following table provides a brief description of PowerStudents' affiliates as of December 31, 1999:
Web Site URL Description - ----------------------------------------------------------- 4Tests.com 4tests.com practice exams Back To College back2college.com resources for reentry students BrainLapse.com brainlapse.com games and movies Bschool.com bschool.com business school resources CampusCareerCenter campuscareercenter.com information on jobs CampusTours campustours.com college campus tours CollegeGate.com collegegate.com editing for admissions essays College Recruiter collegerecruiter.com jobs and internships CollegeTownUSA collegetownusa.com online college community CollegeView collegeview.com college information and virtual tours CollegeXpress collegexpress.com information for college bound students FastAid fastaid.com scholarships and financial aid Fishnet: jayi.com college guide The College Guide FreSch freschinfo.com scholarship information GoCollege gocollege.com information on college, scholarships and tests
Web Site URL Description - -------------------------------------------------------------- GradView gradview.com graduate school resources GreekCentral greekcentral.com fraternity and sorority life InternshipPrograms.com internshipprogram.com internships Interview Feedback interviewfeedback.com interviews The Job Resource thejobresource.com college career center MBAjob mbajob.com MBA job searches MBA ZoNe mbazone.com MBA resources Oilzine oilzine.com British humour Planet Papers planetpapers.com essays and creative writing Quintessential quintcareers.com career and job Careers hunting RealCollegelife.com realcollegelife.com college life RealWorld rwuniversity.com real world University advice Study 24/7 study24/7.com college notetaking SuperCollege supercollege.com information on admissions and financial aid TestTutor testtutor.com standardized test preparation Versity versity.com college notetaking
[LOGO OF INSIDEGUIDE.COM] InsideGuide is a national network of online college sites created by students for students. InsideGuide offers an insider's perspective on college life. Each site provides students at a particular college with an independent forum for expressing their opinions and sharing information relevant to the community, such as classes, sports, activity groups and entertainment. InsideGuide was launched in September 1999 and as of December 31, 1999 offered guides centered around more than 100 individual schools, including University of California at Berkeley, Harvard University, Northwestern University and University of Pennsylvania. Together with its affiliated web sites, InsideGuide had nearly nine million consolidated page views in January 2000. According to Jupiter Communications, as of January 1999, 10.6 million college students in the United States used the Internet and online spending by this group will increase from $890 million in 1999 to $2.5 billion in 2002. 39 Networks Under Development We are continually expanding the content, community and commerce services offered by our networks and evaluating opportunities for the development of new networks to keep pace with the expanding interests of Generation i. For example, our acquisition of High School Alumni in September 1999 will allow each of our networks to offer its users a classmate finder tool. As of December 31, 1999, High School Alumni included over 20,000 high schools throughout the United States. This site enables an alumnus of a registered high school to register, update his or her information and search for an old classmate. This database can then be used for personal communication as well as for organizing and sponsoring group alumni activities such as reunions and fund-raising. High School Alumni had approximately 22 million consolidated page views in January 2000 and over 1.8 million registered users, as of January 31, 2000. Due to its strong following and potential, we are currently evaluating options to establish this site as a separate network during the year 2000. Affiliate Agreements Our standard affiliate agreement provides for an initial term of two years and renews at our option for three consecutive one-year terms. As of January 1, 2000, 52 of our affiliates were parties to affiliate agreements with an initial term of one year, 98 were parties to agreements with an initial term of two years, two were parties to agreements with an initial term of three years and two were parties to agreements with an initial term of five years. The average duration of our current affiliate agreements is 3.4 years and the average term remaining on these agreements is 2.8 years. We enter into affiliate agreements with new affiliates on a rolling basis. Accordingly, our affiliate agreements do not generally terminate at or around the same time. Approximately 20% of our affiliate agreements will expire within the next twelve months. Content We believe that the large number of Generation i users who visit our networks do so for the compelling content contained on the web sites that make up each network. This content is derived from two sources: our in-house editorial staff and our affiliates. As of December 31, 1999, our in-house editorial staff consisted of 50 professional writers, and we had more than 150 affiliate contributors. We view the development of new content as an interactive process and encourage our users to offer suggestions for new subject areas. Once we identify a new subject area, we typically hire an in-house editor to develop content and to work with our affiliate development department to identify potential affiliates. Our affiliate model distinguishes us from many other Internet media companies. This model allows us to recruit independent web sites to supplement and broaden our in-house editorial content. Our affiliate agreements generally require affiliates to display the logo of one or more of our networks and give us the exclusive right to sell advertising on the affiliated site in exchange for a percentage of the advertising revenue. In addition, our agreements generally provide for joint development of e-commerce opportunities. We believe that this model enhances our content, increases our audience reach, builds advertising inventory and expands our distribution at a cost to us that is lower than would be achievable through the development of in-house editorial content alone. We also believe that the affiliate model enables us to adapt quickly to emerging Internet and media trends with reduced incremental costs. For example, when Sega released its new Dreamcast game system in September 1999, we recruited four Dreamcast-related web sites within one month. Because our typical affiliate agreement requires us to pay affiliates only a portion of the revenue that we earn from the affiliate's site, the new Dreamcast affiliates expanded our editorial coverage of the 40 Dreamcast subject area and added new inventory for advertising sales without significantly increasing our expenses. We invest in marketing and technical services to increase the value of affiliate relationships. Our affiliate relations specialists work with our affiliate content partners to promote their sites, build their traffic and improve the technical performance of the sites. Revenue Sources Our business model is designed to provide for multiple revenue streams. Our principal sources of revenue will be (1) advertising, sponsorships and customer partnerships and (2) e-commerce and merchandising. For the years ended December 31, 1997, 1998 and 1999, advertising, sponsorship and customer partnership revenue represented approximately 100% of our revenue. Advertising and sponsorships Our strategy is focused in part on generating a majority of our advertising revenue from sponsors and merchants seeking an integrated and cost-effective means to reach Generation i on the Internet. Our sponsorship arrangements are designed to achieve broad marketing objectives such as brand promotion, brand awareness, product introductions and online research. To help sponsors achieve these goals, we develop individually tailored sponsorship programs that may include any combination of advertising banners, buttons, textlinks, promotions, sponsorships of specific categories and direct merchandise slotting opportunities. We also develop content to support the marketing initiatives of advertisers. In addition, sponsors may communicate with their customers on our message boards and through chats, and may gain insights into their customers' preferences and buying habits through polls and special events. Sponsorships allow us to cater to the specific goals of advertisers in the areas of impressions, product research, market research, new product launches, list development, product information, repositioning, new account openings, lead generation and transactions. Our sponsorship agreements provide for revenue independent from page views as the measure of value and generally have terms of up to one year. One or more of our material agreements, however, have terms as brief as six months. We also generate revenue through customer partnerships, which involve the sale of select placement of advertisements on our web sites to merchants interested in targeting Generation i, such as EBWorld.com, edu.com and Gloss.com. These arrangements provide merchants with exclusive placement on our networks, exposure through banner advertising, special content and promotional offers in exchange for which we collect a fixed fee plus incremental payments for visitors forwarded to the advertiser's site. In addition to helping merchants retain customers, these retailing opportunities can be used to identify valuable purchasing trends, which in turn can be used in future advertising and commerce and to develop additional targeted content. Because these arrangements are exclusive, however, they preclude us from offering our users the products and services of certain competitors of these customers that are similar to those offered by our exclusive customers. We derive a portion of our advertising revenue from banner advertisements, buttons and textlinks that are displayed on pages throughout our networks. From each of these, viewers can hyperlink directly to the advertiser's own web site, thus providing the advertiser the opportunity to interact directly with an interested customer. Under these contracts, we guarantee advertisers a minimum number of impressions for which we receive a fixed fee. During the year ended December 31, 1999, our five largest customers accounted for 19% of our consolidated revenue. If we were to lose any one of these customers, our revenue would decline. 41 E-commerce and merchandising We have recently begun to generate e-commerce revenue by selling carefully selected products. We intend to develop e-commerce stores across all of our networks. In December 1999, we began merchandising directly to our users through the launch of ChickShops within our ChickClick network. ChickShops offers more than 75 products, including clothes and accessories, and was designed to offer online users the experience of shopping in a specialty clothing boutique similar to those found in cities like New York or San Francisco. Online orders are taken 24 hours a day, seven days per week and products are shipped generally within 48 hours of placement of most orders. All product orders and fulfillment are currently handled by ShopNow.com. Sales As of December 31, 1999, we had a direct sales organization of 32 sales professionals. Our sales team consults regularly with advertisers and agencies on design and placement of advertisements, sponsorships and promotions across our networks. We also have a group of sales professionals who concentrate primarily on strategic sponsorships and promotions, seeking to establish relationships with senior level executives and to develop multi-million dollar partnership packages linking our users with the partner's brand. As of December 31, 1999, this group consisted of 12 individuals. We also had 25 sales support, market research and advertising operations staff who focus on market research and provide advertisers with information and expertise that will help them market their products and services more effectively to Generation i. We regularly conduct surveys concerning purchasing patterns, attitudes and brand preferences of Generation i. We have sales offices in New York City, San Francisco and Los Angeles. Corporate Marketing As of December 31, 1999, we had 15 professionals in our corporate marketing group who are complemented by marketing professionals within our four networks. Through the efforts of these professionals, we pursue a variety of marketing initiatives designed to build brand awareness for Snowball and its individual networks among both the advertising community and members of Generation i. To date, these marketing activities have included advertising in online and offline media, attending trade shows, sponsoring events and engaging in ongoing media relations campaigns. We target potential advertising customers in a variety of online and offline media, including newspapers such as The New York Times, The Wall Street Journal, USA Today and over 200 college newspapers; print magazines such as Advertising Age, Adweek, Wired, Industry Standard and Business 2.0; outdoor locations such as commuter rail lines and bus tails; and online sites such as Adage.com, Adweek.com, ClickZ and Channel 7. Network marketing activities focus on increasing traffic to our networks and the number of our registered users. We have engaged in major event sponsorships, such as ChickClick's title sponsorship of the 1999 Lilith Fair and IGN's sponsorship of Sega Dreamcast's 1999 Assault Tour. We have also entered into a strategic relationship with New Line Cinema that will provide us with offline marketing promotions in their products. In addition, all networks have aggressively launched promotions and contests to increase user registration and have entered into service agreements with Microsoft offering free category-specific newsletters via MSN Hotmail. We engage in an ongoing media relations campaigns with business and financial contacts and key industry analysts. Our public relations efforts are a key component of our overall marketing and brand awareness strategy. We plan to continue to develop a media outreach program based on 42 market research that we organize and conduct with third parties. Each individual network also manages public relations activities targeted to the consumer press to encourage publicity on new channels, affiliates, services and partners. The primary purpose of our public relations activities is to increase our share of each network's target audience and increase overall visibility of the Snowball networks. Technology Our web site hosting infrastructure is co-located at our headquarters in San Francisco and at Exodus Communications' Internet Data Center in Santa Clara, California. Exodus is responsible for providing us with a high-speed, scalable, fault-tolerant Internet connection, clean power and physical security. Packaged software enables full text search, bulk email delivery, web serving and traffic analysis. We developed our membership, personalization, advertising delivery and community software using standard application servers and Oracle database systems. Our advertising selection and management system is DoubleClick's NetGravity. We have developed traffic analysis software to compute industry- standard and advanced metrics. We also host a small number of our affiliates on our servers. Our editorial infrastructure is located at our headquarters in San Francisco. We developed our editorial and publishing software by using Informix. We have started to migrate our editorial and publishing processes to the same platform that we use for our dynamic services. Both our hosting and editorial switched local area networks are fault-tolerant, scalable and economical. With respect to disaster recovery, all of our non-derivable data is presently replicated between a storage array at our headquarters in San Francisco and a storage array at Exodus Communications. We are currently studying the advisability of locating a disaster recovery data center in New York City. Our network operations center consists of monitoring software that is monitored by our staff at all times. Competition The market for Internet users and online advertisers is highly fragmented, rapidly changing and characterized by thousands of competitors. With no substantial barriers to entry, we believe that the number of Internet companies relying on web-based advertising revenue will increase greatly in the future. Companies or sites that are primarily focused on targeting Generation i online include MTV.com, Warner Bros. Online (Entertaindome), iTurf Inc. and Alloy Online, Inc. In addition to these direct competitors, we will likely face competition in the future from: . developers of web directories; . search engine providers; . content sites; . commercial online services; . sites maintained by Internet service providers; and . other entities that establish a community on the Internet by developing their own or purchasing one of our competitors. We also could face competition in the future from traditional media companies, a number of which, including Time Warner, Disney, CBS and NBC, have recently combined with, made acquisitions of or investments in significant Internet companies. Finally, we compete with traditional forms of media, such as newspapers, magazines, radio and television, for advertisers and advertising revenue. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and larger existing 43 customer bases than we do. These competitors are able to undertake more extensive marketing campaigns for their brands and services, adopt more aggressive advertising pricing policies and make more attractive offers to potential employees, distribution partners, commerce companies, advertisers and third-party content providers. Further, these competitors may develop communities that are equal or superior to ours or that achieve greater market acceptance than ours. In addition, many of our current advertising customers and strategic partners also have established collaborative relationships with certain of our competitors or potential competitors and other frequently visited web sites. Accordingly, we cannot assure you that: . we will be able to sustain our traffic levels or retain our advertising customers; . competitors will not experience greater growth in traffic as a result of strategic collaborative relationships that make their web sites more attractive to advertisers; or . our affiliates and strategic partners will not sever or renew their agreements with us. We believe that the primary competitive factors in attracting and retaining users are: . quality of content and services; . brand recognition; . user affinity and loyalty; . demographic focus; . variety of value-added services; and . critical mass. We believe that the principal competitive factors in attracting and retaining online advertisers are: . the amount of traffic on a web site; . brand recognition; . the demographic characteristics of a site's users; . the ability to offer targeted audiences; . the average duration of user visits; and . cost-effectiveness. We cannot assure you that we will be able to compete successfully against our current or future competitors. Competitive pressures faced by us may have a material adverse effect on our business, our financial condition and the results of our operations. Proprietary Rights and Licensing We regard our copyrights, trademarks, service marks, trade secrets, technology and other intellectual property rights as important to our success. In particular, we rely upon our domain names and trademarks to increase brand awareness among our users and advertisers. We have registered approximately 300 domain names, including all names currently in use across our networks. "Snowball," "ChickClick," "IGN," "PowerStudents" and "InsideGuide" are trademarks of ours. Our trademarks will remain in effect indefinitely, but only to the extent that we continue to use them in commerce. We have not applied for the registration of all of our trademarks and service marks and may not be successful in obtaining the trademarks and service marks that we have applied for. We have not applied for any patents. 44 To protect our intellectual property rights, we rely on a combination of copyright and trademark laws, trade secret protection, confidentiality agreements with employees and third parties and protective contractual provisions. Prior to entering into discussions with potential content providers and affiliates regarding our business and technologies, we generally require that they enter into nondisclosure agreements with us. If these discussions result in a license or other business relationship, we also generally require that the agreement setting forth each parties' rights and obligations include provisions for the protection of our intellectual property rights. Licensees of these rights may take or fail to take actions that would diminish the value of our rights or reputation. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products or services or obtain and use information that we regard as proprietary. The laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. We do not currently have any patents or patent applications pending in any foreign country. In addition, others may be able independently to develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer. Employees As of December 31, 1999, we had a total of 260 full-time employees, including 102 in sales and marketing, 35 in engineering, 100 in production and content and 23 in administration and finance. Other than as described in "Management-- Employment Arrangements, Termination of Employment Arrangements and Change of Control Arrangements," none of these individuals is bound by an employment agreement. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good. Facilities Our principal editorial, sales, marketing, research, development and administrative office occupies approximately 26,000 square feet in San Francisco, California, under a month-to-month lease. In addition, we also lease sales and service offices in Los Angeles and New York City. We recently entered into a long-term lease for approximately 180,000 square feet to be divided among three buildings in Brisbane, California. We intend to relocate and expand our principal offices to this site next year. This lease will expire with respect to approximately 55,000 square feet, 61,000 square feet and 66,000 square feet 10 years, 11 years and 12 years, respectively, after we take occupancy. We believe that this proposed new facility will be adequate for our needs for the foreseeable future. Legal Proceedings We are not a party to any material legal proceedings. Financial Information about Geographic Areas See Note 1 of our Notes to Consolidated Financial Statements. 45 MANAGEMENT Directors, Executive Officers and Significant Employees The following table presents information regarding our directors, executive officers and significant employees as of March 9, 2000.
Name Age Position ---- --- -------- Mark A. Jung............... 38 President, Chief Executive Officer and Director James R. Tolonen........... 50 Chief Financial Officer, Chief Operating Officer and Director Richard D. Boyce........... 37 President of the Networks Sandra Cavanah............. 40 Vice President, Affiliate Marketing Janette S. Chock........... 33 Vice President, Controller and Chief Accounting Officer Teresa M. Crummett......... 39 Vice President, Corporate Marketing and Product Management Kenneth H. Keller.......... 43 Vice President, Engineering Kathleen Z. Layendecker.... 38 Vice President, Affiliate Development Elizabeth G. Murphy........ 41 Vice President, Sales and Marketing Christopher Anderson....... 43 Chairman of the Board and Director Richard A. LeFurgy......... 43 Director Michael Orsak.............. 39 Director Robert H. Reid............. 34 Director
Mark A. Jung has served as our President and Chief Executive Officer since February 1999 and as a director since our incorporation in January 1999. Prior to joining us, from July 1997 to January 1999, he served as an independent industry consultant to various companies. From February 1992 to July 1997, he co-founded and served as Chief Executive Officer, a director and, from February 1996 to July 1997, Chairman of Worldtalk Communications Corporation, an Internet security company. Mr. Jung holds a Bachelor of Science degree in electrical engineering from Princeton University and a Master of Business Administration from Stanford University. James R. Tolonen has served as our Chief Financial Officer and Chief Operating Officer since October 1999, and as a director since November 1999. Prior to joining us, Mr. Tolonen was on sabbatical from November 1998 to October 1999, during which time he served intermittently as an advisor and board member to several private companies. From August 1996 to October 1998, he served as a director of Cybermedia, Inc., a software product service and support company, and as its President and Chief Operating Officer from May 1998 to October 1998. From June 1989 to April 1998, he served as Senior Vice President and Chief Financial Officer of Novell, Inc., a computer network and software company. Mr. Tolonen holds a Bachelor of Science degree in mechanical engineering and a Master of Business Administration from the University of Michigan. Mr. Tolonen is also a certified public accountant. Richard D. Boyce has served as our President of the Networks since March 2000. Prior to joining to us, in September 1994, he co-founded HotWired, Inc. (now known as Wired Digital), an Internet media company and, as of June 1999, a wholly-owned subsidiary of Lycos, Inc., an Internet media company, and from September 1994 to February 2000, he served in a number positions, including most recently as its Senior Vice President of Advertising Sales and Commerce. Mr. Boyce holds a Bachelor of Arts degree in communications from Washington State University. Sandra Cavanah has served as our Vice President, Affiliate Marketing since June 1999. Ms. Cavanah shares responsibility for affiliate related matters with Ms. Layendecker, focusing primarily on affiliate marketing. From February 1999 to June 1999, she served as our Co-Director of Affiliate Marketing and Development, and from January 1999 to February 1999, she served as a consultant to us. Prior to joining us, from December 1997 to February 1999, she served as Chief 46 Financial Officer of Genstar Capital, L.L.C., a private-equity investment firm. From April 1995 to November 1997, she served as an analyst at Robertson Stephens & Co., an investment banking firm, and from December 1993 to March 1995, she served as a consultant to Pacific Telesis Group, a holding company whose subsidiaries are communication services companies. Ms. Cavanah holds a Bachelor of Science degree in business administration from the University of California at Berkeley and a Master of Business Administration from Harvard University. Janette S. Chock has served as our Vice President, Controller and Chief Accounting Officer since October 1999. From February 1999 to October 1999, she served as our Controller, and from January 1999 to February 1999, she served as a consultant to us. Prior to joining us, from August 1998 to January 1999, she served as Controller of Fujitsu Personal Systems, Inc., a mobile computer hardware company. Ms. Chock was between occupations from July 1996 to October 1996. From October 1996 to July 1998, she served as Controller of Diffusion, Inc., a corporate information delivery software company, and from November 1993 to July 1996, she served as Controller of Worldtalk Communications Corporation, an Internet security company. Ms. Chock holds a Bachelor of Science degree in business administration from the University of California at Berkeley. Ms. Chock is also a certified public accountant. Teresa M. Crummett has served as our Vice President, Corporate Marketing and Product Management since March 1999. From January 1999 to March 1999, she served as a consultant to us. Prior to joining us, from August 1997 to December 1998, she was a self-employed business consultant. She served as a Director of Corporate Marketing at CyberCash, Inc., an electronic commerce company, from January 1996 to August 1997. From July 1995 to December 1996, Ms. Crummett again worked as a self-employed business consultant. From April 1994 to June 1995, she served as Vice President, Direct Marketing of Interactive Network, Inc., an interactive television company, and from December 1993 to March 1994, she served as a business consultant to Time Warner, a worldwide media company. From March 1992 to November 1993, Ms. Crummett served as Director of Marketing of Walt Disney Company, a diversified worldwide entertainment company. Ms. Crummett holds a Bachelor of Arts degree in government from Harvard University and a Master of Business Administration from Stanford University. Kenneth H. Keller has served as our Vice President, Engineering since March 1999. From January 1999 to March 1999, he served as a consultant to us. Prior to joining us, from May 1996 to December 1998, he was a self-employed business consultant, entrepreneur and investor. From April 1995 to April 1996, he served as Director of Development of Excite, Inc., an Internet media company. From January 1995 to April 1995, Mr. Keller was between occupations. Mr. Keller holds a Bachelor of Science degree in mathematics from Carnegie Mellon University and a Master of Science degree and Ph.D. in computer science from the University of California at Berkeley. Kathleen Z. Layendecker has served as our Vice President, Affiliate Development since June 1999. Ms. Layendecker shares responsibility for affiliate related matters with Ms. Cavanah, focusing primarily on affiliate development. From February 1999 to June 1999, she served as our Co-Director of Affiliate Marketing and Development, and from January 1999 to February 1999, she served as a consultant to us. Prior to joining us, from June 1998 to January 1999, Ms. Layendecker was between occupations. From January 1997 to June 1998, she served as an analyst for Bodri Capital Management, Inc., an investment company, and from August 1996 to January 1997, as a consultant to Bodri Capital Management. From May 1995 to August 1996, Ms. Layendecker was on maternity leave. From October 1993 to May 1995, she served as Director of Finance and Administration of Valentis Corp., a biotechnology company. Ms. Layendecker holds a Bachelor of Arts degree in English from Stanford University and a Master of Business Administration from the Yale School of Management. Elizabeth G. Murphy has served as our Vice President, Sales and Marketing since March 1999. Prior to joining us, from April 1992 to March 1999, she was employed by U.S. News and World 47 Report, a publishing company, most recently as Vice President, Associate Publisher. Ms. Murphy holds a Bachelor of Science degree in zoology from the University of Michigan. Christopher Anderson has served as our Chairman of the Board and a director since our incorporation in January 1999. He founded Imagine Media, Inc., an Internet media company, and has served as its President and as one of its directors since October 1993. He has also served as Chairman of the Board of Future Network plc, an Internet media company, since May 1998. Mr. Anderson holds a Bachelor of Arts degree in politics, philosophy and economics from Oxford University. Richard A. LeFurgy has served as a director since April 1999. He has been a member of Walden Media, L.L.C., the general partner of the Walden Media & Information Technology Fund, L.P., a venture capital firm, since August 1999. He served as a consultant to the Walden Media & Information Technology Fund, L.P. from October 1998 to August 1999. From June 1995 to October 1998, he served as Senior Vice President, Advertising Sales of Starwave Corporation, an Internet media company, and from June 1978 to May 1995, he served as Executive Vice President, Senior Partner and a director at NW Ayer & Partners, an advertising agency. Mr. LeFurgy holds a Bachelor of Science degree in advertising from Syracuse University. Michael Orsak has served as a director since May 1999. He is a founder of Worldview Technology Partners, a venture capital firm, and has been a general partner since September 1996. From January 1990 to September 1996, he served as a co-manager of a fund of JAFCO America Ventures, a venture capital firm. Mr. Orsak holds a Bachelor of Arts degree in economics and a Master of Business Administration from Stanford University. Robert H. Reid has served as a director since March 1999. He is a founder of Listen.com, Inc., an Internet music company, and has served as its President and Chief Executive Officer since February 1998. From January 1997 to December 1998, he was an associate of 21st Century Internet Venture Partners, a venture capital firm. He authored a book from April 1996 to December 1996, and from December 1994 to April 1996 he served as a Business Development Manager at Silicon Graphics, Inc., a high-performance computer company. Mr. Reid holds a Bachelor of Arts degree in international relations and a Master of Arts degree in international policy studies from Stanford University and a Master of Business Administration from Harvard University. Each of our executive officers will serve in his or her office until he or she resigns or is removed from office. Board of Directors and Committees We currently have six directors. We intend to amend our certificate of incorporation immediately following the closing of this offering. The amended certificate of incorporation will divide our board of directors into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 2001, Class II, whose term will expire at the annual meeting of stockholders to be held in 2002, and Class III, whose term will expire at the annual meeting of stockholders to be held in 2003. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. In addition, we have amended our bylaws, with an effective date immediately following this offering, to provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. 48 This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. See "Description of Capital Stock--Anti-Takeover Provisions of the Certificate of Incorporation, Bylaws and Delaware Law." There are no family relationships among any of our directors, officers or key employees. Our board of directors has a compensation committee and an audit committee. Compensation Committee. The current members of our compensation committee are Messrs. Anderson and Orsak. The compensation committee reviews and makes recommendations to our board concerning salaries and incentive compensation for our officers and employees. The compensation committee also administers our 1999 Equity Incentive Plan, 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan. Audit Committee. The current members of our audit committee are Messrs. LeFurgy, Orsak and Reid. Our audit committee reviews and monitors our financial statements and accounting practices, makes recommendations to our board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by our independent auditors. Compensation Committee Interlocks and Insider Participation Before June 1999, our board of directors did not have a compensation committee and all compensation decisions were made by the full board of directors. In June 1999, we formed a compensation committee consisting of Richard LeFurgy, Michael Orsak and Mark Jung. Mr. Jung served as our President and Chief Executive Officer while he was a member of the compensation committee. In December 1999, we replaced the membership of our compensation committee with our current compensation committee membership. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has an interlocking relationship existed in the past. Mr. Jung has not participated in discussions by our board of directors or the compensation committee with respect to his compensation. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors. Preferred Stock Financings. In February 1999, Christopher Anderson, our Chairman of the Board and one of our directors, and Mark Jung, our President and Chief Executive Officer and one of our directors, purchased 12,857,143 and 989,011 shares, respectively, of Series A preferred stock at $0.2333 per share in February 1999. In May 1999, Richard LeFurgy, one of our directors, purchased 35,545 shares of Series B-1 preferred stock at $4.22 per share, and in October 1999, the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 and the James R. Tolonen Grantor Retained Annuity Trust purchased 120,000 and 30,000 shares, respectively, of Series B-1 preferred stock at $4.22 per share. In addition, entities associated with Worldview Technology Partners and Walden Media & Information Technology Fund, L.P., purchased 1,540,284 and 1,220,378 shares, respectively, of Series B-1 preferred stock at $4.22 per share in May 1999. In December 1999, these same individuals and entities purchased shares of Series C preferred stock at $10.00 per share in the following amounts: 700,000 shares by Mr. Anderson; 50,000 shares by Mr. Jung and 10,000 by the Jung- Murdock Children's Trust U/A 11/23/93, Susan Murdock TTEE, a trust for the benefit of Mr. Jung's children; 3,400 shares by Mr LeFurgy; 117,800 shares by entities associated with Walden Media & Information Technology Fund, L.P.; and 148,700 shares by entities associated with Worldview Technology Partners. Michael Orsak, one of our directors, is a general partner of Worldview Technology Partners and Richard LeFurgy is a member of Walden Media, L.L.C., the general partner of Walden Media & Information Technology Fund, L.P., and each may be deemed to own beneficially the shares held by the entities with whom they are associated. 49 Loan to Christopher Anderson. In February 1999, we loaned an aggregate of $2.0 million to Mr. Anderson, our Chairman of the Board and one of our directors, in connection with his purchase of 12,857,143 shares of our Series A preferred stock. The loan was secured by a full recourse promissory note and a stock pledge agreement. The note accrued interest at a rate of 4.57% per year and was due and payable with respect to $1.0 million of principal, plus interest, on or before March 1, 1999 and with respect to the remaining $1.0 million of principal, and any remaining interest, on or before April 1, 1999. The note has been repaid in full. Sale of Common Stock and Loan to Mark Jung. In February 1999, we loaned an aggregate of $92,300 to Mark Jung, our President and Chief Executive Officer and one of our directors, in connection with his purchase of 1,978,021 shares of our common stock at $0.04667 per share. The loan is secured by a full recourse promissory note and a stock pledge agreement. The note accrues interest at a rate of 4.64% per year, payable annually, and is due and payable on or before February 1, 2003. We are forgiving the principal and accrued interest ratably over a 48-month period that began on December 1998. In the event that Mr. Jung's employment with us is terminated for any reason, then all remaining unpaid principal and interest will become due and payable within 90 days after termination, unless we agree to a longer period. Sale of Preferred Stock and Loan to Trusts Associated with James Tolonen. In October 1999, we loaned an aggregate of $333,000 to the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 in connection with its purchase of 120,000 shares of our Series B-1 preferred stock at $4.22 per share. The loan is secured by a full recourse promissory note and a stock pledge agreement. The note accrues interest at a rate of 5.86% per year, payable annually, and is due and payable in full on or before October 20, 2003. We will forgive the principal and accrued interest ratably over a 48-month period that began in October 1999. At this time, the James R. Tolonen 1999 Grantor Retained Annuity Trust also purchased 30,000 shares of our Series B-1 preferred stock. Sale of Common Stock and Loan to James Tolonen. In November 1999, we loaned an aggregate of $600,000 to Mr. Tolonen, our Chief Financial Officer and Chief Operating Officer and one of our directors, in connection with his purchase of 350,000 shares of our common stock at $2.00 per share. The loan is secured by a full recourse promissory note and a stock pledge agreement. The note accrues interest at a rate of 6.08% per year, payable annually, and is due and payable in full on or before November 30, 2003. At this time, Mr. Tolonen purchased another 50,000 shares of our common stock pursuant to an option exercise. The promissory notes for Mr. Jung and the trust associated with Mr. Tolonen provide that all remaining unpaid principal and interest will become due and payable if the borrower's position as a director or officer is terminated. Director Compensation Our directors do not receive cash compensation for their services as directors but are reimbursed for their reasonable expenses in attending board and board committee meetings. Each eligible director who is not our employee and who is or becomes a member of our board on or after the effective date of the registration statement, of which this prospectus forms a part, will be granted an option to purchase 20,000 shares of common stock under our 2000 Equity Incentive Plan, unless that director has previously received an option grant in that amount before the effective date. Immediately following each annual meeting of our stockholders, each eligible director will automatically be granted an additional option to purchase 5,000 shares under the plan if the director has served continuously as a member of the board for at least one year. The options will have ten-year terms and will terminate three months following the date the director ceases to be one of our directors or consultants, 12 months if the termination is due to death or disability, or one month if 50 the termination is for cause. All options granted under the plan will vest over four years from the date of grant, with 25% of the shares vesting on the first anniversary of the date of grant and the remainder vesting ratably over a 36- month period thereafter. Executive Compensation The following table presents compensation information for 1999 with regard to compensation paid to or accrued for our chief executive officer and each of our four other most highly compensated executive officers. None of our officers was compensated in 1998. The restricted stock value is calculated based upon a $0.04667 per share purchase price and assumes that the estimated fair market value on the date of grant is equal to the assumed initial public offering price of $11.00 per share. On December 31, 1999, Mr. Jung held 1,978,021 shares of our common stock pursuant to a restricted stock award of $21,665,917 subject to our right to repurchase these shares upon termination of his employment. Our repurchase right expires ratably over a 48-month period that began in December 1998. If declared by the board, dividends will be paid on Mr. Jung's restricted stock. Summary Compensation Table
Long-Term Compensation Awards ---------------------- Annual Compensation ---------------- Securities Name and Principal Restricted Underlying All Other Positions Salary Bonus Stock Award Options Compensation ------------------ -------- ------- ----------- ---------- ------------ Mark A. Jung.............. $230,770 $ -- $21,665,917 -- $20,000 President and Chief Executive Officer Elizabeth G. Murphy....... 160,000 59,250 -- 300,000 -- Vice President, Sales and Marketing Kenneth H. Keller......... 148,077 -- -- 450,000 38,000 Vice President, Engineering Teresa M. Crummett........ 119,616 22,500 -- 198,000 48,500 Vice President, Corporate Marketing and Product Management Janette S. Chock.......... 123,462 -- -- 147,500 5,000 Vice President, Controller and Chief Accounting Officer
The amounts listed in the column captioned "All Other Compensation" represent payments made on our behalf by Imagine Media in January and February 1999. James Tolonen, our Chief Financial Officer and Chief Operating Officer, was hired in October 1999 and, had he been employed for the entire year, would have earned a salary of $225,000. Mr. Tolonen was granted two options to purchase an aggregate of 600,000 shares of common stock and trusts associated with Mr. Tolonen purchased an aggregate of 150,000 shares of Series B-1 preferred stock. Option Grants in 1999 The following table presents the grants of stock options under our 1999 Equity Incentive Plan during 1999 to our chief executive officer, our chief financial officer and each of our four other most highly compensated executive officers in 1999. Options granted under the 1999 Equity Incentive Plan are either incentive stock options or nonqualified stock options and generally become exercisable with respect to 25% of the shares subject to the option on the first anniversary of the date of grant and with respect to an additional 2.0833% of these shares each month thereafter, subject to acceleration in some instances upon certain changes in our control. Stock option grants in excess of 25,000 shares are generally immediately exercisable and subject to acceleration in some instances upon certain changes in our 51 control or termination by us in certain circumstances. We have a right to repurchase these shares upon termination of the optionee's employment with us. This right generally lapses as to 25% of the shares subject to the option on the first anniversary of the date of grant and as to 2.083% of the shares each month thereafter. Options expire ten years from the date of grant. Options were granted at an exercise price equal to the fair market value of our common stock, as determined by our board on the date of grant. As of December 31, 1999, we had granted to our employees options to purchase a total of 3,907,437 shares of common stock under the 1999 Equity Incentive Plan and an additional 550,000 shares of common stock outside the plan. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. The potential realizable values at 5% and 10% appreciation are calculated by assuming that the estimated fair market value on the date of grant, based upon an assumed initial public offering price of $11.00 per share, appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price.
Individual Grants ------------------------------------------ Potential Realizable Value Percent of at Assumed Annual Rates Number of Total of Stock Price Securities Options Appreciation Underlying Granted to Exercise for Option Term Options Employees Price Expiration -------------------------- Name Granted in 1999 Per Share Date 5% 10% ---- ---------- ---------- --------- ---------- ------------ ------------- Mark A. Jung............ -- --% $ -- -- $ -- $ -- Elizabeth G. Murphy..... 300,000 4.78 0.04667 3/15/09 5,361,351 8,545,349 Kenneth H. Keller....... 450,000 7.17 0.04667 3/15/09 8,042,027 12,818,024 Teresa M. Crummett...... 198,000 3.16 0.04667 3/15/09 3,538,492 5,639,930 Janette S. Chock........ 99,000 1.58 0.04667 2/24/09 1,769,246 2,819,965 13,500 0.22 0.04667 3/15/09 241,261 384,541 35,000 0.56 2.00 10/4/09 557,124 928,591 James R. Tolonen........ 600,000 9.56 2.00 10/20/09 9,550,705 15,918,700
52 Aggregated Option Exercises in 1999 and Values at December 31, 1999 The following table presents the number of shares acquired and the value realized upon exercise of stock options for the year ended December 31, 1999 and the number of shares of common stock subject to "exercisable" and "unexercisable" stock options held as of December 31, 1999 by our chief executive officer, chief financial officer and each of our four other most highly compensated executive officers. All options were granted under our 1999 Equity Incentive Plan. Each of these options was immediately exercisable upon grant, but is subject to our right to repurchase the option shares at the exercise price upon termination of the optionee's employment. Our right to repurchase the shares lapses either (1) as to 25% of the shares subject to the option on the first anniversary of the date of grant and the remainder ratably over a 36-month period thereafter or (2) as to 12.5% of the shares subject to the option on the six month anniversary of the date of grant and the remainder ratably over a 42-month period thereafter. In the table below, the heading "exercisable" refers to shares as to which our right of repurchase has lapsed. The heading "unexercisable" refers to shares that we still have the right to repurchase upon termination of the optionee's employment. Also presented are values of "in-the-money" options, which represent the positive difference between the exercise price of each outstanding stock option and an assumed initial public offering price of $11.00 per share.
Number of Securities Underlying Unexercised Value of Unexercised Number of Options at In-the-Money Options at Shares December 31, 1999 December 31, 1999 Acquired on Value ------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- Mark A. Jung............ -- $ -- -- -- $ -- $ -- Elizabeth G. Murphy..... -- -- -- 300,000 -- 3,285,999 Kenneth H. Keller....... -- -- 126,250 323,750 1,382,858 3,546,141 Teresa M. Crummett...... -- -- 45,375 152,625 497,007 1,671,752 Janette S. Chock........ -- -- 23,156 124,344 253,635 1,293,614 James R. Tolonen........ -- -- 25,000 575,000 225,000 5,175,000
Benefit Plans 1999 Equity Incentive Plan As of December 31, 1999, options to purchase 2,158,368 shares of common stock were outstanding under the 1999 Equity Incentive Plan and 2,394,369 shares of common stock remained available for issuance upon the exercise of options that may be granted in the future. The options that were outstanding as of that date had a weighted average exercise price of $2.03 per share. This plan will terminate upon this offering and no options will be granted under this plan after this offering. However, termination will not affect any outstanding options, all of which will remain outstanding until exercise or until they terminate or expire by their terms. Options granted under this plan are subject to terms substantially similar to those described below with respect to options granted under the 2000 Equity Incentive Plan. 2000 Equity Incentive Plan On February 22, 2000, the Board adopted the 2000 Equity Incentive Plan and reserved 5,000,000 shares of common stock to be issued under this plan. On each January 1, beginning in 2001, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 5% of our outstanding shares of capital stock on December 31 of the preceding year, provided that no more than 30,000,000 shares shall be issued as incentive stock options. 53 The following shares will be available for grant and issuance under the equity incentive plan: . shares under the 2000 Equity Incentive Plan not issued or subject to outstanding grants on the date of this prospectus; . shares that are subject to issuance upon exercise of an option granted under the equity incentive plan that cease to be subject to the option for any reason other than exercise of the option including by the expiration of the option or the option's becoming unexercisable for any reason without having been exercised in full; . shares that have been issued upon the exercise of an option granted under the equity incentive plan that are subsequently forfeited, or repurchased by us at the original purchase price; . shares that are subject to an award granted pursuant to a restricted stock purchase agreement under the equity incentive plan that are subsequently forfeited, or repurchased by us at the original issue price; or . shares that are subject to stock bonuses granted under the equity incentive plan that terminate without shares being issued. This plan will become effective on the consummation of this offering and will terminate on February 21, 2010, unless it is terminated earlier by our board. The plan authorizes the award of options, restricted stock awards and stock bonuses. No person will be eligible to receive more than 1,500,000 shares in any calendar year under the plan other than a new employee. A new employee will be eligible to receive no more than 3,000,000 shares in the calendar year in which the employee commences employment. The plan will be administered by our compensation committee, all of the members of which are "non-employee directors" under applicable federal securities laws and "outside directors" as defined under applicable federal tax laws. The compensation committee will have the authority to construe and interpret the plan, grant awards and make all other determinations necessary or advisable for the administration of the plan. Also, non-employee directors are entitled to receive automatic annual grants of options to purchase shares of our common stock, as described under "Management--Director Compensation." The plan will provide for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options. Incentive stock options may be granted only to our employees or employees of our parent or subsidiary, if any. All awards other than incentive stock options may be granted to employees, officers, directors, consultants, independent contractors and advisors of ours or our parent or subsidiary, if any, provided that, in the case of the consultants, independent contractors and advisors, they render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of that value. The exercise price of non-qualified stock options must be at least equal to 85% of the fair market value of our common stock on the date of grant. Options may be exercisable only as they vest or may be immediately exercisable with the shares issued subject to our right of repurchase that lapses as the shares vest. In general, options and the shares issued pursuant to immediately exercisable options will vest over a four-year period. The maximum term of options granted under the plan is ten years. Awards granted under the plan may not be transferred in any manner other than by will or by the laws of descent and distribution. They may be exercised during the lifetime of the optionee only by the optionee. The compensation committee could determine otherwise and provide for these 54 provisions in the award agreement, but only with respect to awards that are not incentive stock options. Options granted under the plan generally may be exercised for a period of time after the termination of the optionee's service to us or to our parent or subsidiary, if any. Options will generally terminate one month after termination of employment for cause. The purchase price for restricted stock will be determined by our compensation committee. Stock bonuses may be issued for past services or may be awarded upon the completion of certain services or performance goals. If we are dissolved or liquidated or have a "change in control" transaction, outstanding awards may be assumed or substituted by the successor corporation, if any. In the discretion of the compensation committee, the vesting of these awards may accelerate upon one of these transactions. 2000 Employee Stock Purchase Plan On February 22, 2000, the board adopted the 2000 Employee Stock Purchase Plan and reserved 500,000 shares of common stock under this plan. The plan will become effective on the first business day on which price quotations for our common stock are available on the Nasdaq National Market. On each January 1, beginning in 2001, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 1% of our outstanding shares on December 31 of the preceding year. The aggregate number of shares reserved for issuance under the plan may not exceed 5,000,000 shares. The plan will be administered by our compensation committee, which will have the authority to construe and interpret the plan. Employees generally will be eligible to participate in the plan if: . they are employed before the beginning of an offering period; . they are customarily employed by us, or our parent or any subsidiaries that we designate, for more than 20 hours per week and more than five months in a calendar year; and . are not, and would not become as a result of being granted an option under the plan, 5% stockholders of us or our designated parent or subsidiaries. Under the plan, eligible employees will be permitted to acquire shares of our common stock through payroll deductions. Eligible employees may select a rate of payroll deduction between 1% and 10% of their compensation, subject to maximum purchase limitations. Participation in the plan will end automatically upon termination of employment for any reason. Each offering period under the plan will be for two years and will consist of four six-month purchase periods. The first offering period is expected to begin on the first business day on which price quotations for our common stock are available on the Nasdaq National Market. Additional offering periods and purchase periods will begin on May 1 and November 1 of each year. Because the first day on which price quotations for our common stock may be available on the Nasdaq National Market may not be May 1 or November 1, the length of the first offering period will be more than two years, and the length of the first purchase period may be more than six months. The plan will provide that, in the event of our proposed dissolution or liquidation, each offering period that commenced prior to the closing of the proposed event will continue for the duration of the offering period, provided that the compensation committee may fix a different date for termination of the plan. The purchase price for our common stock purchased under the plan is 85% of the lesser of the fair market value of our common stock on the first or last day of the applicable offering period. The compensation committee will have the power to change the offering dates, purchase dates and 55 duration of offering periods or purchase periods without stockholder approval, if the change is announced prior to the relevant offering period, or prior to such other time period as is specified by the compensation committee. The plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. Rights granted under the plan will not be transferable by a participant other than by will or the laws of descent and distribution. The plan will terminate in February 21, 2010, unless it is terminated earlier under its terms. The board will have the authority to amend, terminate or extend the term of the plan, except that no action may adversely affect any outstanding options previously granted under the plan. Except for the automatic annual increase of shares described above, stockholder approval is required to increase the number of shares that may be issued or to change the terms of eligibility under the plan. The board may make amendments to the plan as it determines to be advisable if the financial accounting treatment for the plan is different from the financial accounting treatment in effect on the date the plan was adopted by the board. 401(k) Plan We sponsor a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code, or a 401(k) plan. Employees are generally eligible to participate and may enter the plan as of the first day of the month coinciding with or next following the date on which the employee met the requirements. Participants may make pre-tax contributions to the plan of up to 20% of their eligible earnings, subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and the investment earnings. Contributions to the plan by the participants or by us, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Participant and company contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. Employment Arrangements, Termination of Employment Arrangements and Change of Control Arrangements Mark Jung's offer letter, dated February 1, 1999, provides for an initial annual salary of $250,000 commencing on February 1, 1999. Pursuant to the offer letter, Mr. Jung purchased 1,978,021 shares of our common stock at $0.04667 per share. The shares purchased by him are subject to our right to repurchase these shares upon termination of his employment. Our right to repurchase his shares at the original price upon his termination lapses ratably over a 48-month period that began in December 1998. The repurchase right will expire as to half of the shares of common stock subject to repurchase if Mr. Jung is terminated by us without cause or if he terminates his employment under some circumstances. In connection with this stock purchase, we agreed to loan Mr. Jung the entire purchase price. See "Management--Compensation Committee Interlocks and Insider Participation." James Tolonen's offer letter, dated October 18, 1999, provides for an initial annual salary of $225,000 commencing on October 1, 1999. Pursuant to the offer letter, the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 and the James R. Tolonen Grantor Retained Annuity Trust purchased 120,000 and 30,000 shares, respectively, of our Series B-1 preferred stock at a purchase price of $4.22 per share. In connection with this stock purchase, we loaned the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 $333,000, pursuant to a full recourse promissory note representing part of the purchase price for its shares. The principal amount of the loan is due on October 20, 2003 or earlier in the event of Mr. Tolonen's termination for cause or if he terminates his employment under some circumstances, and bears interest at the rate of 5.86% per 56 year. Mr. Tolonen's offer letter provides that the note and any accrued interest will be forgiven in full if he is terminated without cause or if he terminates his employment under some circumstances. See "Management-- Compensation Committee Interlocks and Insider Participation." Pursuant to the offer letter, Mr. Tolonen was granted options to purchase 600,000 shares of our common stock at an exercise price of $2.00 per share, of which 50,000 shares were granted under the 1999 Equity Incentive Plan and 550,000 shares were granted outside the 1999 Equity Incentive Plan, which upon exercise will be subject to our right to repurchase all of the shares of common stock for which our repurchase right has not lapsed upon termination of his employment. In November 1999, he exercised options to purchase 400,000 shares of our common stock at an exercise price of $2.00 per share. Our right to repurchase these shares lapses ratably over a 48-month period that began in October 1999. In addition, our repurchase right lapses as to 75,000 shares of common stock if Mr. Tolonen is terminated by us without cause or if he terminates his employment under some circumstances, unless termination happens 60 days before, or within one year after, we are acquired or merge with another company, in which case our right to repurchase these shares lapses as to 150,000 shares. Janette Chock's offer letter, dated January 18, 1999, provides for an initial annual salary of $120,000 commencing on February 1, 1999. Pursuant to the offer letter, Ms. Chock purchased 99,000 shares of our common stock at an exercise price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon termination of her employment, we have the right to repurchase at the exercise price all of the shares of common stock for which our repurchase right has not lapsed. Our right to repurchase her shares at the original price upon termination lapsed as to 12,375 shares on August 1, 1999 and lapses as to approximately 2,062 shares each month thereafter. Teresa Crummett's offer letter, dated March 15, 1999, provides for an initial annual salary of $140,000 commencing on March 15, 1999, and an incentive bonus of up to $7,500 per quarter commencing in the quarter ended June 30, 1999. Pursuant to the offer letter, Ms. Crummett purchased 198,000 shares of our common stock at an exercise price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon termination of her employment, we have the right to repurchase at the exercise price all of the shares of common stock for which our repurchase right has not lapsed. Our right to repurchase her shares lapsed as to 24,750 shares on July 1, 1999 and lapses as to 4,125 shares each month thereafter. Kenneth Keller's offer letter, dated March 15, 1999, provides for an initial annual salary of $175,000 commencing on March 15, 1999. Pursuant to the offer letter, Mr. Keller purchased 450,000 shares of our common stock at an exercise price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon termination of his employment, we have the right to repurchase at the exercise price all of the shares of common stock for which our repurchase right has not lapsed. Our right to repurchase his shares lapsed as to 28,125 shares on March 22, 1999 and lapses as to approximately 9,375 shares each month thereafter. The repurchase right will expire as to 112,500 shares of the common stock subject to repurchase if Mr. Keller is terminated by us without cause or if he terminates his employment under some circumstances. Elizabeth Murphy's offer letter, dated March 4, 1999, provides for an initial annual salary of $200,000 commencing on March 17, 1999 and an incentive bonus of up to $75,000, of which $36,500 is guaranteed in the first year of her employment. In addition, her offer letter provides that we will pay her $100,000 if she is terminated by us without cause, or if she terminates her employment under some circumstances. Pursuant to the offer letter, Ms. Murphy purchased 300,000 shares of our common stock, of which 75,000 shares will vest on March 15, 2000 and the remainder will vest ratably over a 36-month period thereafter, at an exercise price of $0.04667 per share under the 1999 Equity Incentive Plan. Upon termination of her employment, we have the right to repurchase at the exercise price all of the shares of common stock for which our repurchase right has not lapsed. Our repurchase right will expire as to 75,000 shares of the common stock subject to 57 repurchase if Ms. Murphy is terminated by us without cause or if she terminates her employment under some circumstances. Unless otherwise stated above, if we merge with or are acquired by another company and the surviving company does not assume the employment contracts between our executive officers and us, our executive officers may terminate their employment at their own election and our repurchase right will expire as to 25% of the number of shares purchased pursuant to the offer letter. Limitation of Liability and Indemnification Our amended and restated certificate of incorporation to be filed upon the closing of this offering includes a provision that eliminates the personal liability of our directors for monetary damages resulting from breach of fiduciary duty as a director, except liability for: . any breach of the director's duty of loyalty to us or our stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . unlawful dividends and stock repurchases or redemptions under section 174 of the Delaware General Corporation Law; or . any transaction from which the director derived an improper personal benefit. These provisions are permitted under Delaware law. Our bylaws, as amended, provide that: . we must indemnify our directors and executive officers to the fullest extent permitted by Delaware law or any other applicable law, subject to very limited exceptions; . we may indemnify our other employees and agents to the same extent that we indemnify our directors and executive officers, unless otherwise required by law, our certificate of incorporation, our bylaws or agreements; and . we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to very limited exceptions. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our current directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification provided in our certificate of incorporation and bylaws and to provide additional procedural protections. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. We have liability insurance for our directors and officers and intend to obtain a rider to extend that coverage for public securities matters. 58 RELATED PARTY TRANSACTIONS Other than the employment agreements described in "Management," and the transactions described below, since we were formed there has not been nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party: . in which the amount involved exceeds or will exceed $60,000, and . in which any director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. Sales of Securities Christopher Anderson. On February 1, 1999, we sold 12,857,143 shares our Series A preferred stock to Christopher Anderson, our Chairman of the Board and a director, at a purchase price of $0.2333 per share. On December 20, 1999, we sold 700,000 shares of Series C preferred stock to Mr. Anderson at a purchase price of $10.00 per share. Mr. Anderson is the President and a director of Imagine Media. Imagine Media. On February 1, 1999, we issued to Imagine Media 989,011 shares of Series A preferred stock and 7,500,000 shares of Series B preferred stock in exchange for certain of its assets. In connection with this issuance of Series B preferred stock, we entered into a Services and Support Agreement with Imagine Media dated as of January 1999. This agreement was intended to assist us in our organizational and start-up phases by providing support services to us and by permitting us to occupy space in Imagine Media's premises. The agreement terminated on October 1, 1999. Imagine Media's shares of Series B preferred stock were converted to 414,691 shares of Series B-1 preferred stock on May 11, 1999 for no additional consideration. On June 14, 1999, we sold 260,664 shares of Series B-1 preferred stock to Imagine Media at a purchase price of $4.22 per share. On December 20, 1999, we sold 100,000 shares of Series C preferred stock to Imagine Media at a purchase price of $10.00 per share. Mark Jung. On February 1, 1999, we sold 989,011 shares our Series A preferred stock to Mark Jung, our President and Chief Executive Officer and one of our directors, at a purchase price of $0.2333 per share. Mr. Jung also purchased 1,978,021 shares of common stock from us at a purchase price of $0.04667 per share on February 1, 1999. On December 20, 1999, we sold 50,000 and 10,000 shares of Series C preferred stock to Mr. Jung and the Jung-Murdock Children's Trust U/A 11/23/93 at a purchase price of $10.00 per share. Michael Orsak. On May 11, 1999, we sold an aggregate of 1,540,284 shares of Series B-1 preferred stock to entities associated with Worldview Technology Partners at a purchase price of $4.22 per share. On December 20, 1999, we sold 148,700 shares of Series C preferred stock to entities associated with Worldview Technology Partners at a purchase price of $10.00 per share. Mr. Orsak, one of our directors, is a general partner of Worldview Technology Partners and its affiliated entities. Richard LeFurgy. On April 23, 1999, we sold 108,000 shares of common stock to Richard LeFurgy, one of our directors, at a purchase price of $0.0467 per share. Mr. LeFurgy also purchased 35,545 shares of Series B-1 preferred stock from us at a purchase price of $4.22 per share on May 11, 1999. On December 20, 1999, he purchased 3,400 shares of our Series C preferred stock at a purchase price of $10.00 per share. On May 11, 1999, we sold an aggregate of 1,220,378 shares of Series B-1 preferred stock to entities associated with the Walden Media & Information Technology Fund at a purchase price of $4.22 per share. On December 20, 1999, we sold 117,800 shares of Series C preferred stock to entities associated with the Walden Media & Information Technology Fund at a purchase price of 59 $10.00 per share. Mr. LeFurgy is a member of Walden Media, L.L.C., the general partner of the Walden Media & Information Technology Fund and its affiliated entities. Kenneth Keller. On March 15, 1999, we sold 150,000 shares of Series A preferred stock to Kenneth Keller, our Vice President, Engineering, at a purchase price of $0.2333 per share. On December 20, 1999, we sold 14,500 shares of Series C preferred stock to Mr. Keller at a purchase price of $10.00 per share. Trusts Associated with James Tolonen. On October 22, 1999, we sold 120,000 and 30,000 shares of Series B-1 preferred stock to the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 and the James R. Tolonen Grantor Retained Annuity Trust, respectively, at a purchase price of $4.22 per share. Mr. Tolonen, our Chief Financial Officer and Chief Operating Officer and one of our directors, is a trustee of both these trusts. Indemnification We have entered into an indemnification agreement with Richard LeFurgy. Under that agreement, we will indemnify Mr. LeFurgy for liabilities incurred by him in connection with the possible recruitment of employees or consultants from a particular company. We intend to enter into indemnification agreements with each of our executive officers and directors. Those indemnification agreements will require us to indemnify our officers and directors to the fullest extent permitted by Delaware law. See "Description of Capital Stock--Indemnification of Directors and Executive Officers and Limitation of Liability." Registration Rights Holders of our preferred stock are entitled to registration rights with respect to the shares of common stock that they will hold following this offering. See "Description of Capital Stock--Registration Rights." Loans to and other Arrangements with Officers and Directors Loan to Christopher Anderson. We loaned $2.0 million to Christopher Anderson, our Chairman of the Board and one of our directors, in connection with his purchase of shares of our Series A preferred stock. Loan to Mark Jung. We loaned $92,300 to Mark Jung, our President and Chief Executive Officer, in connection with his purchase of our common stock. Loan to James Tolonen. We loaned $600,000 to James Tolonen, our Chief Financial Officer, Chief Operating Officer and director, in connection with his purchase of 350,000 shares of our common stock. Loan to Trust Associated with James Tolonen. We loaned $333,000 to the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96 in connection with its purchase of our Series B-1 preferred stock. Please refer to "Management--Compensation Committee Interlocks and Insider Participation" for a description of the loans to Messrs. Anderson, Jung and Tolonen and the trust associated with Mr. Tolonen, and "Management--Employment Arrangements, Termination of Employment Arrangements and Change of Control Arrangements" for a description of stock option grants to officers and directors. We believe that all transactions between us and our officers, directors, principal stockholders and other affiliates have been and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 60 PRINCIPAL STOCKHOLDERS The following table presents information as to the beneficial ownership of our common stock as of December 31, 1999 and as adjusted to reflect the sale of the common stock in this offering by . each stockholder known by us to be the beneficial owner of more than 5% of our common stock; . each of our directors; . each executive officer listed in the Summary Compensation Table above; and . all directors and executive officers as a group.
Percentage of Shares Beneficially Owned ------------------------ Number of Shares Prior to After the Name of Beneficial Owner Beneficially Owned Offering Offering ------------------------ ------------------ ---------- ---------- Christopher Anderson(1)................................. 15,321,509 49.2% 41.0% Mark A. Jung(2)......................................... 3,027,032 9.7 8.1 Imagine Media, Inc.(3) 150 North Hill Drive Brisbane, California 94005............................. 1,764,366 5.7 4.7 Michael Orsak(4) Worldview Technology Partners entities 435 Tasso Street, Suite 120 Palo Alto, California 94301............................ 1,688,984 5.4 4.5 Weiss Peck & Greer Venture Partners entities(5) 555 California Street, Suite 3130 San Francisco, California 94104 Attn: Christopher J. Schaepe........................... 1,688,983 5.4 4.5 Richard A. LeFurgy(6) Walden Media & Information Technology Fund, L.P. entities 750 Battery St., 7th Floor San Francisco, California 94111........................ 1,485,123 4.8 4.0 James R. Tolonen(7)..................................... 750,000 2.4 2.0 Kenneth H. Keller(8).................................... 574,504 1.8 1.5 Elizabeth G. Murphy(9).................................. 300,000 * * Teresa M. Crummett(10).................................. 198,000 * * Robert H. Reid(11)...................................... 150,000 * * Janette S. Chock(12).................................... 147,500 * * All 12 directors and executive officers as a group(13).. 23,442,652 75.4% 62.9%
- -------- * Less than 1% of the outstanding shares of common stock. (1) Based on information provided to us by Mr. Anderson and Imagine Media, Inc. indicating that Mr. Anderson has sole voting and dispositive power with respect to 13,557,143 shares and shares voting and dispositive power with respect to 1,764,366 shares held by Imagine Media, Inc. described in footnote 3. Mr. Anderson disclaims beneficial ownership with respect to the shares held by Imagine Media, Inc. (2) Includes 10,000 shares of common stock held by the Jung-Murdock Children's Trust U/A 11/23/93, Susan Murdock TTEE. Mr. Jung disclaims beneficial ownership with respect to the shares held by the Jung-Murdock Children's Trust. Includes 1,401,098 shares of common stock subject to our repurchase right within 60 days of December 31, 1999. (3) Mr. Anderson, one of our directors, is the President and a director of Imagine Media, Inc. Based on information provided to us by Mr. Anderson and Imagine Media, Inc., Mr. Anderson shares voting and dispositive power with respect to the shares held by Imagine Media, Inc. Mr. Anderson disclaims beneficial ownership with respect to the shares held by Imagine Media, Inc. (4) Represents 1,252,425 shares held by Worldview Technology Partners II, L.P., 383,395 shares held by Worldview Technology International II, L.P. and 53,164 shares held by Worldview Strategic Partners II, L.P. Mr. Orsak is a general partner of the Worldview Technology Partner entities. Mr. Orsak disclaims beneficial ownership of shares held by the Worldview Technology Partner entities except to the extent of his pecuniary interest in this venture capital firm. (5) Represents 1,163,600 shares held by Weiss, Peck & Greer Venture Associates V, L.L.C., 11,829 shares held by Weiss, Peck & Greer Venture Associates V- A, L.L.C., 253,687 shares held by Weiss, Peck & Greer Venture Associates V 61 Cayman, L.P. and 259,867 shares held by Discovery Ventures III, LLC. Christopher J. Schaepe is a managing member of WPG VC Fund Adviser II, L.L.C., the fund investment advisory member of Weiss, Peck & Greer Venture Associates V, L.L.C. and Weiss, Peck & Greer Venture Associates V-A, L.L.C., and the fund investment advisory partner of Weiss, Peck & Greer Venture Associates V Cayman, L.P. Mr. Schaepe shares voting and dispositive power with respect to the shares held by Weiss, Peck & Greer Venture Associates V, L.L.C., Weiss, Peck & Greer Venture Associates V-A, L.L.C. and Weiss, Peck & Greer Venture Associates V Cayman, L.P. Based on information provided to us by Weiss, Peck & Greer, L.L.C., Weiss, Peck & Greer, L.L.C. is a member of Discovery III Management, LLC, the fund investment advisory member of Discovery Ventures III, LLC, and is a class A non-managing member of WPG VC Fund Adviser II, L.L.C. Weiss, Peck & Greer, L.L.C. and Mr. Schaepe disclaim beneficial ownership with respect to the shares held by Weiss, Peck & Greer Venture Associates V, L.L.C., Weiss, Peck & Greer Venture Associates V-A, L.L.C., Weiss, Peck & Greer Venture Associates V Cayman, L.P. and Discovery Ventures III, LLC, except to the extent of their pecuniary interests in these entities. (6) Includes 26,007 shares held by Infotech Ventures Ltd., 26,007 shares held by Walden EDB Partners, L.P., 11,848 shares held by Walden Japan Partners, L.P. and 1,274,316 shares held by Walden Media & Information Technology Fund, L.P. Mr. LeFurgy, one of our directors, is a member of Walden Media, L.L.C., the general partner of Walden Media & Information Technology Fund, L.P., and an affiliate of Walden Japan Partners, L.P., Walden EDB Partners, L.P. and Infotech Ventures Ltd. Mr. LeFurgy disclaims beneficial ownership of the shares held by Walden Media & Technology Fund, L.P., Walden Japan Partners, L.P., Walden EDB Partners, L.P. and Infotech Ventures Ltd., except to the extent of his proportionate ownership therein. Includes 85,500 shares of common stock subject to our repurchase right within 60 days of December 31, 1999. (7) Includes 120,000 shares of common stock held by the James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96, Ginger and James Tolonen trustees, and 30,000 shares of common stock held by James R. Tolonen, trustee of the James R. Tolonen 1999 Grantor Retained Annuity Trust. Includes 550,000 shares of common stock subject to our repurchase right within 60 days of December 31, 1999, 200,000 shares of which are issuable upon exercise of options exercisable within 60 days of December 31, 1999. (8) Includes 20,000 shares held by the Shane M. Keller 1990 Trust and 20,000 shares held by the Samantha J. Keller 1991 Trust. Includes 323,750 shares of common stock subject to our repurchase right within 60 days of December 31, 1999. (9) Includes 300,000 shares of common stock subject to our repurchase right within 60 days of December 31, 1999, of which 15,000 shares are held by C.J. Allan Murphy, as custodian for Charles James Murphy under UTMA and 15,000 shares are held by C.J. Allan Murphy, as custodian for Parker Elisabeth Murphy under UTMA. (10) Includes 144,375 shares of common stock subject to our repurchase right within 60 days of December 31, 1999. (11) Includes 115,625 shares of common stock subject to our repurchase right within 60 days of December 31, 1999. (12) Includes 119,656 shares of common stock subject to our repurchase right within 60 days of December 31, 1999. (13) Includes 3,040,004 shares of common stock subject to our repurchase right within 60 days of December 31, 1999 and 200,000 shares of common stock issuable upon exercise of options exercisable within 60 days of December 31, 1999. The percentage of shares beneficially owned prior to the offering is based on 31,145,442 shares of common stock outstanding as of December 31, 1999 after giving effect to the issuance of 150,000 shares of Series C preferred stock in January 2000, assuming that all outstanding preferred stock has been converted into common stock. The percentage of shares beneficially owned after this offering is based on a denominator that includes the 6,250,000 shares of common stock being offered but does not include the shares which are subject to the underwriters' over-allotment option. Percentage ownership figures after the offering do not include shares that may be purchased by each person in this offering. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless indicated above, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options and warrants that are currently exercisable or exercisable within 60 days of December 31, 1999 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated above, the address for each listed stockholder is c/o Snowball.com, Inc., 250 Executive Park Boulevard, Suite 4000, San Francisco, California 94134. 62 DESCRIPTION OF CAPITAL STOCK Immediately following the closing of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As of December 31, 1999, and assuming the conversion of all outstanding preferred stock into common stock upon the closing of this offering, there were outstanding 30,995,442 shares of common stock held of record by approximately 110 stockholders, options to purchase 2,358,368 shares of common stock and warrants to purchase 322,688 shares of common stock. We are incorporated in the state of Delaware. Following the closing of this offering, we intend to amend and restate our certificate of incorporation. Our amended and restated certificate of incorporation, restated bylaws and investors' rights agreement, described below, are included as exhibits to the registration statement of which this prospectus forms a part. Common Stock Status. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that our board may from time to time determine. Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. No preemptive or similar rights. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Right to receive liquidation distributions. Upon a liquidation, dissolution or winding-up of Snowball, the assets legally available for distribution to stockholders would be distributable ratably among the holders of the common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Preferred Stock Upon the closing of this offering, the outstanding shares of preferred stock, including 150,000 shares of Series C preferred stock issued in January 2000, will be converted into 25,559,895 shares of common stock. See note 8 of our Notes to Consolidated Financial Statements for a description of this preferred stock. Following this offering, we will be authorized, subject to the limits imposed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The board can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by the stockholders. The board may authorize the issuance of preferred stock with voting, dividend, liquidation or conversion rights that could adversely affect the voting power or other rights of the holders of the 63 common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of Snowball and might adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock. Warrants As of December 31, 1999, we had outstanding the following warrants to purchase our stock:
Total number of shares Exercise subject to price Type of stock Warrants per share Expiration date -------------------------- ------------ --------- ------------------------- Series B-1 preferred stock 154,804 $8.44 November 8, 2002 Series B-1 preferred stock 115,192 8.44 180 days following this offering Series B-1 preferred stock 31,595 3.165 Upon consummation of this offering Series B-1 preferred stock 21,097 7.11 Upon consummation of this offering
After the closing of this offering, the warrants that survive the consummation of the offering will become exercisable for a like number of shares of common stock. Registration Rights The holders of approximately 25,559,895 shares of common stock will have the right to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold or to include their shares in any registration statement we file. Right to demand registration At any time more than six months after this offering, these stockholders can request that we file a registration statement so they can publicly sell their shares. The underwriters of any underwritten offering will have the right to limit the number of shares to be so included in a registration statement. Who may make a demand. The holders of at least 30% of the shares with registration rights have the right to demand that we file a registration statement on a form other than Form S-3 covering at least a majority of the shares with registration rights (or a lesser amount if the offering price exceeds $10,000,000 (net of underwriting discounts and commissions)). If we are eligible to file a registration statement on Form S-3, the holders with the registration rights above also have the right to demand that we file a registration statement on Form S-3, so long as the amount of securities to be sold in that registration exceeds $10,000,000. Number of times holders can make demands. We will not be required to file more than two registration statements on a form other than Form S-3. If we are eligible to file a registration statement on Form S-3, we are not required to file more than two registration statements during any 12-month period. Postponement. We may postpone the filing of a registration statement for up to 90 days once in a 12-month period if we determine that the filing would be seriously detrimental to us or our stockholders. 64 Piggyback registration rights If we register any securities for public sale, the stockholders with registration rights above, as well as the holders of any shares issued upon exercise of outstanding warrants to purchase 269,996 shares of our Series B-1 preferred stock, will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares to be so included in a registration statement. Expenses of registration We will pay all of the expenses (other than underwriting discounts and commissions) relating to any demand or piggyback registration. However, we will not pay for any expenses of any demand registration if the request is subsequently withdrawn by the holders of a majority of the shares having registration rights, subject to very limited exceptions. Expiration of registration rights The registration rights described above will expire five years after this offering is completed. The registration rights will terminate earlier with respect to a particular stockholder if that holder can resell all of its securities in a 90-day period under Rule 144 of the Securities Act. Anti-Takeover Provisions of our Certificate of Incorporation, Bylaws and Delaware Law The provisions of Delaware law, our amended and restated certificate of incorporation to be filed upon the closing of this offering, and our bylaws, as amended, described below may have the effect of delaying, deferring or discouraging another person from acquiring control of our company. Delaware Law We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents certain Delaware corporations from engaging, under limited circumstances, in a "business combination," with an "interested stockholder" for a period of three years following the date the person became an interested stockholder unless: . the board approves either the business combination or the transaction that resulted in the stockholder becoming an interested director prior to the date the "interested stockholder" attained that status; . upon the closing of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or . on or subsequent to the date, the business combination is approved by the board and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. A "business combination" generally includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. In general, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior to determination of interested stockholder status did own, 15% or more of a corporation's voting stock. A Delaware corporation may "opt out" of this provision with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. 65 However, we have not "opted out" of this provision. Section 203 could prohibit or delay mergers or other takeover or change-in-control attempts and, accordingly, might discourage attempts to acquire us. Charter and Bylaw Provisions Our amended and restated certificate of incorporation to be filed upon the closing of this offering will provide for a classified board divided into three classes. The directors in each class will serve for a three-year term, with our stockholders electing one class each year. The affirmative vote of at least 66 2/3% of all classes of voting stock is required to remove any director. For more information on the classification of our board, please see "Management-- Board of Directors and Committees." This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors. Our bylaws, as amended, provide that any action required or permitted to be taken by our stockholders at an annual meeting or a special meeting of the stockholders may be taken only if it is properly brought before the meeting. Our stockholders may not take any action by written consent. Our certificate of incorporation, as we intend to amend it, provides that our board of directors may issue preferred stock with voting or other rights without stockholder action. Our bylaws and amended and restated certificate of incorporation to be filed upon the closing of this offering, provide that special meetings of the stockholders may only be called by our board, the chairman of our board, our chief executive officer or our president. Our bylaws, as amended, provide that we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management. Indemnification of Directors and Executive Officers and Limitation of Liability Our amended and restated certificate of incorporation to be filed upon the closing of this offering, limits the liability of directors to the fullest extent permitted by Delaware law. In addition, our certificate of incorporation and bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We intend to enter into separate indemnification agreements with our directors and executive officers that provide them indemnification protection in the event the certificate of incorporation is subsequently amended. Our amended and restated certificate of incorporation to be filed upon the closing of this offering and bylaws provide that we will indemnify our directors and executive officers against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management. Transfer Agent and Registrar The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. The address of our transfer agent and registrar is 85 Challenger Road, Ridgefield Park, New Jersey 07660. Listing We have applied for our common stock to be quoted on the Nasdaq National Market under the trading symbol "SNOW". 66 SHARES AVAILABLE FOR FUTURE SALE Sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding warrants or options, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. As described below, no shares currently outstanding will be available for sale immediately after this offering due to limited contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after these restrictions lapse or are released could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, based on shares outstanding as of December 31, 1999 and giving effect to the issuance of 150,000 shares of Series C preferred stock in January 2000, we will have outstanding 37,395,442 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, the shares sold in this offering plus any shares issued upon exercise of the underwriters' over-allotment option will be freely tradable without restriction under the Securities Act unless purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. In general, affiliates include officers, directors and 10% stockholders. The remaining shares will become eligible for public sale as follows:
Number of Shares Date --------- ---- 21,182,467 After 180 days from the date of this prospectus, the 180 day lock- up terminates and these shares are saleable under Rule 144 (subject in some cases to volume limitations) or Rule 144(k) 1,654,464 After 180 days from the date of this prospectus, the 180 day lock- up is released and these shares are saleable under Rule 701 (subject in some cases to a right of repurchase) 8,308,511 After 180 days from the date of this prospectus, restricted securities that are held for less than one year and are not yet saleable under Rule 144
Lock-Up Agreements All of our officers and directors and substantially all of our stockholders have signed lock-up agreements under which they have agreed not to sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock without the prior written consent of Goldman, Sachs & Co. for a period of 180 days after the date of this prospectus. Goldman, Sachs & Co. may choose to release some of these shares from these restrictions prior to the expiration of this 180-day period, though it has no current intention to do so. Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three- month period a number of shares that does not exceed the greater of: . 1% of the number of shares of common stock then outstanding, which will equal approximately 373,954 shares immediately after this offering; or . the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. 67 Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who has not been one of our affiliates 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, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, these shares may be sold immediately upon the completion of this offering. Rule 701 Any of our employees, officers, directors or consultants who purchased his or her shares under a written compensatory plan or contract may be entitled to sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares. However, all shares issued under Rule 701 are subject to lock-up agreements and will only become eligible for sale when the 180-day lock-up agreements expire. Registration Rights Upon completion of this offering and assuming all warrants to purchase shares of Series B-1 preferred stock are exercised, the holders of 25,882,583 shares of common stock, or their transferees, will be entitled to certain rights with respect to the registration of those shares under the Securities Act. For a discussion of these rights please see "Description of Capital Stock-- Registration Rights." After these shares are registered, they will be freely tradable without restriction under the Securities Act. Stock Options As of December 31, 1999, options to purchase 2,358,368 shares of common stock were issued and outstanding. Upon the expiration of the lock-up agreements described above, at least 941,585 shares of common stock will be subject to vested options, based on options outstanding as of December 31, 1999. Immediately after this offering, we intend to file a registration statement under the Securities Act covering shares of common stock reserved for issuance under our stock option and employee stock purchase plans. This registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under this registration statement will, subject to vesting provisions and Rule 144 volume limitation manner of sale, notice and public information requirements applicable to our affiliates, be available for sale in the open market immediately after the 180-day lock-up agreements expire. Warrants As of December 31, 1999, we had outstanding warrants to purchase 322,688 shares of common stock. When these warrants are exercised and the exercise price is paid in cash, the shares must be held for one year before they can be sold under Rule 144. However, each of these warrants contains "net exercise provisions." These provisions allow a holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares that would be issued in this case would be based upon the market price of the common stock at the time of the net exercise. If the warrant had been held for at least one year, the shares of common stock could be publicly sold under Rule 144. After the lock-up agreements described above expire, these warrants will have expired or have been exercised. 68 UNDERWRITING Snowball and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions set forth in the underwriting agreement, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Chase Securities, Inc. and FleetBoston Robertson Stephens Inc. are the representatives of the underwriters.
Number of Underwriters Shares ------------ --------- Goldman, Sachs & Co. .............................................. Chase Securities, Inc. ............................................ FleetBoston Robertson Stephens Inc................................. ---- Total............................................................ ====
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 937,500 shares from Snowball to cover such sales. They may exercise that option for 30 days. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Snowball. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
Paid by Snowball ------------------------- No Exercise Full Exercise ----------- ------------- Per Share............................................. $ $ Total................................................. $ $
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all of the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Snowball and its officers, directors and substantially all of its securityholders have agreed with the underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. See "Shares Available for Future Sale" for a discussion of certain transfer restrictions. 69 Prior to this offering, there has been no public market for the shares. The initial public offering price will be negotiated among Snowball and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be Snowball's historical performance, estimates of Snowball's business potential and earnings prospects, an assessment of Snowball's management and the consideration of the above factors in relation to market valuation of companies in related businesses. We have applied to have our common stock listed on the Nasdaq National Market under the symbol "SNOW". In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short-sale covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. A prospectus in electronic format will be made available on the web sites maintained by one or more underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the lead managers to underwriters that may make Internet distributions on the same basis as other distributions. The underwriters do not expect sales to discretionary accounts to exceed nine percent of the total number of shares offered. At our request, the underwriters have reserved up to 549,400 shares of common stock for sale at the initial public offering price to directors, officers, friends and family members of employees, and other friends of Snowball, through a directed share program. The number of shares of common stock available for sale to the general public in the public offering will be reduced to the extent these persons purchase these reserved shares. There can be no assurance that any of the reserved shares will be so purchased. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as other shares offered hereby. Snowball estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . Snowball has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. 70 LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, will pass upon certain legal matters in connection with this offering for the underwriters. An investment fund associated with Fenwick & West LLP owns 12,948 shares of our common stock. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. J.W. Hunt and Company, LLP, independent auditors, have audited the financial statements of Ameritrack, Inc. (a development stage company) at August 31, 1999 and for the period from the commencement of operations on or about August 14, 1998 through August 31, 1998, as set forth in their report. We have included the financial statements of Ameritrack, Inc. (a development stage company) in the prospectus and elsewhere in the registration statement in reliance on J.W. Hunt and Company, LLP's report, given on their authority as experts in accounting and auditing. Hamilton & Associates, Inc., independent auditors, have audited the financial statements of Extreme Interactive Media, Inc. as of December 31, 1998 and September 30, 1999, and for the year ended December 31, 1998 and the nine months ended September 30, 1999 as set forth in their report. We have included the financial statements of Extreme Interactive Media, Inc. in the prospectus and elsewhere in the registration statement in reliance on Hamilton & Associates, Inc.'s report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock. This prospectus does not contain all of the information set forth in the registration statement and the exhibits to the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The registration statement, including exhibits, may be inspected without charge at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of it may be obtained from that office after payment of fees prescribed by the Securities and Exchange Commission. The public may obtain information on the operation of the Public Reference Room by calling 1-800-732-0330. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission at http://www.sec.gov. 71 Snowball.com, Inc. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Snowball.com, Inc. Consolidated Financial Statements: Page Report of Ernst & Young LLP, Independent Auditors...................... F-2 Consolidated Balance Sheets............................................ F-3 Consolidated Statements of Operations.................................. F-4 Consolidated Statement of Stockholders'/Division Equity................ F-5 Consolidated Statements of Cash Flows.................................. F-6 Notes to Consolidated Financial Statements............................. F-7 Ameritrack, Inc. (a development stage company) Financial Statements: Independent Auditors' Report........................................... F-24 Balance Sheet.......................................................... F-25 Statement of Income and Expense........................................ F-26 Statement of Changes in Stockholders' Equity........................... F-27 Statement of Cash Flows................................................ F-28 Notes to Financial Statements.......................................... F-29 Extreme Interactive Media, Inc. Financial Statements: Independent Auditors' Report........................................... F-31 Balance Sheets......................................................... F-32 Statements of Operations and Accumulated Deficit....................... F-33 Statements of Cash Flows............................................... F-34 Notes to Financial Statements.......................................... F-35 Unaudited Pro Forma Condensed Combined Financial Information: Unaudited Pro Forma Condensed Combined Financial Information........... F-37 Pro Forma Condensed Combined Statement of Operations................... F-38 Notes to the Unaudited Pro Forma Condensed Combined Financial Information........................................................... F-39
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Snowball.com, Inc. We have audited the accompanying consolidated balance sheets of Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. at December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders'/division equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. at December 31, 1998 and 1999, and the results of operations and cash flows of Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Palo Alto, California January 28, 2000 F-2 Snowball.com, Inc. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
Pro forma Stockholders' December 31, Equity at ----------------- December 31, 1998(1) 1999(2) 1999 ------- -------- ------------- (unaudited) Assets Current assets: Cash and cash equivalents.................... $ -- $ 25,489 Short-term investments....................... -- 8,000 Accounts receivable, less allowance of $99 and $528 at December 31, 1998 and 1999, respectively................................ 920 2,560 Prepaid expenses and other current assets.... 148 2,235 ------- -------- Total current assets....................... 1,068 38,284 Goodwill and intangible assets, net........... -- 3,355 Fixed assets, net............................. 93 4,368 Other assets.................................. -- 711 ------- -------- Total assets............................... $ 1,161 $ 46,718 ======= ======== Liabilities and stockholders'/division equity Current liabilities: Accounts payable............................. $ 301 $ 4,757 Accrued liabilities.......................... 50 3,081 Deferred revenue............................. 48 702 Notes payable................................ -- 250 Current portion of term loan ................ -- 150 Current equipment financing obligations...... -- 1,081 ------- -------- Total current liabilities.................. 399 10,021 Long-term equipment financing obligations..... -- 2,036 Commitments Stockholders'/division equity: Convertible preferred stock, $0.001 par value, issuable in series: no shares authorized at December 31, 1998; 20,000,000 shares authorized at December 31, 1999, 18,066,269 shares issued and outstanding (5,000,000 shares authorized, no shares outstanding pro forma)............ -- 18 $ -- Common stock, $0.001 par value: no shares authorized at December 31, 1998; 37,500,000 shares authorized at December 31, 1999, 5,585,547 shares issued and outstanding (100,000,000 shares authorized and 30,995,442 shares issued and outstanding pro forma).................................. -- 6 31 Net contribution from Imagine Media/Additional paid-in capital............ 5,701 88,662 88,655 Notes receivable from stockholders........... -- (1,301) (1,301) Deferred stock compensation.................. -- (10,868) (10,868) Prepaid marketing and distribution rights.... -- (2,095) (2,095) Accumulated/division deficit................. (4,939) (39,761) (39,761) ------- -------- -------- Total stockholders'/division equity........ 762 34,661 $ 34,661 ------- -------- ======== Total liabilities and stockholders'/division equity....................................... $ 1,161 $ 46,718 ======= ========
- -------- (1) Through December 31, 1998, our activities were included in the operations of Imagine Media, Inc. Our financial statements for these periods have been prepared on a carve-out basis. (2) From January 1999, we have operated as a separate legal entity. See accompanying notes. F-3 Snowball.com, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year ended December 31, --------------------------- 1997(1) 1998(1) 1999(2) ------- ------- --------- Revenue.......................................... $ 927 $ 3,256 $ 6,674 Cost of revenue.................................. 171 1,322 4,316 ------- ------- --------- Gross margin..................................... 756 1,934 2,358 Operating expenses: Production and content......................... 628 1,599 6,610 Engineering and development.................... 65 329 5,084 Sales and marketing............................ 836 2,592 20,393 General and administrative..................... 506 1,074 3,486 Stock-based compensation(3).................... -- -- 1,521 Amortization of goodwill and intangible assets........................................ -- -- 471 ------- ------- --------- Total operating expenses..................... 2,035 5,594 37,565 ------- ------- --------- Loss from operations............................. (1,279) (3,660) (35,207) Interest income, net............................. -- -- 265 Other income..................................... -- -- 120 ------- ------- --------- Net loss......................................... $(1,279) $(3,660) $ (34,822) ======= ======= ========= Basic and diluted net loss per share............. $ (186.69) ========= Shares used in per share calculation............. 187 ========= Pro forma basic and diluted net loss per share (unaudited)..................................... $ (1.93) ========= Shares used in pro forma per share calculation (unaudited)..................................... 18,022 =========
- -------- (1) Through December 31, 1998, our activities were included in the operations of Imagine Media, Inc. Our financial statements for these periods have been prepared on a carve-out basis. (2)From January 1999, we have operated as a separate legal entity. (3)Stock-based compensation relates to the following in 1999: Cost of revenue......................................................... $ 7 Production and content.................................................. 407 Engineering and development............................................. 263 Sales and marketing..................................................... 777 General and administrative.............................................. 67 ------ Total................................................................. $1,521 ======
See accompanying notes. F-4 Snowball.com, Inc. CONSOLIDATED STATEMENT OF STOCKHOLDERS'/DIVISION EQUITY (in thousands, except share and per share data)
Prepaid Convertible Net Contribution Notes Marketing Preferred Stock Common Stock From Imagine Receivable Deferred and Accumulated/ ----------------- ---------------- Media/Additional From Stock Distribution Division Shares Amount Shares Amount Paid-In Capital Stockholders Compensation Rights Deficit ---------- ------ --------- ------ ---------------- ------------ ------------ ------------ ------------ Balance at January 1, 1997............ -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ -- Net and comprehensive loss for the period.......... -- -- -- -- -- -- -- -- (1,279) Contribution from Imagine Media........... -- -- -- -- 1,781 -- -- -- -- -------------------------------------------------------------------------------------------------------- Balance at December 31, 1997............ -- -- -- -- 1,781 -- -- -- (1,279) Net and comprehensive loss for the period.......... -- -- -- -- -- -- -- -- (3,660) Contribution from Imagine Media........... -- -- -- -- 3,920 -- -- -- -- -------------------------------------------------------------------------------------------------------- Balance at December 31, 1998............ -- -- -- -- 5,701 -- -- -- (4,939) Issuance of common stock to founders and employees for cash and notes receivable...... -- -- 3,812,297 4 377 (302) -- -- -- Issuance of Series A preferred stock at $0.35 per share for cash, notes receivable and assets transferred from Imagine Media... 9,990,111 10 -- -- 3,257 (2,000) -- -- -- Issuance of Series B and B-1 preferred stock for cash and assets transferred from Imagine Media at $6.33 per share........... 4,028,437 4 -- -- 23,746 -- -- -- -- Issuance of Series B-1 preferred stock at $6.33 per share to strategic partner and officer for cash and marketing rights.......... 668,721 1 -- -- 6,571 -- -- (2,339) -- Issuance of common stock to employees upon exercise of stock options, net of repurchases..... -- -- 1,668,250 2 1,107 (1,044) -- -- -- Issuance of warrants to purchase Series B-1 preferred stock in connection with lease financing and term loan... -- -- -- -- 948 -- -- -- -- Issuance of Series C preferred stock at $10.00 per share for cash and conversion of $3.0 million term loan....... 3,379,000 3 -- -- 33,786 -- -- -- -- Payments received on promissory notes........... -- -- -- -- -- 2,045 -- -- -- Issuance of common stock in connection with Ameritrack and Extreme Interactive Media acquisitions.... -- -- 105,000 -- 780 -- -- -- -- Deferred compensation.... -- -- -- -- 12,389 -- (12,389) -- -- Amortization of deferred compensation and prepaid marketing and distribution rights.......... -- -- -- -- -- -- 1,521 244 -- Net and comprehensive loss for the period.......... -- -- -- -- -- -- -- -- (34,822) -------------------------------------------------------------------------------------------------------- Balance at December 31, 1999............ 18,066,269 $ 18 5,585,547 $ 6 $88,662 $(1,301) $(10,868) $(2,095) $(39,761) -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- Total Stockholders'/ Division Equity -------------- Balance at January 1, 1997............ $ -- Net and comprehensive loss for the period.......... (1,279) Contribution from Imagine Media........... 1,781 -------------------------------------------------------------------------------------------------------- Balance at December 31, 1997............ 502 Net and comprehensive loss for the period.......... (3,660) Contribution from Imagine Media........... 3,920 -------------------------------------------------------------------------------------------------------- Balance at December 31, 1998............ 762 Issuance of common stock to founders and employees for cash and notes receivable...... 79 Issuance of Series A preferred stock at $0.35 per share for cash, notes receivable and assets transferred from Imagine Media... 1,267 Issuance of Series B and B-1 preferred stock for cash and assets transferred from Imagine Media at $6.33 per share........... 23,750 Issuance of Series B-1 preferred stock at $6.33 per share to strategic partner and officer for cash and marketing rights.......... 4,233 Issuance of common stock to employees upon exercise of stock options, net of repurchases..... 65 Issuance of warrants to purchase Series B-1 preferred stock in connection with lease financing and term loan... 948 Issuance of Series C preferred stock at $10.00 per share for cash and conversion of $3.0 million term loan....... 33,789 Payments received on promissory notes........... 2,045 Issuance of common stock in connection with Ameritrack and Extreme Interactive Media acquisitions.... 780 Deferred compensation.... -- Amortization of deferred compensation and prepaid marketing and distribution rights.......... 1,765 Net and comprehensive loss for the period.......... (34,822) -------------------------------------------------------------------------------------------------------- Balance at December 31, 1999............ $ 34,661 -------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------
See accompanying notes. F-5 Snowball.com, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except per share data)
Year ended December 31, -------------------------- 1997(1) 1998(1) 1999(2) ------- ------- -------- Operating activities Net loss.......................................... $(1,279) $(3,660) $(34,822) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................... 20 40 1,769 Stock-based compensation......................... -- -- 1,521 Other noncash expenses........................... -- -- 948 Changes in assets and liabilities: Accounts receivable............................. (653) (272) (1,640) Prepaid expenses and other assets............... (82) (61) (2,798) Accounts payable and accrued liabilities........ 250 102 7,487 Deferred revenue................................ 11 37 654 ------- ------- -------- Net cash used in operating activities.......... (1,733) (3,814) (26,881) ------- ------- -------- Investing activities Purchases of short-term investments............... -- -- (8,000) Purchases of intangible assets.................... -- -- (2,550) Purchases of fixed assets......................... (48) (106) (5,575) ------- ------- -------- Net cash used in investing activities.......... (48) (106) (16,125) ------- ------- -------- Financing activities Proceeds from equipment financing obligations..... -- -- 3,117 Proceeds from issuance of common and preferred stock............................................ -- -- 62,228 Proceeds from borrowings under term loan.......... -- -- 15,150 Payment of borrowings under term loan............. -- -- (12,000) Contributions from Imagine Media.................. 1,781 3,920 -- ------- ------- -------- Net cash provided by financing activities...... 1,781 3,920 68,495 ------- ------- -------- Net increase in cash and cash equivalents......... -- -- 25,489 Cash and cash equivalents at beginning of period........................................... -- -- -- ------- ------- -------- Cash and cash equivalents at end of period........ $ -- $ -- $ 25,489 ======= ======= ======== Schedule of noncash investing and financing activities Conversion of term loan debt to Series C preferred stock.................................. $ -- $ -- $ 3,000 ======= ======= ======== Common and preferred stock issued for goodwill and intangible assets and prepaid marketing and distribution rights.............................. $ -- $ -- $ 3,119 ======= ======= ======== Common stock issued for notes receivable.......... $ -- $ -- $ 3,346 ======= ======= ======== Deferred stock compensation ...................... $ -- $ -- $ 12,389 ======= ======= ========
- -------- (1) Through December 31, 1998, our activities were included in the operations of Imagine Media, Inc. Our financial statements for these periods have been prepared on a carve-out basis. (2) From January 1999, we have operated as a separate legal entity. See accompanying notes. F-6 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Company and Summary of Significant Accounting Policies Description of Company Snowball.com, Inc. ("Snowball") was incorporated as Affiliation, Inc. in the state of Delaware on January 6, 1999, and commenced operations as a separate legal entity at that time. From its inception in January 1997 through January 5, 1999, Snowball operated as a division of Imagine Media, Inc. ("Imagine Media"). Snowball is an Internet media company that operates a network of destination web sites providing content, community and commerce to the Internet generation, or Generation i. Snowball views Generation i as individuals between the ages of 13 and 30 who consider the Internet to be an integral part of their daily lives. Snowball serves the members of this community by providing them with opinionated, current content, relevant services such as email and instant messaging, a forum for interacting with one another and carefully selected merchandise within its online store. Snowball provides its advertisers with targeted access to Generation i and supplies its content partners with an integrated package of marketing services and audience-development opportunities. Snowball has sustained net losses and negative cash flows from operations since inception. Snowball's ability to meet obligations in the ordinary course of business is dependent upon its ability to establish profitable operations and raise additional financing through public or private equity financings, collaborative or other arrangements with corporate sources, or other sources of financing. In the year ended December 31, 1999, Snowball has received financing of approximately $65 million through the issuance of common stock and Series A, B1 and C convertible preferred stock (see Notes 6 and 7). Management believes that these funds will be sufficient to enable Snowball to meet planned expenditures through at least December 31, 2000. If anticipated operating results are not achieved, management intends to delay or reduce expenditures so as not to require additional financial resources, if these resources are not available on terms acceptable to Snowball. The divisional statements of operations for each of the two years in the period ended December 31, 1998 include all revenue and expenses directly attributable to Snowball, including a corporate allocation of the costs of facilities, salaries, and employee benefits based on relative headcount. Additionally, incremental corporate administration, finance, and management costs have been allocated to Snowball (see Note 4). All of the allocations reflected in 1997 and 1998 in the financial statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs that would have resulted if Snowball had been operated on a stand-alone basis in 1997 and 1998. From incorporation on January 6, 1999 through September 30, 1999, there was a service and support agreement in place between Snowball and Imagine Media which specified the terms of certain services to be provided by Imagine Media. Under that agreement, Imagine Media provided certain management, personnel and technology and information services support and rental space in return for cash payments based upon divisional allocations and the actual costs of providing such services. The agreement terminated on October 1, 1999 and Snowball is currently discussing its renewal. Principles of Consolidation The consolidated financial statements include the accounts of Snowball and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. F-7 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Basis of Presentation The accompanying financial statements include the operations of Snowball as part of Imagine Media (on a carved-out basis as discussed below) from its inception as a division of Imagine Media in January 1997 through December 31, 1998 (the "divisional statements") and as a separate legal entity from its incorporation on January 6, 1999. The balance sheet at December 31, 1998 represents the assets, liabilities, and divisional equity of Snowball as a part of Imagine Media and at December 31, 1999, represents the balance sheet of Snowball as a separate legal entity. The divisional financial statements have been derived from the historical books and records of Imagine Media. The balance sheet at December 31, 1998 includes all assets and liabilities specifically identifiable and directly attributable to Snowball, which are derived from historical cost information of Imagine Media. Imagine Media's corporate accounting systems were not designed to track cash receipts and payments and liabilities on a division-specific basis. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ materially from those estimates. Certain Risks and Concentrations Snowball has a limited operating history and its prospects are subject to the risks, expenses, and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as Internet services. These risks include the failure to develop and extend online service brands, the rejection of services by Web consumers, vendors, and/or advertisers, the inability of Snowball to maintain and increase the level of traffic to the Snowball networks from online services, as well as other risks and uncertainties. In the event that Snowball does not successfully implement its business plan, certain assets may not be recoverable. Snowball's revenue is principally derived from the sale of online advertising, the market for which is highly competitive and rapidly changing. Significant changes in the industry or changes in customer buying behavior could adversely affect operating results. For the years ended December 31, 1997, 1998, and 1999, revenue from Snowball's five largest advertisers accounted for approximately 36%, 31%, and 19%, respectively, of total revenue. One customer accounted for over 10% of revenue in 1997. No customer accounted for over 10% of revenue for 1998 or 1999. Snowball generally does not require collateral and maintains allowances for potential credit losses. These losses have been immaterial to date. Revenue Recognition Revenue is derived principally from short-term advertising contracts, including one or more material contracts with a six-month term, in which Snowball guarantees a minimum number of impressions (a view of an advertisement by a consumer), for a fixed fee. Advertising revenue is recognized at the lesser of the ratio of impressions delivered over total guaranteed impressions or the straight-line basis over the term of the contract, if specified, provided that Snowball does not F-8 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) have any significant remaining obligations and collection of the resulting receivable is probable. To the extent that minimum guaranteed impression levels or other obligations are not being met, Snowball defers recognition of the corresponding revenue until guaranteed levels are being achieved. Revenue also includes sponsorship revenue under contracts in which Snowball commits to provide sponsors with a variety of promotional opportunities in addition to traditional banner advertising. Typically, sponsorship agreements provide for the delivery of impressions on Snowball's Web sites through banner, button or text link advertising, exclusive placement on Snowball's Web sites, the licensing of trademarks and other copyrighted material and the design and development of customized Web sites designed to enhance the promotional objective of the sponsor. The portion of sponsorship revenue related to the delivery of impressions is recognized in the period in which the advertisement is displayed, provided that no significant obligations remain and the collection of the resulting receivable is probable, at the lesser of the ratio of impressions delivered over total guaranteed impressions or the straight-line basis over the term of the contract. The portion of any up-front nonrefundable fee specified in the contract related to the up-front customized design work and the licensing of trademarks and other copyrighted material is also recognized at the lesser of the ratio of impressions delivered over total guaranteed impressions or the straight-line basis over the term of the contract. Revenue from sales of product through Snowball's online store was insignificant through December 31, 1999. Snowball has not recognized any revenue related to the nonmonetary exchange of advertising for advertising as such exchanges were not objectively determinable based on the criteria set forth in Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions." Advertising Expenses Advertising is expensed as incurred. The costs of producing advertising are incurred and expensed during production. The costs of communicating advertising are incurred and expensed as the advertisement is broadcast in accordance with Statement of Position No. 93-7 "Reporting on Advertising Costs." Advertising expenses were not significant for the years ended December 31, 1997 and 1998, and were approximately $7,954,000 for the year ended December 31, 1999. Cash Equivalents and Short-term Investments Snowball considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 1999, cash equivalents and short-term investments consist primarily of investments in money market funds, certificates of deposit and corporate commercial paper. To date, Snowball has not experienced losses on any of its investments. Through December 31, 1998, Snowball's net cash requirements were funded by Imagine Media. Fixed Assets Fixed assets are presented at cost less accumulated depreciation. Depreciation and amortization of fixed assets is computed using the straight- line method over the estimated useful lives of the assets (two to five years). F-9 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Goodwill and Intangible Assets Goodwill and intangible assets consist of the excess of purchase price paid over identified tangible net assets and trademarks. Goodwill and intangible assets are amortized using the straight-line method over the period of expected benefit, generally three years. Management assesses the recoverability of goodwill and intangible assets by determining whether the amortization of the unamortized balance over its remaining life can be recovered through forecasted cash flows. If undiscounted forecasted cash flows indicate that the unamortized amounts will not be recovered, an adjustment will be made to reduce the net amounts to an amount consistent with forecasted future cash flows discounted at Snowball's incremental borrowing rate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. Snowball has not identified any such impairment losses. Fair Value of Financial Instruments The carrying amounts of Snowball's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of their short maturities. The carrying amounts of Snowball's capital lease obligations, notes payable and term loan approximate the fair value of these instruments based upon management's best estimate of interest rates that would be available for similar debt obligations at December 31, 1999. Net Loss Per Share Basic net loss per share and diluted net loss per share is presented in conformity with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Pursuant to Securities and Exchange Commission ("SEC") Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per share as if they had been outstanding for all periods presented. To date, Snowball has not had any issuances or grants for nominal consideration. F-10 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less the weighted-average number of shares of common stock issued to founders, investors, and employees that are subject to repurchase as these shares must be returned to Snowball if specified conditions are not met. Pro forma basic and diluted net loss per share, as presented in the statements of operations, has been computed as described above and also gives effect, under SEC guidance, to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance. Snowball commenced operations as a separate legal entity in January 1999 and issued common stock in February 1999. Accordingly, historical earnings per share have been presented only for the year ended December 31, 1999. The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share (in thousands, except share and per share data):
Year ended December 31, 1999 ------------ Net loss....................................................... $ (34,822) =========== Basic and diluted: Weighted-average shares of common stock outstanding.......... 4,134,882 Less: weighted-average shares subject to repurchase.......... (3,948,354) ----------- Weighted-average shares used in computing basic and diluted net loss per share.......................................... 186,528 =========== Basic and diluted net loss per share........................... $ (186.69) =========== Pro forma: Shares used above............................................ 186,528 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock (unaudited)....... 17,835,566 ----------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)....................................... 18,022,094 =========== Pro forma basic and diluted net loss per share (unaudited)..... $ (1.93) ===========
Snowball has excluded all convertible preferred stock, warrants for convertible preferred stock, outstanding stock options and shares subject to repurchase from the calculation of diluted loss per share because all these securities are antidilutive for all periods presented. If the offering contemplated by this prospectus is consummated, all of the convertible preferred stock outstanding will automatically be converted into common stock. Unaudited pro forma stockholders' equity at December 31, 1999, as adjusted for the assumed conversion of convertible preferred stock based on the shares of convertible preferred stock outstanding at December 31, 1999, is disclosed on the balance sheet. F-11 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The total number of shares excluded from the calculation of diluted net loss per share was as follows (on an as-converted-to-common basis as of December 31, 1999):
Total Shares ---------- Common stock, subject to repurchase............................... 6,567,429 Preferred stock................................................... 25,409,895 Common stock options outstanding.................................. 2,358,368 Warrants to purchase preferred stock.............................. 322,688
Income Taxes Through December 31, 1998, Snowball was not a separate taxable entity for federal, state, or local income tax purposes, and its operations were included in the tax returns of Imagine Media. Since incorporation, Snowball has recognized income taxes under the liability method. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Stock-Based Compensation As permitted by the FASB Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), Snowball accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its stock-based compensation plans. Under APB 25, when the exercise price of Snowball's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Stock compensation related to non- employees is based on the fair value of the related stock or options in accordance with SFAS 123 and its interpretations. Comprehensive Loss Snowball has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive loss and its components in the financial statements. To date, Snowball's comprehensive loss has equaled its net loss. Segment Information In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information," which established standards for reporting information about operating segments in annual financial statements. Snowball identifies its operating segments based on business activities, management responsibility, and geographical location. Currently, Snowball has organized its operations into a single operating segment, the development of programming content material for distribution on the Internet. Snowball derives the significant majority of its revenues from operations in the United States. F-12 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Recent Accounting Pronouncements In February 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 establishes the accounting for costs of software products developed or purchased for internal use, including when these costs should be capitalized. The adoption of this pronouncement did not materially impact Snowball's results of operations for the year ended December 31, 1999. In April 1998, AcSEC issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that the costs of start-up activities, including organizational costs, be expensed as incurred. The adoption of this pronouncement did not materially impact Snowball's results of operations for the year ended December 31, 1999. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137, requires Snowball to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through the Statement of Operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through the Statement of Operations or recognized in other comprehensive income until the hedged item is recognized in the Statement of Operations. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. SFAS 133, as amended, is effective for years beginning after June 15, 2000. Snowball does not currently hold any derivatives and does not expect this pronouncement to materially impact the results of its operations. On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Snowball believes that its current revenue recognition principles comply with SAB 101. 2. Cash and Cash Equivalents Cash, cash equivalents, and short-term investments consist of the following (in thousands):
December 31, 1999 ------------ Cash and cash equivalents: Cash.......................................................... $ 818 Money market funds............................................ 15,976 Corporate commercial paper.................................... 3,979 Certificate of deposit........................................ 4,716 ------- 25,489 ------- Short-term investments: Certificate of deposit........................................ 1,000 Municipal bonds............................................... 7,000 ------- 8,000 ------- Cash, cash equivalents, and short-term investments.................................................... $33,489 =======
F-13 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Through December 31, 1999, the difference between the fair value and the amortized cost of available-for-sale securities was not significant; therefore, no unrealized gains or losses have been recorded in stockholders' equity. At December 31, 1999, the contractual maturity of Snowball's short-term investments was one year or less. 3. Balance Sheet Detail
December 31, ------------- 1998 1999 ---- ------- (in thousands) Fixed assets: Computers and equipment..................................... $153 $ 3,762 Furniture and fixtures...................................... -- 602 Software.................................................... -- 1,364 ---- ------- 153 5,728 Less accumulated depreciation and amortization.............. (60) (1,360) ---- ------- $ 93 $ 4,368 ==== ======= Accrued liabilities: Accrued compensation........................................ $ 50 $ 957 Accrued legal and accounting................................ -- 502 Accrued marketing and advertising........................... -- 47 Other accrued expenses...................................... -- 1,575 ---- ------- $ 50 $ 3,081 ==== =======
4. Related Party Transactions Funding Prior to Incorporation Through December 31, 1998, Snowball utilized Imagine Media's centralized cash management services and processes related to receivables, payables, payroll, and other activities. Through December 31, 1998, Snowball's net cash requirements were funded by Imagine Media. Net financing provided by Imagine Media to Snowball in 1997 and 1998 was approximately $1,781,000 and $3,920,000, respectively, including funding related to expenditures for operations and investing activities and corporate services provided, as described below. There were no intercompany transfers and no amounts were paid to Imagine Media by Snowball in repayment of the financing during these periods and through the incorporation of Snowball. These amounts were included in division equity. Amounts financed by Imagine Media did not bear interest. Corporate Services In accordance with the Staff Accounting Bulletin No. 55, prior to the incorporation of Snowball, allocations have been reflected in these financial statements for 1997 and 1998. These expenses include corporate communications, management compensation and benefits administration, payroll, accounts payable, income tax compliance, and other administration and finance overhead. Allocations and charges were based on either a direct cost pass-through for incremental corporate administration, finance and management costs and a percentage allocation of costs for other services provided based on factors such as headcount and relative expenditure levels. Such F-14 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) allocations and charges totaled approximately $718,000, $1,851,000, and $757,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Management believes that the basis used for allocating corporate services is reasonable. However, the terms of these transactions may differ from those that would have resulted from transactions among unrelated parties. Asset Contribution Among the assets transferred to Snowball from Imagine Media, upon the incorporation of Snowball on January 6, 1999, were a number of cohosting and technology agreements to which Imagine Media was a party, revenue from advertising agreements involving Snowball and ownership rights in patent applications. The assets transferred from Imagine Media have been recorded at historical cost. No liabilities were transferred to Snowball, except for those directly resulting from the assets transferred. The Chairman of Snowball's board of directors is a principal stockholder and the Chief Executive Officer of Imagine Media. Accordingly, Imagine Media is considered a related party for the period subsequent to incorporation. As of December 31, 1999, Imagine Media owns approximately 5.6% of the outstanding voting shares of Snowball. 5. Business and Asset Acquisitions Ameritrack, Inc. On September 28, 1999, Snowball acquired all of the outstanding stock of Ameritrack, Inc., an Internet content provider doing business as High School Alumni, in exchange for approximately $1,000,000 in cash and 30,000 shares of common stock valued at $180,000. The cost of the acquisition was allocated to the assets and liabilities assumed based upon their estimated fair values as follows: Working capital (deficit)....................................... $ (3,381) Equipment....................................................... 21,060 Goodwill and purchased intangibles.............................. 1,162,321 ---------- $1,180,000 ==========
The financial results of Ameritrack, Inc. were insignificant and, therefore, no pro forma information reflecting the acquisition has been presented. Asset Purchase In July 1999, Snowball entered into an asset purchase agreement with Vault Networks, an Internet content producer, under which Snowball acquired certain intangible rights such as trademarks, intellectual property rights, certain registered Internet locations, and a small amount of computer hardware. The total purchase price for these assets was $550,000 in cash. This purchase price has been included within goodwill and purchased intangibles. F-15 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Extreme Interactive Media, Inc. On December 17, 1999, Snowball completed the acquisition of Extreme Interactive Media, Inc. ("Extreme"), an Internet community site. Snowball acquired all of the outstanding capital stock of Extreme in exchange for 75,000 shares of Snowball common stock, valued at $600,000, $1.0 million in cash and $250,000 in unsecured promissory notes. The purchase price may be increased by up to $3.5 million of additional cash consideration based upon the attainment of certain economic milestones by Extreme. The cost of the acquisition was allocated to the assets and liabilities assumed based upon their estimated fair values as follows: Working capital.................................................. $ 1,885 Equipment........................................................ 27,361 Goodwill and purchased intangibles............................... 1,820,754 ---------- $1,850,000 ==========
6. Term Loan In November 1999, Snowball entered into a term loan agreement for up to $15.2 million. In connection with this loan agreement, Snowball issued a promissory note, which bears interest at the rate of 11.0% per annum, and warrants to purchase 180,000 shares of Series B-1 preferred stock. In November and December of 1999, Snowball drew down $15.2 million under the term loan. On December 20, 1999, $3.0 million of this loan was converted into Series C preferred stock. An additional $12.0 million was repaid in cash raised through the Series C preferred stock issuance. At December 31, 1999, $150,000 remained payable under the term loan. The note holder maintains a first position lien on all of Snowball's assets, excluding fixed assets. 7. Stockholders' Equity Convertible Preferred Stock
Shares issued and Shares outstanding at authorized December 31, 1999 ---------- ----------------- Series A........................................ 9,990,111 9,990,111 Series B-1...................................... 4,912,285 4,697,158 Series C........................................ 4,500,000 3,379,000 Undesignated.................................... 597,604 -- ---------- ---------- Total convertible preferred stock............. 20,000,000 18,066,269 ========== ==========
Holders of Snowball's preferred stock are entitled to one vote for each share of common stock into which the preferred stock is convertible. Holders of Snowball's preferred stock are also entitled to vote separately as a class with regard to customary protective provisions. The holders of Series A, B-1 and C preferred stock are entitled to annual noncumulative dividends per share of $0.028, $0.51 and $0.80, respectively, when and if declared by the board of directors. Under the terms of certain financing arrangements, Snowball is prohibited from declaring or paying any dividends on its capital stock. In the event of any voluntary or involuntary liquidation of Snowball, F-16 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Series C stockholders are entitled to a liquidation preference of $10.00 per share, plus any declared but unpaid dividends. After payment of the Series C preference, Series A and B-1 stockholders are entitled to a liquidation preference of $0.35 and $6.33 per share, respectively, plus any declared but unpaid dividends, all in preference to the holders of the common stock. After payment to the Series A, B-1 and C stockholders of these preferential amounts in the event of a liquidation, the holders of the Series B-1 and C preferred stock and the holders of the common stock will receive any and all remaining assets of Snowball. However, the rights of the holders of Series B-1 and C preferred stock terminates when the aggregate per share distribution to such holders exceeds $0.70 and $12.66 per share, respectively. The holders of Series A, B-1 and C preferred stock have the right at any time to convert their shares into common stock. Each share of Series A and B-1 preferred stock is convertible into 1.5 shares of common stock. Each share of Series C preferred stock is convertible into 1 share of common stock. Each share of preferred stock will be automatically converted into common stock upon the closing of the issuance of shares following the effectiveness of a registration statement under the Securities Act of 1933, pursuant to a firm commitment public offering of Snowball's common stock with aggregate proceeds in excess of $20,000,000. In January 2000, Snowball issued 150,000 shares of Series C preferred stock at $10 per share. Warrants In April 1999 and October 1999 Snowball issued warrants to purchase 21,063 and 14,064 shares of Series B-1 preferred stock (52,692 shares of common stock as converted) in connection with lease financing. In accordance with SFAS 123, Snowball valued the warrants using the Black-Scholes option pricing model at $2.48 and $6.03 per share respectively. The following assumptions were used in the option pricing model: stock price of $4.22 and $10.00, exercise price of $3.165 and $7.11, option term of five years, risk-free rate of interest of 6%, 50% volatility, and a dividend yield of 0%. The cost of the warrants (approximately $206,000) is being expensed as additional interest expense over the three-year life of the lease arrangement. In November 1999, Snowball issued a series of warrants to purchase 180,000 shares of Series B-1 preferred stock (269,996 shares of common stock as converted), in connection with entering into a term loan agreement. In accordance with SFAS 123, Snowball valued the warrants using the Black-Scholes option pricing model at $2.40-$3.01 per share. The following assumptions were used in the option pricing model: stock price of $8.00, exercise price of $8.44, option term of 2 to 3 years, risk free rate of interest of 6%, 50% volatility and a dividend yield of 0%. The cost of the warrants (approximately $742,000) is being expensed as additional interest over the one year life of the debt agreement. Notes Receivable from Stockholders In February 1999, Snowball loaned an aggregate of $2,000,000 to its Chairman, secured by a full recourse promissory note and a stock pledge agreement, in connection with his purchase of 8,571,429 shares of Series A preferred stock at $0.35 per share. The note accrued interest at a rate of 4.57% per year and was due and payable with respect to $1,000,000 of principal, plus interest, on or before March 1, 1999 and with respect to the remaining $1,000,000 of principal, and any remaining interest, on or before April 1, 1999. The note has been repaid in full. F-17 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In February 1999, Snowball loaned an aggregate of $92,300 to an officer, secured by a full recourse promissory note and a stock pledge agreement, in connection with his purchase of 1,978,021 shares of common stock at $0.05 per share. The note accrues interest at a rate of 4.64% per year, payable annually, and the principal amount of the note is due and payable on or before February 1, 2003. Snowball is forgiving the principal and accrued interest at a rate of $1,667 per month. In the event that the officer's employment is terminated for any reason, then all remaining unpaid principal and interest will become due and payable within 90 days after termination, unless Snowball agrees to a longer period. In March 1999, Snowball loaned an aggregate of $7,000 to one of its directors, secured by a full recourse promissory note and a stock pledge agreement, in connection with his purchase of 150,000 shares of common stock at $0.05 per share. The note accrues interest at a rate of 4.67% per year, payable annually, and is due and payable in full on or before March 11, 2001. In October and November 1999, Snowball loaned an aggregate of $933,000 to an officer secured by full recourse promissory notes and stock pledge agreements in connection with his purchase of 100,000 shares of Series B-1 preferred stock at $6.33 per share and the exercise of options for a total of 350,000 shares of common stock at $2.00 per share. The notes accrue interest at 5.86% and 6.08%, payable annually, and are due and payable on October 20, 2003 and November 20, 2003, respectively. The promissory note of $333,000 attributable to the purchase of Series B-1 preferred stock is being forgiven at the rate of $6,938 per month. In addition, the Company has issued full recourse promissory notes to employees. Common Stock Outside of the Company's 1999 Equity Incentive Plan, Snowball issued shares of common stock to founders and employees. Generally, these shares were sold pursuant to restricted stock purchase or option agreements containing provisions established by the board of directors. These provisions give Snowball the right to repurchase the shares at the original sales price. The rights generally expire at the rate of 25% of the shares after one year and 2.0833% per month thereafter or ratably over four years. A total of 2,614,272 shares or shares underlying options were granted in 1999 and, at December 31, 1999, 1,855,652 of these shares issued outside of the 1999 Equity Incentive Plan remained subject to repurchase. As of December 31, 1999 shares of common stock reserved for future issuance consisted of the following: Stock options..................................................... 4,552,737 Series B-1 warrants (assuming conversion)......................... 322,688 Series A, B-1 and C convertible preferred stock................... 25,409,895 ---------- 30,285,320 ==========
Equity Incentive Plan In February 1999, the board of directors approved the 1999 Equity Incentive Plan (the "Plan"). Under the Plan, Snowball reserved 7,815,812 shares for issuance to eligible participants. The Plan provides for option grants at an option price no less than 85% of the fair market value of the stock F-18 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) subject to the option on the date the option is granted. The options must vest at a rate of at least 20% per year over five years from the date the option was granted. However, in the case of options granted to officers, directors, or consultants, the options may vest at any time established by Snowball. All options under the Plan expire ten years after their grant. The Plan also provides for restricted stock awards. The purchase price of restricted stock under these awards can not be less than 85% of the fair market value of the stock on the date the award is made or at the time the purchase is consummated. At December 31, 1999, 4,711,777 shares of stock issued under these awards remained subject to repurchase. Aggregate activity under the Plan is summarized as follows:
Options outstanding ------------------------------------- Shares Weighted- available Number of Price per average for grant shares share exercise price ---------- ---------- ---------- -------------- Authorized February 1999.................... 7,815,812 -- -- -- Restricted stock granted................. (1,815,525) -- -- -- Options granted.......... (3,907,437) 3,907,437 $0.05-8.00 $1.28 Options canceled......... 301,519 (301,519) $0.05-2.00 $0.76 Options exercised........ -- (1,447,550) $0.05-3.00 $0.28 ---------- ---------- Balance at December 31, 1999.................... 2,394,369 2,158,368 $0.05-8.00 $2.03 ========== ==========
The following table summarizes information regarding options outstanding and exercisable at December 31, 1999:
Weighted- Number Weighted average outstanding average remaining and exercise contractual Exercise Prices exercisable price age (years) --------------- ----------- -------- ----------- $0.05....................................... 495,267 $0.05 9.22 0.67....................................... 459,000 0.67 9.55 1.33....................................... 318,300 1.33 9.65 2.00....................................... 277,101 2.00 9.47 3.00....................................... 261,250 3.00 9.87 4.50....................................... 142,200 4.50 9.94 8.00....................................... 205,250 8.00 9.97 --------- 2,158,368 $2.03 9.58 =========
Stock-Based Compensation In 1999, Snowball recorded deferred compensation expense of approximately $12.0 million representing the difference between the exercise prices and the deemed fair values of Snowball's common stock on the dates these shares and stock options were granted. In October 1999 Snowball sold and issued 100,000 shares of Series B-1 preferred stock to an officer for $633,000 in cash. Snowball has recorded compensation expense of approximately $417,000, representing the difference between the price at which the stock was granted and the deemed fair value of Snowball's common stock on the date the stock was granted. The total deferred stock compensation of $12.4 million is included as a reduction to stockholders' equity and is being amortized by charges to operations on a graded vesting method over four years. Snowball recorded amortization of deferred F-19 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) compensation expense of approximately $1.5 million for the year ended December 31, 1999. At December 31, 1999, Snowball had a total of $10.9 million remaining to be amortized over the corresponding vesting period of each respective option, generally four years. In October 1999, Snowball issued 560,822 shares of Series B-1 preferred stock in connection with a commercial transaction. Snowball recorded approximately $2.3 million in prepaid marketing and distribution rights representing the difference between the purchase price and the deemed fair value of the shares at that date. The rights are being amortized using the straight-line method over two years. The remaining deferred stock compensation at December 31, 1999 will be amortized as follows: $6.2 million for the year ending December 31, 2000, $2.9 million for the year ending December 31, 2001, $1.4 million for the year ending December 31, 2002 and $0.4 million for the year ending December 31, 2003. Subsequent terminations of stock and option holders may reduce future stock- based compensation. Snowball has elected to follow APB 25 and related interpretations in accounting for its employee stock-based compensation plans. Because the exercise price of Snowball's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is generally recognized. Pro forma information regarding net loss has been determined as if Snowball had accounted for its employee stock options under the fair value method prescribed by SFAS 123. The resulting effect on pro forma net loss disclosed is not likely to be representative of the effects on net loss on a pro forma basis in future years, due to additional grants and years of vesting in subsequent years. The fair value of each option granted through December 31, 1999 was estimated on the date of grant using the minimum value method with the following weighted-average assumptions: Dividend yield...................................................... 0 Risk-free interest rate............................................. 6% Volatility factor................................................... 50% Expected life....................................................... 4 years Weighted-average fair value of options granted...................... $ 0.585
For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to pro forma expense over the options' vesting period, and results in a pro forma net loss of approximately $34,927,000 for the year ended December 31, 1999 and pro forma basic and diluted net loss per share of $(187.25). Stock Split On October 12, 1999, Snowball effected a three-for-two stock split of its common stock. All share and per share information included in these financial statements has been retroactively adjusted to reflect this stock split. Snowball also changed the conversion rate of its Series A and B-1 preferred stock. Preferred Series A and B-1 will convert at a rate of 1.5 shares of common stock for each share of preferred stock. 8. Provision for Income Taxes As of December 31, 1999, Snowball had federal net operating loss carryforwards of approximately $31,800,000. The net operating loss carryforwards will expire at various dates through 2019 if not utilized. Utilization of the net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code of F-20 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating loss and tax credit carryforwards before utilization. The net losses incurred for the years ended December 31, 1997 and 1998 are attributable to the operations of the Company as a division of Imagine Media and were included in the income tax returns filed by Imagine Media. Because the Company will not receive any benefit for its historical operating losses incurred through December 31, 1998, no income tax benefit has been reflected for those periods. Snowball has provided a full valuation allowance against its deferred tax assets based on its history of losses. Significant components of net deferred tax assets at December 31, 1999 consist of the following (in thousands):
December 31, 1999 ------------ Net operating loss carryforward................................. $ 12,700 Other........................................................... 500 -------- Total deferred tax assets....................................... 13,200 Valuation allowance............................................. (13,200) -------- Net deferred tax assets......................................... $ -- ========
9. Commitments At December 31, 1999, Snowball's aggregate commitments under noncancelable lease arrangements for office space and computer equipment were as follows:
Capital Operating leases leases ------- --------- (in thousands) Year ending December 31, 2000.................................................... $ 1,266 $ 2,169 2001.................................................... 1,266 4,399 2002.................................................... 903 4,399 2003.................................................... -- 4,399 2004.................................................... -- 4,399 Thereafter.............................................. -- 29,219 ------- ------- Total minimum payments required........................... 3,435 $48,984 ======= Less amount representing interest......................... (318) ------- Present value of future payments.......................... 3,117 Less current portion...................................... (1,081) ------- Long-term portion......................................... $ 2,036 =======
The cost of assets under capital lease arrangements was $3,413,000 at December 31, 1999 (none at December 31, 1998) and the related accumulated depreciation was $573,000 at December 31, 1999 (none at December 31, 1998). F-21 Snowball.com, Inc. and its predecessor division of Imagine Media, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rent expense, principally for leased office space under operating lease commitments, was approximately $514,000 for the year ended December 31, 1999 (approximately $73,000 and $176,000 for the years ended December 31, 1997 and 1998, respectively). Snowball has issued a letter of credit for approximately $4,399,000 in conjunction with the operating lease. 10. Subsequent Events (unaudited) Snowball anticipates that it will record additional deferred compensation expense of approximately $1.4 million relating to the difference between the exercise price and the deemed fair value of options awarded at prices between $8.50 and $9.35 per share in January and February of 2000. In February 2000, Snowball drew down $12 million under its term loan. Acquisition On February 16, 2000, Snowball signed an asset purchase agreement to acquire all of the assets of one of its affiliates, an Internet content provider, in exchange for approximately $4.8 million in cash (of which $500,000 will be placed in escrow to secure certain obligations). The financial results of this entity were insignificant and, therefore, no pro forma information reflecting this proposed acquisition has been presented. 2000 Equity Incentive Plan On February 22, 2000, the board of directors adopted the 2000 Equity Incentive Plan and reserved 5,000,000 shares of common stock to be issued under this plan. On each January 1, beginning in 2001, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 5% of the outstanding shares of capital stock on December 31 of the preceding year. 2000 Employee Stock Purchase Plan On February 22, 2000, the board of directors adopted the 2000 Employee Stock Purchase Plan and reserved 500,000 shares of common stock under this plan. The plan will become effective on the first business day on which price quotations for Snowball common stock are available on the Nasdaq National Market. On each January 1, beginning in 2001, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 1% of the outstanding shares on December 31 of the preceding year. The aggregate number of shares reserved for issuance under the plan may not exceed 5,000,000 shares. F-22 INDEPENDENT AUDITORS' REPORT To the Board of Directors Ameritrack, Inc. Columbia, South Carolina We have audited the accompanying balance sheet of Ameritrack, Inc. (a development stage company) as of August 31, 1999 and the related statement of income and expense, changes in stockholders' equity and cash flows from the commencement of operations on or about August 14, 1998 through August 31, 1999. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our 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, the financial statements referred to above present fairly, in all material respects, the financial position of Ameritrack, Inc. (a development stage company) as of August 31, 1999, and the results of its operations and cash flows from the commencement of operations on or about August 14, 1998 through August 31, 1999, in conformity with generally accepted accounting principles. /s/ J. W. Hunt and Company, L.L.P. Columbia, South Carolina October 8, 1999 F-23 AMERITRACK, INC. (a development stage company) BALANCE SHEET
August 31, 1999 --------------- Assets Current assets: Cash......................................................... $ 5,075 Accounts receivable.......................................... 2,111 --------- Total current assets....................................... 7,186 Equipment--at cost, less accumulated depreciation of $2,162.... 21,060 --------- Total assets............................................... $ 28,246 ========= Liabilities and stockholders' equity Current liabilities: Accounts payable............................................. $ 8,480 Loans from stockholders...................................... 2,087 --------- Total current liabilities.................................. 10,567 Stockholders' equity: Common stock, no par value; 1,000,000 shares authorized, 580,100 shares issued and outstanding....................... 174,025 Additional paid in capital................................... Deficit accumulated during the development stage............. (156,346) --------- Total stockholders' equity................................. 17,679 --------- Total liabilities and stockholders' equity................. $ 28,246 =========
See accompanying notes. F-24 AMERITRACK, INC. (a development stage company) STATEMENT OF INCOME AND EXPENSE From the commencement of operations on or about August 14, 1998 through August 31, 1999 Revenues: Advertising income................................................ $ 8,349 Other income...................................................... 514 --------- Total income.................................................... 8,863 Expenses: Operating expenses................................................ 17,761 Research and development costs.................................... 147,448 --------- Total expenses.................................................. 165,209 --------- Net loss............................................................ $(156,346) =========
See accompanying notes. F-25 AMERITRACK, INC. (a development stage company) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY From the commencement of operations on or about August 14, 1998 through August 31, 1999
Deficit Accumulated During the Number of Development Shares Common Stock Stage Total --------- ------------ ----------- --------- Common stock issued pursuant to: Sales of stock: August 14, 1998................ 5,000 $ 1,500 $ -- $ 1,500 February 23, 1999.............. 5,000 1,500 -- 1,500 April 19, 1999................. 5,000 1,500 -- 1,500 May 28, 1999................... 55,000 16,500 -- 16,500 June 16, 1999.................. 8,350 2,500 -- 2,500 July 6, 1999................... 16,750 5,025 -- 5,025 Stock-based compensation: Initial issue.................. 325,000 97,500 -- 97,500 June 14, 1999.................. 160,000 48,000 -- 48,000 Net loss......................... -- -- (156,346) (156,346) ------- -------- --------- --------- Ending balance................... 580,100 $174,025 $(156,346) $ 17,679 ======= ======== ========= =========
See accompanying notes. F-26 AMERITRACK, INC. (a development stage company) STATEMENT OF CASH FLOWS From the commencement of operations on or about August 14, 1998 through August 31, 1999 Operating activities Net Loss .......................................................... $(156,346) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation expense............................................. 2,162 Increase in accounts receivable.................................. (2,111) Increase in accounts payable..................................... 6,880 Stock-based compensation......................................... 145,500 --------- Net cash used by operating activities.............................. (3,915) --------- Investing activities Purchase of equipment.............................................. (21,621) Financing activities Proceeds from loans from stockholders.............................. 2,510 Repayment of loans from stockholders............................... (424) Proceeds from issuance of stock.................................... 28,525 --------- Net cash provided by financing activities.......................... 30,611 --------- Net increase in cash............................................... 5,075 Cash at beginning of period........................................ -- --------- Cash at end of period.............................................. $ 5,075 =========
See accompanying notes. F-27 AMERITRACK, INC. (a development stage company) NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Nature of Operations Ameritrack, Inc. (the "Company") was formed to develop an Internet web site that would provide information to assist individuals in locating high school classmates and provide web site development assistance. The web site is available internationally. Advertising The Company expenses advertising costs as they are incurred. Advertising expenses totaled $517 for the period. Equipment and Depreciation Computer equipment is valued at cost. Maintenance and repairs are charged to expenses as incurred. Depreciation is computed on the straight-line method, based on an estimated useful life of five years. Income Taxes The financial statements do not include a provision for income taxes because the Company made an S Corporation election for federal and state income tax purposes. The Company's earnings will be included in the stockholders' personal income tax returns. Research and Development Costs Research and development costs related to both future and present web site development are charged to expenses as incurred. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue and expenses. Actual results may differ from those estimates. 2. Development Stage Operations The Company was incorporated and began operations in mid August 1998. Initially, there was one stockholder. Operations through August 31, 1999 were devoted primarily to development of the web site, raising capital, investigating other means of obtaining financing and administrative functions. As of August 31, 1999, the Company had ten stockholders who acquired stock through purchase and by providing services to the Company. The basis for valuing the shares issued for services was determined by reference to the cash price for the shares acquired by purchase. These notes are an integral part of the accompanying financial statements. F-28 AMERITRACK, INC. (a development stage company) NOTES TO FINANCIAL STATEMENTS--(Continued) 3. Related Party Transactions During the period, two stockholders advanced operating funds to the Company. These loans were of a short-term nature and were noninterest bearing. The highest amount outstanding during the period was $2,262. 4. Subsequent Events Subsequent to August 31, 1999, the Company signed a letter of intent to sell all of its outstanding stock for cash and shares of stock in Snowball.com, Inc., unrelated privately held company. This sale closed on September 28, 1999 with 25% of the cash and 50% of stock being held in escrow pending the completion of this audit and certain other matters. The Company was assisted in negotiating this sale by an investment banking firm. This firm agreed to take its fee for services by acquiring a stock warrant entitling it to acquire 30,532 shares in the Company. This warrant was exercised subsequent to August 31, 1999. Upon this exercise, the Company's S Corporation status was automatically revoked and the Company became a C Corporation. These notes are an integral part of the accompanying financial statements. F-29 INDEPENDENT AUDITORS' REPORT The Board of Directors of Extreme Interactive Media, Inc. We have audited the accompanying balance sheets of Extreme Interactive Media, Inc. (an Oklahoma "S" corporation) as of December 31, 1998 and September 30, 1999, and the related statements of operations and accumulated deficit, and cash flows for the periods then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, the financial statements referred to above present fairly, in all material respects, the financial position of Extreme Interactive Media, Inc. as of December 31, 1998 and September 30, 1999, and the results of its operations and its cash flows for the periods then ended, in conformity with generally accepted accounting principles. /s/ Hamilton & Associates, Inc. Oklahoma City, Oklahoma December 9, 1999 F-30 EXTREME INTERACTIVE MEDIA, INC. BALANCE SHEETS
December 31, September 30, 1998 1999 ------------ ------------- Assets Current Assets: Cash and cash equivalents......................... $217,798 $ 20,032 Notes receivable.................................. 50,000 -- Accounts receivable............................... 31,675 75,856 Prepaid expenses.................................. 2,760 1,885 -------- -------- Total current assets............................ 302,233 97,773 Property and equipment: Computer equipment................................ 56,682 70,441 Furniture......................................... 1,622 1,401 -------- -------- 58,304 71,842 Less: accumulated depreciation.................... (3,288) (15,358) -------- -------- Net property and equipment...................... 55,016 56,484 -------- -------- Other assets: Intangible assets................................. 263,472 269,089 Organization cost................................. 458 383 Deposit........................................... 1,885 1,885 -------- -------- Total other assets.............................. 265,815 271,357 -------- -------- Total assets.................................. $623,064 $425,614 ======== ======== Liabilities and shareholders' equity Current liabilities: Accounts payable.................................. $ 20,165 $ 7,284 Other accrued taxes............................... 2,820 -- -------- -------- Total current liabilities....................... 22,985 7,284 Stockholders' equity: Common stock, $.10 par value, 500,000 shares authorized, 100,000 shares issued................ 10,000 10,000 Paid in capital in excess of par.................. 759,000 759,000 Accumulated deficit............................... (168,921) (350,670) -------- -------- Total stockholders' equity...................... 600,079 418,330 Total liabilities and stockholders' equity.... $623,064 $425,614 ======== ========
See accompanying notes and auditor's report. F-31 EXTREME INTERACTIVE MEDIA, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Nine Months Year Ended Ended December 31, September 30, 1998 1999 ------------ ------------- Revenue: Advertising income................................. $ -- $ 143,565 Other income....................................... 34,147 14,566 --------- --------- Total revenue.................................... 34,147 158,131 --------- --------- Operating expenses: Amortization....................................... 7,570 14,458 Depreciation....................................... 3,288 12,071 Salaries........................................... 82,077 153,917 Professional services.............................. 32,175 48,258 Payroll taxes...................................... 10,513 12,677 Media.............................................. 9,792 1,260 Legal and accounting............................... 25,269 13,351 Rent............................................... 7,323 14,645 Office............................................. 2,994 12,293 Telephone.......................................... 3,052 13,438 Travel............................................. 8,351 6,972 Other.............................................. 14,752 26,867 Promotional........................................ -- 14,120 --------- --------- Total operating expenses......................... 207,156 344,327 --------- --------- Loss from operations................................. (173,009) (186,196) Interest Income...................................... 4,088 4,447 --------- --------- Net loss............................................. $(168,921) $(181,749) Accumulated deficit, beginning of the period......... -- (168,921) --------- --------- Accumulated deficit, end of the period............... $(168,921) $(350,670) ========= =========
See accompanying notes and auditor's report. F-32 EXTREME INTERACTIVE MEDIA, INC. STATEMENTS OF CASH FLOWS
Nine Months Year Ended Ended December 31, September 30, 1998 1999 ------------ ------------- Cash flows from operating activities: Net loss............................................ $(168,921) $(181,749) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation...................................... 3,288 12,070 Amortization...................................... 7,570 14,458 (Increase) decrease in: Accounts receivable............................... (31,675) (44,181) Notes receivable.................................. (50,000) 50,000 Prepaid expenses.................................. (2,760) 875 Other assets...................................... (273,385) (20,000) Increase (decrease) in: Accounts payable.................................. 20,165 (12,881) Accrued taxes..................................... 2,820 (2,820) --------- --------- Net cash provided (used) by operating activities.... (492,898) (184,228) Cash flows from investing activities: Purchases of property and equipment............... (58,304) (13,538) Cash flows from financing activities: Increase from sale of stock....................... 769,000 -- --------- --------- Net change in cash and cash equivalents............. 217,798 (197,766) Cash and cash equivalents at beginning of period.... -- 217,798 --------- --------- Cash and cash equivalents at end of period.......... $ 217,798 $ 20,032 ========= =========
See accompanying notes and auditor's report. F-33 EXTREME INTERACTIVE MEDIA, INC. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Property and Equipment The cost of property and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the declining balance or straight-line method for financial reporting purposes and on the modified accelerated cost recovery system method for income tax purposes. Depreciation expense for the period ended September 30, 1999 was $12,071 and $3,288 for the year ended December 31, 1998. Income Taxes Extreme Interactive Media, Inc., (the "Company"), with the consent of its shareholders, has elected to be taxed as an S Corporation under Section 1372 of the Internal Revenue Code, which provides that, in lieu of corporate income taxes, the stockholders are taxed on their proportionate share of the Company taxable income. Cash Equivalents For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management must make estimates based on future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenue and expenses during the reporting period. Actual results could differ from these estimates. Intangible Assets Intangible assets associated with the purchase of websites and organizational costs are being amortized on the straight-line method over a period of five to 15 years. Amortization expense for the period ended September 30, 1999, was $14,458 and $7,570 for the year ended December 31, 1998. 2. Accumulated Depreciation Accumulated depreciation and net book value of property and equipment is as follows:
September 30, 1999 December 31, 1998 ----------------- ----------------- Amount Net Basis Amount Net Basis ------- --------- ------- --------- Computer equipment......................... $70,441 $55,389 $56,682 $53,475 Furniture and fixtures..................... 1,401 1,095 1,622 1,541 ------- ------- ------- ------- $71,842 $56,484 $58,304 $55,016 ======= ======= ======= =======
3. Compensated Absences Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. The Company does not account for the amount of compensation for future absences and the amount would be immaterial, and F-34 EXTREME INTERACTIVE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accordingly, no liability has been recorded in the accompanying financial statements. The Company's policy is to recognize the costs of compensated absences when actually paid to employees. 4. RELATED PARTY TRANSACTIONS The Company paid legal fees of $6,653 (December 31, 1998 $23,895) to a law firm in which two of its stockholders are partners. The Company paid rent of $1,250 (December 31, 1998 $725) to a company owned by one of its stockholders. Extreme Interactive Media, Inc. paid accounting fees of $2,525 to a firm that is owned by one of its stockholders. F-35 Snowball.com, Inc. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial information gives effect to the acquisition of Extreme Interactive Media, Inc. using the purchase accounting method, based on allocations of the purchase price. The historical information has been derived from the respective historical financial information of Snowball and Extreme Interactive Media and should be read in conjunction with their financial statements and the related notes included in this prospectus. The unaudited pro forma condensed combined statement of operations combines Snowball's and Extreme Interactive Media's historical statements of operations and gives effect to the acquisition, including the amortization of goodwill and other intangible assets resulting from the acquisition, as if the acquisition occurred on January 1, 1999. The total purchase price of Extreme Interactive Media has been allocated to assets and liabilities based on management's estimates of their fair values with the excess cost over the net assets acquired allocated to goodwill and other intangible assets. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would actually occur if the acquisition had been consummated as of the date indicated, nor is it necessarily indicative of the future operating results or financial position of the combined company. The pro forma adjustments are based on the information available at the time of the filing of this prospectus. F-36 Snowball.com, Inc. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (unaudited) (in thousands except per share data) For the year ended December 31, 1999(1)
Extreme Interactive Media, Inc. to Snowball.com, December 17, Pro Forma Pro Forma Inc. 1999 Adjustments Combined ------------- ------------ ----------- --------- Revenue...................... $ 6,674 $ 203 $ -- $ 6,877 Cost of revenue.............. 4,316 -- -- 4,316 -------- ----- ----- -------- Gross margin................. 2,358 203 -- 2,561 Operating expenses Production and content...... 6,610 -- -- 6,610 Engineering and develop- ment....................... 5,084 -- -- 5,084 Sales and marketing......... 20,393 24 -- 20,417 General and administrative.. 3,486 442 -- 3,928 Stock-based compensation.... 1,521 -- -- 1,521 Amortization of goodwill and intangible assets.......... 471 4 358 (A) 833 -------- ----- ----- -------- Total operating expenses... 37,565 470 358 38,393 -------- ----- ----- -------- Loss from operations......... (35,207) (267) (358) (35,832) Interest income, net......... 265 13 -- 278 Other income................. 120 (49) -- 71 -------- ----- ----- -------- Net loss..................... $(34,822) $(303) $(358) $(35,483) ======== ===== ===== ======== Basic and diluted net loss per share (B)............... $(186.69) $(135.43) ======== ======== Shares used in per share calculation................. 187 75 262 ======== ===== ======== Pro forma basic and diluted net loss per share (B)(unaudited).... $ (1.93) $ (1.96) ======== ======== Shares used in pro forma per share calculation (unaudited)................. 18,022 75 18,097 ======== ===== ========
- -------- (1) Extreme Interactive Media's results are for the period from January 1, 1999 through the date of acquisition (December 17, 1999). See accompanying notes to the unaudited pro forma condensed consolidated financial statements. F-37 Snowball.com, Inc. NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The total estimated purchase price of the transaction has been allocated to assets and liabilities based on management's estimate of their fair values with the excess cost over the net assets acquired allocated to goodwill and other intangible assets. The adjustments to the unaudited pro forma condensed combined statement of operations for the year ended December 31, 1999, assumes the merger occurred as of January 1, 1999, and are as follows: (A) To reflect the amortization of goodwill and other intangible assets resulting from the merger. The goodwill and other intangible assets are being amortized over periods of approximately three years. Based upon the nature of Extreme Interactive Media's operations, management does not anticipate that any significant value will be attributed to purchased in- process research and development. (B) Pro forma basic and diluted net loss per share has been adjusted to reflect the issuance of 75,000 shares of Snowball common stock, as if the shares had been outstanding for the entire period presented. These notes are an integral part of the accompanying financial statements. F-38 [The image of a hip, adolescent girl is displayed on the top half of the inside back cover, with the phrase "Who am i?" positioned at the top of the page. Beneath the image of the girl are the statements "i am the internet generation," "i am a vast community" and " And, i am here." Displayed horizontally beneath these statements are the logos of the four Snowball networks. Beneath the network logos is the Snowball logo, with the phrase "We are i" under the logo.] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ----------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Cautionary Note on Forward-Looking Statements............................ 18 Use of Proceeds.......................................................... 19 Dividend Policy.......................................................... 19 Capitalization........................................................... 20 Dilution................................................................. 21 Selected Consolidated Financial Data..................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 24 Business................................................................. 31 Management............................................................... 46 Related Party Transactions............................................... 59 Principal Stockholders................................................... 61 Description of Capital Stock............................................. 63 Shares Available for Future Sale......................................... 67 Underwriting............................................................. 69 Legal Matters............................................................ 71 Experts.................................................................. 71 Where You Can Find Additional Information................................ 71 Index to Financial Statements............................................ F-1
-------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6,250,000 Shares Snowball.com, Inc. Common Stock -------------- [SNOWBAL.COM LOGO] -------------- Goldman, Sachs & Co. Chase H&Q Robertson Stephens Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses to be paid by the Registrant in connection with the sale of the shares of common stock being registered hereby. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market filing fee. Securities and Exchange Commission registration fee.............. $ 22,770 NASD filing fee.................................................. 9,125 Nasdaq National Market filing fee................................ 95,000 Accounting fees and expenses..................................... 300,000 Legal fees and expenses.......................................... 400,000 Road show expenses............................................... 35,000 Printing and engraving expenses.................................. 250,000 Blue sky fees and expenses....................................... 10,000 Transfer agent and registrar fees and expenses................... 10,000 Miscellaneous.................................................... 168,105 ---------- Total...................................................... $1,300,000 ==========
Item 14. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the Delaware General Corporation Law, the Registrant's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to the Registrant or its stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . under section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases); or . for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the Registrant's Bylaws provide that: . the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions; . the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law; . the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions; and . the rights conferred in the Bylaws are not exclusive. II-1 The Registrant intends to enter into Indemnity Agreements with each of its current directors and executive officers to give such directors and executive officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's Certificate of Incorporation and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Registrant regarding which indemnification is sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification. Reference is also made to Section 8 of the Underwriting Agreement, which provides for the indemnification of officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provision in the Registrant's Certificate of Incorporation, Bylaws and the Indemnity Agreements entered into between the Registrant and each of its directors and executive officers may be sufficiently broad to permit indemnification of the Registrant's directors and executive officers for liabilities arising under the Securities Act. The Registrant maintains directors' and officers' liability insurance and expects to obtain a rider to such coverage for securities matters. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document Number ---------------- ------ Form of Underwriting Agreement...................................... 1.01 Registrant's Amended and Restated Certificate of Incorporation...... 3.01 Registrant's Restated Bylaws........................................ 3.03 Amended and Restated Investor Rights Agreement, dated as of December 20, 1999........................................................... 4.02 Form of Indemnity Agreement......................................... 10.01
Item 15. Recent Sales of Unregistered Securities. 1. Through December 31, 1999, we issued and sold an aggregate of 3,613,075 shares of our common stock to employees, consultants, directors, and other service providers at prices ranging from $0.0467 to $8.00 per share under direct issuances or exercises of options granted under our 1999 Equity Incentive Plan or exercises of options granted outside of our 1999 Equity Incentive Plan. All shares purchased under our 1999 Equity Incentive Plan are subject to our right to repurchase such shares at their original exercise price. The repurchase feature generally expires for 25% of the shares after the first year of service and then expires ratably over the next 36 months. All sales of common stock made pursuant to the exercise of stock options were made in reliance on Section 4(2) of the Securities Act and/or on Rule 701 or Rule 506 promulgated under the Securities Act. Aggregate sales made in reliance on Rule 701 did not exceed either 15% of our outstanding securities or 15% of our total assets. 2. On February 1, 1999, we issued and sold 1,978,021 shares of our common stock to our President and Chief Executive Officer, Mark Jung, for a purchase price of $92,307.67. This sale was made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and was made without general solicitation or advertising. Mr. Jung is an accredited investor and has access to all relevant information to evaluate the investment and represented to us that the shares were being acquired for investment. 3. On February 1, 1999, we issued and sold an aggregate of 989,011 shares of our Series A preferred stock to certain of our officers and directors and Imagine Media for an II-2 aggregate purchase price of $3,230,770 plus certain assets of Imagine Media. On March 15, 1999, we issued and sold an additional 100,000 shares of our Series A preferred stock to one of our officers for a purchase price of $35,000. Collectively, these shares are convertible into 14,985,165 shares of our common stock. Both sales were made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and were made without general solicitation or advertising. Each purchaser is a sophisticated investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. 4. On February 1, 1999, we issued and sold an aggregate of 5,000,000 shares of Series B preferred stock to Imagine Media in exchange for certain assets of that company. These shares were converted into 276,461 shares of Series B-1 preferred stock on May 11, 1999 for no additional consideration. The Series B-1 shares are convertible into 414,691 shares of our common stock. This sale was made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and was made without general solicitation or advertising. Imagine Media is an accredited investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. 5. On April 30, 1999, we issued warrants to purchase 21,063 shares of our Series B-1 preferred stock to Comdisco in connection with a Master Lease Agreement between Comdisco and us. These warrants were issued to Comdisco in consideration for the leases under the Master Lease Agreement and have an exercise price of $4.75 per share.These shares are convertible into 31,595 shares of our common stock. This sale was made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and was made without general solicitation or advertising. Comdisco is an accredited investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. 6. On May 11, 1999, we issued and sold an aggregate of 3,530,806 shares of our Series B-1 preferred stock to private investors and one of our directors for an aggregate purchase price of $22,350,002. On June 14, 1999, we issued and sold an additional 221,170 shares of Series B-1 preferred stock to private investors for an aggregate purchase price of $1,400,007. On the 20th and 22nd of October 1999, we issued and sold an additional 100,000 shares and 7,899 shares of Series B-1 preferred stock to trusts associated with one of our directors and a private investor for an aggregate purchase price of $683,000. Collectively, these shares are convertible into 5,789,807 shares of our common stock. All sales were made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and were made without general solicitation or advertising. Each purchaser is an accredited investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. 7. On July 9, 1999, we issued 57,500 shares of our common stock to certain former members of Vault Networks in connection with their employment by Snowball. These shares represent 86,250 shares of our common stock after adjustment for the 3-for-2 stock split of our common stock. These sales were made in reliance on Section 4(2) of the Securities Act and/or Rule 504 promulgated under the Securities Act and were made without general solicitation or advertising. Each purchaser represented to us that the shares were being acquired without an intent to distribute. We disclosed to each purchaser that the shares were not registered under the Securities Act and could not be resold unless registered under or exempt from the registration requirements of the Securities Act. 8. On September 28, 1999, we issued 30,000 shares of our common stock to certain stockholders of AmeriTrack in exchange for their shares of that company. These shares II-3 represent 45,000 shares of our common stock after adjustment for the 3-for- 2 stock split of our common stock. These sales were made in reliance on Section 4(2) of the Securities Act and/or Rule 504 promulgated under the Securities Act and were made without general solicitation or advertising. Each purchaser represented to us that the shares were being acquired without an intent to distribute. We disclosed to each purchaser that the shares were not registered under the Securities Act and could not be resold unless registered under or exempt from the registration requirements of the Securities Act. 9. On October 31, 1999, we issued warrants to purchase 14,064 shares of our Series B-1 preferred stock to Comdisco in connection with a Master Lease Agreement between Comdisco and us. These warrants were issued to Comdisco in consideration for additional leases under the Master Lease Agreement and have an exercise price of $10.67 per share. These shares are convertible into 21,097 shares of our common stock. This sale was made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and was made without general solicitation or advertising. Comdisco is an accredited investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. 10. On October 15, 1999, we issued and sold 560,822 shares of Series B-1 preferred stock to New Line New Media in connection with a commercial transaction, for an aggregate purchase price of $3,550,000. These shares are convertible into 841,233 shares of our common stock. This sale was made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and was made without general solicitation or advertising. New Line New Media is an accredited investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. 11. On November 8, 1999, we issued warrants to purchase 180,000 shares of Series B-1 preferred stock to several creditors in connection with a Loan and Security Agreement between Sand Hill Capital and us. These warrants were issued to each of these creditors in consideration for the payment of $1.00 and have an exercise price of $12.66 per share. These shares are convertible into 269,996 shares of our common stock. These sales were made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and were made without general solicitation or advertising. Each purchaser is an accredited investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. 12. On December 17, 1999, we issued 75,000 shares of our common stock to certain stockholders of Extreme Interactive Media in exchange for their shares of that company. These sales were made in reliance on Section 4(2) of the Securities Act and/or Rule 504 promulgated under the Securities Act and were made without general solicitation or advertising. Each purchaser represented to us that the shares were being acquired without an intent to distribute. We disclosed to each purchaser that the shares were not registered under the Securities Act and could not be resold unless registered under or exempt from the registration requirements of the Securities Act. 13. On December 20, 1999, we sold an aggregate of 3,529,000 shares of our Series C preferred stock, of which 3,379,000 shares were issued on December 20, 1999 and 150,000 shares were issued on January 5, 2000, to private investors for an aggregate purchase price of approximately $32.3 million in cash and $3.0 million in debt conversion. Collectively, these shares are convertible into 3,529,000 shares of our common stock. These sales were made in reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under the Securities Act and were made without general solicitation or advertising. Each purchaser is an accredited investor and had access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. II-4 Shares of our Preferred Stock may be converted to Common Stock by any holder of these shares at any time upon surrender of the certificates representing such shares and written notice to us. Shares of any series of our Preferred Stock automatically convert to Common Stock, if a majority of the shares of that series elects to convert. All shares of our Preferred Stock will convert to Common Stock upon completion of this offering. Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed herewith:
Exhibit Number Description of Document ------- ----------------------- 1.01* Form of Underwriting Agreement. 2.01* Stock Exchange Agreement among Registrant, Ameritrack, Inc. and the security holders of Ameritrack, Inc., dated as of September 28, 1999. 2.02* Stock Purchase and Exchange Agreement among Registrant, Extreme Interactive Media, Inc. and all of the security holders of Extreme Interactive Media, Inc., dated as of December 17, 1999. 3.01* Registrant's Amended and Restated Certificate of Incorporation. 3.02* Registrant's Amended and Restated Certificate of Incorporation (to be filed immediately after the closing of this offering). 3.03* Registrant's Bylaws. 3.04* Registrant's Restated Bylaws (adopted February 22, 2000 with an effective date immediately following this offering). 4.01* Form of Specimen Certificate for Registrant's common stock. 4.02* Amended and Restated Investor Rights Agreement, dated as of December 20, 1999. 5.01* Opinion of Fenwick & West LLP regarding legality of the securities being registered. 10.01* Form of Indemnity Agreement between Registrant and each of its directors and executive officers. 10.02* 1999 Equity Incentive Plan and related agreements. 10.03* 2000 Equity Incentive Plan and forms of stock option agreements and stock option exercise agreements. 10.04* 2000 Employee Stock Purchase Plan and forms of related agreements. 10.05* Adoption Agreement for Pan American Life Insurance Standardized 401(k) Profit Sharing Plan and Trust dated April 1, 1999, and related agreements. 10.06* Offer Letter dated February 1, 1999 from Registrant to Mark A. Jung. 10.07* Offer Letter dated January 18, 1999 from Registrant to Janette S. Chock. 10.08* Offer Letter dated March 4, 1999 from Registrant to Elizabeth G. Murphy. 10.09* Offer Letter dated March 15, 1999 from Registrant to Teresa M. Crummett. 10.10* Offer Letter dated March 15, 1999 from Registrant to Kenneth H. Keller. 10.11* Offer Letter dated October 18, 1999 from Registrant to James R. Tolonen. 10.12* Secured Promissory Note between Registrant and Mark A. Jung, dated as of February 1, 1999. 10.13* Secured Promissory Note between Registrant and Christopher Anderson, dated as of February 1, 1999. 10.14* Secured Promissory Note between Registrant and James R. Tolonen and Ginger Tolonen Family Trust dated 9/26/96, dated as of October 20, 1999. 10.15* Secured Promissory Note between Registrant and James R. Tolonen, dated as of November 30, 1999. 10.16* Series A Preferred Stock and Series B Preferred Stock Purchase Agreement, dated as of January 7, 1999. 10.17* Services and Support Agreement between Registrant and Imagine Media, Inc., dated as of January 7, 1999.
II-5
Exhibit Number Description of Document ------- ----------------------- 10.18* Brisbane Technology Park Lease dated November 29, 1999, between Registrant and GAL-Brisbane, L.P. 10.19* Sublease Agreement dated as of May 1, 1999, between Registrant and Imagine Media, Inc. 10.20* Loan and Security Agreement dated November 8, 1999, between Registrant and Sand Hill Capital II, L.P. 10.21* Indemnity Agreement dated as of June 1, 1999, between Registrant and Richard LeFurgy. 10.22+* Desktop.com Letter Agreement dated as of December 29, 1999 between the Registrant and Desktop.com, Inc. 10.23+* eCommerce and Content Agreement dated as of January 1, 2000 between the Registrant and EBWorld.com, Inc. 10.24+* eCommerce Agreement dated as of October 15, 1999 between the Registrant and edu.com, inc. 10.25+* Content Agreement dated as of September 29, 1999 between the Registrant and Gloss.com, Inc. 10.26+* eCommerce Agreement dated as of December 23, 1999 between the Registrant and Kabang.com, Inc. 10.27+* Services and Promotion Agreement dated as of December 22, 1999 between the Registrant and Riffage.com, Inc. 10.28+ Services and Promotion Agreement dated as of December 22, 1999 between the Registrant and X-drive, Inc. 10.29+* Webcourier Provider Agreement dated as of November 29, 1999 between the Registrant and Microsoft Corporation. 10.30+* Webcourier Provider Agreement dated as of October 28, 1999 between the Registrant and Microsoft Corporation. 10.31+* Webcourier Provider Agreement dated as of October 25, 1999 between the Registrant and Microsoft Corporation. 10.32+* eCommerce Agreement dated as of February 1, 2000 between the Registrant and drugstore.com, inc. 10.33+* eCommerce Agreement dated as of February 29, 2000 between the Registrant and JobDirect.com. 10.34 Lease dated March , 2000 between Registrant and 475 Park Avenue So. Co. 21.01* Subsidiaries of Registrant. 23.01* Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of Ernst & Young LLP, independent auditors. 23.03 Consent of Hamilton & Associates, Inc., independent auditors. 23.04 Consent of J.W. Hunt and Company LLP, independent auditors. 24.01* Power of Attorney. 27.01* Financial Data Schedule.
- -------- * Previously filed. ** To be filed by amendment. + Portions of this exhibit have been omitted pursuant to an application for confidential treatment and filed separately with the Commission. (b) Financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or the notes thereto. Item 17. Undertakings. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-6 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 under 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 that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on this 17th day of March, 2000. SNOWBALL.COM, INC. /s/ James R. Tolonen By: _________________________________ James R. Tolonen Chief Financial Officer and Chief Operating Officer POWER OF ATTORNEY Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- * President, Chief Executive March 17, 2000 ______________________________________ Officer and a director Mark A. Jung (Principal Executive Officer) /s/ James R. Tolonen Chief Financial Officer and March 17, 2000 ______________________________________ Chief Operating Officer James R. Tolonen (Principal Financial Officer) * Controller and Chief March 17, 2000 ______________________________________ Accounting Officer Janette S. Chock (Principal Accounting Officer) * Director March 17, 2000 ______________________________________ Christopher Anderson * Director March 17, 2000 ______________________________________ Richard A. LeFurgy * Director March 17, 2000 ______________________________________ Michael Orsak * Director March 17, 2000 ______________________________________ Robert H. Reid /s/ James R. Tolonen *By: _________________________________ James R. Tolonen Attorney-in-Fact
II-8 EXHIBIT INDEX
Exhibit Number Description of Document ------- ----------------------- 10.28+ Services and Promotion Agreement dated as of December 22, 1999 between the Registrant and X-drive, Inc. 10.34 Lease dated March , 2000 between Registrant and 475 Park Avenue So. Co. 23.02 Consent of Ernst & Young LLP, independent auditors. 23.03 Consent of Hamilton & Associates, Inc., independent auditors. 23.04 Consent of J.W. Hunt and Company LLP, independent auditors.
- -------- + Portions of this exhibit have been omitted pursuant to an application for confidential treatment and filed separately with the Commission. EX-10.28 2 SERVICES AND PROMOTION AGREEMENT FOR X-DRIVE EXHIBIT 10.28 CONFIDENTIAL TREATMENT **Confidential treatment has been HAS BEEN REQUESTED FOR requested with respect to the CERTAIN PORTIONS OF THIS information contained within the DOCUMENT "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission Services and Promotion Agreement This Services and Promotion Agreement (this "Agreement") is made as of December 22, 1999 (the "Effective Date"), by and between Snowball.com, Inc., a Delaware corporation with principal offices at 250 Executive Park Boulevard, Suite 4000, San Francisco, CA 94134 ("Snowball") and X-drive, Inc., a Delaware corporation with principal offices at 3002 Pennsylvania Avenue, Santa Monica, CA, 90404 ("X:drive"). Background Snowball owns and operates a network of sites on the World Wide Web, including four hub sites located at IGN.com ("IGN"), Chickclick.com ("Chickclick"), PowerStudents.com ("PS") and InsideGuide.com ("IS") (each, a "Snowball Site" and collectively, the "Snowball Sites"). The Snowball Sites connect to a network of affiliates sites (the "Affiliate Sites") operated by Snowball's affiliates (collectively, "Snowball Affiliates") to provide a greater breadth and depth of entertainment content. The Snowball Sites and the Affiliate Sites are sometimes referred to, collectively, in this Agreement as the "Snowball Network." X:drive provides a Web-based file hosting and file management solution that allows users to store and access information through an on-line account with X:drive as easily as if that information were stored locally (the "X:drive Service"). X:drive currently provides the X:drive Service through its World Wide Web site located at www.xdrive.com (the "X:drive Site"). X:drive wishes to be the exclusive provider of Web-based file hosting and file management solutions on the Snowball Sites and to provide the X:drive Service to users of the Snowball Sites. Snowball wishes to have X:drive provide the X:drive Service to its users and has agreed to promote X:drive as the exclusive provider of file hosting and file management solutions on the Snowball Sites. Snowball has also agreed to establish a program to encourage Snowball Affiliates to place similar links on each of the Snowball Affiliates Sites (the "X:drive Program"), subject to the terms and conditions of this Agreement. Now Therefore, the parties agree as follows: 1. X:drive Service. --------------- (a) Provision of Service. Each registered user of a Snowball Site -------------------- (each, a "Registered User") will be provided access, at no charge, to a personal X:drive Service account (each, a "Service Account"), through which the Registered User will be entitled to store and access data using the X:drive Service. Subject to the provisions of Section 9 (User Data), when a Registered User activates its Service Account, Snowball will provide X:drive with certain data concerning such Registered User as further described in Exhibit A (the --------- "Registration Data") for X:drive's own internal use. Upon receipt of the Registration Data, X:drive will immediately activate the Service Account for the applicable Registered User. X:drive shall provide the X:drive Service to all Registered Users who activate their Service Accounts throughout the term of this Agreement. (b) Development of Snowball Features. X:drive will implement a -------------------------------- dedicated folder for each Snowball Site in the storage menu of the X:drive Service (the "Folders"), as further described in this subsection. The applicable Snowball Site's Folder will appear to the Registered Users from that Snowball Site. If requested by Snowball, each Folder will contain information and promotions to be provided by Snowball specific to the Snowball Site used by the applicable Registered User. For example, if the Registered User accesses her Service Account from ChickClick.com, the Folder that appears will be named in a manner specific to ChickClick.com and will contain information and promotions specific to the users of ChickClick.com (if such materials are provided to X:Drive by Snowball). All of the content and names of each of the Folders shall be provided by Snowball and shall be subject to the terms and conditions of Section 7(f). X:drive's activities under this subsection will be mutually agreed to by the parties and described in a specification to be attached to this Agreement as Exhibit B. --------- (c) Development of Log-In Page. Snowball will develop, host and -------------------------- maintain a page through which Registered Users will be able to activate and access their respective Service Accounts ("Log-In Page"). The Log-In Page will link to the Service Page as described in subsection (d) below. (d) Service Page. X:drive will develop, host and maintain the co- ------------ branded service page through which a Registered User can activate their Service Account (the "Service Page"), at its expense and as further described in this subsection. A mock-up of the Service Page is attached hereto as Exhibit C-1. ----------- Any content other than the Snowball Marks appearing on the In-Box Page is hereinafter referred to as the "X:drive Content." X:drive will implement and maintain links from the Service Page to the Snowball Site from which the applicable Registered User has linked. Each link to the Snowball Site will be indicated by, and in the form of, one of the logos or other trademarks attached hereto as Exhibit D (the "Snowball Marks"). X:drive will implement certain --------- tracking images provided to X:drive by Snowball to enable Snowball to measure impressions and click-throughs with respect to the Service Page. Subject to the provisions of Section 9 (User Data), for each Registered User that activates its Service Account, X:drive will provide Snowball with the information further described in Exhibit A for Snowball's own internal use ("X:drive Data"). --------- (e) Sales. Snowball shall be entitled to sell advertising or other ----- promotions that will appear on the Service Page or in the Folders accessible by each Registered User through the X:drive Service (collectively, "Folder Sales"). Snowball will serve all of the banner advertisements to the Service Page in accordance with the mock-up set forth in Exhibit C-1, as such may be modified by ----------- the parties from time to time. X:drive will cooperate with Snowball to implement the delivery of any such advertising or promotion, as reasonably requested by Snowball. X:drive will deliver any advertising and promotions to the Folders, as reasonably requested by Snowball. Revenues from the Folder Sales will be shared by the parties as set forth in Section 6(c). 2 2. Promotion. Subject to the terms and conditions of this Agreement, --------- (a) Links and Banner Advertisements. Snowball will develop, implement ------------------------------- and maintain links to the Service Page and Log-In Page ("Service Links") that will appear on the home page of each of the Snowball Sites. A mock-up of the Service Links and their appearance on the home pages of the Snowball Sites is attached hereto as Exhibit C-2. Snowball will be entitled to change the content ----------- and look and feel of the home pages of the Snowball Sites and the placement of the Service Links in its discretion, provided that any such changes do not disproportionately materially adversely affect X:drive as compared to X:drive's position prior to Snowball's changes. Snowball will also implement banner advertisements promoting the X:drive Service that will appear on a rotating basis on the Snowball Sites and Affiliate Sites in accordance with Exhibit F. --------- (b) Email Blasts. Snowball will include a Service Link and text up to ------------ forty words provided to Snowball by X:drive in an X:drive dedicated email message sent to every Registered Snowball Network User. This email shall be sent to the original email address of the Registered User that was entered when registering for one of the Snowball Sites. These emails shall be sent out at least [**] for the duration of this agreement and [**] X:drive may elect not to include any content (or any Service Link) in any such Email Blast upon fifteen (15) days written notice to Snowball. (c) Skip-the-Download Implementation. Over the term of this -------------------------------- Agreement, commencing no later than ninety (90) days after the Effective Date, Snowball will implement X:drive's "skip-the-download" feature ("Skip-the- Download") for certain of its downloadable content throughout the Snowball Sites. A mock-up of such implementation is attached hereto as Exhibit C-3. ----------- Snowball will be entitled to change the content provided for and placement of the Skip-the-Download feature as long as Snowball provides reasonable alternative content and placement of the feature. (d) Skip-the-Download Promotion. Snowball will promote Skip-the- --------------------------- Download throughout the Snowball Network, through rotating advertisements and other promotions, as further described in Exhibit F. Snowball's obligations --------- under this subsection include the development and maintenance of customized content about the X:drive Service to be displayed on each of the Snowball Sites and/or delivered to Registered Users through the Folders. (e) Press Releases. The parties will jointly issue a press release -------------- describing the relationship established under this Agreement within thirty days of the Effective Date. Snowball may issue other press releases describing the relationship with X:drive established under this Agreement, subject to X:drive's reasonable approval. (f) Co-Marketing. The parties will work together in good faith to ------------ develop and implement co-marketing activities to promote the X:drive Service and the Snowball Network, as mutually agreed by the parties. (g) Reasonable Assistance. X:drive will provide Snowball with any --------------------- information or assistance reasonably required to implement the Service Links and to provide the X:drive Service **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 3 to Registered Users. X:drive will give Snowball reasonable advance notice in the event X:drive changes its universal record locator (URL) for the X:drive Site. Provided that Snowball has provided the Snowball Marks to X:drive, the Service Page, Folders and the X:drive Service will be ready for implementation no later than the date Snowball completes the Log-In Page and related links. (h) Registered Users. Snowball hereby represents and warrants that, ---------------- as of November 15, 1999, the Snowball Sites had One Million Fifty Thousand Eight Hundred Ninety Seven (1,050,897) Registered Users, which constitutes 24.3% of the overall number of users of the Snowball Network (calculated based on the aggregate number of users of the Snowball Network reported by Media Metrix in its October, 1999 usage reports). 3. Exclusivity. ----------- (a) Standback. Subject to the terms and conditions of this Agreement, --------- Snowball will identify X:drive as Snowball's "exclusive file hosting and file management provider" (or other identification as agreed to by the parties) on each Snowball Site. Snowball will not, during the term of this Agreement, enter into any agreement with respect to any of the sites described on Exhibit E --------- (each, a "X:drive Competitor") to promote such X:drive Competitor as a Snowball recommended provider of Web-based file hosting and file management services or to establish a promotional program for Snowball Affiliates similar to the X:drive Program. Exhibit E may be augmented during the term of this Agreement --------- by mutual agreement of the parties. Notwithstanding the foregoing, Snowball will be free to display advertisements (including links) on the Snowball Network that promote other companies that provide services similar to the X:drive Service and to include such advertisements in emails or newsletters distributed by Snowball. (b) Right of First Refusal. For the term of this Agreement, in the ---------------------- event any X:drive Competitor wishes to purchase advertising inventory on the Snowball Sites, Snowball may sell up to [**] of its available advertising inventory to such X:drive Competitor at Snowball's then-effective rates, subject to the terms and conditions of this subsection. Snowball will notify X:drive of any prospective sale of advertising inventory to a X:drive Competitor including the amount of inventory proposed to be sold, the price and any other relevant terms and conditions ("Sale Notice"). Upon written notice to Snowball, X:drive will be entitled to purchase such inventory on the terms and conditions contained in the Sale Notice, provided that X:drive's notice is received by Snowball within 2 business days of the date of the Sale Notice. If X:drive exercises its rights to purchase under this subsection, Snowball will not sell the inventory identified in the Sale Notice to the applicable X:drive Competitor. If X:drive does not exercise its rights under this subsection with respect to a particular Sale Notice within the time frames described herein, Snowball will be free to complete the transaction described in that Sale Notice. 4. Impressions. Snowball will, through the promotions and other ----------- obligations described in this Agreement, provide to X:drive the minimum number of Impressions on the applicable Snowball Network, as further described in Exhibit F. In the event Snowball fails to deliver the minimum number of - --------- Impressions described in this Section, as X:drive's sole and exclusive remedy **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 4 and Snowball's sole and exclusive obligation, this Agreement will continue in effect until that minimum number of Impressions is met. 5. X:drive Program. --------------- (a) X:drive Program. Each Snowball Affiliate will be offered the --------------- opportunity by Snowball to participate in the X:drive Program and to market X:drive as its "exclusive file hosting and file management solution." For each Snowball Affiliate that chooses to participate, Snowball and the Snowball Affiliate will enter into an agreement that provides the terms and conditions of the Snowball Affiliate's participation. X:drive acknowledges that Snowball makes no representation or warranty with respect to the number of Snowball Affiliates who will participate in the X:drive Program described in this Section or new customer acquisitions that will result from such Affiliate participation. In addition, X:drive acknowledges that each participating Snowball Affiliate will be free to place links to the Log-In Page, in its discretion. X:drive and Snowball agree that there is no limit on the number of Snowball Affiliates that may join the program. (b) No Solicitation. X:drive will not, for the term of this --------------- Agreement, solicit any Snowball Affiliate that has joined the X:drive Program to engage in any kind of linking, co-branding or ecommerce business relationship directly with X:drive. The provisions of this Section are not intended to impose any other restrictions on X:drive, except as expressly provided herein. 6. Payment. ------- (a) Definitions. Achieving "Implementation" with respect to any of ----------- the Snowball Sites means either: (a) Snowball has actually provided access to the X:drive Service on the applicable Snowball Site or (b) Snowball would have been able to provide access to the X:drive Service on the applicable Snowball Site were it not for X:drive's failure to deliver any technical information, content or other materials within the time periods reasonably requested by Snowball or to otherwise perform its obligations under this Agreement. "Initial Implementation Date" means the first date to occur of the following: (1) the first date a Registered User is able to access the X:drive Service on any of the Snowball Sites; or (2) the date a Registered User would have been able to access the X:drive Service any of the Snowball Sites were it not for X:drive's failure to deliver any technical information, content or other materials within the time periods requested by Snowball or to otherwise perform its obligations under this Agreement. Snowball will notify X:drive of the actual date that constitutes the Implementation Date for each of the Snowball Sites at least three (3) days prior to such date. (b) Flat Fee. X:drive will pay Snowball a monthly fee of $[**] -------- as provided in this Section. The first payment shall be due and payable within five (5) days of the Initial Implementation Date and, subject to the terms of this subsection, all remaining payments will be due each calendar month thereafter on the same day of the month as the Initial Implementation Date (e.g. if the Initial Implementation Date is January 10/th/, 2000, each subsequent payment will be due on the 10/th/ day of the applicable calendar month). In the event the Implementation for all of the Snowball Sites has not occurred within thirty (30) days of the Initial **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 5 Implementation Date, then X:drive shall be entitled to postpone the payments due under this Section (after the first payment) until the Implementation of the X:drive Service on all of the Snowball Sites. (c) Registered Users. In addition to the flat fee described above, ---------------- X:drive will pay Snowball, on a monthly basis, the amounts described in Exhibit ------- G. X:drive will make all payments to Snowball due under this Section within - - thirty (30) days of the end of the applicable calendar month. (d) Revenue Share. The parties will share, on a [**] basis, ------------- any revenues derived from the Folder Sales and sales of advertisements on the Service Page and actually received by Snowball (less taxes and sales commissions up to [**], collectively, the "Revenues"). Each party will pay the other party the other party's share of the Revenues within thirty days of the calendar month in which such Revenues were received. (e) Other Payment Terms. Each payment will include a report setting ------------------- forth all of the information needed to calculate the fees payable for that period. Payments made under this Agreement after the applicable due date will incur interest at a rate equal to [**] per month or the highest rate permitted by applicable law, whichever is lower. (f) Taxes. All amounts payable under this Agreement are exclusive of ----- all sales, use, value-added, withholding, and other taxes and duties. (g) Records and Audit Rights. Each party will keep all records ------------------------ relating to all payments made hereunder for a period of three years after the termination of this Agreement. An independent certified public accountant selected by the other party may, no more than once per year and upon at least two weeks' notice, inspect such records during normal business hours. If, upon performing such audit, it is determined that a party has underpaid the other party by an amount greater than 5% of the payments due to such party in the period being audited, then the audited party will bear all reasonable expenses and costs of such audit in addition to its obligation to make full payment under this Section. 7. Licenses and Other. ------------------ (a) X:drive Trademark License. Subject to the terms and conditions of ------------------------- this Agreement, X:drive hereby grants Snowball a non-exclusive, revocable, worldwide license to use the X:drive logos and trademarks (collectively, the "X:drive Marks") solely in conjunction with the Service Links and the promotional activities described in this Agreement. Any use of the X:drive Marks must comply with X:drive's trademark guidelines and will inure to X:drive's benefit. Nothing contained in this Agreement gives Snowball.com any right, title or interest in the X:drive Marks, except as expressly provided in this Section and Snowball shall not take any action inconsistent with the X:drive's ownership rights. Snowball will cease all use and display of the X:drive Marks upon termination of this Agreement. (b) Snowball Trademark License. Subject to the terms and conditions -------------------------- of this **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 6 Agreement, Snowball hereby grants X:drive a non-exclusive, revocable, worldwide license to use the Snowball Marks solely in conjunction with the links described in Section 2(g) of this Agreement. Any use of the Snowball Marks must comply with Snowball's trademark guidelines and will inure to Snowball's benefit. Nothing contained in this Agreement gives X:drive any right, title or interest in the Snowball Marks, except as expressly provided in this Section and X:drive shall not take any action inconsistent with the Snowball's ownership rights. X:drive will cease all use and display of the Snowball Marks upon termination of this Agreement. (c) Ownership. Subject to the rights expressly granted in this --------- Agreement, as between the parties, Snowball will retain all right, title and interest in and to the Snowball Network and the Snowball Marks and X:drive will retain all right title and interest in and to the X:drive Site, the X:drive Service, the X:drive Marks and the X:drive Content. (d) Snowball Discretion. Unless expressly provided in this Agreement, ------------------- the form, format and position of any Service Link or advertisement described in this Agreement, and date of placement, will be determined by Snowball in its discretion. Snowball may, upon written notice to X:drive, reject any content provided by X:drive under this Agreement if it fails to comply with Snowball's reasonable requirements or is otherwise inappropriate for the users of the Snowball Sites. Nothing in this Agreement will be construed to limit Snowball's right to modify any of the content or any aspect of structure of the Snowball Sites, or to rename or reposition the Snowball Sites, in its discretion; provided that, in the event any such change affects Snowball's ability to perform any obligation described in this Agreement, Snowball will use its best efforts to provide reasonable alternative performance. (e) X:drive Discretion. Unless expressly provided in this Agreement, ------------------ the form, format and position of any Folder will be determined by X:drive in its discretion. X:drive may, upon written notice to Snowball, reject any content provided by Snowball for inclusion in a Folder if it fails to comply with X:drive's reasonable requirements or is otherwise inappropriate for the users of the Service. Nothing in this Agreement will be construed to limit X:drive's right to modify the format and position of any Folder, in its discretion; provided that, in the event any such change affects X:drive's ability to perform any obligation described in this Agreement, X:drive will use its best efforts to provide reasonable alternative performance. 8. Confidential Information. ------------------------ (a) Obligations. Each party ("Receiving Party") agrees to treat as ----------- confidential all proprietary information disclosed to it by the other party ("Disclosing Party") including marketing information, customer data, and the terms of this Agreement ("Confidential Information"). Receiving Party agrees not to publish or disclose the Disclosing Party's Confidential Information to others except to those employees and subcontractors to whom disclosure is necessary in order to carry out the purposes of this Agreement. All tangible materials embodying such Confidential Information will remain the sole property of Disclosing Party and will be delivered to Disclosing Party by Receiving Party upon Disclosing Party's request. Receiving Party will inform all its employees and subcontractors who receive Confidential Information of the confidential nature of 7 such Confidential information and of their obligation to keep same confidential and not to use it other than as permitted hereunder. The Receiving Party may disclose the terms and conditions of this Agreement for due diligence purposes as reasonably required by any financing or potential acquisition. For purposes of this Agreement, the Registration Data shall be deemed the Confidential Information of Snowball and the X:drive Data shall be deemed the Confidential Information of X:drive. Throughout the term of this Agreement, X:drive shall use the same level of care to protect the confidentiality of the Registration Data that X:drive uses to protect the data of its other users, which in no event will be less than reasonable care. (b) Exceptions. Neither party will have any obligation with respect ---------- to any Confidential Information which: (1) was rightfully known to Receiving Party prior to receipt of such Confidential Information from Disclosing Party; (2) is lawfully obtained by Receiving Party from a third party under no obligation of confidentiality; (3) is or becomes generally known or available without any act or failure to act by Receiving Party; (4) is developed independently by Receiving Party. Either party may disclose the Confidential Information of the Disclosing Party if required by court order or legal requirement and the party subject to the order has given the other party a reasonable opportunity (and has cooperated fully) to contest or limit the scope of such required disclosure (including application for a protective order). 9. User Data. --------- (a) Ownership. Subject to the restrictions in this Section and any --------- rights to use the applicable data granted under this Agreement, Snowball will own the Registration Data and X:drive will own the X:drive Data. (b) Treatment of Individually Identifiable User Data. Neither party ------------------------------------------------ shall sell, disclose, transfer, or rent any user data obtained by it from the other party which data identifies, or can be used to identify, a specific individual ("Individually Identifiable User Data") to any third party or use any Individually Identifiable User Data on behalf of any third party, without the express permission of the applicable user specifically approving such use. Each of Snowball and X:drive will only use Individually Identifiable User Data in accordance with the Terms of Service and Privacy Policy posted on the Snowball Sites, as such may be amended from time to time by Snowball; provided that, if any Registered User "opts-in" to receive information and promotional materials from X:drive, then X:drive will use all resulting Individually Identifiable User Data in accordance with the X:drive Privacy Policy posted on the X:drive Site. In those cases where permission for disclosure of Individually Identifiable User Data has been obtained from the applicable user, each party shall use all reasonable efforts to implement an "opt out" feature on its own behalf, and an include and enforce through its agreements with third parties a requirement for the inclusion of an "opt out" feature in all e-mail communications generated by, or on behalf of, third party users of the Individually Identifiable User Data. (c) Aggregate Data. Notwithstanding the restrictions above, the -------------- parties retain the right to use, sell, disclose, transfer, or rent any user data as long as such user data is in an aggregate form that does not include any Individually Identifiable User Data; provided that, neither party will 8 identify the other party as the source of such aggregate data. 10. Term and Termination. -------------------- (a) Term. Subject to the provisions of Section 4, this Agreement will ---- commence on the Effective Date and will, with respect to each Snowball Site, remain in effect until [**] of Implementation Date for such Snowball Site, unless terminated earlier under this Section 10. If so requested by either party by written notice to the other party within thirty (30) days of the end of the term, the parties will negotiate in good faith to renew the term of this Agreement, subject to any changes to the terms and conditions of this Agreement agreed to by the parties. (b) X:drive Termination Right. X:drive shall be entitled to terminate ------------------------- this Agreement without further obligation to Snowball if fewer than [**] Registered Users activate their Service Accounts at least once within the [**] period commencing on the launch of the X:drive Service on the Service Page ("Trial Period"). If X:drive does not exercise its option to terminate this Agreement within the ten (10) day period directly following the end of the Trial Period, then the right to terminate this Agreement as described in this Section shall automatically expire and the term shall continue until the end of the term. (c) Termination for Breach or Insolvency. Either party may terminate ------------------------------------ this Agreement at any time prior to the expiration of its stated term in the event that: the other party breaches any term or condition of this Agreement and fails to cure such breach within thirty (30) days of written notice; or either party becomes the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors; or either party becomes the subject of an involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing. (d) Effect of Termination. X:drive's payment obligations hereunder, --------------------- as well as the provisions of this Section and the following Sections will survive any termination of this Agreement: Section 7(d) (Ownership), Section 8 (Confidential Information), Section 9 (User Data), Section 11 (Limitation of Liability), Section 12 (Indemnification) and Section 13 (General). Any proper termination of this Agreement by Snowball under Section 10(b) will not limit the accrual of damages under Section 6 (Payment) hereof; provided, however, that, nothing herein shall be deemed to limit or waive X:drive's rights of counterclaim regarding the satisfactory of provision of services by Snowball as described in this Agreement. 11. Limitation of Liability. EXCEPT WITH RESPECT TO ITS OBLIGATIONS UNDER ----------------------- SECTION 8, SECTION 9 AND SECTION 12, NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY INDIRECT, EXEMPLARY, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, OR ANY LOSS OR REVENUE, PROFITS, OR DATA, ARISING IN CONNECTION WITH THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 9 12. Indemnification. --------------- (a) Snowball Obligations. Snowball hereby agrees to defend, indemnify -------------------- and hold harmless X:drive, and its directors, officers and employees against any and all claims, actions, losses, damages, costs, and expenses (including reasonable attorneys' fees, "Losses") arising out of or based on any claim related to the Snowball Sites other than those claims described in Section 12(b) below. Snowball's obligations under this Section are hereby expressly conditioned on the following: (1) X:drive provides Snowball with prompt notice of any such claim; (2) X:drive permits Snowball to assume and control the defense of such action, with counsel chosen by Snowball (who will be reasonably acceptable to X:drive); and (3) X:drive provides Snowball with any information or assistance requested by Snowball, at Snowball's expense. (b) X:drive's Obligations. X:drive hereby agrees to defend, indemnify --------------------- and hold harmless Snowball, and its directors, officers and employees against any and all Losses arising out of or based on any claim related to the X:drive Site or the X:drive Service or any content, information or other materials provided to Snowball under this Agreement. X:drive's obligations under this Section are hereby expressly conditioned on the following: (1) Snowball provides X:drive with prompt notice of any such claim; (2) Snowball permits X:drive to assume and control the defense of such action, with counsel chosen by X:drive (who will be reasonably acceptable to Snowball); and (3) Snowball provides X:drive with any information or assistance requested by X:drive, at X:drive's expense. 13. General. ------- (a) Waivers/Modifications. Any waiver modification or amendment to --------------------- any provision of this Agreement will be effective only if in writing and executed by both parties. The waiver by either party of any default or breach of this Agreement will not constitute a waiver of any other or subsequent default or breach. (b) Notices. All notices required to be given under this Agreement ------- will be deemed given when delivered personally or sent by confirmed facsimile or U.S. certified mail, return receipt requested, to the address shown in the preamble above, or as may otherwise be specified by either party to the other in writing. (c) Severability. If any provision of this Agreement is found illegal ------------ or unenforceable, it will be enforced to the maximum extent permissible, and the legality and enforceability of the other provisions of this Agreement will remain in full force and effect. (d) Governing Law. This Agreement will be governed by and construed ------------- in accordance with the laws of the State of California applicable to agreements entered into, and to be performed entirely, within California between California residents. (e) No Partnership. The relationship of the parties hereto is solely -------------- that of independent contractors, and not partners, joint venturers or agents. Neither party has any authority 10 to bind the other in connection with this Agreement. (f) Entire Agreement. This Agreement, including any exhibits attached ---------------- hereto, is the complete and exclusive agreement between the parties with respect to the subject matter hereof, and supersedes and replaces any and all prior or contemporaneous agreements regarding such subject matter. (g) No Assignment. Neither party may assign this Agreement without ------------- the other party's written consent except in the event of a reorganization, merger, consolidation or sale of all or substantially all of its assets. Any assignment in violation of this Section will be null and void. (h) Consolidated URL Listing. X:drive hereby grants Snowball ------------------------ permission to include all of the URLs related to the Service Page together with other Snowball-related URLs in a consolidated listing assembled by third-party measurement companies, including but not limited to Media Metrix, NetRatings or another similar measuring service selected by Snowball. X:drive agrees that the rights granted under this Section are exclusive to Snowball and that X:drive will not grant the same or similar rights to any other party. In Witness Whereof, the parties have entered into this Agreement as of the Effective Date. X-drive, Inc. Snowball.com, Inc. By: /s/ Brett B. O'Brien By: /s/ James R. Tolonen -------------------- -------------------- Name: Brett O'Brien Name: James R. Tolonen ------------------ ------------------- Title: CEO Title: COO/CFO ----------------- ----------------- 11 EXHIBIT A REGISTRATION DATA AND OTHER INFORMATION Registration Data includes: Registered User's legal name (first name and surname), user name, password and email address. X:drive Data includes: A monthly usage report, including, for each Registered User that has used their Service Account, their name, their email address and the number of times the Service Account is accessed during the applicable calendar month. 12 EXHIBIT B IMPLEMENTATION ACTIVITIES Please see attached. 13 EXHIBIT C MOCK-UPS Please see attached 14 EXHIBIT D X:DRIVE MARKS AND SNOWBALL MARKS 15 EXHIBIT E COMPETITORS x:drive Competitors: [**] **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 16 EXHIBIT F IMPRESSIONS Snowball will provide the Impressions described below during the term of this Agreement. For purposes of this Agreement, the term "Impression"* means a user's page view of any X:drive mark or other promotion of X:drive or the X:drive Service. 1. Banners (468x60) ---------------- Network: IGN ------------- Totals: [**] total Impressions a month Breakdown: [**] for 'Skip The Download' call to action [**] for 'Free IGN/X:drive account' call to action Network: ChickClick --------------------- Totals: [**] total Impressions a month Breakdown: [**] for 'Free ChickClick/X:drive account' call to action Network: PowerStudents/Inside Guide/High School Alumni/Sports --------------------------------------------------------------- University ---------- Totals: [**] total Impressions a month Breakdown: [**] for 'Free PowerStudents/X:drive account' 2. Margins (120x90, 120x60) ------------------------ Network: IGN -------------- Totals: [**] total Impressions a month Breakdown: [**] for 'Skip The Download' call to action [**] for 'Free IGN/X:drive account' call to action Network: ChickClick --------------------- Totals: [**] total Impressions a month Breakdown: [**] for 'Free ChickClick/X:drive account' call to action **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 17 Network: PowerStudents/Inside Guide/High School Alumni/Sports --------------------------------------------------------------- University ---------- Totals: [**] total Impressions a month Breakdown: [**] for 'Free PowerStudents/X:drive account' * X:drive acknowledges that Snowball is not currently able to track the precise number of Impressions derived from the delivery of emails to users; Snowball will use reasonable estimates to measure the number of email Impressions obtained for purposes of this Agreement. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 18 EXHIBIT G PAYMENTS For each Registered User that uses their Service Account (by uploading a file, downloading a file or sharing a file) at least once during the Term (each, a "Active User"), X:drive will make the following payments: ------------------------------------------------------ Number of Active Users Fee Per Active User ------------------------------------------------------ [**] [**] ------------------------------------------------------ [**] [**] ------------------------------------------------------ [**] [**] ------------------------------------------------------ [**] [**] ------------------------------------------------------ [**] [**] ------------------------------------------------------ [**] [**] ------------------------------------------------------ **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission 19 EX-10.34 3 LEASE BETWEEN REGISTRANT AND 475 PARK AVE. SO. EXECUTION COPY EXHIBIT 10.34 - -------------------------------------------------------------------------------- 475 PARK AVENUE SO. CO., Landlord SNOWBALL.COM, INC. Tenant ------------ LEASE ------------ Premises: 475 Park Avenue South Entire 4th Floor New York, New York 10022 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
ARTICLE PAGE - ------- ----- 1. Premises................................................ 1 2. Commencement of Term.................................... 1 3. Rent.................................................... 2 4. Use..................................................... 4 5. Alterations, Fixtures................................... 5 6. Repairs................................................. 7 7. Floor Load; Noise....................................... 8 8. Laws, Ordinances, Requirements of Public Authorities.... 8 9. Insurance............................................... 9 10. Damage by Fire or Other Cause........................... 11 11. Assignment, Subletting, Mortgaging...................... 12 12. No Liability of Landlord and indemnity of Tenant........ 20 13. Moving of Heavy Equipment............................... 21 14. Condemnation............................................ 21 15. Entry, Right to Charge Public Portions of the Building.. 22 16. Conditional Limitations, Etc. .......................... 23 17. Mechanic's Liens........................................ 28 18. Landlord's Right to Perform Obligations................. 29 19. Covenant of Quiet Enjoyment............................. 29 20. Excavation.............................................. 29 21. Services and Equipment.................................. 30 22. Escalation.............................................. 31 23. Electric Inclusion...................................... 37 24. Broker.................................................. 39 25. Subordination and Ground Lease.......................... 40 26. Estoppel Certificate.................................... 43 27. Waiver of Jury.......................................... 43 28. Surrender of Premises................................... 44 29. Rules and Regulations................................... 44 30. Successors and Assigns and Definitions.................. 45 31. Notices................................................. 46 32. No Waiver; Entire Agreement............................. 46 33. Captions................................................ 48 34. Inability to Perform.................................... 48 35. No Representations by Landlord.......................... 48 36. Rent Control............................................ 49 37. Late Payment Charges.................................... 49 38. Security Deposit........................................ 50 39. Additional Space........................................ 52 40. Arbitration............................................. 55 41. Landlord's Contribution................................. 56 42. Supplemental Air Conditioning........................... 57 Testimony and Signatures................................ 58 ACKNOWLEDGMENT.......................................... 59 SCHEDULE A Floor Plan................................. 60 SCHEDULE B Description of the Land.................... 61 SCHEDULE C Rules and Regulations...................... 66 SCHEDULE D Cleaning Specifications.................... 68 SCHEDULE E Definitions................................ 68
i INDENTURE OF LEASE ("Lease") made this 1st day of March, 2000, between 475 PARK AVENUE SO. CO., a New York partnership, having an office at 750 Lexington Avenue, New York, New York 10022 ("Landlord") and SNOWBALL.COM, INC., a California corporation, having an office at 250 Executive Park Blvd., Suite 4000, San Francisco, California ("Tenant"). WITNESSETH: ARTICLE 1 Premises Landlord hereby leases to Tenant and Tenant hereby hires from Landlord the following space ("Demised Premises"): the entire 4th Floor, as shown on the floor plan (Schedule A) attached hereto, in the office building known as and by the street number 475 Park Avenue South, in the Borough of Manhattan, City and State of New York ("Building"), upon and subject to the terms, covenants and conditions hereafter set forth. TO HAVE AND TO HOLD the Demised Premises unto Tenant for a term commencing on the date hereof (the "Commencement Date") (as defined in Article 2 hereof) and ending on a date (the "Expiration Date") which shall be ten (10) years and six (6) months after the Commencement Date, plus the number of days required, if any, to have such term expire on the last day of the calendar month, or on such earlier date upon which said term may expire or terminate pursuant to any of the conditions or covenants of this lease or pursuant to law. IT IS MUTUALLY COVENANTED AND AGREED between Landlord and Tenant as follows: ARTICLE 2 Commencement of Term Section 2.01. The term of this Lease and the payment of minimum rent hereunder shall commence on the Commencement Date, and Landlord shall deliver possession of the Demised Premises on the Commencement Date. Section 2.02. Tenant has fully inspected the Demised Premises, is familiar with the condition thereof and agrees to accept possession of the same on the Commencement Date in their present "As Is" condition, except for latent defects provided notice of such defects is given to Landlord within one (1) year from the Commencement Date. Landlord shall not be required to do any work therein in order to make the same suitable for the conduct of Tenant's business. Section 2.03. If, prior to the Commencement Date, Tenant shall enter the Demised Premises to make any installations, Landlord shall have no liability or obligation for the care or preservation of Tenant's property, except if due to the negligence of Landlord, its agents, contractors and employees. Section 2.04. Promptly after the Commencement Date, Landlord and Tenant will execute a statement in recordable form confirming the Commencement and Expiration Dates of this Lease, in accordance with the foregoing provisions. ARTICLE 3 Rent Section 3.01. Tenant shall pay, as rent for the Demised Premises, the following: (a) a fixed minimum rent (the "minimum rent") at the following annual rates: (i) $624,000.00 per annum (or $52,000.00 per month) for the first five (5) years following the Commencement Date, provided that if the Commencement Date is other than the first day of the month, then the minimum rent for the month in which the Commencement Date occurs shall be prorated; and (ii) $688,000.00 per annum (or $57,333.33 per month) for the last five (5) years and six (6) months following the Commencement Date; and (b) all other sums and charges required to be paid by Tenant under the terms of this Lease (including without limitation, the payments required to be made under Article 22), which shall be deemed to be and are sometimes referred to hereafter as additional rent. 2 Section 3.02. Notwithstanding the provisions of Section 3.01 hereof, and provided Tenant is not then in default hereunder after any applicable notice and expiration of any applicable cure period, Tenant shall be entitled to an abatement of part of the minimum rent only in the amount of $48,000 for the 1st, 2nd, 3rd, 16th, 17th and 18th months following the Commencement Date, provided that the balance of minimum rent of $4,000.00 for each of said months shall be due and payable. Tenant acknowledges that the consideration for the aforesaid abatement of minimum rent is Tenant's agreement to perform all of the monetary terms, covenants and conditions of this Lease on its part to be performed. Therefore, if Tenant shall be in default under any of the terms, covenants and conditions at any time during the term hereof and this lease shall thereupon be terminated, the aggregate amount of all minimum rent that was abated shall immediately thereafter become due and payable by Tenant to Landlord. In the event of Tenant's failure to pay such aggregate amount to Landlord, Landlord shall be entitled to the same rights and remedies as in the event of tenant's default in the payment of minimum rent. Tenant shall be required to pay additional rent and all other sums from and after the Commencement Date. Section 3.03. The minimum rent shall be payable in equal monthly installments in advance on the first day of each and every month during the term of this Lease, except that the amount of $52,000.00 shall be paid upon the execution of this Lease and be applied to the payment of minimum rent for the fourth (4th) month of the term following the Commencement Date. Section 3.04. Tenant shall pay the minimum rent and additional rent in lawful money of the United States which shall be legal tender for the payment of all debts, public and private, at the time of payment. Landlord and Tenant agree that Tenant shall pay minimum rent, additional rent and other amounts now due or hereafter to become due to the Landlord or its agent as provided for in this Lease, (as and when due) directly to the following lock-box account: 475 Park Avenue So. Co. PO Box 41037 Newark, New Jersey 07101-8007 All rent checks shall be made payable to 475 Park Avenue So. Co. Section 3.05. The minimum rent and additional rent shall be payable by Tenant without any set-off, abatement or deduction whatsoever and without notice or demand, except as otherwise expressly provided herein. 3 ARTICLE 4 Use Section 4.01. Tenant shall use and occupy the Demised Premises only for the purposes of general, executive and administrative offices. Section 4.02. Notwithstanding the provisions of Section 4.01, Tenant shall not use or allow the use of the Demised Premises or any part thereof (1) for the cooking and/or sale of food; (2) for storage for sale of any alcoholic beverage in the Demised Premises; (3) for the sale of any product or material from the Demised Premises to the general public; (4) for manufacturing or printing purposes; (5) for the conduct of a school or training facility or similar type of business which results in the presence of the general public in the Demised Premises; (6) for the conduct of the business of an employment agency or personnel agency; (7) for the conduct of any public auction or public exhibition; (8) for occupancy by a foreign, United States, state, municipal or other governmental or quasi-governmental body, agency or department or any authority or other entity which is affiliated therewith or controlled thereby and which has diplomatic or sovereign immunity or the like with respect to a commercial lease; (9) for messenger or delivery service (excluding Tenant's own employees or outside services); (10) as a public stenographer or typist; (11) as a telephone or telegraph agency; (12) as a company engaged in the business of renting office(s) or desk space in the Demised Premises; (13) as medical offices or a laboratory; (14) as a travel agency; (15) as a dating service; (16) as a restaurant; (17) as a night club, discotheque, arcade or like kind establishments; (18) as a public or quasi-public health facility, radiation treatment facility, methadone clinic or other drug related clinic, abortion clinic, or for any practice conducted in or through the format of a clinic; (19) as a pawn shop; (20) as an off-track betting parlor; (21) as a homeless shelter, soup kitchen or similar use; (22) for the sale or display or pornographic products or services; (23) for the use or storage of flammable liquids or chemicals (unless incidental to a permitted use); (24) as a funeral parlor; (25) for the sale or grooming of pets; or (26) for any form of spiritualist services, such a fortune telling or reading. Section 4.03. If any governmental license or permit, other than a Certificate of Occupancy, shall be required for the proper and lawful conduct of Tenant's business in the Demised Premises, or any part thereof, and if failure to secure such license or permit would in any way affect Landlord, Tenant, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same for inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit. Section 4.04. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Demised Premises, or do or permit anything to be done in the Demised Premises, in violation of the Certificate of Occupancy for the Demised Premises or for the Building, and will not permit or cause any act to be done or any 4 condition to exist on the Demised Premises which may be dangerous unless safeguarded as required by law, or which in law constitutes a nuisance, public or private, or which may make void or voidable any insurance then in force covering the Building and building equipment. ARTICLE 5 Alterations, Fixtures Section 5.01. Tenant without Landlord's prior consent shall make no alterations, installations, additions, or improvements in or to the Demised Premises ("work"), including, but not limited to a water cooler, an air conditioning or cooling system, or any unit or part thereof or other apparatus of like or other nature, paneling, partitions, railings, mezzanine floors, galleries and the like. Notwithstanding the foregoing, Tenant may make, without Landlord's consent but subject to Landlord's approval of contractors, non- structural interior changes and improvements, provided such changes and improvements do not adversely affect the structural integrity of the Building or the Building systems, do not adversely affect other tenants, do not violate the provisions of any mortgage covering the Building, do not violate any Governmental Requirements relating to the Demised Premises, do not cost more than $75,000 in the aggregate during any twelve (12) month period, and Tenant has given Landlord at least ten (10) days prior notice of such changes. If any contractor, other than Landlord, shall perform work, such contractor shall first be approved by Landlord, and as a condition of such approval, Tenant shall pay to Landlord ten (10%) percent of the cost of such work for supervision, coordination and other expenses incurred by Landlord in connection therewith. However, such (10%) percent charge shall not be applicable to Tenant's initial work in the Demised Premises. Tenant acknowledges that the ICIP Program (as hereinafter defined) may impose requirements with respect to the hiring and training practices, among other matters, of contractors and subcontractors engaged to perform certain work in the Building for Tenant (collectively, herein called "Tenant's Contractors"). Tenant shall use Tenant's Contractors (subject to Landlord's approval) that qualify under the applicable requirements of the ICIP Program for the performance of Tenant's initial work and any subsequent alterations to the Demised Premises and Tenant will require Tenant's Contractors to comply with the provisions of the ICIP Program. If Landlord is notified of any violation of the ICIP Program by Tenant's Contractors, Landlord shall promptly advise Tenant, and Tenant shall take all necessary actions to cure such violations. Workers' compensation and public liability insurance and property damage insurance, all in amounts and with companies and/or forms reasonably satisfactory to Landlord, shall be provided and at all times maintained by Tenant's contractors engaged in the performance of the work, and before proceeding with the work certificates of such insurance shall be furnished to Landlord. If consented to by Landlord, all such work shall be done at Tenant's sole expense and at such times and in such manner as Landlord may from time to time designate and in full compliance with all governmental authorities having jurisdiction thereover. Upon completion of the work, Tenant shall deliver to Landlord full scale "as built" plans for the same. All work affixed to the realty or if not so affixed but for which 5 Tenant shall have received a credit (other than Tenant's trade fixtures), shall become the property of Landlord and shall remain upon, and be surrendered with, the Demised Premises as a part thereof at the end of the term, without allowance to Tenant or charge to Landlord, unless Landlord with respect to work which is not standard office installation and which is unusually difficult and costly to remove, elects otherwise on notice to Tenant given at the time that Landlord has consented to the work. If Landlord shall elect otherwise, then all such work or such portion thereof as Landlord shall elect shall be removed by Tenant and Tenant shall restore the Demised Premises to its original condition, at Tenant's expense. Notwithstanding the foregoing, Tenant shall not be required to remove its initial work in the Demised Premises. If any Building facilities or services, including but not limited to air-conditioning and ventilating equipment installed by Landlord and adversely affected or damaged by reason of work by Tenant, Tenant, at its expense, shall repair such damage and shall correct the work so as to prevent any further damage or adverse affect on such facilities or services. Section 5.02. Prior commencing any work pursuant to the provisions of Section 5.01, Tenant shall furnish to Landlord: (a) Plans and specifications for the work. If Landlord fails to respond to Tenant's request for Landlord's consent to such plans within ten (10) business days following its receipt thereof with all required information, the same shall be deemed approved. (b) Copies of all governmental permits and authorizations which may be required in connection with such work. (c) A certificate evidencing that Tenant (or Tenant's contractor) has procured workers' compensation insurance covering all persons employed in connection with the work who might assert claims for death or bodily injury against Overlandlord, as defined in Article 25, Landlord, Tenant or the Building. (d) Such additional personal injury and property damage insurance (over and above the insurance required to be carried by Tenant pursuant to the provisions of Section 9.03) as Landlord may reasonably require because of the nature of the work to be done by Tenant. (e) Except with respect to Tenant's initial work in the Demised Premises or thereafter with respect to work costing less than $75,000 a bond or other security satisfactory to Landlord in the amount of one hundred ten (110%) percent of the cost of the work to insure completion of the work. Section 5.03. Where furnished by or at the expense of Tenant (except the replacement of an item theretofore furnished and paid for by Landlord or for which Tenant has received a credit), all movable property, furniture, furnishings and trade fixtures ("personalty") other than those affixed to the realty shall remain the property of and shall 6 be removed by Tenant on or prior to any termination or expiration of this Lease, and, in the case of damage by reason of such removal, Tenant, at Tenant's expense, promptly shall repair the damage. If Tenant does not remove any such personalty, Landlord, at its election, (a) may cause the personalty to be removed and placed in storage at Tenant's expense or (b) may treat the personalty as abandoned and may dispose of the personalty as it sees fit without accounting to Tenant for any proceeds realized upon such disposal. Section 5.04. Tenant agrees that the exercise of its rights pursuant to the provisions of this Article 5 shall not be done in a manner which would create any work stoppage, picketing, labor disruption or dispute or violate Landlord's union contracts affecting the Building or unreasonably interfere with the business of Landlord or any Tenant or occupant of the Building. In the event of the occurrence of any condition described above arising from the exercise by Tenant of its right pursuant to the provisions of this Article 5, Tenant shall, immediately upon written notice from Landlord, cease the manner of exercise of such right giving rise to such condition. In the event Tenant fails to cease such manner of exercise of its rights as aforesaid, Landlord, in addition to any rights available to it under this Lease and pursuant to law, shall have the right to injunction without notice. With respect to Tenant's work, Tenant shall make all arrangements for, and pay all expenses incurred in connection with, use of the freight elevators servicing the Demised Premises during those hours other than as provided in Section 21.01(a). ARTICLE 6 Repairs Section 6.01. Tenant shall take good care of the Demised Premises and the fixtures and appurtenances therein and of all portions of the HVAC, mechanical, plumbing and electrical systems within and exclusively serving the Demised Premises, and at its sole cost and expense make all repairs thereto as and when needed to preserve them in good working order and condition. Subject to the provisions of Section 9.04, II damage or injury to the Demised Premises or the Building or to any building equipment caused by Tenant moving property in or out of the Building or by installation or removal of personalty or resulting from negligence or conduct of Tenant, its employees, agents, contractors, customers, invitees and visitors, shall be repaired, promptly by Tenant at Tenant's expense, and whether or not involving structural changes or alterations, to the satisfaction of Landlord. All repairs shall include replacements or substitutions where necessary and shall be at least equal to the quality, class and value of the property repaired, replaced or substituted and shall be done in a good and workmanlike manner. Section 6.02. Landlord shall, at Landlord's sole expense, perform all maintenance, repairs and replacements, structural and otherwise, to the exterior and public portions of the Building and the Building systems, unless Tenant is required to make them under the provisions of Section 6.01, or unless required as a result of the performance or existence of alterations performed by Tenant or on its behalf, in which event Tenant, at its 7 expense, shall perform such maintenance, repairs or replacement. Landlord shall have no liability to Tenant by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease, or required by law, to make in or to any portion of the Building or the Demised Premises, or in or to the fixtures, equipment or appurtenances of the Building or the Demised Premises. However, Landlord shall use reasonable efforts to make such repairs or changes in a manner to minimize its interference with the normal conduct of Tenant's business in the Demised Premises, provided Landlord shall not be required to employ overtime or premium labor. Section 6.03. Tenant shall not store or place any materials or other obstructions in the lobby or other public portions of the Building, or on the sidewalk abutting the Building. ARTICLE 7 Floor Load; Noise Section 7.01. Tenant shall not place a load upon any floor of the Demised Premises which exceeds the load per square foot which such floor was designed to carry (50 lbs. live load per square foot). Section 7.02. Business machines and mechanical equipment belonging to Tenant which cause noise, vibration or any other nuisance that may be transmitted to the structure or other portions of the Building or to the Demised Premises, to such a degree as to be objectionable to Landlord or which interfere with the use or enjoyment by other tenants of their premises or the public portions of the Building, shall be placed and maintained by Tenant, at Tenant's expense, in settings of cork, rubber or spring type vibration eliminators sufficient to eliminate such objectionable or interfering noise or vibration. ARTICLE 8 Laws, Ordinances, Requirements of Public Authorities Section 8.01. (a) Tenant, at its expense, shall comply with all laws, orders, ordinances, rules and regulations and directions of Federal, State, County and Municipal authorities and departments thereof having jurisdiction over the Demised Premises and the Building, including without limitation the 8 Americans With Disabilities Act ("Governmental Requirements") referable to Tenant or the Demised Premises, arising by reason of (i) Tenant's occupancy, use or manner of use of the Demised Premises, or any installations made therein by or at Tenant's request, or (ii) any default by Tenant under this Lease. (b) Landlord, at its expense, shall comply with Governmental Requirements relating to the public portions of the Building and that Tenant is not obligated to comply with them under the provisions of subdivision (a) of this Section. Landlord, at its expense, may contest the validity of any Governmental Requirements and postpone compliance therewith pending such contest. Section 8.02. If Tenant receives written notice of any violation of any Governmental Requirements applicable to the Demised Premises, it shall give prompt written notice thereof to Landlord. Section 8.03. Tenant will not clean, nor allow any window in the Demised Premises to be cleaned, from the outside in violation of Section 202 of the Labor Law or the rules of the Board of Standards and Appeals or of any other board or body having or asserting jurisdiction. Section 8.04. Landlord represents that on the Commencement Date the Demised Premises will be in compliance with Governmental Requirements (as hereinbefore defined) including the Americans With Disabilities Act and including available hookup by Tenant to the Building's fire protection system. ARTICLE 9 Insurance Section 9.01. Tenant shall not do or permit to be done any act or thing in or upon the Demised Premises which will invalidate or be in conflict with the Certificate of Occupancy for the Building or the terms of the insurance policies covering the Building and the property and equipment therein; and Tenant, at its expense, shall comply with all rules, orders, regulations and requirements of the New York Board of Fire Underwriters or any other similar body having jurisdiction, and of the insurance carriers, and shall not knowingly do or permit anything to be done in or upon the Demised Premises in a manner which increases the rate of insurance for the Building or any property or equipment therein over the rate in effect on the Commencement Date. Section 9.02. If, by reason of Tenant's failure to comply with the provisions of Section 9.01 or any of the other provisions of this Lease, the rate of insurance for the Building or the property and equipment of Landlord shall be higher than on the 9 Commencement Date, Tenant shall pay to Landlord any additional or increased insurance premiums to the extent resulting therefrom thereafter paid by Landlord, and Tenant shall make such payment forthwith on demand of Landlord. In any action or proceeding wherein Landlord and Tenant are parties, a schedule or "make up" of any insurance rate for the Building or Demised Premises issued by the New York Fire Insurance Exchange, or other body establishing fire insurance rates for the Building, shall be conclusive evidence of the facts therein stated and of the several items and charges in the insurance rates then applicable to the Building or Demised Premises. Section 9.03. (a) Tenant covenants to provide on or before the Commencement Date and to keep in force during the term hereof, the following insurance: (i) A commercial policy of liability insurance protecting and indemnifying Landlord, Tenant and Overlandlord (as defined in Article 25) against claims for personal injury, death or property damage occurring upon, in or about the Demised Premises, and the public portions of the Building used by Tenant, its employees, agents, contractors, customers, invitees, and visitors, including, without limitation, personal injury, death or property damage resulting from any work performed by or on behalf of Tenant, with coverage of not less than an aggregate of $5,000,000.00 combined single limit for personal injury, death and property damage arising out of one occurrence or accident. (ii) Fire and extended coverage in an amount adequate to cover the cost of replacement of all personal property, fixtures, furnishings and equipment, including Tenant's work as set forth in Section 5.01, located in the Demised Premises. (b) All such insurance shall (i) be effected under valid and enforceable policies, (ii) be issued by insurers of recognized responsibility authorized to do business in the State of New York and (iii) contain a provision whereby the insurer agrees not to cancel the insurance without at least thirty (30) days' prior written notice to Landlord. On or before the Commencement Date, Tenant shall deliver to Landlord duplicate originals of the aforesaid policies or certificates evidencing the aforesaid insurance coverage, and renewal policies or certificates shall be delivered to Landlord at least thirty (30) days prior to the expiration date of each policy with proof of payment of the premiums thereof. 10 Section 9.04. Landlord and Tenant shall each secure an appropriate clause in, or an endorsement upon, each fire or extended coverage policy obtained by it and covering the Building, the Demised Premises or the personal property, fixtures and equipment located therein or thereon, pursuant to which the respective insurance companies waive subrogation or permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party. The waiver of subrogation or permission for waiver of any claim herein before referred to shall extend to the agents of each party and its employees and, in the case of Tenant, shall also extend to all other persons and entities occupying or using the Demised Premises in accordance with the terms of this lease. If and to the extent that such waiver or permission can be obtained only upon payment of an additional charge, then, the party benefiting from the waiver or permission shall pay such charge upon demand, or shall be deemed to have agreed that the party obtaining the insurance coverage in question shall be free of any further obligations under the provisions hereof relating to such waiver or permission. Subject to the foregoing provisions of this Section 9.04, and insofar as may be permitted by the terms of the insurance policies carried by it, (i) each party hereby releases the other with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damages or destruction with respect to its property by fire or other casualty (including rental value or business interruption, as the case may be) occurring during the term of this Lease, and (ii) Tenant releases other tenants but only to the extent that the policies of such other tenants permit a similar waiver for the benefit of Tenant and such other tenant gives such a waiver. ARTICLE 10 Damage by Fire or Other Cause Section 10.01. If the Demised Premises or the Building shall be damaged by fire (or other hazards included in extended coverage endorsements to fire insurance policies covering property in the City of New York), the damage shall be repaired by and at the expense of Landlord and the minimum rent and additional rent as provided in Article 22 until such repairs shall be made, shall be apportioned according to the part of the Demised Premises which is usable by Tenant. Landlord shall have no responsibility to repair any damage to tenant's work (as referred to in Section 5.01), the same being the responsibility of Tenant. No penalty shall accrue for delays which may arise by reason of adjustment of insurance by Landlord, unavoidable delays (as hereinafter defined), or any other cause beyond Landlord's reasonable control. Tenant shall give immediate notice to Landlord in case of fire or other damage to the Demised Premises of which Tenant has knowledge. If the Demised Premises are totally or substantially damaged or are rendered wholly or substantially untenantable by fire or any such other casualty and if Landlord decides not to restore or rebuild the same, or if the Building shall be so damaged that Landlord shall decide to demolish it or to rebuild it (whether or not the Demised Premises 11 shall have been damaged), Landlord at its election may, within ninety (90) days after such fire or other casualty, notify Tenant of such decision, and thereupon the term of this Lease shall expire by lapse of time upon the third (3rd) day after such notice is given, and Tenant shall vacate and surrender the Demised Premises to Landlord. Tenant hereby waives the provisions of Section 227 of the Real Property Law, and the provisions of this Article shall govern and control in lieu thereof. Notwithstanding the foregoing provisions of this Section 10.01, within sixty (60) days after such casualty, Landlord shall provide Tenant with an estimate as to the time reasonably required to repair such damage. If such period exceeds six (6) months from the date of such casualty, either party may elect to terminate this Lease by notice to the other party not later than ten (10) days following its receipt of such estimate, and thereupon the term of this Lease shall expire on the thirtieth (30th) day after such notice is given, and Tenant shall vacate and surrender the Demised Premises to Landlord. If the time period set forth in said estimate exceeds six (6) months and this Lease has not been terminated and if the Landlord does not substantially complete such repairs within the time period set forth in such estimate, then Tenant may elect to terminate this Lease by notice to Landlord within ten (10) days following the expiration of such time period, and thereupon the term of this Lease shall expire on the thirtieth (30th) day after such notice is given, and Tenant shall vacate and surrender the Demised Premises to Landlord, unless within such thirty (30) day period, Landlord substantially completes such restoration or rebuilding in which event this Lease shall remain in full force and effect. Section 10.02. No damages or compensation shall be payable by Landlord nor shall Tenant make any claim for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Building. ARTICLE 11 Assignment, Subletting, Mortgaging Section 11.01. Tenant will not, by operation of law or otherwise, assign, mortgage or encumber this Lease or sublet or permit the Demised Premises or any part thereof to be used by others, without Landlord's prior written consent in each instance. If this Lease be assigned, or if the Demised Premises or any part thereof be underlet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved, but no assignment, underletting, occupancy or collection shall be deemed a waiver of the provisions hereof, the acceptance of the assignee, undertenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Landlord to any assignment, subletting, mortgage or encumbrance shall not in any manner be construed to relieve Tenant from obtaining Landlord's express written consent to any other or further assignment, subletting, mortgage or encumbrance. In no event shall any permitted 12 sublessee assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without Landlord's prior written consent in each instance. Section 11.02. If Tenant shall at anytime or times during the term of this Lease desire to assign this Lease or sublet all or part of the Demised Premises, Tenant shall give written notice thereof to Landlord, which notice shall be accompanied by (a) a conformed or photostatic copy of the proposed assignment or sublease, the effective or commencement date, which shall be not less than twenty (20) nor more than one hundred and twenty (120) days after the giving of such notice, (b) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Demised Premises, and (c) current financial information with respect to the proposed assignee or subtenant, including, without limitation, its most recent financial report. Such notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) may, at its option, (i) sublease such space (hereinafter called the "Leaseback Space") from Tenant upon the terms and conditions hereinafter set forth (if the proposed transaction is a sublease of all or part of the Demised Premises), (ii) terminate this Lease if the proposed transaction is an assignment or a sublease (whether by one sublease or a series of related or unrelated subleases) of all or substantially all of the Demised Premises, or (iii) terminate this Lease with respect to the Leaseback Space (if the proposed transaction is a sublease of part of the Demised Premises). Said options may be exercised by Landlord by written notice to Tenant at any time within twenty (20) days after such notice has been given by Tenant to Landlord; and during such twenty (20) day period Tenant shall not assign this lease nor sublet such space to any person. Section 11.03. If Landlord exercises its option to terminate this Lease in the case where Tenant desires either to assign this Lease or sublet (whether by one sublease or a series of related or unrelated subleases) all or substantially all of the Demised Premises, then, this Lease shall end and expire on the date that such assignment or sublet was to be effective or commence, as the case may be, and the minimum rent and additional rent shall be paid and apportioned to such date and any payments with respect thereto made or to be made by Tenant to such date shall be promptly returned to or paid by Tenant, as the case may be. Section 11.04. If Landlord exercises its option to terminate this Lease in part in any case where Tenant desires to sublet part of the Demised Premises, then, (a) this Lease shall end and expire with respect to such part of the Demised Premises on the date that the proposed sublease was to commence; and (b) from and after such date the minimum rent and additional rent shall be adjusted, based upon the proportion that the rentable area of the Demised Premises remaining bears to the total rentable area of the Demised Premises; and (c) Tenant shall pay to Landlord, upon demand, the costs incurred by Landlord in physically separating such part of the Demised Premises from the balance of the Demised Premises and in complying with any laws and requirements of any public authorities relating to such separation. 13 Section 11.05. If Landlord exercises its option to sublet the Leaseback Space, such sublease to Landlord or its designee (as subtenant) shall be at the lower of (i) the rental rate per rentable square foot of minimum rent and additional rent then payable pursuant to this Lease or (ii) the rentals set forth in the proposed sublease, and shall be for the same term as that of the proposed subletting, and such sublease: (a) shall be expressly subject to all of the covenants, agreements, terms, provisions and conditions of this Lease except such as are irrelevant or inapplicable, and except as otherwise expressly set forth to the contrary in this Section; (b) Such sublease shall be upon the same terms and conditions as those contained in the proposed sublease, except such as are irrelevant or inapplicable and except as otherwise expressly set forth to the contrary in this Section; (c) Such sublease shall give the sublessee the unqualified and unrestricted right, without Tenant's permission, to assign such sublease or any interest therein and/or to sublet the Leaseback Space or any part or parts of the Leaseback Space and to make any and all changes, alterations, and improvements in the space covered by such sublease at no cost or liability to Tenant and if the proposed sublease will result in all or substantially all of the Demised Premises being sublet, grant Landlord or its designee the option to extend the term of such sublease for the balance of the term of this Lease less one (1) day; (d) Such sublease shall provide that any assignee or further subtenant, of Landlord or its designee, may, at the election of Landlord, be permitted to make alterations, decorations and installations in the Leaseback Space or any part thereof and shall also provide in substance that any such alterations, decorations and installations in the Leaseback Space therein made by any assignee or subtenant of Landlord or its designee may be removed, in whole or in part, by such assignee or subtenant, at its option, prior to or upon the expiration or other termination of such sublease provided that such assignee or subtenant, at its expense, shall repair any damage and injury to that portion of the Leaseback Space so sublet caused by such removal, and provided further that Tenant shall not be required to restore the Leaseback Space to its condition existing prior to such sublease; and (e) Such sublease shall also provide that (i) the parties to such sublease expressly negate any intention that any estate created under such sublease be merged with any other estate held by either of said parties, (ii) any assignment or subletting by Landlord or its designee (as the subtenant) may be for any purpose or purposes that Landlord, in Landlord's uncontrolled discretion, shall deem suitable or appropriate, (iii) Tenant, at 14 Tenant's expense, shall and will at all times provide and permit reasonably appropriate means of ingress to and egress from the Leaseback Space so sublet by Tenant to Landlord or its designee, (iv) Landlord, at Tenant's expense, may make such alterations as may be required or deemed necessary by Landlord to physically separate the Leaseback Space from the balance of the demised Premises and to comply with any laws and requirements of public authorities relating to such separation, and (v) that at the expiration of the term of such sublease, Tenant will accept the space covered by such sublease in its then existing condition, subject to the obligations of the sublessee to make such repairs thereto as may be necessary to preserve the premises demised by such sublease in good order and condition, and provided further that Tenant shall not be required to restore the Leaseback Space to its condition existing prior to such sublease. Section 11.06. (a) If Landlord exercises its option to sublet the Leaseback Space, Landlord shall indemnify and save Tenant harmless from all obligations under this Lease as to the Leaseback Space during the period of time it is so sublet to Landlord. (b) Performance by Landlord, or its designee, under a sublease of the Leaseback Space shall be deemed performance by Tenant of any similar obligation under this Lease and any default under any such sublease shall not give rise to a default under a similar obligation contained in this Lease, nor shall Tenant be liable for any default under this Lease or deemed to be in default hereunder if such default is occasioned by or arises from any act or omission of the tenant under such sublease or is occasioned by or arises from any act or omission of any occupant holding under or pursuant to any such sublease. (c) Tenant shall have no obligation, at the expiration or earlier termination of the term of this Lease, to remove any alteration, installation or improvement made in the Leaseback Space by Landlord. Section 11.07. In the event Landlord does not exercise an option provided to it pursuant to Section 11.02 and provided that Tenant is not in default of any of Tenant's obligations under this Lease, Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed, provided and upon condition that: (a) Tenant shall have complied with the provisions of Section 11.02 and Landlord shall not have exercised any of its options under said Section 11.02 within the time permitted therefor; 15 (b) The proposed assignee or subtenant is engaged in a business and the Demised Premises, or the relevant part thereof, will be used in a manner which (i) is limited to the use expressly permitted under Sections 4.01 and 4.02 of this Lease, and (ii) is in keeping with the then standards of the Building; (c) The proposed assignee or subtenant is a reputable person or entity with sufficient financial worth considering the responsibility involved, and Landlord has been furnished with reasonable proof thereof; (d) Neither (i) the proposed assignee or sublessee nor (ii) any person which, directly or indirectly, controls, is controlled by or is under common control with, the proposed assignee or sublessee, is then an occupant of any part of the Building; (e) The proposed assignee or sublessee is not a person with whom Landlord is currently negotiating to lease space in the Building; (f) The proposed sublease shall be in form reasonably satisfactory to Landlord and shall comply with the provisions of this Article; (g) At any one time there shall not be more than three (3) subtenants (including Landlord or its designee) in the Demised Premises; (h) Tenant shall reimburse Landlord on demand for any reasonable costs that may be incurred by Landlord in connection with said assignment or sublease, including costs incurred for obtaining financial and credit reports of the proposed assignee or subtenant, and reasonable attorneys' fees incurred in connection with the granting of any requested consent; and (i) Tenant shall not have (i) advertised the Demised Premises for subletting or assignment without prior notice to Landlord or (ii) listed the same at a rental rate less than the minimum rent or additional rent at which Landlord is then offering to lease other space in the Building. Except for any subletting by Tenant to Landlord or its designee pursuant to the provisions of this Article, each subletting pursuant to this Article shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such subletting to Landlord or any such subletting to any other subtenant and/or acceptance of rent or additional rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment for the minimum rent and additional rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and all acts and omissions of any licensee or subtenant or anyone 16 claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant further agrees that notwithstanding any such subletting, no other and further subletting of the Demised Premises by Tenant or any person claiming through or under Tenant (except as provided in Section 11.05) shall or will be made except upon compliance with and subject to the provisions of this Article. If, pursuant to the provisions of this Lease, Landlord shall decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise any of its options under Section 11.02, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all loss, liability, damages, costs and expenses (including reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or sublessee or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease, excluding any employed directly by Landlord and not claiming through Tenant or the proposed assignee or subtenant. Section 11.08. In the event that (a) Landlord fails to exercise any of its options under Section 11.02 and consents to a proposed assignment or sublease, and (b) Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within sixty (60) days after the giving of such consent, then, Tenant shall again comply with all of the provisions and conditions of Section 11.02 before assigning this Lease or subletting all or part of the Demised Premises. Section 11.09. With respect to each and every sublease or subletting authorized by Landlord under the provisions of this Lease, it is further agreed: (a) No subletting shall be for a term ending later than one day prior to the expiration date of this Lease; (b) No sublease shall be valid, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord; (c) Each sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that in the event of termination, re-entry or dispossess by Landlord under this Lease Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not (i) be liable for any previous act or omission of Tenant under such sublease, (ii) be subject to any offset, not expressly provided in such sublease, which theretofore accrued to such subtenant against Tenant, or (iii) be bound by any previous modification of such sublease or by any previous prepayment of more than one month's rent. 17 Section 11.10. If Landlord gives its consent to any assignment of this Lease or to any sublease, Tenant shall, in consideration therefor, pay to Landlord, as additional rent: (a) in the case of an assignment of this Lease or an assignment by any sublessee of any sublease, an amount equal to one-half of all sums and other considerations paid to Tenant from the assignee for such assignment or paid to Tenant by any sublessee or other person claiming through or under Tenant for such assignment, (including, but not limited to sums paid for the sale of Tenant's or sublessee's fixtures, leasehold improvements, less, in case of a sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's or sublessee's federal income tax returns). The sums payable to Landlord under this Section 11.10(a) shall be paid to Landlord as and when paid by such assignee to Tenant; and (b) in the case of a sublease by Tenant or by any sublessee or other person claiming through or under Tenant, an amount equal to one-half of the rents and charges and other consideration payable under the sublease to Tenant by the subtenant or paid to Tenant by any such sublessee or other person claiming through or under Tenant in connection with such subletting, which is in excess of the minimum rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder or such sublessee) pursuant to the terms of this Lease or such sublease (including, but not limited to sums paid for the sale or rental of Tenant's or such sublessee's, fixtures, leasehold improvements, less, in case of a sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's or sublessee's federal income tax returns). The sums payable to Landlord under this Section 11.10(b) shall be paid to Landlord as and when paid by such subtenant to Tenant. (c) For the purposes of computing the sums payable by Tenant to Landlord under subparagraphs (a) and (b) hereof, there shall be excluded from the consideration payable to Tenant by any assignee or sublessee any transfer taxes, rent concession, reasonable attorneys' fees, reasonable brokerage commissions, advertising costs and fix-up costs paid by Tenant with respect to such assignment or subletting, but only to the extent any such sums are allocable to the period of this Lease (in the case of any assignment), or the term of any sublease. Section 11.11. If Tenant or any permitted subtenant is a corporation, partnership, limited liability company or other entity, the provisions of Section 11.01 shall apply to a transfer (by one or more transfers) of a majority of the stock, partnership, membership or other ownership interests of Tenant or such subtenant as if such transfer 18 of a majority of the stock, partnership, membership or other ownership interests of Tenant or such subtenant were an assignment of this Lease; but said provisions and the provisions of Section 11.02 shall not apply to the stock of a publicly held company or to the stock of a company going public or to the issuance of stock in connection with venture capital financing, transactions with a corporation, partnership, limited liability company or other entity into or with which Tenant or such subtenant is merged or consolidated or to which substantially all of Tenant's or such subtenant's stock, ownership interests or assets are transferred or to any corporation or other entity which controls or is controlled by Tenant or such subtenant or is under common control with Tenant or such subtenant, provided that in any of such events, (i) the successor to Tenant or such subtenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (1) the net worth of Tenant or such subtenant immediately prior to such merger, consolidation or transfer, or (2) the net worth of tenant herein named on the date of this Lease or the net worth of such subtenant on the date of the sublease, and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. Section 11.12. Any assignment or transfer, whether made with Landlord's consent pursuant to Section 11.01 or without Landlord's consent pursuant to Section 11.11, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement in form and substance satisfactory to Landlord whereby the assignee shall assume the obligations of this Lease on the part of Tenant to be performed or observed, and whereby the assignee shall agree that the provisions in Section 11.01 shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect of all future assignments and transfers. The original named Tenant covenants that, notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of minimum rent and/or additional rent by Landlord from an assignee, transferee, or any other party, the original named Tenant shall remain fully liable for the payment of the minimum rent and additional rent and for the other obligations of this Lease on the part of Tenant to be performed or observed. Section 11.13. The joint and several liability of Tenant and any immediate or remote successor in interest of Tenant and the due performance of the obligations of this Lease on Tenant's part to be performed or observed shall not be discharged, released or impaired in any respect by any agreement or stipulation made by Landlord extending the time of, or modifying any of the obligations of, this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of this Lease. Section 11.14. The listing of any name other than that of Tenant, whether on the doors of the Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others. Tenant shall be entitled, initially without cost, to sixteen (16) listings on the Building directory. 19 ARTICLE 12 No Liability of Landlord and Indemnity of Tenant Section 12.01. Each party shall indemnify the other, its agents, contractors and employees against and save the other, its agents, contractors and employees harmless from any liability to and claim by or on behalf of any person, firm, governmental authority, corporation or entity for personal injury, death or property damage, arising (a) (i) from its use of the Demised Premises or from any work whatsoever done or omitted to be done by Tenant, its employees, agents, contractors, customers, invitees or visitors, or from any accident thereat, except to the extent caused by the negligence or willful act of Landlord, its agents, contractors and employees, and (ii) with respect to Landlord from any work done or omitted to be done in the Building, except to the extent caused by the negligence or willful act of Tenant, its agents, contractors or employees, and (b) from any default by Tenant under the terms, covenants and conditions of this Lease. Tenant also shall indemnify Landlord, its agents, contractors and employees against and save Landlord, its agents, contractors and employees harmless from all costs, reasonable counsel fees, expenses and penalties incurred by Landlord, its agents, contractors and employees in connection with any such liability or claim. If any action or proceeding shall be brought against Landlord in connection with any such liability or claim, Tenant, on notice from Landlord, shall defend such action or proceeding, at Tenant's expense, by counsel reasonably satisfactory to Landlord. Counsel for Tenant's insurance carrier is satisfactory. Section 12.02. Landlord shall not be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise, except if due to the negligence of Landlord, its agents, contractors or employees. Landlord and its agents shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or sub-surface or from any other place or by dampness or by any other cause of whatsoever nature, except if due to the negligence of Landlord, its agents, contractors or employees; nor shall Landlord be liable for any such damage caused by other tenants or persons in the Building or caused by operations in construction of any public or quasi-public work; nor shall Landlord be liable for any latent defect in the Demised Premises or in the building. If, at any time any windows of the Demised Premises are permanently closed, darkened or bricked up in accordance with the requirements of law or are temporarily darkened or closed by reason of repairs, alterations or maintenance by Landlord, Landlord shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement of rent nor shall the same release Tenant from its obligations 20 hereunder nor constitute an eviction. (Reference hereinabove to Landlord shall for all purposes be deemed to include the Overlandlord as defined in Article 25.) Tenant shall reimburse and compensate Landlord, as additional rent, within ten (10) days after rendition of a statement for all expenditures made by or damages or fines sustained or incurred by Landlord due to any default by Tenant under this Lease. Tenant shall give immediate notice to Landlord upon its discovery of accidents in the Demised Premises. Section 12.03. If in this Lease it is provided that Landlord's consent or approval as to any matter will not be unreasonably withheld, and it is established by a court or body having final jurisdiction thereover that Landlord has been unreasonable, the only effect of such finding shall be that Landlord shall be deemed to have given its consent or approval; but Landlord shall not be liable to Tenant in any respect for money damages by reason of withholding its consent. ARTICLE 13 Moving of Heavy Equipment Tenant shall not move any safe, heavy equipment or bulky matter, except for standard office equipment or furniture, in or out of the Building without Landlord's written consent, which shall not be unreasonably withheld. If the movement of such items requires special handling, Tenant agrees to employ only persons holding a Master Rigger's License to do said work and all such work shall be done in full compliance with the Administrative Code of the City of New York and other municipal requirements. All such movements shall be made during hours which will least interfere with the normal operations of the Building, and all damage caused by such movement shall be promptly repaired by Tenant at Tenant's expense. ARTICLE 14 Condemnation Section 14.01. In the event that the whole of the Demised Premises shall be condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title. In the event that a portion of the Demised Premises shall be so condemned or taken, then, effective as of the date of vesting of title, the rent hereunder for such part shall be equitably abated and this Lease shall continue as to such part not 21 so taken. In the event that a portion of the Building shall be so condemned or taken, then (a) if substantial structural alteration or reconstruction of the Building shall, in the reasonable opinion of Landlord, be necessary or appropriate as a result of such condemnation or taking (whether or not the Demised Premises be affected), Landlord may, at its option, terminate this Lease and the term and estate hereby granted as of the date of such vesting of title by notifying Tenant in writing of such termination within ninety (90) days of following the date on which Landlord shall have received notice of vesting of title, or (b) if Landlord does not elect to terminate this Lease, as aforesaid, this Lease shall be and remain unaffected by such condemnation or taking, except that the minimum rent and additional rent shall be abated to the extent, if any, hereinbefore provided. In the event that only a part of the Demised Premises shall be so condemned or taken and this Lease and the term and estate hereby granted are not terminated as hereinbefore provided, Landlord, out of the portion of the award allocated for such purpose and to the extent such award is sufficient, will restore with reasonable diligence the remaining portions of the Demised Premises as nearly as practicable to the same condition as it was in prior to such condemnation or taking. Section 14.02. In the event of termination in any of the cases hereinabove provided, this Lease and the term and estate hereby granted shall expire as of the date of such termination with the same effect as if that were the Expiration Date and the rent hereunder shall be apportioned as of such date. Section 14.03. In the event of any condemnation or taking hereinabove mentioned of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this Lease in Tenant, and Tenant hereby expressly assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof, and Tenant shall be entitled to receive no part of such award. ARTICLE 15 Entry, Right to Change Public Portions of the Building Section 15.01. Tenant shall permit Landlord to erect, use and maintain pipes and conduits in and through the walls, ceiling or below the floors of the Demised Premises. Landlord, or its agents or designees shall have the right, upon prior reasonable notice (except no notice in an emergency) to enter the Demised Premises for the purpose of making such repairs or alterations as Landlord shall desire, shall be required or shall have the right to make under the provisions of this Lease; and shall also have the right to enter the Demised Premises for the purpose of inspecting them or exhibiting them to prospective purchasers or lessees of the Building or to prospective mortgagees or to prospective assignees of any such mortgagees. Landlord shall be allowed to take all 22 material into and upon the Demised Premises that may be required for the repairs or alterations above mentioned without the same constituting an eviction of Tenant in whole or in part and the rent reserved shall in no wise abate while said repairs or alterations are being made. However, Landlord shall use reasonable efforts to perform such repairs or alterations in a manner to minimize interference with the normal conduct of Tenant's business therein, provided Landlord shall not be required to employ overtime or premium labor. Section 15.02. During the twelve (12) months prior to the expiration of the term of this Lease, Landlord may exhibit the Demised Premises to prospective tenants. Section 15.03. Landlord shall have the right at any time without thereby creating an actual or constructive eviction or incurring any liability to Tenant therefor, to change the arrangement or location of, but not limited to, such of the following as are not contained within the Demised Premises: entrances, passageways, doors and doorways, corridors, elevators, stairs, toilets, and other like public service portions of the Building, provided the same shall not interfere with Tenant's access to see Demised Premises. Section 15.04. Landlord shall have the right at any time to name the Building as it desires and to change any and all such names at any time thereafter. ARTICLE 16 Conditional Limitations, Etc. Section 16.01. If at any time during the term of this Lease: (a) Tenant shall file a petition in bankruptcy or insolvency or for reorganization or arrangement or for the appointment of a receiver of all or a portion of Tenant's property, or (b) Any petition of the kind referred to in subdivision (a) of this Section shall be filed against Tenant and such petition shall not be vacated or withdrawn within ninety (90) days after the date of filing thereof, or (c) Tenant shall be adjudicated a bankrupt by any court, or (d) Tenant shall make an assignment for the benefit of creditors, or (e) a permanent receiver shall be appointed for the property of Tenant by order of a court of competent jurisdiction by reason of the 23 insolvency of Tenant (except where such receiver shall be appointed in an involuntary proceeding, if he shall not be withdrawn within ninety (90) days after the date of his appointment), then Landlord, at Landlord's option, may terminate this Lease on five (5) days' notice to Tenant, and upon such termination, Tenant shall quit and surrender the Demised Premises to Landlord. Section 16.02. (a) If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code") to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment, setting forth (i) the name and address of such person, (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including, without limitation, the assurance referred to in section 365(b)(1) of the Bankruptcy Code, shall be given to Landlord by Tenant not later than twenty (20) days after receipt by Tenant but in no event later than ten (10) days prior to the date that Tenant shall made application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. (b) If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's Property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid to Landlord. (c) Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall 24 upon demand execute and deliver to Landlord an instrument confirming such assumption. (d) Nothing contained in this Section shall, in any way, constitute a waiver of the provisions of this Lease relating to assignment. Tenant shall not, by virtue of this Section, have any further rights relating to assignment other than those granted in the Bankruptcy Code. (e) Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purposes of Section 502(b)(6) of the Bankruptcy Code. (f) The term "Tenant" as used in this Section and in Section 16.01, includes any guarantor(s) of this Lease and any trustee, debtor in possession, receiver, custodian or other similar officer. Section 16.03. If this Lease shall terminate pursuant to the provisions of Section 16.01: (a) Landlord shall be entitled to recover from Tenant arrears in minimum rent and additional rent and, in addition thereto as liquidated damages, an amount equal to the difference between the minimum rent and additional rent for the unexpired portion of the term of this Lease which had been in force immediately prior to the termination effected under Section 16.01 of this Article and the fair and the reasonable rental value of the Demised Premises, on the date of termination, for the same period, both discounted at the rate of eight (8%) percent per annum to the date of termination; or (b) Landlord shall be entitled to recover from Tenant arrears in minimum rent and additional rent and, in addition thereto as liquidated damages, an amount equal to the maximum allowed by statute or rule of law in effect at the time when and governing the proceedings in which such damages are to be proved, whether or not such amount be greater or less than the amount referred to in subdivision (a) of this Section. Section 16.04. (a) If Tenant shall fail to make any payment of any minimum rent or additional rent when the same becomes due and payable, or if Tenant shall fail to cancel or discharge the lien referred to in Section 17.02, or if the Demised Premises become vacant or deserted, and if any such default shall continue for a period of five (5) days after written notice by Landlord, or 25 (b) if Tenant shall be in default in the performance of any of the other terms, covenants and conditions of this Lease, and such default shall not have been remedied within thirty (30) days after notice by Landlord to Tenant specifying such default and requiring it to be remedied; or where such default reasonably cannot be remedied within such period of thirty (30) days, if Tenant shall not have commenced the remedying thereof within such period of time and shall not be proceeding with due diligence to remedy it, then Landlord, at Landlord's election, may terminate this Lease on five (5) days' written notice to Tenant, and upon such termination Tenant shall quit and surrender the Demised Premises to Landlord. Section 16.05. If this Lease shall terminate as provided in this Article, or if Tenant shall be in default in the payment of minimum rent or additional rent when the same become due and payable and such default shall continue for a period of five (5) days after written notice by Landlord, (a) Landlord may re-enter and resume possession of the Demised Premises and remove all persons and property therefrom either by summary dispossess proceedings or by a suitable action or proceeding, at law or in equity, or by force or otherwise, without being liable for any damages therefor, and (b) Landlord may re-let the whole or any part of the Demised Premises for a period equal to, greater or less than the remainder of the then term of this Lease, at such rental and upon such terms and conditions as Landlord shall deem reasonable to any tenant it may deem suitable and for any use and purpose it may deem appropriate. Landlord shall not be liable in any respect for failure to re-let the Demised Premises or, in the event of such re-letting, for failure to collect the rent thereunder and any sums received by Landlord on a re-letting in excess of the rent reserved in this Lease shall belong to Landlord. Section 16.06. If this Lease shall terminate as provided in this Article or by summary proceedings (except as to any termination under Section 16.01), Landlord shall be entitled to recover from Tenant as damages, in addition to arrears in minimum rent and additional rent, (a) an amount equal to (i) all reasonable expenses incurred by Landlord in recovering possession of the Demised Premises and in connection with the re-letting of the Demised Premises, including, without limitation, the reasonable cost of repairing the Demised Premises, and (ii) all reasonable brokers' commissions and legal fees incurred by Landlord in re- letting the Demised Premises, which amounts set forth in this subdivision 26 (a) shall be due and payable by Tenant to Landlord at such time or times as they shall have been incurred; and (b) an amount equal to the deficiency between the minimum rent and additional rent which would have become due and payable had this Lease not terminated and the net amount, if any, of rent collected by Landlord on re-letting the Demised Premises. The amounts specified in this subdivision shall be due and payable by Tenant on the several days on which such minimum rent and additional rent would have become due and payable had this Lease not terminated. Tenant consents that Landlord shall be entitled to institute separate suits or actions or proceedings for the recovery of such amount or amounts, and Tenant hereby waives the right to enforce or assert the rule against splitting a cause of action as a defense thereto. Landlord, at its election, at any time after such termination of this Lease, may collect from Tenant and Tenant shall pay, in lieu of the sums becoming due, under the provisions of subdivision (b) of this Section, an amount equal to the difference between the minimum rent and additional rent which would have become due and payable had this Lease not terminated (from the date of the service of such notice to the end of the term of this Lease which had been in force immediately prior to any termination effected under this Article) and the then fair and reasonable rental value of the Demised Premises for the same period, both discounted to the date of the service of such notice at the rate of eight (8%) percent per annum. Section 16.07. Tenant, for itself and for all persons claiming through or under it, hereby waives any and all rights which are or may be conferred upon Tenant by any present or future law to redeem the Demised Premises after a warrant to dispossess shall have been issued or after judgment in an action of ejectment shall have been made and entered. Section 16.08. The words "re-enter" and "re-entry", as used in this Article, are not restricted to their technical legal meanings. Section 16.09. Landlord shall not be required to give any notice of its intention to re-enter, except as otherwise provided in this Lease. Section 16.10. If this Lease shall terminate as provided in this Article or by summary proceedings or otherwise, Landlord, in addition to any other rights under this Article, shall be entitled to recover as damages, (a) the reasonable cost of performing any work required to be done by Tenant under this Lease; and (b) the reasonable cost of placing the Demised Premises in the same condition as that in which Tenant is required to surrender them to Landlord under this Lease. 27 Section 16.11. In any action or proceeding brought by Landlord against Tenant, predicated on a default in the payment of minimum rent or additional rent, Tenant shall not have the right to and shall not interpose any set-off or counterclaim of any kind whatsoever, except for a mandatory counterclaim. If Tenant has any claim, Tenant shall be entitled only to bring an independent action therefor; and if such independent action is brought by Tenant, Tenant shall not be entitled to and shall not consolidate it with any pending action or proceeding brought by Landlord against Tenant for a default in the payment of minimum rent or additional rent. ARTICLE 17 Mechanic's Liens Section 17.01. If, subject to and notwithstanding Landlord's consent as required under this Lease, Tenant shall cause any changes, alterations, additions, improvements, installations or repairs to be made to or at the Demised Premises or shall cause any labor to be performed or material to be furnished in connection therewith, neither Landlord nor the Demised Premises, under any circumstances, shall be liable for the payment of any expense incurred or for the value of any work done or material furnished, and all such changes, alterations, additions, improvements, installations and repairs and labor and material shall be made, furnished and performed upon Tenant's credit alone and at Tenant's expense, and Tenant shall be solely and wholly responsible to contractors, laborers, and materialmen furnishing and performing such labor and material. Nothing contained in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, to any contractor, laborer or materialman to furnish to perform any such labor or material. Section 17.02. If, because of any act or omission (or alleged act or omission) of Tenant, any mechanic's or other lien, charge or order for the payment of money shall be filed against the Demised Premises or the Building or Landlord's estate as tenant under any ground or underlying lease (whether or not such lien, charge or order is valid or enforceable as such), Tenant, at Tenant's expense, shall cause it to be canceled or discharged of record by bonding or otherwise within ten (10) days after notice to Tenant of such filing, and Tenant shall indemnify Landlord against and save Landlord harmless from and shall pay all costs, expenses, losses, fines and penalties, including, without limitation, reasonable attorneys' fees resulting therefrom. 28 ARTICLE 18 Landlord's and Tenant's Right to Perform Obligations Section 18.01. If Tenant shall default in the performance of any of the terms, covenants and conditions of this Lease, Landlord, without being under any obligation to do so and without hereby waiving such default, may remedy such default for the account and at the expense of Tenant. Any payment made or expense incurred by Landlord for such purpose (including, but not limited to, reasonable attorneys' fees) with interest at the maximum legal rate, shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord on demand, or at Landlord's election, added to any subsequent installment or installments of minimum rent. Section 18.02. If Landlord shall fail to perform any repair or maintenance obligation required to be performed by Landlord in the Demised Premises pursuant to the provisions of this Lease, then Tenant shall give Landlord written notice (the "Repair Notice") stating the repair or maintenance obligation which affects the Demised Premises. If Landlord fails to remedy the condition set forth in the Repair Notice within thirty (30) days after such Repair Notice is given, then, to the extent such repair or maintenance may be performed by Tenant solely within the Demised Premises, Tenant may perform the same. Landlord shall reimburse Tenant for the reasonable actual costs and expenses of performing the same, within twenty (20) days after receipt from Tenant of paid receipts therefor, together with waivers of liens with respect thereto. ARTICLE 19 Covenant of Quiet Enjoyment Landlord covenants that upon Tenant paying the minimum rent and additional rent and observing and performing all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, after any applicable notice and prior to the expiration of any applicable cure period, Tenant may peaceably and quietly enjoy the Demised Premises, subject nevertheless to the terms and conditions of this Lease. ARTICLE 20 Excavation In the event that construction is to be commenced or an excavation is made or authorized for building or other purposes upon land adjacent to the Building, Tenant shall, if necessary, afford to the person or persons causing or authorized to commence 29 construction or cause such excavation or to engage in such other purpose, license to enter upon the Demised Premises for the purpose of doing such work as shall reasonably be necessary to protect or preserve the Building, from injury or damage and to support the Building and any new structure to be built by proper foundations, pinning and/or underpinning, or otherwise. ARTICLE 21 Services and Equipment Section 21.01. Landlord shall, at its cost and expense: (a) Provide operatorless passenger elevator service Mondays through Fridays from 8:00 A.M. to 6:00 P.M., holidays excepted. A passenger elevator will be available at all other times. A service elevator shall be available Mondays through Fridays, holidays excepted, only from 10:00 A.M. to 11:30 A.M. and from 2:30 P.M. to 4:30 P.M. (b) Maintain and keep in good order and repair the central heating, ventilating and air-conditioning system installed by Landlord. The system will be operated by Landlord on Mondays through Fridays, holidays excepted, from 8:30 A.M. to 5:30 P.M. (c) Provide Building standard cleaning services in the Demised Premises and public portions of the Building, except no services shall be performed Saturdays, Sundays and holidays, in accordance with Schedule "D" annexed hereto and made part hereof. Tenant, at its own cost, may utilize its own employees or outside contractors to perform additional cleaning services in the Demised Premises, provided such employees or outside contractors do not cause any labor disruption or dispute or violate Landlord's union contracts affecting the Building. However, such use of outside contractors shall be subject to the right of Landlord to match the costs chargeable by such outside contractors, in which event Landlord shall perform such services at such cost, to be paid by Tenant within ten (10) days after being billed therefor. (d) Furnish hot and cold water for lavatory and drinking purposes. If Tenant requires, uses or consumes water for any other purposes, Landlord may install a meter or meters or other means to measure Tenant's water consumption, and Tenant shall reimburse Landlord for the cost of the meter or meters and the installation thereof, and shall pay for the maintenance of said meter equipment and/or pay Landlord's cost of other means of measuring such water consumption by Tenant. Tenant shall pay 30 to Landlord on demand the cost of all water consumed as measured by said meter or meters or as otherwise measured, including sewer rents. (e) If Tenant shall require and request any of the foregoing services at times other than above provided, and if such request is made at least twenty-four (24) hours prior to the time when such additional services are required, Landlord will provide them and Tenant shall pay to Landlord promptly thereafter the charges therefor at the then Building standard rate charged to other tenants in the Building. If Tenant shall request Landlord to furnish any services in addition to those hereinabove provided or perform any work not required under this Lease, and Landlord agrees to furnish and/or perform the same, Tenant shall pay to Landlord promptly thereafter the charges therefor, which charges are deemed to be additional rent and payable as such. Section 21.02. Holidays shall be deemed to mean all federal holidays, state holidays, Building Service Employees Union Contract holidays and all other applicable union contract holidays. Section 21.03. Landlord reserves the right to interrupt, curtail or suspend the services required to be furnished by Landlord under this Lease when the necessity therefor arises by reason of accident, emergency, mechanical breakdown, or when required by any law, order or regulation of any Federal, State, County or Municipal authority, or for any other cause beyond the reasonable control of Landlord. Tenant shall not be entitled to nor shall Tenant make claim for any diminution or abatement of minimum rent or additional rent or other compensation, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of such interruption, curtailment, suspension, work or inconvenience. Section 21.04. Tenant shall reimburse Landlord promptly upon demand for the cost to Landlord of removal from the Demised Premises and the Building of any refuse and rubbish of Tenant not covered by the Cleaning Specifications and Tenant shall pay all bills therefor when rendered. ARTICLE 22 Escalation Section 22.01. Taxes. Tenant shall pay to Landlord, as additional rent, tax escalation in accordance with this Section: (a) Definitions: For the purpose of this Section, the following definitions shall apply: 31 (i) The term "Tax Base Factor" shall mean the real estate taxes for the Building Project for the period from July 1, 2000 to June 30, 2001, (as finally determined). (ii) The term "The Building Project" shall mean the parcel of land described in Schedule C of this Lease with all improvements erected thereon. (iii) The term "comparative tax year" shall mean the New York City real estate tax year commencing on July 1, 2001, and each subsequent New York City real estate tax year. If the present use of July 1 - June 30 New York City real estate tax year shall hereafter be changed, then such changed tax year shall be used with appropriate adjustment for the transition. (iv) The term "real estate taxes" shall mean the total of all taxes, special or other assessments and charges of any Special Business Improvement District levied, assessed or imposed at any time by any governmental authority upon or against the Building Project, and also any tax or assessment levied, assessed or imposed at any time by any governmental authority in connection with the receipt of income or rents from said Building Project to the extent that same shall be in lieu of all or a portion of any of the aforesaid taxes or assessments, or additions or increases thereof, upon or against said Building Project, excluding income, estate and franchise taxes. If, due to a future change in the method of taxation or in the taxing authority, or for any other reason, a franchise, income, transit, profit rents or other tax or governmental imposition, however designated, shall be levied against Landlord in substitution in whole or in part for the real estate taxes, or in lieu of or additions to or increases of said real estate taxes, then such franchise, income, transit, profit or other tax or governmental imposition shall be deemed to be included within the definition of "real estate taxes" for the purposes hereof. If, by law, any assessment may be paid in installments, then, for the purpose hereof (a) such assessment shall be deemed to have been payable in the maximum number of installments permitted by law and (b) there shall be included in real estate taxes for each comparative year in which such installments may be paid, the installments of such assessment so becoming payable during such comparative tax year, together with interest payable during such comparative tax year. 32 (v) The term "the Percentage" for purposes of computing tax escalation, shall mean 4.85%. (b) (i) In the event that the real estate taxes payable for any comparative tax year shall exceed the Tax Base Factor, Tenant shall pay to Landlord, as additional rent for such comparative tax year, an amount for tax escalation equal to the Percentage of the excess. Before or after the start of each comparative year, Landlord shall furnish to Tenant a statement of the real estate taxes payable for such comparative tax year. Tenant shall make its aforesaid tax escalation payment to Landlord, in installments in the same manner that such taxes are payable by Landlord to the governmental authority. If a statement is furnished to Tenant after the commencement of the comparative tax year in respect of which such statement is rendered, Tenant shall, within ten (10) days thereafter, pay to Landlord an amount equal to those installments of the total tax escalation payable as provided in the preceding sentence, during the period prior to the first day of the month next succeeding the month in which the applicable statement has been furnished. If, during the term of this Lease, taxes are required to be paid, in full or in monthly or other installments, on any other date or dates than as presently required, or if Landlord shall be required to make monthly deposits of real estate taxes to the holder of any first institutional mortgage then Tenant's tax escalation payment(s) shall be correspondingly adjusted so that said payments are due to Landlord in corresponding installments not later than thirty (30) days prior to the last date on which the applicable installment of such real estate taxes shall be due and payable to the governmental authority or such mortgagee. (ii) If in establishing the amount of the real estate taxes payable for any comparative tax year, Landlord has incurred expenses for legal and/or consulting services rendered in, applying for, negotiating or obtaining a reduction of the assessment upon which the real estate taxes are predicated, Tenant shall pay an amount equal to the Percentage of such expenses. (iii) The statements of the tax escalation to be furnished by Landlord as provided above shall be certified by Landlord as correct and shall constitute a final determination as between Landlord and Tenant of the tax escalation for the periods represented thereby, except for manifest error. 33 (iv) In no event shall the fixed minimum rent under this Lease be reduced by virtue of this Section 22.01. (v) Upon the date of any expiration or termination of this Lease, whether the same be the date hereinabove set forth for the expiration of the term or any prior or subsequent date, a proportionate share of said additional rent for the comparative tax year during which such expiration or termination occurs shall immediately become due and payable by Tenant to Landlord, if it was not theretofore already billed and paid. The said proportionate share shall be based upon the length of time that this Lease shall have been in existence during such comparative tax year. Prior to or promptly after said expiration or termination, Landlord shall compute the additional rent due from Tenant, as aforesaid and Tenant shall promptly pay Landlord any amount unpaid. If Landlord shall receive a refund of any amount of real estate taxes for any comparative tax year for which Tenant has made a payment, Landlord shall promptly pay to Tenant the Percentage of any such refund, less the Percentage of any legal fees and other expenses provided for in Section 22.01 (b)(ii) to the extent the same have theretofore been paid by Tenant to Landlord. (vi) Tenant's and Landlord's obligations to make the adjustments referred to in subdivision (v) above shall survive any expiration or termination of this Lease. (vii) Any delay or failure of Landlord in billing any tax escalation hereinabove provided shall not constitute a waiver of or in any way impair the continuing obligation of Tenant to pay such tax escalation hereunder. (viii) Notwithstanding any language to the contrary contained in this Lease, Landlord and Tenant agree that for the purposes of this Section 22.01, Real Estate Taxes and Tax Escalation Payments shall be calculated without regard to any deductions, credits, abatements, or deferral of Real Estate Taxes which Landlord may receive pursuant to Sections 11.256 through 11-267 of the Administrative Code of the City of New York, authorized by Title 2-D of Article 4 of the New York real Property Tax Law and any and all rules and regulations promulgated thereunder (herein collectively called the "ICIP Program"). 34 Section 22.02. Porter's Wage Rate. Tenant shall pay to the Landlord, as additional rent, a porters wage rate escalation in accordance with this Section: (a) For the purpose of this Section, the following definitions shall apply: (i) "Wage Rate" shall mean the minimum regular hourly rate of wages in effect as of January 1st of each year (whether paid by Landlord or any contractor employed by Landlord) computed as paid over a forty hour week to Porters in Class A office buildings pursuant to an Agreement between Realty Advisory Board on Labor Relations, Incorporated, or any successor thereto, and Local 32B-32J of the Building Service Employees International Union, AFL-CIO, or any successor thereto; and provided, however, that if there is no such agreement in effect prescribing a wage rate for Porters, computations and payments shall thereupon be made upon the basis of the regular hourly wage rate actually payable in effect as of January 1st of each year, and provided, however, that if in any year during the term, the regular employment of Porters shall occur on days or during the hours when overtime or other premium pay rates are in effect pursuant to such Agreement, then the term "hourly rate of wages" as used herein shall be deemed to mean the average hourly rate for the hours in a calendar week during which Porters are regularly employed (e.g., if pursuant to an agreement between Realty Advisory Board and the Local the regular employment of Porters for forty hours during a calendar week is at a regular hourly wage rate of $3.00 for the first thirty hours, and premium or overtime hourly wage rate of $4.50 for the remaining ten hours, then the hourly rate of wages under this Article during such period shall be the total weekly rate of $135.00 divided by the total number of regular hours of employment, forty or $3.375). Notwithstanding the foregoing, if at any time such hourly wage rate is different for new hire and old hire Porters, then thereafter such hourly wage rate shall be based on the weighted average of the wage rates for the different classifications of Porters. (ii) "Base Wage Rate" shall mean the Wage Rate in effect on January 1, 2000. (iii) The term "Porters" shall mean that classification of non-supervisory employees employed in and about the Building who devote a major portion of their time to 35 general cleaning, maintenance and miscellaneous services essentially of a non-technical and non-mechanical nature and are the type of employees who are presently included in the classification of "Class A--Others" in the Commercial Building Agreement between the Realty Advisory Board and the aforesaid Union. (iv) The term "minimum regular hourly rate of wages" shall not include any payments for fringe benefits or adjustments of any kind. (v) The term "Multiplication Factor" shall mean 16,000. (b) If the Wage Rate for any calendar year during the term shall be increased above the Base Wage Rate, then Tenant shall pay, as additional rent, an amount equal to the product obtained by multiplying the Multiplication Factor by 100% of the number of cents (including any fraction of a cent) by which the Wage Rate is greater than the Base Wage Rate, such payment to be made in equal one-twelfth (1/12th) monthly installments commencing with the first monthly installment of minimum rent falling due on or after the effective date of such increase in Wage Rate (payable retroactive from said effective date) and continuing thereafter until a new adjustment shall have become effective in accordance with the provisions of this Article. Landlord shall give Tenant notice of each change in Wage Rate which will be effective to create or change Tenant's obligation to pay additional rent pursuant to the provisions of this Section 22.02 and such notice shall contain Landlord's calculation in reasonable detail and certified as true by an authorized partner of Landlord or of its managing agent, of the annual rate of additional rent payable resulting from such increase in Wage Rate. Such amounts shall be prorated for any partial calendar years during the term. (c) Every notice given by Landlord pursuant to Section 22(b) hereof shall be conclusive and binding upon Tenant, except for manifest error. (d) Any delay or failure of Landlord in billing any wage rate escalation hereinabove provided shall not constitute a waiver of or in any way impair the continuing obligation of Tenant to pay such wage rate escalation. (e) The "Wage Rate" is intended to be a substitute comparative index of economic costs and does not necessarily reflect the actual costs of wages or other expenses of operating the Building. The Wage Rate shall be used whether or not the Building is a Class A office 36 building and whether or not Porters are employed in the Building and without regard to whether such employees are members of the Union referred to in subsection (a) hereof. ARTICLE 23 Electric Inclusion Section 23.01 (a) Landlord shall furnish electric energy on a rent inclusion basis to the Demised Premises, the charges therefor being included in the minimum rent. The amount included in the minimum rent is based upon the normal use of such electric energy between the hours of 8:00 A.M. to 6:30 P.M. on Mondays through Fridays, holidays excepted, for lighting and for the normal use of lamps, typewriters, personal computers and similar customary office machines. Landlord shall not be liable in any way for any loss, damage or expense that Tenant may sustain or incur by reason of for any failure, change, interruption or defect in the supply or character of electric energy furnished to the Demised Premises by reason of any requirement, act or omission of the Electric Service Provider or Alternate Service Provider (as said terms are hereinafter defined) serving the Building with electricity and no such failure, change, interruption or defect shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement of minimum rent or additional rent or relieve Tenant of its obligations under this Lease. Tenant shall furnish and install, at its sole cost and expense, all lighting fixtures, tubes, lamps, bulbs, ballasts and outlets relating to Tenant's electrical equipment. (b) Landlord has advised Tenant that presently Con Edison ("Electric Service Provider") is the utility company selected by Landlord to provide electricity service for the Building. Notwithstanding the foregoing, if permitted by law, Landlord shall have the right at any time and from time to time during the term of this Lease to either contract for service from a different company or companies providing electricity service (each such company shall hereinafter be referred to as an "Alternate Service Provider") or continue to contract for service from the Electric Service Provider. (c) Tenant shall cooperate with Landlord, the Electric Service Provider, and any Alternate Service Provider at all times and, as reasonably necessary, shall allow Landlord, Electric Service Provider, and any Alternate Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, and any other machinery within the Demised Premises. 37 Section 23.02. Tenant's connected electrical load in the Demised Premises, including lighting, shall not at any time exceed the capacity of any of the electrical conductors and equipment in or serving the Demised Premises. Landlord represents that such capacity is five (5) watts per usable square foot (excluding Building HVAC. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building electric service, Tenant shall not, without Landlord's prior consent in each instance, connect any additional fixtures, appliances or equipment (other than as set forth in Section 23.01) or make any alteration or addition to the electric system of the Demised Premises existing on the Commencement Date. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant upon Landlord's demand. As a condition to granting such consent, Landlord may require Tenant to agree to an increase in the annual minimum rent by an amount which will reflect the value to Tenant of the additional service to be furnished by Landlord, that is the potential additional electrical energy to be made available to Tenant based upon the estimated additional capacity of such additional risers or other equipment. If Landlord and Tenant cannot agree thereon, the amount of such increase shall be determined by a reputable, independent electrical engineer or consultant, to be selected by Landlord whose fees or charges shall be paid by Tenant. When the amount of such increase is so determined, Tenant shall pay to Landlord within twenty (20) days following notification to Tenant of such determination the amount thereof retroactive to the date of such increased usage, unless within such twenty (20) day period Tenant disputes such determination. If Tenant disputes such determination, it shall, at its own expense, obtain from a reputable, independent electrical engineer or consultant, its own survey of the additional electrical energy consumed by Tenant. Tenant's consultant and Landlord's consultant shall then seek to agree on a finding of such determination of such change in the consumption of electrical energy. If they cannot agree, they shall choose a third reputable, independent electrical engineer or consultant, whose cost shall be shared equally by Landlord and Tenant, to make a similar survey, and the determination of such third consultant shall be controlling. If they cannot agree on such third consultant, within ten (10) days, then either party may apply to the Supreme Court in the County of New York, for the appointment of such third consultant. However, pending such determination, Tenant shall pay to Landlord the amount as determined by Landlord's engineer or consultant. If the amount determined as aforesaid is different from that determined by Landlord's engineer or consultant, then Landlord and Tenant shall make adjustment for any deficiency owed by Tenant or overage paid by Tenant. Following the final determination, the parties shall execute an agreement supplementary hereto to reflect such increase in the annual minimum rent and in the amount set forth in Section 23.03; but such increase shall be effective even if such supplementary agreement is not executed. Section 23.03. If, during the term of this Lease, the public utility rate paid by Landlord for the supply of electric current to the Building shall be increased or decreased or if there shall be an increase or decrease in taxes or if additional taxes shall be imposed upon the sale or furnishing of such electric energy (hereafter collectively as the "cost") the annual minimum rent shall be increased or decreased by an amount arrived at by multiplying $48,000 (or the sum to which said sum may have been increased or 38 decreased pursuant to the provisions of Section 23.02 or this Section 23.03 prior to the effective date of the cost increases or decreases; such sum being referred to herein as the "Rent Inclusion Factor") by the percentage of the increase or decrease of such cost. When the amount of such increase or decrease is so determined, Landlord and Tenant shall execute an agreement supplementary hereto to reflect such increase or decrease in the amount of the minimum rent payable and effective from the effective date of such increase, but such increase shall be effective from such date whether or not such a supplementary agreement is executed. Notwithstanding the foregoing provisions of this Section 23.03, the Rent Inclusion Factor shall never be less than $48,000.00 Section 23.04. Landlord reserves the right to discontinue furnishing electric energy at any time, whether or not Tenant is in default under this Lease, upon not less than thirty (30) days' notice to Tenant. If Landlord exercises such right of discontinuance, this Lease shall continue in full force and effect and shall be unaffected thereby, except only that, from and after the effective date of such discontinuance, Landlord shall not be obligated to furnish electric energy to Tenant, and the minimum rent payable under this Lease shall be reduced by an amount per annum equal to the then prevailing Rent Inclusion Factor. If Landlord so elects to discontinue furnishing electric energy to Tenant, Tenant shall arrange to obtain electric energy directly from the Electric Service Provider furnishing electric service to the Building or the Alternate Service Provider. Notwithstanding the foregoing, Landlord shall not discontinue furnishing electric energy until Tenant is able to obtain such electric energy directly from said Electric Service Provider or the Alternate Service Provider. Such electric energy may be furnished to Tenant by means of the then existing Building system feeders, risers and wiring. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electric energy directly from such public utility company, and which are to be located within the Demised Premises, shall be installed and maintained by Tenant at its expense. Section 23.05. At no time shall Tenant's connected electrical load in the Demised Premises, including lighting, exceed five (5) watts per usable square foot. ARTICLE 24 Broker Landlord and Tenant covenant and represent that the sole brokers who negotiated and brought about this transaction were Cushman & Wakefield, Inc. and Cohen Brothers Realty Corporation and Landlord agrees to pay a commission therefor as per separate agreements. Landlord and Tenant agree to hold the other harmless against any claims for a brokerage commission arising out of a breach by the other of the representations contained in this Article. 39 ARTICLE 25 Subordination and Ground Lease Section 25.01. This Lease is subject and subordinate to (a) the ground and underlying lease, dated as of May 1, 1967 between Southern Associates, Inc., as landlord, and Sherman Cohen, Mortimer H. Cohen and Edward B. Cohen, as tenant, (the "Ground Lease") a memorandum of which was recorded in the Office of the City Register, New York County, in Reel 181, Page 194 and to the rights of the landlord thereunder (the landlord under said Ground Lease being sometimes referred to in this Lease as the "Overlandlord"), (b) any other future ground and underlying lease, and (c) to a leasehold mortgage, dated October 3, 1989 (the "Leasehold Mortgage"), between 475 Park Avenue So. Co., et al., as Mortgagor, and Mutual Life Insurance Company of New York, as Mortgagee, recorded on October 5, 1988, in the Office of the City Register, New York County, in Reel 1474, Page 782, and (d) to all mortgages which may now or hereafter affect any such ground and underlying lease or the Building, and to all renewals, modifications, amendments, consolidations, replacements or extensions of any of the foregoing (hereinafter collectively called the "Mortgages"). This clause shall be self-operative and no further instrument of subordination shall be required. However, in confirmation of such subordination, Tenant, at any time and from time to time, shall execute promptly any certificate and document that Landlord may request, which reasonably evidences such subordination, and Tenant hereby irrevocably constitutes and appoints Landlord attorney-in-fact for Tenant to execute any such instrument for and on behalf of Tenant if not so executed and delivered by Tenant within fifteen (15) days after such request. Notwithstanding the foregoing, Landlord agrees to request from the existing Overlandlord and the existing mortgagee an agreement ("non-disturbance and adornment agreement"), providing in substance that Tenant's possession of and rights in the Demised Premises shall remain undisturbed, so long as Tenant is not in default under the provisions of this Lease, and providing that Tenant agrees in said instrument to attorn to such Overlandlord or mortgagee as its Landlord under this Lease. However, Landlord shall have no liability or responsibility to Tenant if Landlord is unable to obtain either one or both of said non-disturbance and adornment agreements and this Lease shall remain subject and subordinate to said Ground Lease and/or Leasehold Mortgage. Concurrently with the execution of this Lease Tenant has executed a non-disturbance and attornment agreement with respect to the existing Overlandlord and existing mortgagee. Landlord shall also request from the lessor under any future ground lease or the holder of any future mortgage a non- disturbance and attornment agreement in the then customary form of such lessor or mortgagee, provided this Lease shall remain subject and subordinate to such future mortgage or ground lease notwithstanding that Landlord may not be able to obtain a non-disturbance and attornment agreement from either one or both of said parties. 40 Section 25.02. (a) The Tenant covenants and agrees that if by reason of a default under any ground or underlying lease (including an underlying lease through which the Landlord derives its leasehold estate in the Demised Premises), or under the Leasehold Mortgage or any Mortgage, such ground or underlying lease and the leasehold estate of the Landlord in the premises demised hereby is terminated, the Tenant will attorn to the then holder of the reversionary interest in the premises demised by this Lease and will recognize such holder as the Tenant's Landlord under this Lease, unless, subject to any non-disturbance and adornment agreement, the lessor under such ground or underlying lease or the holder of any such Mortgage shall, in any proceeding to terminate such ground or underlying lease or foreclosure of such Mortgage, elect to terminate this Lease and the rights of Tenant hereunder; provided, however, the holder of the reversionary interest shall not be: (i) liable for any act or omission or negligence of Landlord under this Lease; (ii) subject to any counterclaim, defense or offset, which theretofore shall have accrued to Tenant against Landlord; (iii) obligated to perform any work; (iv) bound by any previous modification or amendment of this Lease or by any previous prepayment of more than one months' rent, unless such modification or prepayment shall have been approved in writing by the holder of such Mortgage; (v) obligated to repair the Demised Premises, or the Building, or any part thereof, in the event of any damage beyond such repair as can reasonably be accomplished from the net proceeds of insurance actually made available to the then holder of the reversionary interest; or (vi) obligated to repair the Demised Premises or the Building, or any part thereof, in the event of partial condemnation beyond such repair as can reasonably be accomplished from the net proceeds of any award actually made available to the then holder of the reversionary interest on account of partial condemnation of the Demised Premises or the Building. By execution of this Lease, Tenant acknowledges that is has received sufficient notice of the existence and text of Article 8 of the Leasehold Mortgage to confer upon the Mortgagee of same only the benefits of Section 291-f of the Real Property Law of the State of New York. Tenant agrees to execute and deliver, at any time and from time to time, within fifteen (15) days after the request of the Landlord of or the lessor under any such ground or underlying lease or the holder of any such Mortgage any instrument which may be necessary or appropriate to evidence such adornment, and Tenant hereby irrevocably constitutes and appoints Landlord attorney-in-fact for Tenant to execute any such instrument for and on behalf of Tenant, if not so executed and delivered within such fifteen (15) day period. Tenant further waives the provisions of any statute or rule or law now or hereafter in effect which may give or purport to give Tenant any right of election to terminate this Lease or to surrender possession of the premises demised hereby in the event any proceeding is brought by the lessor under any such ground or 41 underlying lease or the holder of any such Mortgage to terminate the same, and agrees that, subject to any non-disturbance and adornment agreement, unless and until any such lessor, in connection with any such proceeding, shall elect to terminate this Lease and the rights of Tenant hereunder, this Lease shall not be affected in any way whatsoever by any such proceeding. (b) Upon its receipt of a written notice from the lessor under any ground or underlying lease or the holder of any such Mortgage to the effect that (i) the lessor of said ground or underlying lease or the holder of any such Mortgage is entitled to send a notice to Landlord, as tenant under said ground or underlying lease, terminating said lease, and (ii) the Tenant should pay the minimum rent and additional rent thereafter due and payable under this Lease to said lessor or the holder of any such Mortgage at a place designated in such notice, Tenant shall pay such minimum rent and additional rent to said lessor under said ground or underlying lease or the holder of any such Mortgage at such designated place until such time as said lessor or the holder of any such Mortgage shall notify Tenant that Landlord is no longer in default under said ground or underlying lease or said Mortgage and that Tenant may resume paying all minimum rent and additional rent thereafter due and payable under this Lease to Landlord. Tenant shall have no liability to Landlord for paying any minimum rent or additional rent to said lessor under the ground or underlying lease or the holder of any such Mortgage or otherwise acting in accordance with the provisions of any notice sent to it under this paragraph and shall be relieved of its obligations to pay Landlord any minimum rent or additional rent under this Lease to the extent such payments are made to said lessor under the ground or underlying lease or the holder of any such Mortgage. Section 25.03. In the event of any act or omission by Landlord which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, pursuant to the terms of this Lease, Tenant will not exercise any such right until: (a) it has given written notice of such act or omission to the holder of any Mortgage and to the lessor of any ground or underlying lease, whose names and addresses shall previously have been furnished to Tenant in accordance with Article 31, addressed to such holder and lessor at the last addresses so furnished, and (b) a reasonable period (not to exceed the period in the ground lease or the Mortgage, as the case may be) for remedying such act or omission shall have elapsed following such giving of notice during which such parties, or any of them, with reasonable diligence, following the giving of such notice, shall not have commenced and is or are not continuing to remedy such act or omission or to cause the same to be remedied. 42 Section 25.04. If, in connection with obtaining financing for the Building, or of Landlord's interest in any ground or underlying lease, a banking, insurance or other recognized institutional lender shall request modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto and its execution and delivery of such modification agreement, provided that such modifications do not increase the obligations of Tenant hereunder or adversely affect the leasehold interest hereby created or reduce Tenant's rights hereunder. ARTICLE 26 Estoppel Certificate Tenant shall at any time, and from time to time, within fifteen (15) days after so requested by Landlord, execute, acknowledge and deliver to Landlord, a statement addressed to Landlord or its designee stating (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (b) stating the dates to which the minimum rent and additional rent have been paid, (c) stating whether or not there exists any default by Landlord, and, if so, specifying each such default, and (d) such other information requested by Landlord or the Mortgagee that pertains to the status of this Lease or the performance of obligations under this Lease as to which Tenant has actual knowledge, it being intended that any such statement may be relied upon by Landlord and parties with whom it may be dealing, including any mortgagee or prospective mortgagee of any mortgage affecting the Building or the leasehold estate under any ground or underlying lease affecting the land described in Schedule B and/or Building and improvements thereon, or may be relied upon by the landlord under any such ground or underlying lease or a purchaser of Lessee's estate under any such ground or underlying lease or any interest therein. ARTICLE 27 Waiver of Jury Trial Tenant hereby waives trial by jury in any proceeding, action or counterclaim that may hereafter be instituted against it on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord or Tenant, Tenants use or occupancy of the Demised Premises, including any claims for injury or damage, or any emergency or other statutory remedy with respect thereto. 43 ARTICLE 28 Surrender of Premises Section 28.01. Upon the expiration or other termination of the term of this Lease, Tenant shall quit and surrender the Demised Premises in good order and condition, ordinary wear and tear and damage by the elements, fire or other casualty or any other cause for which Tenant might not be liable excepted, and shall remove all its property therefrom, except as otherwise provided in this Lease. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this Lease. Section 28.02. In the event Tenant shall remain in possession of the Demised Premises after the expiration or other termination of the term of this Lease, such holding over shall not constitute a renewal or extension of this Lease. Landlord, may, at its option, elect to treat Tenant as one who is not removed at the end of the term, and thereupon be entitled to all of the remedies against Tenant provided by law in that situation or Landlord may elect to construe such holding over as a tenancy from month-to-month, subject to all of the terms and conditions of this Lease, except as to the duration thereof, and the minimum rent shall be due, in either of such events, at a monthly rental rate equal to two (2) times the monthly installment of minimum rent which would otherwise be payable for such month, together with any and all additional rent. ARTICLE 29 Rules and Regulations Section 29.01. Tenant, its servants, employees, agents, visitors and licensees shall observe faithfully and comply with the rules and regulations set forth in Schedule "C" attached hereto and made a part hereof. Landlord shall have the right from time to time during the term of this Lease to make reasonable changes in and additions to the rules thus set forth. All rules and regulations shall be enforced in a non-discriminatory manner against Tenant. Section 29.02. Any failure by Landlord to enforce any rules and regulations now or hereafter in effect, either against Tenant or any other tenant in the Building, shall not constitute a breach hereunder or waiver of any such rules and regulations. 44 ARTICLE 30 Successors and Assigns and Definitions Section 30.01. The covenants, conditions and agreements contained in this Lease shall bind and enure to the benefit of Landlord and Tenant and their respective distributees, legal representatives, successors and, except as otherwise provided herein, their assigns. Section 30.02. The term "Landlord" as used in this Lease, so far as the covenants and agreements on the part of Landlord are concerned shall be limited to mean and include only the owner or owners at the time in question of the tenant's estate under the Ground Lease or under any ground or underlying lease covering the land described in Schedule B hereto annexed and/or the Building and improvements thereon. In the event of any assignment or assignments of such tenant's estate, and regardless of whether the assignee is financially responsible or solvent and not notwithstanding that the assignor may be a stockholder, officer or director of a corporate assignee or may be associated directly or indirectly with the assignee, Landlord herein named (and in case of any subsequent assignment, the then assignor) shall be automatically freed and relieved from and after the date of such assignment of all personal liability as respects to performance of any of Landlord's covenants and agreements thereafter to be performed, and such assignee shall, by acceptance of such assignment, be bound by all of such covenants and agreements and the assignee shall assume in writing the Landlord's obligations hereunder; it being intended that Landlord's covenants and agreements shall be binding on Landlord, its successors and assigns only during and in respect of their successive periods of such ownership. Notwithstanding the foregoing, Landlord shall not be relieved of any liability with respect to any security deposited with and held by Landlord until said security is transferred to such assignee. However, in any event, Landlord shall not have any personal liability or obligation by reason of any default by Landlord under any of Landlord's covenants and agreements in this Lease, and in case of such default, Tenant will look only to Landlord's estate, as tenant under the Ground Lease or under any ground or underlying lease, covering the land described in Schedule B, to recover any loss or damage resulting therefrom; and Tenant shall have no right to nor shall Tenant assert any claim against nor have recourse to Landlord's other property or assets to recover such loss or damage. Section 30.03. All pronouns or any variation thereof shall be deemed to refer to masculine, feminine or neuter, singular or plural as the identity of the person or persons may require; and if Tenant shall consist of more than one (1) person, the obligations of such persons, as Tenant, under this Lease, shall be joint and several. Section 30.04. The definitions contained in Schedule E annexed hereto are hereby made a part of this Lease. 45 ARTICLE 31 Notices Any notice, statement, certificate, request, approval, consent or demand required or permitted to be given under this Lease shall be in writing sent by registered or certified mail (or reputable, commercial overnight courier service), return receipt requested and postage prepaid, addressed, as the case may be, to Landlord, at 750 Lexington Avenue, New York, New York 10022, and to Tenant, prior to the Commencement Date at 250 Executive Park Blvd., Suite 4000, San Francisco, California, and after the Commencement Date, at the Demised Premises, or to such other addresses as Landlord or Tenant respectively shall designate in the manner herein provided. Such notice, statement, certificate, request, approval, consent or demand shall be deemed to have been given on the date when received, as aforesaid, or on the date of delivery (or refusal to accept delivery) by overnight courier. ARTICLE 32 No Waiver; Entire Agreement Section 32.01. The specific remedies to which Landlord may resort under the provisions of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may be lawfully entitled in case of any breach or threatened breach by Tenant of any of the terms, covenants and conditions of this Lease. The failure of Landlord to insist upon the strict performance of any of the terms, covenants and conditions of this Lease, or to exercise any right or remedy herein contained, shall not be construed as a waiver or relinquishment for the future of such term, covenant, condition, right or remedy. A receipt by Landlord of minimum rent or additional rent with knowledge of the breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such breach. This Lease may not be changed or terminated orally. In addition to the other remedies in this Lease provided, Landlord shall be entitled to restraint by injunction of the violation or attempted or threatened violation of any of the terms, covenants and conditions of this Lease or to a decree, any court having jurisdiction in the matter, compelling performance of any such terms, covenants and conditions. Section 32.02. No receipt of monies by Landlord from Tenant, after any re-entry or after the cancellation or termination of this Lease in any lawful manner, shall reinstate the Lease; and after the service of notice to terminate this Lease, or after commencement of any action, proceeding or other remedy, Landlord may demand, receive and collect any monies due, and apply them of account of Tenant's obligations under this Lease but without in any respect affecting such notice, action, proceeding or remedy, 46 except that if a money judgment is being sought in any such action or proceeding, the amount of such judgment shall be reduced by such payment. Section 32.03. If Tenant is in arrears in the payment of minimum rent or additional rent, Tenant waives its right, if any, to designate the items in arrears against which any payments made by Tenant are to be credited and Landlord may apply any of such payments to any such items in arrears as Landlord, in its sole discretion, shall determine, irrespective of any designation or request by Tenant as to the items against which any such payments shall be credited. Section 32.04. No payment by Tenant nor receipt by Landlord of a lesser amount than may be required to be paid hereunder shall be deemed to be other than on account of any such payment, nor shall any endorsement or statement on any check or any letter accompanying any check tendered as payment be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such payment due or pursue any other remedy in this Lease provided. Section 32.05. This Lease and the Schedules annexed hereto constitute the entire agreement between Landlord and Tenant referable to the Demised Premises, and all prior negotiations and agreements are merged herein. Section 32.06. 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. Section 32.07. Tenant acknowledges that Landlord will contract or has contracted with one or more providers of telecommunications services for the installation of cable, wire and related electrical, electronic or mechanical devices in the Building sufficient to provide telecommunications services to the Demised Premises, and Tenant agrees to engage such a provider, as designated by Landlord, to provide such services, unless another provider selected by Tenant and approved by Landlord agrees to provide such services to Tenant at a lower cost than the provider designated by Landlord. In such event Landlord shall have the right to cause the service provider designated by Landlord to match the cost chargeable by the provider selected by Tenant, in which event Tenant agrees to engage the provider designated by Landlord. Section 32.08. It is understood and agreed that this Lease is submitted to Tenant on the understanding that it shall not be considered an offer and shall not bind Landlord in any way whatsoever until (i) Tenant has duly executed and delivered duplicate originals to Landlord, and (ii) Landlord has executed and delivered one of said fully executed originals to Tenant. 47 ARTICLE 33 Captions The captions of Articles in this Lease are inserted only as a matter of convenience and for reference and they in no way define, limit or describe the scope of this Lease or the intent of any provision thereof. ARTICLE 34 Inability to Perform If the performance or observance by Landlord or Tenant of any of the terms, covenants and conditions of this Lease on the part of Landlord or Tenant to be performed shall be delayed by reason of unavoidable delays (as hereinafter defined), then the time for the performance or observance thereof shall be extended for the period of time as Landlord or Tenant shall have been so delayed, provided Tenant shall continue, notwithstanding unavoidable delays, to be obligated to pay minimum rent and additional rent without abatement. The words "unavoidable delays", as used in this Lease shall mean (a) the enactment of any law or issuance of any governmental order, rule or regulation (i) prohibiting or restricting performance of work of the character required to be performed by Landlord under this Lease, or (ii) establishing rationing or priorities in the use of materials, or (iii) restricting the use of labor, and (b) strikes, lockouts, acts of God, inability to obtain labor or materials, enemy action, civil commotion, fire, unavoidable casualty or other similar types of causes beyond the reasonable control of Landlord, other than financial inability. ARTICLE 35 No Representations by Landlord Neither Landlord nor any agent or employee of Landlord has made any representation whatsoever with respect to the Demised Premises except as expressly set forth in this Lease. 48 ARTICLE 36 Rent Control In the event the minimum rent and/or additional rent or any part thereof provided to be paid by Tenant under the provisions of this Lease during the demised term shall become uncollectible or shall be reduced or required to be reduced or refunded by virtue of any federal, state, county or city law, order or regulation, or by any direction of a public officer or body pursuant to law, or the orders, rules, code or regulations of any organization or entity formed pursuant to law, Tenant shall enter into such agreement(s) and take such other steps (without additional expense or liability to Tenant) as Landlord may reasonably request and as may be legally permissible to permit Landlord to collect the maximum rents which from time to time during the continuance of such legal rent restriction may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (a) the minimum rent and/or additional rent shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination, and (b) Tenant shall pay to Landlord promptly upon being billed, to the maximum extent legally permissible, an amount equal to (i) minimum rent and/or additional rent which would have been paid pursuant to this Lease but for such legal rent restriction less (ii) the rents paid by Tenant during the period such legal rent restriction was in effect. ARTICLE 37 Late Payment Charges If Tenant shall fail to pay any minimum rent or additional rent within ten (10) days after its due date, Tenant shall pay a late charge of $.05 for each $1.00 which remains unpaid after such period to compensate Landlord for additional expense in processing such late payment. In addition, if Tenant fails to pay any minimum rent or additional rent within fifteen (15) days after its due date, Tenant shall pay interest thereon from the date due until the date paid at the rate of one and one-half percent (1-1/2%), per month. If any check of Tenant in payment of any sum due under this Lease, including but not limited to minimum rent and additional rent, fails to clear the bank, Tenant shall pay a charge of $250.00. 49 ARTICLE 38 Security Deposit Section 38.01. Concurrently with the execution of this Lease, Tenant shall deposit with Landlord the sum of $712,000, by Letter of Credit as provided in Section 38.02, as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this Lease. Tenant agrees that, in the event that Tenant defaults, after any applicable notice and expiration of any applicable cure period, in respect of any of the terms, provisions and conditions of this Lease (including the payment of minimum rent and additional rent), Landlord may notify the "Issuing Bank" (as such term is defined in Section 38.02) and thereupon receive all of the monies represented by the said Letter of Credit and use, apply, or retain the whole or any part of such proceeds to the extent required for the payment of any rent, additional rent, or any other sum as to which Tenant is in default, or for any sum that Landlord may expend or may be required to expend by reason of Tenant's default, in respect of any of the terms, covenants and conditions of this Lease (including any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord). In the event that Landlord applies or retains any portion or all of the proceeds of such Letter of Credit Tenant shall forthwith restore the amount so applied or retained so that, at all times, the amount deposited shall be $712,000, or the amount set forth in Section 38.06, as the case may be. Upon Tenant making such additional deposit, Landlord is hereby authorized to act as Tenant's agent to use the proceeds of the Letter of Credit to obtain a new Letter of Credit and Tenant hereby irrevocably appoints Landlord as Tenant's agent and attorney-in-fact to obtain a replacement Letter of Credit from the Issuing Bank or any such qualifying bank (such qualifying bank shall then be the Issuing Bank). If Tenant shall fail or refuse to make such additional deposit, Landlord shall have the same rights in law and in equity and under this Lease as it has with respect to a default by Tenant in the payment of minimum rent. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the Letter of Credit shall be returned to Tenant after the expiration date and after delivery of possession of the entire Demised Premises to Landlord in the condition provided in this Lease for such delivery of possession. Section 38.02. Such letter of credit (the "Letter of Credit") shall be a clean, irrevocable and unconditional Letter of Credit (the "Letter of Credit") issued by and drawn upon any commercial bank (the "Issuing Bank") with offices for banking purposes in the City of New York and having at all times that such Letter of Credit is in effect a net worth of not less than $500,000,000.00, which Letter of Credit shall have an initial term of not less than one year or finally having a term expiring not less than ninety (90) days following the expiration of the term of this Lease, shall permit multiple drawings, shall be transferable by the beneficiary on one or more occasions at no charge to the beneficiary, and otherwise be in form and content satisfactory to Landlord, be for the account of Landlord and be in the amount of $712,000 or the amount set forth in Section 38.06, as the case may be. Notwithstanding the foregoing, if at any time the net worth of the Issuing Bank is less than $500,000,000.00 or its rating is downgraded from its current rating, and 50 provided Tenant does not replace the existing Letter of Credit with a Letter of Credit meeting the criteria of Section 38.02 within the sooner of thirty (30) days following Tenant's receipt of Landlord's notice to Tenant of either of the foregoing events or the number of days remaining until the expiration date of the existing Letter of Credit, Landlord shall have the right, at any time thereafter, to draw down the entire proceeds of the existing Letter of Credit and hold such proceeds pursuant to the terms of Section 38.01 as cash security pending the replacement of such Letter of Credit. The Letter of Credit shall provide that: (a) the Issuing Bank shall pay to Landlord or its duly authorized representative an amount up to the face amount of the Letter of Credit upon presentation of the Letter of Credit and a sight draft, in the amount to be drawn together with a statement signed by a member of Landlord that Tenant is in default under this Lease after any applicable notice and cure period. (b) it shall be deemed automatically renewed, without amendment, for consecutive periods of one (1) year each thereafter during the term of this Lease, unless Issuing Bank sends written notice (hereinafter referred to as the Non-Renewal Notice) to Landlord by certified or registered mail, return receipt requested, not less than sixty (60) days next preceding the expiration date of the Letter of Credit that it elects not to have the Letter of Credit renewed, and it being agreed that the giving of such Non- Renewal Notice shall for the purpose of this Article 38 be deemed a default under this Lease; (c) Landlord, subsequent to its receipt of a Non-Renewal Notice, and prior to the expiration date of the Letter of Credit, shall have the right, exercisable by means of sight draft, to receive the monies represented by the Letter of Credit and hold such proceeds pursuant to the terms of Section 38.01 as cash security pending the replacement of such Letter of Credit; and (d) upon Landlord's sale or assignment of its estate as Tenant under any ground or underlying lease, the Letter of Credit shall be transferable by Landlord, as provided in Section 38.03. Section 38.03. In the event Landlord's estate as tenant under any ground or underlying Lease is sold or assigned, Landlord shall transfer the cash security or the Letter of Credit then held by Landlord to the vendee or assignee, and Landlord shall thereupon be released by Tenant from all liability for the return of such cash security or Letter of Credit. In such event, Tenant agrees to look solely to the new Landlord for the return of said cash security or Letter of Credit. It is agreed that the provisions hereof shall apply to every transfer or assignment made of the cash security or Letter of Credit to a new Landlord. Section 38.04. Tenant covenants that it will not assign or encumber, or attempt to assign or encumber, the monies or Letter of Credit deposited hereunder as 51 security, and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment, or attempted encumbrance. Section 38.05. The use of the security, as provided in this Article, shall not be deemed or construed as a waiver of Tenants default or as a waiver of any other rights and remedies to which Landlord may be entitled under the provisions of this Lease by reason of such default, it being intended that Landlord's rights to use the whole or any part of the security shall be in addition to but not in limitation of any such other rights and remedies; and Landlord may exercise any of such other rights and remedies independent of or in conjunction with its rights under this Article. Section 38.06. Provided that (i) Tenant is not, at the time of any reduction as hereafter provided, then in default under any of the terms, covenants and conditions of this Lease on its part to be performed and (ii) Tenant's net profits, determined in accordance with generally accepted accounting procedures, has been at least $50,000,000.00 for the last two (2) fiscal years of Tenant, then at any time after the actual payment by Tenant of thirty-six (36) monthly installments of minimum rent, the amount of the security deposit hereunder shall be reduced by the amount of $71,200 and shall also be reduced annually thereafter by a like amount of $71,200, until such time that the amount of the security deposit is $356,000, and thereafter there shall be no further reduction. In each such event, Tenant shall either deliver to Landlord a replacement Letter of Credit in the reduced amount and Landlord will then return to Tenant the existing Letter of Credit, or Tenant will deliver to Landlord an amendment to the existing Letter of Credit reducing the amount thereof to the applicable amount. ARTICLE 39 Additional Space Section 39.01. So long as this Lease is then in full force and effect and Tenant is not then in default in performing any of the conditions of this Lease on its part to be performed, both at the time of Landlord's Availability Notice (as hereinafter defined) and on the Effective Date (as hereinafter defined) for the Additional Space (as hereinafter defined), at any time during the term of this Lease (excluding the last two (2) years) that Landlord becomes aware of the potential availability of the entire 3rd, 5th or 6th floors in the Building (each such floor being referred to herein as the "Additional Space"), which Landlord anticipates will come available for lease and future occupancy by Tenant, Landlord shall then give Tenant notice thereof (the "Availability Notice"). Such notice shall also state the rentable square feet of the Additional Space (which for the purpose of this Article 39 is agreed to be 16,000 for each) and Landlord's reasonable estimation of the date when such Additional Space will be available for Tenant's occupancy (the "Occupancy Date"). If the same is subject to the prior right of then tenant thereof to review the term thereof or of another existing tenant to lease the same (the "Prior Right"), Landlord shall include in its Availability Notice the existence of such Prior Right and the date by which the 52 same must be exercised by the existing tenant having such Prior Right. Concurrently with giving the Availability Notice to Tenant, Landlord shall give to the existing tenant notice to exercise its Prior Right. Landlord thereafter shall notify Tenant of the exercise or nonexercise of such Prior Right. Tenant shall have the one time to exercise its option to lease such Additional Space by giving Landlord notice of its election to do so (the "Exercise Notice"), within thirty (30) days from the date of its receipt of the Availability Notice, with TIME OF THE ESSENCE. However, if such Additional Space is subject to a Prior Right, Tenant may exercise its option by giving the Exercise Notice within thirty (30) days from the date of its receipt of notice from Landlord of the non-exercise of such Prior Right, with TIME OF ESSENCE. If Landlord does not receive the Exercise Notice within the applicable thirty (30) day period, then Tenant shall have no further rights with respect to the Additional Space set forth in the Availability Notice under this Article 39, and Landlord may lease such Additional Space to any other party upon such terms and conditions as Landlord may deem desirable. Section 39.02. Tenant shall take possession of the Additional Space and Landlord shall deliver possession thereof to Tenant on the later of the Occupancy Date and the actual date on which Landlord shall have delivered such Additional Space to Tenant vacant (the "Effective Date"), and from and after the Effective Date such Additional Space shall automatically be deemed added to and made part of the Demised Premises upon all of the terms, covenants and conditions as are contained in this Lease (except those which by their terms are no longer applicable), except as follows: (a) Tenant agrees to accept possession of the Additional Space in its then "As Is" condition and Landlord shall not be required to do any work therein to prepare the same for Tenant's occupancy. (b) The respective amounts of the minimum rent provided in Section 3.01(a) shall be increased by the amount equal to the fair market annual rental value ("Rental Value") of the Additional Space as of the Effective Date, but not less than at the aggregate rate per square foot payable for minimum rent and additional rent payable under Articles 22 and 23 of this Lease immediately prior to the Effective Date. In the event the parties fail to agree on such Rental Value within ninety (90) days prior to the Effective Date, such Rental Value shall be determined by arbitration in the manner as hereinafter provided in Article 40, and the determination of such arbitration shall be conclusive and binding on the parties. If for any reason such Rental Value shall not be determined prior to the commencement of the Effective Date, Tenant, in the meantime shall pay the monthly installments of minimum rent at the rate per square foot payable for minimum rent and said additional rent immediately prior to the Effective Date. If the Rental Value shall be greater than the amount paid by Tenant for the Additional Space following the Effective Date, Tenant forthwith after the arbitrators' decision, shall pay to Landlord the difference between the monthly installments actually paid and the monthly installments which should have been paid from the commencement 53 of the Effective Date, and thereafter Tenant shall pay the monthly installments of the new minimum rent. (c) In Section 22.01(a), with respect to the Additional Space only, in subdivision (i) the "Tax Base Factor" shall mean the July 1 - June 30 fiscal year in which the Effective Date occurs; in subdivision (iii) the "comparative tax year" shall mean the July 1 - June 30 fiscal year immediately following the Tax Base Factor; and in subdivision (v) the "Percentage" shall mean 4.85%. (d) In Section 22.02(a), with respect to the Additional Space only, in subdivision (ii), the "Base Wage Rate" shall mean the Wage Rate in effect for the calendar year in which the Effective Date occurs; and in subdivision (v), the "Multiplication Factor" shall mean 16,000. (e) In Section 23.03, the then Rent Inclusion Factor shall be increased by the amount of $48,000. Section 39.03. Notwithstanding the provisions of Section 39.02, if Landlord is unable to give possession of the Additional Space on the Effective Date because of the holding-over of the tenant thereof, Landlord shall not be subject to any liability for failure to give possession on the Effective Date, but the Effective Date shall not be deemed to have occurred for any purpose whatsoever until the date that Landlord shall actually deliver possession of the Additional Space to Tenant. In any event, Landlord shall promptly commence and diligently prosecute holdover proceedings or such other legal proceedings as may be required in order to obtain possession of the Additional Space as promptly thereafter as may be practical. Section 39.04 Following the determination of the Effective Date, the minimum rent and the escalation rents of the Additional Space, Landlord and Tenant shall execute an agreement amending this Lease to reflect the foregoing, but the provisions of this Article 39 shall be effective with respect to the Additional Space effective from and after the Effective Date whether or not such an amendment is executed. Section 39.05. Except as specifically amended in this Article 39, all of the terms, covenants and conditions of this Lease shall continue in full force and effect and unchanged. 54 ARTICLE 40 Arbitration Section 40.01. The arbitration provided for in Article 39 shall be settled in the Borough of Manhattan, City, County and State of New York, conducted to the extent consistent with this Article 40 in accordance with the rules then obtaining of the American Arbitration Association, or any successor body of similar function, governing commercial arbitration, except that the foregoing shall not be deemed or construed to require that such arbitration actually be conducted by or before the American Arbitration Association or any successor body of similar function. The arbitration shall be conducted before arbitrators selected as follows: The party desiring arbitration shall appoint a disinterested person as arbitrator on its behalf and give notice thereof to the other party who shall, within twenty (20) days thereafter, appoint a second disinterested person as arbitrator on its behalf and give written notice thereof to the first party. The arbitrators thus appointed shall, within twenty (20) days after the date of the appointment of the second arbitrator, appoint a third disinterested person, who shall be a person licensed by the State of New York (if such license is required by law) or otherwise qualified and having the necessary expertise, including at least ten (10) years' experience, in the matter or discipline which is the primary subject or is primarily involved in such arbitration. If the arbitrators thus appointed shall fail to appoint such third disinterested person within said twenty (20) day period, then either party may, by application to the presiding Justice of the Appellate Division of the Supreme Court of the State of New York for the First Judicial Department, which application shall be made within fifteen (15) days after the end of said twenty (20) day period, seek to appoint such third disinterested person, such appointment being made not later than thirty (30) days after the date of said application. Upon such appointment, such person shall be the third arbitrator as if appointed by the original two arbitrators. The decision of the majority of the arbitrators shall be final, non-appealable, conclusive and binding on all parties and judgment upon the award may be entered in any court having jurisdiction. If a party who shall have the right pursuant to the foregoing, to appoint an arbitrator, fails or neglects to do so, then and in such event the other party shall select the arbitrator not so selected by the first party, and upon such selection, such arbitrator shall be deemed to have been selected by the first party. The expenses of arbitration shall be shared equally by Landlord and Tenant, unless this Lease expressly provides otherwise, but each party shall pay and be separately responsible for its own counsel and witness fees and disbursements, unless this Lease expressly provides otherwise. Landlord and Tenant agree to sign all documents and to do all other things reasonably necessary to submit any such matter to arbitration and further agree to, and hereby do, waive any and all rights they or either of them may at any time have to revoke their agreement hereunder to submit to arbitration and to abide by the decision rendered thereunder and agree that a judgment or order may be entered in any court of competent jurisdiction based on an arbitration award (including the granting of injunctive relief). Section 40.02. The arbitrators shall be disinterested persons having at least ten (10) years experience in the County of New York in a calling connected with the 55 dispute, and shall have the right to retain and consult experts and competent authorities skilled in the matters under arbitration, but any such consultation shall be made in the presence of both parties, with full right on their part to cross-examine such experts and authorities. The arbitrators shall render their decision and award upon the concurrence of at least two (2) of their number, not later than sixty (60) days after appointment of the third arbitrator. Their decision and award shall be in writing and counterpart copies thereof shall be delivered to each of the parties. In rendering their decision and award, the arbitrators shall have no power to modify or in any manner alter or reform any of the provisions of this Lease, and the jurisdiction of the arbitrators is limited accordingly. ARTICLE 41 Landlord's Contribution Subject to the provisions of Article 5 of this Lease, Tenant agrees to perform the initial work and installations required to make the Demised Premises suitable for the conduct of Tenant's business. Tenant agrees to deliver to Landlord, for Landlord's approval, the plans and specifications for Tenant's initial work on or before April 14, 2000. Landlord agrees to contribute up to the sum of $416,000.00 ("Landlord's Contribution") toward the cost of such work, which shall include hard and soft costs. Landlord shall pay to Tenant, from time to time, but not more often that once a month, ninety (90%) percent of the cost of the work requested by Tenant theretofore performed by the contractor, provided Tenant delivers to Landlord concurrently with its request, receipted bills of the contractor involved approved by Tenant, a certificate by Tenant's architect that such bills have been approved and the work or materials evidenced by such bills have been satisfactorily performed or delivered and a waiver of mechanic's lien signed by the contractor with respect to the amount paid as evidenced by the receipted bill, such payment to be made to Tenant within twenty (20) days after receipt of Tenant's request together with the aforesaid documentation. Notwithstanding the foregoing, Tenant shall advise Landlord of the cost to be charged by any of Tenant's contractors for the work to be performed by such contractors prior to employing such contractor to perform its work. Landlord shall have the right to match the cost chargeable by such contractor(s), provided notice thereof is given to Tenant within ten (10) days after Landlord's receipt of Tenant's notice of such cost. In such event Landlord shall perform the work at such cost, the amount thereof to be applied in reduction of the amount of Landlord's Contribution. The work performed by Landlord shall be comparable to the specifications, materials and quality of the work of the contractor proposed by Tenant. Within ten (10) days after Landlord receives a certificate from Tenant's architect stating that Tenants work (including the work, if any, performed by Landlord) has been substantially completed, that the same has been performed in compliance with all applicable Governmental Requirements and the approved plans and specifications and delivery to Landlord of the final "sign-off" letters and equipment use permits (as necessary) for all work performed from the applicable municipal authorities, Landlord shall pay to Tenant the aggregate of the ten (10%) percent sums 56 retained by Landlord. Landlord shall have no obligation or responsibility to pay any cost exceeding the amount of Landlord's Contribution. If the amount Tenant expends for the cost exceeds the amount of Landlord's Contribution, Tenant shall be responsible for the payment to the contractors of the excess. If said amount is less than the amount of Landlord's Contribution, Landlord shall not be obligated to pay such difference to Tenant. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, costs and expenses in connection with such work exceeding the amount of Landlord's Contribution. ARTICLE 42 Supplemental Air Conditioning Tenant, at its cost, subject to the provisions of Article 5 of the Lease, may install an air cooled supplemental air conditioning system (the "System") in the Demised Premises, such installation to be in accordance with plans and specifications to be approved by Landlord, which approval shall not be unreasonably withheld or delayed. Said System shall be vented only out of the rear lot line windows on the 31st Street corner of the Building. The design, color and location of any louvers installed in connection therewith shall be subject to Landlord's approval, which approval shall not be unreasonably withheld or delayed. Tenant, at its own cost, shall maintain such System in good condition and repair and shall make any replacements thereof as may be required. Tenant, at its own expense, shall obtain in its own name the use permits for such System and provide Landlord with copies of same. Tenant shall also obtain and pay for all annual renewal fees in connection therewith, and provide Landlord with a copy of such annual renewals. Tenant shall indemnify and hold Landlord harmless from and against any loss, claims, costs and expenses (including reasonable attorneys' fees) in connection with the repair and maintenance of said System. Said System shall be subject to the determination by Landlord's electrical consultant of the cost of the additional electricity to be consumed by Tenant with respect to the use and operation of said System, as provided in Section 23.02. Upon such determination, annual minimum rent and the amount set forth in Section 23.03 shall be increased by the amount of the cost of such additional electricity. 57 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. 475 PARK AVENUE SO. CO. By: /s/ Charles Steven Cohen --------------------------------------- Charles Steven Cohen, Agent SNOWBALL.COM, INC. By: /s/ James R. Tolonen --------------------------------------- Name: James R. Tolonen Title: CFO/COO Tenant 58 ACKNOWLEDGMENT STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the day of in the year 2000 before me, the undersigned, a Notary Public in and said State, personally appeared Charles Steven Cohen, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ------------------------------------------- Notary Public STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the day of in the year 2000 before me, the undersigned, a Notary Public in and said State, personally appeared, personally known to me proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ------------------------------------------- Notary Public 59 SCHEDULE A ---------- Floor Plan [DIAGRAM OF EAST 32ND STREET & PARK AVENUE SOUTH] 60 SCHEDULE B ---------- Description of Land All that certain plot, piece or parcel of land situate, lying and being in the Borough of Manhattan, City, County and State of New York, and the buildings and improvements thereon, bounded and described as follows: BEGINNING at the southeasterly corner of Park Avenue South and 32nd Street; running thence southerly along the easterly side of Park Avenue South 162 feet 3-1/2 inches; thence easterly parallel with 31st Street 80 feet; thence northerly parallel with Park Avenue South 35 feet 5-7/8 inches; thence southeasterly on an angle on its southerly side of 86 degrees 34 minutes 00 seconds with the last described line 20 feet 1/2 inch to a line drawn parallel with Park Avenue South and distant 100 feet easterly therefrom; thence northerly along said last mentioned line 29 feet 3 inches to the center line of the block; thence easterly along said center line of the block 61 feet 2 inches; thence northerly parallel with Park Avenue South 98 feet 9 inches; thence westerly along the southerly side of 32nd Street 161 feet 2 inches to the point or place of BEGINNING. SAID PREMISES being known as and by the street numbers 465 to 477 Park Avenue South. 61 SCHEDULE C ---------- Rules and Regulations 1. The rights of tenants in the entrances, corridors, elevators and escalators of the Building are limited to ingress to and egress from the tenants' premises for the tenants and their employees, licensees, guests, customers and invitees, and no tenant shall use, or permit the use of, the entrances, corridors, escalators or elevators for any other purpose. No tenant shall invite to the tenants premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridors, escalators, elevators and other facilities of the Building by other tenants. Fire exits and stairways are for emergency use only, and they shall not be used for any other purposes by the tenants, their employees, licensees or invitees. No tenant shall encumber or obstruct, or permit the encumbrance or obstruction of any of the sidewalks, plazas, entrances, corridors, escalators, elevators, fire exits or stairways of the Building. The Landlord reserves the right to control and operate the public portions of the Building and the public facilities, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. Landlord further reserves the right, at any time, to install a message/package center in an area in the Building designated by Landlord and reasonably accessible to and for the common use of tenants, and the tenants shall comply with the procedures for the same set forth by the Landlord. 2. The reasonable cost of repairing any damage to the public portions of the Building or the public facilities or to any facilities used in common with other tenants, caused by a tenant or the employees, licensees or invitees of the tenant, shall be paid by such tenant. 3. The Landlord may refuse admission to the Building outside of ordinary business hours to any person not known to the watchman in charge or not having Landlord approved identification, and may require ail persons admitted to or leaving the Building outside of ordinary business hours to register. Tenant's agents and visitors shall be permitted to enter and leave the building after ordinary business hours whenever appropriate arrangements have been previously made between the Landlord and the Tenant with respect thereto. Each tenant shall be responsible for all persons for whom he requests such permission and shall be liable to the Landlord for all acts of such persons. Any person whose presence in the Building at any time shall, in the judgment of the Landlord, be prejudicial to the safety, character, reputation and interests of the Building or its tenants may be denied access to the Building or may be rejected therefrom. In case of invasion, riot, public excitement or other commotion the Landlord may prevent all access to the Building during the continuance of the same, by closing the doors or otherwise, for the safety of the tenants and protection of property in the Building. The Landlord may require any person leaving the Building with any package or other object to exhibit a pass from the tenant from whose premises the package or object is being removed, but the 62 establishment and enforcement of such requirement shall not impose any responsibility on the Landlord for the protection of any tenant against the removal of property from the premises of the tenant. The Landlord shall, in no way, be liable to any tenant for damages or loss arising from the admission, exclusion or ejection of any person to or from the tenant's premises or the Building under the provisions of this rule. 4. No tenant shall obtain or accept for use in its premises towel, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services from any persons not authorized by the Landlord in writing to furnish such services, provided always that the charges for such services by persons authorized by the Landlord are comparable to the industry charge. Such services shall be furnished only at such hours, in such places within the tenant's premises and under such reasonable regulations as may be fixed by the Landlord. 5. No awnings or other projections over or around the windows shall be installed by any tenant, and only such window blinds as are supplied or permitted by the Landlord shall be used in a tenant's premises. 6. There shall not be used in any space, or in the public halls of the Building, either by the Tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and side guards. 7. All entrance doors in each tenant's premises shall be left locked when the tenant's premises are not in use. Entrance doors shall not be left open at any time. All windows in each tenant's premises if operable shall be kept closed at all times and all blinds therein above the ground floor shall be lowered when and as reasonably required because of the position of the sun, during the operation of the Building air conditioning system to cool or ventilate the tenant's premises. 8. No noise, including the playing of any musical instruments, radio or television, which, in the judgment of the Landlord, might disturb other tenants in the Building shall be made or permitted by any tenant. Nothing shall be done or permitted in any tenant's premises, and nothing shall be brought into or kept in any tenant's premises, which would impair or interfere with any of the Building services or the proper and economic heating, cleaning or other servicing of the Building or the premises, or the use or enjoyment by any other tenant of any other premises, nor shall there be installed by any tenant any ventilating, air conditioning, electrical or other equipment of any kind which, in the judgment of the Landlord, might cause any such impairment or interference. No dangerous, flammable, combustible or explosive object or material shall be brought into the Building by any tenant or with the permission of any tenant. 9. Tenant shall not permit any cooking or food odors emanating within the Demised Premises to seep into other portions of the Building. 63 10. No acids, vapor or other materials shall be discharged or permitted to be discharged into the waste lines, vents or flues of the Building which may damage them. The water and wash closets and other plumbing fixtures in or serving any tenant's premises shall not be used for any purpose other than the purpose for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. Ail damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 11. No signs, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any tenant on any part of the outside or inside the premises or the Building without the prior written consent of the Landlord. In the event of the violation of the foregoing by any tenant, Landlord may remove the same without any liability, and may charge the expense incurred by such removal to the tenant or tenants violating this rule. Interior signs and lettering on doors and elevators shall be inscribed, painted, or affixed for each tenant by Landlord at the expense of such tenant, (the charge not to exceed that which a reputable outside contractor would charge), and shall be of a size, color and style reasonably acceptable to Landlord. Landlord shall have the right to prohibit any advertising by any tenant which impairs the reputation of the Building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 12. No additional locks or belts of any kind shall be placed upon any of the doors or windows in any tenant's premises and no lock on any door therein shall be changed or altered in any respect. However, the tenant may install an electronic entry device at its cost. Upon the termination of a tenant's lease, all keys of the tenant's premises and toilet rooms shall be delivered to the Landlord. 13. No tenant shall mark, paint, drill into or in any way deface any part of the Building or the premises demised to such tenant. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, which will not be unreasonably withheld or delayed, and as Landlord may reasonably direct. No tenant shall install any resilient tile or similar floor covering in the premises demised to such tenant except in a manner approved by Landlord. 14. No tenant shall use or occupy, or permit any portion of the premises demised to such tenant to be used or occupied, as an office for a public stenographer or typist, or as a barber or manicure shop, or as an employment bureau. No tenant or occupant shall engage or pay any employees in the Building, except those actually working for such tenant or occupant in the Building, nor advertise for laborers giving an address at the Building. 15. No premises shall be used, or permitted to be used, at any time, as a store for the sale or display of goods, wares or merchandise of any kind, or as a restaurant, shop, booth, bootblack or other stand, or for the conduct of any business or 64 occupation which predominantly involves direct patronage of the general public in the premises demised to such tenant, or for manufacturing or for other similar purposes. 16. The requirements of tenants will be attended only upon application at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of the regular duties, unless under special instructions from the office of the Landlord. 17. Each tenant shall, at its expense, provide artificial light in the premises demised to such tenant for Landlord's agents, contractors and employees while performing janitorial or other cleaning services and making repairs or alterations in said premises. 18. The tenant's employees shall not loiter around the hallways, stairways, elevators, front, roof or any other part of the Building used in common by the occupants thereof. 19. If the premises demised to any tenant become infested with vermin, such tenant, at its sole cost and expense, shall cause its premises to be exterminated, from time to time, to the satisfaction of Landlord and shall employ such exterminators therefor as shall be approved by Landlord. 20. No bicycle or other vehicle and no animals shall be allowed in the showrooms, offices, halls, corridors or any other parts of the Building. 21. Tenant shall not, without Landlord's prior written consent, install or operate any hearing device, refrigerating or air conditioning equipment, steam or internal combustion engine, boiler, stove, machinery or mechanical devices upon the premises or carry on any mechanical or manufacturing business thereon, or use or permit to be brought into the Building flammable fluids such as gasoline, kerosene, benzene or naphtha or use any illumination other than electric lights. All equipment, fixtures, lamps and bulbs shall be compatible with, and not exceed the capacity of the Building's electric system. No explosives, firearms, radioactive or toxic or hazardous substances or materials, or other articles deemed hazardous to life, limb or property shall be brought into the Building or the Premises. 22. Tenant shall at its expense provide artificial light for employees of Landlord while doing service or other work and making repairs or alterations in the premises. 23. Tenant must list all furniture and fixtures to be taken from the Building upon a form approved by Landlord. Such list shall be presented at the office of the Building for approval before acceptance by the security officer or elevator operator. 65 24. Tenant, its customers, invitees, licensees, agents, servants, employees and guests shall not encumber or obstruct sidewalks, entrances, passages, courts, vestibules, halls, elevators, stairways or other common areas in or about the Building. 25. Tenant shall not allow anything to be placed against or near the glass in the partitions between the premises and the halls or corridors of the Building which shall diminish the light in the halls or corridors. 26. Upon termination of this Lease, Tenant shall surrender all keys of the premises and of the Building and give to Landlord the explanation of the combination of all locks on safes or vault doors in the Premises. 27. Tenant shall provide the Building Manager with keys to all locks on any doors of the premises. The Building Manager shall be allowed admittance to the premises in the event of any emergency, fire or other casualty that may arise in other appropriate instances. 28. Unless otherwise advised by Landlord, neither Tenant nor its employees shall undertake to regulate the radiator controls of thermostats. Tenant shall report to the office of the Building whenever such thermostats or radiator controls are not working properly or satisfactorily. 29. All window treatments that are visible from the street shall be subject to Landlord's approval. 30. Tenant assumes full responsibility for protecting its space from weather, theft, robbery and pilferage, which includes keeping doors locked and other means of entry into the premises closed and secured. 31. Tenant shall not sell food of any kind or cook in the Building. Tenant may serve complimentary foods to its guests provided that it shall first comply with all Legal Requirements. 32. Water in the premises shall not be wasted by Tenant or its employees by tying or wedging back the faucets of the washbowls or otherwise. 33. All messengers shall be required to sign in and obtain a pass from either the front desk or the elevator starters. Contractors and other workmen shall use only the freight elevators for all movement within the Building. 34. Landlord reserves the right at any time, to install a message/package center in an area in the Building designated by Landlord and reasonably accessible to and for the common use of the tenants, and tenants shall comply with the procedures for the same set forth by the Landlord. 66 SCHEDULE D ---------- Cleaning Specifications for 475 Park Avenue South New York, New York Landlord will provide the following cleaning services in the Demised Premises and related areas on a nightly basis (or as otherwise indicated), Monday through Friday, holidays excluded: OFFICE AREAS - ------------ Empty and wipe clean all waste receptacles. Sweep all vinyl composition tile flooring as needed. Carpet sweep all carpeted areas; vacuum clean weekly. Dust all office furniture within hand high reach, including window sills, wall ledges, chairs, desks, tables, baseboards, file cabinets, convector enclosures, and pictures. Wipe clean all glass desks and table tops. CORE AREA LAVATORIES - -------------------- Wash all toilet bowls, urinals, washbasins and toilet seats. Wash and dry all mirrors, shelves and bright work. Wipe clean sills, partitions, ledges, waste receptacles, and dispensers. Empty paper towel and sanitary napkin disposal receptacles. Insert toilet tissue, paper towels, and hand soap dispensers. Materials to be furnished by Landlord at Tenant's expense. Sweep and mop all flooring. Dust exterior of light fixtures quarterly. 67 FLOOR MAINTENANCE - ----------------- High Dusting Public Areas. High dusting of walls, ledges, fixtures, vents, etc., not reached in the normal nightly cleaning operation, to be done quarterly. WINDOW CLEANING SERVICES - ------------------------ Clean all exterior windows, inside and out periodically during the year, as the Landlord deems necessary. RUBBISH REMOVAL SERVICES - ------------------------ Remove all ordinary dry rubbish and paper only from the office premises of the Demised Premises daily, Monday through Friday, holidays excepted. 68 SCHEDULE E ---------- Definitions (a) The term mortgage shall include an indenture of mortgage and deed -------- of trust to a trustee to secure an issue of bonds, and the term mortgagee shall --------- include such a trustee. (b) The terms include, including and such as shall each be construed ------- --------- ------- as if followed by phrase "without being limited to". (c) The term obligations of this lease, and words of like import, ------------------------- shall mean the covenants to pay rent and additional rent under this lease and all of the other covenants and conditions contained in this lease. Any provision in this lease that one party or the other or both shall do or not do or shall cause or permit or not cause or permit a particular act, condition, or circumstance shall be deemed to mean that such party so covenants or both parties so covenant, as the case may be. (d) The term Tenant's obligations hereunder, and words of like ------------------------------ import, and the term Landlord's obligations hereunder, and words of like -------------------------------- import, shall mean the obligations of this lease which are to be performed or observed by Tenant, or by Landlord, as the case may be. Reference to performance ----------- of either party's obligations under this lease shall be construed as "performance and observance". (e) Reference to Tenant or Landlord being or not being in default ---------- hereunder, or words of like import, shall mean that Tenant or Landlord is in - --------- default in the performance of one or more of Tenant's or Landlord's obligations hereunder after any applicable notice and cure period, or that Tenant or Landlord is not in default in the performance of any of Tenant's or Landlord's obligations hereunder after any applicable notice and cure period, or that a condition of the character described in Section 16.01 has occurred and continues or has not occurred or does not continue, as the case may be. (f) The term laws and/or requirements of public authorities and words ---------------------------------------------- of like import shall mean laws and ordinances of any or all of the Federal, state, city, county and borough governments and rules, regulations, orders and/or directives of any or all departments, subdivisions, bureaus, agencies or offices thereof, or of any other governmental, public or quasi-public authorities, having jurisdiction in the premises, and/or the direction of any public officer pursuant to law. (g) The term requirements of insurance bodies and words of like -------------------------------- import shall mean rules, regulations, orders and other requirements of the New York Board of Fire Underwriters and/or the New York Fire Insurance Rating Organization and/or any other similar body performing the same or similar functions and having jurisdiction or cognizance of the Building and/or the Demised Premises. 69 (h) Reference to termination of this lease includes expiration or ------------------------- earlier termination of the term of this lease or cancellation of this lease pursuant to any of provisions of this lease or to law. Upon a termination of this lease, the term and estate granted by this lease shall end at noon of the date of termination as if such date were the date of expiration of the term of this lease and neither party shall have any further obligation or liability to the other after such termination (i) except as shall be expressly provided for in this lease, or (ii) except for such obligation as by its nature or under the circumstances can only be, or by the provisions of this lease, may be performed after such termination, and, in any event, unless expressly otherwise provided in this lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this lease. (i) The term in full force and effect when herein used in reference ------------------------ to this lease as a condition to the existence or exercise of a right on the part of Tenant shall be construed in each instance as including the further condition that at the time in question no default on the part of Tenant exists, and no event has occurred which has continued to exist for such period of time (after the notice, if any, required by this lease), as would entitle Landlord to terminate this lease or to dispossess Tenant. (j) The term Tenant shall mean Tenant herein named or any assignee or ------ other successor in interest (immediate or remote) of Tenant herein named, but only while such Tenant or such assignee or other successor in interest, as the case may be, is in possession of the Demised Premises as owner of the Tenant's estate and interest granted by this lease and also, if Tenant is not an individual or a corporation, all of the persons, firms and corporations then comprising Tenant. (k) Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. 70 EX-23.02 4 CONSENT OF ERNST & YOUNG Exhibit 23.02 Consent of Ernst & Young LLP, Independent Auditors -------------------------------------------------- We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated January 28, 2000, in Amendment No. 4 to the Registration Statement (Form S-1 No. 333-93487) and related Prospectus of Snowball.com, Inc. for the registration of 7,187,500 shares of its common stock. /s/ Ernst & Young LLP Palo Alto, California March 16, 2000 EX-23.03 5 CONSENT OF HAMILTON & ASSOCIATES EXHIBIT 23.03 Consent of Independent Accountants We hereby consent to the use in Amendment 4 of Snowball.com on Form S-1 of our report dated December 9, 1999 relating to the audited financial statements of Extreme Interactive Media, Inc., which appear in such registration statement. We also consent to the reference to us under heading "Experts" in such registration statement. Sincerely, /s/ Hamilton & Associates, Inc. Hamilton & Associates, Inc. March 16, 2000 EX-23.04 6 CONSENT OF J.W. HUNT & CO. Exhibit 23.04 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated October 8, 1999, with respect to the financial statements and schedules of Ameritrack, Inc. included in Amendment #4 to the Registration Statement (Form S-1) and related Prospectus of Snowball.com, Inc. for the registration of shares of its common stock. /s/ J.W. Hunt and Company, LLP Columbia, South Carolina March 16, 2000 -----END PRIVACY-ENHANCED MESSAGE-----